CACB-2014.09.30-10Q


UNITED STATES
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, 2014
 
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: 000-23322

CASCADE BANCORP
(Exact name of registrant as specified in its charter)
 
Oregon
93-1034484
(State or other jurisdiction of
incorporation)
(IRS Employer Identification No.)
 
1100 N.W. Wall Street
Bend, Oregon 97701
(Address of principal executive offices)
(Zip Code)
 
(877) 617-3400
(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 x  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. 72,482,285 shares of no par value Common Stock as of November 7, 2014.




CASCADE BANCORP & SUBSIDIARY
FORM 10-Q
QUARTERLY REPORT
September 30, 2014

 
INDEX
 
 
Page
PART I:  FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
September 30, 2014 and December 31, 2013
 
 
 
 
 
 
Three and nine months ended September 30, 2014 and 2013
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income:
 
Three and nine months ended September 30, 2014 and 2013
 
 
 
 
 
 
Nine months ended September 30, 2014 and 2013
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II:  OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5
 
 
 
Item 6.
 
 
 

2



PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
Cascade Bancorp & Subsidiary
Condensed Consolidated Balance Sheets
September 30, 2014 and December 31, 2013
(Dollars in thousands)
(unaudited) 
 
September 30, 
 2014
 
December 31,
2013
ASSETS
 

 
 

Cash and cash equivalents:
 

 
 

Cash and due from banks
$
46,363

 
$
33,300

Interest bearing deposits
90,647

 
48,527

Federal funds sold
272

 
22

Total cash and cash equivalents
137,282

 
81,849

Investment securities available-for-sale
289,746

 
194,481

Investment securities held-to-maturity, estimated fair value of $156,454 ($1,342 at 2013)
155,454

 
1,320

Federal Home Loan Bank (FHLB) stock
25,916

 
9,913

Loans held for sale
1,839

 
10,359

Loans, net
1,443,452

 
973,618

Premises and equipment, net
44,399

 
32,953

Bank-owned life insurance (BOLI)
53,175

 
36,567

Other real estate owned (OREO), net
4,032

 
3,144

Deferred tax asset (DTA), net
69,266

 
50,068

Core deposit intangible (CDI)
7,888

 
529

Goodwill
80,189

 

Other assets
27,741

 
11,418

Total assets
$
2,340,379

 
$
1,406,219

LIABILITIES & STOCKHOLDERS' EQUITY
 

 
 

Liabilities:
 

 
 

Deposits:
 

 
 

Demand
$
643,997

 
$
431,079

Interest bearing demand
967,509

 
544,668

Savings
130,763

 
50,258

Time
244,165

 
141,315

Total deposits
1,986,434

 
1,167,320

FHLB borrowings

 
27,000

Other liabilities
45,559

 
23,184

Total liabilities
2,031,993

 
1,217,504

Stockholders' equity:
 

 
 

Preferred stock, no par value; 5,000,000 shares authorized; none issued or outstanding

 

Common stock, no par value; 100,000,000 shares authorized; 72,477,147 issued and outstanding (47,592,061 in 2013)
450,662

 
330,839

Accumulated deficit
(143,391
)
 
(142,088
)
Accumulated other comprehensive income (loss)
1,115

 
(36
)
Total stockholders' equity
308,386

 
188,715

Total liabilities and stockholders' equity
$
2,340,379

 
$
1,406,219

  See accompanying notes to condensed consolidated financial statements.

3



Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2014 and 2013
(Dollars in thousands, except per share amounts)
(unaudited)
 
Three months ended  
 September 30,
 
Nine months ended  
 September 30,
 
2014
 
2013
 
2014
 
2013
Interest income:
 

 
 

 
 
 
 
Interest and fees on loans
$
16,571

 
$
11,080

 
$
41,467

 
$
33,251

Interest on investments
2,655

 
1,356

 
6,003

 
4,059

Other interest income
87

 
71

 
159

 
173

Total interest income
19,313

 
12,507

 
47,629

 
37,483

 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 
 
 
Deposits:
 

 
 

 
 
 
 
Interest bearing demand
284

 
193

 
676

 
541

Savings
10

 
6

 
21

 
17

Time
427

 
235

 
929

 
829

Other borrowings

 
16

 
6

 
949

Total interest expense
721

 
450

 
1,632

 
2,336

 
 
 
 
 
 
 
 
Net interest income
18,592

 
12,057

 
45,997

 
35,147

Loan loss provision

 

 

 
1,000

Net interest income after loan loss provision
18,592

 
12,057

 
45,997

 
34,147

 
 
 
 
 
 
 
 
Non-interest income:
 

 
 

 
 
 
 
Service charges on deposit accounts
1,457

 
766

 
3,324

 
2,245

Card issuer and merchant services fees, net
1,884

 
847

 
4,480

 
2,473

Earnings on BOLI
280

 
224

 
712

 
659

Mortgage banking income, net
734

 
1,284

 
1,790

 
3,504

Swap fee income
476

 

 
1,419

 

Other income
702

 
516

 
1,974

 
1,628

Total non-interest income
5,533

 
3,637

 
13,699

 
10,509

 
 
 
 
 
 
 
 
Non-interest expense:
 

 
 

 
 
 
 
Salaries and employee benefits
10,199

 
7,633

 
31,588

 
24,239

Occupancy
1,553

 
1,101

 
7,544

 
3,830

Information Technology
1,032

 
692

 
3,634

 
1,926

Equipment
497

 
457

 
1,463

 
1,191

Communications
695

 
347

 
1,640

 
1,108

FDIC insurance
371

 
454

 
1,057

 
1,305

OREO expense
314

 
47

 
1,016

 
322

Professional services
1,461

 
1,025

 
6,887

 
2,535

Prepayment penalties on FHLB advances

 

 

 
3,827

Other expenses
3,606

 
1,827

 
8,974

 
5,921

Total non-interest expense
19,728

 
13,583

 
63,803

 
46,204

 
 
 
 
 
 
 
 
Income (loss) before income taxes
4,397

 
2,111

 
(4,107
)
 
(1,548
)
Income tax (provision) benefit
(1,965
)
 
(619
)
 
2,804

 
51,159

Net income (loss)
$
2,432


$
1,492

 
$
(1,303
)
 
$
49,611

 
 
 
 
 
 
 
 
Basic and diluted income per share:
 

 
 

 
 
 
 
Net income (loss) per common share
$
0.03

 
$
0.03

 
$
(0.02
)
 
$
1.05

Net income (loss) per common share (diluted)
$
0.03

 
$
0.03

 
$
(0.02
)
 
$
1.05

 
See accompanying notes to condensed consolidated financial statements.

4




Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2014 and 2013
(Dollars in thousands)
(unaudited)
 
 
Three months ended  
 September 30,
 
Nine months ended  
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
2,432

 
$
1,492

 
$
(1,303
)
 
$
49,611

 
 
 
 
 
 
 
 
Other Comprehensive (loss) income:
 

 
 

 
 
 
 
Change in unrealized (loss) gain on investment securities available-for-sale
(1,595
)
 
(4,477
)
 
1,855

 
(6,729
)
Tax effect of the unrealized (loss) gain on investment securities available-for-sale
606

 
1,701

 
(705
)
 
2,557

Total other comprehensive (loss) income
$
(989
)
 
$
(2,776
)
 
$
1,150

 
$
(4,172
)
Comprehensive income (loss)
$
1,443

 
$
(1,284
)
 
$
(153
)
 
$
45,439

 
See accompanying notes to condensed consolidated financial statements.

5




Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2014 and 2013
(Dollars in thousands)
(unaudited)
 
 
Nine months ended  
 September 30,
 
2014
 
2013
Net cash provided by operating activities
$
5,363

 
$
3,624

 
 
 
 
Investing activities:
 

 
 

Purchases of investment securities available-for-sale
(36,246
)
 
(11
)
Purchases of investment securities held to maturity
(1,112
)
 

Proceeds from sales, maturities, calls, and prepayments of investment securities available-for-sale
75,969

 
49,884

Proceeds from sales, maturities, calls of investment securities held-to-maturity
15,337

 
475

Proceeds from redemption of FHLB stock
612

 
279

Loan originations, net
(77,552
)
 
(100,794
)
Proceeds from purchases of premises and equipment, net
(1,300
)
 
(1,060
)
Proceeds from sales of other assets
2,669

 

Proceeds from sales of OREO
1,946

 
5,091

Net cash received from acquisition of Home
38,620

 

Net cash provided by (used in) investing activities
18,943

 
(46,136
)
 
 
 
 
Financing activities:
 
 
 
Net increase in deposits
58,466

 
119,382

Proceeds from stock options exercised

 
30

Tax effect of non-vested restricted stock
(339
)
 
(102
)
FHLB advance borrowings
60,000

 

Repayment of FHLB advances
(87,000
)
 
(60,000
)
Net cash provided by financing activities
31,127

 
59,310

Net increase in cash and cash equivalents
55,433

 
16,798

Cash and cash equivalents at beginning of period
81,849

 
113,028

Cash and cash equivalents at end of period
$
137,282

 
$
129,826

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Interest paid
$
5,099

 
$
2,573

Loans transferred to OREO
$
129

 
$
2,069

 
See accompanying notes to condensed consolidated financial statements.

6

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)


1.    Basis of Presentation
 
The accompanying interim condensed consolidated financial statements include the accounts of Cascade Bancorp (“Bancorp”), an Oregon chartered single 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 of America (“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 adjustments (all of which are of a normal and recurring nature) necessary 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 dates of the balance sheets and income and expenses for the reporting 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, 2013 were derived from audited consolidated financial statements, but do not include all disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2013 consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

As discussed in Note 2 - Business Combinations, on May 16, 2014 (the "Acquisition Date"), the Company completed the merger with Home Federal Bancorp, Inc. ("Home").
 
Certain amounts in 2013 have been reclassified to conform to the 2014 presentation; however the reclassifications do not have a material impact on the condensed consolidated financial statements.

2.      Business Combinations

On the Acquisition Date, pursuant to the previously announced Agreement and Plan of Merger, dated as of October 23, 2013 (the "Merger Agreement"), between the Company and Home, Home merged with and into Cascade with Cascade continuing as the surviving corporation (the "Merger"). Immediately after the Merger, Home Federal Bank, a wholly-owned subsidiary of Home, merged with and into Bank of the Cascades, a wholly-owned subsidiary of Cascade, with Bank of the Cascades continuing as the surviving bank. The results of Home's operations are included in the Company's financial results beginning on the Acquisition Date.

All of Home’s common stock was converted into the right to receive $8.43 in cash and 1.6772 shares of Cascade common stock. The conversion of Home’s common stock into Cascades common stock resulted in Cascade issuing 24,309,131 shares of its common stock.

The Merger was accounted for using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the Acquisition Date. Preliminary goodwill of $80.2 million was calculated as the purchase premium after adjusting for the fair value of net assets acquired and represents the value expected from the synergies created from combining the two banking organizations as well as the economies of scale expected from combining the operations of the two companies. None of the goodwill is deductible for income tax purposes as the Merger is accounted for as a tax-free exchange.

In most instances, determining the fair value of the acquired assets and assumed liabilities required us to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations relates to the valuation of acquired loans. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the

7

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

impact of estimated credit losses and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of Home’s previously established reserve for loan losses.

The following table provides a summary of the purchase price calculation as of the Acquisition Date and the identifiable assets purchased and the liabilities assumed at their estimated fair values. These fair value measurements are provisional based on third-party valuations that are currently under review and are subject to refinement for up to one year after the Acquisition Date based on additional information that may be obtained by us that existed as of the Acquisition Date.
Purchase Price (in thousands, except per share data)
 
 
 
Cascade Bancorp common stock shares issued for Home Federal shares
 
 
24,309,131

Cascade share price as calculated in the Merger Agreement
 
 
$
4.91

Consideration from common stock conversion (1.6772 ratio)
 
 
$
119,285

Consideration paid in cash ($8.43 per share)
 
 
$
122,163

Total purchase price
 
 
241,448

ASSETS
 
 
 
Cash and cash equivalents
 
$
160,782

 
Investment securities
 
318,893

 
Loans
 
392,411

 
Premises and equipment
 
17,432

 
Other real estate owned
 
3,514

 
Deferred tax asset
 
15,407

 
Bank owned life insurance
 
15,896

 
Other assets
 
13,259

 
Intangible asset acquired (1)
 
7,667

 
Total assets
 
$
945,261

 
LIABILITIES
 
 
 
Deposits
 
$
760,648

 
Other liabilities
 
23,354

 
Total liabilities
 
$
784,002

 
Net identifiable assets acquired
 
 
161,259

Goodwill
 
 
$
80,189

 
 
 
 
(1) Intangible assets consist of core deposit intangibles acquired in the Home transaction. The core deposit intangible is being amortized over a 10 year period, which is its expected useful life.

The estimated fair values presented in the above table reflect additional information that the Company obtained during the three months ended September 30, 2014, which resulted in changes to certain fair value estimates made as of the Acquisition Date. Material adjustments to the acquisition date estimated fair values are recorded in the period in which the acquisition occurred, and as a result, previously recorded results have changed. After considering this additional information, the estimated fair values of premises and equipment decreased $1.2 million and the estimated fair value of loans increased $0.1 million from that originally reported in the three months ended June 30, 2014. The estimated net deferred tax asset increased $0.2 million as a result of these revised fair values. Additionally, the Company recorded a $3.5 million increase in acquired other liabilities related to a purchase accounting adjustment identified during the three months ended September 30, 2014. The combined effect of these items discussed above resulted in a net increase to goodwill of $4.4 million from that originally reported in the three months ended June 30, 2014 to $80.2 million, which is recognized in the September 30, 2014 consolidated balance sheet.

Merger related charges of $0.5 million and $11.3 million were recorded in the consolidated statement of comprehensive income for the three and nine months ended September 30, 2014, respectively. Such expenses were primarily related to professional and legal services, equipment and property maintenance, and information system charges incurred in connection with the acquisition.

