Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(MARK
ONE)
|
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended: September 30,
2010
|
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ________ to __
Commission
file number: 0-23322
CASCADE
BANCORP
(Exact
name of Registrant as specified in its charter)
Oregon
|
|
93-1034484
|
(State
or other jurisdiction of incorporation
or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
1100 N.W.
Wall Street
Bend,
Oregon 97701
(Address
of principal executive offices)
(Zip
Code)
(541)
385-6205
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:
¨ Large
Accelerated Filer ¨
Accelerated Filer ¨
Non-accelerated Filer x
Smaller Reporting Company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date. 28,538,399 shares of no par value
Common Stock as of November 1, 2010.
CASCADE
BANCORP & SUBSIDIARY
FORM
10-Q
QUARTERLY
REPORT
SEPTEMBER
30, 2010
INDEX
|
Page
|
|
|
PART
I: FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets: September 30, 2010 and December 31,
2009
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations: Nine months and three months ended
September 30, 2010 and 2009
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Changes in Stockholders’ Equity: Nine months
ended September 30, 2010 and 2009
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows: Nine months ended September 30,
2010 and 2009
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
35
|
|
|
|
Item
4.
|
Controls
and Procedures.
|
35
|
|
|
|
PART
II: OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
36
|
|
|
|
Item
1A.
|
Risk
Factors
|
36
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
46
|
|
|
|
Item
6.
|
Exhibits
|
46
|
|
|
|
SIGNATURES
|
|
47
|
PART I
ITEM
1. FINANCIAL STATEMENTS
Cascade
Bancorp & Subsidiary
Condensed
Consolidated Balance Sheets
September
30, 2010 and December 31, 2009
(Dollars
in thousands)
(unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Restated)
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
28,242 |
|
|
$ |
38,759 |
|
Interest
bearing deposits
|
|
|
302,760 |
|
|
|
319,627 |
|
Federal
funds sold
|
|
|
681 |
|
|
|
936 |
|
Total
cash and cash equivalents
|
|
|
331,683 |
|
|
|
359,322 |
|
Investment
securities available-for-sale
|
|
|
120,459 |
|
|
|
133,755 |
|
Investment
securities held-to-maturity
|
|
|
1,807 |
|
|
|
2,008 |
|
Federal
Home Loan Bank (FHLB) stock
|
|
|
10,472 |
|
|
|
10,472 |
|
Loans,
net
|
|
|
1,225,154 |
|
|
|
1,489,090 |
|
Premises
and equipment, net
|
|
|
35,779 |
|
|
|
37,367 |
|
Core
deposit intangibles
|
|
|
5,281 |
|
|
|
6,388 |
|
Bank-owned
life insurance (BOLI)
|
|
|
33,638 |
|
|
|
33,635 |
|
Other
real estate owned (OREO), net
|
|
|
47,969 |
|
|
|
28,860 |
|
Income
taxes receivable
|
|
|
- |
|
|
|
43,256 |
|
Accrued
interest and other assets
|
|
|
17,191 |
|
|
|
27,975 |
|
Total
assets
|
|
$ |
1,829,433 |
|
|
$ |
2,172,128 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Demand
|
|
$ |
313,400 |
|
|
$ |
394,583 |
|
Interest
bearing demand
|
|
|
616,287 |
|
|
|
796,628 |
|
Savings
|
|
|
31,301 |
|
|
|
29,380 |
|
Time
|
|
|
527,860 |
|
|
|
594,757 |
|
Total
deposits
|
|
|
1,488,848 |
|
|
|
1,815,348 |
|
Junior
subordinated debentures
|
|
|
68,558 |
|
|
|
68,558 |
|
Other
borrowings
|
|
|
195,000 |
|
|
|
195,207 |
|
Temporary
Liquidity Guarantee Program (TLGP) senior unsecured debt
|
|
|
41,000 |
|
|
|
41,000 |
|
Accrued
interest and other liabilities
|
|
|
27,178 |
|
|
|
28,697 |
|
Total
liabilities
|
|
|
1,820,584 |
|
|
|
2,148,810 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value; 5,000,000 shares authorized; none issued or
outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock, no par value; 45,000,000 shares authorized; 28,538,399 issued and
outstanding
|
|
|
160,105 |
|
|
|
159,617 |
|
Accumulated
deficit
|
|
|
(153,004 |
) |
|
|
(137,953 |
) |
Accumulated
other comprehensive income
|
|
|
1,748 |
|
|
|
1,654 |
|
Total
stockholders' equity
|
|
|
8,849 |
|
|
|
23,318 |
|
Total
liabilities and stockholders' equity
|
|
$ |
1,829,433 |
|
|
$ |
2,172,128 |
|
See
accompanying notes.
Cascade
Bancorp & Subsidiary
Condensed
Consolidated Statements of Operations
Nine
Months and Three Months ended September 30, 2010 and 2009
(Dollars
in thousands, except per share amounts)
(unaudited)
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
60,859 |
|
|
$ |
77,984 |
|
|
$ |
19,185 |
|
|
$ |
24,608 |
|
Taxable
interest on investments
|
|
|
4,286 |
|
|
|
3,712 |
|
|
|
1,288 |
|
|
|
1,229 |
|
Nontaxable
interest on investments
|
|
|
62 |
|
|
|
104 |
|
|
|
17 |
|
|
|
34 |
|
Interest
on federal funds sold
|
|
|
5 |
|
|
|
12 |
|
|
|
1 |
|
|
|
1 |
|
Interest
on interest bearing deposits
|
|
|
394 |
|
|
|
277 |
|
|
|
139 |
|
|
|
219 |
|
Total
interest income
|
|
|
65,606 |
|
|
|
82,089 |
|
|
|
20,630 |
|
|
|
26,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
|
3,978 |
|
|
|
5,585 |
|
|
|
1,101 |
|
|
|
1,891 |
|
Savings
|
|
|
59 |
|
|
|
56 |
|
|
|
22 |
|
|
|
18 |
|
Time
|
|
|
9,269 |
|
|
|
13,805 |
|
|
|
2,789 |
|
|
|
4,647 |
|
Federal
funds purchased & other borrowings
|
|
|
5,288 |
|
|
|
6,794 |
|
|
|
1,827 |
|
|
|
2,261 |
|
Total
interest expense
|
|
|
18,594 |
|
|
|
26,240 |
|
|
|
5,739 |
|
|
|
8,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
47,012 |
|
|
|
55,849 |
|
|
|
14,891 |
|
|
|
17,274 |
|
Loan
loss provision
|
|
|
19,000 |
|
|
|
85,000 |
|
|
|
3,000 |
|
|
|
22,000 |
|
Net
interest income (loss) after loan loss provision
|
|
|
28,012 |
|
|
|
(29,151 |
) |
|
|
11,891 |
|
|
|
(4,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
4,902 |
|
|
|
6,541 |
|
|
|
1,473 |
|
|
|
2,227 |
|
Mortgage
loan origination and processing fees
|
|
|
309 |
|
|
|
1,760 |
|
|
|
91 |
|
|
|
349 |
|
Gains
on sales of mortgage loans, net
|
|
|
59 |
|
|
|
899 |
|
|
|
(2 |
) |
|
|
133 |
|
Gains
on sales of investment securities available-for-sale
|
|
|
644 |
|
|
|
648 |
|
|
|
- |
|
|
|
276 |
|
Card
issuer and merchant services fees, net
|
|
|
1,960 |
|
|
|
2,455 |
|
|
|
634 |
|
|
|
822 |
|
Earnings
on bank-owned life insurance
|
|
|
3 |
|
|
|
64 |
|
|
|
2 |
|
|
|
19 |
|
Gain
on sale of business merchant services
|
|
|
- |
|
|
|
3,247 |
|
|
|
- |
|
|
|
3,247 |
|
Other
income
|
|
|
2,067 |
|
|
|
2,476 |
|
|
|
758 |
|
|
|
1,004 |
|
Total
noninterest income
|
|
|
9,944 |
|
|
|
18,090 |
|
|
|
2,956 |
|
|
|
8,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
21,995 |
|
|
|
25,008 |
|
|
|
7,044 |
|
|
|
8,190 |
|
Occupancy
& equipment
|
|
|
4,824 |
|
|
|
5,271 |
|
|
|
1,560 |
|
|
|
1,662 |
|
Communications
|
|
|
1,361 |
|
|
|
1,494 |
|
|
|
411 |
|
|
|
473 |
|
FDIC
insurance
|
|
|
6,424 |
|
|
|
5,423 |
|
|
|
1,792 |
|
|
|
1,766 |
|
OREO
|
|
|
8,178 |
|
|
|
16,562 |
|
|
|
3,694 |
|
|
|
9,836 |
|
Other
expenses
|
|
|
9,743 |
|
|
|
11,176 |
|
|
|
2,693 |
|
|
|
3,812 |
|
Total
noninterest expense
|
|
|
52,525 |
|
|
|
64,934 |
|
|
|
17,194 |
|
|
|
25,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(14,569 |
) |
|
|
(75,995 |
) |
|
|
(2,347 |
) |
|
|
(22,388 |
) |
Provision
(credit) for income taxes
|
|
|
482 |
|
|
|
(31,367 |
) |
|
|
1,091 |
|
|
|
(9,744 |
) |
Net
loss
|
|
$ |
(15,051 |
) |
|
$ |
(44,628 |
) |
|
$ |
(3,438 |
) |
|
$ |
(12,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss per common share
|
|
$ |
(0.54 |
) |
|
$ |
(1.59 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.45 |
) |
Diluted
loss per common share
|
|
$ |
(0.54 |
) |
|
$ |
(1.59 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.45 |
) |
See
accompanying notes.
Cascade
Bancorp & Subsidiary
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
Nine
Months Ended September 30, 2010 and 2009
(Dollars
in thousands)
(unaudited)
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Total
stockholders' equity at beginning of period (Restated as of December 31,
2009)
|
|
$ |
23,318 |
|
|
$ |
135,239 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(15,051 |
) |
|
|
(44,628 |
) |
Unrealized
gains on investment securities available-for-sale
|
|
|
93 |
|
|
|
1,653 |
|
Comprehensive
loss
|
|
|
(14,958 |
) |
|
|
(42,975 |
) |
|
|
|
|
|
|
|
|
|
Stock
based compensation expense, net
|
|
|
489 |
|
|
|
853 |
|
|
|
|
|
|
|
|
|
|
Cancellation
of shares for tax withholding
|
|
|
- |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity at end of period
|
|
$ |
8,849 |
|
|
$ |
93,087 |
|
See
accompanying notes.
Cascade
Bancorp & Subsidiary
Condensed
Consolidated Statements of Cash Flows
Nine
Months ended September 30, 2010 and 2009
(Dollars
in thousands)
(unaudited)
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
63,725 |
|
|
$ |
52,165 |
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of investment securities available-for-sale
|
|
|
12,215 |
|
|
|
10,323 |
|
Proceeds
from maturities, calls and prepayments of investment securities
available-for-sale
|
|
|
23,973 |
|
|
|
18,750 |
|
Proceeds
from maturities and calls of investment securities
held-to-maturity
|
|
|
200 |
|
|
|
200 |
|
Purchases
of investment securities available-for-sale
|
|
|
(22,465 |
) |
|
|
(19,336 |
) |
Net
decrease in loans
|
|
|
210,728 |
|
|
|
185,358 |
|
Purchases
of premises and equipment
|
|
|
(5 |
) |
|
|
(635 |
) |
Proceeds
from sales of premises and equipment
|
|
|
- |
|
|
|
326 |
|
Proceeds
from sales of OREO
|
|
|
10,697 |
|
|
|
9,947 |
|
Net
cash provided by investing activities
|
|
|
235,343 |
|
|
|
204,933 |
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
(326,500 |
) |
|
|
48,354 |
|
Increase
in TLGP senior unsecured debt
|
|
|
- |
|
|
|
41,000 |
|
Net
decrease in other borrowings
|
|
|
(207 |
) |
|
|
(54,891 |
) |
Net
cash provided (used) by financing activities
|
|
|
(326,707 |
) |
|
|
34,463 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(27,639 |
) |
|
|
291,561 |
|
Cash
and cash equivalents at beginning of period
|
|
|
359,322 |
|
|
|
48,946 |
|
Cash
and cash equivalents at end of period
|
|
$ |
331,683 |
|
|
$ |
340,507 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
18,525 |
|
|
$ |
25,041 |
|
Income
tax refund received
|
|
$ |
43,613 |
|
|
$ |
19,841 |
|
Loans
transferred to OREO
|
|
$ |
34,267 |
|
|
$ |
16,942 |
|
See
accompanying notes.
Cascade
Bancorp & Subsidiary
Notes
to Condensed Consolidated Financial Statements
September
30, 2010
(unaudited)
The
accompanying interim condensed consolidated financial statements include the
accounts of Cascade Bancorp (“Bancorp”), a one bank holding company, and its
wholly-owned subsidiary, Bank of the Cascades (the “Bank”) (collectively, “the
Company” or “Cascade”). All significant inter-company accounts and transactions
have been eliminated in consolidation.
The
interim condensed consolidated financial statements have been prepared by the
Company without audit and in conformity with accounting principles generally
accepted in the United States (GAAP) for interim financial information.
Accordingly, certain financial information and footnotes have been omitted or
condensed. In the opinion of management, the condensed consolidated
financial statements include all necessary adjustments (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented. In preparing the condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheets and income and expenses for the periods. Actual results could
differ from those estimates. Operating results for the interim periods disclosed
herein are not necessarily indicative of the results that may be expected for a
full year or any future period.
The
condensed consolidated financial statements as of and for the year ended
December 31, 2009 were derived from audited consolidated financial
statements, but do not include all disclosures contained in the Company’s Annual
Report on Form 10-K/A for the year ended December 31, 2009. The
interim condensed consolidated financial statements should be read in
conjunction with the December 31, 2009 consolidated financial statements,
including the notes thereto, included in the Company’s Annual Report on Form
10-K/A for the year ended December 31, 2009.
Certain
amounts for 2009 have been reclassified to conform with the 2010
presentation.
Investment
securities at September 30, 2010 and December 31, 2009 consisted of the
following (dollars in thousands):
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Estimated
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
fair value
|
|
9/30/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agency and non-agency mortgage-backed securities (MBS)
|
|
$ |
103,838 |
|
|
$ |
2,931 |
|
|
$ |
301 |
|
|
$ |
106,468 |
|
U.S.
Agency asset-backed securities
|
|
|
13,350 |
|
|
|
457 |
|
|
|
294 |
|
|
|
13,513 |
|
Mutual
fund
|
|
|
452 |
|
|
|
26 |
|
|
|
- |
|
|
|
478 |
|
|
|
$ |
117,640 |
|
|
$ |
3,414 |
|
|
$ |
595 |
|
|
$ |
120,459 |
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of state and political subdivisions
|
|
$ |
1,807 |
|
|
$ |
124 |
|
|
$ |
- |
|
|
$ |
1,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agency and non-agency MBS
|
|
$ |
114,560 |
|
|
$ |
2,793 |
|
|
$ |
714 |
|
|
$ |
116,639 |
|
U.S.
Government and agency securities
|
|
|
7,500 |
|
|
|
- |
|
|
|
19 |
|
|
|
7,481 |
|
Obligations
of state and political subdivisions
|
|
|
1,478 |
|
|
|
120 |
|
|
|
- |
|
|
|
1,598 |
|
U.S.
Agency asset-backed securities
|
|
|
7,108 |
|
|
|
478 |
|
|
|
- |
|
|
|
7,586 |
|
Mutual
fund
|
|
|
440 |
|
|
|
11 |
|
|
|
- |
|
|
|
451 |
|
|
|
$ |
131,086 |
|
|
$ |
3,402 |
|
|
$ |
733 |
|
|
$ |
133,755 |
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of state and political subdivisions
|
|
$ |
2,008 |
|
|
$ |
135 |
|
|
$ |
- |
|
|
$ |
2,143 |
|
The
following table presents the fair value and gross unrealized losses of the
Bank’s investment securities, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at September 30, 2010 and December 31, 2009 (dollars in
thousands):
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Estimated
fair value
|
|
|
Unrealized
losses
|
|
|
Estimated
fair value
|
|
|
Unrealized
losses
|
|
|
Estimated
fair value
|
|
|
Unrealized
losses
|
|
9/30/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agency and non-agency MBS
|
|
$ |
8,666 |
|
|
$ |
198 |
|
|
$ |
6,223 |
|
|
$ |
103 |
|
|
$ |
14,889 |
|
|
$ |
301 |
|
U.S.
Agency asset-backed securities
|
|
|
4,566 |
|
|
|
294 |
|
|
|
- |
|
|
|
- |
|
|
|
4,566 |
|
|
|
294 |
|
|
|
$ |
13,232 |
|
|
$ |
492 |
|
|
$ |
6,223 |
|
|
$ |
103 |
|
|
$ |
19,455 |
|
|
$ |
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agency and non-agency MBS
|
|
$ |
22,931 |
|
|
$ |
690 |
|
|
$ |
2,581 |
|
|
$ |
24 |
|
|
$ |
25,512 |
|
|
$ |
714 |
|
U.S.
Government and agency securities
|
|
|
7,481 |
|
|
|
19 |
|
|
|
- |
|
|
|
- |
|
|
|
7,481 |
|
|
|
19 |
|
|
|
$ |
30,412 |
|
|
$ |
709 |
|
|
$ |
2,581 |
|
|
$ |
24 |
|
|
$ |
32,993 |
|
|
$ |
733 |
|
The unrealized losses on investments in
U.S. Agency and non-agency MBS and U.S Agency asset-backed securities are
primarily due to elevated yield/rate spreads at September 30, 2010 and December
31, 2009 as compared to yield/spread relationships prevailing at the time
specific investment securities were purchased. Management expects the
fair value of these investment securities to recover as market volatility
lessens, and/or as securities approach their maturity
dates. Accordingly, management does not believe that the above gross
unrealized losses on investment securities are
other-than-temporary. Accordingly, no impairment adjustments have
been recorded.
Management
intends to hold the investment securities classified as held-to-maturity until
they mature, at which time the Company will receive full amortized cost value
for such investment securities. Furthermore, as of September 30,
2010, management did not have the intent to sell any of the securities
classified as available-for-sale in the table above and believes that it is more
likely than not that the Company will not have to sell any such securities
before a recovery of cost.
3.
|
Federal
Home Loan Bank of Seattle (“FHLB”)
Stock
|
As of September 30, 2010, the
carrying value of the Bank’s investment in FHLB stock was $10.5 million and is a
condition of membership in the FHLB system and, as such, is required to
obtain credit and other services from the FHLB. As of June 30, 2010, the FHLB
met all of its regulatory capital requirements, but remained classified as
“undercapitalized” by its primary regulator, the Federal Housing Finance Agency
(FHFA), due to several factors including the possibility that further declines
in the value of its private-label mortgage-backed securities could cause it to
fall below its risk-based capital requirements. On October 26, 2010,
the FHLB announced that FHLB entered into a Consent Agreement with
the FHFA, which requires the FHLB to take certain specified actions related to
its business and operations. The FHFA continues to deem the FHLB
"undercapitalized" under the FHFA's Prompt Corrective Action
rule. Management considers several factors in evaluating impairment
including the commitment of the issuer to perform its obligations and to provide
services to the Bank. Based upon the foregoing, management has not
recorded an impairment of the carrying value of our FHLB stock as of
September 30, 2010.
