UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2016
or
¨ | 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 97703
(Address of principal executive offices)
97703
(Zip Code)
(877) 617-3400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value | The NASDAQ Stock Market LLC |
(Title of class) | (Name of exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: N/A
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
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 [X] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes [ ] No [X]
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was $159,289,205 (based on the closing price of registrant’s common stock as quoted on the NASDAQ Capital Market on that date).
There were 76,264,047 shares of no par value common stock outstanding as of March 1, 2017.
CASCADE BANCORP & SUBSIDIARY
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS | ||
Page | ||
PART I | ||
Item 1. | Business | |
Item 1A. | Risk Factors | |
Item 1B. | Unresolved Staff Comments | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | |
PART II | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
Item 6. | Selected Financial Data | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |
Item 9A. | Controls and Procedures | |
Item 9B. | Other Information | |
PART III | ||
Item 10. | Directors, Executive Officers and Corporate Governance | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
Item 14. | Principal Accounting Fees and Services | |
PART IV | ||
Item 15. | Exhibits, Financial Statement Schedules | |
Item 16. | Form 10-K Summary | |
SIGNATURES | ||
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PART I
ITEM 1. BUSINESS.
Cautionary Information Concerning Forward-Looking Statements
This report contains forward-looking statements about the Company’s business and plans and anticipated results of operations and financial condition and liquidity. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the word “expects,” “believes,” “anticipates,” “could,” “may,” “will,” “should,” “plan,” “predicts,” “projections,” “continue” and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties and the Company’s success in managing such risks and uncertainties could cause actual results to differ materially from those projected, including among others, the risk factors described in Item 1A of this report.
These forward-looking statements speak only as of the date of this report. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof, except as required by applicable law. Readers should carefully review all disclosures filed or furnished by the Company from time to time with the Securities and Exchange Commission (“SEC”).
Cascade Bancorp and Bank of the Cascades
Cascade Bancorp (“Bancorp”) is an Oregon corporation and registered bank holding company that was formed in 1990 and is headquartered in Bend, Oregon. Bancorp’s common stock trades on the NASDAQ Capital Market under the symbol “CACB.” Bancorp and its wholly-owned subsidiary, Bank of the Cascades (the “Bank,” and together with Bancorp, “Cascade,” the “Company,” “we,” “our” or “us”), operate in Central, Southern, Coastal and Northwest Oregon, as well as in the greater Boise/Treasury Valley, Idaho and Seattle Metro areas. At December 31, 2016, the Company had total consolidated assets of approximately $3.1 billion, net loans of approximately $2.1 billion and deposits of approximately $2.7 billion. Bancorp has no significant assets or operations other than the Bank.
The Bank is an Oregon state chartered bank, which opened for business in 1977 and operates 50 branches serving communities in Central, Southern, Coastal and Northwest Oregon, as well as in the greater Boise/Treasure Valley, Idaho and Seattle, Washington areas. The Bank offers a broad range of commercial and retail banking services to its customers. The Bank’s lending activities are focused on small- to medium-sized businesses, municipalities and public organizations, and professional and consumer relationships. The Bank provides commercial real estate loans, real estate construction and development loans, and commercial and industrial loans (“C&I”), as well as consumer installment, line-of-credit, credit card and home equity loans. The Bank also originates residential mortgage loans, including 30-year fixed rate loans that are mainly sold on the secondary market. The Bank provides consumer and business deposit services including checking, money market and time deposit accounts and related payment services, Internet banking, electronic bill payment and remote deposits. In addition, the Bank serves business customer deposit needs with a suite of cash management services. The Bank also provides trust and investment related services to its clientele.
The principal office of the Company is located at 1100 NW Wall Street, Bend, Oregon 97703. The Company’s phone number is (877) 617-3400.
Definitive Agreement with First Interstate BancSystem, Inc.
On November 17, 2016, First Interstate BancSystem, Inc. (“First Interstate”) and Cascade announced a definitive agreement (the “First Interstate merger agreement”) under which First Interstate, parent company of First Interstate Bank, will acquire Cascade in a cash and stock transaction for total consideration valued at approximately $590.5 million in aggregate, or $7.62 per share based on the First Interstate closing price of $38.40 per share on November 17, 2016 (the “First Interstate merger”). The First Interstate merger will create a unique regional banking franchise that extends from the Mountain West to the Pacific Northwest and will provide First Interstate with a presence in several high-growth markets, including Bend, Oregon and Boise, Idaho.
Pursuant to the terms of the First Interstate agreement, Cascade shareholders will receive 0.14864 shares of First Interstate Class A common stock and $1.91 in cash in exchange for each share of Cascade common stock they hold. The exchange ratio is fixed and the portion of shares received by Cascade shareholders is expected to qualify as a tax-free exchange. Cascade shareholders will own approximately 20% of the outstanding capital stock of First Interstate once the transaction is complete.
The First Interstate merger is expected to result in long-term annual earnings per share accretion of 10% and 2018 earnings per share accretion of over 8% after accelerating the debit interchange limitations from the Durbin amendment brought on by crossing $10 billion in consolidated total assets. First Interstate is expected to recover the tangible book value dilution experienced in this transaction in approximately five years.
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Each of the board of directors of Cascade and First Interstate has unanimously approved the First Interstate merger, and the directors and certain large shareholders of Cascade have entered into agreements with First Interstate pursuant to which they have agreed to vote their shares of Cascade common stock in favor of the First Interstate merger. Additionally, the directors of First Interstate have entered into agreements with Cascade pursuant to which they have agreed to vote their shares of First Interstate common stock in favor of the First Interstate merger.
First Interstate and Cascade expect to close the First Interstate merger early in the third quarter of 2017 after satisfaction of customary closing conditions, including regulatory approvals and the approvals of the First Interstate and Cascade shareholders. Immediately following the completion of the First Interstate merger, it is anticipated that Bank of the Cascades will be merged with and into First Interstate Bank. Upon completion of the First Interstate merger, two members of Cascade’s Board of Directors will be added to the First Interstate Board of Directors.
Acquisition of Prime Pacific Financial Services, Inc.
On August 1, 2016, Prime Pacific Financial Services, Inc. (“PPFS”) merged with and into Cascade with Cascade continuing as the surviving corporation (the “PPFS merger”). Immediately after the PPFS merger, Prime Pacific Bank, a wholly-owned subsidiary of PPFS, merged with and into the Bank, with the Bank continuing as the surviving bank.
Each share of PPFS common stock was converted into the right to receive 0.3050 shares of Cascade common stock. The conversion of PPFS common stock resulted in Cascade issuing 2,921,012 shares of its common stock.
Acquisition of Bank of America Branches
On March 4, 2016, the Bank completed the purchase of 15 branch locations in Oregon and southwest Washington from Bank of America, National Association (the “branch acquisition” and together with the PPFS merger, the “2016 acquisitions”). The Bank assumed approximately $469.9 million of branch deposits, paying a 2.00% premium on the average balance of deposits assumed, for a cash purchase price of $9.7 million.
Merger Completed with Home Federal Bancorp
On May 16, 2014, pursuant to the Agreement and Plan of Merger, dated as of October 23, 2013, between the Company and Home Federal Bancorp (“Home”), Home merged with and into Cascade with Cascade continuing as the surviving corporation (the “Home merger”). Immediately after the Home merger, Home Federal Bank, a wholly-owned subsidiary of Home, merged with and into the Bank, with the Bank continuing as the surviving bank.
Each share 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 resulted in Cascade paying $122.2 million in cash and issuing 24,309,131 shares of its common stock.
Business Overview
The Company’s banking business is closely tied to the economies of Idaho, Oregon and Washington, which in turn are influenced by regional and national economic trends and conditions. Idaho, Oregon and Washington have recently been experiencing improved economic trends, including gains in employment and increased real estate activity. National and regional economies and real estate prices have generally improved, as has business and consumer confidence. The Company’s markets, however, continue to be sensitive to general economic trends and conditions, including real estate values, and an unforeseen economic shock or a return of adverse economic conditions could cause deterioration of local economies and adversely affect the Company’s business, financial condition and results of operations.
Business Strategies
Cascade’s mission statement is “dedicated to delivering the best in banking for the financial well-being of our customers and stockholders.” The Company’s primary business objective is to continue to improve and diversify revenue resulting in sustainable profitability consistent with safe and sound business principals and its risk management appetite. Growth in franchise value, net income and earnings per share are considered primary metrics for which management goals are established. The achievement of growth in deposits, loans and customer relationships support these metrics. In addition, the Company seeks accretive merger and acquisition transactions to profitably leverage its infrastructure and enhance franchise value. To complement these priorities, the Company also focuses on (i) diversification of its earning assets to mitigate credit risk; (ii) expanding its relationship deposits to fund asset growth; (iii) diversification of revenue sources to reduce income volatility; (iv) improving its operating efficiency; (v) consistently delivering quality customer service and applying technology to enhance the delivery of banking services; and (vi) retaining a high-performing work force. Because of the uncertainties of the current economic climate, competitive factors and the risk factors described in Item 1A of this report, there can be no assurance that Cascade will be successful executing these strategies.
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Highlights of the Company’s progress over recent years include a significant reduction in adversely risk rated loans and the improvement of credit quality metrics to levels that are generally consistent with those of peer banks, enabling the termination of the prior regulatory agreements in 2013. See “Supervision and Regulation - Regulatory Actions” for more information on the regulatory agreements.
Employees
Cascade views its employees as an integral resource in achieving its strategies and long-term goals, and considers its relationship with its employees to be strong. Bancorp has no employees other than its executive officers who are also employees of the Bank. The Bank had 615 full-time equivalent employees as of December 31, 2016.
Risk Management
The Company has risk management policies with respect to identification, assessment and management of important business risks. Such risks include, but are not limited to, credit quality and loan concentration risks, liquidity risk, interest rate risk, economic and market risk, as well as operating risks such as compliance, disclosure, internal control, legal and reputation risks. The Company’s board of directors and related committees review and oversee the implementation of policies that specify various controls and risk tolerances.
Credit risk management objectives include the implementation of loan policies and underwriting practices designed to prudently manage credit risk, and monitoring processes designed to identify and manage loan portfolio risk and concentrations.
Liquidity management policies are designed to maintain an appropriate volume and mix of core relationship deposits and time deposit balances to minimize liquidity risk while efficiently funding the Company’s loan and investment activities. From time to time, the Company has augmented its funding base with borrowings from reliable counterparties such as the Federal Home Loan Bank of Seattle and Des Moines (“FHLB”) and the Federal Reserve Bank of San Francisco (“FRB”).
The Company monitors and manages its sensitivity to changing interest rates by utilizing simulation analysis and scenario modeling and by adopting asset and liability strategies and tactics to control the volatility of its net interest income in the event of changes in interest rates.
Operating risks are managed through policies, procedures and implementation of and adherence to a system of internal controls. Internal controls are subject to testing in the course of internal audit and regulatory compliance activities. Policies, procedures and controls are enhanced over time in conjunction with the Company’s risk management strategies. However, there are a wide range of complex risks inherent in the Company’s business, and there can be no assurance that internal controls will always detect, contain, eliminate or prevent risks that could result in adverse financial results in the future.
Competition
Commercial and consumer banking in Oregon, Idaho and Washington are highly competitive businesses. The Bank competes principally with other banks, thrifts, credit unions, mortgage companies, broker dealers and insurance companies and increasingly other non-bank financial services providers. All of its competitors may also use the Internet as a platform to originate loans and/or acquire deposits. In addition to price competition for deposits and loans, market participants compete with respect to the scope and type of services offered, customer service levels, convenience, fees and service charges. Improvements in technology, communications and the Internet have intensified delivery channel competition. Competitor behavior may result in heightened competition among banking and financial services market participants and thus may adversely affect the Company’s future profitability.
The Company believes that it has been able to compete effectively with financial services competitors because of its execution of local delivery-based community banking strategies, its delivery of technology and mobile banking services, and because of its focus on banking small to medium-sized businesses, professionals and consumers in its locales. The Bank endeavors to offer attractive financial products and services delivered by effective bankers that are differentiated by their professionalism and customer service. The Bank’s products and services are designed to be convenient, with flexible delivery alternatives. In addition, the Bank’s lending and deposit officers have significant experience and reputation in their respective marketplaces. This enables them to maintain close working relationships with their customers.
The Company serves the markets of Central, Southern, Coastal and Northwest Oregon, as well in the greater Boise/Treasure Valley, Idaho and Seattle, Washington metro areas. Loan competition in Oregon, Idaho and Washington is substantial, and success is dependent on price and terms, as well as effectiveness of bankers in building relationships with customers. The Company believes that branch network competitiveness and profitability are enhanced when the Bank has consequential market share in these key markets. In that regard, the Company’s branch strategy targets community bank oriented markets in small- to medium-sized cities and towns away from mega-metropolitan areas. For example, in the Bend, Oregon Metropolitan Statistical Area (“MSA”) as of June 30, 2016, the Federal Deposit Insurance Corporation’s (“FDIC”) “Deposit Market Share Report” indicated the Company had the number one deposit market share at 28% of total deposit balance in the Bend, Oregon MSA.
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At December 31, 2016, loans and deposits in Oregon markets accounted for approximately 64.5% and 72.1%, respectively, of total balances, while Idaho loans and deposits were approximately 16.8% and 23.1%, respectively, of total balances. Loans and deposits in Washington at December 31, 2016, were approximately 6.1% and 4.9%, respectively. Approximately 12.6% of loans are to borrowers located outside of the Company’s primary markets with the aim of diversifying earning assets and to meet asset and liability management strategies.
Supervision and Regulation
The operations of the Company and the Bank may be affected by legislative changes and by the policies of various regulatory authorities. Management is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic control or new federal or state legislation may have in the future. The regulatory framework under which we operate is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund and not for the protection of our security holders and creditors. The significant laws and regulations that apply to the Company and the Bank are summarized below. The summaries are qualified in their entirety by reference to the full text of the statutes, regulations and policies that are described.
Regulatory Agencies
As a registered bank holding company, the Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and, acting under delegated authority, the FRB pursuant to the Bank Holding Company Act, as amended (the “BHC Act”).
As an Oregon state-chartered bank, the Bank is subject to the supervision and regulation of the Division of Finance and Corporate Securities (“Oregon DFCS”) and, with respect to the Bank’s Idaho branching operations, the Idaho Department of Finance and, with respect to the Bank’s Washington operations, the Washington State Department of Financial Institutions. As a state-chartered bank that is not a member of the Federal Reserve, the Bank is also subject to the supervision and regulation of the FDIC.
Regulatory Actions
Bancorp
On October 26, 2009, Bancorp entered into a written agreement with the FRB and Oregon DFCS (the “Written Agreement”) that required Bancorp to take certain measures to improve its safety and soundness. Under the Written Agreement, Bancorp was required to develop and submit for approval a plan to maintain sufficient capital at Bancorp and the Bank within 60 days of the date of the Written Agreement. The Company submitted a strategic plan on October 28, 2009. As of December 31, 2012, Bancorp met the 10% Tier 1 leverage ratio requirement per the Written Agreement. On July 8, 2013, the Bancorp entered into a memorandum of understanding (“FRB-MOU”) with the FRB and the Oregon DFCS that terminated the Written Agreement. On October 23, 2013, the FRB-MOU was lifted by the FRB and Oregon DFCS.
Bank
On August 27, 2009, the Bank entered into an agreement with the FDIC, its principal federal banking regulator, and the Oregon DFCS, that required the Bank to take certain measures to improve its safety and soundness. In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the Oregon DFCS of a cease-and-desist order (the “Order”) against the Bank as a result of certain findings from an examination of the Bank concluded in February 2009 based upon financial and lending data measured as of December 31, 2008 (the Report of Examination, or “ROE”). In entering into the stipulation and consenting to entry of the Order, the Bank did not concede the findings or admit to any of the assertions therein. Under the Order, the Bank was required to take certain measures to improve its capital position, maintain liquidity ratios, reduce its level of non-performing assets, reduce its loan concentrations in certain portfolios, improve management practices and board supervision, and assure that its reserve for loan losses is maintained at an appropriate level.
On March 7, 2013, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and the Oregon DFCS that terminated the Order. The MOU restricted the Bank from paying dividends without the written consent of the FDIC and Oregon DFCS and required that the Bank maintain higher levels of capital than may be required by published capital adequacy requirements. In particular the MOU required the Bank to maintain the minimum capital requirements for a “well-capitalized” bank, including a Tier 1 leverage ratio of at least 10.00%. On September 5, 2013, the MOU was lifted by the FDIC and Oregon DFCS.
Bank Holding Company Regulation
Bancorp is a one-bank holding company within the meaning of the BHC Act and, as such, is subject to regulation, supervision and examination by the Federal Reserve Board. Bancorp is required to file annual reports with the Federal Reserve Board and to provide the Federal Reserve Board such additional information as the Federal Reserve Board may require.
Acquisitions by Bank Holding Companies
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The BHC Act generally requires every bank holding company to obtain the prior approval of the Federal Reserve Board before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5.00% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The Federal Reserve Board will not approve any acquisition, merger or consolidation that would have a substantial anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers, as well as Community Reinvestment Act (“CRA”) performance.
The Change in Bank Control Act, as amended, and the related regulations of the Federal Reserve Board require any person or groups of persons acting in concert (except for companies required to make application under the BHC Act), to file a written notice with the Federal Reserve Board or, acting under delegated authority, the appropriate Federal Reserve Bank, before the person or group acquires control of the Company. The Change in Bank Control Act defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable presumption of control arises under the Change in Bank Control Act where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.
In addition, the Change in Bank Control Act prohibits any entity from acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the Federal Reserve Board. On September 22, 2008, the Federal Reserve Board issued a policy statement on equity investments in bank holding companies and banks, which allows the Federal Reserve Board to generally be able to conclude that an entity’s investment is not “controlling” if the investment in the form of voting and nonvoting shares represents in the aggregate (i) less than one-third of the total equity of the banking organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15% of any class of voting securities of the banking organization.
Permissible Activities
With certain exceptions, the BHC Act also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5.00% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. In making this determination, the Federal Reserve Board considers whether the performance of such activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency in resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest or unsound banking practices.
Source of Strength
Regulations and historical practice of the Federal Reserve Board have required bank holding companies to serve as a source of financial strength for their subsidiary banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) codified this requirement, but added managerial strength to the requirement, and extended it to all companies that control an insured depository institution. The appropriate federal banking regulators are required by the Dodd-Frank Act to issue final rules to carry out this requirement.
Capital Adequacy
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
The Federal Reserve Board and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations, referred to as the “Basel III Rules.” The risk-based guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. The Basel III Rules provide for increased risk-based and leverage capital ratio requirements and refine the definition of what constitutes “capital” for purposes of calculating those ratios. Under the Basel III Rules, which became effective for the Company and the Bank on January 1, 2015, banking organizations are required to maintain minimum ratios for common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For
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purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in one of two tiers, depending on type:
Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, qualifying trust preferred securities, less goodwill, most intangible assets and certain other assets; and
Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for possible loan and lease losses, subject to limitations.
As of December 31, 2016, Bancorp, like other bank holding companies, was required to maintain the following risk-based capital ratios: (i) a new common equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); and (iii) a total risk-based capital ratio of 8% (unchanged from previous rules). As of December 31, 2016, the Bank, like other depository institutions, was required to maintain similar capital levels under capital adequacy guidelines. Common equity Tier 1 capital consists of retained earnings and common stock instruments, subject to certain adjustments, as well as accumulated other comprehensive income (“AOCI”) except to the extent that Bancorp and the Bank exercised a one-time irrevocable option to exclude certain components of AOCI.
Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements as of December 31, 2016 necessitate a minimum leverage ratio of 4.00% for bank holding companies and banks that have the highest supervisory rating. For a depository institution to be considered “well-capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.00%.
The Basel III Rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. The conservation buffer, when fully phased in added to the capital requirements, will result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. An institution will be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio. Although these capital ratios do not become fully phased in until 2019, the banking regulators will expect bank holding companies and banks to meet these requirements well ahead of that date.
The Basel III Rules also revise the prompt corrective action framework (as discussed below), which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions became effective January 1, 2015. The prompt correction action rules include a common equity Tier 1 capital component and increase certain other capital requirements for the various thresholds. As of January 1, 2015, insured depository institutions are required to meet the following capital levels in order to qualify as “well-capitalized:” (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from current rules).
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements to meet well-capitalized standards and future regulatory change could impose higher capital standards as a routine matter. As of December 31, 2016, the Company’s regulatory capital ratios and those of the Bank are in excess of the levels established for “well-capitalized” institutions under the new rules.
The Basel III Rules set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn will affect the calculation of risk based ratios. Under the Basel III Rules, higher or more sensitive risk weights would be assigned to various categories of assets, including certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, these rules include greater recognition of collateral and guarantees, and revised capital treatment for derivatives and repo-style transactions.
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Regulations Concerning Cash Dividends
The principal source of Bancorp’s cash revenues historically has been dividends received from the Bank. In addition, the appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends, the payment of which would constitute an unsafe or unsound banking practice.
Under the Oregon Business Corporation Act (“OBCA”), the Company may declare a dividend to its stockholders only if, after giving it effect, in the judgment of the Cascade Board of Directors, the Company would be able to pay its debts as they become due in the usual course of business and the Company’s total assets would at least equal the sum of its total liabilities (plus the amount that would be needed if the Company were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution). The Federal Reserve Board also has further authority to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that, (1) the company’s net income for the past year is sufficient to cover the cash dividends, (2) the rate of earnings retention is consistent with the company’s capital needs, asset quality, and overall financial condition, and (3) the minimum regulatory capital adequacy ratios are met. It is also the Federal Reserve Board’s policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries.
The Company has no plans to pay dividends to its stockholders at this time.
Bank Regulation
The Bank is a FDIC-insured bank that is not a member of the Federal Reserve Board, and is subject to the supervision and regulation of the Oregon DFCS and the FDIC. These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices.
The Dodd-Frank Act
The Dodd-Frank Act has resulted and continues to result in a major overhaul of the financial institution regulatory system. Among other things, the Dodd-Frank Act created the Financial Stability Oversight Council, which focuses on identifying, monitoring and addressing systemic risks in the financial system. In addition, branching restrictions were relaxed and national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. The Volcker Rule amended the BHC Act to generally prohibit banking entities from engaging in the short-term proprietary trading of securities and derivatives for their own account and bar them from having certain relationships with hedge funds or private equity funds. Included within the range of funds covered by the regulations are certain trust-preferred securities that back collateralized debt obligations. As the Company does not currently hold any of the prohibited investments, this aspect of the Volcker Rule has not had and is not expected to have any impact on the Company’s financial statements. In addition, the Dodd-Frank Act repealed the prohibition on paying interest on demand deposits, so that financial institutions are now allowed, but not required, to pay interest on demand deposits. The Dodd-Frank Act also includes provisions that, among other things, reorganize bank supervision and strengthen the authority of the Federal Reserve Board.
The Dodd-Frank Act requires fees charged for debit card transactions to be both “reasonable and proportional” to the cost incurred by the card issuer. The maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is $0.21 per transaction and 5 basis points multiplied by the value of the transaction. Any debit card issuer that has, along with its affiliates (i.e., any company that controls, is controlled by or is under common control with another company), fewer than $10 billion of assets will be exempt from the limit on interchange fees. The bank is starting to see some erosion of its debit card revenue on a per customer basis now that merchants can select more than one network for transaction routing.
Although the majority of the Dodd-Frank Act’s rulemaking requirements have been met with finalized rules, approximately one-fourth of the rulemaking requirements are either still in the proposal stage or have not yet been proposed. In addition, on February 3, 2017, President Donald J. Trump signed an executive order calling for the administration to review various U.S. financial laws and regulations. The full scope of President Trump's short-term legislative agenda is not yet fully known, but it may include certain deregulatory measures for the banking industry, including the structure and powers of the CFPB and other areas under the Dodd-Frank Act. Accordingly, it is difficult to anticipate the continued impact this expansive legislation will have on the Company, its customers and the financial industry generally.
Consumer Financial Protection Bureau
The Dodd-Frank Act also created a new, independent federal agency called the Consumer Financial Protection Bureau, or CFPB, which is granted broad rule-making, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial
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Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with more than $10 billion in assets as well as their affiliates. Depository institutions with $10 billion or less in assets, such as the Bank, are subject to rules promulgated by the CFPB, which may increase their compliance risk and the costs associated with their compliance efforts, but the banks will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products.
The CFPB has already finalized rules relating to remittance transfers under the Electronic Fund Transfer Act, which requires companies to provide consumers with certain disclosures before the consumer pays for a remittance transfer. In addition, on January 10, 2013, the CFPB released its final “Ability-to-Repay/Qualified Mortgage” rules, which amend TILA’s implementing regulation, Regulation Z. Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd-Frank Act, which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The final rule also implements section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule became effective January 10, 2014. The CFPB allowed for a small creditor exemption for banks with assets under $2 billion and that originate less than 500 mortgage loans in 2015. As of January 1, 2016, the small creditor exemption was extended to banks with assets under $2 billion and that originate less than 2,000 mortgage loans.
On November 20, 2013, pursuant to section 1032(f) of the Dodd-Frank Act, the CFPB issued the Know Before You Owe TILA/RESPA Integrated Disclosure Rule (“TRID”), which combined the disclosures required under TILA and sections 4 and 5 of RESPA, into a single, integrated disclosure for mortgage loan transactions covered by those laws. TRID, which requires the use of a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation, became effective for applications received on or after October 3, 2015 for applicable closed-end consumer credit transactions secured by real property. Creditors must only use the Loan Estimate and Closing Disclosure forms for mortgage loan transactions subject to TRID. All other mortgage loan transactions continue to use the Good Faith Estimate and the Initial Truth-in-Lending Disclosure at application and the HUD-1 Settlement Statement and the Final Truth-in-Lending Disclosure at closing. TRID also has new tolerance requirements and record retention requirements. Of note, the creditor must retain evidence of compliance with the Loan Estimate requirements, including providing the Loan Estimate, and the Closing Disclosure requirements for three years after the later of the date of consummation, the date disclosures are required to be made or the date the action is required to be taken. Additionally, the creditor must retain copies of the Closing Disclosure, including all documents related to the Closing Disclosure, for five years after consummation.
Although it is difficult to predict at this time the extent to which the CFPB’s final rules impact the operations and financial condition of the Bank, such rules may have a material impact on the Bank’s compliance costs, compliance risk and fee income.
Community Reinvestment Act
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a bank holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of a bank holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed transaction. The most recent CRA rating of the Bank is “satisfactory.”
Safety and Soundness Standards
Under the Federal Deposit Insurance Corporation Improvement Act each federal banking agency is required to prescribe, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards are to cover internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution which fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. The Company believes that the Bank meets substantially all the required standards that have been adopted.
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Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (the “FDIA”), requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.
As of December 31, 2016, a bank will be: (i) “well-capitalized” if the institution has a total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a CET1 risk-based capital ratio of 6.50% and a leverage ratio of 5.00% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater, CET1 risk-based capital ratio of 4.50% and a leverage ratio of 4.00% or greater and is not “well-capitalized;” (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.00%, a Tier 1 risk-based capital ratio of less than 6.00%, a CET1 risk-based capital ratio of less than 4.50%, or a leverage ratio of less than 4.00%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.00%, a Tier 1 risk-based capital ratio of less than 4.00%, a CET1 risk-based capital ratio of less than 3.00%, or a leverage ratio of less than 3.00%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.00% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its bank holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s bank holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the bank holding company is limited to the lesser of: (i) an amount equal to 5.00% of the depository institution’s total assets at the time it became undercapitalized; and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions that would be applicable if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
At December 31, 2016, the Company and Bank met regulatory benchmarks for a “well-capitalized” designation. At that date, Bancorp’s Tier 1 leverage, Common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratios were 8.60%, 10.53%, 10.53%, and 11.58%, respectively, and the Bank’s Tier 1 leverage, Common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratios were 8.44%, 10.31%, 10.31%, and 11.36%, respectively.
Dividends
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, less, to the extent not already charged against earnings or reflected in a reserve, the following: (i) 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; (ii) all other assets charged off as required by
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the Director of the Department of Consumer and Business Services or a state or federal examiner; and (iii) all accrued expenses, interest and taxes of the institution. During the fourth quarter of 2012, the Bank received regulatory approval to adjust retained earnings to zero at September 30, 2012. Since that date the retained earnings account has been replenished through positive earnings from the Bank.
Deposit Insurance
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund, referred to as the DIF, of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The maximum amount of deposit insurance for banks and savings institutions is $250,000 per depositor.
The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors and is calculated based on an insured institution’s average consolidated assets less tangible equity capital, instead of being based on deposits.
For the purpose of determining an institution’s assessment rate, each institution is provided an assessment risk assignment, which is generally based on the risk that the institution presents to the DIF. Insured institutions with assets of less than $10.0 billion are placed in one of four risk categories. These risk categories are generally determined based on an institution’s capital levels and its supervisory evaluation. These institutions will generally have an assessment rate that can range from 2.5 to 45 basis points. However, the FDIC does have flexibility to adopt higher or lower assessment rates without additional rule-making provided that (i) no one such quarterly adjustment is in excess of 2 basis points; and (ii) the net cumulative adjustment cannot exceed 2 basis points. In the future, if the reserve ratio reaches certain levels, these assessment rates will generally be lowered.
The minimum ratio of assets in the DIF to the total of estimated insured deposits is now 1.35%, and the FDIC has until September 30, 2020 to meet the reserve ratio.
All FDIC-insured institutions are also required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, or FICO, an agency of the federal government established to recapitalize a predecessor to the DIF. These assessments, which are adjusted quarterly, will continue until the FICO bonds mature in 2017 through 2019. The annual FICO assessment rate for the first quarter of 2017 is 0.54 basis points.
Incentive Compensation
In June 2010, the Federal Reserve Board, Office of Comptroller of the Currency, and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” The findings of the supervisory initiatives will be included in reports of examination. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In addition, Section 956 of the Dodd-Frank Act required certain regulators (including the FDIC, SEC and Federal Reserve Board) to adopt requirements or guidelines prohibiting excessive compensation. In May 2016, the federal banking regulators, joined by the SEC, proposed such a rule that is tailored based on the asset size of the institution. All covered financial institutions would be subject to a prohibition on paying compensation, fees, and benefits that are “unreasonable” or “disproportionate” to the value of the services performed by a person covered by the proposed rule (generally, senior executive officers and employees who are significant risk-takers). Moreover, the proposed rule includes a new requirement which provides that an incentive-based compensation arrangement must (i) include financial and non-financial measures of performance, (ii) be designed to allow non-financial measures of performance to override financial measures of performance, when appropriate (so called safety and soundness factors), and (iii) be subject to adjustment to reflect actual losses, inappropriate risk taking, compliance deficiencies, or other measures or aspects of financial and non-financial performance.
The Dodd-Frank Act contains a number of provisions relating to compensation applying to public companies such as the Company. The Dodd-Frank Act added Section 14A(a) to the Exchange Act that requires companies to include a separate non-
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binding resolution subject to stockholder vote in their proxy materials approving the executive compensation disclosed in the materials. In addition, Section 14A(b) to the Exchange Act requires any proxy or consent solicitation materials for a meeting seeking stockholder approval of an acquisition, merger, consolidation or disposition of all or substantially all of a company’s assets to include a separate non-binding stockholder resolution approving certain “golden parachute” payments made in connection with the transaction. Finally, Section 10D to the Exchange Act requires the SEC to direct the national securities exchanges to require companies to implement a policy to “claw back” certain executive payments that were made based on improper financial statements.
UDAP and UDAAP
Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act (the “FTC Act”), which is the primary federal law that prohibits unfair or deceptive acts or practices (“UDAP”), and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” (“UDAAP”), which have been delegated to the CFPB for supervision. The CFPB has published a Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.
Financial Privacy and Technology Risk Management
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, subject to certain exceptions, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
Bank Secrecy Act, Anti-Money Laundering and the USA Patriot Act
The USA PATRIOT Act (the “USA Patriot Act”), substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and programs to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. These programs must, at a minimum, provide for a system of internal controls to assure ongoing compliance, provide for independent testing of such systems and compliance, designate individuals responsible for such compliance and provide appropriate personnel training. Moreover, certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Specifically, the Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious. In addition, on May 10, 2016, the Financial Crimes Enforcement Network issued a final rule regarding customer due diligence requirements for covered financial institutions in connection with their Bank Secrecy Act and Anti-Money Laundering policies. The final rule adds a requirement to understand the nature and purpose of customer relationships and identify the “beneficial owner” of legal entity customers. The formal implementation date is May 11, 2018. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences.
Restrictions on Transactions with Affiliates
The Bank and any subsidiaries it may have are subject to certain restrictions under federal law on extensions of credit by, and certain other transactions with, Bancorp and any non-banking affiliates it may have. Section 23A of the Federal Reserve Act generally imposes limitations on, and requires collateral for, extensions of credit by an insured depository institution, such as the Bank, and its non-bank affiliates, such as Bancorp. The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of its capital and surplus. In addition, Section 23B of the Federal Reserve Act requires that transactions between an insured depository institution and a non-bank affiliate must generally be on terms at least as favorable to the depository institution as transactions with a non-affiliate. Finally, the Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal stockholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (2) must not involve more than the normal risk of repayment or present other unfavorable features. The Dodd-Frank Act expanded coverage
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of transactions with insiders by including credit exposure arising from derivative transactions (which are also covered by the expansion of Section 23A). The Dodd-Frank Act prohibits an insured depository institution from purchasing or selling an asset to an executive officer, director, or principal shareholder (or any related interest of such a person) unless the transaction is on market terms, and, if the transaction exceeds 10% of the institution’s capital, it is approved in advance by a majority of the disinterested directors. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the Bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of the Bank, the imposition of a regulatory order and other regulatory sanctions.
Reserve Requirements
The Bank is subject to Federal Reserve Board regulations under which depository institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW accounts and checking accounts). The regulations generally require that for 2017 reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts over $15.5 million up to $115.1 million. Net transaction accounts up to $15.5 million are exempt from reserve requirements. The amount of aggregate transaction accounts in excess of $115.1 million is subject to a reserve ratio of 10.0%. The amounts of transaction accounts subject to the various reserve ratios are generally adjusted by the Federal Reserve Board annually. During 2016 and 2015, the Bank was in compliance with the requirements described above.
Risk Retention
The Dodd-Frank Act requires that, subject to certain exemptions, sponsors of mortgage- and other asset-backed securities retain not less than 5% of the credit risk of the related mortgage loans or other assets. On November 19, 2014, the federal banking regulators, together with the SEC, the Federal Housing Finance Agency and the Department of Housing and Urban Development, issued a final rule implementing this requirement. Generally, the final rule provides various ways in which the retention of risk requirement can be satisfied and also describe exemptions from the retention requirements for various types of assets, including mortgage loans.
Consumer Protection Laws and Regulations
The Bank and its affiliates are subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of their business relationships with consumers. These include the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the SAFE Act, the Real Estate Settlement Procedures Act, the FHA, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service Members’ Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair, deceptive and abusive business practices, foreclosure laws and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including, but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages and the loss of certain contractual rights. The Bank is currently operating with real estate loan portfolios within the parameters of such guidance.
Concentrated Commercial Real Estate Lending Regulations
The federal banking regulatory agencies have promulgated guidance governing financial institutions with concentrations in commercial real estate lending, such guidance being recently supplemented as of December 18, 2015. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total reported loans for acquisition, construction, land development, and other land represent 100.0% or more of total capital or (2) total reported loans secured by multifamily and nonfarm residential properties and loans for acquisition, construction, land development, and other land represent 300.0% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address, among other things, Board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. The Bank is currently operating with real estate loan portfolios within such percentage levels.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. The sanctions, which are administered by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”),
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targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Other Legislative and Regulatory Initiatives
In addition to the specific proposals described above, from time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to Bancorp or the Bank could have a material effect on the business of the Company.
Available Information
The Company files annual, quarterly and current reports, proxy statements and other business and financial information with the SEC. You may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 or 1-800-732-0330 for further information on the operation of the Public Reference Room. In addition, the SEC maintains an Internet site that contains the Company’s SEC filings, as well as reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, located at http://www.sec.gov. These filings are also accessible free of charge at the Company’s website at www.botc.com as soon as reasonably practicable after filing with the SEC. The information on or that is accessible through our website is not incorporated by reference into this report or any other document that the Company files with or furnishes to the SEC.
ITEM 1A. RISK FACTORS.
There are a number of risks and uncertainties, many of which are beyond the Company’s control, that could have a material adverse impact on the Company’s business, financial condition, results of operations, liquidity, regulatory capital levels or prospects. The Company describes below the most significant of these risks and uncertainties in connection with both the Company’s business and operations. These should not be viewed as an all-inclusive list. Additional risks that are not currently considered material may also have an adverse effect on the Company. This report is qualified in its entirety by these risk factors.
Before making an investment decision, investors should carefully consider the specific risks detailed in Item 1A; other risks facing the Company identified in this report, including, risks, uncertainties and assumptions identified in this report that are difficult to predict and that could materially and adversely affect the Company’s business financial condition, results of operations, liquidity, regulatory capital levels and prospects; the information in Item 1, including the Company’s cautionary statements as to forward-looking statements; and the information in Item 7.
Risks related to our business
Our business is closely tied to the local economies of Oregon, Idaho and Washington.
The Company’s business is closely tied to the economies of Oregon, Idaho and Washington in general and is particularly affected by the economies of Central, Southern, Coastal and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho and Seattle, Washington metro areas. In addition, the Company has a significant concentration in real estate lending that is directly affected by local and regional economic conditions. Approximately 76% of the Bank’s loan portfolio at December 31, 2016 consisted of loans secured by real estate, including construction and development loans, residential mortgage loans and commercial loans secured by commercial real estate, a strong majority of which are located in Oregon and Idaho. Since the end of the great recession of 2008, the economies of Oregon, Idaho and Washington have generally stabilized or are recovering, the housing market has improved and prices have increased, and vacancy rates for commercial properties have declined. The Company’s markets, however, continue to be sensitive to general economic trends and conditions, including real estate values, and an unforeseen economic shock or a return of adverse economic conditions could cause deterioration of
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local economies and have a material adverse effect on the Company’s business, financial condition and results of operations, and cash flows.
Adverse changes in economic conditions could affect the Company’s business, financial condition and results of operations.
Although economic conditions have improved in recent years, financial institutions are affected by changing conditions in the real estate and financial markets. Between 2008 and 2011, significant declines in the housing market, with falling home prices and increasing foreclosures and unemployment, resulted in significant write-downs of asset values by financial institutions, including the Company. While conditions have improved and continue to indicate a stable recovery, there can be no assurance that these conditions will persist. A return to a recessionary economy could result in financial stress on the Company’s borrowers and other customers that would adversely affect the Company’s business, financial condition and results of operations. The Company may also face the following risks in connection with possible adverse economic events:
•Ineffective monetary policy could cause rapid changes in interest rates and asset values that would have a materially adverse impact on the Company’s profitability and overall financial condition.
•Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities.
•Regulatory scrutiny of the industry could increase, leading to increased regulation of our industry that could lead to a higher cost of compliance, limit the Company’s ability to pursue business opportunities and increase the Company’s exposure to the judicial system and the plaintiff’s bar.
The Company may be required to increase its reserve for credit losses and to charge off additional loans in the future, which could adversely affect the Company’s financial condition and results of operations.
The Company maintains a reserve for credit losses in an amount that the Company believes is adequate to provide for losses inherent in the loan portfolio. The level of the reserve reflects management’s continuing evaluation of specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; industry concentrations; and other unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the reserve for credit losses inherently involves a high degree of subjectivity and judgment and requires the Company to make significant estimates of current credit risks and future trends. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company’s control, may require an increase in the reserve for credit losses. Increases in non-performing loans have a significant impact on the Company’s reserve for credit losses. Generally, the Company’s non-performing loans reflect difficulties of individual borrowers resulting from financial stress on the borrowers’ asset values and cash flow abilities often related to the weakness in general economic conditions and/or adversity in sector specific situations. Changes in Federal and State tax laws may also affect obligor asset values and cash flow.
If real estate markets or the economy in general deteriorate, the Company may experience increased delinquencies and credit losses. The reserve for credit losses may not be sufficient to cover actual loan-related losses. Additionally, banking regulators may require the Company to increase its reserve for credit losses in the future, which could have a negative effect on the Company’s financial condition and results of operations.
The Company’s reserve for credit losses is a significant accounting estimate and may not be adequate to cover future loan losses, which could adversely affect its business, financial condition and results of operations.
The Company maintains a reserve for credit losses in an amount that the Company believes is adequate to provide for losses inherent in the loan portfolio. While the Company strives to monitor credit quality and to identify adversely risk rated loans on a consistent and timely basis, including those that may become non-performing, at any time there are loans in the portfolio that could result in losses that have not been identified as problem or non-performing loans. Estimation of the reserve requires the Company to make various assumptions and judgments about the collectability of loans in the Company’s loan portfolio. These assumptions and judgments include historical loan loss experience, current credit profiles of the Bank’s borrowers, adverse situations that have occurred that may affect a borrower’s ability to meet its financial obligations, the estimated value of underlying collateral and general economic conditions. Determining the appropriateness of the reserve is complex and requires judgment by management about the effect of matters that are inherently uncertain. The Company cannot be certain that it will be able to identify deteriorating loans before they become non-performing assets or that it will be able to limit losses on those loans that have been identified. As a result, future increases to the reserve for credit losses may be necessary. Additionally, future increases to the reserve for credit losses may be required based on changes in the composition of the loans comprising the loan portfolio, deteriorating values in underlying collateral (most of which consists of real estate in the markets served) and changes in the financial condition of borrowers, such as those that may result from changes in economic conditions or as a result of incorrect assumptions by management in determining the reserve for credit loss. Finally, the Financial Accounting Standards Board has issued a proposed Accounting Standards Update that presents a new credit impairment model, the Current Expected Credit Loss (“CECL”) model, which would require financial institutions to estimate and develop a provision for
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credit losses at origination for the lifetime of the loan, as opposed to reserving for incurred or probable losses up to the balance sheet date. Under the CECL model, credit deterioration would be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes. Accordingly, the CECL model could require financial institutions like the Bank to increase their allowances for loan losses. Moreover, the CECL model likely would create more volatility in our level of allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
The Company’s profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe it money.
The Company is exposed to the risk that third parties that owe it money will not perform their obligations. These parties may default on their obligations to the Company due to bankruptcy, lack of liquidity, operational failure or other reasons. The Company’s rights against third parties may not be enforceable in all circumstances. In addition, deterioration in the credit quality of third parties whose securities or obligations the Company holds could result in losses and/or adversely affect the Company’s ability to use those securities or obligations for liquidity purposes. The Company relies on representations of potential borrowers and/or guarantors as to the accuracy and completeness of certain financial information. The Company’s financial condition and results of operations could be negatively impacted if the financial statements or other information that the Company relies upon is materially misleading. The Company also engages in derivative contracts, mainly interest rate swaps with certain business customers and other third parties. Default or deterioration of the credit quality of derivative counterparties resulting in their failure to meet the terms and obligations of these contacts could adversely impact market values of these instrument’s and/or profitability.
Real estate values could decline leading to additional and greater-than-anticipated loan charge-offs and valuation write downs on OREO and OREO-related management and disposition expenses.
Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as other real estate owned (“OREO”). In its normal lending process, the Bank may take a security interest in real estate as collateral for loans. In the event of obligor default, the Bank may have the right to foreclose on such collateral and take title to it. Generally, higher levels of OREO lead to greater expenses as the Bank incurs costs to manage and dispose of the properties, including personnel costs, insurance, taxes, completion costs, repair costs and other costs associated with property ownership. There are also funding costs associated with OREO. The Bank evaluates property values periodically and establishes valuation reserves, as appropriate, to adjust the carrying value of the properties to the lesser of book or appraised value, net of selling costs and any additional liquidation reserves to expedite the sale of such properties. Decreases in market prices may lead to additional OREO valuation reserves, with a corresponding expense in the Company’s consolidated statement of income. Further valuation reserves of OREO or an inability to sell OREO properties could have a material adverse effect on the Company’s results of operations and financial condition. At December 31, 2016, the Bank had OREO with a carrying value of approximately $1.7 million.
The Company could be subject to environmental liabilities with respect to properties to which it takes title.
In the course of business, the Company may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or remediate hazardous or toxic substances at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the contaminated site. If the Company becomes subject to significant environmental liabilities, its business, financial condition and results of operations could be adversely affected.
The Company’s financial condition and ability to fund operations could be impaired by liquidity risk.
Liquidity is essential to the Company’s business. The Company’s primary funding source is customer deposits. In addition, the Bank has historically had access to advances from the FHLB, the FRB discount window and other wholesale sources such as Internet-sourced deposits to fund operations. Although the Company has historically been able to replace maturing deposits and advances as necessary, it might not be able to replace such funds in the future. An inability to raise funds through traditional deposits, brokered deposits, borrowings, or the sale of securities or loans would have a material adverse effect on the Company’s liquidity. The Company’s access to funding sources on terms which are acceptable to the Company could be impaired by factors that affect the Company specifically or the financial services industry or economy in general. The Company believes that it had ample liquidity as of December 31, 2016; however, the Company’s ability to borrow or attract and retain deposits in the future could be adversely affected by the Company’s financial condition or regulatory restrictions, or impaired by factors that are not specific to the Company, such as FDIC insurance changes, disruption in the financial markets or negative views and expectations about the prospects for the banking industry. The Bank’s primary counterparty for
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borrowing purposes is the FHLB and liquid assets are mainly held at correspondent banks or the FRB. Borrowing capacity from the FHLB or FRB may fluctuate based upon the condition of the Bank or the acceptability and risk rating of securities or loan collateral and counterparties could adjust discount rates applied to such collateral at their discretion. The FRB or FHLB could restrict or limit the Company’s access to secured borrowings. Correspondent banks can withdraw unsecured lines of credit or require collateralization for the purchase of federal funds. Liquidity also may be affected by the Bank’s routine commitments to extend credit.
Sources of funds may not remain adequate for liquidity needs and the Company may be compelled to seek additional sources of financing in the future. Additional borrowings, if sought, may not be available or, if available, may not be on favorable terms. If additional financing sources are unavailable or not available on reasonable terms to provide necessary liquidity, the Company’s business, financial condition, results of operations and future prospects could be materially and adversely affected.
Changes in interest rates and/or sustained low absolute interest rates may adversely affect the Company’s net interest income and profitability.
In recent years, it has been the policy of the FRB to maintain interest rates at historically low levels through its targeted federal funds rate. As a result, market rates on the loans the Company has originated and the yields on securities the Company has purchased have been at lower levels than prior to 2008. As a general matter, it is estimated that the Company’s interest-bearing assets reprice or mature more quickly than the Company’s interest-earning liabilities. In the scenario where market interest rates increase, net interest income could improve as compared to an unchanged scenario. Should market rates fall, net interest income could be lower because the Company’s ability to lower its interest expense is limited at low interest rate levels while the average yield on the Company’s interest-earning assets could continue to decrease. The FRB has indicated that future changes in interest rates will be data dependent as to overall employment, inflation and other economic factors.
In addition, the Company’s results of operations are highly dependent on the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in market interest rates impact the rates earned on loans and investment securities and the rates paid on deposits and borrowings. Changes to the market interest rates may impact the level of loans, deposits and investments and the credit quality of existing loans. These rates may be affected by many factors beyond the Company’s control, including general economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. Accordingly, the Company’s net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may be affected, which could have an adverse effect on the Company’s profitability. Also, changes in interest rates may negatively impact the Company’s ability to attract deposits, make loans and achieve satisfactory interest rate spreads, as well as the Company’s market values of its financial instruments, which could adversely affect the Company’s business, financial condition and results of operations.
The financial services business is intensely competitive and the Company may not be able to compete effectively.
The Company faces competition for its services from a variety of competitors. The Company’s future growth and success depend on its ability to compete effectively. The Company competes for deposits, loans and other financial services with numerous financial service providers including banks, thrifts, credit unions, mortgage companies, broker dealers and insurance companies and increasingly other non-bank financial services providers who use the Internet as a platform to originate loans and/or acquire deposits. To the extent these competitors have less regulatory constraints, lower cost structures or increased economies of scale, they may be able to offer a greater variety of products and services or more favorable pricing for such products and services. In addition, improvements in technology, communications and the Internet have intensified competition. As a result, the Company’s competitive position could be weakened, which could adversely affect the Company’s business, financial condition and results of operations.
New lines of business or new products and services may subject us to additional risks.
From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There may be substantial risks or uncertainties associated with these types of efforts, particularly in instances where the markets may not be fully developed. Significant time and resources may be invested in developing and marketing new lines of business and/or new products and services and successful implementation may not be achieved or price and profitability targets may not be obtained. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Additionally, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal control. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.
The Company may not be able to attract or retain key banking employees, which could adversely impact the Company’s business and operations.
The Company expects future success to be driven in large part by the relationships maintained with its customers by its executives and senior lending officers. The Company has entered into employment agreements with several members of senior
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management. The existence of such agreements, however, does not necessarily ensure that the Company will be able to continue to retain the services of these senior management members.
The Company’s future successes and profitability are substantially dependent upon the management and banking abilities of its senior executives. The Company strives to attract and retain key banking professionals, management and staff. Competition to attract the best professionals in the industry can be intense which will limit the Company’s ability to hire new professionals. Banking-related revenues and net income could be adversely affected in the event of the unexpected loss of key personnel.
Risks associated with the Company’s Internet-based systems and online commerce security, including “hacking” and “identify theft,” could adversely affect the Company’s business.
The Company delivers its services both through its branch network and the Internet. The Company relies heavily upon data processing, including loan servicing and deposit processing software, communications systems and information systems from a number of third parties to conduct its business. Third party or internal systems and networks may fail to operate properly or become disabled due to deliberate attacks or unintentional events. The Company’s operations are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks, denial of service attacks, unauthorized access and other unforeseen events. Undiscovered data corruption could render the Company’s customer information inaccurate. These events may obstruct the Company’s ability to provide services and process transactions. While the Company believes that it is in compliance with all applicable privacy and data security laws, an incident could put its customer confidential information at risk.
While the Company believes that it has appropriate protective measures in place, the Company can never be certain that all of its systems are entirely free from vulnerability to breaches of security or other technological difficulties or failures. The Company monitors and modifies, as necessary, its protective measures in response to the perpetual evolution of cyber threats.
A breach in the security of any of the Company’s information systems, or other cyber incident, could have a material adverse effect on, among other things, its revenue, ability to attract and maintain customers and business reputation. In addition, as a result of any breach, the Company could incur higher costs to conduct its business, to increase protection, or related to remediation.
Furthermore, the Company’s customers could incorrectly blame the Company and terminate their accounts with the Bank for a cyber-incident which occurred on their own system or with that of an unrelated third party. In addition, a security breach could also subject the Company to additional regulatory scrutiny and expose the Company to civil litigation and possible financial liability.
In response to the Executive Order released by the Obama Administration, Improving Critical Infrastructure Cyber security, referred to as the Executive Order, the Federal Financial Institutions Examination Council developed a cyber security assessment tool to help institutions identify their risks and determine their cyber security preparedness. The FFIEC has also published cyber security guidance on its website, along with observations from recent cyber security assessments. The federal banking agencies have indicated that they will use the assessment tool as guidance during a financial institution’s safety and soundness examination. Although we have used the assessment tool to develop policies and procedures related to our cyber security, no assurance can be given that the regulators will believe that our information security systems are adequate or that these policies and procedures will be effective in preventing cyber threats and attacks. Furthermore, the implementation of any recommended guidance could require us to incur additional costs.
The Company encounters technological changes and may not have the resources to invest in technological improvements.
Frequent introductions of new technology-driven products and services in the financial services industry result in the need for rapid technological change. In addition, the effective use of technology may result in improved customer service and reduced costs. The Company’s future success depends, to a certain extent, on its ability to identify the needs of customers and address those needs by using technology to provide the desired products and services and to create additional efficiencies in its operations. Certain competitors may have substantially greater resources to invest in technological improvements. The Company may not be able to successfully implement new technology-driven products and services or to effectively market these products and services to the Company’s customers. Failure to implement the necessary technological changes could have a material adverse impact on the Company’s business, financial condition and results of operations.
The Company relies heavily on technology and computer systems, and computer failure could result in loss of business and adversely affect the Company’s financial condition and results of operations.
Advances and changes in technology could significantly affect the Company’s business, financial condition, results of operations and prospects. The Company faces many challenges, including the increased demand for providing customers access to their accounts and the systems to perform banking transactions electronically. The Company’s ability to compete depends on its ability to continue to adapt technology on a timely and cost-effective basis to meet these demands. In addition, the Company’s business and operations are susceptible to negative effects from computer system failures, communication and
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energy disruption and unethical individuals with the technological ability to cause disruptions or failures of its data processing systems.
The Company could incur losses due to operating disruptions.
Operating disruptions could occur without warning, and the results may be predictable or unknown. Disruptions could be either internal or external, and could include natural disasters, technological failures, pandemic events, human error, or terrorism. In alignment with regulatory guidance, the Company has developed detailed Business Continuity Plans and Disaster Recovery Plans to mitigate the impact of a disaster, provide for operations at backup facilities, and minimize risk to the organization, its customers, stockholders, and reputation. These plans may or may not be sufficient to mitigate or prevent material loss to the Company in an event that disrupts operations. External events could also adversely affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses.
Changes or disruptions in the market for certain securities in the Company’s investment portfolio could negatively affect the value of those securities.
The Company’s investment portfolio includes a variety of securities that are subject to interest rate risk and credit risk. The portfolio includes obligations of, and mortgage-backed securities guaranteed by, government sponsored enterprises (“GSEs”) such as the Federal National Mortgage Association (“Fannie Mae”), the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the FHLB or otherwise backed by Federal Housing Administration or Veteran’s Administration guaranteed loans. In addition, the portfolio contains non-GSE securities, including mortgage and other debt issued by public entities that are secured by expected future cash flows of the issuer. Adverse general economic conditions, credit risk associated with the collateral or guarantors of securities, and volatility or illiquidity in markets may cause investment securities held within the Company’s investment portfolio to fall in value and/or become less liquid. Should securities become impaired, they may be subject to material write-downs thereby impacting results of operations or financial condition of the Company. In addition, market conditions may reduce valuations due to the perception of heightened credit and liquidity risks in addition to interest rate risk typically associated with these securities. Possible FRB actions to increase interest rates in the future may cause a decline in the value of securities held by the Company. Declines in market value associated with these disruptions would result in impairments of these assets, which would lead to accounting charges that could have a material adverse effect on the Company’s results of operations, equity and capital ratios.
If the goodwill that the Company has recorded or may record in connection with a business acquisition becomes impaired, it could require charges to earnings, which would adversely affect the Company’s business, financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets the Company acquired in connection with the purchase of another financial institution. The Company reviews goodwill for impairment at least annually, or more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2016, the Company’s goodwill totaled $85.9 million. While the Company has not recorded any impairment charges since it initially recorded the goodwill, there can be no assurance that future evaluations of the Company’s existing goodwill or goodwill it may acquire in the future will not result in findings of impairment and related write-downs, which could adversely affect the Company’s business, financial condition and results of operations.
The Company will face risks with respect to future expansion and through acquisitions or mergers
As described in our Current Report on Form 8-K filed with the SEC on November 17, 2016, we entered into the definitive agreement with First Interstate, which, subject to regulatory approvals and shareholder approvals and various other conditions, would result in Bancorp being merged with and into First Interstate. Our management and board of directors have devoted and will continue to devote a significant amount of time and attention to the First Interstate merger. In addition, in connection with the First Interstate merger, we have incurred and will continue to incur expenses, which may be significant. Our business and our operating and financial results may be materially adversely affected by the diversion of management’s time and attention and the expenses incurred in connection with the First Interstate merger.
In addition and in accordance with the Company’s strategic plan, it regularly evaluates opportunities to acquire other banks and branch locations to expand the Company. As a result, the Company may engage in acquisitions and other transactions that could have a material effect on its operating results, financial condition and liquidity.
The Company’s acquisition activities could involve a number of additional risks, including the risks of:
•the possibility that expected benefits may not materialize in the timeframe expected or at all, or may be more costly to achieve;
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•incurring the time and expense associated with identifying and evaluating potential acquisitions and merger partners and negotiating potential transactions, resulting in management’s attention being diverted from the operation of the Company’s existing business;
•using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets;
•incurring the time and expense required to integrate the operations and personnel of the combined businesses;
•the possibility that the Company will be unable to successfully implement integration strategies, due to challenges associated with integrating complex systems, technology, banking centers, and other assets of the acquired bank in a manner that minimizes any adverse effect on customers, suppliers, employees, and other constituencies;
•the possibility that the acquisition may not be timely completed, if at all; and
•the loss of key employees and customers as a result of an acquisition that is poorly received.
If the Company does not successfully manage these risks, its acquisition activities could have a material adverse effect on its operating results, financial condition and liquidity.
The failure to complete the First Interstate merger could negatively impact our business.
There is no assurance that the conditions to the First Interstate merger will be satisfied in a timely manner, or at all, or that the First Interstate merger will occur. Further, there is no assurance that any event, change or other circumstances that could give rise to the termination of the First Interstate merger agreement will not occur. If the First Interstate merger is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that the First Interstate merger will be completed. In addition, if the First Interstate merger were not to occur, under certain circumstances defined in the Merger Agreement, such as the company entering into a merger or acquisition agreement with another company, we may be required to pay a termination fee of $22.1 million. Certain costs associated with the First Interstate merger, which were incurred subsequent to December 31, 2016, may be payable even if the First Interstate merger is not completed. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. There can be no assurance that our business, these relationships or our financial condition will not be negatively impacted, if the First Interstate merger is not completed.
New or acquired banking office facilities and other facilities may not be profitable.
The Company may not be able to identify profitable locations for new banking offices. The costs to start up new banking offices or to acquire existing branches, and the additional costs to operate these facilities, may increase the Company’s non-interest expense and decrease our earnings in the short term. If branches of other banks become available for sale, the Company may acquire those offices. It may be difficult to adequately and profitably manage our growth through the establishment or purchase of additional banking offices and the Company can provide no assurance that any such banking offices will successfully attract enough deposits to offset the expenses of their operation. In addition, any new or acquired banking offices will be subject to regulatory approval, and there can be no assurance that the Company will succeed in securing such approval.
The Company’s operations rely on certain external vendors, which presents certain risks to our business, including the risk that they may not perform in accordance with the contracted arrangements under service level agreements.
The Company relies on certain external vendors to provide products and services necessary to maintain day-to-day operations of the Company. Accordingly, external vendors are a source of operational and information security risk to us. The Company’s operations are exposed to risk that these external vendors will not perform in accordance with the contracted arrangements under service level agreements. Moreover, external vendors’ market power significantly limits our ability to be indemnified for a vendor’s negligence and insurance does not adequately cover all such exposure. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to the Company’s operations, which could have a material adverse impact on the Company’s business, financial condition and results of operations. In addition, such a failure may force the Company to replace or renegotiate contracts with external vendors which could entail significant operational expense and delays for the Company.
We may be subject to potential liability and business risk from actions by our regulators related to supervision of third parties.
Oversight management by us of third parties by which we acquire deposit accounts and offer products and services, may be required to be expanded by our auditors or regulators. Although we have added significant compliance staff and have used outside consultants, our internal and external compliance examiners must be satisfied with the results of such augmentation and enhancement. We cannot assure you that we will satisfy all related requirements. Not achieving a compliance management system which is deemed adequate could result a wide variety of sanctions, including the required payment of damages and civil
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money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact the Bank’s reputation, business, financial condition and results of operations. Our ongoing review and analysis of our compliance management systems and implementation of any changes resulting from that review and analysis will likely result in increased noninterest expense.
The Bank is a community bank and its ability to maintain its reputation is critical to the success of its business and the failure to do so may materially adversely affect the Company’s performance.
The Bank is a community bank, and its reputation is one of the most valuable components of its business. A key component of the Bank’s business strategy is to rely on its reputation for customer service and knowledge of local markets to expand its presence by capturing new business opportunities from existing and prospective customers in its market area and contiguous areas. As such, the Bank strives to conduct its business in a manner that enhances its reputation. This is done, in part, by recruiting, hiring and retaining employees who share the Bank’s core values of being an integral part of the communities the Bank serves, delivering superior service to its customers and caring about its customers and associates. If Bancorp’s or the Bank’s reputation is negatively affected, by the actions of their employees, by their inability to conduct their operations in a manner that is appealing to current or prospective customers, or otherwise, the Company’s business and results of operations may be materially adversely affected.
The soundness of other financial institutions could adversely affect the Company.
The Bank is a public depository and, accordingly, accepts deposit funds that belong to, or are held for the benefit of, the State of Oregon, political subdivisions thereof, municipal corporations and other public funds. In accordance with applicable state law, in the event of default of one bank, all participating banks in the state collectively assure that no loss of funds is suffered by any public depositor. Generally, in the event of default by a depository of public funds in excess of collateral pledged, an assessment applicable to all public depositories is allocated on a pro rata basis in proportion to the maximum liability of each public depository as it existed on the date of loss. The maximum liability is dependent upon potential changes in regulations, the occurrence of Oregon bank failures and the level of public fund deposits held by the failing bank and cannot be presently determined.
In 2016, the amount of collateral the Bank was required to pledge against Oregon public deposits was 50% of the uninsured portion of these Oregon public deposits, but the percentage of collateral required to be pledged could be increased in the future.
The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions or the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of the Company’s counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. Such losses may materially and adversely affect the Company’s results of operations.
Regulatory Risks
The banking industry and the Company operate under certain regulatory requirements that may change significantly and in a manner that further impairs revenues, operating income and financial condition.
The Company operates in a highly regulated industry and is subject to examination, supervision and comprehensive regulation by the Oregon DFCS, the FDIC and the Federal Reserve Board. The regulations affect the Company’s investment practices, lending activities and dividend policy, among other things. Notwithstanding the recent U.S. presidential election, federal and state banking laws and regulations undergo frequent and often significant changes and have been subject to significant change in recent years, sometimes retroactively applied, and may change significantly in the future. Changes to these laws and regulations or other actions by regulatory agencies could, among other things, make regulatory compliance more difficult or expensive for the Company, limit the products the Company can offer or increase the ability of non-banks to compete and could adversely affect the Company’s business in significant but unpredictable ways, which in turn could have a material adverse effect on the Company’s financial condition or results of operations.
The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes in light of the performance of and government intervention in the financial services sector. Included in the Dodd-Frank Act are, for example, changes related to deposit insurance assessments, executive compensation and corporate governance requirements, payment of interest on demand deposits, interchange fees and overdraft services. The Dodd-Frank Act also resulted in the “Volcker Rule” for banks and bank holding companies, which prohibits proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and otherwise limit the relationships with such funds. Many aspects of the Dodd-Frank Act remain subject to rulemaking by various regulatory agencies, making it difficult at this time to anticipate the overall financial impact of this expansive legislation on the Company, its customers or the financial industry generally. Likewise, any new consumer
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financial protection laws enacted by the Consumer Financial Protection Bureau, which was established pursuant to the Dodd-Frank Act, that would apply to all banks and thrifts may increase the Company’s compliance and operational costs in the future.
In addition, the banking regulatory agencies revised the U.S. risk-based and leverage capital requirements for U.S. banking organizations in accordance with the Basel III Rules to strengthen identified areas of weakness in the capital rules and to address relevant provisions of the Dodd-Frank Act. The Basel III Rules establish a stricter regulatory capital framework that requires banking organizations to hold more and higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress.
The Company cannot predict the substance or impact of pending or future legislation or regulation. The Company’s compliance with these laws and regulations is costly and may restrict certain activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, access to capital and brokered deposits and locations of banking offices. Failure to comply with these laws or regulations could result in fines, penalties, sanctions and damage to the Company’s reputation, which could have an adverse effect on the Company’s business, financial condition or results of operations.
If the Company fails to maintain sufficient capital under regulatory requirements, whether due to losses, an inability to raise additional capital or otherwise, that failure would adversely affect the Company’s financial condition, liquidity and results of operations, as well as the Company’s ability to maintain regulatory compliance.
Bancorp and the Bank must meet regulatory capital requirements and maintain sufficient liquidity. The Company’s ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor preferences regarding the banking industry and market condition and governmental activities, many of which are outside the Company’s control, and on the Company’s financial condition and performance. Accordingly, the Company may not be able to raise additional capital if needed or on terms acceptable to the Company. If the Company fails to meet these capital and other regulatory requirements or is unable to raise additional capital when needed, the Company’s financial condition, liquidity and results of operations would be materially and adversely affected.
The Company may be subject to more stringent capital and liquidity requirements, which would adversely affect the Company’s net income and future growth.
As a result of the enactment of the Basel III Rules, the Company recently became subject to increased required capital levels. The Basel III Rules became effective as applied to us on January 1, 2015, with a phase-in period that generally extends through January 1, 2019. See “Supervision and Regulation - Bank Holding Company Regulation - New Capital Rules.”
Although the Company currently cannot predict the specific impact and long-term effects that Basel III will have on the Company and the banking industry more generally, the Company will be required to maintain higher regulatory capital levels which could impact the Company’s operations, net income and ability to grow. Furthermore, the Company’s failure to comply with the minimum capital requirements could result in regulators taking formal or informal actions against the Company, which could restrict future growth or operations.
The Bank’s deposit insurance premium could be higher in the future, which could have a material adverse effect on its results of operations.
The FDIC insures deposits at FDIC-insured financial institutions, including the Bank. The FDIC charges the insured financial institutions assessments to maintain the Deposit Insurance Fund at a certain level; if an FDIC-insured financial institution fails, payments of deposits up to insured limits are made from the Deposit Insurance Fund. An increase in the risk category of the Bank, adjustments to assessment rates and/or a special assessment could have an adverse effect on the Company’s results of operations.
Changes in the Federal Reserve Board’s monetary or fiscal policies could adversely affect the Company’s results of operations and financial condition.
The Company’s results of operations will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The Federal Reserve Board affects the levels of bank loans, investments and deposits through its purchases of government and other securities, its regulation of the discount rate applicable to member banks and its management of bank reserve requirements. The Company cannot predict the nature or impact of future changes in monetary and fiscal policies.
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The Company could be subject to fines, sanctions or other adverse consequences if it fails to comply with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth in Lending Act, Home Mortgage Disclosure Act, Fair Lending Laws or other laws and regulations.
Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial Institutions are also obligated to file suspicious activity reports with the United States Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the Company is required to develop compliance management systems designed to detect and prevent violations of the Real Estate Settlement Procedures Act, Truth in Lending Act, Home Mortgage Disclosure Act, Fair Lending Laws and similar laws and regulations. The federal government has imposed and is expected to expand these and other laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks. The Company has developed policies and continues to augment procedures and systems designed to assist in compliance with these laws and regulations, however no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. Failure to comply with these regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact the Bank’s reputation, business, financial condition and results of operations.
Our financial condition, earnings and asset quality could be adversely affected if our consumer facing operations do not operate in compliance with applicable regulations.
While all aspects of our operations are subject to detailed and complex compliance regimes, bank regulators have increased their focus on risk management and consumer compliance, and we expect this focus to continue. As a result, those portions of our lending operations which most directly deal with consumers, in particular our mortgage operations, credit card and other consumer lending business, pose particular challenges. While we are not aware of any material issues with our compliance, mortgage and other consumer lending raises significant compliance risks resulting from the detailed and complex nature of mortgage and other consumer lending regulations imposed by federal regulatory agencies, and the relatively independent operating environment in which loan officers operate. As a result, despite the education, compliance training, supervision and oversight we exercise in these areas, failure to comply with these regulations could result in the Bank being strictly liable for restitution or damages to individual borrowers, and to a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact the Bank’s reputation, business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
The Company’s headquarters is located in downtown Bend, Oregon and the building and land are owned by the Bank. The Company also owns or leases other facilities within the Company’s primary market areas as follows: 30 locations in Oregon located in the counties of Clatsop, Coos, Crook, Deschutes, Douglas, Jackson, Jefferson, Josephine, Klamath, Lane, Marion and Multnomah; 14 locations in Idaho located in the counties of Ada, Canyon, Elmore, Gem and Payette; and six locations in Washington located in the counties of Grays Harbor, King, Pacific, Snohomish and Wahkiakum. The Company considers its properties to be suitable and adequate for its present needs. For information about the Company’s lease commitments, see Note 13 of the "Notes to Consolidated Financial Statements" included elsewhere in this annual report.
ITEM 3. LEGAL PROCEEDINGS.
On February 16, 2017, a putative shareholder class action was filed in the Circuit Court for Deschutes County, Oregon styled Sternheim Family Trust v. Cascade Bancorp, No. 17CV06744. In the complaint, the plaintiff alleges that the Company’s directors breached their fiduciary duties by negotiating and agreeing to the First Interstate merger. Specifically, the plaintiff alleges that the directors failed to obtain the highest possible value for the Company, agreed to preclusive deal protection provisions in the merger agreement, and failed to disclose all material information in the Registration Statement filed with the SEC. The plaintiff further alleges that the Company and First Interstate aided and abetted the directors’ breaches of fiduciary duties. The complaint seeks injunctive relief to prevent the First Interstate merger from going forward, damages, and attorneys’ fees. The Company
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believes that the allegations of the Complaint are without merit and that it has substantial meritorious defenses to the claims set forth in the Complaint.
On February 24, 2017, a putative shareholder class action was filed in the Circuit Court for Multnomah County, Oregon styled Crosse v. Cascade Bancorp, No. 17CV08305. In the complaint, the plaintiff alleges that the Company’s directors breached their fiduciary duties by filing with the SEC a Registration Statement that fails to disclose all material information about the First Interstate merger. The plaintiff further alleges that the Company and First Interstate aided and abetted the directors’ breaches of fiduciary duties. The complaint seeks injunctive relief to prevent the First Interstate merger from going forward, as well as attorneys’ fees. The Company believes that the allegations of the Complaint are without merit and that it has substantial meritorious defenses to the claims set forth in the Complaint.
In addition to the two lawsuits described above, 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 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
The Company’s common stock trades on the NASDAQ Capital Market under the symbol “CACB.” The following table sets forth, for the quarters shown, the range of high and low sales prices of our common stock on the NASDAQ Capital Market. The Company did not pay any cash dividends during the quarters shown.
Quarter Ended | High | Low | Dividend per share | |||||||
2016 | ||||||||||
December 31 | $ | 8.13 | $ | 6.01 | N/A | |||||
September 30 | $ | 6.26 | $ | 5.42 | N/A | |||||
June 30 | $ | 6.05 | $ | 5.32 | N/A | |||||
March 31 | $ | 5.95 | $ | 5.03 | N/A | |||||
2015 | ||||||||||
December 31 | $ | 6.14 | $ | 5.26 | N/A | |||||
September 30 | $ | 5.56 | $ | 5.10 | N/A | |||||
June 30 | $ | 5.25 | $ | 4.74 | N/A | |||||
March 31 | $ | 5.14 | $ | 4.25 | N/A | |||||
Holders
As of March 1, 2017, the Company had 76,264,047 shares of common stock outstanding, held of record by approximately 985 holders of record. The last reported sales price of our common stock on the NASDAQ Capital Market on March 1, 2017 was $8.41 per share.
Dividends
As noted in the table above, Bancorp has not paid dividends for the last two fiscal years and has not paid dividends since 2008. The amount of future dividends, if any, will depend upon our earnings, financial condition, capital requirements and other factors and will be determined by our board of directors. The appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. Bancorp has no plan to pay dividends at this time. See “Regulations Concerning Cash Dividends” in Item 1 of this report for additional discussion of limitations on the Bank’s and Bancorp’s respective abilities to pay cash dividends.
Stock Performance Graph
The following chart compares the yearly percentage changes in the cumulative shareholder return on our common stock during the five fiscal years ended December 31, 2016, with (i) the NASDAQ composite index and (ii) the SNL Bank NASDAQ index. This comparison assumes $100.00 was invested on December 31, 2011, in our common stock and the comparison indices, and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. Price information from December 31, 2011 to December 31, 2016, was obtained by using the NASDAQ closing prices as of the last trading day of each year.
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Period Ending | ||||||||||||
Index | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | ||||||
Cascade Bancorp | 100.00 | 142.92 | 119.41 | 118.49 | 138.58 | 185.39 | ||||||
NASDAQ Composite | 100.00 | 117.45 | 164.57 | 188.84 | 201.98 | 219.89 | ||||||
SNL Bank NASDAQ | 100.00 | 119.19 | 171.31 | 177.42 | 191.53 | 265.56 | ||||||
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ITEM 6. SELECTED FINANCIAL DATA.
Cascade Bancorp
Annual Financial Trends
(in thousands, except per share data) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Interest income | $ | 95,277 | $ | 80,387 | $ | 67,374 | $ | 50,985 | $ | 54,879 | ||||||||||
Interest expense | 2,154 | 1,872 | 2,289 | 2,769 | 4,999 | |||||||||||||||
Net interest income | 93,123 | 78,515 | 65,085 | 48,216 | 49,880 | |||||||||||||||
Loan loss (recovery) provision | — | (4,000 | ) | — | 1,000 | 1,100 | ||||||||||||||
Net interest income after loan loss provision | 93,123 | 82,515 | 65,085 | 47,216 | 48,780 | |||||||||||||||
Non-interest income | 29,446 | 24,973 | 20,171 | 14,453 | 13,091 | |||||||||||||||
Non-interest expense | 95,230 | 74,396 | 81,341 | 60,970 | 55,841 | |||||||||||||||
Income before income taxes | 27,339 | 33,092 | 3,915 | 699 | 6,030 | |||||||||||||||
Income tax (provision) benefit | (10,568 | ) | (12,513 | ) | (178 | ) | 50,146 | (79 | ) | |||||||||||
Net income (loss) before extraordinary net gain | 16,771 | 20,579 | 3,737 | 50,845 | 5,951 | |||||||||||||||
Net income (loss) | $ | 16,771 | $ | 20,579 | $ | 3,737 | $ | 50,845 | $ | 5,951 | ||||||||||
Share Data | ||||||||||||||||||||
Basic net income per common share | $ | 0.23 | $ | 0.29 | $ | 0.06 | $ | 1.08 | $ | 0.13 | ||||||||||
Diluted net income per common share | $ | 0.23 | $ | 0.29 | $ | 0.06 | $ | 1.07 | $ | 0.13 | ||||||||||
Book value per basic common share | $ | 4.85 | $ | 4.63 | $ | 4.35 | $ | 3.97 | $ | 2.97 | ||||||||||
Tangible book value per common share1 | $ | 3.56 | $ | 3.45 | $ | 3.14 | $ | 3.95 | $ | 2.97 | ||||||||||
Basic average shares outstanding | 71,895 | 71,789 | 62,265 | 47,187 | 47,128 | |||||||||||||||
Fully diluted average shares outstanding | 72,159 | 71,969 | 62,340 | 47,484 | 47,278 | |||||||||||||||
Balance Sheet Detail | ||||||||||||||||||||
Gross loans | $ | 2,102,648 | $ | 1,686,573 | $ | 1,490,837 | $ | 994,475 | $ | 856,318 | ||||||||||
Wholesale loans | $ | 327,286 | $ | 268,417 | $ | 222,383 | $ | 128,297 | $ | 26,939 | ||||||||||
Total organic loans | $ | 1,671,109 | $ | 1,418,156 | $ | 1,268,454 | $ | 866,178 | $ | 829,379 | ||||||||||
Total deposits | $ | 2,661,813 | $ | 2,083,088 | $ | 1,981,622 | $ | 1,167,320 | $ | 1,076,234 | ||||||||||
Non-interest bearing | $ | 916,197 | $ | 727,730 | $ | 619,377 | $ | 431,079 | $ | 410,258 | ||||||||||
Checking | $ | 1,471,068 | $ | 1,183,274 | $ | 1,056,284 | $ | 584,002 | $ | 539,003 | ||||||||||
Money market | $ | 773,104 | $ | 588,590 | $ | 558,590 | $ | 391,744 | $ | 367,929 | ||||||||||
Time | $ | 220,362 | $ | 175,697 | $ | 237,138 | $ | 141,315 | $ | 129,272 | ||||||||||
Key Ratios | ||||||||||||||||||||
Return on average stockholders’ equity | 4.75 | % | 6.30 | % | 1.41 | % | 28.89 | % | 4.34 | % | ||||||||||
Return on average tangible stockholders’ equity2 | 6.47 | % | 8.56 | % | 1.77 | % | 30.59 | % | 4.34 | % | ||||||||||
Return on average assets | 0.57 | % | 0.84 | % | 0.19 | % | 3.78 | % | 0.46 | % | ||||||||||
Return on average tangible assets3 | 0.59 | % | 0.87 | % | 0.19 | % | 3.75 | % | 0.46 | % | ||||||||||
Common stockholders’ equity ratio | 12.01 | % | 13.65 | % | 13.48 | % | 13.42 | % | 10.82 | % | ||||||||||
Tangible common stockholders’ equity ratio4 | 8.82 | % | 10.18 | % | 9.73 | % | 13.38 | % | 10.82 | % | ||||||||||
Net interest spread | 3.49 | % | 3.62 | % | 3.69 | % | 3.75 | % | 3.85 | % | ||||||||||
Net interest margin | 3.54 | % | 3.67 | % | 3.76 | % | 3.90 | % | 4.11 | % | ||||||||||
Total revenue (net int. inc. + non int. inc.) | $ | 122,569 | $ | 103,488 | $ | 85,256 | $ | 62,669 | $ | 62,971 | ||||||||||
Efficiency ratio5 | 77.70 | % | 71.89 | % | 95.41 | % | 97.29 | % | 88.68 | % | ||||||||||
Loan to deposit ratio | 78.04 | % | 79.79 | % | 74.12 | % | 83.41 | % | 77.03 | % | ||||||||||
Non-interest income to average assets | 1.00 | % | 1.02 | % | 1.02 | % | 1.07 | % | 1.01 | % | ||||||||||
Non-interest expense to average assets | 3.22 | % | 3.05 | % | 4.11 | % | 4.49 | % | 4.30 | % | ||||||||||
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(in thousands, except per share data) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Credit Quality Ratios | ||||||||||||||||||||
Reserve for loan losses | $ | 25,290 | $ | 24,415 | $ | 22,053 | $ | 20,857 | $ | 27,261 | ||||||||||
Reserve for loan losses to ending gross loans | 1.20 | % | 1.45 | % | 1.48 | % | 2.10 | % | 3.18 | % | ||||||||||
Reserve for credit losses | $ | 25,730 | $ | 24,855 | $ | 22,493 | $ | 21,297 | $ | 27,701 | ||||||||||
Reserve for credit losses to ending gross loans | 1.22 | % | 1.47 | % | 1.51 | % | 2.14 | % | 3.23 | % | ||||||||||
Non-performing assets (“NPAs”) | $ | 15,388 | $ | 8,396 | $ | 15,047 | $ | 11,453 | $ | 25,305 | ||||||||||
NPAs to total assets | 0.50 | % | 0.34 | % | 0.64 | % | 0.81 | % | 1.94 | % | ||||||||||
Delinquent >30 days to total loans (excl. NPAs) | 0.20 | % | 0.24 | % | 0.27 | % | 0.29 | % | 1.78 | % | ||||||||||
Net (recoveries) charge-offs | $ | (874 | ) | $ | (6,362 | ) | $ | (1,196 | ) | $ | 7,404 | $ | 17,744 | |||||||
Net loan (recoveries) charge-offs to average total loans | (0.05 | )% | (0.40 | )% | (0.09 | )% | 0.81 | % | 2.06 | % | ||||||||||
1 Tangible book value per common share is a non-GAAP measure defined as total stockholders’ equity, less the sum of core deposit intangible (“CDI”) and goodwill, divided by total number of shares outstanding.