The following table provides the unaudited pro forma information for the results of operations for the three and nine month periods ended September 30, 2014 and 2013, as if the acquisition had occurred on January 1 of each year. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily comprised of Home’s loan, investment and deposit

8

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

portfolios. In addition, the $0.5 million and $11.3 million in merger-related expenses noted earlier are included in each period presented. These unaudited pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organization that would have been achieved had the Merger occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Net interest income
$
18,592

 
$
23,309

 
$
59,870

 
$
67,433

Non-interest expense
19,728

 
23,693

 
88,455

 
83,123

Net income
2,432

 
2,689

 
8,689

 
46,473

Net income per diluted share
0.03

 
0.04

 
0.11

 
0.65


3.    Investment Securities
 
Investment securities at September 30, 2014 and December 31, 2013 consisted of the following (dollars in thousands):
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair value
September 30, 2014
 

 
 

 
 

 
 

Available-for-sale
 

 
 

 
 

 
 

U.S. Agency mortgage-backed securities (MBS) *
$
233,149

 
$
3,688

 
$
(2,083
)
 
$
234,754

Non-agency MBS
38,685

 
75

 
(360
)
 
38,400

U.S. Agency asset-backed securities
8,306

 
791

 
(45
)
 
9,052

Corporate securities
7,297

 

 
(277
)
 
7,020

Mutual fund
511

 
9

 

 
520

 
$
287,948

 
$
4,563

 
$
(2,765
)
 
$
289,746

Held-to-maturity
 

 
 

 
 

 
 

U.S. Agency mortgage-backed securities (MBS)
$
112,747

 
$
630

 
$
(76
)
 
$
113,301

Obligations of state and political subdivisions
42,133

 
490

 
(44
)
 
42,579

Tax credit investments
574

 

 

 
574

 
$
155,454

 
$
1,120

 
$
(120
)
 
$
156,454

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Available-for-sale
 

 
 

 
 

 
 

U.S. Agency MBS *
$
171,853

 
$
3,125

 
$
(3,646
)
 
$
171,332

Non-agency MBS
13,500

 
11

 
(414
)
 
13,097

U.S. Agency asset-backed securities
8,683

 
887

 
(21
)
 
9,549

Mutual fund
502

 
1

 

 
503

 
$
194,538

 
$
4,024

 
$
(4,081
)
 
$
194,481

Held-to-maturity
 

 
 

 
 

 
 

Obligations of state and political subdivisions
$
706

 
$
22

 
$

 
$
728

Tax credit investments
614

 

 

 
614

 
$
1,320

 
$
22

 
$

 
$
1,342

 
* U.S. Agency MBS include private label MBS of approximately $9.9 million and $11.3 million at September 30, 2014 and December 31, 2013, respectively, which are supported by FHA/VA collateral.
  
The following table presents the contractual maturities of investment securities at September 30, 2014 (dollars in thousands):

9

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

 
 
Available-for-sale
 
Held-to-maturity
 
Amortized
cost
 
Estimated
fair value
 
Amortized
cost
 
Estimated
fair value
Due in one year or less
$
357

 
$
359

 
$
185

 
$
186

Due after one year through five years
6,460

 
6,475

 
18,551

 
18,516

Due after five years through ten years
73,413

 
71,768

 
103,800

 
104,511

Due after ten years
207,207

 
210,624

 
32,344

 
32,667

Mutual fund
511

 
520

 

 

Tax credit investments

 

 
574

 
574

 
$
287,948

 
$
289,746

 
$
155,454

 
$
156,454

 
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, 2014 and December 31, 2013 (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
September 30, 2014
 


 


 


 


 


 

Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Agency MBS
$
24,479


$
(65
)

$
44,027


$
(2,018
)

$
68,506


$
(2,083
)
Non-Agency MBS
27,225


(49
)

6,596


(311
)

33,821


(360
)
U.S. Agency asset-backed securities
744


(7
)

1,609


(38
)

2,353


(45
)
Corporate Securities
7,020

 
(277
)
 

 

 
7,020

 
(277
)
 
$
59,468


$
(398
)

$
52,232


$
(2,367
)

$
111,700


$
(2,765
)


















Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
U.S. Agency MBS
$
17,448

 
$
(76
)
 

 

 
$
17,448

 
$
(76
)
Obligations of state and political subdivisions
4,279

 
(44
)
 

 

 
4,279

 
(44
)
 
$
21,727

 
$
(120
)
 
$

 
$

 
$
21,727

 
$
(120
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Agency MBS
$
35,440

 
$
(810
)
 
$
30,779

 
$
(2,836
)
 
$
66,219

 
$
(3,646
)
Non-Agency MBS
9,569

 
(412
)
 
179

 
(2
)
 
9,748

 
(414
)
U.S. Agency asset-backed securities
703

 
(4
)
 
1,775

 
(17
)
 
2,478

 
(21
)
 
$
45,712

 
$
(1,226
)
 
$
32,733

 
$
(2,855
)
 
$
78,445

 
$
(4,081
)
 
The unrealized losses on investments in U.S. Agency and non-agency MBS and U.S Agency asset-backed securities are primarily due to changes in market yield/rate spreads at September 30, 2014 and December 31, 2013 as compared to yield/rate spread relationships prevailing at the time specific investment securities were purchased. Management expects the fair value of these investment securities to recover as securities approach their maturity dates. 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, 2014, management did not

10

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

have the intent to sell any of the securities classified as held-to-maturity 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.

4.    Loans and reserve for credit losses

 The composition of the loan portfolio at September 30, 2014 and December 31, 2013 was as follows (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
 
Amount
 
Percent
 
Amount
 
Percent
Originated loans (a):
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

Owner occupied
$
202,015

 
17.9
%
 
$
204,998

 
20.6
%
Non-owner occupied
362,102

 
32.1
%
 
347,014

 
34.8
%
Total commercial real estate loans
564,117

 
50.0
%
 
552,012

 
55.4
%
Construction
82,825

 
7.4
%
 
52,503

 
5.3
%
Residential real estate
102,004

 
9.1
%
 
101,557

 
10.2
%
Commercial and industrial
342,994

 
30.4
%
 
254,170

 
25.5
%
Consumer
34,661

 
3.1
%
 
35,990

 
3.6
%
Total loans
1,126,601

 
100.0
%
 
996,232

 
100.0
%
 
 
 
 
 
 
 
 
Less:
 

 
 

 
 

 
 

Deferred loan fees
(1,907
)
 
 

 
(1,757
)
 
 

Reserve for loan losses
(21,351
)
 
 

 
(20,857
)
 
 

Loans, net
$
1,103,343

 
 

 
$
973,618

 
 

 
 
 
 
 
 
 
 
Acquired loans (b):
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 
 
 
Owner occupied
$
49,284

 
17.0
%
 
 
 
 
Non-owner occupied
106,344

 
36.7
%
 
 
 
 
Total commercial real estate loans
155,628

 
53.7
%
 
 
 
 
Construction
29,775

 
10.3
%
 
 
 
 
Residential real estate
76,453

 
26.3
%
 
 
 
 
Commercial and industrial
25,775

 
8.9
%
 
 
 
 
Consumer
2,416

 
0.8
%
 
 
 
 
Total loans
290,047

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 

 
 

 
 
 
 
Reserve for loan losses

 
 
 
 
 
 
Loans, net
$
290,047

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Acquired covered loans (c):
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 
 
 
Owner occupied
$
12,864

 
25.7
%
 
 
 
 
Non-owner occupied
18,698

 
37.4
%
 
 
 
 
Total commercial real estate loans
31,562

 
63.1
%
 
 
 
 
Construction
2,520

 
5.0
%
 
 
 
 
Residential real estate
11,766

 
23.5
%
 
 
 
 
Commercial and industrial
3,745

 
7.5
%
 
 
 
 
Consumer
469

 
0.9
%
 
 
 
 
Total loans
50,062

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 

 
 

 
 
 
 

11

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

Reserve for loan losses

 
 
 
 
 
 
Loans, net
$
50,062

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total loans:
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 
 
 
Owner occupied
$
264,163

 
18.0
%
 
 
 
 
Non-owner occupied
487,144

 
33.2
%
 
 
 
 
Total commercial real estate loans
751,307

 
51.2
%
 
 
 
 
Construction
115,120

 
7.8
%
 
 
 
 
Residential real estate
190,223

 
13.0
%
 
 
 
 
Commercial and industrial
372,514

 
25.4
%
 
 
 
 
Consumer
37,546

 
2.6
%
 
 
 
 
Total loans
1,466,710

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Less:
 

 
 

 
 
 
 
Deferred loan fees
(1,907
)
 
 
 
 
 
 
Reserve for loan losses
(21,351
)
 
 
 
 
 
 
Loans, net
$
1,443,452

 
 

 
 
 
 
 
 
 
 
 
 
 
 
(a) Originated loans are loans organically made through the Company's normal and customary origination process
(b) Acquired loans are loans acquired in the acquisition of Home, discussed elsewhere in this report, less acquired covered loans
(c) Acquired covered loans acquired in the acquisition of Home that are covered under FDIC loss share agreements
 
The following describes the distinction between originated, acquired and covered loan portfolios and certain significant accounting policies relevant to each of these portfolios.

Originated loans

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the reserve for loan losses and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans. Interest is not accrued on loans where collectability is uncertain. Accrued interest on loans is presented in "Other assets" on the condensed consolidated balance sheet. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan as an adjustment to the related loan yield.

Approximately 66.5% of the Bank’s originated loan portfolio at September 30, 2014 consisted of real estate-related loans including construction and development loans, residential mortgage loans, and commercial loans were secured by commercial real estate. At September 30, 2014, approximately 72.0% of the Bank's total portfolio (inclusive of acquired and acquired covered loans) consisted of real estate-related loans as described above. The Bank's results of operations and financial condition are affected by general economic trends and in particular, the strength of the local residential and commercial real estate markets in Central, Southern and Northwest Oregon and the greater Boise/Treasure Valley, Idaho area. Real estate values could be affected by, among other things, a worsening of national and local economic conditions, an increase in foreclosures, a decline in home sale volumes, and an increase in interest rates. Furthermore, the Bank may experience an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to the Bank in the event of a sustained downturn in business and economic conditions generally or specifically in the principal markets in which the Bank does business. An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of non-performing assets, net charge-offs, and loan loss provision. Management is targeting to diversify its commercial real estate ("CRE") concentration over time, but real estate-related loans will remain a significant portfolio component due to the nature of the economies, businesses, and markets we serve.
 
In the normal course of business, the Bank may participate portions of loans to third parties in order to extend the Bank’s lending capability or to mitigate risk. At September 30, 2014 and December 31, 2013, the portion of loans participated to third-parties (which are not included in the accompanying condensed consolidated financial statements) totaled $31.4 million and $11.3 million, respectively.


12

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

Acquired and acquired covered loans

Acquired loans and acquired covered loans are those purchased in the Home acquisition (See Note 2 - "Business Combinations" for further information). These loans were recorded at estimated fair value at the Acquisition Date. The fair value estimates for acquired and acquired covered loans is based on expected prepayments, charge offs and the amount and timing of undiscounted expected principal, interest and other cash flows. The net fair value adjustment to the acquired and acquired covered loans at acquisition was a reduction of $6.0 million, representing a valuation adjustment for interest rate and credit which will be accreted over the life of the loans (approximately 10 years).

Of the loans acquired on May 16, 2014 and still held at September 30, 2014, $15.3 million or 4.5% were graded substandard. Of that amount $7.9 million or 51.8% of the substandard loans were covered under a loss share agreement with the FDIC. With the amount of classified loans acquired being nominal, all loans acquired are treated in a manner consistent with originated loans for credit risk management and accounting purposes.

As of September 30, 2014, $50.1 million or 14.7% of the $340.1 million in acquired and acquired covered loans were covered under loss sharing agreements with the FDIC. The agreements were entered into in September 2009 and September 2010 between the FDIC and Home. The loss sharing agreements expire five years after the date of the FDIC agreements for non-single family covered assets and ten years after the acquisitions date for single-family covered assets. After the expiration of the loss sharing agreements, the Company will not be indemnified for losses and related expenses on covered assets. When the loss sharing agreements expire, the Company's and the Bank's risk-based capital ratios will be reduced. While the agreements are in place, the covered assets receive a 20% risk-weighting. When the agreements expire, the risk-weighting for previously covered assets will most likely increase to 100%, based on current regulatory capital definitions. Nearly all of the assets remaining in the covered asset portfolios are non-single family covered assets. Therefore, most of the covered assets will no longer be indemnified after September 2014 or September 2015. Only $7.9 million of the acquired covered loans were graded substandard. With the amount of classified loans covered under these agreements being nominal, amounts that may be due to or due from the FDIC under loss sharing agreements will be accounted for on a cash basis.

A net loss share payable was recorded at the Acquisition Date which represents the estimated value of reimbursement the Company expects to pay to the FDIC for recoveries net of incurred losses on covered loans. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets.

Upon the determination of an incurred loss or recovery the loss share receivable/payable will be changed by the amount due to or due from the FDIC.

Changes in the loss share payable (receivable) associated with covered loans for the three months ended September 30, 2014 was as follows (dollars in thousands):
 
 
Three months ended
 
 
September 30, 2014
Balance at beginning of period
 
$
1,283

Paid to FDIC
 
(1,283
)
Increase due to impairment
 
(14
)
FDIC reimbursement
 
722

Shared loss expenses
 
(985
)
Shared income
 
21

Adjustments from prior periods
 
(63
)
Balance at end of period
 
$
(319
)

Reserve for loan losses
 
The reserve for loan losses represents management’s estimate of known and inherent losses in the loan portfolio as of the condensed consolidated balance sheet date and is recorded as a reduction to loans. The reserve for loan losses is increased by charges to operating expense through the loan loss provision, and decreased by loans charged-off, net of recoveries. The reserve for loan losses requires complex subjective judgments as a result of the need to make estimates about matters that are uncertain. The reserve

13

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

for loan losses is maintained at a level currently considered adequate to provide for potential loan losses based on management’s assessment of various factors affecting the loan portfolio.
 
However the reserve for loan losses is based on estimates and actual losses may vary from the current estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Therefore, management cannot provide assurance that, in any particular period, the Company will not have significant losses in relation to the amount reserved. The level of the reserve for loan losses is also determined after consideration of bank regulatory guidance and recommendations and is subject to review by such regulatory authorities who may require increases or decreases to the reserve based on their evaluation of the information available to them at the time of their examinations of the Bank.

For purposes of assessing the appropriate level of the reserve for loan losses, the Company analyzes loans and commitments to loan, and the amount of reserves allocated to loans and commitments to loan in each of the following reserve categories: pooled reserves, specifically identified reserves for impaired loans, and the unallocated reserve. Also, for purposes of analyzing loan portfolio credit quality and determining the appropriate level of reserve for loan losses, the Company identifies loan portfolio segments and classes based on the nature of the underlying loan collateral.
 
The increase in the reserve for loan losses from December 31, 2013 to September 30, 2014 was related to net recoveries during the period. The unallocated reserve for loan losses at September 30, 2014 has increased $2.3 million from the balance at December 31, 2013. Management believes that the amount of unallocated reserve for loan losses is appropriate and will continue to evaluate the amount going forward.

Acquired reserve for loan losses

The fair value estimates for acquired and acquired covered loans is based on expected prepayments, charge offs, and the amount and timing of undiscounted expected principal, interest and other cash flows. The net fair value adjustment to the acquired and acquired covered loans was $6.0 million, representing a valuation adjustment for interest rate and credit quality. The credit portion of the fair value adjustment not accreted at any point in time represents the estimated reserve for loan losses for acquired loans. If the Company determines that this amount is insufficient a provision to the reserve for loan losses will be made.

Covered reserve for loan losses

The reserve for loan losses on covered loans is estimated similarly to acquired loans as described above except any increase to the reserve from a recovery or a decrease in the reserve from a charge-off is partially offset by an increase in the loss share payable (or receivable) for the portion of the losses recoverable and recoveries payable to the FDIC under the loss sharing agreements. No allowance was recorded at quarter-end given management's judgment that purchase discounts adequately address the estimated losses in the acquired loans.