4.
|
Loans
and Reserve for Credit Losses
|
The
composition of the loan portfolio at September 30, 2010 and December 31, 2009
was as follows (dollars in thousands):
Loan portfolio
|
|
September 30,
2010
|
|
|
% of
gross
loans
|
|
|
December 31,
2009
|
|
|
% of
gross
loans
|
|
|
%
Change
Sep/Dec
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
306,696 |
|
|
|
24 |
% |
|
$ |
420,155 |
|
|
|
27 |
% |
|
|
-27.0 |
% |
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/lot/land
development
|
|
|
167,103 |
|
|
|
13 |
% |
|
|
308,346 |
|
|
|
20 |
% |
|
|
-45.8 |
% |
Mortgage
|
|
|
86,782 |
|
|
|
7 |
% |
|
|
93,465 |
|
|
|
6 |
% |
|
|
-7.2 |
% |
Commercial
|
|
|
670,461 |
|
|
|
52 |
% |
|
|
675,728 |
|
|
|
44 |
% |
|
|
-0.8 |
% |
Consumer
|
|
|
45,645 |
|
|
|
4 |
% |
|
|
49,982 |
|
|
|
3 |
% |
|
|
-8.7 |
% |
Total
loans
|
|
|
1,276,687 |
|
|
|
100 |
% |
|
|
1,547,676 |
|
|
|
100 |
% |
|
|
-17.5 |
% |
Less
reserve for loan losses
|
|
|
51,533 |
|
|
|
4.0 |
% |
|
|
58,586 |
|
|
|
3.8 |
% |
|
|
-12.0 |
% |
Total
loans, net
|
|
$ |
1,225,154 |
|
|
|
|
|
|
$ |
1,489,090 |
|
|
|
|
|
|
|
-17.7 |
% |
Total
loans continue to be strategically reduced as a result of paydowns, select loan
sales or participations, non-renewal of mainly transaction-only loans where the
deposit relationship with the related customer was de minimus, as well as net
charge-offs (particularly in the residential land development
portfolio).
The above
loans are net of deferred loan fees of approximately $2.7 million at September
30, 2010 and $3.3 million at December 31, 2009.
Transactions in the reserve for loan
losses and unfunded commitments for the nine months ended September 30, 2010 and
2009 were as follows (dollars in thousands):
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Reserve for loan losses
|
|
|
|
|
|
|
|
|
Balance
at beginning of period (Restated as of December 31, 2009)
|
|
$ |
58,586 |
|
|
$ |
47,166 |
|
Loan
loss provision
|
|
|
19,000 |
|
|
|
85,000 |
|
Recoveries
|
|
|
7,861 |
|
|
|
1,946 |
|
Loans
charged off
|
|
|
(33,914 |
) |
|
|
(80,989 |
) |
Balance
at end of period
|
|
$ |
51,533 |
|
|
$ |
53,123 |
|
|
|
|
|
|
|
|
|
|
Reserve for unfunded
commitments
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
704 |
|
|
$ |
1,039 |
|
Provision
(credit) for unfunded commitments
|
|
|
237 |
|
|
|
(335 |
) |
Balance
at end of period
|
|
$ |
941 |
|
|
$ |
704 |
|
|
|
|
|
|
|
|
|
|
Reserve for credit losses
|
|
|
|
|
|
|
|
|
Reserve
for loan losses
|
|
$ |
51,533 |
|
|
$ |
53,123 |
|
Reserve
for unfunded commitments
|
|
|
941 |
|
|
|
704 |
|
Total
reserve for credit losses
|
|
$ |
52,474 |
|
|
$ |
53,827 |
|
At
September 30, 2010, the Bank had approximately $207.6 million in outstanding
commitments to extend credit, compared to approximately $288.7 million at
year-end 2009. The reduction is a function of completion of prior period
construction draws as well as management’s efforts to reduce commitments to a
lower level. Reserves for unfunded commitments are classified as
other liabilities in the accompanying condensed consolidated balance
sheets.
5.
|
Non-Performing
Assets (“NPA's”)
|
Risk of nonpayment exists with respect
to all loans, which could result in the classification of such loans as
non-performing. NPA balances have declined during 2010 compared to the rapid
growth experienced in the first half of 2009. While this is a
positive development no assurance can be given that NPA’s will not increase in
the future. During the three months ended September 30, 2010 certain non
performing loans were foreclosed upon resulting in a reduction in non performing
loans (NPL’s).
At September 30, 2010, the Company had
22 troubled debt restructurings ("TDRs") totaling $41.4 million, of which $11.5
million is reported as non-accrual loans. At December 31, 2009, the
Company’s TDR’s totaled $27.3 million, of which $11.8 million was reported as
non-accrual loans. The TDRs at September 30, 2010 and December 31, 2009
are classified as impaired loans and, in the opinion of management, are reserved
appropriately.
The
following table presents information with respect to NPA’s at September 30, 2010
and December 31, 2009 (dollars in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(Restated)
|
|
Loans
on non-accrual status
|
|
$ |
81,509 |
|
|
$ |
132,110 |
|
Loans
past due 90 days or more but not on non-accrual
status
|
|
|
57 |
|
|
|
- |
|
Other
real estate owned (“OREO”)
|
|
|
47,969 |
|
|
|
28,860 |
|
Total
NPA's
|
|
$ |
129,535 |
|
|
$ |
160,970 |
|
|
|
|
|
|
|
|
|
|
Selected
ratios:
|
|
|
|
|
|
|
|
|
NPLs
to total gross loans
|
|
|
6.39 |
% |
|
|
8.54 |
% |
NPAs
to total gross loans and OREO
|
|
|
9.78 |
% |
|
|
10.21 |
% |
NPAs
to total assets
|
|
|
7.08 |
% |
|
|
7.41 |
% |
The
composition of NPA’s as of September 30, 2010, June 30, 2010, March 31, 2010 and
December 31, 2009 was as follows (dollars in thousands):
|
|
September 30,
2010
|
|
|
% of
total
|
|
|
June 30,
2010
|
|
|
% of
total
|
|
|
March 31,
2010
|
|
|
% of
total
|
|
|
December 31,
2009
|
|
|
% of
total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Commercial
|
|
$ |
23,953 |
|
|
|
19 |
% |
|
$ |
23,320 |
|
|
|
17 |
% |
|
$ |
35,906 |
|
|
|
22 |
% |
|
$ |
28,964 |
|
|
|
18 |
% |
Real
Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development/Construction/lot
|
|
|
82,248 |
|
|
|
63 |
% |
|
|
91,822 |
|
|
|
65 |
% |
|
|
100,797 |
|
|
|
63 |
% |
|
|
106,752 |
|
|
|
66 |
% |
Commercial
|
|
|
22,535 |
|
|
|
17 |
% |
|
|
24,164 |
|
|
|
17 |
% |
|
|
23,411 |
|
|
|
15 |
% |
|
|
24,749 |
|
|
|
16 |
% |
Consumer/other
|
|
|
799 |
|
|
|
1 |
% |
|
|
819 |
|
|
|
1 |
% |
|
|
595 |
|
|
|
0 |
% |
|
|
505 |
|
|
|
0 |
% |
Total
NPA's
|
|
$ |
129,535 |
|
|
|
100 |
% |
|
$ |
140,125 |
|
|
|
100 |
% |
|
$ |
160,710 |
|
|
|
100 |
% |
|
$ |
160,970 |
|
|
|
100 |
% |
The
following table presents non-performing assets as of September 30, 2010, June
30, 2010, March 31, 2010 and December 31, 2009 by region (dollars in
thousands):
Region
|
|
September 30,
2010
|
|
|
% of
total
NPA's
|
|
|
June 30,
2010
|
|
|
% of
total
NPA's
|
|
|
March 31,
2010
|
|
|
% of
total
NPA's
|
|
|
December 31,
2009
|
|
|
% of
total
NPA's
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
Central
Oregon
|
|
$ |
32,885 |
|
|
|
25 |
% |
|
$ |
38,080 |
|
|
|
27 |
% |
|
$ |
47,939 |
|
|
|
30 |
% |
|
$ |
49,167 |
|
|
|
31 |
% |
Northwest
Oregon
|
|
|
24,537 |
|
|
|
19 |
% |
|
|
24,114 |
|
|
|
17 |
% |
|
|
25,659 |
|
|
|
16 |
% |
|
|
27,042 |
|
|
|
17 |
% |
Southern
Oregon
|
|
|
17,386 |
|
|
|
14 |
% |
|
|
17,730 |
|
|
|
13 |
% |
|
|
17,067 |
|
|
|
11 |
% |
|
|
17,758 |
|
|
|
11 |
% |
Total
Oregon
|
|
|
74,808 |
|
|
|
58 |
% |
|
|
79,924 |
|
|
|
57 |
% |
|
|
90,665 |
|
|
|
56 |
% |
|
|
93,967 |
|
|
|
58 |
% |
Idaho
|
|
|
54,727 |
|
|
|
42 |
% |
|
|
60,201 |
|
|
|
43 |
% |
|
|
70,045 |
|
|
|
44 |
% |
|
|
67,003 |
|
|
|
42 |
% |
Grand
total
|
|
$ |
129,535 |
|
|
|
100 |
% |
|
$ |
140,125 |
|
|
|
100 |
% |
|
$ |
160,710 |
|
|
|
100 |
% |
|
$ |
160,970 |
|
|
|
100 |
% |
A loan is
considered to be impaired (non-performing) when it is determined probable that
the principal and/or interest amounts due will not be collected according
to the contractual terms of the loan agreement. Impaired loans are generally
carried at the lower of cost or fair value, which may be determined based upon
recent independent appraisals which are further reduced for estimated selling
costs or as a practical expedient basis by estimating the present value of
expected future cash flows, discounted at the loan’s effective interest
rate. Certain large groups of smaller balance homogeneous loans,
collectively measured for impairment, are excluded. Impaired loans are charged
to the reserve for loan losses when management believes after considering
economic and business conditions, collection efforts and collateral position
that the borrower’s financial condition is such that collection of principal is
not probable. See “Footnote 13 – Fair Value Measurements” for additional
information related to fair value measurement.
At
September 30, 2010, impaired loans carried at fair value totaled
approximately $111.3 million and related specific valuation allowances were
approximately $6.6 million. At December 31, 2009, impaired loans
were approximately $147.6 million and related specific valuation allowances were
approximately $0.1 million. Interest income recognized for cash
payments received on impaired loans for the periods presented was insignificant.
The average recorded investment in impaired loans was approximately $149.3
million and $159.3 million for the nine months ended September 30, 2010 and
2009, respectively.
The
accrual of interest on a loan is discontinued when, in management’s judgment,
the future collectability of principal or interest is in doubt. Loans
placed on non-accrual status may or may not be contractually past due at the
time of such determination, and may or may not be secured. When a
loan is placed on non-accrual status, it is the Bank’s policy to reverse, and
charge against current operations, interest previously accrued on the loan but
uncollected. Interest subsequently collected on such loans is credited to loan
principal if, in the opinion of management, full collectability of principal is
doubtful. Interest income that was reversed and charged against
income for the nine months ended September 30, 2010 and 2009, was approximately
$0.9 million and $1.6 million, respectively.
Since a
significant portion of the Bank’s loans are collateralized by real estate, the
Bank primarily measures impairment of such loans based on the estimated fair
value of the underlying real estate collateral. OREO is carried at the lower of
cost or estimated net realizable value, which is also based on the estimated
fair value of the related real estate property. The valuation of real estate
collateral and OREO is subjective in nature and may be adjusted in the future
because of changes in economic conditions. The valuation of real estate
collateral and OREO is also subject to review by Federal and State bank
regulatory authorities who may require increases or decreases to carrying
amounts based on their evaluation of the information available to them at the
time of their examinations of the Bank, in addition to State banking regulations
which require periodic mandatory write-downs of OREO. Management considers
third-party appraisals, as well as independent fair market value assessments
from realtors or persons involved in selling real estate and OREO, in
determining the estimated fair value of particular properties. In addition, as
certain of these third-party appraisals and independent fair market value
assessments are only updated on an annual basis, changes in the values of
specific properties may have occurred subsequent to the most recent appraisals.
Accordingly, the amounts of any such potential changes – and any related
adjustments – are generally
recorded at the time such information is received.
6.
|
Other
Real Estate Owned (“OREO”), Net
|
The following table presents activity
related to OREO for the periods shown (dollars in thousands):
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Balance
at beginning of period (Restated as of December 31, 2009)
|
|
$ |
28,860 |
|
|
$ |
52,727 |
|
Additions
to OREO
|
|
|
34,267 |
|
|
|
16,942 |
|
Dispositions
of OREO
|
|
|
(10,697 |
) |
|
|
(25,674 |
) |
Valuation
adjustments in the period
|
|
|
(4,461 |
) |
|
|
(6,341 |
) |
Balance
at end of period
|
|
$ |
47,969 |
|
|
$ |
37,654 |
|
7.
|
Mortgage
Servicing Rights (“MSRs”)
|
Effective
April 30, 2010, the Bank executed an agreement to sell its mortgage servicing
assets as previously discussed in the Company’s Quarterly Report on Form 10-Q
for the period ending March 31, 2010. Going forward, the Bank will
not directly service mortgage loans it originates, but rather sell originations
“servicing released”. “Servicing released” means that whoever the Bank sells the
loan to will service or arrange for servicing of the loan.
MSRs are
included in other assets in the accompanying condensed consolidated balance
sheet as of December 31, 2009. MSR’s were carried at the lower of
origination value less accumulated amortization, or current fair
value. The net carrying value of MSRs was approximately $3.9 million
at December 31, 2009.
Activity
in MSRs for the nine months ended September 30, 2010 and 2009 was as follows
(dollars in thousands):
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Balance
at beginning of period
|
|
$ |
3,947 |
|
|
$ |
3,605 |
|
Additions
|
|
|
25 |
|
|
|
1,687 |
|
Amortization
|
|
|
(378 |
) |
|
|
(1,204 |
) |
Sale
of MSR's
|
|
|
(3,594 |
) |
|
|
- |
|
Balance
at end of period
|
|
$ |
- |
|
|
$ |
4,088 |
|
For further discussion of activity in
MSRs for the nine months ended September 30, 2010 and 2009, please see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Non-Interest Income” elsewhere in this Form 10-Q.
8.
|
Junior
Subordinated Debentures
|
At
September 30, 2010, the Company had four subsidiary grantor trusts for the
purpose of issuing Trust Preferred Securities (TPS) and common securities. The
common securities were purchased by the Company, and the Company’s investment in
the common securities of $2.1 million is included in accrued interest and other
assets in the accompanying condensed consolidated balance sheets. The
weighted average interest rate of all TPS was 2.82% at September 30, 2010 and
2.79% at December 31, 2009.
During
2009, the Company exercised its right to defer regularly scheduled interest
payments on outstanding junior subordinated debentures related to its TPS. At
September 30, 2010, the Company had a balance in other liabilities of $3.2
million in accrued and unpaid interest expense related to these junior
subordinated debentures, and it may not pay dividends on its common stock until
all accrued but unpaid interest has been paid in full. Payment of dividends is
also restricted by state and federal regulators (see Note 14). The Company has
recorded and continues to record junior subordinated debenture interest expense
in its statement of operations.
At September 30, 2010 the Bank had a
total of $195.0 million in long-term borrowings from FHLB with maturities
ranging from 2011 to 2017, bearing a weighted-average rate of 1.83% with $50
million maturing in 2011. In addition, the Bank had
$98.0 million in off-balance sheet FHLB letters of credit used for
collateralization of public deposits held by the Bank. The available
line of credit with the FHLB is reduced by the amount of these letters of
credit. Also, the Bank had $41.0 million of senior unsecured debt
issued in connection with the Federal Deposit Insurance Corporation’s (“FDIC”)
Temporary Liquidity Guarantee Program (“TLGP”) maturing February 12, 2012
bearing a weighted average rate of 2.04%, exclusive of net issuance costs and 1%
per annum FDIC insurance assessment applicable to TLGP debt which are being
amortized straight line over the term of the debt. (See Management’s Discussion
and Analysis of Financial Results of Operation - “Liquidity and Sources of
Funds” for further discussion).
10.
|
Basic
and Diluted loss per Common Share
|
The
Company’s basic loss per common share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the
period. The Company’s diluted loss per common share is the same as
the basic loss per common share due to the anti-dilutive effect of common stock
equivalents.
The
numerators and denominators used in computing basic and diluted loss per common
share for the nine months and three months ended September 30, 2010 and 2009 can
be reconciled as follows (dollars in thousands, except per share
data):
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
loss
|
|
$ |
(15,051 |
) |
|
$ |
(44,628 |
) |
|
$ |
(3,438 |
) |
|
$ |
(12,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding - basic
|
|
|
28,047,835 |
|
|
|
27,991,675 |
|
|
|
28,049,748 |
|
|
|
28,029,087 |
|
Basic
and diluted loss per common share
|
|
$ |
(0.54 |
) |
|
$ |
(1.59 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock equivalent shares excluded due to antidilutive
effect
|
|
|
482,928 |
|
|
|
120,347 |
|
|
|
476,840 |
|
|
|
132,934 |
|
11.
|
Stock-Based
Compensation
|
During
the nine months ended September 30, 2010 the Company granted 770,750 stock
options with a calculated fair value of $0.43 per option. The Company did not
grant any equity grants for the nine month period ended September 30,
2009.
The
Company used the Black-Scholes option-pricing model with the following
weighted-average assumptions to value options granted for the nine months ended
September 30, 2010:
Dividend
yield
|
|
|
0.0 |
% |
Expected
volatility
|
|
|
78.1 |
% |
Risk-free
interest rate
|
|
|
3.1 |
% |
Expected
option lives
|
|
7.9
years
|
|
The dividend yield is based on
historical dividend information. The expected volatility is based on historical
volatility of the Company’s common stock price. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the date of grant for
periods corresponding with the expected lives of the options granted. The
expected option lives represent the period of time that options are expected to
be outstanding giving consideration to vesting schedules and historical exercise
and forfeiture patterns.
The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of publicly-traded options that have no vesting restrictions and are fully
transferable. Additionally, the model requires the input of highly
subjective assumptions. Because the Company’s stock options have
characteristics significantly different from those of publicly-traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimates, in the opinion of the Company’s management, the
Black-Scholes option-pricing model does not necessarily provide a reliable
single measure of the fair value of the Company’s stock options.
The
following table presents the activity related to stock options for the nine
months ended September 30, 2010:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
(000)
|
|
Options
outstanding at January 1, 2010
|
|
|
990,618 |
|
|
$ |
12.18 |
|
|
|
4.4 |
|
|
$ |
- |
|
Granted
|
|
|
770,750 |
|
|
|
0.57 |
|
|
|
N/A |
|
|
|
N/A |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
N/A |
|
|
|
N/A |
|
Cancelled
|
|
|
(179,743 |
) |
|
|
8.49 |
|
|
|
N/A |
|
|
|
N/A |
|
Options
outstanding at September 30, 2010
|
|
|
1,580,367 |
|
|
$ |
6.93 |
|
|
|
5.1 |
|
|
$ |
- |
|
Options
exercisable at September 30, 2010
|
|
|
563,633 |
|
|
$ |
13.48 |
|
|
|
3.2 |
|
|
$ |
- |
|
As of
September 30, 2010, there was approximately $0.4 million of unrecognized
compensation expense related to nonvested stock options, which will be
recognized over the remaining vesting periods of the underlying stock
options.
During the nine months ended September
30, 2010, the Company granted 378,000 shares of nonvested restricted stock at a
weighted-average grant date fair value of $0.57 per share
(approximately $215,000). The nonvested restricted stock is scheduled to
cliff-vest three years from the grant date.