2 Return on average tangible stockholders’ equity is a non-GAAP measure defined as average total stockholders’ equity, less the sum of average CDI and goodwill, divided by net income.
3 Return on average tangible assets is a non-GAAP measure defined as average total assets, less the sum of average CDI and goodwill, divided by net income.
4 Tangible common stockholders’ equity ratio is a non-GAAP measure defined as total stockholders’ equity, less the sum of CDI and goodwill, divided by total assets.
5 The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income. Other companies may define and calculate this data differently.
Reconciliation of Non-GAAP measures
This report contains certain financial measures that are not calculated in accordance with GAAP. The Company’s management uses these non-GAAP financial measures, specifically return on average tangible assets, return on average tangible stockholders equity, organic loan growth, tangible book value per common share, tangible common equity ratio to total assets and tangible stockholders’ equity, as important measures of the strength of the Company’s capital and its ability to generate earnings on its tangible capital invested by its shareholders. Management believes presentation of these non-GAAP financial measures provides useful supplemental information to our investors and others that contributes to a proper understanding of the financial results and capital levels of the Company. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance. These non-GAAP disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the tables below.
Reconciliation of period end total stockholders’ equity to period end tangible book value per common share: | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Total stockholders’ equity | $ | 369,652 | $ | 336,774 | $ | 315,483 | $ | 188,715 | $ | 140,775 | ||||||||||
Core deposit intangible | (12,317 | ) | (6,863 | ) | (7,683 | ) | (529 | ) | — | |||||||||||
Goodwill | (85,852 | ) | (78,610 | ) | (80,082 | ) | — | — | ||||||||||||
Tangible stockholders equity | $ | 271,483 | $ | 251,301 | $ | 227,718 | $ | 188,186 | $ | 140,775 | ||||||||||
Common shares outstanding | 76,262,184 | 72,792,570 | 72,491,850 | 47,592,061 | 47,326,306 | |||||||||||||||
Tangible book value per common share | $ | 3.56 | $ | 3.45 | $ | 3.14 | $ | 3.95 | $ | 2.97 | ||||||||||
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Reconciliation of return on average tangible stockholders’ equity: | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Average stockholders’ equity | $ | 353,059 | $ | 326,557 | $ | 265,277 | $ | 166,290 | $ | 137,173 | ||||||||||
Average core deposit intangible | (11,213 | ) | (7,240 | ) | (5,154 | ) | (99 | ) | — | |||||||||||
Average goodwill | (82,549 | ) | (78,940 | ) | (48,723 | ) | — | — | ||||||||||||
Average tangible stockholders’ equity | $ | 259,297 | $ | 240,377 | $ | 211,400 | $ | 166,191 | $ | 137,173 | ||||||||||
Net income | 16,771 | 20,579 | 3,737 | 50,845 | 5,951 | |||||||||||||||
Return on average tangible stockholders’ equity (annualized) | 6.47 | % | 8.56 | % | 1.77 | % | 30.59 | % | 4.34 | % | ||||||||||
Reconciliation of return on average tangible assets: | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Average total assets | $ | 2,957,558 | $ | 2,439,474 | $ | 1,977,733 | $ | 1,356,637 | $ | 1,298,351 | ||||||||||
Average core deposit intangible | (11,213 | ) | (7,240 | ) | (5,154 | ) | (99 | ) | — | |||||||||||
Average goodwill | (82,549 | ) | (78,940 | ) | (48,723 | ) | — | — | ||||||||||||
Average tangible assets | $ | 2,863,796 | $ | 2,353,294 | $ | 1,923,856 | $ | 1,356,538 | $ | 1,298,351 | ||||||||||
Net income | 16,771 | 20,579 | 3,737 | 50,845 | 5,951 | |||||||||||||||
Return on average tangible assets (annualized) | 0.59 | % | 0.87 | % | 0.19 | % | 3.75 | % | 0.46 | % | ||||||||||
Reconciliation of period end common stockholders’ equity ratio to period end tangible common stockholders’ equity ratio: | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Total stockholders’ equity | $ | 369,652 | $ | 336,774 | $ | 315,483 | $ | 188,715 | $ | 140,775 | ||||||||||
Core deposit intangible | (12,317 | ) | (6,863 | ) | (7,683 | ) | (529 | ) | — | |||||||||||
Goodwill | (85,852 | ) | (78,610 | ) | (80,082 | ) | — | — | ||||||||||||
Tangible stockholders equity | $ | 271,483 | $ | 251,301 | $ | 227,718 | $ | 188,186 | $ | 140,775 | ||||||||||
Total assets | 3,079,058 | 2,468,029 | 2,341,137 | 1,406,219 | 1,301,417 | |||||||||||||||
Tangible common stockholders’ equity ratio | 8.82 | % | 10.18 | % | 9.73 | % | 13.38 | % | 10.82 | % | ||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is management’s discussion and analysis of the Company’s results of operation, financial condition, cash flows and liquidity. The following should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto as of December 31, 2016 and 2015 and for each of the years in the three-year period ended December 31, 2016 included in Item 8 of this report.
Overview
Cascade Bancorp is an Oregon corporation and registered bank holding company that was formed in 1990 and is headquartered in Bend, Oregon. Bancorp’s common stock trades on the NASDAQ Capital Market under the symbol “CACB.” Bancorp and its wholly-owned subsidiary, Bank of the Cascades, operate in Central, Southern and Northwest Oregon, as well as in the greater Boise/Treasury Valley, Idaho and Seattle Metro areas. At December 31, 2016, the Company had total consolidated assets of approximately $3.1 billion, net loans of approximately $2.1 billion and deposits of approximately $2.7 billion. Bancorp has no significant assets or operations other than the Bank.
The Bank offers a broad range of commercial and retail banking services to its customers. The Bank’s lending activities are focused on small- to medium-sized businesses, municipalities and public organizations, and professional and consumer relationships. The Bank provides commercial real estate loans, real estate construction and development loans, and commercial and industrial loans, as well as consumer installment, line-of-credit, credit card and home equity loans. The Bank also originates residential mortgage loans, including 30-year fixed rate loans that are mainly sold on the secondary market. The Bank provides consumer and business deposit services including checking, money market and time deposit accounts and related payment services, Internet banking, electronic bill payment and remote deposits. In addition, the Bank serves business
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customer deposit needs with a suite of cash management services. The Bank also provides trust and investment related services to its clientele.
The primary source of our revenue is net interest income, which represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities used to fund those assets. Interest-earning assets include loans, securities, interest-earning deposits and federal funds sold. Interest-bearing liabilities include deposits and borrowings. Sources of non-interest income include service charges on deposit accounts, revenue derived from customer credit and debit card activity, gains or losses on the sale of securities, earnings on investment in bank owned life insurance and other miscellaneous income. Deposits, FHLB borrowed funds, borrowed funds from other sources and federal funds purchased are our primary sources of funding. Our largest expenses are salaries and related employee benefits as well as costs associated with maintaining our branch network. Measures of our performance include net interest margin, return on average assets (“ROAA”), return on average common equity (“ROAE”), average common equity to average assets and efficiency ratio. Such measures are common performance indicators in the banking industry.
Recent Mergers and Acquisitions
Definitive Agreement with First Interstate BancSystem, Inc.
On November 17, 2016, First Interstate and Cascade announced a definitive agreement under which First Interstate, parent company of First Interstate Bank, will acquire Cascade in a cash and stock transaction for total consideration valued at approximately $590.5 million in aggregate, or $7.62 per share based on the First Interstate closing price of $38.40 per share on November 17, 2016. The First Interstate merger will create a unique regional banking franchise that extends from the Mountain West to the Pacific Northwest and will provide First Interstate with a presence in several high-growth markets, including Bend, Oregon and Boise, Idaho. See “Business - Definitive Agreement with First Interstate BancSystem, Inc.” in Item 1 of this report for additional discussion of the First Interstate merger.
Acquisition of Prime Pacific Financial Services, Inc.
On August 1, 2016, PPFS merged with and into Cascade with Cascade continuing as the surviving corporation. Immediately after the PPFS merger, Prime Pacific Bank, a wholly-owned subsidiary of PPFS, merged with and into the Bank, with the Bank continuing as the surviving bank.
Each share of PPFS common stock was converted into the right to receive 0.3050 shares of Cascade common stock. The conversion of PPFS common stock resulted in Cascade issuing 2,921,012 shares of its common stock.
Acquisition of Bank of America Branches
On March 4, 2016, the Bank completed the purchase of 15 branch locations in Oregon and southeast Washington from Bank of America, National Association. The Bank assumed approximately $469.9 million of branch deposits, paying a 2.00% premium on the average balance of deposits assumed, for a cash purchase price of $9.7 million.
Merger Completed with Home Federal Bancorp
On May 16, 2014, pursuant to the Agreement and Plan of Merger, dated as of October 23, 2013, between the Company and Home, Home merged with and into Cascade with Cascade continuing as the surviving corporation. Immediately after the Home merger, Home Federal Bank, a wholly-owned subsidiary of Home, merged with and into the Bank, with the Bank continuing as the surviving bank.
Each share 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 resulted in Cascade paying $122.2 million in cash and issuing 24,309,131 shares of its common stock.
Critical Accounting Policies and Accounting Estimates
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company believes that its most critical accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments are set forth below. For more information, see Note 1 of our “Notes to Consolidated Financial Statements” included elsewhere in this report.
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 the Company’s reserve for loan losses and 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.
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Management uses historical information to assess the adequacy of the reserve for loan losses and considers qualitative factors, including national and local macroeconomic conditions, real estate market behavior and a range of other factors, in its determination of the reserve. Qualitative factors are reviewed to determine if expected loss rates quantified by the methodology should be adjusted for factors not within its scope.
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. The Company’s methodology includes a separate qualitative risk assessment process that focuses on the commercial and industrial (“C&I”) portion of the portfolio. The C&I loan portfolio is stratified by industry classification using NAICS codes. At the stratified level, factors considered in the evaluation of the loans include current events, economic or market data, loan performance and concentration risks. This C&I qualitative risk assessment is separate from other qualitative risk assessments included in the allowance methodology.
The reserve for loan loss methodology was previously enhanced within the Company’s C&I loan portfolio with respect to shared national credits (“SNCs”). Risk ratings for individual SNCs are estimated using analysis of both public debt ratings and internal ratings. Expected loss rates are determined based upon historical published specific loss data for similar loans based on average losses and losses stratified by public debt ratings. Public ratings combined with internal risk rates are used to determine a minimum historical loss factor for each SNC loan. This amount may be increased for qualitative conditions including macroeconomic environment and observations by the Company’s SNC management group.
A homogeneous pool approach is used to estimate reserves for consumer and small business loans. The Company’s methodology is an estimate that 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 more discussion of Cascade’s methodology of assessing the adequacy of the reserve for credit losses, see “Loan Portfolio and Credit Quality” below in this Item 7.
Deferred Income Taxes
Deferred tax assets (“DTA”) 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. The Company believes it is more likely than not that the DTA will be realized in a tax year that will be subject to a 35% federal effective tax rate and used that rate in providing deferred taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized.
Deferred tax assets are recognized subject to management’s judgment that realization is “more likely than not.” Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. Tax benefits not meeting our realization criteria represent unrecognized tax benefits. We account for interest and penalties as a component of income tax expense.
Cascade reversed its DTA valuation allowance as of June 30, 2013 due to management’s determination that it was more likely than not that the Company’s DTA would be realized. The determination resulted from consideration of both the positive and negative evidence available that can be objectively verified.
The Company refreshes its analysis each year, focusing on the changes in positive and negative evidence. Primary amongst those changes was the elimination of the existence of a cumulative loss position in recent years, with the Company in a four-year cumulative net income position at year end 2016. The Company’s financial position and performance continued to improve substantially during 2014, 2015 and 2016. The acquisition and integration of Home during 2014, as well as the 2016 acquisitions, resulted in an improved earnings performance that is expected to be sustained in future periods. Management continues to believe positive evidence outweighs the negative evidence. As a result of this analysis, management concluded it was more likely than not that forecasted earnings performance would allow for the realization of the DTA in a timely manner.
As of December 31, 2016 and 2015, Cascade had a net deferred tax asset of $45.2 million and $50.7 million, respectively.
OREO and Foreclosed Assets
OREO 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 OREO 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
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acquisition are also recorded as non-interest expense. Gains and losses on the disposition of OREO and foreclosed assets are netted and posted to other non-interest expenses.
Goodwill
Goodwill from an acquisition is the value attributable to unidentifiable intangible elements acquired. At a minimum, annual evaluation of the value of goodwill is required.
An entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Factors assessed include all relevant events and circumstances including macroeconomic conditions, industry and market conditions, cost factors that have a negative effect on earnings and cash flows, overall financial performance, other relevant entity or reporting unit specific events and, if applicable, a sustained decrease in share price.
If after assessing the totality of events or circumstances, such as those described above, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity shall perform a two-step impairment test.
The first step of the impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that goodwill impairment exists.
The second step of the impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.
In relation to the goodwill recognized with the PPFS merger, branch acquisition, and Home merger, management performed a qualitative assessment and concluded as of December 31, 2016 that there have been no material events or circumstances that have changed since the initial recognition of goodwill on August 1, 2016, March 4, 2016, and May 16, 2014, the respective dates of completion, that lead management to believe it is more likely than not that the fair value of the Bank is less than its carrying amount. Therefore, no further testing is deemed necessary.
Economic Conditions
The Company’s banking business is closely tied to the economies of Idaho, Oregon and Washington, which in turn are influenced by regional and national economic trends and conditions. Idaho, Oregon and Washington have recently been experiencing improved economic trends, including gains in employment and increased real estate activity. National and regional economies and real estate prices have generally improved, as has business and consumer confidence. The Company’s markets, however, continue to be sensitive to general economic trends and conditions, including real estate values, and an unforeseen economic shock or a return of adverse economic conditions could cause deterioration of local economies and adversely affect the Company’s business, financial condition and results of operations.
Consolidated Results of Operations — Years ended December 31, 2016, 2015, and 2014
Net Income/Loss
The Company’s consolidated results of operations are dependent to a large degree on net interest income. Interest income is earned based upon average earning asset yields of our loan portfolio and investment securities, including loan fees generated in connection with origination of such loans. The earnings from such sources are partially offset by the cost of funding such assets, including interest paid on customer deposits and the cost of borrowings, as needed. We generate other income primarily through banking-related service charges and fees, card issuer and merchant service fees, mortgage banking, Small Business Administration (“SBA”) lending and fees on interest rate derivative instruments for certain qualified customers. In addition, the Bank generates revenue from its investment in bank-owned life insurance (“BOLI”) as a means to defray employee benefit expenses.
Net income is also affected when loan loss provisions are made to ensure the reserve for loan losses is adequate.
The Company’s largest operating expenses relate to employee and human resource related costs, including compensation and benefits expense. In addition, to support the provision of banking services to its customers, the Bank incurs expenses related to its branch network and facilities, communications, equipment, information technology, card and mobile transaction related activity, insurance expenses, FDIC and other regulatory assessments, professional and outside services, and expenses related to collection and resolution of credit quality issues. Interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
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In 2016, the Company recorded net income of $16.8 million, compared to net income of $20.6 million in 2015 and $3.7 million in 2014. During these periods, net income per basic common share was $0.23, $0.29 and $0.06, respectively. Net income increases in 2016 and 2015 over 2014 levels were primarily a result of improvements in net interest income arising from strong loan and deposit growth, while non-interest income was up on higher transaction activity. 2015 net income also benefited from a $4.0 million credit to the provision for loan losses due to increased loan recoveries. The Company recorded no loan loss provision in 2016 or 2014.
2016 earnings were negatively impacted by a high level of M&A expenses and other transitory items. M&A expense was $4.9 million during 2016 as a consequence of the 2016 acquisitions, as well as due diligence costs incurred related to the First Interstate merger. In addition, 2016 expenses included transitory items of $2.2 million in pre-tax expense for several branch consolidations and $0.8 million in gains on disposition of decommissioned properties. Non-interest expense for 2016 was up $20.8 million as compared to 2015, due primarily to expenses related to M&A activities, as well as the ongoing costs of maintaining the expanded branch network.
The 2015 year-over-year increase in net income from 2014 was primarily related to the full year impact of the Home merger, which closed on May 16, 2014. Non-interest expenses for 2015 were down $6.9 million as compared to 2014, in part because 2014 included significant Home-related transitory costs.
Net Interest Income
For most financial institutions, including the Company, the primary component of earnings is net interest income. Net interest income is the difference between interest income earned, principally from loans and the investment securities portfolio, and interest paid, principally on customer deposits and borrowings. Changes in net interest income typically result from changes in volume, spread and margin. Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.
Net interest income was $93.1 million in 2016, a $14.6 million, or 18.6%, increase from 2015. This improvement is primarily due to net revenues arising from higher earning assets generated by organic and acquisition growth. 2016 also included $1.5 million from interest on called securities in the first quarter of the year. Similarly, net interest income in 2015 increased $13.4 million, or 20.6%, from 2014 levels due to higher volume of average earning assets due to increased loan growth as well as the full year effect of the Home merger.
Yields on earning assets decreased to 3.62% for 2016 as compared to 3.75% in 2015 and 3.89% in 2014 mainly due to the ongoing period of historically low market interest rates. In addition, the mix of earning assets in 2016 had a higher portion of lower yielding cash and investment securities with deployment of funds acquired in the branch acquisition. Lower market interest rates also resulted in the average rates paid on interest bearing liabilities for 2016 declining to 0.13% compared to 0.14% in 2015 and 0.21% in 2014.
Total interest income for 2016 increased $14.9 million, or 18.5%, compared to total interest income in 2015 due mainly to higher average earning assets resulting from organic and acquisition related growth. Similarly, total interest income for 2015 increased approximately $13.0 million, or 19.3%, compared to total interest income in 2014 due to increased average earning assets arising from the full year impact of the Home merger. Total interest expense increased by $0.3 million, or 15.1%, in 2016 as compared to 2015 mainly due to increased levels of interest-bearing deposits, partially offset by the strategic runoff of time deposits. Interest expense for 2015 declined $0.4 million, or 18.2%, as compared to 2014 mainly due to the effect of lower time deposit costs, which were higher in 2014 with the Home merger.
Net Interest Margin (NIM)
The Company’s NIM decreased to 3.54% for 2016 compared to 3.67% for 2015 and 3.76% for 2014. The 2016 and 2015 decreases in NIM were mainly a result of lower loan portfolio yields between the periods as the portfolio repriced over time. Also during this period, the Bank increased the portion of loans with yields floating with the LIBOR index. This was achieved through the acquisition of a portfolio of SNC participations and the ongoing origination of commercial loans bearing interest rates tied to LIBOR. These strategies reduced the Company’s interest rate risk.
The following table presents further analysis of the components of the Company’s NIM and sets forth for 2016, 2015, and 2014 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, NIM and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company:
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Year ended December 31, | ||||||||||||||||||||||||||||||||
(dollars in thousands) | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Yield or Rates | Average Balance | Interest Income/ Expense | Average Yield or Rates | Average Balance | Interest Income/ Expense | Average Yield or Rates | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Investment securities | $ | 593,376 | $ | 15,441 | 2.60 | % | $ | 454,258 | $ | 11,687 | 2.57 | % | $ | 346,235 | $ | 8,982 | 2.59 | % | ||||||||||||||
Interest bearing balances due from other banks | 133,169 | 732 | 0.55 | % | 80,096 | 216 | 0.27 | % | 92,104 | 237 | 0.26 | % | ||||||||||||||||||||
Federal funds sold | 289 | — | — | % | 273 | — | — | % | 128 | — | — | % | ||||||||||||||||||||
Federal Home Loan Bank stock | 3,407 | — | — | % | 12,315 | — | — | % | 19,882 | — | — | % | ||||||||||||||||||||
Loans (1)(2)(3) | 1,902,985 | 79,104 | 4.16 | % | 1,594,082 | 68,484 | 4.30 | % | 1,272,426 | 58,155 | 4.57 | % | ||||||||||||||||||||
Total earning assets/interest income | 2,633,226 | 95,277 | 3.62 | % | 2,141,024 | 80,387 | 3.75 | % | 1,730,775 | 67,374 | 3.89 | % | ||||||||||||||||||||
Reserve for loan losses | (25,380 | ) | (24,640 | ) | (21,533 | ) | ||||||||||||||||||||||||||
Cash and due from banks | 54,195 | 43,214 | 37,152 | |||||||||||||||||||||||||||||
Premises and equipment, net | 46,442 | 42,796 | 40,109 | |||||||||||||||||||||||||||||
Bank-owned life insurance | 55,559 | 53,920 | 46,834 | |||||||||||||||||||||||||||||
Deferred tax asset | 47,483 | 58,937 | 61,364 | |||||||||||||||||||||||||||||
Goodwill | 82,549 | 78,940 | 48,723 | |||||||||||||||||||||||||||||
Core deposit intangibles | 11,213 | 7,240 | 5,154 | |||||||||||||||||||||||||||||
Accrued interest and other assets | 52,271 | 38,043 | 29,155 | |||||||||||||||||||||||||||||
Total assets | $ | 2,957,558 | $ | 2,439,474 | $ | 1,977,733 | ||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||
Interest bearing demand deposits | $ | 1,284,281 | $ | 1,867 | 0.15 | % | $ | 1,027,228 | $ | 1,333 | 0.13 | % | $ | 803,271 | $ | 982 | 0.12 | % | ||||||||||||||
Savings deposits | 174,334 | 62 | 0.04 | % | 133,440 | 40 | 0.03 | % | 101,419 | 31 | 0.03 | % | ||||||||||||||||||||
Time deposits | 213,259 | 192 | 0.09 | % | 202,293 | 493 | 0.24 | % | 203,817 | 1,270 | 0.62 | % | ||||||||||||||||||||
Other borrowings | 8,256 | 33 | 0.40 | % | 1,685 | 6 | 0.36 | % | 2,214 | 6 | 0.27 | % | ||||||||||||||||||||
Total interest bearing liabilities/interest expense | 1,680,130 | 2,154 | 0.13 | % | 1,364,646 | 1,872 | 0.14 | % | 1,110,721 | 2,289 | 0.21 | % | ||||||||||||||||||||
Demand deposits | 868,437 | 700,838 | 566,577 | |||||||||||||||||||||||||||||
Other liabilities | 55,932 | 47,433 | 35,158 | |||||||||||||||||||||||||||||
Total liabilities | 2,604,499 | 2,112,917 | 1,712,456 | |||||||||||||||||||||||||||||
Stockholders’ equity | 353,059 | 326,557 | 265,277 | |||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 2,957,558 | $ | 2,439,474 | $ | 1,977,733 | ||||||||||||||||||||||||||
Net interest income | $ | 93,123 | $ | 78,515 | $ | 65,085 | ||||||||||||||||||||||||||
Net interest spread | 3.49 | % | 3.62 | % | 3.69 | % | ||||||||||||||||||||||||||
Net interest income to earning assets | 3.54 | % | 3.67 | % | 3.76 | % | ||||||||||||||||||||||||||
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(1) Average non-accrual loans included in the computation of average loans were $13.1 million for 2016, $9.3 million for 2015, and $13.1 million for 2014.
(2) Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled $1.9 million in 2016, $2.6 million in 2015, and $2.2 million in 2014.
(3) Includes loans held for sale.
Changes in Interest Income and Expense
The following table shows the dollar amount of increase (decrease) in the Company’s consolidated interest income and expense, and attributes such variance to “volume” or “rate” changes. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.
Year ended December 31, | Year ended December 31, | ||||||||||||||||||||||
2016 over 2015 | 2015 over 2014 | ||||||||||||||||||||||
Total Increase | Amount of Change Attributed to | Total Increase | Amount of Change Attributed to | ||||||||||||||||||||
(dollars in thousands) | (Decrease) | Volume | Rate | (Decrease) | Volume | Rate | |||||||||||||||||
Interest income: | |||||||||||||||||||||||
Interest and fees on loans | $ | 10,620 | $ | 13,271 | $ | (2,651 | ) | $ | 10,329 | $ | 14,701 | $ | (4,372 | ) | |||||||||
Interest on investment securities | 3,754 | 3,579 | 175 | 2,705 | 2,802 | (97 | ) | ||||||||||||||||
Other investment income | 516 | 143 | 373 | (21 | ) | (31 | ) | 10 | |||||||||||||||
Total interest income | 14,890 | 16,993 | (2,103 | ) | 13,013 | 17,472 | (4,459 | ) | |||||||||||||||
Interest expense: | |||||||||||||||||||||||
Interest on deposits: | |||||||||||||||||||||||
Interest bearing demand | 534 | 334 | 200 | 351 | 274 | 77 | |||||||||||||||||
Savings | 22 | 12 | 10 | 9 | 10 | (1 | ) | ||||||||||||||||
Time deposits | (301 | ) | 27 | (328 | ) | (777 | ) | (9 | ) | (768 | ) | ||||||||||||
Other borrowings | 27 | 23 | 4 | — | (1 | ) | 1 | ||||||||||||||||
Total interest expense | 282 | 396 | (114 | ) | (417 | ) | 274 | (691 | ) | ||||||||||||||
Net interest income | $ | 14,608 | $ | 16,597 | $ | (1,989 | ) | $ | 13,430 | $ | 17,198 | $ | (3,768 | ) | |||||||||
Loan Loss Provision
In 2016, the Company recorded no loan loss provision, as compared to a $4.0 million recovery in 2015 and no provision in 2014. The credit to the provision in 2015 was due primarily to a net recovery of prior loan losses of approximately $6.4 million as well as a generally improving credit risk profile within the loan portfolio. At December 31, 2016, the reserve for loan losses was approximately $25.3 million while the reserve for unfunded commitments was $0.4 million, as compared to a reserve for loan losses of $24.4 million and a reserve for unfunded commitments of $0.4 million at December 31, 2015.
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” and “Loan Portfolio and Credit Quality” in Item 7 of this report. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan-related losses.
Non-interest Income
The following table details categories of non-interest income for the years ended December 31, 2016, 2015, and 2014, and the changes therein:
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(dollars in thousands) | 2016 | 2015 | 2014 | 2016 to 2015 change | 2015 to 2014 change | ||||||||||||||
Service charges on deposit accounts | $ | 6,578 | $ | 5,121 | $ | 4,621 | $ | 1,457 | $ | 500 | |||||||||
Card issuer and merchant services fees, net | 9,722 | 7,052 | 6,213 | 2,670 | 839 | ||||||||||||||
Earnings on BOLI | 1,190 | 1,001 | 986 | 189 | 15 | ||||||||||||||
Mortgage banking income, net | 3,396 | 2,617 | 2,296 | 779 | 321 | ||||||||||||||
Swap fee income | 2,483 | 2,533 | 1,847 | (50 | ) | 686 | |||||||||||||
SBA gain on sales and fee income | 1,519 | 1,294 | 1,120 | 225 | 174 | ||||||||||||||
Gain (loss) on sales of investments | — | 475 | — | (475 | ) | 475 | |||||||||||||
ATM income | 1,712 | 876 | 641 | 836 | 235 | ||||||||||||||
Other income | 2,846 | 4,004 | 2,447 | (1,158 | ) | 1,557 | |||||||||||||
Total non-interest income | $ | 29,446 | $ | 24,973 | $ | 20,171 | $ | 4,473 | $ | 4,802 | |||||||||
Non-interest income increased $4.5 million, or 17.9%, in 2016 compared to 2015 due primarily to customer transaction volumes with the solid economy and an expanded customer base driven by the 2016 acquisitions. These factors were particularly evident in service charges and card activity. 2016 mortgage banking volume also improved with low residential mortgage rates. 2016 other income declined from the prior year because 2015 included a contractual arrangement for future revenue-sharing of merchant services of $0.6 million. The 2015 non-interest income increase of $4.8 million, or 23.8%, compared to 2014 was attributable to transaction volume growth across all categories of fee businesses and the full year effect of banking relationships in the Home merger from the prior year. Other income in 2015 benefited from gain on sale of surplus bank properties.
Non-interest Expenses
The following table details categories of non-interest expense for the years ended December 31, 2016, 2015, and 2014, and the changes therein:
(dollars in thousands) | 2016 | 2015 | 2014 | 2016 to 2015 change | 2015 to 2014 change | ||||||||||||||
Salaries and employee benefits | $ | 52,414 | $ | 43,744 | $ | 41,421 | $ | 8,670 | $ | 2,323 | |||||||||
Occupancy | 8,420 | 5,200 | 9,131 | 3,220 | (3,931 | ) | |||||||||||||
Information technology | 5,436 | 3,675 | 4,346 | 1,761 | (671 | ) | |||||||||||||
Equipment | 2,272 | 1,539 | 1,963 | 733 | (424 | ) | |||||||||||||
Communications | 2,497 | 2,130 | 2,263 | 367 | (133 | ) | |||||||||||||
FDIC insurance | 1,899 | 1,321 | 1,517 | 578 | (196 | ) | |||||||||||||
OREO | 171 | 68 | 988 | 103 | (920 | ) | |||||||||||||
Professional services | 6,382 | 5,327 | 8,121 | 1,055 | (2,794 | ) | |||||||||||||
Card issuer | 4,045 | 2,836 | 2,903 | 1,209 | (67 | ) | |||||||||||||
Insurance | 681 | 732 | 1,214 | (51 | ) | (482 | ) | ||||||||||||
CDI Amortization | 1,316 | 820 | 513 | 496 | 307 | ||||||||||||||
Other expenses | 9,697 | 7,004 | 6,961 | 2,693 | 43 | ||||||||||||||
Total non-interest expense | $ | 95,230 | $ | 74,396 | $ | 81,341 | $ | 20,834 | $ | (6,945 | ) | ||||||||
Non-interest expense was $95.2 million in 2016 compared to $74.4 million in 2015 due to significant acquisition-related and transitory expenses incurred in 2016. 2016 run rate expenses were also driven by the acquisition growth that necessitated the hiring of additional full-time employees in banking and supporting significant increases in branch and customer account volumes. 2016 support services were tangentially impacted by this growth, including higher costs for occupancy, IT and the like to maintain an expanded branch and customer banking network.
2015 expense levels declined by $6.9 million from 2014 largely because 2014 included Home merger-related transitory costs including occupancy and professional service related items.
Total salaries and benefits were $52.4 million in 2016 compared to $43.7 million in 2015 and $41.4 million in 2014. The 2016 increase related primarily to higher staffing costs associated with the expanded branch network resulting from the 2016 acquisitions. The 2015 increase in human resource related costs was mainly due to a higher accrual for the cost of equity incentive grants as well as increased cash incentive performance plan results.
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In the aggregate, occupancy, information technology, equipment and communications expenses increased $6.1 million in 2016 compared to 2015 primarily due to the one-time costs incurred in the 2016 acquisitions. In addition, the increase in occupancy in 2016 as compared to 2015 primarily related to the effect of an increase in number of branches from the 2016 acquisitions and one-time costs associated with branch consolidations.
In the aggregate, occupancy, information technology, equipment and communications expenses decreased $5.2 million in 2015 compared to 2014 related to efficiencies gained in the Home merger. In addition, expense levels benefited as a result of down-sizing of branch and administrative facilities, expense reduction in our transition to cloud-based information technology services, and ongoing improvements via contract negotiations for services such as software, equipment and facilities.
FDIC insurance increased $0.6 million in 2016 compared to 2015 due to growth in the Company’s average asset and equity levels, combined with a 2016 change in FDIC methodology which resulted in rate increases for the Bank. 2015 remained stable compared to 2014 levels.
OREO expenses were stable in 2016 compared to 2015 and decreased $0.9 million in 2015 compared to 2014, mainly because of recoveries on certain property dispositions during the year, net of valuation adjustments.
Professional services increased $1.1 million in 2016 compared to 2015 and decreased $2.8 million in 2015 compared to 2014 due primarily to timing of the 2016 acquisitions and Home merger-related expenses, respectively.
Card issuer expense increased in 2016 compared to 2015 due to higher transaction volumes, including the impact of the 2016 acquisitions. Card issuer expense was stable in 2015 compared to 2014.
Insurance expense was stable in 2016 compared to the prior year and decreased $0.5 million in 2015 compared to 2014 because of contract renegotiations and favorable loss performance history.
CDI amortization expense increased $0.5 million in 2016 as compared to 2015 due to the 2016 acquisitions and timing of the amortization of the related CDI assets. Similarly, 2015 CDI amortization expense increased $0.3 million over 2014 due to the full year impact of amortization of Home-related CDI.
Other expenses increased $2.7 million in 2016 as compared to 2015 primarily due to acquisition related expenses and costs associated with supporting our expanded branch network. Other expenses were stable in 2015 compared to 2014.
Income Taxes
In 2016, the Company recorded an income tax provision of $10.6 million as compared to $12.5 million in 2015 and $0.2 million in 2014. The income tax provisions in 2016 represented a 38.7% effective tax rate on its $27.3 million pretax income, slightly higher than statutory rates due to nondeductible merger and acquisition (“M&A”) related items and the impact of other permanent differences. The 2015 provision represented a 37.8% effective rate on its pretax income of $33.1 million, slightly higher than statutory rates due primarily to the impact of permanent differences. The income tax provision in 2014 represents a 4.5% effective tax rate on its $3.9 million of pretax income. This rate differs from statutory rates due primarily to a revaluation of net deferred tax assets, mainly related to an anticipated change in our applicable Federal rate from 34.0% to 35.0%, less additional tax of $1.0 million arising from disallowed costs incurred in connection with the 2016 acquisitions and the First Interstate merger. Other differences to the effective tax rate were related to normal recurring permanent differences and tax credits. The Company expects its book tax rate for 2017 to continue slightly below its net statutory rate due to continued permanent differences.
At December 31, 2016 and 2015, the Company determined it will generate sufficient taxable income in the future to fully utilize its DTA. In its analysis, the Company considers whether it is more likely than not that some portion or all of the DTA will not be realized. 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 ultimate realization of DTA is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Financial Condition
Balance Sheet Overview
At December 31, 2016, total assets were $3.1 billion compared to $2.5 billion at December 31, 2015. The increase in total assets at December 31, 2016 compared to December 31, 2015 relates primarily to increased net loans and investments.
Net loans increased $415.3 million to $2.1 billion at December 31, 2016 compared to $1.7 billion at December 31, 2015. The higher loan balance was largely attributable to organic and acquired loan growth, augmented by the deployment of deposits acquired in the 2016 acquisitions into the wholesale loan portfolio. The wholesale loan book totaled $327.3 million at
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December 31, 2016 as compared to $268.4 million at December 31, 2015. The increase was mainly related to the purchase of residential mortgage adjustable rate mortgages (“ARMs”), partially offset by a decrease in SNCs (included in the C&I balance).
The investment portfolio increased to $635.4 million at December 31, 2016 from $449.7 million a year earlier, mainly due to the deployment of excess cash assumed in the 2016 acquisitions into securities. Cash and cash equivalents marginally decreased to $72.6 million at December 31, 2016 from $77.8 million at December 31, 2015.
Total deposits increased $578.7 million to $2.7 billion at December 31, 2016, as compared to $2.1 billion at December 31, 2015. The increase in deposits related to the 2016 acquisitions as well as the continued growth in core relationship deposits.
The Company had no FHLB borrowings outstanding at December 31, 2016 or December 31, 2015.
Stockholders’ equity increased to $369.7 million at December 31, 2016, which is a $32.9 million increase over the balance at December 31, 2015 of $336.8 million. This increase was predominately due to 2016 net income and shares issued in the PPFS merger.
The following sections provide detailed analysis of the Company’s financial condition, describing its investment securities, loan portfolio composition and credit risk management practices (including those related to the loan loss reserve), as well as its deposits and capital position.