14

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

Transactions and allocations in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the three and nine months ended September 30, 2014 and 2013 were as follows (dollars in thousands):
 
Commercial
real estate
 
Construction
 
Residential
real estate
 
Commercial 
and 
industrial
 
Consumer
 
Unallocated
 
Total
Three months ended September 30, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan losses
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at June 30, 2014
$
7,960

 
$
728

 
$
2,068

 
$
6,615

 
$
1,181

 
$
1,919

 
$
20,471

Loan loss provision (credit)
(1,203
)
 
(597
)
 
6

 
469

 
211

 
1,114

 

Recoveries
317

 
869

 
349

 
512

 
76

 

 
2,123

Loans charged off
(91
)
 

 
(539
)
 
(244
)
 
(369
)
 

 
(1,243
)
Balance at end of period
$
6,983

 
$
1,000

 
$
1,884

 
$
7,352

 
$
1,099

 
$
3,033

 
$
21,351

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at June 30, 2014
$
48

 
$
268

 
$
25

 
$
75

 
$
24

 
$

 
$
440

Provision for unfunded loan commitments

 

 

 

 

 

 

Balance at end of period
$
48

 
$
268

 
$
25

 
$
75

 
$
24

 
$

 
$
440

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for credit losses
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan losses
$
6,983

 
$
1,000

 
$
1,884

 
$
7,352

 
$
1,099

 
$
3,033

 
$
21,351

Reserve for unfunded lending commitments
48

 
268

 
25

 
75

 
24

 

 
440

Total reserve for credit losses
$
7,031

 
$
1,268

 
$
1,909

 
$
7,427

 
$
1,123

 
$
3,033

 
$
21,791



15

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

 
Commercial
real estate
 
Construction
 
Residential
real estate
 
Commercial 
and 
industrial
 
Consumer
 
Unallocated
 
Total
For the nine months ended September 30, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan losses
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2013
$
9,565

 
$
535

 
$
2,381

 
$
6,261

 
$
1,401

 
$
714

 
$
20,857

Loan loss provision (credit)
(2,681
)
 
(482
)
 
(264
)
 
706

 
402

 
2,319

 

Recoveries
1,318

 
1,243

 
630

 
1,969

 
230

 

 
5,390

Loans charged off
(1,219
)
 
(296
)
 
(863
)
 
(1,584
)
 
(934
)
 

 
(4,896
)
Balance at end of period
$
6,983

 
$
1,000

 
$
1,884

 
$
7,352

 
$
1,099

 
$
3,033

 
$
21,351

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2013
$
48

 
$
268

 
$
25

 
$
75

 
$
24

 
$

 
$
440

Provision for unfunded loan commitments

 

 

 

 

 

 

Balance at end of period
$
48

 
$
268

 
$
25

 
$
75

 
$
24

 
$

 
$
440

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for credit losses
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan losses
$
6,983

 
$
1,000

 
$
1,884

 
$
7,352

 
$
1,099

 
$
3,033

 
$
21,351

Reserve for unfunded lending commitments
48

 
268

 
25

 
75

 
24

 

 
440

Total reserve for credit losses
$
7,031

 
$
1,268

 
$
1,909

 
$
7,427

 
$
1,123

 
$
3,033

 
$
21,791


  
 
Commercial
real estate
 
Construction
 
Residential
real estate
 
Commercial 
and 
industrial
 
Consumer
 
Unallocated
 
Total
Three months ended September 30, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan losses
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at June 30, 2013
$
10,712

 
$
842

 
$
2,972

 
$
5,348

 
$
1,690

 
$
1,130

 
$
22,694

Loan loss provision (credit)
1,049

 
(201
)
 
(202
)
 
(23
)
 
185

 
(808
)
 

Recoveries
79

 
249

 
28

 
554

 
72

 

 
982

Loans charged off
(656
)
 
(292
)
 
(129
)
 
(534
)
 
(412
)
 

 
(2,023
)
Balance at end of period
$
11,184

 
$
598

 
$
2,669

 
$
5,345

 
$
1,535

 
$
322

 
$
21,653

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at June 30, 2013
$
48

 
$
268

 
$
25

 
$
75

 
$
24

 
$

 
$
440

Provision for unfunded loan commitments

 

 

 

 

 

 

Balance at end of period
$
48

 
$
268

 
$
25

 
$
75

 
$
24

 
$

 
$
440

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for credit losses
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan losses
$
11,184

 
$
598

 
$
2,669

 
$
5,345

 
$
1,535

 
$
322

 
$
21,653

Reserve for unfunded lending commitments
48

 
268

 
25

 
75

 
24

 

 
440

Total reserve for credit losses
$
11,232

 
$
866

 
$
2,694

 
$
5,420

 
$
1,559

 
$
322

 
$
22,093


16

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

 
Commercial
real estate
 
Construction
 
Residential
real estate
 
Commercial 
and 
industrial
 
Consumer
 
Unallocated
 
Total
For the nine months ended September 30, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan losses
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2012
$
11,596

 
$
1,583

 
$
3,551

 
$
7,267

 
$
2,177

 
$
1,087

 
$
27,261

Loan loss provision (credit)
1,030

 
341

 
(590
)
 
989

 
(5
)
 
(765
)
 
1,000

Recoveries
294

 
412

 
216

 
1,900

 
190

 

 
3,012

Loans charged off
(1,736
)
 
(1,738
)
 
(508
)
 
(4,811
)
 
(827
)
 

 
(9,620
)
Balance at end of period
$
11,184

 
$
598

 
$
2,669

 
$
5,345

 
$
1,535

 
$
322

 
$
21,653

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2012
$
48

 
$
268

 
$
25

 
$
75

 
$
24

 
$

 
$
440

Provision for unfunded loan commitments

 

 

 

 

 

 

Balance at end of period
$
48

 
$
268

 
$
25

 
$
75

 
$
24

 
$

 
$
440

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for credit losses
 

 
 

 
 

 
 

 
 

 
 

 
 

Reserve for loan losses
$
11,184

 
$
598

 
$
2,669

 
$
5,345

 
$
1,535

 
$
322

 
$
21,653

Reserve for unfunded lending commitments
48

 
268

 
25

 
75

 
24

 

 
440

Total reserve for credit losses
$
11,232

 
$
866

 
$
2,694

 
$
5,420

 
$
1,559

 
$
322

 
$
22,093



17

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

An individual loan is impaired when, based on current information and events, management believes that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The following table presents the reserve for loan losses and the recorded investment in loans by portfolio segment and impairment evaluation method at September 30, 2014 and December 31, 2013 (dollars in thousands):
 
Reserve for loan losses

Recorded investment in loans
 
Individually
evaluated for
impairment

Collectively
evaluated for
impairment

Total

Individually
evaluated for
impairment

Collectively
evaluated for
impairment

Total
September 30, 2014
 


 


 


 


 


 

Commercial real estate
$
172

 
$
6,811

 
$
6,983

 
$
28,547

 
$
722,760

 
$
751,307

Construction

 
1,000

 
1,000

 
963

 
114,157

 
115,120

Residential real estate

 
1,884

 
1,884

 
322

 
189,901

 
190,223

Commercial and industrial
25

 
7,327

 
7,352

 
3,656

 
368,858

 
372,514

Consumer

 
1,099

 
1,099

 

 
37,546

 
37,546

 
$
197

 
$
18,121

 
18,318

 
$
33,488

 
$
1,433,222

 
$
1,466,710

Unallocated
 

 
 

 
3,033

 
 

 
 

 
 

 
 

 
 

 
$
21,351

 
 

 
 

 
 



















December 31, 2013
 


 


 


 


 


 

Commercial real estate
$
665

 
$
8,900

 
$
9,565

 
$
32,227

 
$
519,785

 
$
552,012

Construction

 
535

 
535

 
1,987

 
50,516

 
52,503

Residential real estate
62

 
2,319

 
2,381

 
430

 
101,127

 
101,557

Commercial and industrial
56

 
6,205

 
6,261

 
5,823

 
248,347

 
254,170

Consumer

 
1,401

 
1,401

 

 
35,990

 
35,990

 
$
783

 
$
19,360

 
20,143

 
$
40,467

 
$
955,765

 
$
996,232

Unallocated
 

 
 

 
714

 
 

 
 

 
 

 
 

 
 

 
$
20,857

 
 

 
 

 
 


The above reserve for loan losses includes an unallocated allowance of $3.0 million at September 30, 2014 and $0.7 million at December 31, 2013. The increased unallocated allowance at September 30, 2014 is considered by management to be reasonable and appropriate due to lack of seasoning in the retail/small business “pools” of loans, and market uncertainty associated with loss expectations for both historical and recently acquired loan portfolios.

The Company uses credit risk ratings, which reflect the Bank’s assessment of a loan’s risk or loss potential, for purposes of assessing the appropriate level of reserve for loan losses. The Bank’s credit risk rating definitions along with applicable borrower characteristics for each credit risk rating are as follows:
 
Acceptable
 
The borrower is a reasonable credit risk and demonstrates the ability to repay the loan from normal business operations. Loans are generally made to companies operating in an economy and/or industry that is generally sound. The borrower tends to operate in regional or local markets and has achieved sufficient revenues for the business to be financially viable. The borrowers financial performance has been consistent in normal economic times and has been average or better than average for its industry.
 
A loan can also be considered Acceptable even though the borrower may have some vulnerability to downturns in the economy due to marginally satisfactory working capital and debt service cushion. Availability of alternate financing sources may be limited or nonexistent. In some cases, the borrower’s management, may have limited depth or continuity but is still considered capable. An adequate primary source of repayment is identified while secondary sources may be illiquid, more speculative, less readily identified, or reliant upon collateral liquidation. Loan agreements will be well defined, including several financial performance covenants and detailed operating covenants. This category also includes commercial loans to individuals with average or better than average capacity to repay.

Pass-Watch

18

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

 
Loans are graded Pass-Watch when temporary situations increase the level of the Bank’s risk associated with the loan, and remain graded Pass-Watch until the situation has been corrected. These situations may involve one or more weaknesses in cash flow, collateral value or indebtedness that could, if not corrected within a reasonable period of time, jeopardize the full repayment of the debt. In general, loans in this category remain adequately protected by the borrower’s net worth and paying capacity, or pledged collateral.
 
Special Mention
 
A Special Mention credit has potential weaknesses that may, if not checked or corrected, weaken the loan or leave the Bank inadequately protected at some future date. Loans in this category are deemed by management of the Bank to be currently protected but reflect potential problems that warrant more than the usual management attention but do not justify a Substandard classification.
 
Substandard
 
Substandard loans are those inadequately protected by the net worth and paying capacity of the obligor and/or by the value of the pledged collateral, if any. Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision and borrowers are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants.
 
CRE and construction loans are classified Substandard when well-defined weaknesses are present which jeopardize the orderly liquidation of the loan. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, and/or the project’s failure to fulfill economic expectations. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
 
In addition, Substandard loans also include impaired loans. Impaired loans bear the characteristics of Substandard loans as described above, and the Company has determined it does not expect timely payment of all contractually due interest and principal. Impaired loans may be adequately secured by collateral.
 
During the nine months ended September 30, 2014, the Bank reduced loans classified as special mention and substandard in the originated loan portfolio by $16.4 million, while total loans classified as special mention and substandard increased $17.1 million as a result of the loans acquired in the merger. Remediation on the originated portfolio was accomplished through credit upgrades mainly owing to improved obligor cash flows as well as payoffs/paydowns, and/or sales. Work began on the acquired and acquired covered portfolio at Acquisition Date.
 
The following table presents, by portfolio class, the recorded investment in loans by internally assigned grades at September 30, 2014 and December 31, 2013 (dollars in thousands):
 
 
Loan grades
 
 
 
Acceptable
 
Pass-Watch
 
Special
Mention
 
Substandard
 
Total
September 30, 2014
 

 
 

 
 

 
 

 
 

Originated loans (a):
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$
165,642

 
$
8,700

 
$
6,093

 
$
21,580

 
$
202,015

Non-owner occupied
328,866

 
11,662

 
15,004

 
6,570

 
362,102

Total commercial real estate loans
494,508

 
20,362

 
21,097

 
28,150

 
564,117

Construction
76,716

 
3,467

 
2,254

 
388

 
82,825

Residential real estate
99,687

 
1,480

 
22

 
815

 
102,004

Commercial and industrial
317,201

 
9,929

 
12,032

 
3,832

 
342,994

Consumer
34,616

 

 

 
45

 
34,661

 
$
1,022,728

 
$
35,238

 
$
35,405

 
$
33,230

 
$
1,126,601


19

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

 
 
 
 
 
 
 
 
 
 
Acquired loans (b):
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
Owner occupied
$
43,483

 
$
1,135

 
$
4,386

 
$
280

 
$
49,284

Non-owner occupied
79,193

 
10,945

 
11,067

 
5,139

 
106,344

Total commercial real estate loans
122,676

 
12,080

 
15,453

 
5,419

 
155,628

Construction
29,369

 

 

 
406

 
29,775

Residential real estate
75,082

 

 

 
1,371

 
76,453

Commercial and industrial
24,499

 

 
1,195

 
81

 
25,775

Consumer
2,346

 

 

 
70

 
2,416

 
$
253,972

 
$
12,080

 
$
16,648

 
$
7,347

 
$
290,047

 
 
 
 
 
 
 
 
 
 
Acquired covered loans (c):
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
Owner occupied
$
11,078

 
$

 
$
1,059

 
$
727

 
$
12,864

Non-owner occupied
5,736

 
7,580

 
560

 
4,822

 
18,698

Total commercial real estate loans
16,814

 
7,580

 
1,619

 
5,549

 
31,562

Construction
49

 
2,422

 

 
49

 
2,520

Residential real estate
10,006

 

 

 
1,760

 
11,766

Commercial and industrial
3,196

 

 

 
549

 
3,745

Consumer
469

 

 

 

 
469

 
$
30,534

 
$
10,002

 
$
1,619

 
$
7,907

 
$
50,062

 
 
 
 
 
 
 
 
 
 
Total loans:
 
 
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
 
 
Owner occupied
$
220,203

 
$
9,835

 
$
11,538

 
$
22,587

 
$
264,163

Non-owner occupied
413,795

 
30,187

 
26,631

 
16,531

 
487,144

Total commercial real estate loans
633,998

 
40,022

 
38,169

 
39,118

 
751,307

Construction
106,134

 
5,889

 
2,254

 
843

 
115,120

Residential real estate
184,775

 
1,480

 
22

 
3,946

 
190,223

Commercial and industrial
344,896

 
9,929

 
13,227

 
4,462

 
372,514

Consumer
37,431

 

 

 
115

 
37,546

 
$
1,307,234

 
$
57,320

 
$
53,672

 
$
48,484

 
$
1,466,710

 
 
 
 
 
 
 
 
 
 