The following table presents the
activity for nonvested restricted stock for the nine months ended September 30,
2010:
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant
Date Fair Value
Per Share
|
|
|
Weighted-
Average
Remaining
Vesting Term
(years)
|
|
Nonvested
as of January 1, 2010
|
|
|
131,734 |
|
|
$ |
14.68 |
|
|
|
N/A |
|
Granted
|
|
|
378,000 |
|
|
|
0.57 |
|
|
|
N/A |
|
Vested
|
|
|
(19,130 |
) |
|
|
20.72 |
|
|
|
N/A |
|
Cancelled
|
|
|
(13,764 |
) |
|
|
11.20 |
|
|
|
N/A |
|
Nonvested
as of September 30, 2010
|
|
|
476,840 |
|
|
$ |
3.50 |
|
|
|
2.24 |
|
As of September 30, 2010, unrecognized
compensation cost related to nonvested stock totaled approximately $0.4
million. The nonvested stock is scheduled to vest over periods of
three to four years from the grant date. The unearned compensation on
nonvested stock is being amortized to expense on a straight-line basis over the
applicable vesting periods.
The
Company has also granted awards of restricted stock units (RSUs). A RSU
represents the unfunded, unsecured right to require the Company to deliver to
the participant one share of common stock for each RSU. There was no
unrecognized compensation cost related to RSUs at September 30, 2010 and 2009,
as all RSUs were fully-vested.
During
the three months ended September 30, 2010 the IRS commenced a required
examination of the Company’s 2009 tax year and December 31, 2009 income tax
receivable of $43.3 million. In connection therewith, and in completion of
the 2009 income tax examination, the Company settled with the IRS’ field
examiner and recorded a provision for income taxes of $1.1 million for the three
months ended September 30, 2010. The provision for income taxes of $0.5 million
for the nine months ended September 30, 2010 also reflects adjustments to the
2009 income tax receivable. During the three month and nine month periods
ended September 30, 2009, the Company recorded income tax benefits of $9.7
million and $31.4 million, respectively, as management believed at that time
that it was more likely than not that such benefits would be received.
Effective December 31, 2009, management determined that there should be a 100%
valuation allowance against the Company’s net deferred tax assets.
As of
September 30, 2010, the Company maintained a valuation allowance of $37.4
million against the deferred tax asset balance of $36.3 million, for a net
deferred tax credit of $1.1 million. This amount represented a $0.1 million
increase from year-end 2009 due to an increase in gross unrealized gains in the
Company’s investment portfolio during the nine months ended September 30, 2010.
The Company’s future net deferred tax asset or liability will continue to be
impacted by changes in the gross unrealized gains/losses on the Company’s
investment portfolio. For discussion of the Company’s deferred income tax assets
see “Critical Accounting Policies – Deferred Income Taxes” included in the
Company’s Annual Report on Form 10-K/A for the year ended December 31,
2009.
13.
|
Fair
Value Measurements
|
GAAP
establishes a hierarchy for determining fair value measurements, and
includes three levels based upon the valuation techniques used to measure assets
and liabilities. The three levels are as follow:
|
·
|
Quoted prices in
active markets for identical assets (Level 1): Inputs that are
quoted unadjusted prices in active markets for identical assets that the
Company has the ability to access at the measurement date. An active
market for the asset is a market in which transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing
information on an ongoing
basis.
|
|
·
|
Significant other
observable inputs (Level 2): Inputs that reflect the assumptions
market participants would use in pricing the asset or liability developed
based on market data obtained from sources independent of the reporting
entity including quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
inactive markets, and inputs derived principally from, or corroborated by,
observable market data by correlation or other
means.
|
|
·
|
Significant
unobservable inputs (Level 3): Inputs that reflect the
reporting entity's own assumptions about the assumptions market
participants would use in pricing the asset or liability developed based
on the best information available in the circumstances.
|
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation methodologies were
applied to all of the Company’s financial assets and financial liabilities
carried at fair value. In general, fair value is based upon quoted
market prices, where available. If such quoted market prices are not available,
fair value is based upon internally-developed models that primarily use, as
inputs, observable market-based parameters. Valuation adjustments may be made to
ensure that financial instruments are recorded at fair value. These adjustments
may include amounts to reflect counterparty credit quality and the Company’s
creditworthiness, among other things, as well as unobservable parameters. Any
such valuation adjustments are applied consistently over time. The Company’s
valuation methodologies may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values. While
management believes that the Company’s valuation methodologies are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting
date. Furthermore, the reported fair value amounts have not been comprehensively
revalued since the presentation dates, and therefore, estimates of fair value
after the condensed consolidated balance sheet date may differ significantly
from the amounts presented herein.
The
following is a description of the valuation methodologies used for instruments
measured at fair value, as well as the general classification of such
instruments pursuant to valuation hierarchy:
Investment
securities: Where quoted prices for identical assets are available in an
active market, investment securities available-for-sale are classified within
level 1 of the hierarchy. If quoted market prices for identical securities are
not available then fair values are estimated by independent sources using
pricing models and/or quoted prices of investment securities with similar
characteristics or discounted cash flows. The Company has categorized its
investment securities available-for-sale as level 2, since a majority of such
securities are MBS which are mainly priced in this latter manner.
Impaired loans: A
loan is considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due (both
interest and principal) according to the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan’s effective interest rate or, as a
practical expedient, at the loan’s observable market price or the fair market
value of the collateral. A significant portion of the Bank's impaired loans are
measured using the estimated fair market value of the collateral.
OREO: Management
obtains third party appraisals as well as independent fair market value
assessments from realtors or persons involved in selling OREO in determining the
estimated fair value of particular properties. Accordingly, the valuation of
OREO is subject to significant external and internal judgment. Management
periodically reviews OREO to determine whether the property continues to be
carried at the lower of its recorded book value or estimated fair
value.
At
September 30, 2010 and December 31, 2009, the Company had no financial
liabilities measured at fair value on a recurring basis. The
Company’s financial assets measured at fair value on a recurring basis at
September 30, 2010 and December 31, 2009 are as follows (dollars in
thousands):
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
Investment
securities available - for - sale
|
|
$ |
- |
|
|
$ |
120,459 |
|
|
$ |
- |
|
Total
recurring assets measured at fair value
|
|
$ |
- |
|
|
$ |
120,459 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available - for - sale
|
|
$ |
- |
|
|
$ |
133,755 |
|
|
$ |
- |
|
Total
recurring assets measured at fair value
|
|
$ |
- |
|
|
$ |
133,755 |
|
|
$ |
- |
|
Certain
non-financial assets are also measured at fair value on a non-recurring
basis. These assets primarily consist of intangible assets and other
non-financial long-lived assets which are measured at fair value for periodic
impairment assessments.
Certain
assets are measured at fair value on a nonrecurring basis (e.g., the instruments
are not measured at fair value on an ongoing basis but are subject to fair value
adjustments when there is evidence of impairment). The following table
represents the assets measured at fair value on a nonrecurring basis by the
Company at September 30, 2010 and December 31, 2009 (dollars in
thousands):
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
(Restated)
|
|
Impaired
loans with specific valuation allowances
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
105,916 |
|
Other
real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
47,969 |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
153,885 |
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans with specific valuation allowances
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
114,039 |
|
Other
real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
28,860 |
|
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
142,899 |
|
The Company did not change the
methodology used to determine fair value for any financial instruments during
the nine months ended September 30, 2010 or 2009. Accordingly, for
any given class of financial instruments, the Company did not have any transfers
between Level 1, Level 2, or Level 3 during the nine month periods ended
September 30, 2010 or 2009.
The following disclosures are made in
accordance with GAAP, which requires the disclosure of fair value information
about financial instruments where it is practicable to estimate that
value.
In cases where quoted market values are
not available, the Company primarily uses present value techniques to estimate
the fair value of its financial instruments. Valuation methods
require considerable judgment, and the resulting estimates of fair value can be
significantly affected by the assumptions made and methods
used. Accordingly, the estimates provided herein do not necessarily
indicate amounts which could be realized in a current market
exchange.
The disclosures also do not include
estimated fair value amounts for items which are not defined as financial
instruments but which may have significant value. The Company does
not believe that it would be practicable to estimate a representational fair
value for these types of items as of September 30, 2010 and December 31,
2009.
Because
GAAP excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements, any aggregation of the fair value amounts
presented would not represent the underlying value of the Company.
The Company uses the following methods
and assumptions to estimate the fair value of its financial
instruments:
Cash and cash
equivalents: The carrying amount approximates the estimated
fair value of these instruments.
Investment
securities: See above description.
FHLB
stock: The carrying amount approximates the estimated fair
value.
|
Loans: The
estimated fair value of loans is calculated by discounting the contractual
cash flows of the loans using September 30, 2010 and December 31, 2009
origination rates. The resulting amounts are adjusted to estimate the
effect of changes in the credit quality of borrowers since the loans were
originated. Fair values for impaired loans are estimated using a
discounted cash flow analysis or the underlying collateral
values.
|
|
BOLI: The
carrying amount approximates the estimated fair value of these
instruments.
|
|
OREO: See
above description.
|
|
Deposits: The
estimated fair value of demand deposits, consisting of checking, interest
bearing demand and savings deposit accounts, is represented by the amounts
payable on demand. At the reporting date, the estimated fair
value of time deposits is calculated by discounting the scheduled cash
flows using the September 30, 2010 and December 31, 2009 rates offered on
those instruments.
|
|
Junior subordinated
debentures, other borrowings and TLGP senior unsecured
debt: The fair value of the Bank’s junior subordinated
debentures, other borrowings (including federal funds purchased) and TLGP
senior unsecured debt are estimated using discounted cash flow analyses
based on the Bank’s September 30, 2010 and December 31, 2009 incremental
borrowing rates for similar types of borrowing
arrangements. However, as of September 30, 2010 and December
31, 2009, the estimated fair value of the Bank’s junior subordinated
debentures has been adjusted to reflect the possible negotiated exchange
of such debentures for cash.
|
Loan commitments and standby
letters of credit: The majority of the Bank’s commitments to
extend credit have variable interest rates and are conditional on defined
customer credit quality parameters. Standby Letters of Credit are similarly
structured with conditional requirements and therefore the fair value of both
items is not significant and not included in the following table.
The estimated fair values of the
Company’s significant on-balance sheet financial instruments at September 30,
2010 and December 31, 2009 were approximately as follows (dollars in
thousands):
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
value
|
|
|
Estimated
fair value
|
|
|
Carrying
value
|
|
|
Estimated
fair value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
331,683 |
|
|
$ |
331,683 |
|
|
$ |
359,322 |
|
|
$ |
359,322 |
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
120,459 |
|
|
|
120,459 |
|
|
|
133,755 |
|
|
|
133,755 |
|
Held-to-maturity
|
|
|
1,807 |
|
|
|
1,931 |
|
|
|
2,008 |
|
|
|
2,143 |
|
FHLB
stock
|
|
|
10,472 |
|
|
|
10,472 |
|
|
|
10,472 |
|
|
|
10,472 |
|
Loans,
net (Restated as of December 31, 2009)
|
|
|
1,225,154 |
|
|
|
1,236,090 |
|
|
|
1,489,090 |
|
|
|
1,483,232 |
|
BOLI
|
|
|
33,638 |
|
|
|
33,638 |
|
|
|
33,635 |
|
|
|
33,635 |
|
OREO
(Restated as of December 31, 2009)
|
|
|
47,969 |
|
|
|
47,969 |
|
|
|
28,860 |
|
|
|
28,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,488,848 |
|
|
|
1,493,472 |
|
|
|
1,815,348 |
|
|
|
1,819,103 |
|
Junior
subordinated debentures, other borrowings, and TLGP senior unsecured
debt
|
|
|
304,558 |
|
|
|
257,000 |
|
|
|
304,765 |
|
|
|
256,814 |
|
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory – and possibly
additional discretionary – actions by regulators that, if undertaken, could have
a direct material effect on the Company’s consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company’s and the Bank’s capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
tables below) of Tier 1 capital to average assets and Tier 1 and total
capital to risk-weighted assets (all as defined in the
regulations).
Federal
banking regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
Such actions could potentially include a leverage capital limit, a risk-based
capital requirement, and any other measure of capital deemed appropriate by the
federal banking regulator for measuring the capital adequacy of an insured
depository institution. In addition, payment of dividends by the Company and the
Bank are subject to restriction by state and federal regulators and availability
of retained earnings. At September 30, 2010 and December 31, 2009, the Company
and the Bank did not meet the regulatory benchmarks to be “adequately
capitalized” under the applicable regulations.
On August
27, 2009, the Bank entered into an agreement with the FDIC, its principal
federal banking regulator, and the Oregon Division of Finance and Corporate
Securities (“DFCS”) which requires the Bank to take certain measures to improve
its safety and soundness (the “Order”).
In
connection with this agreement, the Bank stipulated to the issuance by the FDIC
and the DFCS of the Order based on certain findings from an examination of the
Bank conducted in February 2009 based upon financial and lending data measured
as of December 31, 2008 (the “ROE”). In entering into the stipulation and
consenting to entry of the Order, the Bank did not concede the findings or admit
to any of the assertions therein.
Under the
Order, the Bank is required to take certain measures to improve its capital
position, maintain liquidity ratios, reduce its level of non-performing assets,
reduce its loan concentrations in certain portfolios, improve management
practices and board supervision and to assure that its reserve for loan losses
is maintained at an appropriate level. As of September 30, 2010, the
Bank has failed to comply with certain requirements of the Order, particularly
those requirements that are tied to or dependent upon execution of a capital
raise as described below. Due to uncertain economic and banking
conditions, no assurance can be given that such compliance will be attained in
the future or that compliance with other terms of the Order will
continue.
Among the
corrective actions required are for the Bank to develop and adopt a plan to
maintain the minimum capital requirements for a “well-capitalized” bank,
including a Tier 1 leverage ratio of at least 10% at the Bank level beginning
150 days from the issuance of the Order. As of September 30, 2010 and through
the date of this report the requirement relating to increasing the Bank’s
Tier 1 leverage ratio has not been met.
In
addition, pursuant to the Order, the Bank must retain qualified management and
must notify the FDIC and the DFCS in writing when it proposes to add any
individual to its Board or to employ any new senior executive officer. Under the
Order the Bank’s Board must also increase its participation in the affairs of
the Bank, assuming full responsibility for the approval of sound policies and
objectives and for the supervision of all the Bank’s activities.
The Order
further requires the Bank to ensure the level of the reserve for loan losses is
maintained at appropriate levels to safeguard the book value of the Bank’s loans
and leases, and to reduce the amount of classified loans as of the ROE to no
more than 75% of capital. As of September 30, 2010 and through the date of
this report, the requirement that the amount of classified loans as of the ROE
be reduced to no more than 75% of capital has not been met. However,
as required by the Order, all assets classified as “Loss” in the ROE have been
charged-off. The Bank has also developed and implemented a process for the
review and approval of all applicable asset disposition plans.
The Order
restricts the Bank from taking certain actions without the consent of the FDIC
and the DFCS, including paying cash dividends, and from extending additional
credit to certain types of borrowers.
The Order
further requires the Bank to maintain a primary liquidity ratio (net cash, net
short-term and marketable assets divided by net deposits and short-term
liabilities) of at least 15%. At September 30, 2010, the Bank’s
primary liquidity ratio was 26.32%.
The Bank
was required to implement these measures under various time frames, all of which
have expired. While the Bank successfully completed several of the measures, it
was unable to implement certain measures in the time frame provided,
particularly those related to raising capital levels. In order for the Bank to
meet the capital requirements of the Order, as of September 30, 2010 the Bank is
targeting a minimum of approximately $150 million of additional equity
capital at the Bank level. The economic environment in our market
areas and the duration of the downturn in the real estate market will continue
to have a significant impact on the implementation of the Bank’s business plans.
While the Company plans to continue its efforts to aggressively pursue and
evaluate opportunities to raise capital, there can be no assurance that such
efforts will be successful or that the Bank’s plans to achieve the objectives
set forth in the Order will successfully improve the Bank’s results of
operations or financial condition or result in the termination of the Order from
the FDIC and the DFCS. In addition, failure to increase capital levels
consistent with the requirements of the Order could result in further
enforcement actions by the FDIC and/or DFCS or the placing of the Bank into
conservatorship or receivership, and could affect the Company’s ability to
continue as a going concern.
On
October 26, 2009, the Company entered into a written agreement with the Federal
Reserve Bank (the “FRB”) and DFCS (the “Written Agreement”), which requires the
Bank to take certain measures to improve its safety and soundness. Under the
Written Agreement, the Bank is required to develop and submit for approval, a
plan to maintain sufficient capital at the Company and the Bank within 60 days
of the date of the Written Agreement. The Company submitted a
strategic plan on October 28, 2009 and as of September 30, 2010 and through the
date of this report, management believes that the Company is in compliance with
the terms of the Written Agreement with the exception of requirements tied to or
dependent upon increasing capital.
As
outlined in the table below, as of September 30, 2010 and December 31, 2009 the
Company and the Bank failed to meet the minimum regulatory requirements for an
“adequately capitalized” institution and had therefore not complied with terms
of the Order and Written Agreement to bring its capital ratios to the targeted
levels.
The
Bank’s and Company’s actual and required capital amounts and ratios are
presented in the following tables. Note that the Company’s ratios are
substantially below those of the Bank because regulatory calculations disallow
portions of TPS from inclusion of capital at the Company level, but it is
included as Tier 1 capital at the Bank level.
The
Bank’s actual and required capital amounts and ratios are presented in the
following table (dollars in thousands):
|
|
Actual
|
|
|
Regulatory minimum
to be "adequately
capitalized"
|
|
|
Regulatory minimum
to be "well capitalized"
under prompt
corrective action
provisions
|
|
|
|
Capital
Amount
|
|
|
Ratio
|
|
|
Capital
Amount
|
|
|
Ratio
|
|
|
Capital
Amount
|
|
|
Ratio
|
|
September
30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 leverage (to average assets)
|
|
$ |
72,849 |
|
|
|
3.9 |
% |
|
$ |
74,515 |
|
|
|
4.0 |
% |
|
$ |
186,287 |
|
|
|
10.0 |
% (1) |
Tier
1 capital (to risk-weighted assets)
|
|
|
72,849 |
|
|
|
5.2 |
|
|
|
55,557 |
|
|
|
4.0 |
|
|
|
83,335 |
|
|
|
6.0 |
|
Total
capital (to risk-weighted assets)
|
|
|
90,656 |
|
|
|
6.5 |
|
|
|
111,114 |
|
|
|
8.0 |
|
|
|
138,892 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009 (Restated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 leverage (to average assets)
|
|
$ |
82,847 |
|
|
|
3.8 |
% |
|
$ |
88,629 |
|
|
|
4.0 |
% |
|
$ |
221,573 |
|
|
|
10.0 |
% (1) |
Tier
1 capital (to risk-weighted assets)
|
|
|
82,847 |
|
|
|
5.0 |
|
|
|
66,664 |
|
|
|
4.0 |
|
|
|
99,996 |
|
|
|
6.0 |
|
Total
capital (to risk-weighted assets)
|
|
|
104,159 |
|
|
|
6.3 |
|
|
|
133,328 |
|
|
|
8.0 |
|
|
|
166,660 |
|
|
|
10.0 |
|
(1)
Pursuant to the Order, in order to be deemed "well capitalized", the Bank must
maintain a Tier 1 leverage ratio of at least 10.00%.