Investment Securities
The following table, which includes available-for-sale and held-to-maturity securities, shows the carrying value of the Company’s portfolio of investments at December 31, 2016, 2015 and 2014:
(dollars in thousands) | 2016 | 2015 | 2014 | ||||||||
U.S. Agency mortgage backed securities (MBS) (1) | $ | 268,525 | $ | 255,734 | $ | 346,355 | |||||
Non-Agency MBS | 248,948 | 118,226 | 66,697 | ||||||||
U.S. Agency asset-backed securities | 7,062 | 8,245 | 9,008 | ||||||||
Corporate securities | 71,323 | 26,320 | 7,470 | ||||||||
Obligations of state and political subdivisions | 38,707 | 40,203 | 41,840 | ||||||||
Total debt securities | 634,565 | 448,728 | 471,370 | ||||||||
Tax credit investments | 287 | 421 | 564 | ||||||||
Mutual fund | 524 | 537 | 527 | ||||||||
Total investment securities | $ | 635,376 | $ | 449,686 | $ | 472,461 | |||||
(1) U.S. Agency MBS include private label MBS of approximately $6.6 million, $7.8 million and $9.3 million at December 31, 2016, 2015 and 2014, respectively, which are supported by FHA/VA collateral.
The Company’s investment portfolio increased by $185.7 million from December 31, 2015 to December 31, 2016, due mainly to the deployment of excess cash assumed in the 2016 acquisitions into U.S. agency MBS, non-agency MBS and corporate securities. The investment portfolio decreased by $22.8 million from December 31, 2014 to December 31, 2015 as the result of the sale of certain short maturity securities in the third quarter of 2015. The increase in 2015 non-agency MBS is mainly related to acquired AAA rated securities composed of ARMs with significant credit support to protect senior holders.
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The following is a summary of the contractual maturities and weighted average yields of investment securities at December 31, 2016:
Type and maturity | Carrying Value | Weighted Average Yield (1) | |||||
U.S. Agency and non-agency MBS | |||||||
Due within 1 year | $ | 82 | 2.28 | % | |||
Due after 1 but within 5 years | 39,860 | 2.41 | % | ||||
Due after 5 but within 10 years | 96,890 | 2.60 | % | ||||
Due after 10 years | 380,641 | 2.67 | % | ||||
Total U.S. Agency and non-agency MBS | 517,473 | 2.63 | % | ||||
U.S. Agency asset-backed securities | |||||||
Due after 10 years | 7,062 | 4.77 | % | ||||
Total U.S. Agency asset-backed securities | 7,062 | 4.77 | % | ||||
Corporate securities | |||||||
Due within 1 year | 3,329 | 1.74 | % | ||||
Due after 1 but within 5 years | 63,213 | 1.55 | % | ||||
Due after 5 but within 10 years | 4,781 | 2.42 | % | ||||
Total Corporate securities | 71,323 | 1.62 | % | ||||
Obligations of state and political subdivisions (1) | |||||||
Due after 1 year but within 5 years | 7,514 | 2.37 | % | ||||
Due after 5 but within 10 years | 23,487 | 3.28 | % | ||||
Due after 10 years | 7,706 | 3.37 | % | ||||
Total State and Political Subdivisions | 38,707 | 3.12 | % | ||||
Total debt securities | 634,565 | 2.57 | % | ||||
Mutual fund | 524 | 3.17 | % | ||||
Tax credit investments | 287 | (35.95 | )% | ||||
Total investment securities | $ | 635,376 | 2.58 | % | |||
(1) Yields on tax-exempt securities are not stated on a tax equivalent basis.
MBS include collateralized mortgage obligations and ARMs, as well as direct pass through securities. Prepayment speeds on mortgages underlying MBS may cause the average life of such securities to be shorter (or longer) than expected.
Investments are classified as “available-for-sale” and “held-to-maturity” and consist mainly of MBS and agency notes backed by government sponsored enterprises, such as Ginnie Mae, Fannie Mae and FHLB. The Company regularly reviews its investment portfolio to determine whether any securities are other-than-temporarily impaired. At December 31, 2016, the investment portfolio had gross unrealized losses on securities of $4.8 million compared to unrealized losses of $1.5 million at December 31, 2015. Management does not believe that these unrealized losses are other-than-temporary.
Loan Portfolio and Credit Quality
Loan Portfolio Composition
Net loans represented approximately 67.5% of total assets as of December 31, 2016. The Company makes most of its loans to customers located within the Company’s primary markets; however, in 2013 Cascade diversified its portfolio by lending to SNCs, which are loans recorded in the C&I portfolio. Cascade’s loan portfolio remains concentrated in real estate related loans because of the nature of the economies in its primary markets. The Company has no significant agricultural loans.
The following table presents the composition of the Company’s December 31 loan portfolio at the dates indicated:
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(dollars in thousands) | 2016 | % of total | 2015 | % of total | 2014 | % of total | 2013 | % of total | 2012 | % of total | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||
Owner occupied | $ | 391,211 | 18.6 | % | $ | 308,331 | 18.3 | % | $ | 259,109 | 17.4 | % | $ | 204,998 | 20.6 | % | $ | 196,821 | 22.9 | % | ||||||||||||||
Non-owner occupied and other | 612,397 | 29.1 | % | 526,562 | 31.2 | % | 497,543 | 33.3 | % | 347,014 | 34.8 | % | 328,480 | 38.3 | % | |||||||||||||||||||
Total commercial real estate loans | 1,003,608 | 47.7 | % | 834,893 | 49.5 | % | 756,652 | 50.7 | % | 552,012 | 55.4 | % | 525,301 | 61.2 | % | |||||||||||||||||||
Construction | 211,038 | 10.0 | % | 130,352 | 7.7 | % | 125,428 | 8.4 | % | 52,503 | 5.3 | % | 45,650 | 5.3 | % | |||||||||||||||||||
Residential real estate | 431,842 | 20.5 | % | 298,390 | 17.7 | % | 204,687 | 13.7 | % | 101,557 | 10.2 | % | 85,494 | 10.0 | % | |||||||||||||||||||
Commercial and industrial | 414,436 | 19.7 | % | 384,444 | 22.8 | % | 368,475 | 24.7 | % | 254,170 | 25.5 | % | 162,213 | 18.9 | % | |||||||||||||||||||
Consumer | 43,488 | 2.1 | % | 39,850 | 2.3 | % | 37,298 | 2.5 | % | 35,990 | 3.6 | % | 39,506 | 4.6 | % | |||||||||||||||||||
Total loans | 2,104,412 | 100.0 | % | 1,687,929 | 100.0 | % | 1,492,540 | 100.0 | % | 996,232 | 100.0 | % | 858,164 | 100.0 | % | |||||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||||
Deferred loan fees | (1,764 | ) | (1,419 | ) | (1,703 | ) | (1,757 | ) | (1,846 | ) | ||||||||||||||||||||||||
Reserve for loan losses | (25,290 | ) | (24,415 | ) | (22,053 | ) | (20,857 | ) | (27,261 | ) | ||||||||||||||||||||||||
Loans, net | $ | 2,077,358 | $ | 1,662,095 | $ | 1,468,784 | $ | 973,618 | $ | 829,057 | ||||||||||||||||||||||||
The following table provides the geographic distribution of the Company’s loan portfolio by region as a percent of total company-wide loans at December 31, 2016. Loan balances outside of Bank geographies are inclusive of certain wholesale purchased loans, such as SNCs and those residential loans where collateral is located outside of the Bank geographies.
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Central Oregon | Northwest Oregon | Southern Oregon | Idaho | Washington | Community Bank Total | Outside Primary Markets | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | % of total | Amount | % of total | Amount | % of total | Amount | % of total | Amount | % of total | Amount | % of total | Amount | % of total | Amount | % of total | |||||||||||||||||||||||||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Owner occupied | $ | 159,175 | 19.0 | % | $ | 31,319 | 8.3 | % | $ | 48,111 | 33.5 | % | $ | 91,920 | 26.1 | % | 60,686 | 47.0 | % | $ | 391,211 | 21.3 | % | $ | — | — | % | $ | 391,211 | 18.6 | % | ||||||||||||||||||||||||
Non-owner occupied and other | 191,721 | 22.9 | % | 195,756 | 52.2 | % | 49,707 | 34.5 | % | 135,539 | 38.4 | % | 39,674 | 30.8 | % | 612,397 | 33.3 | % | — | — | % | 612,397 | 29.1 | % | |||||||||||||||||||||||||||||||
Total commercial real estate loans | 350,896 | 41.9 | % | 227,075 | 60.5 | % | 97,818 | 68.0 | % | 227,459 | 64.5 | % | 100,360 | 77.8 | % | 1,003,608 | 54.6 | % | — | — | % | 1,003,608 | 47.7 | % | |||||||||||||||||||||||||||||||
Construction | 113,612 | 13.6 | % | 33,190 | 8.8 | % | 20,606 | 14.3 | % | 39,448 | 11.2 | % | 4,182 | 3.2 | % | 211,038 | 11.5 | % | — | — | % | 211,038 | 10.0 | % | |||||||||||||||||||||||||||||||
Residential real estate | 208,874 | 24.9 | % | 49,830 | 13.3 | % | 6,563 | 4.6 | % | 31,254 | 8.9 | % | 6,320 | 4.9 | % | 302,841 | 16.5 | % | 129,001 | 48.5 | % | 431,842 | 20.5 | % | |||||||||||||||||||||||||||||||
Commercial and industrial | 143,748 | 17.2 | % | 60,881 | 16.2 | % | 14,899 | 10.4 | % | 40,020 | 11.3 | % | 18,171 | 14.1 | % | 277,719 | 15.1 | % | 136,717 | 51.5 | % | 414,436 | 19.7 | % | |||||||||||||||||||||||||||||||
Consumer | 20,746 | 2.4 | % | 4,535 | 1.2 | % | 3,882 | 2.7 | % | 14,325 | 4.1 | % | — | — | % | 43,488 | 2.3 | % | — | — | % | 43,488 | 2.1 | % | |||||||||||||||||||||||||||||||
Total loans | $ | 837,876 | 100.0 | % | $ | 375,511 | 100.0 | % | $ | 143,768 | 100.0 | % | $ | 352,506 | 100.0 | % | $ | 129,033 | 100.0 | % | $ | 1,838,694 | 100.0 | % | $ | 265,718 | 100.0 | % | $ | 2,104,412 | 100.0 | % | |||||||||||||||||||||||
At December 31, 2016, the contractual maturities of all loans by category were as follows:
(dollars in thousands) | Due within one year | Due after one year, but within five years | Due after five years | Total | |||||||||||
Commercial real estate: | |||||||||||||||
Owner occupied | $ | 6,898 | $ | 45,325 | $ | 338,988 | $ | 391,211 | |||||||
Non-owner occupied and other | 29,499 | 91,063 | 491,835 | 612,397 | |||||||||||
Total commercial real estate loans | 36,397 | 136,388 | 830,823 | 1,003,608 | |||||||||||
Construction | 65,412 | 45,772 | 99,854 | 211,038 | |||||||||||
Residential real estate | 12,886 | 19,942 | 399,014 | 431,842 | |||||||||||
Commercial and industrial | 52,850 | 263,371 | 98,215 | 414,436 | |||||||||||
Consumer | 12,713 | 21,841 | 8,934 | 43,488 | |||||||||||
Total loans | $ | 180,258 | $ | 487,314 | $ | 1,436,840 | $ | 2,104,412 | |||||||
Commercial Real Estate Loan Concentration Risk
Real estate loans have historically represented a significant portion of the Company’s overall loan portfolio and real estate is frequently a material component of collateral for the Company’s loans. Risks associated with real estate loans include fluctuating land values, demand and prices for housing or commercial properties, national, regional and local economic conditions, changes in tax policies, and concentration within the Bank’s market area.
The following provides information on the Company’s commercial real estate loan portfolio and is based upon FDIC call report loan type categorization.
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The $1.0 billion commercial real estate (“CRE”) portfolio generally represents loans to finance retail, office and industrial commercial properties. The expected source of repayment of CRE loans is generally the operations of the borrower’s business, rents or the obligor’s personal income. CRE loans represent approximately 47.7% of total loans outstanding as of December 31, 2016. Approximately 39.0% of CRE loans are made to owner-occupied users of the commercial property, while 61.0% of CRE loans are to obligors who do not directly occupy the property. Management believes that lending to owner-occupied businesses may mitigate, but not eliminate, commercial real estate risk. However, no assurance can be given that residential real estate or other economic factors will not adversely impact the CRE portfolio.
2016 | 2015 | ||||||||||||||||||
(dollars in thousands) | Loans | % of total CRE | % of total loans | Loans | % of total CRE | % of total loans | |||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 391,211 | 39.0 | % | 18.6 | % | $ | 308,331 | 36.9 | % | 18.3 | % | |||||||
Non-owner occupied and other | 612,397 | 61.0 | % | 29.1 | % | 526,562 | 63.1 | % | 31.2 | % | |||||||||
Total commercial real estate loans | $ | 1,003,608 | 100.0 | % | 47.7 | % | $ | 834,893 | 100.0 | % | 49.5 | % | |||||||
Lending and Credit Risk Management
The Company has a comprehensive risk management process to control, underwrite, monitor and manage credit risk in lending. The underwriting of loans relies principally on an analysis of an obligor’s historical and prospective cash flow augmented by collateral valuation analysis, credit bureau information, as well as business plan assessment. Ongoing loan portfolio monitoring is performed by a centralized credit administration function including review and testing of compliance to loan policies and procedures augmented from time to time with third party credit reviews. Internal auditors and bank regulatory examiners periodically sample and test certain credit files as well. Risk of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing. Certain specific types of risks are associated with different types of loans.
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 the Company’s reserve for loan losses and the Company’s 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 December 31, 2016, the Company enhanced its qualitative analysis to include an estimate of inherent portfolio risk during sustained periods of relatively low to moderate incurred credit costs. As of December 31, 2015, the Company enhanced its methodology to better estimate reserves through the implementation of a separate qualitative risk assessment process that focuses on the C&I portion of the portfolio. The C&I loan portfolio is stratified by industry classification using NAICS codes. At the stratified level, factors considered in the evaluation of the loans include current events, economic or market data, loan performance and concentration risks. This qualitative risk assessment is separate from other qualitative risk assessments included in the allowance methodology. Management believes that the reserve for credit losses is adequate, 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 credit losses was $25.7 million, or 1.22% of total loans, as of December 31, 2016, as compared to $24.9 million, or 1.47% of loans, at December 31, 2015. The increase in balance from 2015 to 2016 was a result of net loan recoveries of $0.9 million recorded during 2015. The decline in the ratio in 2015 was mainly a result of increases in loan balances over the course of 2016, including organic growth and wholesale loan acquisition. The reduction was also affected by improved levels of numerous credit quality related metrics.
Purchase accounting resulted in the recording of PPFS and Home loans at fair value, including a discount to the stated value of such loans that reflected a credit mark and an interest rate mark. On a periodic basis, the Company will evaluate the ongoing credit quality of the acquired portfolio to assess whether any remaining credit quality discount balances are adequate. Any deficiency in such determination could result in a provision to the reserve for loan losses.
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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.
The following table allocates the Company’s reserve for credit losses among major loan types for the years indicated.
2016 | 2015 | ||||||||||||||||||
(dollars in thousands) | Reserve for loan and commitment losses | Allocated reserve as a % of loan category | Loan category as a % of total loans | Reserve for loan and commitment losses | Allocated reserve as a % of loan category | Loan category as a % of total loans | |||||||||||||
Commercial real estate | $ | 6,321 | 0.6 | % | 47.7 | % | $ | 3,934 | 0.5 | % | 49.5 | % | |||||||
Construction | 2,196 | 1.0 | % | 10.0 | % | 1,044 | 0.8 | % | 7.7 | % | |||||||||
Residential real estate | 3,325 | 0.8 | % | 20.5 | % | 2,075 | 0.7 | % | 17.7 | % | |||||||||
Commercial and industrial | 10,657 | 2.6 | % | 19.7 | % | 13,969 | 3.6 | % | 22.8 | % | |||||||||
Consumer | 1,203 | 2.8 | % | 2.1 | % | 917 | 2.3 | % | 2.3 | % | |||||||||
Committed/unfunded | 440 | — | % | — | % | 440 | — | % | — | % | |||||||||
Unallocated | 1,588 | — | % | — | % | 2,476 | — | % | — | % | |||||||||
Total reserve for credit losses | $ | 25,730 | 1.2 | % | 100.0 | % | $ | 24,855 | 1.5 | % | 100.0 | % | |||||||
2014 | 2013 | ||||||||||||||||||
Reserve for loan and commitment losses | Allocated reserve as a % of loan category | Loan category as a % of total loans | Reserve for loan and commitment losses | Allocated reserve as a % of loan category | Loan category as a % of total loans | ||||||||||||||
Commercial real estate | $ | 5,614 | 0.7 | % | 50.7 | % | $ | 9,565 | 1.7 | % | 55.4 | % | |||||||
Construction | 1,133 | 0.9 | % | 8.4 | % | 535 | 1.0 | % | 5.3 | % | |||||||||
Residential real estate | 2,121 | 1.0 | % | 13.7 | % | 2,381 | 2.3 | % | 10.2 | % | |||||||||
Commercial and industrial | 6,844 | 1.9 | % | 24.7 | % | 6,261 | 2.5 | % | 25.5 | % | |||||||||
Consumer | 1,047 | 2.8 | % | 2.5 | % | 1,401 | 3.9 | % | 3.6 | % | |||||||||
Committed/unfunded | 440 | — | % | — | % | 440 | — | % | — | % | |||||||||
Unallocated | 5,294 | — | % | — | % | 714 | — | % | — | % | |||||||||
Total reserve for credit losses | $ | 22,493 | 1.5 | % | 100.0 | % | $ | 21,297 | 2.1 | % | 100.0 | % | |||||||
2012 | |||||||||||||||||||
Reserve for loan and commitment losses | Allocated reserve as a % of loan category | Loan category as a % of total loans | |||||||||||||||||
Commercial real estate | $ | 11,596 | 2.2 | % | 61.2 | % | |||||||||||||
Construction | 1,583 | 3.5 | % | 5.3 | % | ||||||||||||||
Residential real estate | 3,551 | 4.2 | % | 10.0 | % | ||||||||||||||
Commercial and industrial | 7,267 | 4.5 | % | 18.9 | % | ||||||||||||||
Consumer | 2,177 | 5.5 | % | 4.6 | % | ||||||||||||||
Committed/unfunded | 440 | — | % | — | % | ||||||||||||||
Unallocated | 1,087 | — | % | — | % | ||||||||||||||
Total reserve for credit losses | $ | 27,701 | 3.2 | % | 100.0 | % | |||||||||||||
In the above table, the percentage of the reserve for loan losses allocated to various loan types is a function of changes in risk ratings, historical loss factors and portfolio composition. 2016 allocations were generally stable with a reduction in allocation
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to the C&I category. This change was related to declining exposure and improved risk ratings in the mining/energy segment of the portfolio. The Bank portfolio holds under 1% of total loans with exposure to this NAICS segment.
Allocations between 2015 and 2014 were reduced with the exception of the portion allocated to the C&I category. This general decline in reserve percentage was a result of continuing improvement in credit quality, including ongoing lower historical loss rates. The increase in the portion allocated to C&I loans is related to the reserve methodology enhancements implemented in 2015 (described elsewhere) that enhanced the model’s qualitative factor related to the SNC portfolio industry concentration exposure. Specifically, the qualitative factor related to the mining and energy industry segment increased due to the economic stress resulting from historic lows in energy prices. The portion of the reserve designated as ‘unallocated’ declined in 2015 due to the implementation of the 2015 enhancements described above.
The above table reflects a trend toward lower levels of unallocated reserves. The Company has determined the level of unallocated reserve is appropriate given improving credit conditions and seasoning of the portfolios.
The following table summarizes the Company’s reserve for loan losses and charge-off and recovery activity for each of the last five years:
Year ended December 31, | |||||||||||||||||||
(dollars in thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Loans outstanding at end of period, net of deferred loan fees | $ | 2,102,648 | $ | 1,686,510 | $ | 1,490,837 | $ | 994,475 | $ | 856,318 | |||||||||
Average loans outstanding during the period | $ | 1,902,985 | $ | 1,594,082 | $ | 1,272,426 | $ | 914,493 | $ | 862,057 | |||||||||
Reserve for loan losses, balance beginning of period | $ | 24,415 | $ | 22,053 | $ | 20,857 | $ | 27,261 | $ | 43,905 | |||||||||
Recoveries: | |||||||||||||||||||
Commercial real estate | 2,957 | 4,150 | 1,801 | 1,034 | 198 | ||||||||||||||
Construction | 368 | 436 | 1,242 | 708 | 584 | ||||||||||||||
Residential real estate | 288 | 850 | 929 | 433 | 262 | ||||||||||||||
Commercial and industrial | 1,470 | 3,820 | 2,158 | 2,694 | 3,094 | ||||||||||||||
Consumer | 920 | 618 | 309 | 263 | 311 | ||||||||||||||
6,003 | 9,874 | 6,439 | 5,132 | 4,449 | |||||||||||||||
Loans charged off: | |||||||||||||||||||
Commercial real estate | (40 | ) | (278 | ) | (1,268 | ) | (3,268 | ) | (13,079 | ) | |||||||||
Construction | — | — | (296 | ) | (1,915 | ) | (264 | ) | |||||||||||
Residential real estate | (110 | ) | (402 | ) | (874 | ) | (590 | ) | (2,620 | ) | |||||||||
Commercial and industrial | (3,074 | ) | (1,377 | ) | (1,563 | ) | (5,508 | ) | (5,024 | ) | |||||||||
Consumer | (1,904 | ) | (1,455 | ) | (1,242 | ) | (1,255 | ) | (1,206 | ) | |||||||||
(5,128 | ) | (3,512 | ) | (5,243 | ) | (12,536 | ) | (22,193 | ) | ||||||||||
Net loan recoveries (charge-offs) | 875 | 6,362 | 1,196 | (7,404 | ) | (17,744 | ) | ||||||||||||
Provision (recovery) charged to operations | — | (4,000 | ) | — | 1,000 | 1,100 | |||||||||||||
Reserve for loan losses, balance end of period | $ | 25,290 | $ | 24,415 | $ | 22,053 | $ | 20,857 | $ | 27,261 | |||||||||
Ratio of net loans charged-off to average loans outstanding | (0.05 | )% | (0.40 | )% | (0.09 | )% | 0.81 | % | 2.06 | % | |||||||||
Ratio of reserve for loan losses to loans at end of period | 1.20 | % | 1.45 | % | 1.48 | % | 2.10 | % | 3.18 | % | |||||||||
The following table presents information with respect to non-performing assets ("NPAs"), for the years presented.
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(dollars in thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Loans on nonaccrual status | $ | 13,695 | $ | 5,053 | $ | 11,685 | $ | 7,226 | $ | 17,220 | |||||||||
Loans past due 90 days or more but not on nonaccrual status | 17 | 68 | 54 | 1,083 | 1,533 | ||||||||||||||
OREO | 1,677 | 3,274 | 3,309 | 3,144 | 6,552 | ||||||||||||||
Total non-performing assets | $ | 15,389 | $ | 8,395 | $ | 15,048 | $ | 11,453 | $ | 25,305 | |||||||||
Selected ratios: | |||||||||||||||||||
Non-performing loans to total gross loans | 0.65 | % | 0.30 | % | 0.79 | % | 0.83 | % | 2.19 | % | |||||||||
NPAs to total gross loans and OREO | 0.73 | % | 0.50 | % | 1.00 | % | 1.14 | % | 2.93 | % | |||||||||
NPAs to total assets | 0.50 | % | 0.34 | % | 0.64 | % | 0.81 | % | 1.94 | % | |||||||||
The following table presents the composition of NPAs for the years presented. As of December 31, 2016, commercial real estate represented 35.4% of NPAs; construction 6.1%; residential real estate 11.0%; C&I 47.4%; and consumer 0.1%.
(dollars in thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 2,794 | $ | 5,206 | $ | 7,090 | $ | 4,443 | $ | 4,836 | |||||||||
Non-owner occupied and other | 2,659 | 434 | 1,940 | 687 | 8,618 | ||||||||||||||
Total commercial real estate loans | 5,453 | 5,640 | 9,030 | 5,130 | 13,454 | ||||||||||||||
Construction | 932 | 503 | 1,505 | 2,894 | 6,833 | ||||||||||||||
Residential real estate | 1,690 | 1,427 | 3,352 | 477 | 1,774 | ||||||||||||||
Commercial and industrial | 7,300 | 810 | 1,060 | 2,946 | 3,231 | ||||||||||||||
Consumer | 14 | 15 | 101 | 6 | 13 | ||||||||||||||
Total non-performing assets | $ | 15,389 | $ | 8,395 | $ | 15,048 | $ | 11,453 | $ | 25,305 | |||||||||
The 2016 increase in loans on nonaccrual status and nonperforming assets relates mainly to the deterioration of an energy sector, shared national credit ("SNC"). The increase occurred when a specific loan was downgraded from substandard rating because of heightened financial stress resulting from a protracted period of low energy prices and oversupply of oil globally that led to a significant restructuring of the industry. The company has less than 1 percent of its loans in the oil and energy sectors of the economy and expects its SNC energy portfolio loans to be resolved in due course. In this regard, the company believes it is maintaining adequate reserves for expected outcomes.
The accrual of interest on a loan is discontinued when, in management’s judgment, the future collectability of principal or interest is in doubt. Loans placed on nonaccrual status may or may not be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on nonaccrual status, it is the Bank’s policy to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such loans is credited to loan principal if, in the opinion of management, full collectability of principal is doubtful. Interest income that was reversed and charged against income was $0.2 million in 2016, $0 in 2015, and $0.2 million in 2014. Interest income that would have been recorded in 2016 had nonaccrual loans at December 31, 2016 been on accrual status throughout the year would have been $0.1 million.
During the Company’s normal loan review procedures, a loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair market value of the collateral if the loan is collateral dependent. Impaired loans are currently measured at the lower of cost or fair value. Certain small balance homogeneous loans are collectively measured for impairment. Impaired loans are charged to the allowance when management believes, after considering economic and business conditions, collection efforts and collateral position that the borrower’s financial condition is such that collection of principal is not probable. At December 31, 2016 and 2015, the Company’s recorded investment in certain loans covered by the allowance that were considered to be impaired was $7.7 million and $6.9 million, respectively, and specific valuation allowances were $2.0 million and $0.2 million, respectively. As the acquired loan portfolio is covered by the valuation adjustment taken at the time of acquisition and as the original mark continues to be more than sufficient, the acquired loan portfolio has not required additional impairment under the allowance methodology.
The following table presents the outstanding balance for loans that previously went through a troubled debt restructuring (“TDRs”) for the years presented:
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December 31, | |||||||||||||||||||
(dollars in thousands) | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||
TDR balance | $ | — | $ | 4,785 | $ | 29,137 | $ | 34,475 | $ | 44,968 | |||||||||
TDRs classified as non-accrual loans | $ | — | $ | 813 | $ | 2,439 | $ | 1,252 | $ | 1,406 | |||||||||
Remaining commitments to lend on TDRs | $ | — | $ | — | $ | — | $ | — | $ | 962 | |||||||||
The TDRs for the years presented above are classified as impaired loans and, in the opinion of management, were reserved appropriately.
Management, to the best of its ability, works to properly classify loans. As of December 31, 2016, management was unaware of any loans that are not disclosed above as nonaccrual, past due or TDR and with respect to which there was known information about possible credit problems of the borrowers that caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonaccrual, past due or TDR. The decrease in TDR balance outstanding since December 31, 2012 has been a result of management’s efforts to remediate loans that are considered TDR by working with the borrowers to pay the loans off, or down.
Bank-Owned Life Insurance
The Company has purchased bank-owned life insurance (“BOLI”) to protect itself against the loss of certain key employees and directors due to death and to offset the Bank’s future obligations to its employees under its retirement and benefit plans. See Note 1 of the Company’s “Notes to Consolidated Financial Statements” in Item 8 of this report. During 2016, 2015, and 2014, the Bank did not purchase any new BOLI. In 2014, the Bank acquired $15.9 million in policies as part of the Home merger. As of December 31, 2016 and 2015, the cash surrender value of the Bank’s total BOLI policies was $57.0 million and $54.5 million, respectively. The Bank recorded income from the BOLI policies of $1.2 million in 2016, $1.0 million in 2015 and $1.0 million in 2014.
The Company owns both general account and separate account BOLI. The separate account BOLI was purchased in the fourth quarter of 2006 as an investment expected to provide a long-term source of earnings to support existing employee benefit plans. The fair value of the general account BOLI is based on the insurance contract cash surrender value. The cash surrender value of the separate account BOLI is the quoted market price of the underlying securities, further supported by a stable value wrap which mitigates, but may not fully insulate against, changes in the fair market value of the underlying securities.
Liabilities
Deposit Liabilities and Time Deposit Maturities
At December 31, 2016, total deposits were $2.7 billion, compared to $2.1 billion at December 31, 2015 and $2.0 billion at December 31, 2014. The increase from December 31, 2015 to December 31, 2016 was across all deposit types and was primarily related to the 2016 acquisitions.
At December 31, 2016, 2015 and 2014, the Company did not have any wholesale brokered deposits, however, at December 31, 2016, 2015 and 2014, the Company had deposits obtained through the Bank’s reciprocal Certificate of Deposit Account Registry Service (“CDARS”) program totaling $8.9 million, $10.0 million and $11.5 million, respectively. Further, at December 31, 2016, the Company had $11.0 million in remaining internet listing service CD’s inherited as part of the PPFS merger. Banks that are not “well-capitalized” or subject to regulatory restrictions are prohibited from acquiring wholesale brokered deposits. Since the lifting of regulatory restrictions in 2013, the Company is under no restrictions with respect to wholesale brokered deposits.
The following table presents the deposit balances by major category as of December 31, 2016 and December 31, 2015:
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December 31, 2016 | December 31, 2015 | |||||||||||||
(dollars in thousands) | Amount | Percentage | Amount | Percentage | ||||||||||
Demand | $ | 916,197 | 34 | % | $ | 727,730 | 35 | % | ||||||
Interest bearing demand | 1,327,975 | 50 | % | 1,044,134 | 50 | % | ||||||||
Savings | 197,279 | 7 | % | 135,527 | 7 | % | ||||||||
Time, $100,000 or greater | 96,849 | 4 | % | 82,730 | 4 | % | ||||||||
Time, less than $100,000 | 123,513 | 5 | % | 92,967 | 4 | % | ||||||||
Total | $ | 2,661,813 | 100 | % | $ | 2,083,088 | 100 | % | ||||||
The following table summarizes the average amount of, and the average rate paid on, each of the deposit categories for the periods shown:
Years ended December 31, | ||||||||||||||||||||
2016 Average | 2015 Average | 2014 Average | ||||||||||||||||||
(dollars in thousands) | Amount | Rate Paid | Amount | Rate Paid | Amount | Rate Paid | ||||||||||||||
Demand | $ | 868,437 | N/A | $ | 700,838 | N/A | $ | 566,577 | N/A | |||||||||||
Interest-bearing demand | 1,284,281 | 0.15 | % | 1,027,228 | 0.13 | % | 803,271 | 0.12 | % | |||||||||||
Savings | 174,334 | 0.04 | % | 133,440 | 0.03 | % | 101,419 | 0.03 | % | |||||||||||
Time | 213,259 | 0.09 | % | 202,293 | 0.24 | % | 203,817 | 0.62 | % | |||||||||||
Total deposits | $ | 2,540,311 | $ | 2,063,799 | $ | 1,675,084 | ||||||||||||||
As of December 31, 2016, the Company’s time deposit liabilities had the following times remaining to maturity:
Time deposits of $100,000 or more (1) | All other time deposits (2) | ||||||||||||
(dollars in thousands) | Amount | Percent | Amount | Percent | |||||||||
Due in 3 months or less | $ | 31,947 | 33.0 | % | $ | 27,626 | 22.4 | % | |||||
Due after 3 months through 6 months | 17,803 | 18.4 | % | 23,473 | 19.0 | % | |||||||
Due after 6 months through 12 months | 22,129 | 22.8 | % | 31,122 | 25.2 | % | |||||||
Due after 12 months | 24,970 | 25.8 | % | 41,292 | 33.4 | % | |||||||
Total | $ | 96,849 | 100.0 | % | $ | 123,513 | 100.0 | % | |||||
(1) Time deposits of $100,000 or more represent 3.6% of total deposits as of December 31, 2016.
(2) All other time deposits represent 4.6% of total deposits as of December 31, 2016.
Other Borrowings
At December 31, 2016, 2015 and 2014, the Bank had no borrowings from the FHLB and no borrowings with the FRB. As of December 31, 2016, 2015 and 2014, the Bank had no off-balance sheet FHLB letters of credit used for collateralization of public deposits held by the Bank.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commitments under credit card lines of credit, and standby letters of credit. These financial instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of amounts recognized in the accompanying consolidated balance sheets. The contractual amounts of these financial instruments reflect the extent of the Bank’s involvement in these particular classes of financial instruments. As of December 31, 2016 and 2015, the Bank had no material commitments to extend credit at below-market interest rates.
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The Bank’s exposure to credit loss for commitments to extend credit, commitments under credit card lines of credit, and standby letters of credit is represented by the contractual amount of these instruments. The Bank follows the same credit policies in underwriting and offering commitments and conditional obligations as it does for on-balance sheet financial instruments.
A schedule of significant off-balance sheet commitments at December 31, 2016 and 2015 is included in the following table (dollars in thousands):
(dollars in thousands) | December 31, 2016 | December 31, 2015 | |||||
Commitments to extend credit | $ | 580,450 | $ | 479,353 | |||
Commitments under credit card lines of credit | 80,612 | 65,988 | |||||
Standby letters of credit | 5,887 | 5,090 | |||||
Total off-balance sheet financial instruments | $ | 666,949 | $ | 550,431 | |||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank applies established credit related standards and underwriting practices in evaluating the creditworthiness of such obligors. The amount of collateral obtained, if it is deemed necessary by the Bank upon the extension of credit, is based on management’s credit evaluation of the counterparty.
The Bank typically does not obtain collateral related to credit card commitments. Collateral held for other commitments varies but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. In the event that 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 was 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 Bank considers the fees collected in connection with the issuance of standby letters of credit to be representative of the fair value of its obligations undertaken in issuing the guarantees. In accordance with GAAP related to guarantees, the Bank defers fees collected in connection with the issuance of standby letters of credit. The fees are then recognized in income proportionately over the life of the related standby letter of credit agreement. At December 31, 2016 and 2015, the Bank’s deferred standby letter of credit fees, which represent the fair value of the Bank’s potential obligations under the standby letter of credit guarantees, were insignificant to the accompanying consolidated financial statements.
Future Contractual Obligations
The following table presents a summary of significant contractual obligations extending beyond one year as of December 31, 2016 and maturing as indicated:
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(dollars in thousands) | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 years | Total | |||||||||||||||
Deposits (1) | $ | 2,595,549 | $ | 48,447 | $ | 17,112 | $ | 705 | $ | 2,661,813 | ||||||||||
Operating leases | 1,726 | 2,470 | 1,315 | 4,513 | 10,024 | |||||||||||||||
Other long-term liabilities (2) | 1,552 | 4,255 | 5,706 | 28,195 | 39,708 | |||||||||||||||
Total contractual obligations | $ | 2,598,827 | $ | 55,172 | $ | 24,133 | $ | 33,413 | $ | 2,711,545 | ||||||||||
(1) Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reflected as obligations due in less than one year. | ||||||||||||||||||||
(2) Includes maximum payments related to employee benefit plans, assuming all future vesting conditions are met. Additional information about employee benefit plans is provided in Note 17 of the Notes to Consolidated Financial Statements in Item 8 below. | ||||||||||||||||||||
Stockholders’ Equity and Capital Resources
The Company’s total stockholders’ equity at December 31, 2016 was $369.7 million, an increase of $32.9 million from $336.8 million at December 31, 2015. The balance at December 31, 2015 was also an increase of $21.3 million from December 31, 2014. The increase in total stockholders’ equity from December 31, 2015 to December 31, 2016 was predominately due to net income recorded for the year ended December 31, 2016 of $16.8 million as well as shares issued in the PPFS merger. The increase in stockholders’ equity from December 31, 2014 to December 31, 2015 primarily was due to net income of $20.6 million recorded for the year ended December 31, 2015.
Federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements, including a leverage limit, risk-based capital requirements and any other measure of capital deemed appropriate by the federal banking regulator for measuring the capital adequacy of an insured depository institution. The Bank has not been operating under any order since 2013.
Effective January 1, 2015, minimum capital requirements increased for both the quantity and quality of capital held by the Bancorp and the Bank. These rules, known as the “Basel III Rules,” include a new common equity Tier 1 capital to risk-weighted assets ratio (“CET1” ratio) of 4.5% and a capital conservation buffer of 2.5% above each of the three minimum risk-based capital requirements, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. The Basel III Rules also (i) raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), (ii) effectively result in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and (iii) require a minimum leverage ratio of 4.0%. The Basel III Rules also make changes to risk weights for certain assets and off-balance-sheet exposures which affects our capital calculations.
At December 31, 2016 and 2015, the Bancorp’s and Bank’s capital ratios exceeded the requirements to be designated as “well-capitalized” under the applicable regulatory capital framework.
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Actual | Regulatory minimum to be “well capitalized” | ||||||||||||
Capital Amount | Ratio | Capital Amount | Ratio | ||||||||||
December 31, 2016 | |||||||||||||
Tier 1 leverage (to average assets) | |||||||||||||
Bancorp | $ | 259,216 | 8.6 | % | $ | 150,754 | 5.0 | % | |||||
Bank | 254,270 | 8.4 | 150,578 | 5.0 | |||||||||
CET1 capital (to risk weighted assets) | |||||||||||||
Bancorp | 259,216 | 10.5 | 159,955 | 6.5 | |||||||||
Bank | 254,270 | 10.3 | 160,237 | 6.5 | |||||||||
Tier 1 capital (to risk-weighted assets) | |||||||||||||
Bancorp | 259,216 | 10.5 | 196,868 | 8.0 | |||||||||
Bank | 254,270 | 10.3 | 197,214 | 8.0 | |||||||||
Total capital (to risk-weighted assets) | |||||||||||||
Bancorp | 284,949 | 11.6 | 246,085 | 10.0 | |||||||||
Bank | 280,003 | 11.4 | 246,518 | 10.0 | |||||||||
December 31, 2015 | |||||||||||||
Tier 1 leverage (to average assets) | |||||||||||||
Bancorp | $ | 227,542 | 9.4 | % | $ | 121,022 | 5.0 | % | |||||
Bank | 223,553 | 9.3 | 120,827 | 5.0 | |||||||||
CET1 capital to risk weighted assets | |||||||||||||
Bancorp | 227,542 | 11.5 | 128,292 | 6.5 | |||||||||
Bank | 223,533 | 11.4 | 128,069 | 6.5 | |||||||||
Tier 1 capital (to risk-weighted assets) | |||||||||||||
Bancorp | 227,542 | 11.5 | 157,898 | 8.0 | |||||||||
Bank | 223,553 | 11.4 | 157,624 | 8.0 | |||||||||
Total capital (to risk-weighted assets) | |||||||||||||
Bancorp | 252,401 | 12.8 | 197,373 | 10.0 | |||||||||
Bank | 248,346 | 12.6 | 197,030 | 10.0 | |||||||||
Liquidity and Sources of Funds
The objective of the Bank’s liquidity management is to maintain ample cash flows to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. At December 31, 2016, liquid assets of the Bank were mainly interest bearing balances held at FRB totaling $16.9 million compared to $22.3 million at December 31, 2015.