(a) Originated loans are loans organically made through the Company's normal and customary origination process
(b) Acquired loans are loans acquired in the acquisition of Home, discussed elsewhere in this report, less acquired covered loans
(c) Acquired covered loans acquired in the acquisition of Home that are covered under FDIC loss share agreements
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$
147,865

 
$
19,798

 
$
14,730

 
$
22,605

 
$
204,998

Non-owner occupied
278,854

 
33,827

 
24,188

 
10,145

 
347,014

Total commercial real estate loans
426,719

 
53,625

 
38,918

 
32,750

 
552,012

Construction
46,274

 
2,772

 
2,131

 
1,326

 
52,503

Residential real estate
98,633

 
1,570

 
147

 
1,207

 
101,557


20

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

Commercial and industrial
242,053

 
3,518

 
2,694

 
5,905

 
254,170

Consumer
35,984

 

 

 
6

 
35,990

 
$
849,663

 
$
61,485

 
$
43,890

 
$
41,194

 
$
996,232


The following table presents, by portfolio class, an age analysis of past due loans, including loans placed on non-accrual at September 30, 2014 and December 31, 2013 (dollars in thousands):
 
30-89 days
past due
 
90 days
or more
past due
 
Total
past due
 
Current
 
Total
loans
September 30, 2014
 

 
 

 
 

 
 

 
 

Originated loans (a):
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$
1,255

 
$
2,969

 
$
4,224

 
$
197,791

 
$
202,015

Non-owner occupied
860

 
332

 
1,192

 
360,910

 
362,102

Total commercial real estate loans
2,115

 
3,301

 
5,416

 
558,701

 
564,117

Construction
419

 
39

 
458

 
82,367

 
82,825

Residential real estate
1,270

 

 
1,270

 
100,734

 
102,004

Commercial and industrial
419

 
473

 
892

 
342,102

 
342,994

Consumer
162

 
45

 
207

 
34,454

 
34,661

 
$
4,385

 
$
3,858

 
$
8,243

 
$
1,118,358

 
$
1,126,601

 
 
 
 
 
 
 
 
 
 
Acquired loans (b):
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$

 
$

 
$

 
$
49,284

 
$
49,284

Non-owner occupied

 

 

 
106,344

 
106,344

Total commercial real estate loans

 

 

 
155,628

 
155,628

Construction

 
167

 
167

 
29,608

 
29,775

Residential real estate
1,774

 
752

 
2,526

 
73,927

 
76,453

Commercial and industrial

 

 

 
25,775

 
25,775

Consumer
46

 

 
46

 
2,370

 
2,416

 
$
1,820

 
$
919

 
$
2,739

 
$
287,308

 
$
290,047

 
 
 
 
 
 
 
 
 
 
Acquired covered loans (c):
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$

 
$
84

 
$
84

 
$
12,780

 
$
12,864

Non-owner occupied
74

 
27

 
101

 
18,597

 
18,698

Total commercial real estate loans
74

 
111

 
185

 
31,377

 
31,562

Construction

 

 

 
2,520

 
2,520

Residential real estate
387

 

 
387

 
11,379

 
11,766

Commercial and industrial
6

 
43

 
49

 
3,696

 
3,745

Consumer

 

 

 
469

 
469

 
$
467

 
$
154

 
$
621

 
$
49,441

 
$
50,062

 
 
 
 
 
 
 
 
 
 
Total loans:
 
 
 
 
 
 
 
 
 
Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$
1,255

 
$
3,053

 
$
4,308

 
$
259,855

 
$
264,163

Non-owner occupied
934

 
359

 
1,293

 
485,851

 
487,144

Total commercial real estate loans
2,189

 
3,412

 
5,601

 
745,706

 
751,307


21

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

Construction
419

 
206

 
625

 
114,495

 
115,120

Residential real estate
3,431

 
752

 
4,183

 
186,040

 
190,223

Commercial and industrial
425

 
516

 
941

 
371,573

 
372,514

Consumer
208

 
45

 
253

 
37,293

 
37,546

 
$
6,672

 
$
4,931

 
$
11,603

 
$
1,455,107

 
$
1,466,710

 
 
 
 
 
 
 
 
 
 
(a) Originated loans are loans organically made through the Company's normal and customary origination process
(b) Acquired loans are loans acquired in the acquisition of Home, discussed elsewhere in this report, less acquired covered loans
(c) Acquired covered loans acquired in the acquisition of Home that are covered under FDIC loss share agreements
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$
959

 
$
2,905

 
$
3,864

 
$
201,134

 
$
204,998

Non-owner occupied

 

 

 
347,014

 
347,014

Total commercial real estate loans
959

 
2,905

 
3,864

 
548,148

 
552,012

Construction
215

 
119

 
334

 
52,169

 
52,503

Residential real estate
436

 
163

 
599

 
100,958

 
101,557

Commercial and industrial
597

 
2,077

 
2,674

 
251,496

 
254,170

Consumer
53

 
6

 
59

 
35,931

 
35,990

 
$
2,260

 
$
5,270

 
$
7,530

 
$
988,702

 
$
996,232

 
Loans contractually past due 90 days or more on which the Company continued to accrue interest were $0.1 million and $1.1 million at September 30, 2014 and December 31, 2013, respectively.
 

22

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

The following table presents information related to impaired loans, by portfolio class, at September 30, 2014 and December 31, 2013 (dollars in thousands):
 
Impaired loans
 
 
 
With a
related
allowance
 
Without a
related
allowance
 
Total
recorded
balance
 
Unpaid
principal
balance
 
Related
allowance
September 30, 2014
 

 
 

 
 

 
 

 
 

Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$
1,614

 
$
4,547

 
$
6,161

 
$
8,742

 
$
153

Non-owner occupied
1,096

 
21,290

 
22,386

 
22,439

 
19

Total commercial real estate loans
2,710

 
25,837

 
28,547

 
31,181

 
172

Construction

 
963

 
963

 
963

 

Residential real estate

 
322

 
322

 
357

 

Commercial and industrial
2,732

 
924

 
3,656

 
4,133

 
25

Consumer

 

 

 

 

 
$
5,442

 
$
28,046

 
$
33,488

 
$
36,634

 
$
197

 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

Commercial real estate:
 

 
 

 
 

 
 

 
 

Owner occupied
$
2,772

 
$
6,582

 
$
9,354

 
$
12,707

 
$
652

Non-owner occupied
1,116

 
21,757

 
22,873

 
22,904

 
13

Total commercial real estate loans
3,888

 
28,339

 
32,227

 
35,611

 
665

Construction
751

 
1,236

 
1,987

 
2,029

 

Residential real estate
174

 
256

 
430

 
515

 
62

Commercial and industrial
4,074

 
1,749

 
5,823

 
6,701

 
56

Consumer

 

 

 

 

 
$
8,887

 
$
31,580

 
$
40,467

 
$
44,856

 
$
783

 
At September 30, 2014 and December 31, 2013, the total recorded balance of impaired loans in the above table included $26.9 million and $33.2 million, respectively, of Troubled Debt Restructuring (“TDR”) loans which were not on non-accrual status.
 
The following table presents, by portfolio class, the average recorded investment in impaired loans for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Commercial real estate:
 

 
 

 
 
 
 
Owner occupied
$
6,010

 
$
13,948

 
$
6,134

 
$
14,579

Non-owner occupied
22,586

 
25,062

 
22,637

 
26,656

Total commercial real estate loans
28,596

 
39,010

 
28,771

 
41,235

Construction
963

 
1,927

 
1,221

 
4,220

Residential real estate
391

 
560

 
403

 
2,698

Commercial and industrial
3,663

 
6,585

 
4,188

 
7,984

Consumer

 

 

 
894

 
$
33,613

 
$
48,082

 
$
34,583

 
$
57,031

 
Interest income recognized for cash payments received on impaired loans for the nine months ended September 30, 2014 was insignificant.

23

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)


Information with respect to the Company’s non-accrual loans, by portfolio class, at September 30, 2014 and December 31, 2013 is as follows (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Commercial real estate:
 

 
 

Owner occupied
$
5,708

 
$
4,443

Non-owner occupied
1,995

 
280

Total commercial real estate loans
7,703

 
4,723

Construction
473

 
236

Residential real estate
3,946

 
399

Commercial and industrial
995

 
1,868

Consumer
70

 

Total non-accrual loans
$
13,187

 
$
7,226

 
 
 
 
Accruing loans which are contractually past due 90 days or more:
 

 
 

Commercial real estate:
 

 
 

Owner occupied
$

 
$

Non-owner occupied

 

Total commercial real estate loans

 

Construction
39

 

Residential real estate

 

Commercial and industrial
6

 
1,077

Consumer
45

 
6

Total accruing loans which are contractually past due 90 days or more
$
90

 
$
1,083


TDRs
 
The Company allocated $0.2 million and $0.8 million of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2014 and December 31, 2013, respectively. TDRs involve the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. As indicated above, TDRs may also include loans to borrowers experiencing financial distress that renewed at existing contractual rates, but below market rates for comparable credit quality. The Company has been actively utilizing these programs and working with its customers to improve obligor cash flow and related prospect for repayment. Concessions may include, but are not limited to, interest rate reductions, principal forgiveness, deferral of interest payments, extension of the maturity date, and other actions intended to minimize potential losses to the Company. For each commercial loan restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the new structure can be successful and whether cash flows will be sufficient to support the restructured debt. Generally, if the loan is on accrual at the time of restructuring, it will remain on accrual after the restructuring. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.
 
Typically, once a loan is identified as a TDR it will retain that designation until it is paid off, because restructured loans generally are not at market rates following restructuring. Under certain circumstances a TDR may be removed from TDR status if it is determined to no longer be impaired and the loan is at a competitive interest rate. Under such circumstances, allowance allocations for loans removed from TDR status would be based on the historical allocation for the applicable loan grade and loan class.
 

24

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

The following table presents, by portfolio segment, information with respect to the Company’s loans that were modified and recorded as TDRs during the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):
 
Three months ended September 30,
 
2014
 
2013
 
Number of
loans
 
TDR outstanding
recorded investment
 
Number of
loans
 
TDR outstanding
recorded investment
Commercial real estate

 
$

 

 
$

Construction

 

 
1

 
1,243

Residential real estate

 

 

 

Commercial and industrial

 

 
1

 
963

Consumer

 

 

 

 

 
$

 
2

 
$
2,206

 
Nine months ended September 30,
 
2014
 
2013
 
Number of
loans
 
TDR outstanding
recorded investment
 
Number of
loans
 
TDR outstanding
recorded investment
Commercial real estate

 
$

 
5

 
$
27,677

Construction

 

 
1

 
1,243

Residential real estate

 

 

 

Commercial and industrial

 

 
4

 
1,237

Consumer

 

 

 

 

 
$

 
10

 
$
30,157


There were no loans modified and recorded as TDRs during the three and nine months ended September 30, 2014. During the same period in 2013, TDR activity was primarily the result of remediation to bolster cash flow of stressed loans, and included the restructuring of a large CRE credit in the Bank’s loan portfolio.

At both September 30, 2014 and 2013, the Company had no remaining commitments to lend on loans accounted for as TDRs.
 
The following table presents, by portfolio segment, the post modification recorded investment for TDRs restructured during the three and nine months ended September 30, 2013 by the primary type of concession granted (dollars in thousands). There were no TDRs restructured during the three and nine months ended September 30, 2014.
Three Months Ended  
 September 30, 2013
Rate
reduction
 
Term
extension
 
Rate reduction
and term
extension
 
Total
Commercial real estate
$

 
$

 
$

 
$

Construction

 
1,243

 

 
1,243

Residential real estate

 

 

 

Commercial and industrial

 
963

 

 
963

Consumer

 

 

 

 
$

 
$
2,206

 
$

 
$
2,206



25

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

Nine Months Ended 
 September 30, 2013
Rate
reduction
 
Term
extension
 
Rate reduction
and term
extension
 
Total
Commercial real estate
$
3,809

 
$
2,368

 
$
21,500

 
$
27,677

Construction

 
1,243

 

 
1,243

Residential real estate

 

 

 

Commercial and industrial
174

 
1,063

 

 
1,237

Consumer

 

 

 

 
$
3,983

 
$
4,674

 
$
21,500

 
$
30,157


The following table presents, by portfolio segment, the TDRs which had payment defaults during the nine months ended September 30, 2013 that had been previously restructured within the last twelve months prior to September 30, 2013 (dollars in thousands). There were no TDRs which had payment defaults during the nine months ended September 30, 2014 that had been previously restructured within the last twelve months prior to September 30, 2104.
 
 
2013
 
 
Number
of loans
 
TDRs restructured in the
period with a payment
default
Commercial real estate
 
2

 
$
3,500

Construction
 

 

Residential real estate
 

 

Commercial and industrial loans
 

 

Consumer loans
 

 

 
 
2

 
$
3,500


5.    Other Real Estate Owned, net
 
The following table presents activity related to OREO for the periods shown (dollars in thousands):
 
Three months ended  
 September 30,
 
Nine months ended  
 September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
5,724

 
$
2,606

 
$
3,144

 
$
6,552

Additions
129

 
970

 
3,643

 
2,068

Dispositions
(1,756
)
 
(497
)
 
(2,070
)
 
(13,614
)
Change in valuation allowance
(65
)
 
266

 
(685
)
 
8,339

Balances at end of period
$
4,032

 
$
3,345

 
$
4,032

 
$
3,345

 
The following table summarizes activity in the OREO valuation allowance for the periods shown (dollars in thousands):
 
 
Three months ended  
 September 30,
 
Nine months ended  
 September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
3,014

 
$
2,569

 
$
2,394

 
$
10,642

Additions to the valuation allowance
219

 
37

 
925

 
262

Reductions due to sales
(154
)
 
(303
)
 
(240
)
 
(8,601
)
Balance at end of period
$
3,079

 
$
2,303

 
$
3,079

 
$
2,303

 

26

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

The following table summarizes OREO expenses for the periods shown (dollars in thousands):
 
 
Three months ended  
 September 30,
 
Nine months ended  
 September 30,
 
2014
 
2013
 
2014
 
2013
Operating costs
$
151

 
$
26

 
$
210

 
$
137

Net gains on dispositions
(56
)
 
(16
)
 
(119
)
 
(77
)
Increases in valuation allowance
219

 
37

 
925

 
262

Total
$
314

 
$
47

 
$
1,016

 
$
322


6.    Mortgage Servicing Rights (“MSRs”)
 
The Bank sells a predominant share of the mortgage loans it originates into the secondary market while retaining servicing of such loans. MSRs included in other assets in the condensed consolidated financial statements as of September 30, 2014 and December 31, 2013 are accounted for at the lower of origination value less accumulated amortization or current fair value. The net carrying value of MSRs at September 30, 2014 and December 31, 2013 was $2.3 million and $2.2 million, respectively. There was no valuation allowance at September 30, 2014 or December 31, 2013.
 