The
Company’s actual and required capital amounts and ratios are presented in the
following table (dollars in thousands):
|
|
Actual
|
|
|
Regulatory minimum
to be "adequately
capitalized"
|
|
|
Regulatory minimum
to be "well capitalized"
under prompt corrective
action provisions
|
|
|
|
Capital
Amount
|
|
|
Ratio
|
|
|
Capital
Amount
|
|
|
Ratio
|
|
|
Capital
Amount
|
|
|
Ratio
|
|
September
30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 leverage (to average assets)
|
|
$ |
6,280 |
|
|
|
0.3 |
% |
|
$ |
74,640 |
|
|
|
4.0 |
% |
|
$ |
93,300 |
|
|
|
5.0 |
% |
Tier
1 capital (to risk-weighted assets)
|
|
|
6,280 |
|
|
|
0.5 |
|
|
|
55,647 |
|
|
|
4.0 |
|
|
|
83,471 |
|
|
|
6.0 |
|
Total
capital (to risk-weighted assets)
|
|
|
12,560 |
|
|
|
0.9 |
|
|
|
111,294 |
|
|
|
8.0 |
|
|
|
139,118 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009 (Restated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 leverage (to average assets)
|
|
$ |
24,637 |
|
|
|
1.1 |
% |
|
$ |
88,563 |
|
|
|
4.0 |
% |
|
$ |
110,704 |
|
|
|
5.0 |
% |
Tier
1 capital (to risk-weighted assets)
|
|
|
24,637 |
|
|
|
1.5 |
|
|
|
66,754 |
|
|
|
4.0 |
|
|
|
100,132 |
|
|
|
6.0 |
|
Total
capital (to risk-weighted assets)
|
|
|
49,274 |
|
|
|
3.0 |
|
|
|
133,509 |
|
|
|
8.0 |
|
|
|
166,886 |
|
|
|
10.0 |
|
15. New
Authoritative Accounting Guidance
In June
2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards
Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860) -
Accounting for Transfers of Financial Assets” (ASU
2009-16). ASU 2009-16 amends prior accounting guidance to
enhance reporting about transfers of financial assets, including
securitizations, and where companies have continuing exposure to the risks
related to transferred financial assets. ASU 2009-16 eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. ASU 2009-16 also requires additional
disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the
period. The new authoritative guidance in ASU 2009-16 became effective
January 1, 2010 and did not have a significant impact on the Company’s
condensed consolidated financial statements.
In
December 2009, the FASB issued ASU No. 2009-17, “Consolidations
(Topic 810) - Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities” (ASU 2009-17). ASU 2009-17
amends prior guidance to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance. ASU 2009-17 requires additional disclosures about
the reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements. The provisions of ASU 2009-17
became effective on January 1, 2010 and did not have a significant impact
on the Company’s condensed consolidated financial statements.
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) - Improving Disclosures About Fair Value
Measurements” (ASU 2010-06). ASU 2010-06 requires expanded
disclosures related to fair value measurements including (i) the amounts of
significant transfers of assets or liabilities between Levels 1 and 2 of
the fair value hierarchy and the reasons for the transfers, (ii) the
reasons for transfers of assets or liabilities in or out of Level 3 of the
fair value hierarchy, with significant transfers disclosed separately,
(iii) the policy for determining when transfers between levels of the fair
value hierarchy are recognized and (iv) for recurring fair value
measurements of assets and liabilities in Level 3 of the fair value
hierarchy, a gross presentation of information about purchases, sales, issuances
and settlements. ASU 2010-06 further clarifies that
(i) fair value measurement disclosures should be provided for each class of
assets and liabilities (rather than major category), which would generally be a
subset of assets or liabilities within a line item in the statement of financial
position and (ii) entities should provide disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements for each class of assets and liabilities
included in Levels 2 and 3 of the fair value hierarchy. The disclosures
related to the gross presentation of purchases, sales, issuances and settlements
of assets and liabilities included in Level 3 of the fair value hierarchy
will be required for the Company beginning January 1, 2011, and management
does not expect that the adoption of this disclosure requirement will have a
significant effect on the Company’s future condensed consolidated financial
statements. The remaining disclosure requirements and clarifications
made by ASU 2010-06 became effective for the Company on January 1,
2010 and did not have a significant effect on the Company’s condensed
consolidated financial statements.
In
February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events (Topic 855) –
Amendments to Certain Recognition and Disclosure Requirements” (ASU 2010-09), which amends
certain subsequent events disclosure guidance. The amendments include
a definition of an SEC filer, requires an SEC filer or conduit bond obligor to
evaluate subsequent events through the date the financial statements are issued,
and removes the requirement for an SEC filer to disclose the date through which
subsequent events have been evaluated. ASU 2010-09 was effective upon
issuance except for the use of the issued date for conduit debt obligors, and
did not have a significant effect on the Company’s condensed consolidated
financial statements.
In April
2010, the FASB issued ASU No. 2010-18, “Effect of a Loan Modification When the
Loan Is Part of a Pool That Is Accounted for as a Single Asset” (ASU 2010-18),
regarding improving comparability by eliminating diversity in practice about the
treatment of modifications of loans accounted for within pools under Subtopic
310-30–Receivables–Loans and Debt Securities Acquired with Deteriorated Credit
Quality (Subtopic 310-30). Furthermore, the amendments clarify guidance
about maintaining the integrity of a pool as the unit of accounting for acquired
loans with credit deterioration. Loans accounted for individually under
Subtopic 310-30 continue to be subject to the troubled debt restructuring
accounting provisions within Subtopic 310-40, Receivables—Troubled Debt
Restructurings by Creditors. The amendments in ASU 2010-18 are effective
for modifications of loans accounted for within pools under Subtopic 310-30
occurring in the first interim or annual period ending on or after July 15,
2010. The amendments are to be applied prospectively. The adoption of ASU
2010-18 did not have a significant effect on the Company’s condensed
consolidated financial statements.
In July
2010, the FASB issued ASU No. 2010-20 “Disclosures About the Credit Quality of
Financing Receivables and the Allowance for Credit Losses” (ASU 2010-20) which
requires entities to provide disclosures designed to facilitate financial
statement users’ evaluation of (i) the nature of credit risk inherent in the
entity’s portfolio of financing receivables, (ii) how that risk is analyzed and
assessed in arriving at the allowance for credit losses and (iii) the changes
and reasons for those changes in the allowance for credit losses. Disclosures
must be disaggregated by portfolio segment, the level at which an entity
develops and documents a systematic method for determining its allowance for
credit losses, and class of financing receivable, which is generally a
disaggregation of portfolio segment. The required disclosures include, among
other things, a rollforward of the allowance for credit losses as well as
information about modified, impaired, non-accrual and past due loans and credit
quality indicators. ASU 2010-20 will be effective for the Company’s
financial statements as of December 31, 2010, as it relates to disclosures
required as of the end of a reporting period. Disclosures that relate to
activity during a reporting period will be required for the Company’s
consolidated financial statements that include periods beginning on or after
January 1, 2011. Management is currently evaluating the effect that ASU
2010-20 will have on the Company’s future condensed consolidated financial
statements.
16.
|
Restatement
of December 31, 2009 consolidated financial
statements
|
Subsequent
to the Company’s filing of its Annual Report on Form 10-K for the year ended
December 31, 2009, management made the decision to restate its previously
reported results of operations and financial condition. This
restatement was related to an examination by banking regulators of the Bank that
commenced on March 15, 2010 and was primarily related to the reserve for loan
losses and loan loss provision. In connection with the examination,
the regulators provided additional information to the Company on July 29, 2010
which resulted in management refining and enhancing its model for calculating
the reserve for loan losses by considering an expanded scope of information and
augmenting the qualitative and judgmental factors used to estimate losses
inherent in the loan portfolio. As a result of the findings of the
regulatory examination, the regulators required the Bank to amend its Call
Report of Condition as of and for the year ended December 31,
2009. On August 3, 2010, the Audit Committee of the Board concluded,
based upon additional information received from banking
regulators and the recommendation of management, that the Company’s
previously issued audited consolidated financial statements as of and for the
year ended December 31, 2009 as reported in the Company’s Annual
Report on Form 10-K, could no longer be relied upon. Accordingly, all
amounts as of December 31, 2009 in the accompanying condensed consolidated
financial statements have been restated as applicable.
17.
|
Commitments
and Contingencies
|
The
Company is subject to legal proceedings, claims, and litigation arising in the
ordinary course of business. While the outcome of these matters is
currently not determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on the Company’s
condensed consolidated financial position, results of operations or cash
flows.
On August
18, 2010, the Bank was sued in an asserted class action lawsuit in Idaho federal
court. The lawsuit alleges that, in 2004, the Bank’s predecessor (Farmers
and Merchants Bank), acting as trustee under three similar trust indentures,
inappropriately disbursed the proceeds of three bond issuances, supposedly
resulting years later in the bondholders’ loss of their collective investment of
approximately $23.5 million. Recovery is sought on theories of breach of
the indentures, breach of fiduciary duty, and conversion. The lawsuit is
in its initial stages and the class has not been certified. While the outcome of
this proceeding cannot be predicted with certainty, based on management's
review, management believes that the lawsuit is without merit and plans to
vigorously pursue its defenses. Management also believes that if any
liability were to result, it would not have a material adverse effect on the
Company's consolidated liquidity, financial condition or results of
operations.
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 as of
September 30, 2010 and the operating results for the nine months and three
months then ended, included elsewhere in this report. 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/A filed with the Securities and Exchange Commission
on August 23, 2010; including its audited 2009 consolidated financial statements
and the notes thereto as of December 31, 2009 and 2008 and for each of the years
in the three-year period ended December 31, 2009.
Cautionary
Information Concerning Forward-Looking Statements
This quarterly report on Form 10-Q
contains forward-looking statements, which are not historical facts and pertain
to our future operating results. These statements include, but are
not limited to, our plans, objectives, expectations and intentions and are not
statements of historical fact. When used in this report, the word
"expects," "believes," "anticipates,” “could,” “may,” “will,” “should,” “plan,”
“predicts,” “projections,” “continue” and other similar expressions constitute
forward-looking statements, as do any other statements that expressly or
implicitly predict future events, results or performance, and such statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Certain risks and uncertainties and
the Company’s success in managing such risks and uncertainties may cause actual
results to differ materially from those projected, including among others, the
risk factors described in Item 1A of this report as well as the
following factors: our inability to comply in a timely manner with the Order
with the FDIC and the DFCS, under which we are currently operating, could lead
to further regulatory sanctions or orders, which could further restrict our
operations and negatively affect our results of operations and financial
condition; local and national economic conditions could be less favorable than
expected or could have a more direct and pronounced effect on us than expected
and adversely affect our results of operations and financial condition; the
local housing/real estate market could continue to decline for a longer period
than we anticipate; the risks presented by a continued economic recession, which
could continue to adversely affect credit quality, collateral values, including
real estate collateral and OREO properties, investment values, liquidity and
loan originations, reserves for loan losses and charge offs of loans and loan
portfolio delinquency rates and may be exacerbated by our concentration of
operations in the States of Oregon and Idaho generally, and the Oregon
communities of Central Oregon, Northwest Oregon, Southern Oregon and the greater
Boise area, specifically; we are seeking additional capital to improve capital
ratios, but capital may not be available on acceptable terms or at all; interest
rate changes could significantly reduce net interest income and negatively
affect funding sources; competition among financial institutions could increase
significantly; competition or changes in interest rates could negatively affect
net interest margin, as could other factors listed from time to time in the
Company’s reports filed with the Securities and Exchange Commission (“SEC”); the
reputation of the financial services industry could further deteriorate, which
could adversely affect our ability to access markets for funding and to acquire
and retain customers; and existing regulatory requirements, changes in
regulatory requirements and legislation and our inability to meet those
requirements, including capital requirements and increases in our deposit
insurance premium, could adversely affect the businesses in which we are
engaged, our results of operations and financial condition.
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.
Recent
Developments
As previously disclosed, the Company
continues to actively pursue a capital raise of a minimum of $150
million. Of this total, $65 million previously committed by Lightyear
Capital and large shareholder David F. Bolger continue in place through October
29, 2010 subject to certain conditions. While the Company plans to
continue its efforts to aggressively pursue and evaluate opportunities to raise
capital, there can be no assurance that such efforts will be successful. In
addition to the capital raise, the Company continues to implement the
following operating plan to improve its financial condition 1) reduce loan
portfolio to mitigate credit risk and conserve capital; 2) strive to maintain
liquidity by sustaining core insured deposits and other funding sources; 3)
reduce controllable non-interest expenses; and 4) retain high performing
employees. Because of the uncertainties of the current economic
climate and other factors outside of its control, there can be no assurance that
the implementation of this plan will be successful.
On April
19, 2010 the Bank received notification from the Oregon State Treasury that the
Oregon Revised Statutes established a maximum aggregate balance of 100% of the
Bank’s net worth for Oregon public fund deposits for banks whose regulatory
capital ratios are less than that required to be categorized “adequately
capitalized”. The statute does not require divestiture but restricts a
bank in this circumstance from accepting additional public funds where such
deposit would cause aggregate balances to exceed 100%. On September
29, 2010, the Bank received notification from the Oregon State Treasury that it
had failed to comply with the statute within the 90-day period
provided. Therefore, the Bank was required to reduce its aggregate
Oregon Public Fund balances to a level below 100% of the Bank’s net worth by
October 1, 2010. Accordingly, the Bank reduced its aggregate Oregon
Public Fund balances to a level below 100% of the Bank’s net worth on October 1,
2010, achieving compliance with the statute. The Bank will continue
to accept public deposits and operate in compliance with this
statute.
On August
18, 2010, the Bank was sued in an asserted class action lawsuit, Russell Firkins & Rena Firkins
v. Bank of the Cascades, Case No. 1:10-cv-414-BLW in the United States
District Court for the District of Idaho. The lawsuit alleges that, in
2004, the Bank’s predecessor (Farmers and Merchants Bank), acting as trustee
under three similar trust indentures, inappropriately disbursed the proceeds of
three bond issuances, supposedly resulting years later in the bondholders’ loss
of their collective investment of approximately $23.5 million. Recovery is
sought on theories of breach of the indentures, breach of fiduciary duty, and
conversion. The lawsuit is in its initial stages and the class has not
been certified. While the outcome of this proceeding cannot be predicted with
certainty, based on management's review, management believes that the lawsuit is
without merit and plans to vigorously pursue its defenses. Management also
believes that if any liability were to result, it would not have a material
adverse effect on the Company's consolidated liquidity, financial condition or
results of operations.
On August
3, 2010, after discussion with its outside independent accountants and financial
reporting consultants, the Audit Committee of the Company concluded, based upon
the findings of its bank regulatory examination and recommendation of
management, that the Company’s previously issued financial statements as of and
for the year ended December 31, 2009 and three month period ended March 31,
2010, as reported in the Company’s Annual Report on Form 10-K and Quarterly
Report on Form 10-Q, respectively, could no longer be relied upon. This
determination was made in connection with an examination by banking regulators
of the Bank. The Bank regulatory examination commenced on March 15, 2010, and at
the conclusion of the on-site examination of the Bank, examiners orally informed
the Company that it was their opinion that the allowance for loan and lease
losses (“ALLL”) was underfunded as of the subject dates. Following
significant discussion and consideration, on July 29, 2010 the Bank received
written specification of the required Call Report amendments. The
Bank has amended its Call Report of Condition (‘Call Report’) for the subject
periods, as well as its Annual Report on Form 10-K for the year ended December
31, 2009 and its Quarterly Report on Form 10-Q for the quarter ended March 31,
2010.
On June
16, 2010, the Company received a letter from NASDAQ advising the Company that it
had not regained compliance with Rule 5550(a)(2) of the NASDAQ Marketplace Rules
with respect to the minimum bid price requirement of $1.00 per share as required
by the notice letter received by the Company on December 17, 2009. A
NASDAQ appeal hearing was held on July 22, 2010 and on September 8, 2010 the
Company was notified that the request to remain listed on the NASDAQ Stock
Market was granted, subject to certain conditions. The Panel granted the full
extent of its exception authority, to December 13, 2010, by which time the
Company must have evidenced a closing bid price of $1.00 or more for a minimum
of ten prior consecutive trading days. The shareholders of the Company have
approved reverse splits of the Company’s Common Stock at various levels, up to a
1 for 10 reverse split. The Company has not implemented a reverse
split to date due to its ongoing discussions relating to raising additional
capital. The Company believes that implementation of the reverse split will
permit the Company to regain compliance with the Rule.
Effective
April 30, 2010, the Company executed an agreement to sell its mortgage servicing
assets as previously discussed in the Company’s Form 10-Q for March 31,
2010. Going forward the Bank will not directly service mortgage loans
it originates, but rather sell originations servicing released. ‘Servicing
released’ means that whoever the Bank sells the loan to will service or arrange
for servicing of the loan.
Critical
Accounting Policies and Accounting Estimates
The
accounting and reporting policies followed by the Company conform, in all
material respects, to accounting principles generally accepted in the United
States and to general practices within the financial services industry. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. While the Company bases estimates on historical experience,
current information and other factors deemed to be relevant, actual results
could differ from those estimates.
The
Company considers accounting estimates to be critical to reported financial
results if (i) the accounting estimate requires management to make
assumptions about matters that are highly uncertain and (ii) different
estimates that management reasonably could have used for the accounting estimate
in the current period, or changes in the accounting estimate that are reasonably
likely to occur from period to period, could have a material impact on the
Company’s financial statements. Accounting policies related to the reserve for
loan losses are considered to be critical, as these policies involve
considerable subjective judgment and estimation by management.
For
additional information regarding critical accounting policies, refer to Item
7 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Critical Accounting Policies and Accounting Estimates
included in the Company’s Form 10-K/A for the year ended December 31,
2009.
There
have been no significant changes in the Company’s application of critical
accounting policies since December 31, 2009, with the exception of the
Company’s reserve for credit losses as described below under “Reserve for Credit
Losses”.
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 (reserve for loan losses and 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 as
well as consideration of the prevailing business environment. On an ongoing
basis the Company seeks to refine its methodology such that the reserve is
responsive to the effect that qualitative and environmental factors have upon
the loan portfolio. However, external factors and changing economic conditions
may impact the portfolio and the level of reserves in ways currently
unforeseen.
On August
3, 2010, the Company determined that it would restate its audited consolidated
financial statements as of and for the year ended December 31,
2009. This restatement was related to an examination by banking
regulators of the Bank that commenced on March 15, 2010. In
connection with the examination the regulators provided additional information
to the Company on July 29, 2010 which resulted in management refining and
enhancing its model for calculating the reserve for loan losses by considering
an expanded scope of information and augmenting the qualitative and judgmental
factors used to estimate potential losses inherent in the loan
portfolio. As a result of the restatement, the December 31, 2009
reserve for loan losses increased to $58.6 million from the previously reported
$37.6 million. The loan loss provision for the year ended December 31,
2009 increased from $113.0 million to $134.0 million.
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” later in this
report.
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, Idaho area. The uncertain depth
and duration of the present economic downturn could continue to 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. Unemployment
rates in these areas have increased significantly 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 the lack of consumer spending driven by elevated unemployment and
uncertainty. Recently the national and regional economies and real estate price
depreciation have appeared to show signs of stabilization. However,
elevated unemployment and other indicators continue to suggest, as articulated
by Fed Chairman Bernake that there remains “unusual uncertainty” as to direction
of the economy.
The
Company’s financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
declining value of collateral securing those loans, is reflective of the
business environment in the markets where the Company operates. The present
significant downturn in economic activity and declining real estate values has
had a direct and adverse effect on the condition and results of operations of
the Company. This is particularly evident in the residential land development
and residential construction segments of the Company’s loan portfolio.
Developers or home builders whose cash flows are dependent on the sale of lots
or completed residences have reduced ability to service their loan obligations
and the market value of underlying collateral has been and continues to be
adversely affected. The impact on the Company has been an elevated level of
impaired loans, an associated increase in provisioning expense and charge-offs
for the Company leading to a net loss in 2009 and 2008 of $114.8 million and
$134.6 million, respectively. During 2010 the level of impaired loans
have declined, as has the pace of charge-offs and provisioning
expense leading to a net loss of $15.1 million for the nine
months including a loss of $3.4 million for the quarter ended
September 30, 2010. The local and regional economy also has a direct
impact on the volume of bank deposits. Core deposits have declined
since mid-2006 because business and retail customers have experienced a
reduction in cash available to deposit in the Bank and have migrated balances to
“too big to fail institutions” out of concerns for soundness of many community
banks.