Core relationship deposits are the Bank’s primary source of funds. As such, the Bank focuses on deposit relationships with local business and consumer clients who maintain multiple accounts and services at the Bank. The Company views such deposits as the foundation of its long-term liquidity because it believes such core deposits are more stable and less sensitive to changing interest rates and other economic factors compared to large time deposits or wholesale purchased funds. The Bank’s customer relationship strategy has resulted in a relatively higher percentage of its deposits being held in checking and money market accounts, and a lesser percentage in time deposits.
The Bank may augment core deposits with borrowings or wholesale funds from time to time, including brokered deposits. Currently, the Bank accepts local relationship-based reciprocal CDARS and Demand Deposit Marketplace ("DDM deposits"). These deposits are classified as brokered deposits. At December 31, 2016, the Company had $8.9 million in reciprocal CDARS and $80.7 million in reciprocal DDM deposits. At December 31, 2015, the Company had $10.0 million in reciprocal
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CDARS and $76.0 million in reciprocal DDM deposits. Banks that are not “well-capitalized” or that are subject to regulatory restrictions are prohibited from acquiring wholesale brokered deposits. Since the lifting of regulatory restrictions in 2013, the Company is under no restrictions with respect to wholesale brokered deposits.
The Bank accepts deposits from public funds within its primary markets. Current rules imposed by the Oregon State Treasury require that the Bank collateralize 50% of the uninsured public funds held by the Bank. At December 31, 2016, the Bank was in compliance with this statute. Current rules imposed by Washington’s Public Deposit Protection Commission require that well-capitalized banks collateralize 50% of the uninsured public funds held by the Bank. Banks that are less than well-capitalized are required to collateralize 100% of the uninsured public funds held by the Bank. As of December 31, 2016, the Bank was in compliance with this statute. As of December 31, 2016, there were no collateral requirements set on Idaho public deposits.
The Bank also utilizes borrowings and lines of credit as sources of funds. At December 31, 2016, the FHLB had extended the Bank a secured line of credit of $1.1 billion (35.0% of total assets) accessible for short- or long-term borrowings given sufficient qualifying collateral. As of December 31, 2016, the Bank had qualifying collateral pledged for FHLB borrowings totaling $644.7 million, none of which have been utilized by the Bank. At December 31, 2016, the Bank also had undrawn borrowing capacity at FRB of approximately $16.1 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 December 31, 2016, 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 December 31, 2016, the Bank had approximately $666.9 million in outstanding commitments to extend credit, compared to approximately $550.4 million at December 31, 2015. The increase during 2016 relates to additional volume from the 2016 acquisition, as well as growth in existing and new customer lending relationships. 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 December 31, 2016, the Company held unpledged investments with a book value that totaled $488.8 million compared to $331.7 million at December 31, 2015.
As of December 31, 2016, the Bank’s primary liquidity ratio (net cash, plus short-term and marketable assets divided by net deposits and short term liabilities) was 31.84%.
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: (i) 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; (ii) 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 (iii) all accrued expenses, interest and taxes of the institution. The Bank received regulatory approval to adjust retained earnings to zero at September 30, 2012. Accordingly, the Bank’s ability to pay dividends is constrained by the amount of increases in retained earnings from that date.
Inflation
The effect of changing prices on financial institutions is typically different than on non-banking companies since a substantial portion 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 to interest rates can be directly correlated to price level indices; therefore, the Company can best counter inflation over the long term by managing sensitivity to interest rates of its net interest income and controlling levels of non-interest income and expenses.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk and Asset and Liability Management
The goal of the Company’s asset and liability management policy is to maximize long-term profitability under a range of likely interest rate scenarios. Interest rate risk management requires estimating the probability and impact of changes in interest rates on assets and liabilities. The Asset/Liability Management Committee (ALCO) formulates and monitors strategies to control interest rate risk in accordance with policies approved by the Board of Directors. Management engages a qualified independent service provider to assist in modeling, assessing and monthly reporting of interest rate risk. The Bank adjusts its sensitivity to changing interest rates by managing its loan and deposit portfolios with respect to pricing, maturity or contractual characteristics. The Bank may also target the expansion or contraction of specific investment portfolio or borrowing structures to further affect its risk profile. In addition, the Bank is authorized to enter into interest rate swap or other hedging contracts with re-pricing characteristics that tend to moderate interest rate risk. However, there are no material structured hedging instruments in use at this time. Because of the volatility of market rates, event risk and other uncertainties described below, there can be no assurance of the effectiveness of management programs to achieve its interest rate risk objectives.
To assess and estimate the degree of market risk, the Bank utilizes a simulation model that estimates the volatility of Bank earnings and market value of equity resulting from changes in interest rates. In addition to conducting static shock analysis, management models earnings in a wide range of interest rate scenarios over a two-year forecast period. Such scenarios routinely include a “stable” or unchanged scenario and an “estimated” or most likely scenario given current and forecast economic conditions. In addition, scenarios titled “rising rates”, “declining rates”, and “alternate rising rates” are established to stress-test the impact of rate movements that are perceived as less likely, but may still occur. From time to time, management also evaluates the impact of a different yield curve scenario than the one used in the standard two-year forecast analysis. The following table defines the market interest rates projected in various interest rate scenarios. Generally, projected market rates are reached gradually over the 2-year simulation horizon.
December 2016 | December 2018 | ||||
Actual Market Rates | Estimated Rates | Alternate Rising Rates | Rising Rates | Declining Rates | |
Federal Funds Rate | 0.75% | 2.13% | 1.63% | 3.75% | 0.06% |
Prime Rate | 3.75% | 5.13% | 4.63% | 9.75% | 3.06% |
Yield Curve Spread Fed Funds to 10-year Treasury | 1.69% | 1.38% | 1.50% | 0.45% | 1.10% |
Earnings projections include the effect of estimated loan and deposit growth that management deems reasonable; however, such volume projections are not varied by rate scenario. The effect on earnings assumes some changes in non-interest income but not changes to non-interest expense between scenarios. Nonetheless, management focuses on the projected variances in net interest income between each scenario and the stable rate scenario. The following table presents these variances as of December 31, 2016:
% Change in Pro-Forma Net Interest Income vs. Stable Rate Scenario | ||||
Estimated Rates | Alternate Rising Rates | Rising Rates | Declining Rates | |
First Twelve Month Average | 1.08% | 0.62% | 6.33% | (6.03)% |
Second Twelve Month Average | 6.77% | 4.52% | 17.81% | (13.31)% |
In management’s judgment and at this date, the interest rate risk profile of the Bank is reasonably balanced within the most likely range of possible outcomes. The model indicates that should future interest rates actually follow the path indicated in the “estimated” rate scenario, the net interest margin would range between 3.58% and 4.18% all else being equal. However, with the more dramatic changes reflected in the “rising” or “declining” scenarios, the model suggests the margin would likely move outside of this range should such interest rates actually occur. This is mainly because the Bank has a large portion of non-interest bearing funds (approximately 35% of total deposits) that are assumed to be relatively insensitive to changes in interest rates. Thus in the event of rising rates, yields on earning assets would tend to increase at a faster pace than overall cost of funds, leading to an improving margin. Conversely, should rates fall, yields on loans and securities would compress against an already low cost of funds. Management has concluded that the degree of margin and earnings volatility under the above scenarios is acceptable because of the cost of mitigating such risk and because the model suggests that the Bank would still generate satisfactory returns under such circumstances.
53
Please carefully review and consider the following information regarding the risk of placing undue reliance on simulation models, interest rate projections and scenario results. In all scenarios discussed above, results are modeled using management’s estimates as to growth in loans, deposits and other balance sheet items, as well as the expected mix and pricing thereof. These volume estimates are static in the various scenarios. Such estimates may be inaccurate as to future periods. Model results are only indicative of interest rate risk exposure under various scenarios. The results do not encompass all possible paths of future market rates, in terms of absolute change or rate of change, or changes in the shape of the yield curve. Nor does the simulation anticipate changes in credit conditions that could affect results. Likewise, scenarios do not include possible changes in volumes, pricing or portfolio management tactics that may enable management to moderate the effect of such interest rate changes.
Simulations are dependent on assumptions and estimations that management believes are reasonable, although the actual results may vary materially, and there can be no assurance that simulation results are reliable indicators of future earnings under such conditions. This is, in part, because of the nature and uncertainties inherent in simulating future events including: (1) no presumption of changes in asset and liability strategies in response to changing circumstances; (2) model assumptions may differ from actual outcomes; (3) uncertainties as to customer behavior in response to changing circumstances; (4) unexpected absolute and relative loan and deposit volume changes; (5) unexpected absolute and relative loan and deposit pricing levels; (6) unexpected behavior by competitors; and (7) other unanticipated credit conditions or other events impacting volatility in market conditions and interest rates.
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ITEM 8. FINANCIAL STATEMENTS.
The following reports and audited consolidated financial statements and notes thereto are set forth in this report on the pages indicated:
Page | |
Report of Independent Registered Public Accounting Firm - BDO USA, LLP | |
Consolidated Balance Sheets at December 31, 2016 and 2015 | |
For the Years Ended December 31, 2016, 2015, and 2014: | |
Consolidated Statements of Income | |
Consolidated Statements of Comprehensive Income | |
Consolidated Statements of Changes in Stockholders’ Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements | |
55
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Cascade Bancorp
Bend, Oregon
We have audited the accompanying consolidated balance sheets of Cascade Bancorp as of December 31, 2016 and 2015 and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cascade Bancorp at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cascade Bancorp's internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 3, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Spokane, Washington
March 3, 2017
56
Cascade Bancorp & Subsidiary
Consolidated Balance Sheets
December 31, 2016 and 2015
(Dollars in thousands)
2016 | 2015 | ||||||
ASSETS | |||||||
Cash and cash equivalents: | |||||||
Cash and due from banks | $ | 52,561 | $ | 46,354 | |||
Interest bearing deposits | 19,743 | 31,178 | |||||
Federal funds sold | 273 | 273 | |||||
Total cash and cash equivalents | 72,577 | 77,805 | |||||
Investment securities available-for-sale | 494,819 | 310,262 | |||||
Investment securities held-to-maturity, estimated fair value of $142,272 ($142,260 in 2015) | 140,557 | 139,424 | |||||
Federal Home Loan Bank (FHLB) stock | 3,268 | 3,000 | |||||
Loans held for sale | 8,651 | 3,621 | |||||
Loans, net | 2,077,358 | 1,662,095 | |||||
Premises and equipment, net | 48,658 | 42,031 | |||||
Bank-owned life insurance (BOLI) | 56,957 | 54,450 | |||||
Other real estate owned (OREO), net | 1,677 | 3,274 | |||||
Deferred tax asset (DTA), net | 45,172 | 50,673 | |||||
Core Deposit Intangible (CDI) | 12,317 | 6,863 | |||||
Goodwill | 85,852 | 78,610 | |||||
Other assets | 31,195 | 35,921 | |||||
Total assets | $ | 3,079,058 | $ | 2,468,029 | |||
LIABILITIES & STOCKHOLDERS’ EQUITY | |||||||
Liabilities: | |||||||
Deposits: | |||||||
Demand | $ | 916,197 | $ | 727,730 | |||
Interest bearing demand | 1,327,975 | 1,044,134 | |||||
Savings | 197,279 | 135,527 | |||||
Time | 220,362 | 175,697 | |||||
Total deposits | 2,661,813 | 2,083,088 | |||||
Other liabilities | 47,593 | 48,167 | |||||
Total liabilities | 2,709,406 | 2,131,255 | |||||
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; 76,262,184 issued and outstanding as of December 31, 2016; 72,792,570 issued and outstanding as of December 31, 2015 | 471,718 | 452,925 | |||||
Accumulated deficit | (101,001 | ) | (117,772 | ) | |||
Accumulated other comprehensive (loss) income | (1,065 | ) | 1,621 | ||||
Total stockholders’ equity | 369,652 | 336,774 | |||||
Total liabilities and stockholders’ equity | $ | 3,079,058 | $ | 2,468,029 | |||
The accompanying notes are an integral part of the consolidated financial statements.
57
Cascade Bancorp & Subsidiary
Consolidated Statements of Income
Years ended December 31, 2016, 2015 and 2014
(Dollars in thousands, except per share amounts)
2016 | 2015 | 2014 | |||||||||
Interest income: | |||||||||||
Interest and fees on loans | $ | 79,104 | $ | 68,484 | $ | 58,155 | |||||
Interest on investments | 15,441 | 11,687 | 8,982 | ||||||||
Other investment income | 732 | 216 | 237 | ||||||||
Total interest income | 95,277 | 80,387 | 67,374 | ||||||||
Interest expense: | |||||||||||
Deposits: | |||||||||||
Interest bearing demand | 1,867 | 1,333 | 982 | ||||||||
Savings | 62 | 40 | 31 | ||||||||
Time | 192 | 493 | 1,270 | ||||||||
Other borrowings | 33 | 6 | 6 | ||||||||
Total interest expense | 2,154 | 1,872 | 2,289 | ||||||||
Net interest income | 93,123 | 78,515 | 65,085 | ||||||||
Loan loss recovery | — | (4,000 | ) | — | |||||||
Net interest income after loan loss provision | 93,123 | 82,515 | 65,085 | ||||||||
Non-interest income: | |||||||||||
Service charges on deposit accounts | 6,578 | 5,121 | 4,621 | ||||||||
Card issuer and merchant services fees, net | 9,722 | 7,052 | 6,213 | ||||||||
Earnings on BOLI | 1,190 | 1,001 | 986 | ||||||||
Mortgage banking income, net | 3,396 | 2,617 | 2,296 | ||||||||
Swap fee income | 2,483 | 2,533 | 1,847 | ||||||||
SBA gain on sales and fee income | 1,519 | 1,294 | 1,120 | ||||||||
Gain on sales of investments | — | 475 | — | ||||||||
ATM income | 1,712 | 876 | 641 | ||||||||
Other income | 2,846 | 4,004 | 2,447 | ||||||||
Total non-interest income | 29,446 | 24,973 | 20,171 | ||||||||
Non-interest expense: | |||||||||||
Salaries and employee benefits | 52,414 | 43,744 | 41,421 | ||||||||
Occupancy | 8,420 | 5,200 | 9,131 | ||||||||
Information technology | 5,436 | 3,675 | 4,346 | ||||||||
Equipment | 2,272 | 1,539 | 1,963 | ||||||||
Communications | 2,497 | 2,130 | 2,263 | ||||||||
FDIC insurance | 1,899 | 1,321 | 1,517 | ||||||||
OREO expense | 171 | 68 | 988 | ||||||||
Professional services | 6,382 | 5,327 | 8,121 | ||||||||
Card issuer | 4,045 | 2,836 | 2,903 | ||||||||
Insurance | 681 | 732 | 1,214 | ||||||||
CDI Amortization | 1,316 | 820 | 513 | ||||||||
Other expenses | 9,697 | 7,004 | 6,961 | ||||||||
Total non-interest expense | 95,230 | 74,396 | 81,341 | ||||||||
Income before income taxes | 27,339 | 33,092 | 3,915 | ||||||||
Income tax provision | (10,568 | ) | (12,513 | ) | (178 | ) | |||||
Net income | $ | 16,771 | $ | 20,579 | $ | 3,737 | |||||
Basic and diluted income per share: | |||||||||||
Net income per common share (basic) | $ | 0.23 | $ | 0.29 | $ | 0.06 | |||||
Net income per common share (diluted) | $ | 0.23 | $ | 0.29 | $ | 0.06 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
58
Cascade Bancorp & Subsidiary
Consolidated Statements of Comprehensive Income
Years ended December 31, 2016, 2015 and 2014
(Dollars in thousands)
2016 | 2015 | 2014 | |||||||||
Net Income | $ | 16,771 | $ | 20,579 | $ | 3,737 | |||||
Other Comprehensive (loss) income: | |||||||||||
Change in unrealized (losses) gains on investment securities available-for-sale | (4,332 | ) | (1,368 | ) | 4,515 | ||||||
Realized net gains reclassified from other comprehensive income | — | (475 | ) | — | |||||||
Tax effect on securities | 1,646 | 629 | (1,644 | ) | |||||||
Total other comprehensive (loss) income | (2,686 | ) | (1,214 | ) | 2,871 | ||||||
Comprehensive income | $ | 14,085 | $ | 19,365 | $ | 6,608 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
59
Cascade Bancorp & Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
Years ended December 31, 2016, 2015 and 2014
(Dollars in thousands)
Number of shares | Common stock | Accumulated deficit | Accumulated other comprehensive income (loss) | Total Stockholders’ equity | ||||||||||||||
Balances at December 31, 2013 | 47,592,061 | $ | 330,839 | $ | (142,088 | ) | $ | (36 | ) | $ | 188,715 | |||||||
Comprehensive income (loss) | — | — | 3,737 | 2,871 | 6,608 | |||||||||||||
Issuance of common stock, net | 24,454,170 | 119,285 | — | — | 119,285 | |||||||||||||
Restricted stock grants, net | 445,619 | — | — | — | — | |||||||||||||
Stock-based compensation expense | — | 1,214 | — | — | 1,214 | |||||||||||||
Tax effect on nonvested restricted stock | — | (339 | ) | — | — | (339 | ) | |||||||||||
Balances at December 31, 2014 | 72,491,850 | 450,999 | (138,351 | ) | 2,835 | 315,483 | ||||||||||||
Comprehensive income (loss) | — | — | 20,579 | (1,214 | ) | 19,365 | ||||||||||||
Issuance of common stock, net | 207,266 | — | — | — | — | |||||||||||||
Restricted stock grants, net | 93,454 | — | — | — | — | |||||||||||||
Stock-based compensation expense | — | 2,482 | — | — | 2,482 | |||||||||||||
Tax effect on nonvested restricted stock | — | (556 | ) | — | — | (556 | ) | |||||||||||
Balances at December 31, 2015 | 72,792,570 | 452,925 | (117,772 | ) | 1,621 | 336,774 | ||||||||||||
Comprehensive income (loss) | — | — | 16,771 | (2,686 | ) | 14,085 | ||||||||||||
Issuance of common stock, net | 3,171,940 | 16,246 | — | — | 16,246 | |||||||||||||
Restricted stock grants, net | 297,674 | — | — | — | — | |||||||||||||
Stock-based compensation expense | — | 3,124 | — | — | 3,124 | |||||||||||||
Tax effect on nonvested restricted stock | — | (577 | ) | — | — | (577 | ) | |||||||||||
Balances at December 31, 2016 | 76,262,184 | $ | 471,718 | $ | (101,001 | ) | $ | (1,065 | ) | $ | 369,652 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
60
Cascade Bancorp & Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2016, 2015 and 2014
(Dollars in thousands)
2016 | 2015 | 2014 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 16,771 | $ | 20,579 | $ | 3,737 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 4,955 | 5,294 | 4,694 | ||||||||
Loan loss credit | — | (4,000 | ) | — | |||||||
Write-down of OREO | — | 73 | 1,163 | ||||||||
Decrease/ (increase) in deferred income taxes | 8,657 | 16,601 | (577 | ) | |||||||
Mortgage loan sales (premiums) discounts, net | (2,850 | ) | (1,505 | ) | (1,181 | ) | |||||
Gains on sales of investment securities available-for-sale | — | (475 | ) | — | |||||||
Deferred benefit plan income | (1,299 | ) | (1,806 | ) | (1,287 | ) | |||||
Stock-based compensation expense | 3,124 | 2,482 | 1,214 | ||||||||
Gains on sales of OREO | (86 | ) | (192 | ) | (203 | ) | |||||
Loss on sale of premises and equipment | 963 | — | — | ||||||||
Increase in cash surrender value of BOLI | (1,016 | ) | (1,001 | ) | (986 | ) | |||||
Increase in other assets | 7,468 | (8,364 | ) | (3,050 | ) | ||||||
Increase (decrease) in other liabilities | (7,216 | ) | 5,422 | (2,830 | ) | ||||||
Originations of mortgage loans for sale | (110,038 | ) | (72,319 | ) | (67,823 | ) | |||||
Proceeds from sales of mortgage loans | 107,858 | 76,893 | 72,673 | ||||||||
Net cash provided by operating activities | 27,291 | 37,682 | 5,544 | ||||||||
Cash flows from investing activities: | |||||||||||
Purchases of investment securities available-for-sale | (326,896 | ) | (101,689 | ) | (76,757 | ) | |||||
Purchases of investment securities held to maturity | (6,464 | ) | — | (2,292 | ) | ||||||
Proceeds from maturities, calls, sales and prepayments of investment securities available-for-sale | 137,702 | 108,489 | 88,466 | ||||||||
Proceeds from maturities and calls of investment securities held-to-maturity | 5,000 | 12,618 | 19,193 | ||||||||
Proceeds from redemption of FHLB stock | 13,096 | 22,646 | 882 | ||||||||
Purchases of FHLB stock | (12,940 | ) | — | — | |||||||
Loan originations, net of collections | (312,637 | ) | (190,519 | ) | (102,946 | ) | |||||
Proceeds from sale of loans | — | 3,150 | — | ||||||||
Purchases of loans | — | (3,500 | ) | — | |||||||
Purchases of premises and equipment | (2,388 | ) | (749 | ) | (1,034 | ) | |||||
Proceeds from sales of premises and equipment | — | 26 | — | ||||||||
Proceeds from sales of other assets | — | 2,468 | 2,669 | ||||||||
Proceeds from sales of OREO | 2,050 | 1,712 | 2,580 | ||||||||
Net cash received from acquisition of Home | — | — | 38,620 | ||||||||
Net cash assumed in Bank of America branch acquisition | 456,611 | — | — | ||||||||
Net cash assumed in Prime Pacific Financial Services, Inc. acquisition | 7,625 | — | — | ||||||||
Net cash used in investing activities | (39,241 | ) | (145,348 | ) | (30,619 | ) | |||||
Cash flows from financing activities: | |||||||||||
Net increase in deposits | 7,292 | 102,938 | 53,654 | ||||||||
Proceeds from stock options exercised | 7 | — | — | ||||||||
Tax effect of non-vested restricted stock | (577 | ) | (556 | ) | (339 | ) | |||||
FHLB advance borrowing | 327,000 | 95,000 | 110,000 | ||||||||
Repayment of FHLB advances | (327,000 | ) | (95,000 | ) | (137,000 | ) | |||||
Net cash provided by financing activities | 6,722 | 102,382 | 26,315 | ||||||||
Net (decrease) increase in cash and cash equivalents | (5,228 | ) | (5,284 | ) | 1,240 | ||||||
Cash and cash equivalents at beginning of period | 77,805 | 83,089 | 81,849 | ||||||||
Cash and cash equivalents at end of period | $ | 72,577 | $ | 77,805 | $ | 83,089 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
61
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
1. Basis of presentation and summary of significant accounting policies
Basis of presentation
The accompanying 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”). All significant intercompany accounts and transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform with the 2016 presentation. None of these reclassifications have an effect on net income, net cash flows or equity.
Description of business
The Bank conducts a general banking business, operating branches in Central, Southern, Coastal and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho and Seattle, Washington metro areas. Banking activities include the usual lending and deposit functions of a community and business bank: commercial, construction, real estate, installment, credit card, and mortgage loans; checking, money market, time deposit, and savings accounts; internet banking and bill payment; automated teller machines, and safe deposit facilities. Additionally, the Bank originates and sells mortgage loans into the secondary market and offers trust and investment services.
Method of accounting
The Company prepares its consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) and prevailing practices within the banking industry. The Company utilizes the accrual method of accounting which recognizes income and gains when earned and expenses and losses when incurred. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income, gains, expenses, and losses during the reporting periods. Actual results could differ from those estimates.
Segment reporting
The Company is managed by legal entity and not by lines of business. The Company has determined that its operations are solely in the community and business banking industry and consist of traditional banking services, including lending activities; acceptance of demand, savings, and time deposits; business services; and trust services. These products and services have similar distribution methods, types of customers and regulatory responsibilities. The performance of the Company is reviewed by the executive management team and the Company’s Board of Directors (the “Board”) on a monthly basis. All of the executive officers of Bancorp are members of the Bank’s executive management team, and operating decisions are made based on the performance of the Company as a whole. Accordingly, disaggregated segment information is not required to be presented in the accompanying consolidated financial statements, and the Company will continue to present one segment for financial reporting purposes.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash items in process of collection), interest bearing deposits with the Federal Reserve Bank of San Francisco (the “FRB”) and FHLB, and federal funds sold. Generally, any interest bearing deposits are invested for a maximum of 90 days. Federal funds are generally sold for one-day periods.
The Bank maintains balances in correspondent bank accounts which, at times, may exceed federally insured limits. In addition, federal funds sold are essentially uncollateralized loans to other financial institutions. Management believes that its risk of loss associated with such balances is minimal due to the financial strength of the correspondent banks and counterparty financial institutions. The Bank has not experienced any losses in such accounts. At December 31, 2016, the Bank was not required to maintain any specific balances in correspondent bank accounts.
62
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Supplemental disclosures of cash flow information
Noncash investing and financing activities consist of unrealized gains and losses on investment securities available-for-sale, net of income taxes, issuance of nonvested restricted stock, and stock-based compensation expense, all as disclosed in the accompanying consolidated statements of changes in stockholders’ equity; the net capitalization of originated mortgage-servicing rights, as disclosed in Note 6; assets and liabilities assumed in the acquisition of Prime Pacific Financial Services, Inc., the Bank of America, N.A. branch acquisition and the acquisition of Home Federal Bancorp, Inc., as disclosed in Note 2; the transfer of approximately $0.4 million, $1.6 million, and $0.2 million of loans to other real estate owned in 2016, 2015, and 2014, respectively; and the transfer of approximately $0.9 million, $0.4 million, and $5.9 million of fixed assets to other assets in 2016, 2015, and 2014, respectively.
During 2016, 2015, and 2014 the Company paid approximately $2.1 million, $1.9 million, and $2.2 million, respectively, in interest expense.
During 2016, 2015 and 2014, the Company made income tax payments of $0.7 million, $1.1 million and nil, respectively.
Investment securities
Investment securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.
Investment securities that are purchased and held principally for the purpose of selling in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in non-interest income. The Company had no trading securities during 2016, 2015, and 2014.
Investment securities that are not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as other comprehensive income or loss, net of income taxes. Management determines the appropriate classification of securities at the time of purchase.
Investment securities are valued utilizing a number of methods including quoted prices in active markets, quoted prices for similar assets, quoted prices for securities in inactive markets, and inputs derived principally from - or corroborated by -observable market data by correlation or other means.
Gains and losses on the sales of available-for-sale securities are determined using the specific-identification method. Premiums and discounts on available-for-sale securities are recognized in interest income using the interest method generally over the period to maturity.
In estimating other-than-temporary impairment (“OTTI”) losses, management considers, among other things, (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates, and (4) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are deemed to be OTTI would result in write-downs of the individual securities to their fair value. The fair value of the security then becomes the new cost basis. The related write-downs to fair value for available-for-sale equity securities would be included in earnings as realized losses. For individual debt securities which the Company does not intend to sell and for which it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the OTTI losses would be evaluated and (1) the portion related to credit losses would be included in earnings as realized losses and (2) the portion related to market or other factors would be recognized in other comprehensive income or loss. Credit loss is recorded if the present value of cash flows is less than the amortized cost. For individual debt securities which the Company intends to sell or for which it more likely than not will not recover all of its amortized cost, the OTTI is recognized in earnings equal to the entire difference between the security’s cost basis and its fair value at the consolidated balance sheet date. For individual debt securities for which credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis. Management believes that all unrealized losses on investment securities at December 31, 2016 and 2015 are temporary (see Note 4).
63
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
FHLB stock
On May 31, 2015, the FHLB Seattle merged with and into FHLB Des Moines, as approved by the FHFA on December 22, 2014. As part of the FHLB merger, each share of FHLB Seattle stock outstanding was converted into one share of FHLB Des Moines stock. Immediately following the merger, all excess shares were repurchased or issued as needed to meet the membership stock requirements. Our investment in FHLB stock increased from $3.0 million at December 31, 2015 to $3.3 million at December 31, 2016.
As a member of the FHLB system, the Bank is required to maintain a minimum investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2016 and 2015, the Bank met its minimum required investment. The Bank may request redemption at par value of any FHLB stock in excess of the minimum required investment; however, stock redemptions are at the discretion of the FHLB.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Loans
Loans are stated at the amount of unpaid principal, net of any premium or discount, reduced by the reserve for loan losses, the undisbursed portion of loans in process, and deferred loan fees.
Interest income on loans is accrued daily based on the principal amounts outstanding. Allowances are established for uncollected interest on loans for which the interest is determined to be uncollectible. Generally, all loans past due (based on contractual terms) 90 days or more are placed on non-accrual status and internally classified as substandard. Any interest income accrued at that time is reversed. Subsequent collections are applied proportionately to past due principal and interest, unless collectability of principal is in doubt, in which case all payments are applied to principal. Loans are removed from non-accrual status only when the loan is deemed current, and the collectability of principal and interest is no longer doubtful, or, on one-to-four family loans, when the loan is less than 90 days delinquent.
The Bank charges fees for originating loans. These fees, net of certain loan origination costs, are deferred and amortized to interest income, on the level-yield basis, over the loan term. If the loan is repaid prior to maturity, the remaining unamortized deferred loan origination fee is recognized in interest income at the time of repayment.
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 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.
At December 31, 2016 and 2015, management believes that the Company’s reserve for loan losses is at an appropriate level under current circumstances and prevailing economic conditions. However the reserve for loan losses is based on estimates and ultimate 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.
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
64
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Company seeks to enhance and refine its methodology such that the reserve is at an appropriate level and responsive to changing conditions. The Company’s methodology includes a separate qualitative risk assessment process that focuses on the commercial and industrial (“C&I”) portion of the portfolio. The C&I loan portfolio is stratified by industry classification using NAICS codes. At the stratified level, factors considered in the evaluation of the loans include current events, economic or market data, loan performance and concentration risks. This qualitative risk assessment is separate from other qualitative risk assessments included in the allowance methodology.
As of June 30, 2013, management implemented a homogeneous pool approach to estimating reserves for consumer and small business loans. As of March 31, 2015, the reserve for loan loss methodology was enhanced within the Company’s C&I loan portfolio with respect to its holdings of shared national credits (“SNCs”). Risk ratings for individual SNCs are estimated using analysis of both public debt ratings and internal ratings. Expected loss rates are determined based upon historical published specific loss data for similar loans based on average losses and losses stratified by public debt ratings. Public ratings combined with internal risk rates are used to determine a minimum historical loss factor for each SNC loan. This amount may be increased for qualitative conditions including macroeconomic environment and observations by the Company’s SNC management group. The SNC lending strategy is intended to diversify the Company’s credit risk profile geographically and by industry. Additionally, such loans enhance the Company’s interest rate risk profile as they float with LIBOR rates.
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.
Reserves for impaired loans are either specifically allocated within the reserve for loan losses or reflected as a partial charge-off of the loan balance. The Bank considers loans to be impaired when management believes that it is probable that either principal and/or interest amounts due will not be collected according to the contractual terms. Impairment is measured on a loan-by-loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, including the loan’s observable market price, the estimated fair value of the loan’s underlying collateral, or the value of a related guaranty. A significant portion of the Bank’s loans are either (1) collateralized by real estate, whereby the Bank primarily measures impairment based on the estimated fair value of the underlying collateral less the cost to sell, or the value of a related guaranty, or (2) are supported by underlying cash flows, whereby impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Accordingly, changes in such estimated collateral values or future cash flows could result in actual losses which differ from those estimated at the date of the consolidated balance sheets. Impairment measurements may also include consideration of information that becomes available subsequent to year-end. Small balance loans are reserved for based on the applicable loan segment and are reserved at the related pool rate (regardless of dollar amount). Generally, shortfalls on impaired small balance loans are charged off and the Bank does not establish specific reserves. Small balance loans are evaluated for impairment based on the borrower’s difficulty in making payments, an analysis of the borrower’s repayment capacity, collateral coverage, and shortfall, if any, created by reductions in payments or principal. Generally, the Bank evaluates a loan for impairment when a loan is determined to be adversely classified; small balance loans are monitored based on payment performance and are evaluated for impairment no later than 90 days past due.
The reserve for loan losses may include an unallocated amount based upon the Company’s judgment as to possible credit losses inherent in the loan portfolio that may not have been captured by historical loss experience, qualitative factors, or specific evaluations of impaired loans. Unallocated reserves may be adjusted for factors including, but not limited to, unexpected or unusual events, volatile market and economic conditions, effects of changes or seasoning in methodologies, regulatory guidance and recommendations, or other factors that may impact operating conditions and loss expectations. Management’s judgment as to unallocated reserves is determined in the context of, but separate from, the historical loss trends and qualitative factors described above. The unallocated reserve for loan losses of $1.6 million at December 31, 2016 has decreased $0.9 million from the balance at December 31, 2015. Management believes that the amount of unallocated reserve for loan losses is appropriate and will continue to evaluate the amount going forward.
Due to the judgment involved in the determination of the qualitative and unallocated portions of the reserve for loan losses, the relationship of these components to the total reserve for loan losses may fluctuate from period to period.
Troubled debt restructurings (“TDRs”)
A loan is classified as a TDR when a borrower is experiencing financial difficulties and the Company grants a concession to the borrower in the restructuring that the Company would not otherwise consider in the origination of a loan. In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession. These modifications are not
65
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
considered TDRs. In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate. These modifications would also not be considered TDRs. Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs. A TDR loan is considered to be impaired and is individually evaluated for impairment. As with other impaired loans, a specific reserve is estimated for each TDR based on the difference between expected future cash flows discounted at the original contractual rate and the current balance of the loan. For collateral dependent loans, expected future cash flows include the estimated market value less cost to sell.
Reserve for unfunded loan commitments
The Company maintains a separate reserve for losses related to unfunded loan commitments. The reserve for unfunded loan commitments represents management’s estimate of losses inherent in the Bank’s unfunded loan commitments. Management estimates the amount of probable losses related to unfunded loan commitments by applying the loss factors used in the reserve for loan loss methodology to an estimate of the expected amount of funding and applies this adjusted factor to the unused portion of unfunded loan commitments. The reserve for unfunded loan commitments totaled $0.4 million at both December 31, 2016 and 2015 and these amounts are included in other liabilities in the accompanying consolidated balance sheets. Increases (decreases) in the reserve for unfunded loan commitments are recorded in non-interest expenses in the accompanying consolidated statements of income.
Mortgage servicing rights (“MSRs”)
Net MSRs were $2.3 million at December 31, 2016 and $2.2 million at December 31, 2015. MSRs are capitalized at their allocated carrying value and amortized in proportion to, and over the period of, estimated future net servicing revenue. MSRs are measured by allocating the carrying value of loans between the assets sold and interest retained, based upon the relative estimated fair value at date of sale. Impairment of MSRs is assessed based on the estimated fair value of servicing rights. Fair value is estimated using discounted cash flows of servicing revenue less servicing costs taking into consideration market estimates of prepayments as applied to underlying loan type, note rate, and term. Impairment adjustments, if any, are recorded through a valuation allowance. Fees earned for servicing mortgage loans are reported as income when the related mortgage loan payments are received.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the shorter of the estimated useful lives of the assets or terms of the leases. Estimated useful lives of the assets range predominantly as follows: 3 to 15 years for land improvements, 5 to 39 years for buildings, 3 to 5 years for computers, and 3 to 15 years for furniture, fixtures, and other equipment. Amortization of leasehold improvements is included in depreciation and amortization expense in the accompanying consolidated financial statements.
As part of an ongoing review of the valuation and amortization of premises and equipment, the Company assesses the carrying value of such assets if facts and circumstances suggest that they may be impaired. If this review indicates that the assets will not be fully recoverable, the carrying value of the Company’s premises and equipment would be reduced to its estimated fair value.
Core deposit intangibles (“CDI”)
CDI represents amounts recorded in business combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the customer relationships associated with the deposits.
The Company has CDI of $12.3 million and $6.9 million at December 31, 2016 and 2015, respectively. The increase is a result of the 2016 acquisitions.
Bank-owned life insurance (“BOLI”)
The Company has purchased BOLI to protect itself against the loss of certain key employees and directors due to death and as a source of long-term earnings to support certain employee benefit plans. At December 31, 2016 and 2015, the Company had $28.9 million and $28.6 million, respectively, of separate account BOLI and $28.0 million and $25.9 million, respectively, of general account BOLI.
66
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The cash surrender value of the separate account BOLI is the quoted market price of the underlying securities, further supported by a stable value wrap, which mitigates, but does not fully protect, the investment against changes in the fair market value depending on the severity and duration of market price disruption. The fair value of the general account BOLI is based on the insurance contract cash surrender value. The underlying funds within the separate account structure generated positive performance during 2016, 2015, and 2014. There can be no assurance that losses in excess of the stable value wrap protection will not occur on separate account BOLI in the future.
Other Real Estate Owned (“OREO”)
OREO, acquired through foreclosure or deeds in lieu of foreclosure, is carried at the lower of cost or estimated net realizable value. When the property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the reserve for loan losses. Holding costs, subsequent write-downs to net realizable value, if any, and any disposition gains or losses are included in non-interest expenses. The valuation of OREO is subjective in nature and may be adjusted in the future because of changes in economic conditions. The valuation of OREO is also subject to review by federal and state bank regulatory authorities who may require increases or decreases to carrying amounts based on their evaluation of the information available to them at the time of their examinations of the Bank. Management considers third-party appraisals, as well as independent fair market value assessments from realtors or persons involved in selling OREO, in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated on an annual basis, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes - and any related adjustments - are generally recorded at the time such information is received. OREO valuation adjustments have been recorded on certain OREO properties. These adjustments are recorded in OREO expense in the Company’s consolidated statements of income.
OREO, net of specific property valuation allowances, was $1.7 million at December 31, 2016 and $3.3 million at December 31, 2015.
Advertising
Advertising costs are generally charged to expense during the year in which they are incurred. Advertising expense was $0.6 million for the years ended December 31, 2016 and 2015 and $0.9 million for the year ended December 31, 2014.
Income taxes
The provision (benefit) for income taxes is based on income and expenses as reported for consolidated financial statement purposes using the “asset and liability method” for accounting for deferred 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 (benefit) for income taxes.
In estimating 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.
At December 31, 2016 and 2015, the Company had a $0.1 million valuation allowance against its DTA due to state attributes that will expire without benefit.