The following table presents activity in MSRs for the periods shown (dollars in thousands):
 
 
Three months ended  
 September 30,
 
Nine months ended  
 September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
2,239

 
$
1,786

 
$
2,232

 
$
1,308

Additions
256

 
369

 
542

 
1,018

Amortization
(207
)
 
(111
)
 
(486
)
 
(282
)
Change in valuation allowance

 

 

 

Balances at end of period
$
2,288

 
$
2,044

 
$
2,288

 
$
2,044

 
Mortgage banking income, net, consisted of the following for the periods shown (dollars in thousands):
 
Three months ended  
 September 30,
 
Nine months ended  
 September 30,
 
2014
 
2013
 
2014
 
2013
Origination and processing fees
$
264

 
$
245

 
$
562

 
$
542

Gain on sales of mortgage loans, net
502

 
1,007

 
1,218

 
2,888

MSR valuation allowance

 

 

 

Servicing fees
175

 
143

 
496

 
356

Amortization
(207
)
 
(111
)
 
(486
)
 
(282
)
Mortgage banking income, net
$
734

 
$
1,284

 
$
1,790

 
$
3,504


7.    Basic and Diluted Net Income per Common Share
 
The Company’s basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. The Company’s diluted net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding plus any incremental shares arising from the dilutive effect of stock-based compensation.
 

27

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

The numerators and denominators used in computing basic and diluted net income per common share for the three and nine months ended September 30, 2014 and 2013 can be reconciled as follows (dollars in thousands, except per share data):
 
 
Three months ended  
 September 30,
 
Nine months ended  
 September 30,
 
2014
 
2013
 
2014
 
2013
Net (loss) income
$
2,432

 
$
1,492

 
$
(1,303
)
 
$
49,611

 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
71,653,141

 
47,212,330

 
59,128,342

 
47,175,243

Dilutive securities
79,255

 
356,240

 
47,543

 
277,852

Weighted-average shares outstanding - diluted
71,732,396

 
47,568,570

 
59,175,885

 
47,453,095

Common stock equivalent shares excluded due to antidilutive effect

 
32,399

 
589,198

 
32,399

 
 
 
 
 
 
 
 
Basic and diluted:
 

 
 

 
 
 
 
Net income (loss) per common share
$
0.03

 
$
0.03

 
$
(0.02
)
 
$
1.05

Net income (loss) per common share (diluted)
$
0.03

 
$
0.03

 
$
(0.02
)
 
$
1.05


8.    Stock-Based Compensation
 
At September 30, 2014, 3,959,337 shares reserved under the stock-based compensation plans were available for future grants.

During the nine months ended September 30, 2014, the Company granted 641,879 shares of restricted stock with a weighted-average grant date fair value of $4.80 per share, which vest between 2015 through 2019. During the same period, no stock options were granted. During the nine months ended September 30, 2013, the Company granted 296,417 additional shares of restricted stock with a weighted-average grant date fair value of $5.81 per share, which vest between 2014 and 2016. During the same period, the Company also granted 5,507 stock options with a weighted-average grant date fair value of approximately $6.80 per option. These stock options vest in 2016. The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions to value options granted in 2013
 
 
2013
Dividend yield
 
%
Expected volatility
 
77.2
%
Risk-free interest rate
 
1.1
%
Expected option lives
 
6.0 years

 
The dividend yield was based on historical dividend information. The Company has not paid dividends since the third quarter of 2008 resulting in the dividend yield of 0.0%. The expected volatility was based on the historical volatility of the Company’s common stock price. The risk-free interest rate was 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.  The Black-Scholes model is affected by subjective assumptions including historical volatility of the Company’s common stock price.  Because the Company has relatively low average trading volume in its common stock, its estimated volatility may be higher than publicly-traded companies with greater trading volumes. 
 

28

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

The following table presents the activity related to stock options for the nine months ended September 30, 2014 and 2013:
 
Options
 
Weighted-
average
exercise
price
 
Weighted-
average
remaining
contractual
term (years)
 
Aggregate
intrinsic
value (000)
Options outstanding at January 1, 2014
111,571

 
$
38.92

 
6.2
 
$

Canceled / forfeited
(18,763
)
 
30.52

 
N/A
 
N/A

Expired
(5,188
)
 
125.83

 
N/A
 
N/A

Options outstanding at September 30, 2014
87,620

 
$
35.67

 
5.9
 
$

Options exercisable at September 30, 2014
69,126

 
$
43.50

 
5.3
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options outstanding at January 1, 2013
139,446

 
$
53.66

 
6.2
 
$
79.4

Granted
5,507

 
6.80

 
9.5
 

Exercised
(5,250
)
 
5.70

 
N/A
 
N/A

Canceled / forfeited
(16,193
)
 
128.43

 
N/A
 
N/A

Expired
(10,806
)
 
90.72

 
N/A
 
N/A

Options outstanding at September 30, 2013
112,704

 
$
39.31

 
6.4
 
$
9.9

Options exercisable at September 30, 2013
74,798

 
$
56.16

 
5.3
 
$
6.2

 
Stock-based compensation expense related to stock options for the nine months ended September 30, 2014 and 2013 was approximately $0.02 million and $0.05 million, respectively. As of September 30, 2014, there was approximately $0.03 million unrecognized compensation cost related to nonvested stock options which will be recognized over the remaining vesting periods of the underlying stock options.

The following table presents the activity related to nonvested restricted stock for the nine months ended September 30, 2014:
 
 
Number of
shares
 
Weighted-
average grant
date fair value
per share
Nonvested as of January 1, 2014
354,270

 
$
9.41

Granted
641,879

 
4.80

Vested
(202,993
)
 
5.70

Canceled / forfeited
(7,970
)
 
5.81

Nonvested as of September 30, 2014
785,186

 
$
6.64

 
Restricted stock is generally scheduled to vest over a three to five year period, with the unearned compensation related to restricted stock amortized to expense on a straight-line basis. As of September 30, 2014, unrecognized compensation cost related to nonvested restricted stock totaled approximately $3.5 million. Total expense recognized by the Company for nonvested restricted stock for the nine months ended September 30, 2014 and 2013 was $0.9 million and $0.7 million, respectively. There was no unrecognized compensation cost related to restricted stock units (“RSUs”) at September 30, 2014 and December 31, 2013, as all RSUs were fully-vested at the date of the grant.

9.      Interest Rate Swap Derivatives

Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of

29

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

units to be exchanged between the parties and influences the market value of the derivative contract. The Company obtains dealer quotation to value its derivative contracts.

The Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company provides the customer with a variable rate loan and enters into an interest rate swap in which the customer receives a variable rate payment in exchange for a fixed rate payment. The Company offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the customer interest rate swap providing the dealer counterparty with a fixed rate payment in exchange for a variable rate payment. Generally, these instruments help the Company manage exposure to market risk and meet customer financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparties to fail their obligations.

In connection with the interest rate swaps between the Company and the dealer counterparties, the agreements contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations. Similarly, the Company could be required to settle its obligations under certain of its agreements if certain credit ratings fall below specified standards or if specific regulatory events occur, such as a publicly issued memorandum of understanding, cease and desist order, or a termination of insurance coverage by the FDIC.

As of September 30, 2014, the notional values or contractual amounts and fair values of the Company's derivatives not designated in hedge relationships were as follows (dollars in thousands).
 
 
Asset Derivatives
 
Liability Derivatives
 
 
September 30, 2014
 
September 30, 2014
 
 
Notional/
Contract Amount
 
Fair Value (1)
 
Notional/
Contract Amount
 
Fair Value (2)
Interest rate swaps
 
$
67,993

 
$
2,891

 
$
67,993

 
$
2,891

 
 
 
 
 
 
 
 
 
(1) Included in Other Assets on the Consolidated Balance Sheet.
(2) Included in Other Liabilities on the Consolidated Balance Sheet.

Swap fee income, as included in non-interest income, was $0.5 million and $1.4 million for the three and nine months ended September 30, 2014, respectively. No derivatives instruments were in place for the three or nine months ended September 30, 2013.

The Company generally posts collateral against derivative liabilities in the form of cash. Collateral posted against derivative liabilities was $2.6 million and $0.3 million as of September 30, 2014 and December 31, 2013, respectively.

Derivative assets and liabilities are recorded at fair value on the balance sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative position with related collateral where applicable.

The following table illustrates the potential effect of the Company's derivative master netting arrangements, by type of financial instrument, on the Company's balance sheet as of
September 30, 2014 (in thousands):

30

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

 
 
September 30, 2014
 
 
 
 
 
 
 
 
Gross Amounts of Financial Instruments Not Offset in the Balance Sheet
 
 
Gross Amounts Recognized
 
Amounts offset in the Balance Sheet
 
Net Amounts in the Balance Sheet
 
Netting Adjustment Per Applicable Master Netting Agreements
 
Fair Value of Financial Collateral in the Balance Sheet
 
Net Amount
Asset Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
2,891

 
$

 
$
2,891

 
$

 
$

 
$
2,891

 
 
 
 
 
 
 
 
 
 
 
 
 
Liability Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
2,891

 
$

 
$
2,891

 
$

 
$
2,585

 
$
306


10.    Income Taxes

In assessing the realizability of deferred tax assets (“DTA”), management considers whether it is more likely than not that some portion or all of the DTA will or will not be realized. The Company's ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

During the three and nine months ended September 30, 2014, the Company recorded a $2.0 million income tax provision and a $2.8 million income tax benefit, respectively. During the three and nine months ended September 30, 2013, the Company recorded a $0.6 million income tax provision and a $51.2 million income tax benefit, respectively. As of September 30, 2014, the net deferred tax asset was $69.3 million. Included in the net deferred taxes are NOL's (tax affected) for federal taxes of $29.6 million, Oregon state taxes of $4.6 million and Idaho state taxes of $4.0 million. Also included in the net deferred taxes are federal and state tax credits of $1.1 million and $0.2 million, respectively. This is compared with a deferred tax asset as of December 31, 2013 of $50.1 million. The Company reversed substantially all of the its DTA valuation allowance at June 30, 2013 of $41.6 million and the reversal of certain previously written-off deferred tax benefits of $8.5 million resulting from the reassessment of the Company's Internal Revenue Code ("IRC") Section 382 limitations and other related analyses.

There are a number of tax issues that impact the deferred tax asset balance including changes in temporary differences between the financial statement recognition of revenue and expenses, estimates as to the deductibility of prior losses and potential consequence of Section 382 of the IRC. See also “Critical Accounting Policies and Accounting Estimates - Deferred Income Taxes” included in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

11.    Fair Value Measurements
 
GAAP establishes a hierarchy for determining fair value measurements which includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:
 
Level 1: Inputs that are quoted unadjusted prices in active markets - that the Company has the ability to access at the measurement date - for identical assets or liabilities.

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.

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.


31

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

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 assets and 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 internal or third party models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that assets or liabilities 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 assets and liabilities 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 assets measured at fair value on a recurring or nonrecurring basis, as well as the general classification of such assets pursuant to valuation hierarchy:
 
Investment securities available-for-sale: 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.

Interest rate swap derivatives: The fair value of interest rate swap derivatives is determined based on mid-market values derived from market pricing data available for comparable transactions in the over-the-counter interest rate derivative market (Level 2 inputs). The fair value adjustment is included in other assets or other liabilities.

Impaired loans: In accordance with GAAP, loans measured for impairment during the calendar year are reported at estimated fair value, including impaired loans measured at an observable market price (if available), the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the fair value of the loan’s collateral (if collateral dependent). Estimated fair value of the loan’s collateral is determined by appraisals or independent valuations which are then adjusted for the estimated costs related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. A significant portion of the Bank’s impaired loans are measured using the estimated fair market value of the collateral less the estimated costs to sell. The Company has categorized its impaired loans as level 3.
 
OREO: The Company’s OREO is measured at estimated fair value less estimated costs to sell. Fair value is generally determined based on third-party appraisals of fair value in an orderly sale. Historically, appraisals have considered comparable sales of like assets in reaching a conclusion as to fair value. Since many recent real estate sales could be termed “distressed sales”, and since a preponderance have been short-sale or foreclosure related, this has directly impacted appraisal valuation estimates. Estimated costs to sell OREO are based on standard market factors. 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, net of estimated costs to sell. The Company has categorized its OREO as level 3.
 

32

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

The Company’s financial assets measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 were as follows (dollars in thousands):
 
Level 1
 
Level 2
 
Level 3
September 30, 2014
 

 
 

 
 

Assets:
 
 
 
 
 
Investment securities available-for-sale
$

 
$
289,746

 
$

Interest rate swap derivatives

 
2,891

 

Total assets
$

 
$
292,637

 
$

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Interest rate swap derivatives
$

 
$
2,891

 
$

 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

Assets:
 
 
 
 
 
Investment securities available-for-sale
$

 
$
194,481

 
$

 
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, 2014 and December 31, 2013 (dollars in thousands):
 
Level 1
 
Level 2
 
Level 3
September 30, 2014
 

 
 

 
 

Impaired loans
$

 
$

 
$
1,958

Other real estate owned

 

 
4,032

 
$

 
$

 
$
5,990

 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

Impaired loans
$

 
$

 
$
8,887

Other real estate owned

 

 
3,144

 
$

 
$

 
$
12,031

 
The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2014 and December 31, 2013 (dollars in thousands):
 
September 30, 2014
 
Fair Value Estimate
 
Valuation Techniques
 
Unobservable Input
Impaired loans
$
1,958

 
Market approach
 
Appraised value less selling costs of 5% to 10%
Additional discounts of 5% to 50% to appraised value to reflect liquidation value
Other real estate owned
$
4,032

 
Market approach
 
Appraised value less selling costs of 5% to 10%
 
 
December 31, 2013
 
Fair Value Estimate
 
Valuation Techniques
 
Unobservable Input
Impaired loans
$
8,887

 
Market approach
 
Appraised value less selling costs of 5% to 10%
Additional discounts of 5% to 50% to appraised value to reflect liquidation value
Other real estate owned
$
3,144

 
Market approach
 
Appraised value less selling costs of 5% to 10%

33

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

 
The Company did not change the methodology used to determine fair value for any assets or liabilities during 2013, or during the nine months ended September 30, 2014. In addition, for any given class of assets, the Company did not have any transfers between level 1, level 2, or level 3 during 2013 or the nine months ended September 30, 2014.
 
The following disclosures are made in accordance with the provisions of 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.
 
In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. 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, 2014 and December 31, 2013.
 
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 of this investment.
 
Loans:  The estimated fair value of non-impaired loans is calculated by discounting the contractual cash flows of the loans using September 30, 2014 and December 31, 2013 origination rates. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. Estimated fair values for impaired loans are determined using an observable market price, (if available), the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the loan’s collateral (if collateral dependent) as described above. Observable market prices for community bank loans are not generally available given the non-homogenous characteristics of such loans.
 
BOLI: The carrying amount approximates the estimated fair value of these instruments.
 
MSRs: The estimated fair value of MSRs is calculated by discounting the expected future contractual cash flows. The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights exceeds its estimated fair value. Impairment, if deemed temporary, is recognized through a valuation allowance to the extent that estimated fair value is less than the recorded amount.