Highlights
and Summary of Performance – Third Quarter of 2010
Third Quarter
Performance:
|
·
|
Third Quarter Net Loss
Per Share: ($0.12) per share or ($3.4 million) compared to a net
loss of ($0.01) per share or ($0.3 million) for the linked-quarter and
($0.45) or ($12.6 million) for the year-ago
quarter.
|
|
·
|
Credit Quality:
Non-performing assets (NPA’s) decrease 7.6% to $129.5 million compared to
$140.1 million for the linked-quarter and decreases over 34% compared to
$197.3 million for the year-ago
period.
|
|
·
|
Credit Quality:
Net charge-offs were $9.2 million compared to $4.9 million for the
linked-quarter and $31.3 million for the year-ago
period.
|
|
·
|
Credit Quality:
Reserve for credit losses was at $52.5 million or 4.11% of total loans,
compared to $58.7 million or 4.35% for the linked-quarter and $53.8
million or 3.21% for the year-ago
period.
|
|
·
|
Total Loans, Deposits
and Liquidity: Loan and deposit balances have declined by similar
amounts as compared to prior periods due to management’s
strategic reduction of loans, and a reduction
of deposit balances resulting from the
continued adverse customer effects of current economic
conditions and some migration to too-big-to-fail banks. The
Company maintains a strong primary liquidity ratio of over
25%.
|
|
·
|
Net Interest Margin
(NIM): The NIM was 3.51% compared to 3.60% for the linked-quarter
and 3.13% for the year-ago quarter.
|
The
Company had a net loss of ($0.12) per share or ($3.4 million) for the third
quarter 2010, compared to ($0.01) per share or ($0.3 million) for the
linked-quarter. The loss primarily resulted from lower net interest
income of $1.1 million as compared to the linked-quarter and a tax adjustment of
$1.1 million. Reserve for credit losses was approximately $52.5
million or 4.11% of gross loans compared to approximately $59.3 million or 3.83%
at December 31, 2009 (as amended). NPA’s decreased to $129.5
million compared to $140.1 million for the linked-quarter and delinquent loans
decreased to 0.48% of gross loans compared to 0.75% for the linked-quarter and
0.65% at December 31, 2009. Net charge-offs were $9.2 million for the
third quarter of 2010 up from $4.9 million for the linked-quarter, mainly due to
the linked-quarter included $5.1 million in recoveries as compared to the
current quarters recoveries of $0.6 million. Net interest income was
lower for the third quarter of 2010 primarily due to reduced interest and loan
fee income related to the decline in earning loan
volumes. Non-interest income decreased $0.8 million during the third
quarter of 2010 when compared to the linked-quarter mainly due to a gain on
sales of investment securities of $.6 million recorded in the linked-quarter.
When compared to the year-ago period non-interest income was down $5.1 primarily
due to a one-time $3.2 gain recorded on the sale of the Bank’s credit card
merchant business recorded in the year-ago period.
Compared
to the linked-quarter, non-interest expense was down by $1.0 million or 5.5%
because of lower FDIC and OREO related expenses. In addition,
salaries and benefits cost were down $0.2 million or 3.1% from the prior
quarter. As compared to the year-ago quarter, noninterest expenses
were down by $8.5 million primarily due to decreases in OREO expenses of $6.1
million, salary expenses of $1.1 million and other expenses of $1.1 million for
the quarter compared to the year-ago quarter.
At
September 30, 2010, Cascade’s loan portfolio was approximately $1.3 billion,
down $72.2 million and $399.1 million when compared to the linked-quarter and a
year-ago, respectively. Loans have declined primarily due to loan payoffs,
reduced demand owing to economic contraction, an increase in loan charge-offs
and management’s strategic loan reduction program to mitigate credit
risk and preserve capital.
Total
deposits at September 30, 2010, were $1.5 billion, down $354.1 million or 19.2%
compared to the year-ago quarter mainly as a result of decreases in interest
bearing demand and demand deposits.
The NIM
was 3.51% for the third quarter of 2010 compared to 3.60% for the linked-quarter
and 3.13% for the year-ago period. The linked-quarter decline was
mainly due to decreases in loans fees and lower rates on short term interest
bearing deposits. Interest bearing deposits (including FRB) held for
liquidity purposes totaled $302.8 million or approximately 17% of total
assets at September 30, 2010 compared to $319.6 million at December 31,
2009. During the quarter interest bearing funds held at FRB had the
effect of lowering the Company’s NIM by approximately 52 basis points
because such assets presently earn a low overnight rate of 0.25% which is below
the average cost of funds. The Company is required to hold liquid
funds per the terms of the Order. In addition, the NIM for this
quarter was affected by approximately 7 basis points due to interest reversals
on loans placed into a non-performing status.
At
September 30, 2010, the Bank’s Tier 1 leverage, Tier 1 risk-based capital and
total risk-based capital ratios were 3.91%, 5.24% and 6.53%, respectively,
relatively stable compared to the linked-quarter. However, they do
not meet regulatory benchmarks for
“adequately-capitalized.” Regulatory benchmarks for an
“adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier
1 risk-based capital and total risk-based capital, respectively;
“well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1
risk-based capital and total risk-based capital, respectively. However, pursuant
to the Order, the Bank is required to maintain a Tier 1 leverage ratio of at
least 10% to be considered “well-capitalized” Tier 1 leverage, Tier 1 risk-based
capital and total risk-based capital ratios at the Company level are lower than
those at the Bank, primarily because holding company ratios disallow inclusion
of trust preferred debentures which qualify as capital at the Bank
itself. Accordingly, the Company’s Tier 1 leverage, Tier risk-based
and total risk-based capital ratios were 0.34%, 0.45% and 0.90%, respectively as
of September 30, 2010.
Loan portfolio and credit
quality
At September 30, 2010, Cascade’s loan
portfolio was approximately $1.3 billion, down $72.2 million and $399.1 million
when compared to the linked-quarter and a year-ago, respectively. Loans have
declined primarily due to loan payoffs, reduced demand owing to economic
contraction, an increase in loan charge-offs and management’s strategic loan
reduction program which has resulted in lower loan portfolio risk exposure and
helped to support regulatory capital ratios. The loan reduction plan has
included select loan sales and loan participations as well as non-renewal of
mainly transaction only loans where the Company does not consider itself to be
the customer’s primary bank based upon the overall balance of its banking and
deposit relationship with the customer.
Commercial Real Estate (“CRE”) and
Commercial and Industrial (“C&I”) loan portfolios continue to perform in a
satisfactory manner given the adverse economic climate. At September
30, 2010, total loans delinquent greater than 30 days were at 0.48% of total
loans compared to 0.65% at December 31, 2009. CRE and C&I
portfolios at September 30, 2010 were 0.22% and 0.14%,
respectively. CRE and C&I delinquencies were 0.11% and 0.18% at
December 31, 2009. CRE loans represent the largest portion of Cascade’s
portfolio at 53% of total loans and the C&I loans represent 24% of total
loans. Credit quality challenges have been centered in the Bank’s
residential land development and construction portfolios. Ongoing
favorable CRE and C&I credit metrics is attributable to the Company’s
underwriting disciplines including guarantor support and secondary sources, as
well as its granularity and our avoidance of conduit type
lending. However, due to the current economic challenges no assurance
can be given that the favorable delinquency rates for CRE and C&I portfolios
will continue.
At September 30, 2010, NPA’s were
$129.6 million, or 7.1% of total assets compared to $161.0 million or 7.4% of
total assets at December 31, 2009. Because of the uncertain real
estate market, no assurances can be given as to the timing of ultimate
disposition of these NPA’s or that the sale price will be at or above carrying
fair value. The orderly resolution of non-performing loans and OREO properties
is a priority for management. In the past several quarters the Bank has been
able to sell certain OREO properties and non performing loans to investors at or
near their carrying value. Carrying values reflect write-downs and
charge off amounts previously taken on such assets. However, future
sales are subject to uncertainty because of the volatility of property value
prices with respect to distressed assets.
At September 30, 2010, the total
reserve for credit losses was $52.5 million or 4.11% of total loans compared to
$59.3 million or 3.83% at December 31, 2009. Management believes the
reserve for credit losses is at an appropriate level based on evaluation and
analysis of portfolio credit quality in conjunction with prevailing economic
conditions and estimated fair values of collateral supporting non performing
loans. The reserve includes approximately $6.9 million or 13.2% in unallocated
reserves which reflects qualitative risk factors such as level and trend of
charge-off and recoveries; level and trend in delinquencies, nonaccrual loans
and impaired loans; and experience, ability, and depth of lending management
staff, economic conditions, risk identification practices, loan review
influence, loan trends, effects of underwriting practices and changes in
policy. With uncertainty as to the depth and duration of the real
estate slowdown and its economic effect on the communities within the Bank’s
banking markets, we can give no assurances that the reserve will be adequate in
future periods or that the level of NPA’s will not increase. Further
provisioning and charge-offs may be required before values stabilize. In
addition, the level of reserve for loan losses is subject to review by the
Bank’s regulatory authorities who may require adjustments to the reserve based
on their evaluation of the information available.
Since a
significant portion of the Bank’s loans are collateralized by real estate, the
Bank primarily measures impairment of such loans based on the estimated fair
value of’ the underlying real estate collateral. OREO is carried at the lower of
cost or estimated net realizable value, which is also based on the estimated
fair value of the related real estate property. The valuation of real estate
collateral and OREO is subjective in nature and may be adjusted in the future
because of changes in economic conditions. The valuation of real estate
collateral and OREO is also subject to review by Federal and State bank
regulatory authorities who may require increases or decreases to carrying
amounts based on their evaluation of the information available to them at the
time of their examinations of the Bank, in addition to State banking regulations
which require periodic mandatory write-downs of OREO. Management considers
third-party appraisals, as well as independent fair market value assessments
from realtors or persons involved in selling real estate and OREO, in
determining the estimated fair value of particular properties. In addition, as
certain of these third-party appraisals and independent fair market value
assessments are only updated on an annual basis, changes in the values of
specific properties may have occurred subsequent to the most recent appraisals.
Accordingly, the amounts of any such potential changes — and any related
adjustments —
are generally recorded at the time such information is
received.
Deposits
Total
deposits at September 30, 2010, were $1.5 billion, down $87.2 million or 5.5%
from the linked-quarter and down $354.1 million or 19.2% compared to the
year-ago quarter. In general, deposit balances have declined due to the
combination of adverse customer effects of current economic conditions and some
migration to too-big-to-fail banks due to uncertainty. Linked-quarter
declines were primarily in interest bearing demand (NOW) accounts totaling $59.9
million resulting from the Bank’s active reduction of Oregon public
funds.
To
provide ongoing customer assurance, nearly 100% of the Bank’s deposits are
covered by FDIC insurance and the Company is participating in the FDIC’s TAG
program. In that regard, effective July 2010, the Dodd-Frank Wall
Street Reform and Consumer Protection Act was passed and FDIC deposit-insurance
has been permanently increased to $250,000 effective immediately. The
Transaction Guarantee Program (TAG) has been extended to December 31, 2012.
The TAG program currently provides unlimited FDIC insurance for
non-interest bearing accounts, IOLTAs, and interest-bearing checking accounts
with an interest rate of .25 or less, this coverage is separate and in addition
to the general limit. Effective December 31, 2010, the TAG program will no
longer include or provide unlimited insurance for low-interest NOW accounts
or IOLTAs (0.25 interest rate or less). These accounts will be subject to
the standard $250,000 coverage.
Consistent
with the terms of the Order the Company has reduced its brokered deposits to a
negligible level. The Bank’s internet listing service deposits at September 30,
2010 were approximately $283.3 million, an increase of $88.2 million or 45.2%
since December 31, 2009 and an increase of $72.2 million from a year-ago. Such
deposits are sourced by posting time deposit rates on an internet site where
institutions seeking to deploy funds contact the Bank directly to open a deposit
account.
RESULTS
OF OPERATIONS – Nine Months
and Three Months ended September 30, 2010 and 2009
Income
Statement
Net
Loss
For the
nine month and three month periods ended September 30, 2010, Cascade reported a
net loss of ($15.1 million) or ($0.54) per share and a net loss of ($3.4
million) or ($0.12) per share, respectively. These losses are significantly
lower than the same period in the prior year due to reduced loan loss provision
and other credit quality related expenses. Net interest income was
down $8.8 million for the nine months and down $2.4 million for the quarter
ended September 30, 2010, as compared to the same periods in the prior year,
mainly due to lower loan balances and interest foregone on non performing
loans. Non-interest income was down 45.0% and 63.4%, respectively,
for the nine month and three month periods ended September 30, 2010 primarily
due to decreases in all categories with the larger decreases in mortgage revenue
and service charges. In addition, the prior year periods included a
one-time gain on the sale of business merchant services of $3.2
million. Non-interest expenses are down for the periods presented
primarily due to a reduction OREO related expenses as well as decreases in
staffing expenses.
Net
Interest Income / Net Interest Margin
Net
interest income was lower on linked-quarter basis due to lower earning assets
and reduced deposit balances. The NIM was 3.51% for the third quarter
of 2010 compared to 3.60% for the linked-quarter and 3.13% for the year-ago
period. The linked-quarter decline was mainly due to decreases in
loans fees and lower rates on short term interest bearing deposits (including
FRB balances held for liquidity purposes). The overall cost of funds was
down to 1.24% for the quarter ended September 30, 2010 compared to 1.55% for the
year-ago quarter. Interest bearing balances held for liquidity purposes
with the Federal Reserve Bank reduced the margin by approximately 52 basis
points because earnings were below cost of funds. In addition, the
NIM for the quarter ended September 30, 2010 was affected by approximately 7
basis points due to interest reversals on loans placed into a non-performing
status.
Yields on
earning assets during the third quarter of 2010 were 4.86% compared to 4.97% for
the linked-quarter and 4.72% for the third quarter of 2009. The
decline in yields is mainly a result of declining market rates as well as the
effect of interest forgone and reversed on non-performing loans. The average
rate paid on interest bearing liabilities for the quarter ended September 30,
2010 was 1.52% compared to 1.55% for the linked-quarter and 1.91% for the third
quarter of 2009.
Components of Net Interest
Margin
The following table sets forth for the
quarters ended September 30, 2010 and 2009 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):
|
|
Quarter ended
|
|
|
Quarter ended
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield or
|
|
|
Average
|
|
|
Income/
|
|
|
Yield or
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Rates
|
|
|
Balance
|
|
|
Expense
|
|
|
Rates
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
securities
|
|
$ |
123,365 |
|
|
$ |
1,288 |
|
|
|
4.14 |
% |
|
$ |
101,558 |
|
|
$ |
1,229 |
|
|
|
4.80 |
% |
Non-taxable
securities
|
|
|
1,807 |
|
|
|
17 |
|
|
|
3.73 |
% |
|
|
3,566 |
|
|
|
34 |
|
|
|
3.78 |
% |
Interest
bearing balances due from other banks
|
|
|
227,726 |
|
|
|
139 |
|
|
|
0.24 |
% |
|
|
347,880 |
|
|
|
219 |
|
|
|
0.25 |
% |
Federal
funds sold
|
|
|
3,014 |
|
|
|
1 |
|
|
|
0.13 |
% |
|
|
3,919 |
|
|
|
1 |
|
|
|
0.10 |
% |
Federal
Home Loan Bank stock
|
|
|
10,472 |
|
|
|
- |
|
|
|
0.00 |
% |
|
|
10,472 |
|
|
|
- |
|
|
|
0.00 |
% |
Loans
(1)(2)(3)
|
|
|
1,317,509 |
|
|
|
19,185 |
|
|
|
5.78 |
% |
|
|
1,734,611 |
|
|
|
24,608 |
|
|
|
5.63 |
% |
Total
earning assets/interest income
|
|
|
1,683,893 |
|
|
|
20,630 |
|
|
|
4.86 |
% |
|
|
2,202,006 |
|
|
|
26,091 |
|
|
|
4.70 |
% |
Reserve
for loan losses
|
|
|
(56,253 |
) |
|
|
|
|
|
|
|
|
|
|
(58,589 |
) |
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
95,606 |
|
|
|
|
|
|
|
|
|
|
|
40,790 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
36,104 |
|
|
|
|
|
|
|
|
|
|
|
38,492 |
|
|
|
|
|
|
|
|
|
Bank-owned
life insurance
|
|
|
33,637 |
|
|
|
|
|
|
|
|
|
|
|
33,615 |
|
|
|
|
|
|
|
|
|
Accrued
interest and other assets
|
|
|
75,306 |
|
|
|
|
|
|
|
|
|
|
|
110,247 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,868,293 |
|
|
|
|
|
|
|
|
|
|
$ |
2,366,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand deposits
|
|
$ |
638,025 |
|
|
|
1,101 |
|
|
|
0.68 |
% |
|
$ |
756,852 |
|
|
|
1,891 |
|
|
|
0.99 |
% |
Savings
deposits
|
|
|
31,053 |
|
|
|
22 |
|
|
|
0.28 |
% |
|
|
33,433 |
|
|
|
18 |
|
|
|
0.21 |
% |
Time
deposits
|
|
|
528,571 |
|
|
|
2,789 |
|
|
|
2.09 |
% |
|
|
729,951 |
|
|
|
4,647 |
|
|
|
2.53 |
% |
Other
borrowings
|
|
|
302,500 |
|
|
|
1,827 |
|
|
|
2.40 |
% |
|
|
314,801 |
|
|
|
2,261 |
|
|
|
2.85 |
% |
Total
interest bearing liabilities/interest expense
|
|
|
1,500,149 |
|
|
|
5,739 |
|
|
|
1.52 |
% |
|
|
1,835,037 |
|
|
|
8,817 |
|
|
|
1.91 |
% |
Demand
deposits
|
|
|
328,130 |
|
|
|
|
|
|
|
|
|
|
|
415,544 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
27,571 |
|
|
|
|
|
|
|
|
|
|
|
12,560 |
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,855,850 |
|
|
|
|
|
|
|
|
|
|
|
2,263,141 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
12,443 |
|
|
|
|
|
|
|
|
|
|
|
103,420 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
1,868,293 |
|
|
|
|
|
|
|
|
|
|
$ |
2,366,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
14,891 |
|
|
|
|
|
|
|
|
|
|
$ |
17,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
|
|
2.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income to earning assets
|
|
|
|
|
|
|
|
|
|
|
3.51 |
% |
|
|
|
|
|
|
|
|
|
|
3.11 |
% |
(1)
|
Average
non-accrual loans included in the computation of average loans was
approximately $134.6 million for 2010 and $164.9 million for
2009.
|
(2)
|
Loan
related fees recognized during the period and included in the yield
calculation totalled approximately $0.4 million in 2010 and $0.7 million
in 2009.
|
(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 quarter ended September 30,
2010, 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
|
|
|
|
September 30, 2010 vs. 2009
|
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
(5,528 |
) |
|
$ |
(5,942 |
) |
|
$ |
414 |
|
Investments
and other
|
|
|
(51 |
) |
|
|
160 |
|
|
|
(211 |
) |
Total
interest income
|
|
|
(5,579 |
) |
|
|
(5,782 |
) |
|
|
203 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand
|
|
|
(790 |
) |
|
|
(297 |
) |
|
|
(493 |
) |
Savings
|
|
|
5 |
|
|
|
(1 |
) |
|
|
6 |
|
Time
deposits
|
|
|
(1,858 |
) |
|
|
(1,297 |
) |
|
|
(561 |
) |
Other
borrowings
|
|
|
(435 |
) |
|
|
(99 |
) |
|
|
(336 |
) |
Total interest expense
|
|
|
(3,078 |
) |
|
|
(1,694 |
) |
|
|
(1,384 |
) |
Net
interest income
|
|
$ |
(2,501 |
) |
|
$ |
(4,088 |
) |
|
$ |
1,587 |
|
Loan
Loss Provision
The loan
loss provision for the nine months ended September 30, 2010 was $19.0 million
and for the quarter ended September 30, 2010 was $3.0 million, as compared to
$85.0 million and $22.0 million for the nine-month and three-month periods,
respectively, a year ago. The decreases in 2010 were primarily due to
stabilizing credit quality profile and lower absolute and relative charge-offs
than in the prior periods. Last year the Company’s adverse trend in
NPA’s peaked in March 2009. Since that time both the frequency and
severity of charge-offs has abated somewhat.