Deferred tax assets are recognized subject to management’s judgment that realization is “more likely than not.” Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. Tax benefits not meeting our realization criteria represent unrecognized tax benefits. We account for interest and penalties as a component of income tax expense.
67
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Derivatives and Hedging Activities
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 enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate loan. The Company then enters into a corresponding swap agreement with a third party in order to offset its exposure on the fixed components of the customer agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC 815, the instruments are marked to market in earnings. The Company recorded non-interest income of $2.5 million for the years ended December 31, 2016 and 2015 and $1.8 million for the year ended December 31, 2014, related to swap fee income. The offsetting fair value of the swap agreement assets and liabilities were $5.2 million at December 31, 2016 and $8.6 million as of December 31, 2015. The notional amount of open interest rate swap agreements at December 31, 2016 and December 31, 2015 was $257.0 million and $169.7 million, respectively.
Trust assets
Assets of the Bank’s trust department, other than cash on deposit at the Bank, are not included in the accompanying consolidated financial statements, because they are not assets of the Bank. Assets (unaudited) totaling approximately $54.3 million and $57.0 million were held in trust as of December 31, 2016 and 2015, respectively.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Loss contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is deemed probable and an amount of loss can be reasonably estimated.
Cash dividend restriction
Payment of dividends by Bancorp and the Bank is subject to restriction by state and federal regulators and the availability of retained earnings (see Note 20).
Comprehensive income (loss)
Comprehensive income (loss) includes all changes in stockholders’ equity during a period, except those resulting from transactions with stockholders. The Company’s comprehensive income (loss) consists of net income (loss) and the changes in net unrealized increase or decrease in the fair value of investment securities available-for-sale, net of taxes.
Definitive Agreement with First Interstate BancSystem, Inc.
On November 17, 2016, First Interstate BancSystem, Inc. (“First Interstate”) and Cascade jointly announced the entry into a definitive agreement (the “First Interstate agreement") under which First Interstate, parent company of First Interstate Bank, will acquire Cascade in a cash and stock transaction for total consideration valued at approximately $590.5 million in aggregate, or $7.62 per share based on the First Interstate closing price of $38.40 per share on November 17, 2016 (the “First Interstate merger”).
Pursuant to the terms of the First Interstate agreement, Cascade shareholders will receive 0.14864 shares of First Interstate Class A common stock and $1.91 in cash in exchange for each share of Cascade common stock they hold. The exchange ratio is fixed and the portion of shares received by Cascade shareholders is expected to qualify as a tax-free exchange. Cascade shareholders will own approximately 20% of the outstanding capital stock of First Interstate once the transaction is complete.
First Interstate expects the transaction will result in long-term annual earnings per share accretion of 10% and 2018 earnings per share accretion of over 8% after accelerating the debit interchange limitations from the Durbin amendment brought on by crossing $10 billion in consolidated total assets. First Interstate is expected to recover the tangible book value dilution experienced in this transaction in approximately five years.
68
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Each of the board of directors of Cascade and First Interstate has unanimously approved the First Interstate merger, and the directors and certain large shareholders of Cascade have entered into agreements with First Interstate pursuant to which they have agreed to vote their shares of Cascade common stock in favor of the First Interstate merger. Additionally, the directors of First Interstate have entered into agreements with Cascade pursuant to which they have agreed to vote their shares of First Interstate common stock in favor of the First Interstate merger.
First Interstate and Cascade expect to close the First Interstate merger early in the third quarter of 2017 after satisfaction of customary closing conditions, including regulatory approvals and the approvals of the First Interstate and Cascade shareholders. Immediately following the completion of the First Interstate merger, it is anticipated that Bank of the Cascades will be merged with and into First Interstate Bank. Upon completion of the First Interstate merger, two members of Cascade’s Board of Directors will be added to the First Interstate Board of Directors in order to maintain the community commitment that Cascade has established in important markets in the Pacific Northwest.
New authoritative accounting guidance
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating a step from the goodwill impairment test. The amendments in this update provide that an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As we approach the adoption date, we will consult the updated goodwill impairment test steps to determine if an impairment charge should be recognized.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2016-15"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. As we approach the adoption date, we will consult the framework to determine if the event should be disclosed as an acquisition or disposal of an asset or business.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" (“ASU 2016-15”). ASU 2016-15 addresses the classification of debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of Corporate-Owned Life Insurance policies, including Bank-Owned Life Insurance policies, distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating which classifications apply to our business and will be prepared to report these classifications in the statement of cash flows.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”). ASU 2016-13 requires financial assets that are measured at amortized cost to be presented as the net amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets and for the expected increase or decrease of expected credit losses. ASU 2016-13 notes that credit losses related to available-for-sale debt securities should be recorded through an allowance for credit losses. The
69
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
initial allowance for credit losses, for purchased available-for-sale securities, is added to the purchase price rather than reported as a credit loss expense. Subsequent changes in the allowance are recorded as credit loss expense. Interest income should be recognized based on the effective interest rate, excluding the discount attributed to the assessment of credit loss at acquisition. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating our available-for-sale security portfolio in order to determine the most efficient way to track the net amount expected to be collected on the security. As we approach the effective date, we will continue to develop this process in order to report on the expected increase or decrease of expected credit losses.
In March 2016, the FASB issued ASU 2016-09, “Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 describes simplifications related to accounting and presenting share-based payment awards. ASU 2016-09 states that excess tax benefits and tax deficiencies are to be recognized as income tax expense or benefit in the income statement; excess tax benefits should be classified with other income tax as an operating activity on the statement of cash flows; an entity may make an entity-wide accounting policy to either estimate the number of awards that are expected to vest or account for forfeitures as they occur; and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Adoption of ASU 2016-09 is not expected to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While the effect of the pronouncement has not yet been quantified, we are continuing to evaluate the impact of recording the right-of-use assets and liabilities on our balance sheet.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 simplifies the impairment assessment of equity investments, clarifies reporting disclosure requirements for financial instruments measured at amortized cost, and requires the exit price notion be disclosed when measuring fair value of financial instruments. ASU 2016-01 details the required separate presentation in other comprehensive income for the change in fair value of a liability related to change in instrument specific credit risk and details the required separate presentation of financial assets and liabilities by measurement category, and clarifies the need for a valuation allowance on deferred tax assets related to available-for-sale securities. ASU 2016-01 is effective for annual and interim reporting periods beginning after December 15, 2017. Adoption of ASU 2016-01 is not expected to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs and requires that the debt issuance costs related to a recognized debt liability be presented in the balance sheet as direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this update. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. Adoption of ASU 2015-03 did not have a material impact on our consolidated financial statements.
70
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” (“ASU 2015-14”). ASU 2015-14 amended the effective date to December 15, 2017. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal Versus Agent Considerations” (“ASU 2016-08”). ASU 2016-08 defines the roles of a principal and agent in revenue recognition and determines when control of the good or service is transferred to the customer. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (“ASU 2016-10”). ASU 2016-10 establishes guidance on identifying performance obligations and licensing implementation. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers: Narrow- Scope Improvements and Practical Expedients" (“ASU 2016-12”). ASU 2016-12 clarifies the objective of the collectability criteria and notes the differences in applying the update at transition and on an ongoing basis. In December 2016, the FASB issued ASU 2016-20, "Revenue from Contracts with Customers: Technical Corrections and Improvements to Topic 606" ("ASU 2016-20"). ASU 2016-20 provides clarity on codification or to correct unintended application of guidance. Adoption of ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are not expected to have a material effect on our consolidated financial statements.
2. Business Combinations
Prime Pacific Financial Services, Inc.
On August 1, 2016, (the "PPFS Acquisition Date”), the Company acquired Prime Pacific Financial Services, Inc. (“PPFS”), the holding company of Prime Pacific Bank, National Association, a Snohomish county, national banking association (the “PPFS merger”).
Each share of PPFS common stock was converted into the right to receive 0.3050 shares of Cascade common stock. The conversion resulted in Cascade issuing 2,921,012 shares of its common stock.
The PPFS 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 $3.3 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 and the economies of scale expected from combining the two banking organizations.
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 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 PPFS’s previously established reserve for loan losses.
The following table provides a summary of the purchase price calculation as of the PPFS 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 PPFS Acquisition Date based on additional information that may be obtained by us that existed as of the PPFS Acquisition Date.
71
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Purchase Price (in thousands), except per share data | ||||||||
Cascade shares issued for PPFS shares | 2,921,012 | |||||||
Cascade share price | $ | 5.56 | ||||||
Consideration from common stock conversion (0.3050 ratio) | $ | 16,238 | ||||||
Cash paid in lieu of fractional shares | 1 | |||||||
Total purchase price | $ | 16,239 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 7,625 | ||||||
Investment securities | — | |||||||
FHLB stock | 424 | |||||||
Loans, net | 102,670 | |||||||
Premises and equipment | 5,333 | |||||||
Other real estate owned | — | |||||||
Deferred tax asset | 2,488 | |||||||
Bank owned life insurance | 1,491 | |||||||
Other assets | 2,364 | |||||||
Total assets | $ | 122,395 | ||||||
Liabilities | ||||||||
Deposits | $ | 101,544 | ||||||
Other liabilities | 8,212 | |||||||
Total liabilities | $ | 109,756 | ||||||
Net identifiable assets acquired | 12,639 | |||||||
Intangible asset acquired (1) | 342 | |||||||
Goodwill | $ | 3,258 | ||||||
(1) Intangible assets consist of core deposit intangibles. The useful life for which the core deposit intangible is being amortized is 10 years. | ||||||||
PPFS merger-related charges of $1.5 million were recorded in the consolidated statement of comprehensive income for the year ended December 31, 2016. Such expenses were for human resources and professional services, among other categories, and include investment banker fees, legal and accounting support, as well as severance, IT and certain branch consolidation items.
The following table provides the unaudited pro forma information for the results of operations for the twelve months ended December 31, 2016 and 2015, as if the acquisition had occurred on January 1, 2015. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily comprised of PPFS’s loan and deposit portfolios. In addition, the $1.5 million in acquisition-related expenses noted earlier are included in the twelve months ended December 31, 2015. 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 acquisition occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of operations.
72
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Twelve months ended December 31, | ||||||||
2016 | 2015 | |||||||
Net interest income | $ | 96,511 | $ | 83,931 | ||||
Non-interest expense | 96,898 | 83,418 | ||||||
Net income | 18,825 | 19,532 | ||||||
Net income per diluted share | 0.26 | 0.26 | ||||||
Bank of America, National Association branches
On March 4, 2016, the Bank completed the acquisition of twelve Oregon branch locations and three Washington branch locations from Bank of America, National Association (the “branch acquisition” and together with the PPFS merger, the “2016 acquisitions”). This transaction allowed Cascade the opportunity to enhance and strengthen its footprint in Oregon, while providing entry into the Washington market. The Bank assumed approximately $469.9 million of branch deposits, paying a 2.00% premium on the average balance of deposits assumed, for a cash purchase price of $9.7 million.
The following is a condensed balance sheet disclosing the estimated fair value amounts of the branches acquired in the branch acquisition assigned to the major consolidated asset and liability captions at the acquisition date (dollars in thousands):
ASSETS | ||||
Cash and cash equivalents | $ | 456,611 | ||
Premises and equipment, net | 3,113 | |||
Core deposit intangibles | 6,427 | |||
Goodwill | 3,984 | |||
Other assets | 463 | |||
Total assets | $ | 470,598 | ||
LIABILITIES | ||||
Deposits | $ | 469,889 | ||
Other liabilities | 709 | |||
Total liabilities | $ | 470,598 | ||
The core deposit intangible asset recognized as part of the branch acquisition will be amortized over its estimated useful life of approximately 10 years.
The fair value of demand deposit accounts assumed from the branch acquisition approximated the carrying value as checking and savings accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by comparing the contractual cost of the portfolio to a similar portfolio bearing current market rates.
Direct costs related to the branch acquisition were expensed as incurred in the year ended December 31, 2016. Such expenses primarily related to professional and legal services, human resource costs and information system charges. For the year ended December 31, 2016, the Company incurred $2.3 million of expenses related to the branch acquisition.
Pro forma income statements are not being presented as the information is not practicable to produce.
Home Federal Bank (“Home”)
On May 16, 2014 (the “Home Acquisition Date”), pursuant to the Agreement and Plan of Merger, dated as of October 23, 2013, between the Company and Home, Home merged with and into Cascade with Cascade continuing as the surviving corporation (the “Home merger”). Immediately after the Home 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 strategic rationale for the Home merger was to enhance the Company’s franchise value by improving earnings, revenue, scale and efficiency and to improve deposit market share in select high growth markets in Oregon and Idaho.
73
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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 Home 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 Home Acquisition Date. Goodwill of $78.6 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 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 Home Acquisition Date and the identifiable assets purchased and the liabilities assumed at their estimated fair values.
Purchase Price (in thousands, except 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 | 15,514 | ||||||
BOLI | 15,896 | ||||||
Other assets | 13,259 | ||||||
Core deposit intangible | 7,667 | ||||||
Total assets | $ | 945,368 | |||||
LIABILITIES | |||||||
Deposits | $ | 759,176 | |||||
Other liabilities | 23,354 | ||||||
Total liabilities | $ | 782,530 | |||||
Net identifiable assets acquired | 162,838 | ||||||
Goodwill | $ | 78,610 | |||||
(1) The core deposit intangible is being amortized over a 10 year period, which is its expected useful life. | |||||||
Home merger-related charges of $11.6 million were recorded in the consolidated statement of comprehensive income for the year to date December 31, 2014. Such expenses were primarily related to professional and legal services, equipment and property maintenance, and information system charges incurred in connection with the acquisition.
74
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The following table provides the unaudited pro forma information for the results of operations for the year to date periods ended December 31, 2014 and 2013, as if the Home merger had occurred on January 1, 2013. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily comprised of Home’s loan, investment and deposit portfolios. In addition, merger-related expenses and certain change in control costs incurred in 2014 have been excluded from the pro forma December 31, 2014 results and included in the pro forma results for December 31, 2013. 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 on January 1, 2013, nor are they intended to represent or be indicative of future results of operations.
Twelve Months Ended December 31, | ||||||||
2014 | 2013 | |||||||
Net interest income | $ | 79,373 | $ | 77,932 | ||||
Non interest expense | 89,205 | 110,454 | ||||||
Net income | 11,288 | 27,308 | ||||||
Net income per diluted share | 0.16 | 0.38 | ||||||
3. Cash and due from banks
By regulation, the Bank must meet reserve requirements as established by the FRB ($24.8 million and $21.9 million at December 31, 2016 and 2015, respectively). Accordingly, the Bank complies with such requirements by holding cash on hand and maintaining average reserve balances on deposit with the FRB in accordance with such regulations.
75
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
4. Investment securities
Investment securities at December 31, 2016 and 2015 consisted of the following (dollars in thousands):
Amortized cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value | ||||||||||||
2016 | |||||||||||||||
Available-for-sale | |||||||||||||||
U.S. Agency mortgage-backed securities (MBS) | $ | 165,933 | $ | 1,828 | $ | (799 | ) | $ | 166,962 | ||||||
Non-agency MBS | 252,153 | 203 | (3,408 | ) | 248,948 | ||||||||||
U.S. Agency asset-backed securities | 6,700 | 419 | (57 | ) | 7,062 | ||||||||||
Corporate securities | 71,213 | 397 | (287 | ) | 71,323 | ||||||||||
Mutual fund | 537 | — | (13 | ) | 524 | ||||||||||
$ | 496,536 | $ | 2,847 | $ | (4,564 | ) | $ | 494,819 | |||||||
Held-to-maturity | |||||||||||||||
U.S. Agency mortgage-backed securities (MBS) | $ | 101,563 | $ | 1,195 | $ | (148 | ) | $ | 102,610 | ||||||
Tax credit investments | 287 | — | — | 287 | |||||||||||
Obligations of state and political subdivisions | 38,707 | 770 | (102 | ) | 39,375 | ||||||||||
$ | 140,557 | $ | 1,965 | $ | (250 | ) | $ | 142,272 | |||||||
2015 | |||||||||||||||
Available-for-sale | |||||||||||||||
U.S. Agency MBS | $ | 154,691 | $ | 2,698 | $ | (455 | ) | $ | 156,934 | ||||||
Non-agency MBS | 118,765 | 477 | (1,016 | ) | 118,226 | ||||||||||
U.S. Agency asset-backed securities | 7,468 | 800 | (23 | ) | 8,245 | ||||||||||
Corporate securities | 26,199 | 121 | — | 26,320 | |||||||||||
Mutual fund | 525 | 12 | — | 537 | |||||||||||
$ | 307,648 | $ | 4,108 | $ | (1,494 | ) | $ | 310,262 | |||||||
Held-to-maturity | |||||||||||||||
U.S. Agency mortgage-backed securities (MBS) | $ | 98,800 | $ | 1,875 | $ | (5 | ) | $ | 100,670 | ||||||
Tax credit investments | 421 | — | — | 421 | |||||||||||
Obligations of state and political subdivisions | 40,203 | 968 | (2 | ) | 41,169 | ||||||||||
$ | 139,424 | $ | 2,843 | $ | (7 | ) | $ | 142,260 | |||||||
76
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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 December 31, 2016 and 2015 (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 | ||||||||||||||||||
2016 | |||||||||||||||||||||||
Available-for-sale | |||||||||||||||||||||||
U.S. Agency MBS | $ | 51,082 | $ | (786 | ) | $ | 1,733 | $ | (13 | ) | $ | 52,815 | $ | (799 | ) | ||||||||
Non-Agency MBS | 211,909 | (3,268 | ) | 1,933 | (140 | ) | 213,842 | (3,408 | ) | ||||||||||||||
U.S. Agency asset-backed securities | — | — | 1,918 | (57 | ) | 1,918 | (57 | ) | |||||||||||||||
Corporate securities | 6,709 | (287 | ) | — | — | 6,709 | (287 | ) | |||||||||||||||
Mutual fund | 524 | (13 | ) | — | — | 524 | (13 | ) | |||||||||||||||
$ | 270,224 | $ | (4,354 | ) | $ | 5,584 | $ | (210 | ) | $ | 275,808 | $ | (4,564 | ) | |||||||||
Held-to-maturity | |||||||||||||||||||||||
U.S. Agency MBS | $ | 7,641 | $ | (148 | ) | $ | — | $ | — | $ | 7,641 | $ | (148 | ) | |||||||||
Obligations of state and political subdivisions | 1,942 | (102 | ) | — | — | 1,942 | (102 | ) | |||||||||||||||
$ | 9,583 | $ | (250 | ) | $ | — | $ | — | $ | 9,583 | $ | (250 | ) | ||||||||||
2015 | |||||||||||||||||||||||
Available-for-sale | |||||||||||||||||||||||
U.S. Agency MBS | $ | 23,630 | $ | (123 | ) | $ | 34,576 | $ | (332 | ) | $ | 58,206 | $ | (455 | ) | ||||||||
Non-Agency MBS | 66,412 | (765 | ) | 12,225 | (251 | ) | 78,637 | (1,016 | ) | ||||||||||||||
U.S. Agency asset-backed securities | — | — | 1,521 | (23 | ) | 1,521 | (23 | ) | |||||||||||||||
$ | 90,042 | $ | (888 | ) | $ | 48,322 | $ | (606 | ) | $ | 138,364 | $ | (1,494 | ) | |||||||||
Held-to-maturity | |||||||||||||||||||||||
U.S. Agency MBS | $ | 2,063 | $ | (5 | ) | $ | — | $ | — | $ | 2,063 | $ | (5 | ) | |||||||||
Obligations of state and political subdivisions | 725 | (2 | ) | — | — | 725 | (2 | ) | |||||||||||||||
$ | 2,788 | $ | (7 | ) | $ | — | $ | — | $ | 2,788 | $ | (7 | ) | ||||||||||
At December 31, 2016 and 2015 there were 87 and 46 securities, respectively, in an unrealized loss position. The unrealized losses on investments in U.S. Agency and non-agency MBS, U.S. Agency asset-backed securities, and corporate securities are primarily due to elevated yield/rate spreads at December 31, 2016 and 2015 as compared to yield/rate relationships prevailing at the time specific investment securities were purchased. Differences between fair value and book value will continue to vary with changes in market interest rates and credit quality risks of such securities. However, temporary differences from book value are expected to lessen as securities approach their maturity dates. Management does not believe that the above gross unrealized losses on investment securities are other-than-temporary and no impairment adjustments have been recorded for the years ended December 31, 2016, 2015 and 2014.
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 December 31, 2016, management did not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.
77
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The amortized cost and estimated fair value of investment securities at December 31, 2016, by contractual maturity, are shown below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-sale | Held-to-maturity | ||||||||||||||
Amortized cost | Estimated fair value | Amortized cost | Estimated fair value | ||||||||||||
Due in one year or less | $ | 3,397 | $ | 3,411 | $ | — | $ | — | |||||||
Due after one year through five years | 75,489 | 75,632 | 34,955 | 35,205 | |||||||||||
Due after five years through ten years | 37,600 | 37,341 | 87,817 | 89,323 | |||||||||||
Due after ten years | 379,513 | 377,911 | 17,498 | 17,457 | |||||||||||
Mutual fund | 537 | 524 | — | — | |||||||||||
Tax credit investments | — | — | 287 | 287 | |||||||||||
$ | 496,536 | $ | 494,819 | $ | 140,557 | $ | 142,272 | ||||||||
Investment securities with an estimated fair value of approximately $138.3 million and $118.0 million at December 31, 2016 and 2015, respectively, were pledged or in the process of being pledged, to secure various borrowings or available lines of credit and for other purposes as required or permitted by law.
The Company sold no investment securities during the year ended December 31, 2016, and sold $30.0 million and $63.5 million of investment securities during the years ended December 31, 2015 and 2014, respectively.
78
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
5. Loans and reserve for credit losses
Loans receivable at December 31, 2016 and 2015 consisted of the following (dollars in thousands):
2016 | 2015 | ||||||||||||
Amount | Percent | Amount | Percent | ||||||||||
Originated loans (a): | |||||||||||||
Commercial real estate: | |||||||||||||
Owner occupied | $ | 298,721 | 16.4 | % | $ | 263,095 | 18.1 | % | |||||
Non-owner occupied | 514,363 | 28.3 | % | 431,379 | 29.7 | % | |||||||
Total commercial real estate loans | 813,084 | 44.7 | % | 694,474 | 47.8 | % | |||||||
Construction | 200,654 | 11.0 | % | 119,723 | 8.2 | % | |||||||
Residential real estate | 377,374 | 20.7 | % | 237,084 | 16.3 | % | |||||||
Commercial and industrial | 386,150 | 21.2 | % | 363,335 | 25.0 | % | |||||||
Consumer | 42,072 | 2.4 | % | 38,362 | 2.7 | % | |||||||
Total loans | 1,819,334 | 100.0 | % | 1,452,978 | 100.0 | % | |||||||
Less: | |||||||||||||
Deferred loan fees, net | (1,764 | ) | (1,419 | ) | |||||||||
Reserve for loan losses | (25,290 | ) | (24,415 | ) | |||||||||
Loans, net | $ | 1,792,280 | $ | 1,427,144 | |||||||||
Acquired loans (b): | |||||||||||||
Commercial real estate: | |||||||||||||
Owner occupied | $ | 92,490 | 32.5 | % | $ | 45,236 | 19.3 | % | |||||
Non-owner occupied and other | 98,034 | 34.4 | % | 95,183 | 40.5 | % | |||||||
Total commercial real estate loans | 190,524 | 66.9 | % | 140,419 | 59.8 | % | |||||||
Construction | 10,384 | 3.6 | % | 10,629 | 4.5 | % | |||||||
Residential real estate | 54,468 | 19.1 | % | 61,306 | 26.1 | % | |||||||
Commercial and industrial | 28,286 | 9.9 | % | 21,109 | 9.0 | % | |||||||
Consumer | 1,416 | 0.5 | % | 1,488 | 0.6 | % | |||||||
Total loans | 285,078 | 100.0 | % | 234,951 | 100.0 | % | |||||||
Total loans: | |||||||||||||
Commercial real estate: | |||||||||||||
Owner occupied | $ | 391,211 | 18.6 | % | $ | 308,331 | 18.3 | % | |||||
Non-owner occupied and other | 612,397 | 29.1 | % | 526,562 | 31.2 | % | |||||||
Total commercial real estate loans | 1,003,608 | 47.7 | % | 834,893 | 49.5 | % | |||||||
Construction | 211,038 | 10.0 | % | 130,352 | 7.7 | % | |||||||
Residential real estate | 431,842 | 20.5 | % | 298,390 | 17.7 | % | |||||||
Commercial and industrial | 414,436 | 19.7 | % | 384,444 | 22.8 | % | |||||||
Consumer | 43,488 | 2.1 | % | 39,850 | 2.3 | % | |||||||
Total loans | 2,104,412 | 100.0 | % | 1,687,929 | 100.0 | % | |||||||
Less: | |||||||||||||
Deferred loan fees | (1,764 | ) | (1,419 | ) | |||||||||
Reserve for loan losses | (25,290 | ) | (24,415 | ) | |||||||||
Loans, net | $ | 2,077,358 | $ | 1,662,095 | |||||||||
(a) Loans organically made through the Company’s normal and customary origination process, including ARM purchases. | |||||||||||||
(b) Loans acquired in the Home merger and PPFS merger. | |||||||||||||
79
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The following describes the distinction between originated and acquired 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, net of any premium or discount, 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 consolidated balance sheets. 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 76.4% of the Bank’s originated loan portfolio at December 31, 2016 consisted of real estate-related loans including construction and development loans, residential mortgage loans, and commercial loans secured by commercial real estate. At December 31, 2016, approximately 78.2% of the Bank’s total portfolio (inclusive of acquired 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 and Seattle, Washington areas. 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 reduce commercial real estate (“CRE”) concentration over the long term, but real estate-related loans will remain a significant portfolio component due to the nature of the economies, businesses, and markets we serve.
The Company originates C&I loans mainly to businesses in its footprint. Repayment of such loans is dependent upon future cash flows of the obligor businesses that are subject to various industry sector risk. In addition, the Company has purchased C&I participations typically referred to as SNCs. The SNC portfolio strategy is intended to diversify the Company’s credit risk profile geographically and by industry. Additionally, such loans enhance the Company’s interest rate risk profile as they float with LIBOR rates. C&I loans are subject to the variety of credit risks described above but they are not directly secured by real estate.
In the normal course of business, the Bank may buy or participate portions of loans to third parties in order to extend the Bank’s lending capability or to mitigate risk. At December 31, 2016 and 2015, the portion of loans participated to third-parties (which are not included in the accompanying consolidated balance sheets) totaled $128.8 million and $44.2 million, respectively. At December 31, 2016 and 2015, purchased loan participations totaled $145.3 million and $179.2 million, respectively.
Acquired loans
PPFS
Acquired loans include those loans purchased by the Company in the PPFS merger. These loans were recorded at estimated fair value at the PPFS Acquisition Date. The fair value estimates for acquired loans are 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 PPFS acquired loans at acquisition was a reduction of $2.5 million, representing a valuation adjustment for interest rate and credit which will be accreted over the life of the loans (approximately 10 years). As of December 31, 2016, the remaining net fair value adjustment to the PPFS acquired loans was $1.7 million.
Home
Acquired loans also include those loans purchased by the Company in the Home merger. These loans were recorded at estimated fair value at the Home Acquisition Date. The fair value estimates for acquired loans are 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 loans 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). As of December 31, 2016, the remaining net fair value adjustment was $1.6 million.
80
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Of the PPFS and Home loans acquired on the PPFS Acquisition Date and Home Acquisition Date, as applicable, and still held at December 31, 2016, $8.0 million or 2.8% were graded substandard. 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 December 31, 2016, $21.6 million, or 7.6%, of the $285.1 million in acquired 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 have limited terms (10 years for net losses on single-family residential real estate loans, as defined by the FDIC, five years for losses on non-residential real estate loans, as defined by the FDIC, and an additional three years with respect to recoveries on non-residential real estate loans). After the expiration of the loss sharing agreements in September 2014 and 2015, the Company is no longer indemnified for losses and related expenses on covered assets and the risk-based capital ratios have been reduced. While the agreements were in place, the covered assets received a 20% risk-weighting. After the agreements expired, the risk-weighting for previously covered assets most likely increases 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 were no longer indemnified after September 2014 or September 2015. With the amount of 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 Home 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 were recorded as part of covered loans in conjunction with the Home merger accounting. Upon the determination of an incurred loss or recovery, the loss share receivable/payable is changed by the amount due to or due from the FDIC.
Changes in the loss share payable (receivable) associated with covered loans for the year ended December 31, 2016 were as follows (dollars in thousands):
Year ended | |||
December 31, 2016 | |||
Balance at beginning of period | $ | 289 | |
Paid to FDIC | (1,224 | ) | |
Increase due to impairment | (53 | ) | |
FDIC reimbursement | 1,156 | ||
Shared loss expenses | (96 | ) | |
Adjustments from prior periods | 4 | ||
Balance at end of period | $ | 76 | |
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 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 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.
81
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The increase in the reserve for loan losses from December 31, 2015 to December 31, 2016 was related to net recoveries during the period. The unallocated reserve for loan losses at December 31, 2016 has decreased by $0.9 million from the balance at December 31, 2015. The Company has determined the level of unallocated reserve is appropriate based upon the lack of seasoning with respect to its methodology enhancements, including qualitative adjustments with respect to concentration risk and estimating reserves against certain loan pools and industries as opposed to reserving on a loan by loan basis for such loans. In addition, the unallocated reflects the lack of seasoning as to credit quality performance of its recently acquired PPFS, Home and SNCs portfolios. 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 loans are 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 loans was $6.0 million and $2.5 million for Home and PPFS, respectively, at the time of the applicable acquisition representing a valuation adjustment for interest rate and credit quality. The credit component 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.
Transactions and allocations in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the years ended December 31, 2016, 2015 and 2014 were as follows (dollars in thousands):
Commercial real estate | Construction | Residential real estate | Commercial and industrial | Consumer | Unallocated | Total | |||||||||||||||||||||
2016 | |||||||||||||||||||||||||||
Reserve for loan losses | |||||||||||||||||||||||||||
Balance at beginning of year | $ | 3,934 | $ | 1,044 | $ | 2,075 | $ | 13,969 | $ | 917 | $ | 2,476 | $ | 24,415 | |||||||||||||
Loan loss provision (credit) | (530 | ) | 784 | 1,072 | (1,708 | ) | 1,270 | (888 | ) | — | |||||||||||||||||
Recoveries | 2,957 | 368 | 288 | 1,470 | 920 | — | 6,003 | ||||||||||||||||||||
Loans charged off | (40 | ) | — | (110 | ) | (3,074 | ) | (1,904 | ) | — | (5,128 | ) | |||||||||||||||
Balance at end of year | $ | 6,321 | $ | 2,196 | $ | 3,325 | $ | 10,657 | $ | 1,203 | $ | 1,588 | $ | 25,290 | |||||||||||||
Reserve for unfunded lending commitments | |||||||||||||||||||||||||||
Balance at beginning of year | $ | 48 | $ | 268 | $ | 25 | $ | 75 | $ | 24 | $ | — | $ | 440 | |||||||||||||
Provision (credit) for unfunded loan commitments | — | — | — | — | — | — | — | ||||||||||||||||||||
Balance at end of year | $ | 48 | $ | 268 | $ | 25 | $ | 75 | $ | 24 | $ | — | $ | 440 | |||||||||||||
Reserve for credit losses | |||||||||||||||||||||||||||
Reserve for loan losses | $ | 6,321 | $ | 2,196 | $ | 3,325 | $ | 10,657 | $ | 1,203 | $ | 1,588 | $ | 25,290 | |||||||||||||
Reserve for unfunded lending commitments | 48 | 268 | 25 | 75 | 24 | — | 440 | ||||||||||||||||||||
Total reserve for credit losses | $ | 6,369 | $ | 2,464 | $ | 3,350 | $ | 10,732 | $ | 1,227 | $ | 1,588 | $ | 25,730 | |||||||||||||
82
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Commercial real estate | Construction | Residential real estate | Commercial and industrial | Consumer | Unallocated | Total | |||||||||||||||||||||
2015 | |||||||||||||||||||||||||||
Reserve for loan losses | |||||||||||||||||||||||||||
Balance at beginning of year | $ | 5,614 | $ | 1,133 | $ | 2,121 | $ | 6,844 | $ | 1,047 | $ | 5,294 | $ | 22,053 | |||||||||||||
Loan loss provision (credit) | (5,552 | ) | (525 | ) | (494 | ) | 4,682 | 707 | (2,818 | ) | (4,000 | ) | |||||||||||||||
Recoveries | 4,150 | 436 | 850 | 3,820 | 618 | — | 9,874 | ||||||||||||||||||||
Loans charged off | (278 | ) | — | (402 | ) | (1,377 | ) | (1,455 | ) | — | (3,512 | ) | |||||||||||||||
Balance at end of year | $ | 3,934 | $ | 1,044 | $ | 2,075 | $ | 13,969 | $ | 917 | $ | 2,476 | $ | 24,415 | |||||||||||||
Reserve for unfunded lending commitments | |||||||||||||||||||||||||||
Balance at beginning of year | $ | 48 | $ | 268 | $ | 25 | $ | 75 | $ | 24 | $ | — | $ | 440 | |||||||||||||
Provision (credit) for unfunded loan commitments | — | — | — | — | — | — | — | ||||||||||||||||||||
Balance at end of year | $ | 48 | $ | 268 | $ | 25 | $ | 75 | $ | 24 | $ | — | $ | 440 | |||||||||||||
Reserve for credit losses | |||||||||||||||||||||||||||
Reserve for loan losses | $ | 3,934 | $ | 1,044 | $ | 2,075 | $ | 13,969 | $ | 917 | $ | 2,476 | $ | 24,415 | |||||||||||||
Reserve for unfunded lending commitments | 48 | 268 | 25 | 75 | 24 | — | 440 | ||||||||||||||||||||
Total reserve for credit losses | $ | 3,982 | $ | 1,312 | $ | 2,100 | $ | 14,044 | $ | 941 | $ | 2,476 | $ | 24,855 | |||||||||||||
Commercial real estate | Construction | Residential real estate | Commercial and industrial | Consumer | Unallocated | Total | |||||||||||||||||||||
2014 | |||||||||||||||||||||||||||
Reserve for loan losses | |||||||||||||||||||||||||||
Balance at beginning of year | $ | 9,565 | $ | 535 | $ | 2,381 | $ | 6,261 | $ | 1,401 | $ | 714 | $ | 20,857 | |||||||||||||
Loan loss provision (credit) | (4,484 | ) | (348 | ) | (315 | ) | (12 | ) | 579 | 4,580 | — | ||||||||||||||||
Recoveries | 1,801 | 1,242 | 929 | 2,158 | 309 | — | 6,439 | ||||||||||||||||||||
Loans charged off | (1,268 | ) | (296 | ) | (874 | ) | (1,563 | ) | (1,242 | ) | — | (5,243 | ) | ||||||||||||||
Balance at end of year | $ | 5,614 | $ | 1,133 | $ | 2,121 | $ | 6,844 | $ | 1,047 | $ | 5,294 | $ | 22,053 | |||||||||||||
Reserve for unfunded lending commitments | |||||||||||||||||||||||||||
Balance at beginning of year | $ | 48 | $ | 268 | $ | 25 | $ | 75 | $ | 24 | $ | — | $ | 440 | |||||||||||||
Provision (credit) for unfunded loan commitments | — | — | — | — | — | — | — | ||||||||||||||||||||
Balance at end of year | $ | 48 | $ | 268 | $ | 25 | $ | 75 | $ | 24 | $ | — | $ | 440 | |||||||||||||
Reserve for credit losses | |||||||||||||||||||||||||||
Reserve for loan losses | $ | 5,614 | $ | 1,133 | $ | 2,121 | $ | 6,844 | $ | 1,047 | $ | 5,294 | $ | 22,053 | |||||||||||||
Reserve for unfunded lending commitments | 48 | 268 | 25 | 75 | 24 | — | 440 | ||||||||||||||||||||
Total reserve for credit losses | $ | 5,662 | $ | 1,401 | $ | 2,146 | $ | 6,919 | $ | 1,071 | $ | 5,294 | $ | 22,493 | |||||||||||||
83
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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 December 31, 2016 and 2015 (dollars in thousands). As the acquired loan portfolio is covered by the valuation adjustment taken at the time of acquisition and as the original mark continues to be more than sufficient, impaired acquired loans are excluded from the individually evaluated for impairment amounts below.
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 | ||||||||||||||||||
2016 | |||||||||||||||||||||||
Commercial real estate | $ | — | $ | 6,321 | $ | 6,321 | $ | 640 | $ | 1,002,968 | $ | 1,003,608 | |||||||||||
Construction | — | 2,196 | 2,196 | — | 211,038 | 211,038 | |||||||||||||||||
Residential real estate | — | 3,325 | 3,325 | — | 431,842 | 431,842 | |||||||||||||||||
Commercial and industrial | 2,000 | 8,657 | 10,657 | 7,034 | 407,402 | 414,436 | |||||||||||||||||
Consumer | — | 1,203 | 1,203 | — | 43,488 | 43,488 | |||||||||||||||||
$ | 2,000 | $ | 21,702 | 23,702 | $ | 7,674 | $ | 2,096,738 | $ | 2,104,412 | |||||||||||||
Unallocated | 1,588 | ||||||||||||||||||||||
$ | 25,290 | ||||||||||||||||||||||
2015 | |||||||||||||||||||||||
Commercial real estate | $ | 78 | $ | 3,856 | $ | 3,934 | $ | 3,835 | $ | 831,058 | $ | 834,893 | |||||||||||
Construction | — | 1,044 | 1,044 | 365 | 129,987 | 130,352 | |||||||||||||||||
Residential real estate | — | 2,075 | 2,075 | 18 | 298,372 | 298,390 | |||||||||||||||||
Commercial and industrial | 164 | 13,805 | 13,969 | 2,724 | 381,720 | 384,444 | |||||||||||||||||
Consumer | — | 917 | 917 | — | 39,850 | 39,850 | |||||||||||||||||
$ | 242 | $ | 21,697 | 21,939 | $ | 6,942 | $ | 1,680,987 | $ | 1,687,929 | |||||||||||||
Unallocated | 2,476 | ||||||||||||||||||||||
$ | 24,415 | ||||||||||||||||||||||
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
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.
84
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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 year ended December 31, 2016 the Bank reduced loans classified as special mention and substandard in the originated portfolio by $10.2 million, while total loans classified as special mention and substandard decreased $26.5 million. 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 loan portfolio at the PPFS and Home Acquisition Dates.