Interest rate swap derivatives: 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, 2014 and December 31, 2013 rates offered on those instruments.
 
Other borrowings:   The fair value of other borrowings (including federal funds purchased, if any) are estimated using discounted cash flow analyses based on the Bank’s September 30, 2014 and December 31, 2013 incremental borrowing rates for similar types of borrowing arrangements.
 

34

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

Loan commitments and standby letters of credit: The majority of the Bank’s commitments to extend credit have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.
 
The estimated fair values of the Company’s significant on-balance sheet financial instruments at September 30, 2014 and December 31, 2013 were approximately as follows (dollars in thousands):
 
 
 
 
September 30, 2014
 
December 31, 2013
 
Level in Fair
Value
Hierarchy
 
Carrying
value
 
Estimated
fair value
 
Carrying
value
 
Estimated
fair value
Financial assets:
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
Level 1
 
$
137,282

 
$
137,282

 
$
81,849

 
$
81,849

Investment securities:
 
 
 
 
 
 
 
 
 
Available-for-sale
Level 2
 
289,746

 
289,746

 
194,481

 
194,481

Held-to-maturity
Level 2
 
155,454

 
156,454

 
1,320

 
1,342

FHLB stock
Level 2
 
25,916

 
25,916

 
9,913

 
9,913

Loans held-for-sale
Level 2
 
1,839

 
1,839

 
10,359

 
10,359

Loans, net
Level 3
 
1,443,452

 
1,442,479

 
973,618

 
977,142

BOLI
Level 3
 
53,175

 
53,175

 
36,567

 
36,567

MSRs
Level 3
 
2,288

 
2,935

 
2,232

 
2,790

Interest rate swap derivatives
Level 2
 
2,891

 
2,891

 

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
Level 2
 
1,986,434

 
1,987,083

 
1,167,320

 
1,167,532

FHLB borrowings
Level 2
 

 

 
27,000

 
27,000

Interest rate swap derivatives
Level 2
 
2,891

 
2,891

 

 


12.      Regulatory Matters
 
Bancorp 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, Bancorp 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. Bancorp’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 Bancorp 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 Bancorp and the Bank are subject to restriction by state and federal regulators and availability of retained earnings.
 
Bancorp’s actual and required capital amounts and ratios as of September 30, 2014 and December 31, 2013 are presented in the following table (dollars in thousands): 

35

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

 
Actual
 
Regulatory minimum to
be "adequately
capitalized"
 
Regulatory minimum
to be "well capitalized"
 
Capital
Amount
 
Ratio
 
Capital
Amount
 
Ratio
 
Capital
Amount
 
Ratio
September 30, 2014
 

 
 

 
 

 
 

 
 

 
 

Tier 1 leverage (to average assets)
$
163,920

 
7.5
%
 
$
88,005

 
4.0
%
 
$
110,007

 
5.0
%
Tier 1 capital (to risk-weighted assets)
163,920

 
9.7

 
67,385

 
4.0

 
101,078

 
6.0

Total capital (to risk-weighted assets)
184,991

 
11.0

 
134,771

 
8.0

 
168,464

 
10.0

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

Tier 1 leverage (to average assets)
$
142,937

 
10.5
%
 
$
54,527

 
4.0
%
 
$
68,159

 
5.0
%
Tier 1 capital (to risk-weighted assets)
142,937

 
13.0

 
44,021

 
4.0

 
66,031

 
6.0

Total capital (to risk-weighted assets)
156,787

 
14.3

 
88,041

 
8.0

 
110,052

 
10.0

 
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"
 
Capital
Amount
 
Ratio
 
Capital
Amount
 
Ratio
 
Capital
Amount
 
Ratio
September 30, 2014
 

 
 

 
 

 
 

 
 

 
 

Tier 1 leverage (to average assets)
$
159,292

 
7.3
%
 
$
87,828

 
4.0
%
 
$
109,785

 
5.0
%
Tier 1 capital (to risk-weighted assets)
159,292

 
9.5

 
67,137

 
4.0

 
100,705

 
6.0

Total capital (to risk-weighted assets)
180,286

 
10.7

 
134,274

 
8.0

 
167,842

 
10.0

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

Tier 1 leverage (to average assets)
$
142,964

 
10.5
%
 
$
54,529

 
4.0
%
 
$
68,162

 
5.0
%
Tier 1 capital (to risk-weighted assets)
142,964

 
13.0

 
43,939

 
4.0

 
65,909

 
6.0

Total capital (to risk-weighted assets)
156,788

 
14.3

 
87,879

 
8.0

 
109,848

 
10.0


13.      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.

14.      New Authoritative Accounting Guidance

In August 2014, the FASB issued ASU 2014-14. "Receivables- Troubled Debt Structurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure" ("ASU 2014-14"). ASU 2014-14 clarifies accounting and reporting for foreclosed mortgage loans when the loan is subject to a government guarantee. The provisions require that a mortgage loan be derecognized and that a separate other receivable recognized upon foreclosure if 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU 2014-14 is effective for annual period and interim

36

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
 September 30, 2014
(unaudited)

periods within those annual periods, beginning after December 15, 2014. Adoption of ASU 2014-14 is not expected to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016 with three transition methods available - full retrospective, retrospective and cumulative effect approach. Adoption of ASU 2014-09 is not expected to have a material effect on our consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, "Receivables- Troubled Debt Restructurings by Creditors (subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure" ("ASU 2014-04"). The provisions of ASU 2014-04 clarify that when an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either 1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or 2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through similar legal agreement. The provisions of ASU 2014-04 are effective for annual and interim reporting periods beginning on or after December 15, 2014. The adoption of ASU 2014-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013 and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ASU 2013-11 is not expected to have a material impact on the Company's consolidated financial statements.

ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto, included elsewhere in this Quarterly Report on Form 10-Q. This discussion highlights key information as determined by management but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2014, including its audited 2013 consolidated financial statements and the notes thereto as of December 31, 2013 and 2012 and for each of the years in the three-year period ended December 31, 2013.
 
In this documents please note that “we” “our” “us” “Cascade” or the “Company” refer collectively to Cascade Bancorp (“Bancorp”), an Oregon chartered single bank holding company and its wholly-owned subsidiary, Bank of the Cascades (the “Bank”).

Cautionary Information Concerning Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements about the Company’s plans and anticipated results of operations and financial condition. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the words “expects,” “believes,” “anticipates,” “could,” “may,”

37



“will,” “should,” “plan,” “predicts,” “projections,” “continue” and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the economy of the States of Oregon and Idaho generally, and Central, Southern and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho area; our ability to maintain asset quality and expand our market share or net interest margin; and expected cost savings, synergies and other related benefits of our recently completed merger with Home Federal Bancorp, Inc. might not be realized within the expected timeframe and costs or difficulties relating to the integration might be greater than expected. Further, actual results may be affected by competition with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Certain risks and uncertainties, and the Company’s success in managing such risks and uncertainties could cause actual results to differ materially from those projected, including, among others, the risk factors disclosed in Part II - Item 1A of this Quarterly Report on Form 10-Q and in Part I - Item 1A of the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2014 for the year ended December 31, 2013. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations

These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. Readers should carefully review all disclosures filed by the Company from time to time with the SEC.

 Critical Accounting Policies and Accounting Estimates
 
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the SEC on March 31, 2014. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows.
 
Reserve for Credit Losses
 
The Company’s reserve for credit losses provides for estimated losses based upon evaluations of known and inherent risks in the loan portfolio and related loan commitments. Arriving at an estimate of the appropriate level of reserve for credit losses (which consists of our reserve for loan losses and our reserve for loan commitments) involves a high degree of judgment and assessment of multiple variables that result in a methodology with relatively complex calculations and analysis. Management uses historical information to assess the adequacy of the reserve for loan losses and considers qualitative factors including economic conditions and a range of other factors in its determination of the reserve. On an ongoing basis, the Company seeks to enhance and refine its methodology such that the reserve is at an appropriate level and responsive to changing conditions. In this regard, as of June 30, 2013 management implemented a homogeneous pool approach to estimating reserves for consumer and small business loans. As of September 30, 2014, this change has not had a material effect on the level of the reserve for loan losses. However, the Company’s methodology may not accurately estimate inherent loss or external factors and changing economic conditions may impact the loan portfolio and the level of reserves in ways currently unforeseen.
 
The reserve for loan losses is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. The reserve for loan commitments is increased and decreased through non-interest expense. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for credit losses, see "Loan Portfolio and Credit Quality” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.
 
Deferred Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision (credit) for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized.
Deferred tax assets are recognized subject to management's judgment that realization is “more likely than not.” Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize.

38



An uncertain tax position is measured at the amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. Tax benefits not meeting our realization criteria represent unrecognized tax benefits. We account for interest and penalties as a component of income tax expense.
The Company reversed its deferred tax asset, or "DTA", valuation allowance as of June 30, 2013 due to management’s determination that it was more likely than not that a significant portion of the Company's DTA would be realized. Management’s determination resulted from consideration of both the positive and negative evidence available that can be objectively verified. For a full discussion of the Company’s considerations, see "Deferred Income Taxes” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.
As of September 30, 2014 and December 31, 2013, the Company had a net deferred tax asset of $69.3 million and $50.1 million, respectively. There are a number of tax issues that impact the deferred tax asset balance, including changes in temporary differences between the financial statement and tax recognition of revenue and expenses and estimates as to the deductibility of prior losses.

Other Real Estate Owned and Foreclosed Assets

Other real estate owned and other foreclosed assets acquired through loan foreclosure are initially recorded at estimated fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the reserve for loan losses. Due to the subjective nature of establishing the asset’s fair value when it is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expenses.

Economic Conditions
 
The Company's business is closely tied to the economies of Idaho and Oregon which in turn are influenced by regional and national economic trends and conditions. Economic conditions in both Idaho and Oregon have improved from the severe economic downturn in 2007 through 2009, and both regions have experienced gains in employment and real estate prices since such time. Economic conditions and real estate prices have also improved nationally since the economic downturn. However lingering effects of the economic downturn, including fiscal imbalances, continue to affect employment and business and consumer confidence to various degrees and the future direction of both the national and regional economies remains uncertain. The Company's markets continue to be sensitive to real estate values and unemployment rates continue to be higher than prior to the downturn. An unforeseen economic shock or a return of adverse economic conditions could cause deterioration of local economies and adversely affect the Company's financial condition and results of operations.

Financial Highlights and Summary of the Third Quarter of 2014 (period ended September 30, 2014)

Net Income for the Third Quarter of 2014: $2.4 million, or $0.03, per common share in the third quarter of 2014 compared to $1.5 million, or $0.03, per common share for the third quarter of 2013. Net income in the current quarter included $0.5 million of merger related expenses (pre-tax).
Stockholders Equity/Book Value per Share: Stockholders' equity increased to $308.4 million, or $4.25, per share, at September 30, 2014 compared to $188.7 million, or $3.97 per share, at December 31, 2013. The increase was mainly a result of the acquisition of Home Federal Bancorp, Inc. ("Home").
Loans: Gross loans were up $470.3 million, or 47.3% at September 30, 2014 as compared to December 31, 2013. This increase was primarily the result of the addition of acquired and acquired covered loans of $340.1 million in connection with the acquisition of Home.
Deposits: Total deposits were up $819.1 million, or 70.2% at September 30, 2014 as compared to December 31, 2013. This increase was primarily a result of the deposits acquired in connection with the acquisition of Home at a fair value of $760.6 million.
Credit Quality: Reserve for loan losses at $21.4 million, or 1.46%, of total loans compared to $20.9 million, or 2.08%, of total loans at December 31, 2013; no loan loss provision was recorded in the third quarter of 2014 or 2013.
Credit Quality: Non-performing assets improved to 0.74% of total assets at September 30, 2014 compared to 0.81% at December 31, 2013.
Net Interest Margin ("NIM"): NIM was 3.63% for the quarter ended September 30, 2014 compared to 3.81% for the quarter ended September 30, 2013.

On May 16, 2014 (the “Acquisition Date”), the Company completed the acquisition of Home (the “Merger”) in a stock and cash transaction valued at $241.4 million. The transaction value includes $122.2 million in cash and the issuance of 24,309,131 shares

39



of the Company's common stock. The completion of the Merger provided an expanded geographic footprint for the Company and increased the size of the balance sheet wherein the combined companies expect to realize economies of scale and other operating efficiencies.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
RESULTS OF OPERATIONS –Three and Nine Months Ended September 30, 2014 and 2013
 
Loans acquired in the Merger are recorded at fair value with no allowance for loan losses brought forward in accordance with purchase accounting principles. The net fair value adjustment to acquired loans from the Home acquisition was $6.0 million at the acquisition date, representing a valuation adjustment for interest rate and credit quality which will be accreted over the life of the loans (approximately 10 years).

At September 30, 2014, $50.1 million or 14.7% of the $340.1 million in acquired and acquired covered loans were covered under loss sharing agreements with the Federal Deposit Insurance Commission ("FDIC"). These loss sharing agreements will expire five years after the date of the FDIC agreements for non-single family covered assets and ten years after the acquisitions date for single-family covered assets.

The Company has determined it will report on a cash basis any potential future benefits and/or costs incurred with respect to the remaining loss share receivables (or payables) under these agreements. The remaining benefit and/or cost of the FDIC Agreements are not expected to be material to the Company’s financial condition. In the acquired loan portfolio, $50.1 million in loans remain covered loans at September 30, 2014 of which 94.4% are currently performing. Estimated future losses on acquired covered loans are included in the fair value purchase accounting mark.

Total net loans and loans held-for-sale outstanding at September 30, 2014 was $1.4 billion, an increase of $461.3 million from December 31, 2013. Of this total, $340.1 million was from the Home acquired and acquired covered loan portfolio. Organic loan growth of $130.4 million for the nine months ended September 30, 2014 was primarily attributable to increased balances of shared national credits in the commercial and industrial portfolio.

Loans categorized as special mention and substandard totaled $102.2 million at September 30, 2014 as compared to $85.1 million at December 31, 2013. The increase was primarily a result of the acquisition of Home whose acquired portfolio included $33.5 million of special mention and substandard loans at September 30, 2014. The credit quality of the Company's originated loans continued to improve with special mention and substandard loans decreasing by $16.4 million from the balance at December 31, 2013. Remediation was accomplished through credit upgrades owing to improved obligor cash flows as well as payoffs/paydowns and/or charge offs related to the restructure of adversely risk rated loans. Non-performing assets as of September 30, 2014 were 0.74% of total assets as compared to 0.81% at December 31, 2013, including Home acquired and acquired covered non-performing loans. Net recoveries during the third quarter of 2014 were $0.9 million; year to date net recoveries were $0.5 million. The Company made no provision for loan losses as management believes the reserve for loan losses of $21.4 million at September 30, 2014 is adequate.

Total deposits as of September 30, 2014 were $2.0 billion, which represents an increase of $819.1 million from the balance at December 31, 2013. The increased balance was primarily a result of $760.6 million in fair value of added deposits from the acquisition of Home. As of September 30, 2014, 53.6% of total deposits are in checking account balances.