As of
September 30, 2010, the Bank is maintaining its level of reserves for credit
losses (reserve for loan losses and loan commitments) of approximately $52
million or 4.11% of gross loans, down slightly from 4.28% for the
linked-quarter, but comparable to the balance of reserves for the amended
periods of December 31, 2009 and March 31, 2010 of 3.83% and 4.16%,
respectively. In addition, the Bank has maintained solid levels of
pooled and unallocated reserves in consideration of qualitative factors
including the continued uncertainty of the economic environment. The
level of reserve for loan losses is subject to review by the Bank’s regulatory
authorities who may require adjustments to the reserve based on their evaluation
and opinion of economic and industry factors as well as specific loans in the
portfolio. For further discussion, see “Critical Accounting Policies - Reserve
for Credit Losses” and “Loan Portfolio and Credit Quality” in the Company’s
Annual Report on Form 10-K/A for the year ended December 31,
2009. There can be no assurance that the reserve for credit losses
will be sufficient to cover actual loan related losses.
Non-Interest
Income
Non-interest income as reported for the
nine and three months ended September 30, 2010, decreased 45.0% and 63.4%,
respectively, compared to the year ago periods. However, the prior year
periods included a one-time gain on the sale of business merchant services of
$3.2 million and when adjusted out the decreases in non-interest income for the
nine months and three months ended September 30, 2010 are 33.0% and 38.8%,
respectively. The adjusted decreases are generally a function of slowing
economic activity affecting service charge revenue, net mortgage revenue and a
decrease in card issuer and merchant services fees. Service charges
were down $1.6 million and $0.8 million for the nine-month and three-month
periods primarily due to less usage of overdraft protection while net
mortgage revenue was off $2.3 million year-to-date due to a decrease in mortgage
originations of 86.3% compared to the same period in 2009.
Non-Interest
Expense
Non-interest
expense decreased 19.1% and 33.2% for the nine and three months ended September
30, 2010, respectively. The 2010 decreases are primarily due to a
reduction in salaries and employee benefits expense of 12.0% year-to-date and
lower costs and valuation adjustments to OREO for both the nine month and three
month periods of 2010 compared to the same periods a year ago. OREO
costs for the nine months ended September 30, 2010 were $5.2 million compared to
$6.7 million for the year-ago period.
Income
Taxes
During
the three months ended September 30, 2010 the IRS commenced a required
examination of the Company’s 2009 tax year and December 31, 2009 income tax
receivable of $43.3 million. In connection therewith and in completion of
the 2009 income tax examination, the Company settled with the IRS’ field
examiner and recorded a provision for income taxes of $1.1 million for the three
months ended September 30, 2010. The provision for income taxes of $0.5 million
for the nine months ended September 30, 2010 also reflects adjustments to the
2009 income tax receivable. During the three month and nine month periods
ended September 30, 2009, the Company recorded income tax benefits of $9,744 and
$31,367, respectively, as management believed at that time that it was more
likely than not that such benefits would be received. Effective December
31, 2009, management determined that there should be a 100% valuation allowance
against the Company’s net deferred tax assets.
As of
September 30, 2010, the Company maintained a valuation allowance of $37.4
million against the deferred tax asset balance of $36.3 million, for a net
deferred tax credit of $1.1 million. This amount represented a $0.1 million
increase from year-end 2009 due to an increase in gross unrealized gains in the
Company’s investment portfolio during the nine months ended September 30, 2010.
The Company’s future net deferred tax asset or liability will continue to be
impacted by changes in the gross unrealized gains/losses on the Company’s
investment portfolio. For discussion of the Company’s deferred income tax assets
see “Critical Accounting Policies – Deferred Income Taxes” included in the
Company’s Annual Report on Form 10-K/A for the year ended December 31,
2009.
Financial
Condition
Balance
Sheet Overview
As
compared to year-end 2009 total assets have declined to $1.8 billion at
September 30, 2010 mainly because of continued reduction in loan
portfolio. Total deposits are similarly lower due to the combination
of adverse customer effects of current economic conditions and some migration to
too-big-to-fail banks due to uncertainty. Time deposits are down
mainly as a result of a decrease in brokered deposits of $116.5 million since
year-end that have been partially offset with an increase in internet
deposits. Cash and cash equivalents were $331.7 million or 18.1% of
total assets at September 30, 20109. Total loans have been reduced by $271.0
million as compared to year-end 2009. The reduction in loan balances
has resulted in lower credit risk exposure and has helped to support the Bank’s
regulatory capital ratios. Net charge-offs of $26.1 million for the
nine months ended September 30, 2010, also contributed to the overall reduction
in loan balances.
The Company had no material off balance
sheet derivative financial instruments as of September 30, 2010 and December 31,
2009.
Capital
Resources
The
Company’s total stockholders’ equity at September 30, 2010 was $8.8 million, a
decrease of $14.5 million from December 31, 2009. The decrease
primarily resulted from a net loss for the nine months ended September 30,
2010.
Bank
level equity was approximately $77.8 million at September 30,
2010. This is mainly because regulatory calculations give different
treatment to the $66.5 million in Trust Preferred debt. In that
regard, among the corrective actions required under the Order, are for the Bank
to develop and adopt a plan to maintain the minimum capital requirements for a
“well-capitalized” bank, including a Tier 1 leverage ratio of at least 10% at
the Bank level beginning 150 days from the issuance of the Order. As of
September 30, 2010 and through the date of this report, the requirement relating
to increasing the Bank’s Tier 1 leverage ratio has not been met. At
September 30, 2010, the Company’s Tier 1 leverage, Tier 1 risk-based capital and
total risk-based capital ratios were 0.34%, 0.45% and 0.90%, respectively, and
the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based
capital ratios were 3.91%, 5.24% and 6.53%, respectively, which do not meet
regulatory benchmarks for “adequately-capitalized”. Regulatory benchmarks for an
“adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier
1 risk-based capital and total risk-based capital, respectively;
“well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1
risk-based capital and total risk-based capital, respectively. However, as
mentioned above, pursuant to the Order, the Bank is required to maintain a Tier
1 leverage ratio of at least 10% to be considered “well-capitalized.” As
discussed elsewhere in this report, as of September 30, 2010 and through the
date of this report, the Bank has failed to meet this requirement of the
Order.
From time
to time the Company makes commitments to acquire banking properties or to make
equipment or technology related investments of capital. At September 30, 2010,
the Company had no material capital expenditure commitments apart from those
incurred in the ordinary course of business.
Off-Balance
Sheet Arrangements
A summary
of the Bank’s off-balance sheet commitments at September 30, 2010 and December
31, 2009 is included in the following table (dollars in thousands):
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
$ |
177,888 |
|
|
$ |
253,362 |
|
Commitments
under credit card lines of credit
|
|
|
26,325 |
|
|
|
28,455 |
|
Standby
letters of credit
|
|
|
3,384 |
|
|
|
6,932 |
|
|
|
|
|
|
|
|
|
|
Total
off-balance sheet financial instruments
|
|
$ |
207,597 |
|
|
$ |
288,749 |
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of fees. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank applies
established credit related standards and underwriting practices in evaluating
the creditworthiness of such obligors. The amount of collateral obtained, if it
is deemed necessary by the Bank upon the extension of credit, is based on
management’s credit evaluation of the counterparty.
The Bank
typically does not obtain collateral related to credit card
commitments. Collateral held for other commitments varies but may
include accounts receivable, inventory, property and equipment, residential real
estate and income-producing commercial properties.
Standby
letters of credit are written conditional commitments issued by the Bank to
guarantee the performance of a customer to a third-party. These
guarantees are primarily issued to support public and private borrowing
arrangements. In the event the customer does not perform in
accordance with the terms of the agreement with the third-party, the Bank would
be required to fund the commitment. The maximum potential amount of
future payments the Bank could be required to make is represented by the
contractual amount of the commitment. If the commitment were funded,
the Bank would be entitled to seek recovery from the customer. The
Bank’s policies generally require that standby letter of credit arrangements
contain security and debt covenants similar to those involved in extending loans
to customers. The credit risk involved in issuing standby letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
There are
no other obligations or liabilities of the Company arising from its off-balance
sheet arrangements that are or are reasonably likely to become material.
In addition, the Company knows of no event, demand, commitment, trend or
uncertainty that will result in or is reasonably likely to result in the
termination or material reduction in availability of the off-balance sheet
arrangements.
Liquidity
and Sources of Funds
The
objective of the Bank’s liquidity management is to maintain ample cash flows to
meet obligations for depositor withdrawals, to fund the borrowing needs of loan
customers, and to fund ongoing operations. To build contingent liquidity
in response to challenging market conditions, the Bank has worked to stabilize
and retain local deposits, accessed internet listing service deposits, and
reduced its loan balances. At September 30, 2010, liquid assets of the
Bank are mainly interest bearing balances held at FRB totaling $289.0 million
compared to $314.6 million at December 31, 2009. Because of the economic
downturn, the condition of the Bank and other uncertainties no assurance can be
given as to the Company’s ability to maintain sufficient liquidity.
Core
relationship deposits are the Bank’s primary source of funds. As such, the
Bank focuses on deposit relationships with local business and consumer clients
who maintain multiple accounts and services at the Bank. The Company views
such deposits as the foundation of its long-term liquidity because it believes
such core deposits are more stable and less sensitive to changing interest rates
and other economic factors compared to large time deposits or wholesale
purchased funds. The Bank’s customer relationship strategy has resulted in a
relatively higher percentage of its deposits being held in checking and money
market accounts, and a lesser percentage in time deposits.
The Bank
augments core deposits with wholesale funds. The Bank is currently
restricted under the terms of the Order from accepting or renewing brokered
deposits. At September 30, 2010 the Company did not have any brokered
deposits compared to $116.5 million at December 31, 2009. Local
relationship based reciprocal CDARS deposits which are also technically
classified as brokered deposits totaled $7.9 million at September 30, 2010, down
from $47.3 million at December 31, 2009. At September 30, 2010 internet
sourced deposits were approximately $283.3 million compared to $195.1 million at
year-end 2009. Such deposits are sourced by posting time deposit rates on an
internet site where institutions seeking to deploy funds contact the Bank
directly to open a deposit account.
On April
19, 2010 the Bank received notification from the Oregon State Treasury that the
Oregon Revised Statutes established a maximum aggregate balance of 100% of the
Bank’s net worth for Oregon public fund deposits for banks whose regulatory
capital ratios are less than that required to be categorized “adequately
capitalized”. The statute does not require divestiture but restricts a
bank in this circumstance from accepting additional public funds where such
deposit would cause aggregate balances to exceed 100%. On September 29,
2010, the Bank received notification from the Oregon State Treasury that it had
failed to comply with the statute within the 90-day period
provided. Therefore, the Bank was required to reduce its aggregate
Oregon Public Fund balances to a level below 100% of the Bank’s net worth by
October 1, 2010. Accordingly, the Bank reduced its aggregate Oregon
Public Fund balances to a level below 100% of the Bank’s net worth on October 1,
2010, achieving compliance with the statute. The Bank will continue
to accept public deposits and operate in compliance with this
statute.
The Bank also utilizes borrowings and
lines of credit as sources of funds. At September 30, 2010, the FHLB had
extended the Bank a secured line of credit of $325.8 million (17% of total
assets) accessible for short or long-term borrowings given sufficient qualifying
collateral. As of September 30, 2010, the Bank had qualifying collateral pledged
for FHLB borrowings totaling $297.8 million which was largely utilized by
approximately $195.0 million in secured borrowings and $98 million FHLB letter
of credit used for collateralization of Oregon public deposits held by the
Bank. At September 30, 2010, the Bank also had undrawn borrowing capacity
at FRB of approximately $54.4 supported by specific qualifying collateral.
Borrowing capacity from FHLB or FRB may fluctuate based upon the acceptability
and risk rating of loan collateral, and counterparties could adjust discount
rates applied to such collateral at their discretion. Also, FRB or FHLB
could restrict or limit our access to secured borrowings. As with many
community banks, correspondent banks have withdrawn unsecured lines of credit or
now require collateralization for the purchase of fed funds on a short-term
basis due to the present adverse economic environment.
In 2008,
TLGP was established under which the FDIC would temporarily provide a guarantee
of the senior debt of FDIC-insured institutions and their holding companies. On
February 12, 2009 the Bank issued $41 million of notes under the
TLGP. The issuance included $16 million floating rate and $25 million
fixed rate notes maturing February 12, 2012.
Liquidity
may be affected by the Bank’s routine commitments to extend credit. At
September 30, 2010, the Bank had approximately $207.6 million in outstanding
commitments to extend credit, compared to approximately $288.7 million at
year-end 2009. At this time, management believes that the Bank’s available
resources will be sufficient to fund its commitments in the normal course of
business.
The
investment portfolio also provides a secondary source of funds as investments
may be pledged for borrowings or sold for cash. This liquidity is limited,
however, by counterparties’ willingness to accept securities as collateral and
the market value of securities at the time of sale could result in a loss to the
Bank. As of September 30, 2010, unpledged investments totaled approximately
$47.9 million.
Bancorp
is a single bank holding company and its primary ongoing source of liquidity is
dividends received from the Bank. Such dividends arise from the cash flow
and earnings of the Bank. Banking regulations and authorities may limit
the amount or require certain approvals of the dividend that the Bank may pay to
Bancorp. Pursuant to the Order, the Bank is required to seek permission
from its regulators prior to payment of cash dividends on its common stock. The
Company cut its dividend to zero in the fourth quarter of 2008. We do
not expect the Bank to pay dividends to Bancorp for the foreseeable future.
Bancorp is unable to pay dividends on its common stock until it pays all accrued
payments on its Trust Preferred Securities. Payment of dividends is
also restricted by state and federal regulators (see Note 14 of accompanying
condensed consolidated financial statements). As of September 30,
2010, Bancorp had $66.5 million of TPS outstanding with a weighted average
interest rate of 2.04%. The Company elected to defer payments on its TPS
beginning in the second quarter of 2009 and as of September 30, 2010, accrued
dividends were $3.2 million. Bancorp does not expect to pay any dividend for the
foreseeable future.
Inflation
The effect of changing prices on
financial institutions is typically different than on non-banking companies
since virtually all of a bank's assets and liabilities are monetary in nature.
In particular, interest rates are significantly affected by inflation, but
neither the timing nor magnitude of the changes are directly related to price
level indices; therefore, the Company can best counter inflation over the long
term by managing net interest income and controlling net increases in
noninterest income and expenses.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures in this item are
qualified by the Risk Factors set forth in Part II, Item 1A and the Section
entitled “Cautionary Information Concerning Forward-Looking Statements” included
in Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations in this report and any other cautionary statements
contained herein.
Refer to the disclosures of market
risks included in Item 7A Quantitative and Qualitative Disclosures about Market
Risks in the Company’s Annual Report on Form 10-K/A for the year ended December
31, 2009.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure
Controls and Procedure
As a
result of the restatement of the Company’s consolidated financial statements as
of and for the year ended December 31, 2009 and the condensed consolidated
financial statements as of and for the three months ended March 31, 2010 arising
from additional information received from banking regulators in connection with
our estimated reserve for loan losses, a re-evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures was performed
under the supervision of the Audit Committee of the Board and with the
participation of the Company’s management, including its Chief Executive Officer
and Chief Financial Officer. Based upon this evaluation which was performed
using the COSO framework, the Company’s Chief Executive Officer and Chief
Financial Officer have determined that the Company’s disclosure controls and
procedures are not effective as of September 30, 2010, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required due to a material weakness in our internal control over
financial reporting specifically with respect to our estimate of the reserve for
loan losses.
Remediation Steps to Address
Material Weakness
Management
previously disclosed a material weakness in internal control over financial
reporting in its quarterly report on Form 10-Q for the quarter ended June 30,
2010, specifically with respect to our estimate of the reserve for loan losses.
During the third quarter of 2010, management continued to refine and
enhance its model for calculating the reserve for loan losses by considering an
expanded scope of information and augmenting the qualitative and judgmental
factors used to estimate potential losses inherent in the loan portfolio and the
Company has also engaged the assistance of external independent consulting
resources to assist with these revisions and enhancements. Management
anticipates evaluating and testing the refined and enhanced model of calculating
the Company’s reserve for loan losses during the remainder of 2010. As of the
date of this quarterly report for September 30, 2010, management believes that
the reserve for loan losses is appropriately stated and that additional
refinements and testing will occur in Q4 to fully remediate the material
weakness.
Changes in Internal Control
over Financial Reporting
There
were no other changes in the Company’s internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the third quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
Company is subject to legal proceedings, claims, and litigation arising in the
ordinary course of business. While the outcome of these matters is
currently not determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on the Company’s
condensed consolidated financial position, results of operations or cash
flows.
On August
18, 2010, the Bank was sued in an asserted class action lawsuit, Russell Firkins & Rena Firkins
v. Bank of the Cascades, Case No. 1:10-cv-414-BLW in the United States
District Court for the District of Idaho. The lawsuit alleges that, in
2004, the Bank’s predecessor (Farmers and Merchants Bank), acting as trustee
under three similar trust indentures, inappropriately disbursed the proceeds of
three bond issuances, supposedly resulting years later in the bondholders’ loss
of their collective investment of approximately $23.5 million. Recovery is
sought on theories of breach of the indentures, breach of fiduciary duty, and
conversion. The lawsuit is in its initial stages and the class has not
been certified. While the outcome of this proceeding cannot be predicted with
certainty, based on management's review, management believes that the lawsuit is
without merit and plans to vigorously pursue its defenses. Management also
believes that if any liability were to result, it would not have a material
adverse effect on the Company's consolidated liquidity, financial condition or
results of operations.
ITEM
1A. RISK FACTORS
There are
a number of risks and uncertainties, many of which are beyond the Company’s
control that could have a material adverse impact on the Company’s financial
condition or results of operations. The Company describes below the most
significant of these risks and uncertainties. These should not be viewed as an
all inclusive list or in any particular order. Additional risks that are not
currently considered material may also have an adverse effect on the Company.
This report is qualified in its entirety by these risk factors.
Before
making an investment decision investors should carefully consider the specific
risks detailed in this section and other risks facing the Company including,
among others, those certain risks, uncertainties and assumptions identified
herein by management that are difficult to predict and that could materially
affect the Company’s financial condition and results of operations and other
risks described in this Quarterly Report on Form 10-Q, the information in
Part I, Item 2 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Company’s cautionary statements as
to “Forward-Looking Statements” contained therein.
Risks
Related to Our Business
The
Bank was issued a regulatory order from the FDIC and the DCFS which prohibits
the Bank from paying dividends to the Company without the consent of the FDIC
and the DFCS and places other limitations and obligations on the
Bank.
On August
27, 2009, the Bank entered into an agreement with the FDIC, its principal
federal banking regulator, and the DFCS which requires the Bank to take certain
measures to improve its safety and soundness.