The following table presents, by portfolio class, the recorded investment in loans by internally assigned grades at December 31, 2016 and 2015 (dollars in thousands):
Loan grades | |||||||||||||||||||
Acceptable | Pass-Watch | Special Mention | Substandard | Total | |||||||||||||||
2016 | |||||||||||||||||||
Originated loans (a): | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 282,438 | $ | 9,007 | $ | 1,302 | $ | 5,974 | $ | 298,721 | |||||||||
Non-owner occupied | 506,946 | 2,234 | 4,180 | 1,003 | 514,363 | ||||||||||||||
Total commercial real estate loans | 789,384 | 11,241 | 5,482 | 6,977 | 813,084 | ||||||||||||||
Construction | 200,278 | — | — | 376 | 200,654 | ||||||||||||||
Residential real estate | 376,713 | — | — | 661 | 377,374 | ||||||||||||||
Commercial and industrial | 351,914 | 11,472 | 5,452 | 17,312 | 386,150 | ||||||||||||||
Consumer | 42,060 | — | — | 12 | 42,072 | ||||||||||||||
$ | 1,760,349 | $ | 22,713 | $ | 10,934 | $ | 25,338 | $ | 1,819,334 | ||||||||||
Acquired loans (b): | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 85,868 | $ | 3,222 | $ | 1,663 | $ | 1,737 | $ | 92,490 | |||||||||
Non-owner occupied | 81,494 | 3,967 | 7,962 | 4,611 | 98,034 | ||||||||||||||
Total commercial real estate loans | 167,362 | 7,189 | 9,625 | 6,348 | 190,524 | ||||||||||||||
Construction | 10,331 | — | — | 53 | 10,384 | ||||||||||||||
Residential real estate | 51,489 | 1,988 | — | 991 | 54,468 | ||||||||||||||
Commercial and industrial | 27,636 | 64 | — | 586 | 28,286 | ||||||||||||||
85
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Consumer | 1,416 | — | — | — | 1,416 | ||||||||||||||
$ | 258,234 | $ | 9,241 | $ | 9,625 | $ | 7,978 | $ | 285,078 | ||||||||||
Total loans: | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 368,306 | $ | 12,229 | $ | 2,965 | $ | 7,711 | $ | 391,211 | |||||||||
Non-owner occupied | 588,440 | 6,201 | 12,142 | 5,614 | 612,397 | ||||||||||||||
Total commercial real estate loans | 956,746 | 18,430 | 15,107 | 13,325 | 1,003,608 | ||||||||||||||
Construction | 210,609 | — | — | 429 | 211,038 | ||||||||||||||
Residential real estate | 428,202 | 1,988 | — | 1,652 | 431,842 | ||||||||||||||
Commercial and industrial | 379,550 | 11,536 | 5,452 | 17,898 | 414,436 | ||||||||||||||
Consumer | 43,476 | — | — | 12 | 43,488 | ||||||||||||||
$ | 2,018,583 | $ | 31,954 | $ | 20,559 | $ | 33,316 | $ | 2,104,412 | ||||||||||
2015 | |||||||||||||||||||
Originated (a): | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 243,113 | $ | 8,623 | $ | 1,426 | $ | 9,933 | $ | 263,095 | |||||||||
Non-owner occupied | 411,137 | 9,825 | 4,522 | 5,895 | 431,379 | ||||||||||||||
Total commercial real estate loans | 654,250 | 18,448 | 5,948 | 15,828 | 694,474 | ||||||||||||||
Construction | 118,752 | — | 971 | — | 119,723 | ||||||||||||||
Residential real estate | 236,574 | — | — | 510 | 237,084 | ||||||||||||||
Commercial and industrial | 328,934 | 11,220 | 13,729 | 9,452 | 363,335 | ||||||||||||||
Consumer | 38,350 | — | — | 12 | 38,362 | ||||||||||||||
$ | 1,376,860 | $ | 29,668 | $ | 20,648 | $ | 25,802 | $ | 1,452,978 | ||||||||||
Acquired loans (b): | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 34,081 | $ | 3,480 | $ | 7,341 | $ | 334 | $ | 45,236 | |||||||||
Non-owner occupied | 71,334 | 2,751 | 9,386 | 11,712 | 95,183 | ||||||||||||||
Total commercial real estate loans | 105,415 | 6,231 | 16,727 | 12,046 | 140,419 | ||||||||||||||
Construction | 10,597 | — | — | 32 | 10,629 | ||||||||||||||
Residential real estate | 60,151 | — | — | 1,155 | 61,306 | ||||||||||||||
Commercial and industrial | 17,034 | 153 | 3,461 | 461 | 21,109 | ||||||||||||||
Consumer | 1,485 | — | — | 3 | 1,488 | ||||||||||||||
$ | 194,682 | $ | 6,384 | $ | 20,188 | $ | 13,697 | $ | 234,951 | ||||||||||
Total loans: | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 277,194 | $ | 12,103 | $ | 8,767 | $ | 10,267 | $ | 308,331 | |||||||||
Non-owner occupied | 482,471 | 12,576 | 13,908 | 17,607 | 526,562 | ||||||||||||||
Total commercial real estate loans | 759,665 | 24,679 | 22,675 | 27,874 | 834,893 | ||||||||||||||
Construction | 129,349 | — | 971 | 32 | 130,352 | ||||||||||||||
Residential real estate | 296,725 | — | — | 1,665 | 298,390 | ||||||||||||||
Commercial and industrial | 345,968 | 11,373 | 17,190 | 9,913 | 384,444 | ||||||||||||||
Consumer | 39,835 | — | — | 15 | 39,850 | ||||||||||||||
$ | 1,571,542 | $ | 36,052 | $ | 40,836 | $ | 39,499 | $ | 1,687,929 | ||||||||||
(a) Loans organically made through the Company’s normal and customary origination process, including ARM purchases. | |||||||||||||||||||
(b) Loans acquired in the Home merger and PPFS merger. | |||||||||||||||||||
86
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The following table presents, by portfolio class, an age analysis of past due loans, including loans placed on non-accrual at December 31, 2016 and 2015 (dollars in thousands):
30-89 days past due | 90 days or more past due | Total past due | Current | Total loans | |||||||||||||||
2016 | |||||||||||||||||||
Originated loans (a): | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 205 | $ | 490 | $ | 695 | $ | 298,026 | $ | 298,721 | |||||||||
Non-owner occupied | 100 | — | 100 | 514,263 | 514,363 | ||||||||||||||
Total commercial real estate loans | 305 | 490 | 795 | 812,289 | 813,084 | ||||||||||||||
Construction | 97 | 376 | 473 | 200,181 | 200,654 | ||||||||||||||
Residential real estate | 1,488 | — | 1,488 | 375,886 | 377,374 | ||||||||||||||
Commercial and industrial | 290 | 338 | 628 | 385,522 | 386,150 | ||||||||||||||
Consumer | 322 | 12 | 334 | 41,738 | 42,072 | ||||||||||||||
$ | 2,502 | $ | 1,216 | $ | 3,718 | $ | 1,815,616 | $ | 1,819,334 | ||||||||||
Acquired loans (b): | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 317 | $ | — | $ | 317 | $ | 92,173 | $ | 92,490 | |||||||||
Non-owner occupied | — | — | — | 98,034 | 98,034 | ||||||||||||||
Total commercial real estate loans | 317 | — | 317 | 190,207 | 190,524 | ||||||||||||||
Construction | — | 17 | 17 | 10,367 | 10,384 | ||||||||||||||
Residential real estate | 2,053 | 543 | 2,596 | 51,872 | 54,468 | ||||||||||||||
Commercial and industrial | 257 | — | 257 | 28,029 | 28,286 | ||||||||||||||
Consumer | 9 | — | 9 | 1,407 | 1,416 | ||||||||||||||
$ | 2,636 | $ | 560 | $ | 3,196 | $ | 281,882 | $ | 285,078 | ||||||||||
Total loans: | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 522 | $ | 490 | $ | 1,012 | $ | 390,199 | $ | 391,211 | |||||||||
Non-owner occupied | 100 | — | 100 | 612,297 | 612,397 | ||||||||||||||
Total commercial real estate loans | 622 | 490 | 1,112 | 1,002,496 | 1,003,608 | ||||||||||||||
Construction | 97 | 393 | 490 | 210,548 | 211,038 | ||||||||||||||
Residential real estate | 3,541 | 543 | 4,084 | 427,758 | 431,842 | ||||||||||||||
Commercial and industrial | 547 | 338 | 885 | 413,551 | 414,436 | ||||||||||||||
Consumer | 331 | 12 | 343 | 43,145 | 43,488 | ||||||||||||||
$ | 5,138 | $ | 1,776 | $ | 6,914 | $ | 2,097,498 | $ | 2,104,412 | ||||||||||
2015 | |||||||||||||||||||
Originated loans (a): | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 1,020 | $ | 719 | $ | 1,739 | $ | 261,356 | $ | 263,095 | |||||||||
Non-owner occupied | 593 | — | 593 | 430,786 | 431,379 | ||||||||||||||
Total commercial real estate loans | 1,613 | 719 | 2,332 | 692,142 | 694,474 | ||||||||||||||
Construction | — | — | — | 119,723 | 119,723 | ||||||||||||||
Residential real estate | 196 | — | 196 | 236,888 | 237,084 | ||||||||||||||
Commercial and industrial | 346 | 239 | 585 | 362,750 | 363,335 | ||||||||||||||
Consumer | 209 | 12 | 221 | 38,141 | 38,362 | ||||||||||||||
87
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
$ | 2,364 | $ | 970 | $ | 3,334 | $ | 1,449,644 | $ | 1,452,978 | ||||||||||
Acquired loans (b): | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | — | $ | — | $ | — | $ | 45,236 | $ | 45,236 | |||||||||
Non-owner occupied | 2,049 | — | 2,049 | 93,134 | 95,183 | ||||||||||||||
Total commercial real estate loans | 2,049 | — | 2,049 | 138,370 | 140,419 | ||||||||||||||
Construction | 46 | — | 46 | 10,583 | 10,629 | ||||||||||||||
Residential real estate | 748 | 534 | 1,282 | 60,024 | 61,306 | ||||||||||||||
Commercial and industrial | 6 | 5 | 11 | 21,098 | 21,109 | ||||||||||||||
Consumer | 53 | — | 53 | 1,435 | 1,488 | ||||||||||||||
$ | 2,902 | $ | 539 | $ | 3,441 | $ | 231,510 | $ | 234,951 | ||||||||||
Total loans: | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 1,020 | $ | 719 | $ | 1,739 | $ | 306,592 | $ | 308,331 | |||||||||
Non-owner occupied | 2,642 | — | 2,642 | 523,920 | 526,562 | ||||||||||||||
Total commercial real estate loans | 3,662 | 719 | 4,381 | 830,512 | 834,893 | ||||||||||||||
Construction | 46 | — | 46 | 130,306 | 130,352 | ||||||||||||||
Residential real estate | 944 | 534 | 1,478 | 296,912 | 298,390 | ||||||||||||||
Commercial and industrial | 352 | 244 | 596 | 383,848 | 384,444 | ||||||||||||||
Consumer | 262 | 12 | 274 | 39,576 | 39,850 | ||||||||||||||
$ | 5,266 | $ | 1,509 | $ | 6,775 | $ | 1,681,154 | $ | 1,687,929 | ||||||||||
(a) Loans organically made through the Company’s normal and customary origination process, including ARM purchases. | |||||||||||||||||||
(b) Loans acquired in the Home merger and PPFS merger. | |||||||||||||||||||
Loans contractually past due 90 days or more on which the Company continued to accrue interest were $0.02 million and $0.07 million at December 31, 2016 and 2015, respectively.
88
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The following table presents information related to impaired loans, by portfolio class, at December 31, 2016 and 2015 (dollars in thousands):
Impaired loans | |||||||||||||||||||
With a related allowance | Without a related allowance | Total recorded balance | Unpaid principal balance | Related allowance | |||||||||||||||
2016 | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | — | $ | 640 | $ | 640 | $ | 1,077 | $ | — | |||||||||
Non-owner occupied | — | — | — | — | — | ||||||||||||||
Total commercial real estate loans | — | 640 | 640 | 1,077 | — | ||||||||||||||
Construction | — | — | — | — | — | ||||||||||||||
Residential real estate | — | — | — | — | — | ||||||||||||||
Commercial and industrial | 6,701 | 333 | 7,034 | 10,359 | 2,000 | ||||||||||||||
Consumer | — | — | — | — | — | ||||||||||||||
$ | 6,701 | $ | 973 | $ | 7,674 | $ | 11,436 | $ | 2,000 | ||||||||||
2015 | |||||||||||||||||||
Commercial real estate: | |||||||||||||||||||
Owner occupied | $ | 1,032 | $ | 2,157 | $ | 3,189 | $ | 4,285 | $ | 73 | |||||||||
Non-owner occupied | 646 | — | 646 | 646 | 5 | ||||||||||||||
Total commercial real estate loans | 1,678 | 2,157 | 3,835 | 4,931 | 78 | ||||||||||||||
Construction | — | 365 | 365 | 365 | — | ||||||||||||||
Residential real estate | — | 18 | 18 | 18 | — | ||||||||||||||
Commercial and industrial | 2,539 | 185 | 2,724 | 3,366 | 164 | ||||||||||||||
Consumer | — | — | — | — | — | ||||||||||||||
$ | 4,217 | $ | 2,725 | $ | 6,942 | $ | 8,680 | $ | 242 | ||||||||||
At December 31, 2016, the total recorded balance of impaired loans in the above table included no TDR loans which were not on non-accrual status and at December 31, 2015, the total recorded balance of impaired loans in the above table included $0.8 million 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 years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
Year ended | |||||||||||
2016 | 2015 | 2014 | |||||||||
Commercial real estate: | |||||||||||
Owner occupied | $ | 1,757 | $ | 3,216 | $ | 6,115 | |||||
Non-owner occupied | 1,905 | 6,384 | 22,699 | ||||||||
Total commercial real estate loans | 3,662 | 9,600 | 28,814 | ||||||||
Construction | — | 499 | 1,157 | ||||||||
Residential real estate | — | 54 | 381 | ||||||||
Commercial and industrial | 7,409 | 2,793 | 4,015 | ||||||||
Consumer | — | — | — | ||||||||
$ | 11,071 | $ | 12,946 | $ | 34,367 | ||||||
Interest income recognized for cash payments received on impaired loans for the years ended December 31, 2016 and 2015 was $1.1 million and $0.6 million, respectively, and for the year ended December 31, 2014 was insignificant.
89
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Information with respect to the Company’s non-accrual loans, by portfolio class, at December 31, 2016 and 2015 is as follows (dollars in thousands):
2016 | 2015 | ||||||
Commercial real estate: | |||||||
Owner occupied | $ | 1,739 | $ | 2,742 | |||
Non-owner occupied | 2,659 | 434 | |||||
Total commercial real estate loans | 4,398 | 3,176 | |||||
Construction | 429 | — | |||||
Residential real estate | 1,598 | 1,427 | |||||
Commercial and industrial | 7,270 | 447 | |||||
Consumer | — | 3 | |||||
Total non-accrual loans | $ | 13,695 | $ | 5,053 | |||
Accruing loans which are contractually past due 90 days or more: | |||||||
Commercial and industrial | 5 | 56 | |||||
Consumer | 12 | 12 | |||||
Total accruing loans which are contractually past due 90 days or more | $ | 17 | $ | 68 | |||
TDRs
The Company allocated no specific reserves to customers whose loan terms have been modified in TDRs as of December 31, 2016 and as of December 31, 2015. 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 accrual 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. Consistent with accounting principles, acquired loans previously identified by Home as TDRs were marked to fair value at the Home Acquisition Date and accordingly are not included as TDRs on the Company’s books.
90
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The following table presents, by portfolio segment, information with respect to the Company’s loans that were modified and recorded as TDRs during the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
2016 | 2015 | 2014 | ||||||||||||||||||
Number of loans | TDR outstanding recorded investment | Number of loans | TDR outstanding recorded investment | Number of loans | TDR outstanding recorded investment | |||||||||||||||
Commercial real estate | — | $ | — | — | $ | — | — | $ | — | |||||||||||
Construction | — | — | — | — | — | — | ||||||||||||||
Residential real estate | — | — | — | — | — | — | ||||||||||||||
Commercial and industrial | 1 | 22 | 1 | 25 | — | — | ||||||||||||||
Consumer | — | — | — | — | — | — | ||||||||||||||
1 | $ | 22 | 1 | $ | 25 | — | $ | — | ||||||||||||
There were no loans modified and recorded as TDRs during the year ended December 31, 2014. There was no change in the pre- and post-TDR outstanding recorded investment for loans restructured during the years ended December 31, 2016, 2015 and 2014.
At December 31, 2016 and 2015, 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 years ended December 31, 2016 and 2015, and by the primary type of concession granted (dollars in thousands). There were no restructured TDRs in 2014.
2016 | Rate reduction | Term extension | Rate reduction and term extension | Total | |||||||||||
Commercial real estate | $ | — | $ | — | $ | — | $ | — | |||||||
Construction | — | — | — | — | |||||||||||
Residential real estate | — | — | — | — | |||||||||||
Commercial and industrial | — | 22 | — | 22 | |||||||||||
Consumer | — | — | — | — | |||||||||||
$ | — | $ | 22 | $ | — | $ | 22 | ||||||||
2015 | Rate reduction | Term extension | Rate reduction and term extension | Total | |||||||||||
Commercial real estate | $ | — | $ | — | $ | — | $ | — | |||||||
Construction | — | — | — | — | |||||||||||
Residential real estate | — | — | — | — | |||||||||||
Commercial and industrial | — | 25 | — | 25 | |||||||||||
Consumer | — | — | — | — | |||||||||||
$ | — | $ | 25 | $ | — | $ | 25 | ||||||||
There were no TDRs which had payment defaults during the year ended December 31, 2016, 2015, and 2014 that had been previously restructured within the last twelve months prior to December 31, 2016 and 2015, and 2014.
6. Mortgage banking activities
Net MSRs, as included in Other Assets, at December 31, 2016 and 2015 were $2.3 million and $2.2 million, respectively. Transactions in the Company’s MSRs for the years ended December 31, 2016 and 2015 were as follows (dollars in thousands).
91
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
2016 | 2015 | ||||||
Balance at beginning of year | $ | 2,186 | $ | 2,248 | |||
Additions | 885 | 631 | |||||
Amortization | (723 | ) | (693 | ) | |||
Balances at end of year | $ | 2,348 | $ | 2,186 | |||
Mortgage banking income, net, consisted of the following for the periods shown (dollars in thousands):
2016 | 2015 | 2014 | |||||||||
Origination and processing fees | $ | 360 | $ | 614 | $ | 748 | |||||
Gain on sales of mortgage loans, net | 3,044 | 2,007 | 1,539 | ||||||||
Servicing fees, net | 715 | 689 | 678 | ||||||||
Amortization | (723 | ) | (693 | ) | (669 | ) | |||||
Mortgage banking income, net | $ | 3,396 | $ | 2,617 | $ | 2,296 | |||||
7. Premises and equipment
Premises and equipment at December 31, 2016 and 2015 consisted of the following (dollars in thousands):
2016 | 2015 | ||||||
Land | $ | 13,591 | $ | 10,501 | |||
Buildings and leasehold improvements | 41,748 | 39,150 | |||||
Furniture and equipment | 17,603 | 15,991 | |||||
72,942 | 65,642 | ||||||
Less accumulated depreciation and amortization | (24,284 | ) | (23,611 | ) | |||
Premises and equipment, net | $ | 48,658 | $ | 42,031 | |||
8. Other real estate owned, net
Transactions in the Company’s OREO for the years ended December 31, 2016, 2015 and 2014 were as follows (dollars in thousands):
2016 | 2015 | 2014 | |||||||||
Balance at beginning of year | $ | 3,274 | $ | 3,309 | $ | 3,144 | |||||
Additions | 367 | 1,558 | 3,705 | ||||||||
Dispositions | (1,964 | ) | (3,140 | ) | (3,611 | ) | |||||
Change in valuation allowance | — | 1,547 | 71 | ||||||||
Balance at end of year | $ | 1,677 | $ | 3,274 | $ | 3,309 | |||||
The following table summarizes activity in the OREO valuation allowance for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
2016 | 2015 | 2014 | |||||||||
Balance at beginning of year | $ | 776 | $ | 2,323 | $ | 2,394 | |||||
Additions to valuation allowance | — | 72 | 1,163 | ||||||||
Reductions due to sales of OREO | — | (1,619 | ) | (1,234 | ) | ||||||
Balance at end of year | $ | 776 | $ | 776 | $ | 2,323 | |||||
92
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The following table summarizes OREO expenses for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
2016 | 2015 | 2014 | |||||||||
Operating costs | $ | 251 | $ | 367 | $ | 175 | |||||
(Gains) losses on sales of OREO | (247 | ) | (371 | ) | (183 | ) | |||||
Increases in valuation allowance | 167 | 72 | 996 | ||||||||
Total | $ | 171 | $ | 68 | $ | 988 | |||||
9. Goodwill and other intangibles assets
The Company recorded $3.3 million of goodwill in connection with the PPFS merger.
The Company recorded $4.0 million of goodwill in connection with the branch acquisition.
The Company recorded $78.6 million of goodwill in connection with the Home merger.
In accordance with the Intangibles - Goodwill and Other topic of the FASB ASC, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level. Management analyzes its goodwill for impairment on an annual basis and between annual tests in certain circumstances, such as upon material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an impairment assessment as of December 31, 2016 and 2015 and concluded that there was no impairment to goodwill.
Core deposit intangibles (“CDI”) are evaluated for impairment on an annual basis and between annuals tests if events and circumstances indicate a possible impairment. The CDI is amortized on a straight-line basis over an estimated life of 10 years. The following table sets forth activity for CDI for the years ended December 31, 2016 and 2015 (dollars in thousands). The Company had $7.7 million recorded CDI and $0.5 million amortization expense during 2014.
2016 | 2015 | |||||||
Gross core deposit intangibles balance, beginning of period | $ | 8,196 | $ | 8,196 | ||||
Accumulated amortization, beginning of period | (1,333 | ) | (513 | ) | ||||
Core deposit intangible, net, beginning of period | 6,863 | 7,683 | ||||||
Established through acquisitions | 6,770 | — | ||||||
CDI current period amortization | (1,316 | ) | (820 | ) | ||||
Total core deposit intangible, end of period | $ | 12,317 | $ | 6,863 | ||||
The following table provides the estimated future amortization expense of CDI for the succeeding five years (dollars in thousands):
Years Ending December 31, | |||
2017 | $ | 1,497 | |
2018 | 1,497 | ||
2019 | 1,497 | ||
2020 | 1,497 | ||
2021 | 1,497 | ||
10. 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 units to be exchanged between the parties and influences the market value of the derivative contract. The Company obtains dealer quotations to value its derivative contracts.
93
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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. The dealer counterparty receives a fixed rate payment and in exchange the Company receives 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 may be 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 December 31, 2016 and 2015, 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 | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
Notional/ Contract Amount | Fair Value (1) | Notional/ Contract Amount | Fair Value (1) | Notional/ Contract Amount | Fair Value (2) | Notional/ Contract Amount | Fair Value (2) | |||||||||||||||||||||||||
Interest rate swaps | $ | 256,950 | $ | 5,239 | $ | 169,720 | $ | 8,646 | $ | 256,950 | $ | 5,239 | $ | 169,720 | $ | 8,646 | ||||||||||||||||
(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 noninterest income, was $2.5 million, $2.5 million and $1.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company generally posts collateral against derivative liabilities in the form of cash. Collateral posted against derivative liabilities was $5.0 million and $8.6 million as of December 31, 2016 and 2015, 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 December 31, 2016 and 2015 (dollars in thousands):
94
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
December 31, 2016 | ||||||||||||||||||||||||
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 | $ | 5,239 | $ | — | $ | 5,239 | $ | — | $ | — | $ | 5,239 | ||||||||||||
Liability Derivatives | ||||||||||||||||||||||||
Interest rate swaps | $ | 5,239 | $ | — | $ | 5,239 | $ | — | $ | 5,000 | $ | 239 | ||||||||||||
December 31, 2015 | ||||||||||||||||||||||||
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 | $ | 8,646 | $ | — | $ | 8,646 | $ | — | $ | — | $ | 8,646 | ||||||||||||
Liability Derivatives | ||||||||||||||||||||||||
Interest rate swaps | $ | 8,646 | $ | — | $ | 8,646 | $ | — | $ | 8,595 | $ | 51 | ||||||||||||
11. Time deposits
Time deposits in amounts of $250 thousand or more aggregated to approximately $22.7 million and $32.5 million at December 31, 2016 and 2015, respectively.
At December 31, 2016, the scheduled annual maturities of all time deposits were approximately as follows (dollars in thousands):
2017 | $ | 154,098 | |
2018 | 31,931 | ||
2019 | 16,516 | ||
2020 | 12,357 | ||
2021 | 4,755 | ||
Thereafter | 705 | ||
$ | 220,362 | ||
At December 31, 2016 and 2015, the Bank had no wholesale brokered deposits.
At December 31, 2016 the Bank had $11.0 million internet listing service deposits and at December 31, 2015 the Bank no internet listing service deposits. The remaining internet listing service CD’s were from the PPFS merger.
95
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
12. Other borrowings
The Bank is a member of the FHLB Des Moines. As a member, the Bank has a committed borrowing line of credit up to 35% of total assets, subject to the Bank pledging sufficient collateral and maintaining the required investment in FHLB stock. At December 31, 2016 and 2015, the Bank had no outstanding borrowings under the committed lines of credit. All outstanding borrowings and letters of credit with the FHLB are collateralized by a blanket pledge agreement on the Bank’s FHLB stock, any funds on deposit with the FHLB, certain investment securities, and certain loans. At December 31, 2016, the Bank had available borrowings with the FHLB of approximately $644.7 million, based on eligible collateral. There can be no assurance that future advances will be allowed by the FHLB.
At December 31, 2016, the Bank had no borrowings outstanding with the FRB and had approximately $16.1 million in available short-term borrowings at FRB, collateralized by certain of the Bank’s securities.
As an additional source of liquidity, the Bank has federal fund borrowing agreements with correspondent banks aggregating approximately $90.0 million at December 31, 2016. At December 31, 2016, the Company had no outstanding borrowings under these federal fund borrowing agreements.
13. Commitments, guarantees and contingencies
Off-balance sheet financial instruments
In the ordinary course of business, the Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commitments under credit card lines of credit, and standby letters of credit. These financial instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of amounts recognized in the accompanying consolidated balance sheets. The contractual amounts of these financial instruments reflect the extent of the Bank’s involvement in these particular classes of financial instruments. As of December 31, 2016 and 2015, the Bank had no material commitments to extend credit at below-market interest rates.
The Bank’s exposure to credit loss for commitments to extend credit, commitments under credit card lines of credit, and standby letters of credit is represented by the contractual amount of these instruments. The Bank follows the same credit policies in underwriting and offering commitments and conditional obligations as it does for on-balance sheet financial instruments.
A summary of the Bank’s off-balance sheet financial instruments which are used to meet the financing needs of its customers is approximately as follows at December 31, 2016 and 2015 (dollars in thousands):
2016 | 2015 | ||||||
Commitments to extend credit | $ | 580,450 | $ | 479,353 | |||
Commitments under credit card lines of credit | 80,612 | 65,988 | |||||
Standby letters of credit | 5,887 | 5,090 | |||||
Total off-balance sheet financial instruments | $ | 666,949 | $ | 550,431 | |||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank applies established credit related standards and underwriting practices in evaluating the creditworthiness of such obligors. The amount of collateral obtained, if it is deemed necessary by the Bank upon the extension of credit, is based on management’s credit evaluation of the counterparty. The increase in commitments between 2015 and 2016 mainly reflect higher commercial, construction and commercial real estate loan commitments.
The Bank typically does not obtain collateral related to credit card commitments. Collateral held for other commitments varies but may include accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. In the event that the
96
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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 was 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 Bank considers the fees collected in connection with the issuance of standby letters of credit to be representative of the fair value of its obligations undertaken in issuing the guarantees. In accordance with GAAP related to guarantees, the Bank defers fees collected in connection with the issuance of standby letters of credit. The fees are then recognized in income proportionately over the life of the related standby letter of credit agreement. At December 31, 2016 and 2015, the Bank’s deferred standby letter of credit fees, which represent the fair value of the Bank’s potential obligations under the standby letter of credit guarantees, were insignificant to the accompanying consolidated financial statements.
Lease commitments
The Bank leases certain land and facilities under operating leases, some of which include renewal options and escalation clauses. At December 31, 2016, the aggregate minimum rental commitments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year were approximately as follows (dollars in thousands):
2017 | $ | 1,706 | |
2018 | 1,356 | ||
2019 | 1,114 | ||
2020 | 762 | ||
2021 | 553 | ||
Thereafter | 4,513 | ||
$ | 10,004 | ||
Total rental expense was approximately $3.2 million in 2016, $2.3 million in 2015, and $3.0 million in 2014. The increase in rental expense in 2016 was primarily related to additional leased properties obtained during the 2016 acquisitions.
Litigation
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 consolidated financial position, results of operations or cash flows as of and for the year ended December 31, 2016.
Other
The Bank is a public depository and, accordingly, accepts deposit funds belonging to, or held for the benefit of, the state of Oregon, political subdivisions thereof, municipal corporations, and other public funds. In accordance with applicable state law, in the event of default of one bank, all participating banks in the state collectively assure that no loss of funds is suffered by any public depositor. Generally, in the event of default by a public depository and to the extent sufficient collateral is unavailable to repay public funds, the assessment applicable to all public depositories is allocated on a pro rata basis in proportion to the maximum liability of each public depository as it existed on the date of loss. The Bank has pledged letters of credit issued by the FHLB which collateralizes public deposits not otherwise insured by the FDIC. At December 31, 2016, there was no liability associated with the Bank’s participation in this pool because all participating banks are presently required to fully collateralize uninsured Oregon public deposits, and there were no occurrences of an actual loss on Oregon public deposits at such participating banks. The maximum future contingent liability is dependent upon the occurrence of an actual loss, the amount of such loss, the failure of collateral to cover such a loss, and the resulting share of loss to be assessed to the Company.
The Company has entered into employment contracts and benefit plans with certain executive officers and members of the Board that allow for payments (or accelerated payments) contingent upon a change in control of the Company.
97
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
14. Income taxes
The approximate provision for income taxes for the years ended December 31, 2016, 2015, and 2014 was as follows (dollars in thousands):
2016 | 2015 | 2014 | |||||||||
Current: | |||||||||||
Federal | $ | (801 | ) | $ | (582 | ) | $ | (185 | ) | ||
State | (160 | ) | (111 | ) | (30 | ) | |||||
(961 | ) | (693 | ) | (215 | ) | ||||||
Deferred | (9,607 | ) | (11,820 | ) | 37 | ||||||
(Provision) for income taxes | $ | (10,568 | ) | $ | (12,513 | ) | $ | (178 | ) | ||
The provision for income taxes results in effective tax rates which are different than the federal income tax statutory rate. A reconciliation of the differences for the years ended December 31, 2016, 2015, and 2014 is as follows (dollars in thousands):
2016 | 2015 | 2014 | |||||||||
Expected federal income tax provision/credit at statutory rates | $ | (9,569 | ) | $ | (11,582 | ) | $ | (1,370 | ) | ||
State income taxes, net of federal effect | (1,293 | ) | (1,456 | ) | (179 | ) | |||||
Effect of nontaxable income, net | 779 | 643 | 489 | ||||||||
Reversal of valuation allowance | 15 | 4 | — | ||||||||
Tax affected disallowed merger costs | (369 | ) | — | (974 | ) | ||||||
Rate change for deferred taxes | 195 | (353 | ) | 1,687 | |||||||
Other, net | (326 | ) | 231 | 169 | |||||||
(Provision) for income taxes | $ | (10,568 | ) | $ | (12,513 | ) | $ | (178 | ) | ||
The income tax provision in 2016 represents a 38.7% effective tax rate on the Company’s $27.3 million of pretax income. This rate differs from statutory rates due primarily to a revaluation of net deferred tax assets, mainly related to an anticipated change in our applicable state rate at the time the net DTA will be utilized and additional tax effect of nontaxable income arising from bank-owned life insurance and municipal securities, less the impact of tax affected disallowed merger costs related to the 2016 acquisitions and pending merger with First Interstate. Other differences to the effective tax rate were related to normal recurring permanent differences and tax credits.
The significant components of the net deferred tax assets and liabilities at December 31, 2016 and 2015 were as follows (dollars in thousands):
98
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
2016 | 2015 | ||||||
Deferred tax assets: | |||||||
Reserve for loan losses and unfunded loan commitments | $ | 10,431 | $ | 8,961 | |||
Deferred benefit plan expenses, net | 13,663 | 12,768 | |||||
Federal and state net operating loss and other carryforwards | 14,840 | 28,068 | |||||
Tax credit carryforwards | 3,419 | 2,427 | |||||
Allowance for losses on OREO | 441 | 651 | |||||
Accrued interest on non-accrual loans | 125 | 169 | |||||
Purchased intangibles | 4,870 | 5,390 | |||||
Fair value of acquired assets/liabilities | 2,698 | 1,563 | |||||
Other | 1,464 | 575 | |||||
Deferred tax assets | 51,951 | 60,572 | |||||
Valuation allowance for deferred tax assets | (59 | ) | (74 | ) | |||
Deferred tax assets, net of valuation allowance | 51,892 | 60,498 | |||||
Deferred tax liabilities: | |||||||
Accumulated depreciation and amortization | 2,755 | 2,070 | |||||
Deferred loan fees | 1,240 | 1,233 | |||||
FHLB stock dividends | 289 | 2,242 | |||||
Net unrealized gains (losses) on investment securities available-for-sale | (653 | ) | 994 | ||||
Purchased intangibles | 2,395 | 2,543 | |||||
Other | 694 | 743 | |||||
Deferred tax liabilities | 6,720 | 9,825 | |||||
Net deferred tax assets (liabilities) | $ | 45,172 | $ | 50,673 | |||
The Company recorded an income tax provision of $10.6 million, $12.5 million, and $0.2 million in 2016, 2015, and 2014, respectively.
At December 31, 2016, the Company had deferred tax assets of $10.7 million and $4.1 million for federal and state net operating loss (“NOL”) carry-forwards, respectively. Also, the Company had deferred tax assets of $0.0 million, $3.4 million and $0.0 million for charitable contribution carry-forwards, federal and state tax credits, respectively. At December 31, 2015, the Company had deferred tax assets of $22.1 million and $6.0 million relating to federal and state NOL carry-forwards, respectively. Also, the Company had $0.0 million, $2.3 million and $0.2 million relating to charitable contribution carry-forwards, federal and state tax credits, respectively.
At December 31, 2016, the deferred tax assets above correspond to federal and state NOL carry forwards available of $30.7 million and $82.0 million, respectively. The NOLs are available to offset future taxable income through 2034. Also, at December 31, 2016, the Company had no charitable contributions carry-forwards and federal and state credits of $3.4 million and $0.0 million, respectively, which will expire between 2028 and 2036.
In estimating 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.
The valuation allowance for deferred tax assets as of December 31, 2016 and 2015 was $0.1 million. The DTA valuation allowance relates to state attributes that will expire without benefit.
The Company files a U.S. federal income tax return, state income tax returns in Idaho, Oregon, and other state and local income tax returns in various jurisdictions.
99
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
The Company has evaluated its income tax positions as of December 31, 2016 and 2015. Based on this evaluation, the Company has determined that it does not have any uncertain income tax positions for which an unrecognized tax liability should be recorded. The Company recognizes interest and penalties related to income tax matters as additional income taxes in the consolidated statements of income. The Company had no significant interest or penalties related to income tax matters during the years ended December 31, 2016, 2015 or 2014.
15. 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.
The numerators and denominators used in computing basic and diluted net income per common share for the years ended December 31, 2016, 2015 and 2014 can be reconciled as follows (dollars in thousands, except per share data):
2016 | 2015 | 2014 | |||||||||
Net income | $ | 16,771 | $ | 20,579 | $ | 3,737 | |||||
Weighted-average shares outstanding - basic | 71,895,427 | 71,788,827 | 62,265,230 | ||||||||
Dilutive securities | 263,755 | 179,926 | 74,640 | ||||||||
Weighted-average shares outstanding - diluted | 72,159,182 | 71,968,753 | 62,339,870 | ||||||||
Common stock equivalent shares excluded due to antidilutive effect | 450 | 3,361,624 | 85,901 | ||||||||
Basic and diluted: | |||||||||||
Net income per common share (basic) | $ | 0.23 | $ | 0.29 | $ | 0.06 | |||||
Net income per common share (diluted) | $ | 0.23 | $ | 0.29 | $ | 0.06 | |||||
16. Transactions with related parties
Certain officers and directors (and the companies with which they are associated) are customers of, and have had banking transactions with, the Bank in the ordinary course of the Bank’s business. In addition, the Bank expects to continue to have such banking transactions in the future. All loans and commitments to loan to such parties are generally made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. In the opinion of management, these transactions do not involve more than the normal risk of collectability or present any other unfavorable features.
An analysis of activity with respect to loans to officers and directors of the Bank for the years ended December 31, 2016 and 2015 was approximately as follows (dollars in thousands):
2016 | 2015 | ||||||
Balance at beginning of year | $ | 2,253 | $ | 2,791 | |||
Additions | 485 | 106 | |||||
Repayments | (1,321 | ) | (644 | ) | |||
Balance at end of year | $ | 1,417 | $ | 2,253 | |||
Some officers and directors of the Bank also have credit card lines. The total outstanding balance of their credit cards at December 31, 2016 and 2015 was $0.01 million and $0.03 million, respectively while the total outstanding commitments on these cards were $0.1 million.
100
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
17. Benefit plans
401(k) profit sharing plan
The Company maintains a 401(k) profit sharing plan (the “Plan”) that covers substantially all full-time employees. Employees may make voluntary tax-deferred contributions to the Plan, and the Company’s contributions to the Plan are at the discretion of the Board, not to exceed the amount deductible for federal income tax purposes.
Employees vest in the Company’s contributions to the Plan over a period of 5 years. The total amounts charged to operations under the Plan were approximately $1.1 million, $0.9 million and $0.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Other benefit plans
The Bank has deferred compensation plans for the Board and certain key executives and managers, and a salary continuation plan and a supplemental executive retirement (“SERP”) plan for certain key executives. In accordance with the provisions of the deferred compensation plans, participants can elect to defer portions of their annual compensation or fees. The deferred compensation plus interest is generally payable upon termination in either a lump-sum or monthly installments.
The salary continuation and SERP plans for certain key executives provide specified benefits to the participants upon termination or change of control. The benefits are subject to certain vesting requirements, and vested amounts are generally payable upon termination or change of control in either a lump-sum or monthly installments. The Bank annually expenses amounts sufficient to accrue for the present value of the benefits payable to the participants under these plans. These plans also include death benefit provisions for certain participants.