Non-interest income increased to $5.5 million in the third quarter of 2014 compared to non-interest income of $3.6 million in the third quarter of 2013, primarily due to an increase in service charges and card issuer and merchant fees, in part attributable to the additional business from Home's former customers. Non-interest expense increased $6.1 million in the third quarter of 2014 as compared to the third quarter of 2013, due primarily to the integration of former Home employees and operations into the Company's operations during the third quarter of 2014 as well as merger related expenses of $0.5 million during such period.

As a result of the Merger, goodwill of $80.2 million was recorded. Goodwill represents the excess of the purchase price of $241.4 million less the fair value of the net identifiable assets acquired of $161.3 million. The goodwill is not amortized but the Company will periodically assess (at least on an annual basis) whether events or changes in circumstances indicate that the carrying amount of goodwill may be impaired.

Income Statement

The Company’s financial results for the third quarter and nine months ended September 30, 2014 include revenues and expenses generated by assets acquired in the Merger since the Acquisition Date.
 
Net Income

40



 
Net income for the quarter ended September 30, 2014 was $0.03 per share, or $2.4 million, compared to net income of $0.03 per share, or $1.5 million, for the third quarter of 2013. The increase in net income in the third quarter of 2014 compared to the same period in 2013 was primarily the result of a $6.5 million increase in net interest income and a $1.9 million increase in non-interest income, partially offset by a $6.1 million increase in non-interest expense and a $1.3 million increase in the provision for income taxes. Non-interest expense for the third quarter of 2014 includes $0.5 million in transactional expenses related to our merger with Home.

Net loss for the nine months ended September 30, 2014 was $1.3 million, or $0.02 per share, compared to net income of $49.6 million, or $1.05 per share, for the nine months ended September 30, 2013. The decreased net income for the nine months ended September 30, 2014 compared to the same period in 2013 was primarily the result of an income tax benefit in the second quarter of 2013. The net loss for the nine months ended September 30, 2014 includes $11.3 million in transaction expenses related to our merger with Home.

Net Interest Income
 
Net interest income was $18.6 million for the third quarter of 2014, as compared to $12.1 million in the third quarter of 2013. For the nine months ended September 30, 2014, net interest income was $46.0 million compared to $35.1 million for the same period in 2013.

Total interest income increased $6.8 million from $12.5 million in the third quarter of 2013 to $19.3 million in the third quarter of 2014 and $10.1 million from $37.5 million in the first nine months of 2013 to $47.6 million in the same period of 2014. These increases were due primarily to the addition of earning assets acquired in the Merger. Accretion of the fair value discount on loans acquired as part the acquisition of Home is accreted over the remaining term to maturity of the acquired loans into interest income on loans. Accretion will vary in the event of payoffs or paydowns of specific loans. For the three and nine months ended September 30, 2014, accretion was approximately $0.4 million and $0.8 million, respectively.

Total interest expense for the third quarter of 2014 increased $0.3 million compared to the third quarter of 2013. Deposit interest expense for the three months ended September 30, 2014 increased slightly compared to the same period in 2013 as a result of increased deposits acquired as a result of the Merger. Interest expense for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 decreased $0.7 million. This improvement was primarily due to a reduction in borrowings during the first nine months of 2014 compared to the same period in 2013. Other borrowing expense was nil for the nine months ended September 30, 2014 compared to $0.9 million in the nine months ended September 30, 2013. This decrease was primarily due to increased liquidity, partially resulting from the effects of the Merger, which resulted in the Company having no borrowings for most of the first nine months of 2014.

The net interest margin for the third quarter of 2014 was 3.63%, compared to net interest margin of 3.98% in the second quarter of 2014 and 3.81% in the third quarter of 2013. The decline in the current quarter from the previous periods was mainly due to the high level of liquidity maintained during this quarter, which is pending prospective deployment to loans and other earning assets. Excess liquidity is also a result of the Bank's strategy to redeploy long duration Home investment securities into a combination of floating and adjustable rate assets. The Company's strategic objective is to moderate duration risk in the combined balance sheet and better position the Bank to benefit from rising market interest rates.
 
Components of Net Interest Margin
 
The following tables set forth the components of the Company's net interest margin for the three and nine months ended September 30, 2014 and 2013. The tables present average balance sheet information, interest income and yields on average interest-earning assets, interest expense and rates paid on average interest-bearing liabilities, net interest income, net interest spread and net interest margin for the Company (dollars in thousands):

41



 
Three Months Ended September 30,
 
2014
 
2013
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield or
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield or
Rates
Assets
 

 
 

 
 

 
 

 
 

 
 

Investment securities
$
426,055

 
$
2,655

 
2.47
%
 
$
211,652

 
$
1,356

 
2.54
%
Interest bearing balances due from other banks
145,433

 
87

 
0.24
%
 
108,422

 
71

 
0.26
%
Federal funds sold
191

 

 
%
 
22

 

 
%
Federal Home Loan Bank stock
26,124

 

 
%
 
10,083

 

 
%
Loans (1)(2)(3)
1,433,394

 
16,571

 
4.59
%
 
924,822

 
11,080

 
4.75
%
Total earning assets/interest income
2,031,197

 
19,313

 
3.77
%
 
1,255,001

 
12,507

 
3.95
%
Reserve for loan losses
(21,341
)
 
 

 
 

 
(22,410
)
 
 

 
 

Cash and due from banks
42,400

 
 

 
 

 
32,307

 
 

 
 

Premises and equipment, net
44,458

 
 

 
 

 
34,085

 
 

 
 

Bank-owned life insurance
53,006

 
 

 
 

 
36,225

 
 

 
 

Deferred tax asset
70,056

 
 
 
 
 
48,628

 
 
 
 
Goodwill
76,032

 
 
 
 
 

 
 
 
 
Accrued interest and other assets
46,128

 
 

 
 

 
16,881

 
 

 
 

Total assets
$
2,341,936

 
 

 
 

 
$
1,400,717

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

 
 

 
 

 
 

 
 

Interest bearing demand deposits
$
964,803

 
284

 
0.12
%
 
$
551,667

 
193

 
0.14
%
Savings deposits
131,075

 
10

 
0.03
%
 
46,360

 
6

 
0.05
%
Time deposits
252,429

 
427

 
0.67
%
 
141,924

 
235

 
0.66
%
Other borrowings

 

 
%
 
24,239

 
16

 
0.26
%
Total interest bearing liabilities/interest expense
1,348,307

 
721

 
0.21
%
 
764,190

 
450

 
0.23
%
Demand deposits
644,939

 
 

 
 

 
423,351

 
 

 
 

Other liabilities
39,923

 
 

 
 

 
24,078

 
 

 
 

Total liabilities
2,033,169

 
 

 
 

 
1,211,619

 
 

 
 

Stockholders' equity
308,767

 
 

 
 

 
189,098

 
 

 
 

Total liabilities and stockholders' equity
$
2,341,936

 
 

 
 

 
$
1,400,717

 
 

 
 

Net interest income
 

 
$
18,592

 
 

 
 

 
$
12,057

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread
 

 
 

 
3.56
%
 
 

 
 

 
3.72
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income to earning assets
 

 
 

 
3.63
%
 
 

 
 

 
3.81
%

(1)
Average non-performing loans included in the computation of average loans for the three months ended September 30, 2014 and 2013 was approximately $10.7 million and $12.0 million, respectively.
(2)
Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled approximately $0.5 million in 2014 and $0.3 million in 2013.
(3)
Includes loans held for sale.


42



 
Nine Months Ended September 30,
(dollars in thousands)
2014
 
2013
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield or
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield or
Rates
Assets
 

 
 

 
 

 
 

 
 

 
 

Investment securities
$
308,958

 
$
6,003

 
2.60
%
 
$
227,938

 
$
4,059

 
2.38
%
Interest bearing balances due from other banks
86,727

 
159

 
0.25
%
 
93,678

 
173

 
0.25
%
Federal funds sold
79

 

 
%
 
22

 

 
%
Federal Home Loan Bank stock
17,873

 

 
%
 
10,180

 

 
%
Loans (1)(2)(3)
1,207,022

 
41,467

 
4.59
%
 
897,803

 
33,251

 
4.95
%
Total earning assets/interest income
1,620,659

 
47,629

 
3.93
%
 
1,229,621

 
37,483

 
4.08
%
Reserve for loan losses
(21,449
)
 
 
 
 

 
(24,578
)
 
 
 
 

Cash and due from banks
35,468

 
 
 
 

 
30,519

 
 
 
 

Premises and equipment, net
38,685

 
 
 
 

 
34,294

 
 
 
 

Bank-owned life insurance
44,660

 
 
 
 

 
36,006

 
 
 
 

Deferred tax asset
58,708

 
 
 
 
 
15,427

 
 
 
 
Goodwill
38,119

 
 
 
 
 

 
 
 
 
Accrued interest and other assets
31,596

 
 
 
 

 
17,767

 
 
 
 

Total assets
$
1,846,446

 
 

 
 

 
$
1,339,056

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

 
 

 
 

 
 

 
 

Interest bearing demand deposits
$
740,260

 
676

 
0.12
%
 
$
528,894

 
541

 
0.14
%
Savings deposits
91,584

 
21

 
0.03
%
 
44,164

 
17

 
0.05
%
Time deposits
191,507

 
929

 
0.65
%
 
133,087

 
829

 
0.83
%
Other borrowings
2,960

 
6

 
0.27
%
 
49,897

 
949

 
2.54
%
Total interest bearing liabilities/interest expense
1,026,311

 
1,632

 
0.21
%
 
756,042

 
2,336

 
0.41
%
Demand deposits
539,197

 
 
 
 

 
402,249

 
 
 
 

Other liabilities
31,400

 
 
 
 

 
21,944

 
 
 
 

Total liabilities
1,596,908

 
 
 
 

 
1,180,235

 
 
 
 

Stockholders' equity
249,538

 
 
 
 

 
158,821

 
 
 
 

Total liabilities and stockholders' equity
$
1,846,446

 
 
 
 

 
$
1,339,056

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
45,997

 
 

 
 
 
$
35,147

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread
 

 
 

 
3.72
%
 
 
 
 
 
3.67
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income to earning assets
 

 
 

 
3.79
%
 
 
 
 
 
3.82
%

(1)
Average non-performing loans included in the computation of average loans for the three months ended September 30, 2014 and 2013 was approximately $8.4 million and $17.6 million, respectively.
(2)
Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled approximately $1.8 million in 2014 and $1.2 million in 2013.
(3)
Includes loans held for sale.

Analysis of Changes in Interest Income and Expense
 

43



The following table shows the dollar amount of increase (decrease) in the Company’s consolidated interest income and expense for the nine months ended September 30, 2014, and attributes such variance to “volume” or “rate” changes (dollars in thousands):
 
Three Months Ended September 30,
 
2014 over 2013
 
Total
Increase
 
Amount of Change
Attributed to
 
(Decrease)
 
Volume
 
Rate
Interest income:
 
 
 
 
 
Interest and fees on loans
$
5,491

 
$
6,093

 
$
(602
)
Interest on investment securities
1,299

 
1,374

 
(75
)
Other investment income
16

 
24

 
(8
)
Total interest income
6,806

 
7,491

 
(685
)
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

Interest on deposits:
 

 
 

 
 

Interest bearing demand
91

 
145

 
(54
)
Savings
4

 
11

 
(7
)
Time deposits
192

 
183

 
9

Other borrowings
(16
)
 
(16
)
 

Total interest expense
271

 
323

 
(52
)
 
 
 
 
 
 
Net interest income
$
6,535

 
$
7,168

 
$
(633
)
  
 
Nine Months Ended September 30,
 
2014 over 2013
 
Total
Increase
 
Amount of Change
Attributed to
 
(Decrease)
 
Volume
 
Rate
Interest income:
 
 
 
 
 
Interest and fees on loans
$
8,216

 
$
11,452

 
$
(3,236
)
Interest on investment securities
1,944

 
1,443

 
501

Other investment income
(14
)
 
(13
)
 
(1
)
Total interest income
10,146

 
12,882

 
(2,736
)
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

Interest on deposits:
 

 
 

 
 

Interest bearing demand
135

 
216

 
(81
)
Savings
4

 
18

 
(14
)
Time deposits
100

 
364

 
(264
)
Other borrowings
(943
)
 
(893
)
 
(50
)
Total interest expense
(704
)
 
(295
)
 
(409
)
 
 
 
 
 
 
Net interest income
$
10,850

 
$
13,177

 
$
(2,327
)

Loan Loss Provision
 

44



The Company did not record a loan loss provision during the three or nine months ended September 30, 2014 or three months ended September 30, 2013. The Company recorded a loan loss provision of $1.0 million during the nine months ended September 30, 2013.
 
Net recoveries in the third quarter of 2014 were $0.9 million compared to net charge-offs of $1.0 million in the third quarter of 2013, primarily in the commercial real estate and commercial and industrial loan categories. At September 30, 2014, the reserve for loan losses was $21.4 million, or 1.46%, of outstanding loans compared to $20.9 million, or 2.08%, of outstanding loans at December 31, 2013.

The Bank maintains pooled and impaired loan reserves with additional consideration of qualitative factors and unallocated reserves in reaching its determination of the total reserve for loan losses. The level of reserves 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 and Estimates” in this report and “Loan Portfolio and Credit Quality” in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan-related losses.
 
The reserve for unfunded lending commitments was $0.4 million at September 30, 2014, which remained unchanged from December 31, 2013.
 
Non-Interest Income
 
Non-interest income was as follows for the periods presented below (dollars in thousands):
 
 
Three Months Ended  
 September 30, 2014
 
Three Months Ended  
 September 30, 2013
 
% Change
 
Nine Months Ended 
 September 30, 2014
 
Nine Months Ended 
 September 30, 2013
 
% Change
Service charges on deposit accounts
 
$
1,457

 
$
766

 
90.2
 %
 
$
3,324

 
$
2,245

 
48.1
 %
Card issuer and merchant services fees, net
 
1,884

 
847

 
122.4
 %
 
4,480

 
2,473

 
81.2
 %
Earnings on BOLI
 
280

 
224

 
25.0
 %
 
712

 
659

 
8.0
 %
Mortgage banking income, net
 
734

 
1,284

 
(42.8
)%
 
1,790

 
3,504

 
(48.9
)%
Swap fee income
 
476

 

 
 %
 
1,419

 

 
 %
Other income
 
702

 
516

 
36.0
 %
 
1,974

 
1,628

 
21.3
 %
Total non-interest income
 
$
5,533

 
$
3,637

 
52.1
 %
 
$
13,699

 
$
10,509

 
30.4
 %

Overall, the increase in non-interest income in both the three and nine months ended September 30, 2014 compared to the same periods in 2013 was related to inclusion of earnings on assets acquired in the Merger for approximately half of the second quarter and all of the third quarter of 2014.