In
connection with this agreement, the Bank stipulated to the issuance by the FDIC
and the DFCS of a regulatory order against the Bank based on certain findings
from an examination of the Bank conducted in February 2009 based upon financial
and lending data measured as of December 31, 2008 (the “Order”). In entering
into the stipulation and consenting to entry of the order, the Bank did not
concede the findings or admit to any of the assertions therein.
Under the
Order, the Bank is required to take certain measures to improve its capital
position, maintain liquidity ratios, reduce its level of non-performing assets,
reduce its loan concentrations in certain portfolios, improve management
practices and board supervision and to assure that its Reserve for Loan Losses
is maintained at an appropriate level. While the Bank successfully completed
several of the measures under the Order as of September 30, 2010, it was
unable to implement certain measures in the time frame provided, particularly
those related to raising capital levels.
Among the
corrective actions required are for the Bank to develop and adopt a plan to
maintain the minimum capital requirements for a “well-capitalized” bank,
including a Tier 1 leverage ratio of at least 10% at the Bank level beginning
150 days from the issuance of the Order. As of September 30, 2010, and through
the date of this report, the requirement relating to increasing the Bank’s Tier
1 leverage ratio has not been met.
In
addition, pursuant to the Order, the Bank must retain qualified management and
must notify the FDIC and the DFCS in writing when it proposes to add any
individual to its board of directors or to employ any new senior executive
officer. Under the Order the Bank’s board of directors must also increase its
participation in the affairs of the Bank, assuming full responsibility for the
approval of sound policies and objectives and for the supervision of all the
Bank’s activities.
The Order
further requires the Bank to ensure the level of the reserve for loan losses is
maintained at appropriate levels to safeguard the book value of the Bank’s loans
and leases, and to reduce the amount of classified loans as of the date of the
Order to no more than 75% of capital. As of September 30, 2010, and through
the date of this report, the requirement that the amount of classified loans as
of the date of the Order be reduced to no more than 75% of capital has not been
met. However, as required by the Order, all assets classified as “Loss” in the
Bank’s report of examination from February 2009 (the “ROE”) have been
charged-off. The Bank has also developed and implemented a process for the
review and approval of all applicable asset disposition plans.
The Order
restricts the Bank from taking certain actions without the consent of the FDIC
and the DFCS, including paying cash dividends, and from extending additional
credit to certain types of borrowers.
The Order
further requires the Bank to maintain a primary liquidity ratio (net cash, net
short-term and marketable assets divided by net deposits and short-term
liabilities) of at least 15%. At September 30, 2010, the Bank’s primary
liquidity ratio was 26.32%.
The Bank
was required to implement these measures under various time frames, all of which
have expired. While the Bank successfully completed several of the measures, it
was unable to implement certain measures in the time frame provided,
particularly those related to raising capital levels. In order for the Bank to
meet the 10% capital requirement of the Order, as of September 30, 2010,
the Bank is targeting a minimum of approximately $150 million of additional
equity capital. The economic environment in our market areas and the duration of
the downturn in the real estate market will continue to have a significant
impact on the implementation of the Bank’s business plans. While the Company
plans to continue its efforts to aggressively pursue and evaluate opportunities
to raise capital, there can be no assurance that such efforts will be successful
or that the Bank’s plans to achieve objectives set forth in the Order will
successfully improve the Bank’s results of operation or financial condition or
result in the termination of the Order from the FDIC and the DFCS. In addition,
failure to increase capital levels consistent with the requirements of the Order
could result in further enforcement actions by the FDIC and/or DFCS or the
placing of the Bank into conservatorship or receivership.
On
October 26, 2009, the Company entered into a written agreement with the FRB and
DFCS (the “Written Agreement”), which requires the Company to take certain
measures to improve its safety and soundness. Under the Written Agreement, the
Company is required to develop and submit for approval, a plan to maintain
sufficient capital at the Company and the Bank within 60 days of the date of the
Written Agreement. The Company submitted a strategic plan on October 28, 2009,
and as of September 30, 2010, and through the date of this report the
Company is in compliance with the terms of the Written Agreement with the
exception of requirements tied to or dependent upon execution of a capital
raise.
We
have failed to comply with certain provisions of our regulatory
order.
The Order
to which the Bank is subject requires, among other obligations described
elsewhere in this report, that we increase our regulatory capital and reduce our
troubled assets. Our obligation to increase regulatory capital was subject to a
deadline of January 26, 2010. As of the date of this report, we have been unable
to raise capital or achieve this goal by other means.
At
September 30, 2010, the Company’s Tier 1 leverage, Tier 1 risk-based capital and
total risk-based capital ratios were 0.34%, 0.46% and 0.91%, respectively, and
the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based
capital ratios were 3.91%, 5.24% and 6.53%, respectively, which do not meet
regulatory benchmarks for “adequately-capitalized.” Regulatory benchmarks for an
“adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier
1 risk-based capital and total risk-based capital, respectively;
“well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1
risk-based capital and total risk-based capital, respectively. However, as
mentioned above, pursuant to the Order, the Bank is required to maintain a Tier
1 leverage ratio of at least 10% to be considered “well-capitalized.” We can
provide no assurances that we will be able to raise additional capital in the
foreseeable future given the present condition of financial markets. If we fail
to raise additional capital or take other measures that will cause our
regulatory capital levels to increase, regulators may take additional measures
that could include receivership or a forced divestiture of our assets and
deposits. Any such measures, if taken, may have a material adverse effect upon
the value of our common stock.
Because
of our condition and uncertainties as to the implementation of management plans
there is doubt about our ability to continue as a going concern.
The
condensed consolidated financial statements have been prepared based upon the
Company’s judgment that the Company will continue as a going concern, which
contemplates the realization of assets and the discharge of liabilities in the
normal course of business. Accordingly, the condensed consolidated financial
statements do not include any adjustments to reflect the possible future effects
that may result from the outcome of various uncertainties as discussed
below.
The
effects of the severe economic contraction caused the Company to incur net
losses for the years ended December 31, 2009 and 2008 and the nine months ended
September 30, 2010. The Company and the Bank do not currently meet the
definition of an “adequately capitalized institution” and are thus operating
under significant regulatory restrictions including a requirement to achieve
certain capital requirements, enhance liquidity and improve the credit quality
of the Bank’s assets. In response, the Company has implemented plans to meet the
requirements of the August 27, 2009 agreement with the FDIC, its principal
federal banking regulator, and the DFCS which requires the Bank to take certain
measures to improve its safety and soundness (the Order) including an ongoing
effort to raise capital. Additional plans and actions to preserve existing
capital and to conserve liquidity include (1) improve asset quality and reduce
non performing asset totals; (2) reduce loan portfolio totals and thereby reduce
required capital; (3) retain core deposits while reducing brokered deposits; and
(4) continued reduction of discretionary expenses.
Based
upon its plans and expectations management believes the Company has sufficient
capital and liquidity to achieve realization of assets and the discharge of
liabilities in the normal course of business. However, uncertainties exist as to
future economic conditions and regulatory actions, and the successful
implementation of plans to improve the Company’s financial condition and meet
the requirements of the Order. These uncertainties raise doubt about the
Company’s ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments that might result from the
lack of success in implementing its plans or the occurrence of other events that
could adversely affect its condition or operations.
The
Company may continue to be adversely affected by current economic and market
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, Idaho area. Since mid-2007 the
country has experienced a significant economic downturn. Business activity
across a wide range of industries and regions has been negatively impacted and
local governments and many businesses are being challenged due to the lack of
consumer spending and the lack of liquidity in the credit markets. Unemployment
has increased significantly in Idaho and Oregon, and may remain elevated for
some time.
The
Company’s financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
value of collateral securing those loans, is highly dependent upon the business
environment in the markets where the Company operates. The current downturn in
the economy and declining real estate values have had a direct and adverse
effect on the financial condition and results of operations for the Company.
This is particularly evident in the residential land development and residential
construction segments of the Bank’s loan portfolio. Developers or home builders
whose cash flows are dependent on sale of lots or completed residences have
experienced reduced ability to service their loan obligations and the market
value of underlying collateral has decreased dramatically. The impact on the
Company has been an elevated level of impaired loans, an associated increase in
provisioning expense and charge-offs for the Company, leading to a net loss for
2008 and 2009 and the nine months ended September 30, 2010. During 2010 the
level of impaired loans has declined, as has the pace of charge-offs and
provisioning expense leading to a reduced loss of for the year to
date. However, no assurance can be given that such trends will
continue.
The
banking industry and the Company operate under certain regulatory requirements
that are expected to further impair our revenues, operating income and financial
condition.
The
Company operates in a highly regulated industry and is subject to examination,
supervision, and comprehensive regulation by the DFCS, the FDIC, and the Federal
Reserve. Our compliance with these laws and regulations is costly and restricts
certain of our activities, including payment of dividends, mergers and
acquisitions, investments, loans and interest rates charged, interest rates paid
on deposits, access to capital and brokered deposits and locations of banking
offices. If we are unable to meet these regulatory requirements, our financial
condition, liquidity and results of operations would be materially and adversely
affected.
The
Company has a significant concentration in real estate lending. The sustained
downturn in real estate within the Company’s markets has had and is expected to
continue to have a negative impact on the Company.
Approximately
72% of the Bank’s loan portfolio at September 30, 2010 consisted of loans
secured by real estate located in Oregon and Idaho. Declining real estate values
and a severe constriction in the availability of mortgage financing have
negatively impacted real estate sales, which has resulted in customers’
inability to repay loans. In addition, the value of collateral underlying such
loans has decreased materially. During 2008 and 2009, we experienced significant
increases in non-performing assets relating to our real estate lending,
primarily in our residential real estate portfolio. We will see a further
increase in non-performing assets if more borrowers fail to perform according to
loan terms and if we take possession of real estate properties. Additionally, if
real estate values continue to further decline, the value of real estate
collateral securing our loans could be significantly reduced. If any of these
effects continue or become more pronounced, loan losses will increase more than
we expect and our financial condition and results of operations would be
adversely impacted.
In
addition, the Bank’s loans in other real estate portfolios including commercial
construction and commercial real estate have experienced and are expected to
continue to experience reduced cash flow and reduced collateral value.
Approximately 53% of the Bank’s loan portfolio at September 30, 2010, consisted
of loans secured by commercial real estate. Nationally, delinquencies in these
types of portfolios are increasing significantly. While our portfolios of these
types of loans have not been as adversely impacted as residential loans, there
can be no assurance that the credit quality in these portfolios will not
decrease significantly and may result in losses that exceed the estimates that
are currently included in the reserve for credit losses, which could adversely
affect the Company’s financial conditions and results of
operations.
The
Company may be required to make further increases to its reserve for credit
losses and to charge off additional loans in the future, which could adversely
affect our results of operations.
The
Company maintains a reserve for credit losses, which is a reserve established
through a provision for loan losses charged to expense, that represents
management’s best estimate of probable incurred losses within the existing
portfolio of loans. The reserve, in the judgment of management, is necessary to
reserve for estimated loan losses and risks inherent in the loan portfolio. The
level of the reserve reflects management’s continuing evaluation of specific
credit risks; loan loss experience; current loan portfolio quality; present
economic, political and regulatory conditions; industry concentrations and other
unidentified losses inherent in the current loan portfolio. The determination of
the appropriate level of the reserve for credit losses inherently involves a
high degree of subjectivity and judgment and requires us to make significant
estimates of current credit risks and future trends, all of which may undergo
material changes. Changes in economic conditions affecting borrowers, new
information regarding existing loans, identification of additional problem loans
and other factors, both within and outside of our control, may require an
increase in the reserve for loan losses. Increases in nonperforming loans have a
significant impact on our reserve for loan losses. Generally, our non-performing
loans and assets reflect operating difficulties of individual borrowers
resulting from weakness in the economy of the markets we serve.
On August
3, 2010, the Company determined that it would restate its audited consolidated
financial statements as of and for the year ended December 31, 2009. This
restatement was related to an examination by banking regulators of the Bank that
commenced on March 15, 2010. In connection with the examination the
regulators provided additional information to the Company on July 29, 2010 which
resulted in management refining and enhancing its model for calculating the
reserve for loan losses by considering an expanded scope of information and
augmenting the qualitative and judgmental factors used to estimate potential
losses inherent in the loan portfolio. As a result of the
restatement, the December 31, 2009 reserve for loan losses increased to $58.6
million from the previously reported $37.6 million. The loan loss
provision for the year ended December 31, 2009 increased from $113.0 million to
$134.0 million. Our reserve for loan losses was 39.8% and 26.9% of NPA’s
at September 30, 2010 and 2009, respectively.
If real
estate markets deteriorate further, we expect that we may continue to experience
increased delinquencies and credit losses. While economic conditions have
stabilized on a national level, conditions could worsen, potentially resulting
in higher delinquencies and credit losses. There can be no assurance that the
reserve for credit losses will be sufficient to cover actual loan related losses
or that our regulators will not require us to make further increases to our
reserve for loan losses. Additional provision for loan losses or charge-off of
loans could adversely impact our results of operations and financial
condition.
The Company’s
reserve for credit losses may not be adequate to cover future loan losses, which could adversely
affect our earnings.
The
Company maintains a reserve for credit losses in an amount that we believe is
adequate to provide for losses inherent in our portfolio. While we strive to
carefully monitor credit quality and to identify loans that may become
non-performing, at any time there are loans in the portfolio that could result
in losses that have not been identified as non-performing or potential problem
loans. Estimation of the allowance requires us to make various assumptions and
judgments about the collectability of loans in our portfolio. These assumptions
and judgments include historical loan loss experience, current credit profiles
of our borrowers, adverse situations that have occurred that may affect a
borrower’s ability to meet its financial obligations, the estimated value of
underlying collateral and general economic conditions. Determining the
appropriateness of the reserve is complex and requires judgment by management
about the effect of matters that are inherently uncertain. We cannot be certain
that we will be able to identify deteriorating loans before they become
non-performing assets, or that we will be able to limit losses on those loans
that have been identified. As a result, future significant increases to the
reserve for credit losses may be necessary. Additionally, future increases to
the reserve for credit losses may be required based on changes in the
composition of the loans comprising our loan portfolio, deteriorating values in
underlying collateral (most of which consists of real estate in the markets we
serve) and changes in the financial condition of borrowers, such as may result
from changes in economic conditions, or as a result of incorrect assumptions by
management in determining the reserve for credit loss.
Additionally,
banking regulators, as an integral part of their supervisory function,
periodically review our reserve for credit losses. As a result of an examination
by banking regulators of the Bank that commenced on March 15, 2010, the
regulators provided additional information to the Company on July 29, 2010 which
resulted in management refining and enhancing its model for calculating the
reserve for loan losses by considering an expanded scope of information and
augmenting the qualitative and judgmental factors used to estimate potential
losses inherent in the loan portfolio. As a result of the additional information
provided by regulators, on August 3, 2010, the Company determined that it would
restate its audited consolidated financial statements as of and for the year
ended December 31, 2009. As a result of the restatement, the December 31, 2009
reserve for loan losses increased to $58.6 million from the previously reported
$37.6 million. The loan loss provision for the year ended December 31, 2009
increased from $113.0 million to $134.0 million. Our regulators may require us
to increase the reserve for credit losses in the future which could have a
negative effect on our financial condition and results of
operations.
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.
Liquidity
is essential to our business. Our primary funding source is commercial and
retail deposits of our customers, brokered deposits, advances from the FHLB, FRB
discount window and other borrowings to fund our operations. Although we have
historically been able to replace maturing deposits and advances as necessary,
we might not be able to replace such funds in the future depending on adverse
results of operations, financial condition or capital ratings or regulatory
restrictions. An inability to raise funds through traditional deposits, brokered
deposits, borrowings, the sale of securities or loans and other sources could
have a substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities on terms which are
acceptable to us could be impaired by factors that affect us specifically or the
financial services industry or economy in general. At the onset of the economic
downturn in 2007 and through 2008 and early 2009 core deposits declined because
customers in general experienced reduced funds available for core deposits. As a
result, the amount of our wholesale funding increased. Core deposits stabilized
in late 2009, and the Company has established a significant liquidity reserve as
of September 30, 2010. However, our ability to borrow or attract and retain
deposits in the future could be adversely affected by our financial condition,
regulatory restrictions, or impaired by factors that are not specific to us,
such as FDIC insurance changes including the expiration of TAG program, or
further disruption in the financial markets or negative views and expectations
about the prospects for the banking industry. We are presently restricted from
accepting additional brokered deposits, including the Bank’s reciprocal
Certificate of Deposit Account Registry Service (“CDARs”) program. As of
September 30, 2010, we had no outstanding brokered deposits.
The
Bank’s primary counterparty for borrowing purposes is the FHLB, and liquid
assets are mainly balances held at the FRB. Available borrowing capacity has
been reduced as we drew on our available sources. Borrowing capacity from the
FHLB or FRB may fluctuate based upon the condition of the bank or the
acceptability and risk rating of loan collateral, and counterparties could
adjust discount rates applied to such collateral at their discretion, and the
FRB or FHLB could restrict or limit our access to secured borrowings. As with
many community banks, correspondent banks have withdrawn unsecured lines of
credit or now require collateralization for the purchase of fed funds on a
short-term basis due to the present adverse economic environment. In addition,
collateral pledged against public deposits held at the Bank has been increased
under Oregon law to more than 110% of such balances. The Bank is a public
depository and, accordingly, accepts deposit funds that belong to, or are held
for the benefit of, the State of Oregon, political subdivisions thereof,
municipal corporations and other public funds. In accordance with applicable
state law, in the event of default of one bank, all participating banks in the
state collectively assure that no loss of funds is suffered by any public
depositor. Generally in the event of default by a public depository, the
assessment attributable to all public depositories is allocated on a pro rata
basis in proportion to the maximum liability of each public depository as it
existed on the date of loss. The maximum liability is dependent upon potential
changes in regulations, bank failures and the level of public fund deposits, all
of which cannot be presently determined. Liquidity also may be affected by the
Bank’s routine commitments to extend credit. These circumstances have the effect
of reducing secured borrowing capacity.
There can
be no assurance that our sources of funds will remain adequate for our liquidity
needs and we may be compelled to seek additional sources of financing in the
future. There can be no assurance additional borrowings, if sought, would be
available to us or, if available, would be on favorable terms. The Company’s
stock price has been negatively affected by the recent adverse economic trend,
as has the ability of banks and holding companies to raise capital or borrow in
the debt markets compared to recent years. If additional financing sources are
unavailable or not available on reasonable terms to provide necessary liquidity,
our financial condition, results of operations and future prospects could be
materially adversely affected.
The
Company is seeking additional capital to improve capital ratios, but capital may
not be available when it is needed.
The
Company is required by federal and state regulatory authorities, including under
the obligations placed on the Bank by the Order, to maintain adequate levels of
capital to support our operations. In addition, we may elect to raise additional
capital to offset elevated risks arising from adverse economic conditions, support
our business, finance acquisitions, if any, or we may otherwise elect to raise
additional capital. Our ability to raise additional capital, if needed, will
depend on conditions in the capital markets, economic conditions and a number of
other factors, many of which are outside our control, and on our financial
performance. In that regard, current market conditions and investor uncertainty
have made it very challenging for financial institutions in general to raise
capital. Market conditions and investor sentiment prevented the Company from
raising capital through public and private offerings in the fourth quarter of
2009. If we cannot raise additional capital when needed, it may have a material
adverse effect on our financial condition, results of operations and prospects,
in addition to any possible action discussed above, that the FDIC or DFCS could
take in connection with a failure to comply with or a violation of the
Order.