During the quarter ended September 30, 2014, service charges on deposit accounts and cash issuer and merchant service fees increased 90.2% and 122.4%, respectively, compared to the quarter ended September 30, 2013. The increase was mainly related to the addition of Home customer transaction volumes for banking services. Increases in year-to-date revenues over the same period in 2013 were also attributable to the same.

Net mortgage banking income decreased in the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013, mainly due to lower residential mortgage origination volumes and related gains on sales. Home did not have a mortgage banking portfolio, as a result, this change is attributable to Cascade only.

Customer interest rate swap fee income was $0.5 million in the third quarter of 2014, bringing the year-to-date swap fee income to $1.4 million. The customer swap product offering was initiated in late 2013.

Other income for the three and nine months ended September 30, 2014 increased 36.0% and 21.3%, respectively, over the comparable prior year periods. The increases in both periods were due to a combination of increased small business administration loans gains on sales, ATM surcharges, and money pass revenues.
 

45



Non-Interest Expense

Non-interest expense was as follows for the periods presented below (dollars in thousands):

 
 
Three Months Ended  
 September 30, 2014
 
Three Months Ended  
 September 30, 2013
 
% Change
 
Nine Months Ended 
 September 30, 2014
 
Nine Months Ended 
 September 30, 2013
 
% Change
Salaries and employee benefits
 
$
10,199

 
$
7,633

 
33.6
 %
 
$
31,588

 
$
24,239

 
30.3
 %
Occupancy
 
1,553

 
1,101

 
41.1
 %
 
7,544

 
3,830

 
97.0
 %
Information Technology
 
1,032

 
692

 
49.1
 %
 
3,634

 
1,926

 
88.7
 %
Equipment
 
497

 
457

 
8.8
 %
 
1,463

 
1,191

 
22.8
 %
Communications
 
695

 
347

 
100.3
 %
 
1,640

 
1,108

 
48.0
 %
FDIC insurance
 
371

 
454

 
(18.3
)%
 
1,057

 
1,305

 
(19.0
)%
OREO
 
314

 
47

 
568.1
 %
 
1,016

 
322

 
215.5
 %
Professional services
 
1,461

 
1,025

 
42.5
 %
 
6,887

 
2,535

 
171.7
 %
Prepayment penalties on FHLB advances
 

 

 
 %
 

 
3,827

 
(100.0
)%
Other expenses
 
3,606

 
1,827

 
97.4
 %
 
8,974

 
5,921

 
51.6
 %
Total non-interest expense
 
$
19,728

 
$
13,583

 
45.2
 %
 
$
63,803

 
$
46,204

 
38.1
 %

Non-interest expense for the third quarter of 2014 was $19.7 million compared to $13.6 million for the third quarter of 2013. Non-interest expense in the third quarter of 2014 includes expenses related to Home's former operations incurred since the Acquisition Date, as well as $0.5 million in acquisition related costs. Acquisition expenses in the third quarter were primarily related to professional service, property and equipment and information system charges incurred in connection with the acquisition.
Non-interest expense for the nine months ended September 30, 2014 and 2013 was $63.8 million and $46.2 million, respectively. Year-to-date 2014 acquisition related costs of $11.3 million and expenses related to Home's former operations incurred since the Acquisition Date are included in the results reported.
Total salaries and benefits increased 33.6% and 30.3% for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013. These increases primarily relate to the inclusion of former employees of Home who were retained by the Company after the Acquisition Date as well as severance costs for former employees who were not retained by the Company.

Information technology for the three and nine months ended September 30, 2014 increased over the same periods in 2013, due primarily to Merger related expenses including additional cost for our core service provider, as well as costs related to our internet banking platform, launched in late 2013.
 
Occupancy, equipment and communications expenses for the three and nine months ended September 30, 2014 increased an aggregate of $0.8 million and $4.5 million, respectively, compared to the three and nine months ended September 30, 2013 primarily related to the effect of an increase in number of branches resulting from the Home acquisition.

FDIC insurance declined for the nine months ended September 30, 2014 compared to the same period in 2013. This decrease was mainly due to reduced monetary assessments by the Federal Deposit Insurance Corporation (“FDIC”) as a result of the Bank's improved financial condition.

Other real estate owned, or "OREO" expenses increased in the three and nine months ended September 30, 2014 compared to the same periods in 2013, mainly as a result of losses on the disposition of OREO properties during the year.

Professional services increased during the three and nine months ended September 30, 2014 compared to the same periods in 2013, due primarily to Merger related expenses.

Other expenses increased in the third quarter of 2014 compared to the same period in 2013 mainly as a result of the inclusion of expenses related to Home's former operations incurred since the Acquisition Date.

46




Income Taxes
 
During the nine months ended September 30, 2014, the Company recorded an income tax benefit of $2.8 million compared to a $51.2 million income tax benefit during the nine months ended September 30, 2013. The Company recorded an income tax provision of $2.0 million and $0.6 million during the three months ended September 30, 2014 and 2013, respectively. The decrease in the income tax benefit in the nine months ended September 30, 2014 compared to the same period in 2013 was due primarily to the result of releasing the valuation allowance against the Company's DTA at June 30, 2013. The increase in the Company's third quarter provision in 2014 compared to 2013 was primarily a result of improved earnings.

As of September 30, 2014, the DTA was $69.3 million. Included in the net deferred taxes are net operating losses (tax affected) for federal taxes of $29.6 million, Oregon state taxes of $4.6 million and Idaho state taxes of $4.0 million. Also included in the net deferred taxes are federal and state tax credits of $1.1 million and $0.2 million, respectively. This is compared with a deferred tax asset as of December 31, 2013 of $50.1 million. The increase relates primarily to the inclusion of Home deferred tax assets acquired in the Merger.

In assessing the Company's ability to utilize its DTA, management considers whether it is more likely than not that some portion or all of the DTA will not be realized. The ultimate realization of DTA is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

The Company reversed its DTA valuation allowance as of June 30, 2013 due to management’s determination that it was more likely than not that a significant portion of the Company's DTA would be realized. Management’s determination resulted from consideration of both the positive and negative evidence available that can be objectively verified. For a full discussion of the Company’s considerations, see "Deferred Income Taxes” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013.


Financial Condition
 
Stockholders Equity and Capital Resources
 
Total stockholders’ equity increased to $308.4 million at September 30, 2014, as compared to total stockholders’ equity of $188.7 million at December 31, 2013. The increase in total stockholders' equity was primarily due to the acquisition of Home and increased equity through the issuance of stock options. At September 30, 2014, the total common equity to total assets ratio was 13.2% and the Company’s basic book value per share was $4.25 as compared to the total common equity to total assets ratio of 13.4% and basic book value per share of $3.97 at December 31, 2013.
 
At September 30, 2014, Bancorp’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 7.45%, 9.73% and 10.98%, respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 7.25%, 9.49% and 10.74%, respectively, which meet regulatory benchmarks for a “well-capitalized” designation. Regulatory benchmarks for a “well-capitalized” designation are 5.00%, 6.00%, and 10.00% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. Additional information regarding capital requirements can be found in Note 12 of the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average assets. Average assets for the third quarter of 2014 includes the merged companies for the whole period.

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, 2014, the Company had no material capital expenditure commitments apart from those incurred in the ordinary course of business.
 
Total Assets and Liabilities
 
Total assets were $2.3 billion at September 30, 2014, up $934.2 million from December 31, 2013. The increase in total assets during the nine months ended September 30, 2014 primarily resulted from the acquisition of Home's former assets at fair value of $945.3 million. Overall, cash and cash equivalents increased $55.4 million, mainly due to the increased deposits acquired from

47



Home in the Merger at a fair value of $760.6 million, partially offset by the acquisition of investments at a fair value of $318.9 million and loans at a fair value of $392.4 million.
 
Total liabilities were $2.0 billion at September 30, 2014, a $814.5 million increase from December 31, 2013. This was primarily the result of an increase of $819.1 million in total deposits, of which $760.6 million was the fair value of deposits acquired from Home, which was partially offset by a $27.0 million reduction in FHLB borrowings.
 
Off-Balance Sheet Arrangements
 
The following table summarizes the Bank’s off-balance sheet commitments at September 30, 2014 and December 31, 2013 (dollars in thousands):
 
September 30, 2014
 
December 31, 2013
Commitments to extend credit
$
343,112

 
$
245,906

Commitments under credit card lines of credit
27,111

 
24,321

Standby letters of credit
3,299

 
2,161

 
 
 
 
Total off-balance sheet financial instruments
$
373,522

 
$
272,388

 
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the customer 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 standards and underwriting practices in evaluating the creditworthiness of such obligors and related collateral requirements, if any. Collateral held for commitments varies but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. The Bank typically does not obtain collateral related to credit card commitments.
 
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.

The increase in commitments to extend credit from the balance at December 31, 2013 to the balance at September 30, 2014 was primarily related to the acquisition of Home.
 
Other than those commitments discussed above, 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. The Company had no material off-balance sheet derivative financial instruments as of September 30, 2014 and December 31, 2013.
 
Liquidity and Sources of Funds
 
The objective of the Bank’s liquidity management is to maintain sufficient cash flows to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. At September 30, 2014, liquid assets of the Bank were mainly interest bearing balances held at the Federal Reserve Bank of San Francisco ("FRB") totaling $75.3 million compared to $39.5 million at December 31, 2013. The increase was primarily the result of increased deposits related to the acquisition of Home.
 
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

48



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 from time to time. Until the cease-and-desist order (the "Order") between the Bank and the FDIC and the Oregon Division of Finance and Corporate Securities was terminated on March 7, 2013, the Bank was restricted under the terms of the Order from accepting or renewing brokered deposits. Upon termination of the Order, the Bank was permitted to accept local relationship-based reciprocal Certificate of Deposit Account Registry Service, or "CDARS" and Demand Deposit Marketplace, or "DDM" deposits. These deposits are technically classified as brokered deposits. At September 30, 2014 and December 31, 2013, the Company had $6.1 million and $21.7 million in reciprocal CDARS, respectively, and $35.0 million in reciprocal DDM deposits.

The Bank accepts public fund deposits in Oregon and Idaho and follows rules imposed by state authorities. Current rules imposed by the Oregon State Treasury require that the Bank collateralize 50% of the uninsured public funds of Oregon entities held by the Bank. At September 30, 2014, the Bank was in compliance with this requirement. Currently there are no collateral requirements set on Idaho public deposits.
 
The Bank also utilizes borrowings and lines of credit as sources of funds. At September 30, 2014, the Federal Home Loan Bank of Seattle, or "FHLB" had extended the Bank a secured line of credit of $456.2 million (20.00% of total assets) accessible for short or long-term borrowings given sufficient qualifying collateral. As of September 30, 2014, the Bank had qualifying collateral pledged for FHLB borrowings totaling $409.2 million of which the Bank had nothing outstanding. At September 30, 2014, the Bank also had undrawn borrowing capacity at FRB of $14.2 million 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. Correspondent banks have extended $90.0 million in unsecured or collateralized short-term lines of credit for the purchase of federal funds. At September 30, 2014, the Company had no outstanding borrowings under these federal fund borrowing agreements.
 
Liquidity may be affected by the Bank’s routine commitments to extend credit. At September 30, 2014, the Bank had $373.5 million in total outstanding commitments to extend credit, compared to $272.4 million at year-end 2013. 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, 2014, the book value of unpledged investments totaled $272.7 million compared to $24.4 million at December 31, 2013, the increase of which came primarily from the acquired investments from the Home acquisition that were mostly unpledged.
 
Bancorp is a single bank holding company and its primary ongoing source of liquidity is dividends received from the Bank. Oregon banking laws impose certain limitations on the payment of dividends by Oregon state chartered banks.  The amount of the dividend may not be greater than the Bank’s unreserved retained earnings, deducting from that, to the extent not already charged against earnings or reflected in a reserve, the following: (1) all bad debts, which are debts on which interest is past due and unpaid for at least six months, unless the debt is fully secured and in the process of collection; (2) all other assets charged off as required by the Director of the Department of Consumer and Business Services or a state or federal examiner; and (3) all accrued expenses, interest and taxes of the institution.
 
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
 
As a smaller reporting company, the Company is not required to provide the information called for by Item 3.

ITEM 4. CONTROLS AND PROCEDURES

49



 
Evaluation of Disclosure Controls and Procedure
 
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Control over Financial Reporting
 
There were no 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 last fiscal quarter 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.

ITEM 1A. RISK FACTORS
 
In addition to the other information set forth in this Quarterly Report on Form 10-Q, including the risk factors related to the recently completed Merger state below, you should carefully consider the factors previously disclosed in Part I – Item 1A Risk Factors of Cascade’s Annual Report on Form 10-K filed with the SEC on March 31, 2014 for the year ended December 31, 2013. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Except for the updated risk factors described below, there have been no material changes to Cascade’s risk factors described in our Form 10-K. The information below updates, and should be read in conjunction with, Cascade’s risk factors and information disclosed in our Form 10-K.

We have a deferred tax asset position of $69.3 million at September 30, 2014 and we are required to assess the recoverability of this asset on an ongoing basis.

Deferred tax assets are evaluated on a quarterly basis to determine if they are expected to be recoverable in the future. Our evaluation considers positive and negative evidence to assess whether it is more likely than not that a portion of the asset will not be realized. The risk of a valuation allowance increases if continuing operating losses are incurred. Future negative operating performance or other negative evidence may result in a valuation allowance being recorded against some or all of the deferred tax asset. A valuation allowance on our deferred tax asset could have a material adverse impact on our capital and results of operations.

The market price of Cascade common stock after the Merger may be affected by factors different from those historically affecting the shares of Cascade or Home.

Upon completion of the Merger, holders of Home common stock became holders of 24,309,131 shares of Cascade common stock. Cascade’s business differs in important respects from that of Home, and, accordingly, the results of operations of the combined company and the market price of Cascade common stock may be affected by factors different from those that affected the results of Cascade’s operations prior to the Merger.

Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the Merger may not be realized.


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Cascade and Home operated independently prior to completion of the Merger on May 16, 2014. The success of the Merger, including anticipated benefits and cost savings, will depend, in part, on Cascade’s ability to successfully combine and integrate the businesses of Cascade and Home. It is possible that the integration process could result in the loss of key employees, the disruption of Cascade’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the Cascade’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the Merger. If Cascade experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected. As with any Merger of financial institutions, there also may be business disruptions that cause the Bank to lose customers or cause customers to remove their accounts from the Bank and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on the Company’s financial results and the value of its common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(a)-(b) Not applicable.
 
(c) During the quarter ended September 30, 2014, the Company did not repurchase any shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5. OTHER INFORMATION
 
(a) Not applicable.
 
(b) There have been no material changes to the procedures by which shareholders may nominate directors to the Company’s board of directors.

ITEM 6. EXHIBITS

31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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 12, 2014
By
/s/ Terry E. Zink
 
 
 
Terry E. Zink, President & Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date
November 12, 2014
By
/s/ Gregory D. Newton
 
 
 
Gregory D. Newton, EVP & Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
 


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