The
Company may not be able to obtain such financing or it may be only available on
terms that are unfavorable to the Company and its shareholders. In the case of
equity financings, dilution to the Company’s shareholders could result and
securities issued in such financings may have rights, preferences and privileges
that are senior to those of the Company’s current shareholders. Under the
Company’s articles of incorporation, the Company may issue preferred equity
without first obtaining shareholder approval. In addition, debt financing may
include covenants that restrict our operations, and interest charges would
detract from future earnings Further, in the event additional capital is not
available on acceptable terms through available financing sources, the Company
may instead take additional steps to preserve capital, including reducing loans
outstanding, selling certain assets and increasing loan participations. The
Company reduced its dividend to $.01 in the third quarter of 2008, and
eliminated its cash dividend at year end 2008 as part of its effort to preserve
capital under current adverse economic conditions. There can be no assurance
that dividends on our common stock will be paid in the future, and if paid, at
what amount.
Real
estate values may continue to decrease leading to additional and greater than
anticipated loan charge-offs and valuation write downs on our other real estate
owned (“OREO”) properties.
Real
estate owned by the Bank and not used in the ordinary course of its operations
is referred to as “other real estate owned” or “OREO” property. We foreclose on
and take title to the real estate serving as collateral for many of our loans as
part of our business. At September 30, 2010, we had OREO with a carrying
value of $48.0 million relating to loans originated in the raw land and
land development portfolio and to a lesser extent, other loan portfolios.
Increased OREO balances lead to greater expenses as we incur costs to manage and
dispose of the properties. We expect that our earnings in 2010 will continue to
be negatively affected by various expenses associated with OREO, including
personnel costs, insurance and taxes, completion and repair costs, and other
costs associated with property ownership, as well as by the funding costs
associated with assets that are tied up in OREO. Moreover, our ability to sell
OREO properties is affected by public perception that banks are inclined to
accept large discounts from market value in order to quickly liquidate
properties. Any decrease in market prices may lead to OREO write downs, with a
corresponding expense in our statement of operations. We evaluate OREO property
values periodically and write down the carrying value of the properties if the
results of our evaluations require it. Further write-downs on OREO or an
inability to sell OREO properties could have a material adverse effect on our
results of operations and financial condition.
The
Company is not in compliance with certain continued listing requirements of the
NASDAQ Stock Market.
On June 16, 2010, the Company received
a letter from NASDAQ advising the Company that it had not regained compliance
with Rule 5550(a)(2) of the NASDAQ Marketplace Rules with respect to the minimum
bid price requirement of $1.00 per share as required by the notice letter from
The NASDAQ Stock Market received by the Company on December 17,
2009. As a result, The NASDAQ advised the Company that it is not
eligible for an additional 180 calendar day compliance period.
A NASDAQ
appeal hearing was held on July 22, 2010 and on September 8, 2010 the Company
was notified that the request to remain listed on the NASDAQ Stock Market was
granted, subject to certain conditions. The Panel granted the full extent of its
exception authority, to December 13, 2010, by which time the Company must have
evidenced a closing bid price of $1.00 or more for a minimum of ten prior
consecutive trading days. A failure to regain compliance with The
NASDAQ listing rules will have a material adverse impact on the liquidity of the
Company’s common stock, as well as on the Company’s financial
condition.
The
Bank’s deposit insurance premium could be substantially higher in the future,
which could have a material adverse effect on our future earnings.
The FDIC
insures deposits at FDIC insured financial institutions, including the Bank. The
FDIC charges the insured financial institutions premiums to maintain the Deposit
Insurance Fund at a certain level. Current economic conditions have increased
bank failures and expectations for further failures, in which case the FDIC
ensures payments of deposits up to insured limits from the Deposit Insurance
Fund. Either an increase in the risk category of the Bank or adjustments to the
base assessment rates, and/or a significant special assessment could have a
material adverse effect on our earnings. In addition, the deposit insurance
limit on FDIC deposit insurance coverage generally has increased to $250,000
through December 31, 2013. These developments will cause the premiums assessed
on us by the FDIC to increase and will materially increase our noninterest
expense.
On
February 27, 2009, the FDIC issued a final rule that revises the way the FDIC
calculates federal deposit insurance assessment rates beginning in the second
quarter of 2009. Under the new rule, the FDIC first establishes an institution’s
initial base assessment rate. This initial base assessment rate will range,
depending on the risk category of the institution, from 12 to 45 basis points.
The FDIC will then adjust the initial base assessment (higher or lower) to
obtain the total base assessment rate. The adjustments to the initial base
assessment rate will be based upon an institution’s levels of unsecured debt,
secured liabilities, and certain brokered deposits. The total base assessment
rate will range from 7 to 77.5 basis points of the institution’s
deposits.
Additionally,
on May 22, 2009, the FDIC announced a final rule imposing a special emergency
assessment as of June 30, 2009, payable September 30, 2009, of 5 basis points on
each FDIC insured deposit any institution’s assets, less Tier 1 capital, as of
June 30, 2009, but the amount of the assessment is capped at 10 basis points of
domestic deposits. The final rule also allows the FDIC to impose additional
special emergency assessments on or after September 30, 2009, of up to 5 basis
points per quarter, if necessary to maintain public confidence in FDIC
insurance. These higher FDIC assessment rates and special assessments will have
an adverse impact on our results of operations. We are unable to predict the
impact in future periods; including whether and when additional special
assessments will occur, in the event the economic crisis continues. However, the
FDIC has indicated that for now it will not impose additional special
assessments but instead is requiring institutions to prepay certain
assessments.
On
November 12, 2009, the FDIC issued a final rule pursuant to which all insured
depository institutions were required to prepay on December 31, 2009, their
estimated assessments for the fourth quarter of 2009 and for all of 2010, 2011,
and 2012. Under the rule, however, the FDIC has the authority to exempt an
institution from the prepayment requirements if the FDIC determines that the
prepayment would adversely affect the safety and soundness of the institution.
The Bank has received an exemption from the prepayment requirements. The Bank
will continue to pay its insurance assessments on a quarterly
basis.
We also
participate in the TLGP for noninterest-bearing transaction deposit accounts.
Banks that participate in the TLGP’s noninterest-bearing transaction account
guarantee program in 2009 generally paid the FDIC an annual assessment of 10
basis points on the amounts in such accounts above the amounts covered by FDIC
deposit insurance. The guarantee program has been extended through December 31,
2013. Beginning in 2010, participants will be assessed at an annual rate of
between 15 and 25 basis points on the amounts in the guaranteed accounts in
excess of the amounts covered by the FDIC deposit insurance. To the extent that
these TLGP assessments are insufficient to cover any loss or expenses arising
from the TLGP program, the FDIC is authorized to impose an emergency special
assessment on all FDIC-insured depository institutions. The FDIC has authority
to impose charges for the TLGP program upon depository institution holding
companies as well. These charges, along with the full utilization of our FDIC
deposit insurance assessment credit in early 2009, will cause the premiums and
TLGP assessments charged by the FDIC to increase. These actions have
significantly increased our noninterest expense in 2009 and will likely do so
for the foreseeable future.
Changes
in interest rates could adversely impact the Company.
The
Company’s earnings are highly dependent on the difference between the interest
earned on loans and investments and the interest paid on deposits and
borrowings. Changes in market interest rates impact the rates earned on loans
and investment securities and the rates paid on deposits and borrowings. In
addition, changes to the market interest rates may impact the level of loans,
deposits and investments, and the credit quality of existing loans. These rates
may be affected by many factors beyond the Company’s control, including general
and economic conditions and the monetary and fiscal policies of various
governmental and regulatory authorities. Changes in interest rates may
negatively impact the Company’s ability to attract deposits, make loans and
achieve satisfactory interest rate spreads, which could adversely affect the
Company’s financial condition or results of operations.
The
Company is subject to extensive regulation which undergoes frequent and often
significant changes.
The
Company’s operations are subject to extensive regulation by federal and state
banking authorities which impose requirements and restrictions on the Company’s
operations. The regulations affect the Company’s and the Bank’s investment
practices, lending activities, and dividend policy, among other things.
Moreover, federal and state banking laws and regulations undergo frequent and
often significant changes and have been subject to significant change in recent
years, sometimes retroactively applied, and may change significantly in the
future. Changes to these laws and regulations or other actions by regulatory
agencies could, among other things, make regulatory compliance more difficult or
expensive for the Company, could limit the products the Company and the Bank can
offer or increase the ability of non-banks to compete and could adversely affect
the Company in significant but unpredictable ways which in turn could have a
material adverse effect on the Company’s financial condition or results of
operations. Failure to comply with the laws or regulations could result in
fines, penalties, sanctions and damage to the Company’s reputation which could
have an adverse effect on the Company’s business and financial
results.
The
financial services business is intensely competitive and our success will depend
on our ability to compete effectively.
The
Company faces competition for its services from a variety of competitors. The
Company’s future growth and success depends on its ability to compete
effectively. The Company competes for deposits, loans and other financial
services with numerous financial service providers including banks, thrifts,
credit unions, mortgage companies, broker dealers, and insurance companies. To
the extent these competitors have less regulatory constraints, lower cost
structures, or increased economies of scale they may be able to offer a greater
variety of products and services or more favorable pricing for such products and
services. Improvements in technology, communications and the internet have
intensified competition. As a result, the Company’s competitive position could
be weakened, which could adversely affect the Company’s financial condition and
results of operations.
Our
information systems may experience an interruption or breach in
security.
The
Company relies on its computer information systems in the conduct of its
business. The Company has policies and procedures in place to protect against
and reduce the occurrences of failures, interruptions, or breaches of security
of these systems, however, there can be no assurance that these policies and
procedures will eliminate the occurrence of failures, interruptions or breaches
of security or that they will adequately restore or minimize any such events.
The occurrence of a failure, interruption or breach of security of the Company’s
computer information systems could result in a loss of information, business or
regulatory scrutiny, or other events, any of which could have a material adverse
effect on the Company’s financial condition or results of
operations.
We
continually encounter technological change.
Frequent
introductions of new technology-driven products and services in the financial
services industry result in the need for rapid technological change. In
addition, the effective use of technology may result in improved customer
service and reduced costs. The Company’s future success depends, to a certain
extent, on its ability to identify the needs of our customers and address those
needs by using technology to provide the desired products and services and to
create additional efficiencies in its operations. Certain competitors may have
substantially greater resources to invest in technological improvements. We may
not be able to successfully implement new technology-driven products and
services or to effectively market these products and services to our customers.
Failure to implement the necessary technological changes could have a material
adverse impact on our business and, in turn, our financial condition and results
of operations.
The
Company’s controls and procedures may fail or be circumvented.
Management
regularly reviews and updates the Company’s internal controls, disclosure
controls and procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. As a result of the restatements of
the Company’s consolidated financial statements as of and for the year ended
December 31, 2009 and the condensed consolidated financial statements as of and
for the three months ended March 31, 2010 arising from additional information
received from banking regulators in connection with our estimated reserve for
loan losses, a re-evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures was performed as of June 30, 2010, under
the supervision of the Audit Committee of the Board and with the participation
of the Company’s management, including its Chief Executive Officer and Chief
Financial Officer. Based upon this evaluation which was performed using the COSO
framework, the Company’s Chief Executive Officer and Chief Financial Officer
have determined that the Company’s disclosure controls and procedures are not
effective as of September 30, 2010, to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required due to a
material weakness in our internal control over financial reporting specifically
with respect to our estimate of the reserve for loan
losses. Management previously disclosed a material weakness in
internal control over financial reporting in its quarterly report on Form 10-Q
for the quarter ended June 30, 2010, specifically with respect to our estimate
of the reserve for loan losses. During the third quarter of 2010, management
continued to refine and enhance its model for calculating the reserve for
loan losses by considering an expanded scope of information and augmenting the
qualitative and judgmental factors used to estimate potential losses inherent in
the loan portfolio and the Company has also engaged the assistance of external
independent consulting resources to assist with these revisions and
enhancements. Management anticipates evaluating and testing the
refined and enhanced model of calculating the Company’s reserve for loan losses
during the remainder of 2010. As of the date of this quarterly report for
September 30, 2010, management believes that the reserve for loan losses is
appropriately stated and that additional refinements and testing will occur in
Q4 to fully remediate the material weakness.
Cascade
Bancorp relies on dividends from the Bank.
Cascade
Bancorp is a separate legal entity from the Bank and substantially all of our
revenues are derived from Bank dividends. These dividends may be limited by
certain federal and state laws and regulations. In addition, any distribution of
assets of the Bank upon a liquidation or reorganization would be subject to the
prior liens of the Bank’s creditors. Because of the elevated credit risk and
associated loss incurred in 2008 and 2009, regulators have required the Company
to seek permission prior to payment of dividends on common stock or on Trust
Preferred Securities. In addition, pursuant to the Order, the Bank is required
to seek permission prior to payment of cash dividends on its common stock. The
Company cut its dividend to zero in the fourth quarter of 2008 and deferred
payments on its Trust Preferred Securities beginning in the second quarter of
2009. We do not expect the Bank to pay dividends to Cascade Bancorp for the
foreseeable future. Cascade Bancorp does not expect to pay any dividends for the
foreseeable future. Cascade Bancorp is unable to pay dividends on its common
stock until it pays all accrued payments on its Trust Preferred Securities. As
of September 30, 2010, we had $66.5 million of TPS outstanding with a weighted
average interest rate of 2.04%. The Company elected to defer payments on its TPS
beginning in the second quarter of 2009 and as of September 30, 2010, accrued
dividends were $3.2 million. If the Bank is unable to pay dividends to Cascade
Bancorp in the future, Cascade Bancorp may not be able to pay dividends on its
stock or pay interest on its debt, which could have a material adverse effect on
the Company’s financial condition and results of operations.
The
Company may not be able to attract or retain key banking employees.
We expect
our future success to be driven in large part by the relationships maintained
with our clients by our executives and senior lending officers. We have entered
into employment agreements with several members of senior management. The
existence of such agreements, however, does not necessarily ensure that we will
be able to continue to retain their services. The unexpected loss of key
employees could have a material adverse effect on our business and possibly
result in reduced revenues and earnings.
The
Company strives to attract and retain key banking professionals, management and
staff. Competition to attract the best professionals in the industry can be
intense which will limit the Company’s ability to hire new professionals.
Banking related revenues and net income could be adversely affected in the event
of the unexpected loss of key personnel.
The
value of certain securities in our investment securities portfolio may be
negatively affected by disruptions in the market for these
securities.
The
Company’s investment portfolio securities are mainly mortgage backed securities
guaranteed by government sponsored enterprises such as FNMA, GNMA, FHLMC and
FHLB, or otherwise backed by FHA/VA guaranteed loans; however, volatility or
illiquidity in financial markets may cause certain investment securities held
within our investment portfolio to become less liquid. This coupled with the
uncertainty surrounding the credit risk associated with the underlying
collateral or guarantors may cause material discrepancies in valuation estimates
obtained from third parties. Volatile market conditions may affect the value of
securities through reduced valuations due to the perception of heightened credit
and liquidity risks in addition to interest rate risk typically associated with
these securities. There can be no assurance that the declines in market value
associated with these disruptions will not result in impairments of these
assets, which would lead to accounting charges that could have a material
adverse effect on our results of operations, equity, and capital
ratios.
We
are exposed to risk of environmental liabilities with respect to properties to
which we take title.
In the
course of our business, we may foreclose and take title to real estate, and
could be subject to environmental liabilities with respect to these properties.
We may be held liable to a governmental entity or to third parties for property
damage, personal injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or may be required to
investigate or clean-up hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation activities
could be substantial. In addition, if we are the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
the property. If we become subject to significant environmental liabilities, our
business, financial condition, results of operations and prospects could be
adversely affected.
The
Bank sold its mortgage servicing asset and no longer services loans under the
FNMA designation.
The
Company sold its mortgage servicing asset and business because it no longer
qualified as a FNMA designated mortgage loan seller or servicer as a result of
the Bank’s capital ratios falling below contractual requirements. The
Company will originate mortgages for local customers on a fee for service basis
only in the future. The closing of such contracts will generally
occur on the books of conduit lenders. The Bank will no longer
service loans under the FNMA designation. Accordingly, the Bank’s
mortgage income will be wholly dependent upon fees and costs incurred in the
retail origination and sale of mortgages to wholesale investors. The
Bank’s mortgage income may be lower than prior periods, especially with the loss
of ongoing mortgage servicing fee income. This lower mortgage income
may have a material adverse effect on the Company’s financial
condition.
Recent legislative and required
regulatory initiatives will impose restrictions and requirements on financial
institutions that could have an adverse effect on our
business.
The
United States Congress, the Treasury Department and the Federal Deposit
Insurance Corporation have taken several steps to support the financial services
industry that have included certain well publicized programs, such as the
Troubled Asset Relief Program, as well as programs enhancing the liquidity
available to financial institutions and increasing insurance available on bank
deposits. These programs have provided an important source of support to many
financial institutions. Partly in response to these programs and the current
economic climate, the President signed on July 21, 2010, the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010. Few provisions of the Act are
effective immediately with various provisions becoming effective in stages. Many
of the provisions require governmental agencies to implement rules over the next
18 months. These rules will increase regulation of the financial services
industry and impose restrictions on the ability of firms within the industry to
conduct business consistent with historical practices. These rules will, as
examples, impact the ability of financial institutions to charge certain banking
and other fees, allow interest to be paid on demand deposits, impose new
restrictions on lending practices and require depository institution holding
companies to maintain capital levels at levels not less than the levels required
for insured depository institutions. We cannot predict the substance or impact
of pending or future legislation or regulation. Compliance with such legislation
or regulation may, among other effects, significantly increase our costs, limit
our product offerings and operating flexibility, require significant adjustments
in our internal business processes, and possibly require us to maintain our
regulatory capital at levels above historical practices.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the quarter ended September 30, 2010, the Company did not repurchase any shares
under its currently authorized repurchase plan and does not expect to engage in
repurchase for the foreseeable future. As of September 30, 2010, the
Company was authorized to repurchase up to an additional 940,426 shares under
this repurchase plan.
ITEM
6. EXHIBITS
|
10.1
|
Sixth
Amendment to the Securities Purchase Agreement, dated August 15, 2010,
between the Company and David F. Bolger, Two-Forty Associates, and The
David F. Bolger 2008 Grantor Retained Annuity
Trust.
|
|
10.2
|
Sixth
Amendment to the Securities Purchase Agreement, dated August 15, 2010,
between the Company and BOTC Holdings
LLC.
|
|
10.3
|
Seventh
Amendment to the Securities Purchase Agreement, dated September 15, 2010,
between the Company and David F. Bolger, Two-Forty Associates, and The
David F. Bolger 2008 Grantor Retained Annuity
Trust.
|
|
10.4
|
Seventh
Amendment to the Securities Purchase Agreement, dated September 15, 2010,
between the Company and BOTC Holdings
LLC.
|
|
10.5
|
Eighth
Amendment to the Securities Purchase Agreement, dated September 28, 2010,
between the Company and David F. Bolger, Two-Forty Associates, and The
David F. Bolger 2008 Grantor Retained Annuity
Trust.
|
|
10.6
|
Eighth
Amendment to the Securities Purchase Agreement, dated September 28, 2010,
between the Company and BOTC Holdings
LLC.
|
|
31.1
|
Certification
of Chief Executive Officer
|
|
31.2
|
Certification
of Chief Financial Officer
|
|
32
|
Certification
Pursuant to Section 906
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
CASCADE BANCORP
|
|
|
(Registrant)
|
|
|
|
Date November 3, 2010
|
By
|
/s/
Patricia L. Moss |
|
|
Patricia
L. Moss, President & CEO
|
|
|
|
Date November 3, 2010
|
By
|
/s/ Gregory
D. Newton |
|
|
Gregory
D. Newton, EVP/Chief Financial
Officer
|