To assist in the funding of these plans, the Bank has purchased BOLI policies on the majority of the participants. The cash surrender value of the general account policies at December 31, 2016 and 2015 was approximately $28.0 million and $25.9 million, respectively. The cash surrender value of the separate account policies, including the value of the stable value wraps, was approximately $28.9 million and $28.6 million at December 31, 2016 and 2015, respectively. At December 31, 2016 and 2015, the liabilities related to the deferred compensation plans included in other liabilities in the accompanying consolidated balance sheets totaled approximately $7.2 million and $7.4 million, respectively. The amount of expense charged to operations in 2016 and 2015, related to the deferred compensation plans was approximately $0.4 million, and in 2014 was $0.3 million, respectively. As of December 31, 2016 and 2015, the liabilities related to the salary continuation and SERP plans included in other liabilities in the accompanying consolidated balance sheets totaled approximately $19.0 million and $19.1 million, respectively. The amount of expense charged to operations in 2016, 2015, and 2014 for the salary continuation, SERP and fee continuation plan was $0.9 million, $1.4 million and $1.0 million, respectively.
18. Stock-based compensation
The Company has historically maintained certain stock-based compensation plans, approved by the Company’s stockholders that are administered by the Board or the Compensation Committee of the Board (the “Compensation Committee”). In April 2008, the stockholders of the Company approved the 2008 Cascade Bancorp Performance Incentive Plan (the “2008 Plan”). The 2008 Plan authorized the Board to issue up to an additional 1,000,000 shares of common stock related to the grant or settlement of stock-based compensation awards, expanded the types of stock-based compensation awards that may be granted, and expanded the parties eligible to receive such awards. In addition, in April 2011, the stockholders approved an increase in the common stock reserved under the 2008 Plan from 1,000,000 shares to 6,000,000 shares and in May 2016, from 6,000,000 to 8,000,000. Under the Company’s stock-based compensation plans, the Board (or the Compensation Committee) may grant stock options (including incentive stock options (“ISOs”) as defined in Section 422 of the IRC and non-qualified stock options (“NSOs”)), restricted stock, restricted stock units, stock appreciation rights, and other similar types of equity awards intended to qualify as “performance-based” compensation under applicable tax rules. The stock-based compensation plans were established to allow for the granting of compensation awards to attract, motivate, and retain employees, executive officers, non-employee directors, and other service providers who contribute to the success and profitability of the Company and to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s success.
The Board or Compensation Committee may establish and prescribe grant guidelines including various terms and conditions for the granting of stock-based compensation and the total number of shares authorized for this purpose. Under the 2008 Plan, for ISOs and NSOs, the option strike price must be no less than 100% of the stock price at the grant date. Prior to the approval of the 2008 Plan, the option strike price for NSOs could be no less than 85% of the stock price at the grant date. Generally,
101
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
options become exercisable in varying amounts based on years of employee service and vesting schedules. All options expire after a period of ten years from the date of grant. Other permissible stock awards include restricted stock grants, restricted stock units, stock appreciation rights or other similar stock awards (including awards that do not require the grantee to pay any amount in connection with receiving the shares or that have a purchase price that is less than the grant date fair market value of the Company’s stock).
At December 31, 2016, 1,623,875 shares reserved under the stock-based compensation plans were available for future grants.
Stock Option Grants
During the year ended December 31, 2016, the Company granted 14,222 stock options related to the conversion of existing PPFS options as of the PPFS Acquisition Date and incurred stock option compensation expense of $1.1 million. During the year ended December 31, 2015, the Company granted 3,300,000 stock options and incurred stock option compensation expense of $1.0 million. The 2015 grants were the first material stock option grants since 2008. In this time interval, the Company made only de minimis option grants to non-executive officers to facilitate hiring. The 2015 grants, which had an estimated grant date fair value of $1.63 per share and strike price of $4.79 per share, are scheduled to vest over a three to five year period and carry a 10 year life. Using the Black-Scholes model, assumptions related to the fair value of grants include a dividend yield of 0%, expected volatility of 36.59%, a risk free rate of 1.28%, and expected option life of five years.
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. Assumptions affecting the Black-Scholes option pricing model for the 2015 stock grants include a dividend yield that was based on historical dividend information. The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods of extraordinary volatility in order to provide a basis for a reasonable estimate of fair value.
In adjusting its methodology for calculating expected volatility for the 2015 grants, the Company identified certain historical periods during which extraordinary price volatility which was caused by discrete events specific to the Company that are not likely to recur, including recapitalization, the discounted payoff of its junior subordinated debentures, a major bulk sale of its adversely risk rated assets, the write off and recapture of its DTA, and highly uncertain regulatory circumstances. For the identified periods, the Company replaced its common stock price volatility with the average volatility of a peer group of publicly traded banks in the Western U.S. of comparable size and complexity. The Company expects to use this methodology for potential future stock options grants until such a time that the periods of historical volatility containing the events noted above drop off of its historical analysis. The risk-free interest rate assumption 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, historical exercise and forfeiture patterns.
During the year ended December 31, 2014, the Company granted a de minimis number of stock options, and related stock option compensation expense was immaterial for the period.
As of December 31, 2016, unrecognized compensation cost related to nonvested stock options totaled $3.3 million, which is expected to be recognized in 2017 through 2020.
The following table presents the activity related to options under all plans for the years ended December 31, 2016, 2015, and 2014.
102
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
2016 | 2015 | 2014 | ||||||||||||||||||
Options outstanding | Weighted-average exercise price | Options outstanding | Weighted-average exercise price | Options outstanding | Weighted-average exercise price | |||||||||||||||
Balance at beginning of year | 3,375,909 | $ | 5.44 | 85,901 | $ | 34.85 | 111,571 | $ | 38.92 | |||||||||||
Granted | 14,222 | 3.71 | 3,300,000 | 4.79 | — | — | ||||||||||||||
Exercised/Released | (2,266 | ) | 3.60 | — | — | — | — | |||||||||||||
Cancelled / forfeited | (2,196 | ) | 30.56 | (8,301 | ) | 21.14 | (20,482 | ) | 33.90 | |||||||||||
Expired | (1,697 | ) | 209.87 | (1,691 | ) | 151.20 | (5,188 | ) | 125.83 | |||||||||||
Balance at end of year | 3,383,972 | $ | 5.32 | 3,375,909 | $ | 5.44 | 85,901 | $ | 34.85 | |||||||||||
Exercisable at end of year | 83,972 | 75,909 | 67,404 | |||||||||||||||||
Information regarding the number, weighted-average exercise price, and weighted-average remaining contractual life of options by range of exercise price at December 31, 2016 is as follows:
Options outstanding | Exercisable options | ||||||||||||||
Exercise price range | Number of options | Weighted-average exercise price | Weighted-average remaining contractual life (years) | Number of options | Weighted-average exercise price | ||||||||||
Under $50.00 | 3,371,834 | $ | 4.80 | 8.0 | 71,834 | $ | 5.45 | ||||||||
$80.01 - $120.00 | 8,831 | 101.30 | 1.2 | 8,831 | 101.30 | ||||||||||
$220.01 - $279.00 | 3,307 | 271.82 | 0.1 | 3,307 | 271.82 | ||||||||||
3,383,972 | $ | 5.32 | 8.0 | 83,972 | $ | 26.02 | |||||||||
Restricted Stock and Restricted Stock Unit Grants
The Company has also granted awards of nonvested restricted stock. During the year ended December 31, 2016, the Company granted 579,638 additional shares of restricted stock with a weighted-average grant date fair value of $5.70 per share, which vest during 2017 through 2021. The following table presents the activity for nonvested restricted stock for the year ended December 31, 2016:
Number of shares | Weighted- average grant date fair value per share | |||||
Nonvested as of January 1, 2016 | 909,410 | $ | 6.37 | |||
Granted | 579,638 | 5.70 | ||||
Released | (297,088 | ) | 5.18 | |||
Canceled / forfeited | (42,985 | ) | 4.94 | |||
Nonvested as of December 31, 2016 | 1,148,975 | $ | 6.39 | |||
Nonvested restricted stock is scheduled to vest over a three to five year period. The unearned compensation on restricted stock is being amortized to expense on a straight-line basis over the estimated applicable service or vesting periods. As of December 31, 2016, unrecognized compensation cost related to nonvested restricted stock totaled approximately $5.0 million, which is expected to be recognized over the next five years. Total expense recognized by the Company for nonvested restricted stock for the years ended December 31, 2016, 2015, and 2014 was $2.0 million, $1.5 million, and $1.2 million, respectively.
The Company has also granted awards of restricted stock units (“RSUs”). A RSU represents the unfunded, unsecured right to require the Company to deliver to the participant one share of common stock for each RSU. Total expense recognized by the Company related to RSUs was $0.1 million for the year ended December 31, 2016, and insignificant for the years ended
103
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
December 31, 2015 and 2014. There was $0.2 million unrecognized compensation cost related to RSUs at December 31, 2016, and no unrecognized compensation cost at December 31, 2015, and 2014. There were 57,292 RSUs granted and no RSUs cancelled during the years ended December 31, 2016. There were no RSUs granted and no RSUs cancelled during the years ended December 31, 2015 and 2014. At December 31, 2016, there were 4,569 fully-vested RSUs outstanding with a weighted average grant date fair value of $5.69 per share. At December 31, 2015, there were no fully-vested RSUs outstanding. At December 31, 2014, there were 16,067 fully-vested RSUs outstanding with a weighted-average grant date fair value of $9.22 per share.
19. Fair Value
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. |
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. Where available, fair value is based upon quoted market prices. Significant balances of the Bank’s financial assets and liabilities do not have quoted market prices. In such circumstances, fair value is based upon internal or third party models that primarily use, as inputs, observable market-based parameters, such as yields and discount rates of comparable instruments of like duration or credit quality. Valuation adjustments may be made to model results with respect to various assets or liabilities. 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 the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The fair value of the interest rate swaps is determined using a discounted cash flow technique with values provided by third party swap dealers or consultants. The Company has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2.
Impaired loans: In accordance with GAAP, loans are measured for impairment using one of three methods: 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
104
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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 all its loans impaired during the calendar year utilizing fair value metrics as level 3. Loans that were impaired during the calendar year based on the present value of expected future cash flows discounted at the loans’ effective interest rates are not included in the table below as the loans’ effective interest rates are not based on current market rates.
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.
The Company’s only financial assets measured at fair value on a recurring basis at December 31, 2016 and 2015 were as follows (dollars in thousands):
Level 1 | Level 2 | Level 3 | |||||||||
2016 | |||||||||||
Assets: | |||||||||||
Investment securities available-for-sale | $ | — | $ | 494,819 | $ | — | |||||
Interest rate swap derivatives | — | 5,239 | — | ||||||||
Total assets | $ | — | $ | 500,058 | $ | — | |||||
Liabilities: | |||||||||||
Interest rate swap derivatives | $ | — | $ | 5,239 | $ | — | |||||
2015 | |||||||||||
Assets: | |||||||||||
Investment securities available-for-sale | $ | — | $ | 310,262 | $ | — | |||||
Interest rate swap derivatives | — | 8,646 | — | ||||||||
Total assets | $ | — | $ | 318,908 | $ | — | |||||
Liabilities: | |||||||||||
Interest rate swap derivatives | $ | — | $ | 8,646 | $ | — | |||||
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 December 31, 2016 and 2015 (dollars in thousands):
Level 1 | Level 2 | Level 3 | |||||||||
2016 | |||||||||||
Impaired loans | $ | — | $ | — | $ | 66 | |||||
Other real estate owned | — | — | 1,677 | ||||||||
$ | — | $ | — | $ | 1,743 | ||||||
2015 | |||||||||||
Impaired loans | $ | — | $ | — | $ | 50 | |||||
Other real estate owned | — | — | 3,274 | ||||||||
$ | — | $ | — | $ | 3,324 | ||||||
105
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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 December 31, 2016 and 2015 (dollars in thousands):
2016 | |||||||
Fair Value Estimate | Valuation Techniques | Unobservable Input | |||||
Impaired loans | $ | 66 | Market approach | Appraised value less selling costs of 5% to 10% Additional discounts of 70% to 100% to appraised value to reflect liquidation value | |||
Other real estate owned | $ | 1,677 | Market approach | Appraised value less selling costs of 5% to 10% | |||
2015 | |||||||
Fair Value Estimate | Valuation Techniques | Unobservable Input | |||||
Impaired loans | $ | 50 | 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 | $ | 3,274 | Market approach | Appraised value less selling costs of 5% to 10% | |||
The Company did not change the methodology used to determine fair value for any assets or liabilities during 2016 or 2015. In addition, for any given class of assets, the Company did not have any transfers between level 1, level 2, or level 3 during 2016 or 2015.
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 December 31, 2016 and 2015.
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 December 31, 2016 and 2015 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) 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.
106
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
BOLI: The carrying amount of both the separate and general account BOLI approximates the estimated fair value of these instruments. Fair values of insurance policies owned are based on the insurance contracts’ cash surrender values.
MSRs: The estimated fair value of MSRs is calculated by discounting the expected future contractual cash flows. Factors considered in the estimated fair value calculation include prepayment speed forecasts, market discount rates, earning rates, servicing costs, acquisition costs, ancillary income, and borrower rates.
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 December 31, 2016 and 2015 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 December 31, 2016 and 2015 incremental borrowing rates for similar types of borrowing arrangements.
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 December 31, 2016 and 2015 were approximately as follows (dollars in thousands):
2016 | 2015 | ||||||||||||||||
Level in Fair Value Hierarchy | Carrying value | Estimated fair value | Carrying value | Estimated fair value | |||||||||||||
Financial assets: | |||||||||||||||||
Cash and cash equivalents | Level 1 | $ | 72,577 | $ | 72,577 | $ | 77,805 | $ | 77,805 | ||||||||
Investment securities: | |||||||||||||||||
Available-for-sale | Level 2 | 494,819 | 494,819 | 310,262 | 310,262 | ||||||||||||
Held-to-maturity | Level 2 | 140,557 | 142,272 | 139,424 | 142,260 | ||||||||||||
FHLB stock | Level 2 | 3,268 | 3,268 | 3,000 | 3,000 | ||||||||||||
Loans held-for-sale | Level 2 | 8,651 | 8,651 | 3,621 | 3,621 | ||||||||||||
Loans, net | Level 3 | 2,077,358 | 2,064,937 | 1,662,095 | 1,656,986 | ||||||||||||
BOLI | Level 3 | 56,957 | 56,957 | 54,450 | 54,450 | ||||||||||||
MSRs | Level 3 | 2,348 | 3,321 | 2,186 | 3,027 | ||||||||||||
Interest rate swap derivatives | Level 2 | 5,239 | 5,239 | 8,646 | 8,646 | ||||||||||||
Financial liabilities: | |||||||||||||||||
Deposits | Level 2 | 2,661,813 | 2,661,045 | 2,083,088 | 2,082,748 | ||||||||||||
Interest rate swap derivatives | Level 2 | 5,239 | 5,239 | 8,646 | 8,646 | ||||||||||||
20. 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.
107
Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
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.
Effective January 1, 2015, Bancorp and the Bank became subject to new capital guidelines known as the “Basel III Rules.” The Basel III Rules increased minimum capital requirements for both the quantity and quality of capital held by the Bancorp and the Bank. The Basel III Rules include a new common equity Tier 1 capital to risk-weighted assets ratio (“CET1” ratio) of 4.5% and a capital conservation buffer of 2.5% above each of the three minimum risk-based capital requirements, which is being phased-in through January 1, 2019. The Basel III Rules also (i) raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the fully phased-in capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5%), (ii) effectively result in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and (iii) require a minimum leverage ratio of 4.0%. The Basel III Rules also change the risk weights for certain assets and off-balance-sheet exposures.
Bancorp’s and Bank’s actual capital amounts and ratios and the required capital ratios under the Basel III Rules and the prompt corrective action framework as of December 31, 2016 and 2015 are presented in the following table (dollars in thousands):
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Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
Actual | Regulatory minimum to be “adequately capitalized” | Basel III minimum adequacy with capital conservation buffer | Regulatory minimum to be “well capitalized” | ||||||||||||||||||||||
Capital Amount | Ratio | Capital Amount | Ratio | Capital Amount | Ratio | Capital Amount | Ratio | ||||||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||
Tier 1 leverage (to average assets) | |||||||||||||||||||||||||
Bancorp | $ | 259,216 | 8.6 | % | $ | 120,604 | 4.0 | % | N/A | N/A | $ | 150,754 | 5.0 | % | |||||||||||
Bank | 254,270 | 8.4 | 120,462 | 4.0 | N/A | N/A | 150,578 | 5.0 | |||||||||||||||||
CET1 capital (to risk weighted assets) | |||||||||||||||||||||||||
Bancorp | 259,216 | 10.5 | 110,738 | 4.5 | 125,504 | 5.1 | 159,955 | 6.5 | |||||||||||||||||
Bank | 254,270 | 10.3 | 110,933 | 4.5 | 125,724 | 5.1 | 160,237 | 6.5 | |||||||||||||||||
Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||
Bancorp | 259,216 | 10.5 | 147,651 | 6.0 | 162,416 | 6.6 | 196,868 | 8.0 | |||||||||||||||||
Bank | 254,270 | 10.3 | 147,911 | 6.0 | 162,702 | 6.6 | 197,214 | 8.0 | |||||||||||||||||
Total capital (to risk-weighted assets) | |||||||||||||||||||||||||
Bancorp | 284,949 | 11.6 | 196,868 | 8.0 | 211,633 | 8.6 | 246,085 | 10.0 | |||||||||||||||||
Bank | 280,003 | 11.4 | 197,214 | 8.0 | 212,005 | 8.6 | 246,518 | 10.0 | |||||||||||||||||
December 31, 2015 | |||||||||||||||||||||||||
Tier 1 leverage (to average assets) | |||||||||||||||||||||||||
Bancorp | $ | 227,542 | 9.4 | % | $ | 96,817 | 4.0 | % | N/A | N/A | $ | 121,022 | 5.0 | % | |||||||||||
Bank | 223,553 | 9.3 | 96,662 | 4.0 | N/A | N/A | 120,827 | 5.0 | |||||||||||||||||
CET1 capital to risk weighted assets | |||||||||||||||||||||||||
Bancorp | 227,542 | 11.5 | 88,818 | 4.5 | N/A | N/A | 128,292 | 6.5 | |||||||||||||||||
Bank | 223,533 | 11.4 | 88,663 | 4.5 | N/A | N/A | 128,069 | 6.5 | |||||||||||||||||
Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||
Bancorp | 227,542 | 11.5 | 118,424 | 6.0 | N/A | N/A | 157,898 | 8.0 | |||||||||||||||||
Bank | 223,553 | 11.4 | 118,218 | 6.0 | N/A | N/A | 157,624 | 8.0 | |||||||||||||||||
Total capital (to risk-weighted assets) | |||||||||||||||||||||||||
Bancorp | 252,401 | 12.8 | 157,898 | 8.0 | N/A | N/A | 197,373 | 10.0 | |||||||||||||||||
Bank | 248,346 | 12.6 | 157,624 | 8.0 | N/A | N/A | 197,030 | 10.0 | |||||||||||||||||
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Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
21. Parent company financial information
Condensed financial information for Bancorp (Parent company only) is presented as follows (dollars in thousands):
CONDENSED BALANCE SHEETS
December 31, | |||||||
2016 | 2015 | ||||||
Assets: | |||||||
Cash and cash equivalents | $ | 1,253 | $ | 2,272 | |||
Investment in subsidiary | 360,426 | 328,771 | |||||
Deferred tax asset | 6,338 | 4,624 | |||||
Other assets | 1,635 | 1,107 | |||||
Total assets | $ | 369,652 | $ | 336,774 | |||
Liabilities and stockholders’ equity: | |||||||
Stockholders’ equity | $ | 369,652 | $ | 336,774 | |||
Total liabilities and stockholders’ equity | $ | 369,652 | $ | 336,774 | |||
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Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
21. Parent company financial information - (continued)
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Income: | |||||||||||
Interest income | $ | 5 | $ | 5 | $ | 10 | |||||
Expenses: | |||||||||||
Administrative | 3,279 | 2,619 | 1,347 | ||||||||
Other | 1,356 | 378 | 3,217 | ||||||||
Total expenses | 4,635 | 2,997 | 4,564 | ||||||||
Loss before income taxes and equity in undistributed net losses of subsidiary | (4,630 | ) | (2,992 | ) | (4,554 | ) | |||||
Credit for income taxes | 1,804 | 1,154 | 2,053 | ||||||||
Gain (loss) before equity in undistributed net losses of subsidiary | (2,826 | ) | (1,838 | ) | (2,501 | ) | |||||
Equity in undistributed net income of subsidiary | 19,597 | 22,417 | 6,238 | ||||||||
Net income | $ | 16,771 | $ | 20,579 | $ | 3,737 | |||||
Comprehensive income | $ | 14,085 | $ | 19,365 | $ | 6,608 | |||||
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Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
21. Parent company financial information - (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 16,771 | $ | 20,579 | $ | 3,737 | |||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
Equity in undistributed net income of subsidiary | (19,597 | ) | (22,417 | ) | (6,238 | ) | |||||
Stock-based compensation expense | 3,124 | 2,482 | 1,214 | ||||||||
Increase in deferred tax asset | (1,714 | ) | (1,010 | ) | (1,794 | ) | |||||
Increase in other assets | (527 | ) | 17 | (936 | ) | ||||||
(Decrease) increase in other liabilities | — | — | — | ||||||||
Net cash used in operating activities | (1,943 | ) | (349 | ) | (4,017 | ) | |||||
Cash flows from financing activities: | |||||||||||
Tax effect of nonvested restricted stock | (577 | ) | (556 | ) | (339 | ) | |||||
Proceeds from issuance of common stock | 16,238 | — | 119,285 | ||||||||
Increase due to business combination | (16,244 | ) | — | (111,879 | ) | ||||||
Stock options exercised | 7 | — | — | ||||||||
Dividend from Bank | 1,500 | — | — | ||||||||
Net cash provided by (used in) financing activities | 924 | (556 | ) | 7,067 | |||||||
Net increase (decrease) in cash and cash equivalents | (1,019 | ) | (905 | ) | 3,050 | ||||||
Cash and cash equivalents at beginning of year | 2,272 | 3,177 | 127 | ||||||||
Cash and cash equivalents at end of year | $ | 1,253 | $ | 2,272 | $ | 3,177 | |||||
Noncash financing activities consist of issuance of common stock as disclosed in the accompanying consolidated statements of changes in stockholders' equity and assets and liabilities assumed in the PPFS merger, the branch acquisition and the Home merger, as disclosed in Note 2.
These consolidated financial statements have not been reviewed or confirmed for accuracy or relevance by the FDIC.
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Cascade Bancorp & Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2016, 2015 and 2014
22. Quarterly Financial Information (Unaudited)
The following tables present the summary results for the eight quarters ending December 31, 2016 (dollars in thousands):
2016 | ||||||||||||||||||||
December 31 | September 30 | June 30 | March 31 | Four Quarters | ||||||||||||||||
Interest income | $ | 25,491 | $ | 24,353 | $ | 22,739 | $ | 22,694 | $ | 95,277 | ||||||||||
Interest expense | 527 | 569 | 523 | 535 | 2,154 | |||||||||||||||
Net interest income | 24,964 | 23,784 | 22,216 | 22,159 | 93,123 | |||||||||||||||
Loan loss provision (recovery) | — | — | — | — | — | |||||||||||||||
Net interest income after loan loss provision | 24,964 | 23,784 | 22,216 | 22,159 | 93,123 | |||||||||||||||
Non-interest income | 8,279 | 7,940 | 7,771 | 5,456 | 29,446 | |||||||||||||||
Non-interest expense | 23,157 | 25,220 | 22,335 | 24,518 | 95,230 | |||||||||||||||
Income before provision for income taxes | 10,086 | 6,504 | 7,652 | 3,097 | 27,339 | |||||||||||||||
Income tax (provision)/ benefit | (4,168 | ) | (2,415 | ) | (2,828 | ) | (1,157 | ) | (10,568 | ) | ||||||||||
Net income | $ | 5,918 | $ | 4,089 | $ | 4,824 | $ | 1,940 | $ | 16,771 | ||||||||||
Basic net income per common share | $ | 0.08 | $ | 0.06 | $ | 0.07 | $ | 0.03 | ||||||||||||
Diluted net income per common share | $ | 0.08 | $ | 0.06 | $ | 0.07 | $ | 0.03 | ||||||||||||
2015 | ||||||||||||||||||||
December 31 | September 30 | June 30 | March 31 | Four Quarters | ||||||||||||||||
Interest income | $ | 20,217 | $ | 20,841 | $ | 19,819 | $ | 19,510 | $ | 80,387 | ||||||||||
Interest expense | 429 | 430 | 467 | 546 | 1,872 | |||||||||||||||
Net interest income | 19,788 | 20,411 | 19,352 | 18,964 | 78,515 | |||||||||||||||
Loan loss provision (recovery) | (2,000 | ) | — | — | (2,000 | ) | (4,000 | ) | ||||||||||||
Net interest income after loan loss provision | 21,788 | 20,411 | 19,352 | 20,964 | 82,515 | |||||||||||||||
Non-interest income | 5,772 | 6,384 | 6,695 | 6,122 | 24,973 | |||||||||||||||
Non-interest expense | 18,115 | 19,070 | 18,391 | 18,820 | 74,396 | |||||||||||||||
Income before provision for income taxes | 9,445 | 7,725 | 7,656 | 8,266 | 33,092 | |||||||||||||||
Income tax (provision)/ benefit | (3,878 | ) | (2,626 | ) | (2,861 | ) | (3,148 | ) | (12,513 | ) | ||||||||||
Net income | $ | 5,567 | $ | 5,099 | $ | 4,795 | $ | 5,118 | $ | 20,579 | ||||||||||
Basic net income per common share | $ | 0.08 | $ | 0.07 | $ | 0.07 | $ | 0.07 | ||||||||||||
Diluted net income per common share | $ | 0.08 | $ | 0.07 | $ | 0.07 | $ | 0.07 | ||||||||||||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, management of the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such is defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 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 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
During the quarter ended December 31, 2016, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 as required by Rule 13a-15(c) under the Exchange Act. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to the reliability of financial reporting and financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, has been audited by BDO USA, LLP, the independent registered public accounting firm, as stated in their report which is included herein.
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Cascade Bancorp
Bend, Oregon
We have audited Cascade Bancorp’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cascade Bancorp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cascade Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cascade Bancorp as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016 and our report dated March 3, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Spokane, Washington
March 3, 2017
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ITEM 9B. OTHER INFORMATION.
On February 28, 2017, the board of directors of the Company amended Article I, Section 1 of the Company’s Amended and Restated Bylaws to provide that the date, time and place of the Company’s annual meeting of shareholders will be determined by the Company’s board of directors, effective immediately.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Board Composition
The Company’s Board of Directors consists of the 10 directors named below. The age indicated and other information in each nominee’s biography is as of March 1, 2017.
Director: | Age | Year First Elected Director | ||
Jerol E. Andres | 73 | 1993 | ||
Michael J. Connolly | 51 | 2011* | ||
Annette G. Elg | 60 | 2014 | ||
Dennis L. Johnson | 62 | 2014 | ||
J. LaMont Keen | 64 | 2012 | ||
James B. Lockhart III | 70 | 2011* | ||
Patricia L. Moss | 63 | 1993 | ||
Ryan R. Patrick | 61 | 1998 | ||
Thomas M. Wells | 65 | 2006* | ||
Terry E. Zink | 65 | 2012 | ||
________________
* | On January 28, 2011, the Company sold 44,193,750 shares of common stock at a price of $4.00 per share, for total gross proceeds of $176,775,000. As a condition of the closing of the sale of common stock, private equity funds affiliated with Lightyear Capital LLC (“Lightyear”), private equity funds affiliated with Leonard Green & Partners, L.P. (“Leonard Green”), an affiliate of WL Ross & Co. LLC (“WL Ross”) and David F. Bolger, were each entitled to have one person nominated by them elected to the Board of Directors of the Company and the Bank. The rights to representation briefly outlined above will continue with respect to each of Lightyear, Leonard Green, WL Ross and David F. Bolger until such investor together with his or its affiliates ceases to own at least 5% of the outstanding shares of common stock of the Company. Michael J. Connolly is the director representative for Leonard Green, James B. Lockhart III is the director representative for WL Ross and Thomas M. Wells is the director representative for David F. Bolger. Currently, Lightyear does not have a director representative serving on the Board of Directors of each of the Company and the Bank. |
There are no family relationships among any of the directors or executive officers. For director qualifications, please see the “Director Qualifications and Experience” table, included in this report.
Jerol E. Andres. Mr. Andres is currently retired. From 1988 to 2011 Mr. Andres served as Chief Executive Officer and President of JELD-WEN Development, Inc., a real estate development company. He also served as the Board Chair of Clear Choice Health Plans Inc. and was a board member of the Redmond Chamber of Commerce through 2016. Currently, Mr. Andres serves on the boards of Redmond Proficiency Academy and Partners in Care. He is also a partner of Workhorse Solutions, LLC, which provides consulting services to the hospitality and resort real estate industry.
Michael J. Connolly. Mr. Connolly is a partner and managing director of Breakaway Capital Partners, LLC, a lower-middle market lending fund based in Los Angeles that he co-founded in 2014. From 2007 through 2013, he was a partner of Leonard Green & Partners, L.P., a Los Angeles-based private equity firm that manages approximately $15 billion in assets. From 2001 through 2007, Mr. Connolly was an investment banker at UBS Securities, LLC, most recently as Managing Director and co-head of UBS Securities’ Los Angeles Investment Banking office. Before joining UBS, he was a Senior Vice President at Donaldson, Lufkin and Jenrette from 1992 through 2000. He currently serves on the boards of Motorini, Inc., and Malibu
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Boats, Inc. and previously served on the board of Fiesta ParentCo, L.L.C., the parent company of the Palms Casino Resort in Las Vegas, from 2011 - 2016.
Annette G. Elg. Ms. Elg is retired, having previously served as the Senior Vice President and Chief Financial Officer of J. R. Simplot Company, one of the largest privately held food and agribusiness companies in the U.S., from August 2002 until December 2016. She joined Simplot in December 1989 and during her 27 year career progressed through various finance and operational positions. Prior to joining Simplot, Ms. Elg spent 10 years with the Boise office of the public accounting firm of Arthur Andersen & Co. Ms. Elg is dedicated to community service and is involved in various community activities, including Ballet Idaho, Boise Art Museum and Learning Lab. She is the Chairman of the University of Idaho College of Business and Economics Advisory Board and sits on the President’s Advisory Council for the University of Idaho.
Dennis L. Johnson. Mr. Johnson has been President and Chief Executive Officer of United Heritage Mutual Holding Company since 2001, and United Heritage Financial Group and United Heritage Life Insurance Company, which are insurance, annuity, and financial products companies, since 1999. He served as President and CEO of United Heritage Financial Services, a broker-dealer, from 1994 to 1998 and served as General Counsel of United Heritage Mutual Holding Company and certain of its affiliates from 1983 to 1999. He is a former trustee of the Public Employees Retirement System of Idaho and currently serves on the Idaho State Treasurer’s Investment Advisory Board. He also sits on the Board of Directors of IDACORP, Inc. and Idaho Power Company.
J. LaMont Keen. Mr. Keen is the former President and Chief Executive Officer of IDACORP, Inc., a subsidiary of Idaho Power Company, serving from 2006 to 2014, and was Chief Executive Officer of IDACORP, Inc. from 2005 through 2013 where he was employed for 40 years. He has served as a director of IDACORP, Inc. and Idaho Power Company since 2004.
James B. Lockhart III. Mr. Lockhart is Vice Chairman of WL Ross & Co. LLC and a member of the Management Committee and Investment Committees for the WLR Recovery Funds, Invesco Mortgage Recovery Funds as well as other funds. His responsibilities include overseeing financial services portfolio companies and sourcing new opportunities in the financial services industry. Prior to joining WL Ross in September 2009, he was the Director of the Federal Housing Finance Agency, regulator of Fannie Mae, Freddie Mac and the twelve Federal Home Loan Banks, and its predecessor agency, the Office of Federal Housing Enterprise Oversight, since May 2006. He served as the Chairman of Federal Housing Finance Oversight Board and a member of the Financial Stability Oversight Board with the Chairman of the Federal Reserve Board, the Secretaries of Treasury and HUD, and the Chairman of SEC. For the prior 4 years Mr. Lockhart was the Deputy Commissioner and Chief Operating Officer of Social Security, Secretary to its Board of Trustees and a member of President Bush’s Management Council. Mr. Lockhart also served in the previous Bush Administration as Executive Director of the Pension Benefit Guaranty Corporation from 1989 until 1993.
Mr. Lockhart co-founded and served as managing director of NetRisk, a risk management software and consulting firm serving major financial institutions, banks, insurance companies and investment management firms worldwide. He held senior positions at National Reinsurance, Smith Barney, Alexander & Alexander and Gulf Oil, in Europe and the U.S. He has served as a member of the American Benefits Council’s Board of Directors and of the Advisory Board to the Task Force for the Critical Review of the US Actuarial Profession. He is a director of Bank of the Cascades, Shellpoint Partners and the Bruce Museum. In 2009, he received The American Financial Leadership Award from the Financial Services Roundtable. He is a Fellow of the Association of Corporate Treasurers in the UK. Mr. Lockhart is a co-chair with former Senator Conrad (D-ND) on the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings.
Mr. Lockhart graduated from Yale University with a BA and received an MBA from Harvard Business School. He served as a Lieutenant (j.g.) in the U.S. Navy aboard a nuclear submarine.
Patricia L. Moss. Ms. Moss currently serves as Vice Chairman of the Board. Ms. Moss served as Chief Executive Officer of the Bank and President and Chief Executive Officer of the Company from 1998 to 2012. She currently serves as a director of MDU Resources, Inc., the Oregon Growth Board and the Aquila Tax Free Trust of Oregon. Ms. Moss is a former board member of Clear One Health Plans and has served on various community boards, including Central Oregon Community College, Oregon State University Cascades Campus and St. Charles Medical Center. Ms. Moss also serves as a Trustee on the Company’s Profit Sharing/401(k) Plan and as Chairman of the Bank of the Cascades Foundation.
Ryan R. Patrick, CPA. Mr. Patrick, a certified public accountant, has been a partner in the firm of Patrick Casey & Co., LLP since 2000. His experience includes financial reporting and business and tax consulting for a wide range of clients, including individuals, corporations, partnerships, estates and trusts. Mr. Patrick is a former director of St. Charles Health
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System, which operates St. Charles Medical Centers throughout Central Oregon. He is also a former director of CentWise Drug of Redmond Inc.
Thomas M. Wells. Mr. Wells is the senior partner and Chief Financial Officer of the law firm Wells, Jaworski & Liebman, LLP, with offices in New York and New Jersey. Mr. Wells serves as the sole trustee of the David F. Bolger Revocable Trust, the owner of approximately 8.62% of Cascades’ outstanding shares. In addition to his legal practice, Mr. Wells serves as a Director and Chief Executive Officer of the Bolger Foundation, as a Director and President of the Wells Mountain Foundation, and as Managing Member of Wells Mountain LLC, a real estate development, ownership and hospitality company.
Terry E. Zink. Mr. Zink has been the President and Chief Executive Officer and a director of the Company as well as Chief Executive Officer of the Bank since January 1, 2012. Mr. Zink was also President of the Bank from 2012 until February 2016. Prior to joining Bank of the Cascades, Mr. Zink served as President and Chief Executive Officer of Fifth Third Bank Chicago, an affiliate of the Fifth Third Bancorp network. He was also responsible for the oversight of the other 18 affiliates within the Fifth Third Bancorp network and the strategic oversight of the Retail and Small Business Banking lines. As an Executive Officer of Fifth Third Bank, Mr. Zink managed the Bank’s strategic growth throughout 13 states. This role included overseeing operations of approximately 22,000 employees, 1,300 branches, and more than $110 billion in assets. Prior to joining Fifth Third Bank, Mr. Zink served nearly 17 years with Wells Fargo & Company in several senior management positions in California and Arizona.
Director Qualifications and Experience
The following table identifies the experience, qualifications, attributes and skills that the Board considered in making its decision to appoint and nominate directors to the Board. This information supplements the biographical information provided above. The vertical axis displays the primary factors reviewed by the Governance Committee in evaluating a board candidate.
Andres | Connolly | Elg | Johnson | Keen | Lockhart | Moss | Patrick | Wells | Zink | |||||||||||
Experience, Qualifications, Skill or Attribute | ||||||||||||||||||||
Professional standing in chosen field | X | X | X | X | X | X | X | X | X | X | ||||||||||
Expertise in financial services or related industry | X | X | X | X | X | X | X | X | X | X | ||||||||||
Audit Committee Financial Expert (actual or potential) | X | X | X | X | X | X | X | X | ||||||||||||
Civic and community involvement | X | X | X | X | X | X | X | X | X | X | ||||||||||
Other public company experience | X | X | X | X | X | X | X | X | ||||||||||||
Leadership and team building skills | X | X | X | X | X | X | X | X | X | X | ||||||||||
Diversity by race, gender or culture | X | X | ||||||||||||||||||
Specific skills/knowledge | ||||||||||||||||||||
– finance | X | X | X | X | X | X | X | X | ||||||||||||
– marketing | X | X | ||||||||||||||||||
– public affairs | X | X | X | X | X | |||||||||||||||
– human resources | X | X | ||||||||||||||||||
– governance | X | X | X | X | X | X | X | X | X | |||||||||||
Committees of the Board of Directors
The Board has designated the following committees: Compensation Committee; Audit and Enterprise Risk Management Committee; and Nominating and Corporate Governance Committee.
The current composition of each Board committee is set forth below:
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Compensation Committee | Audit and Enterprise Risk Management Committee | Nominating and Corporate Governance Committee | ||
Jerol E. Andres (chair) | J. LaMont Keen (chair) | Thomas M. Wells (chair) | ||
Michael J. Connolly | Jerol E. Andres | Annette G. Elg | ||
Dennis L. Johnson | Michael J. Connolly | J. LaMont Keen | ||
Annette G. Elg | James B. Lockhart III | |||
Ryan R. Patrick | Ryan R. Patrick | |||
Audit and Enterprise Risk Management Committee
The Audit and Enterprise Risk Management Committee consists of the five directors named above, each of whom meets the independence standards for members of public company audit committees set forth in the NASDAQ listing rules and SEC rules. The Audit Committee operates under a written charter adopted by the Board, which is available on the Company’s website at www.botc.com (click on “About Us,” “Investor Information” and then “Governance Documents” on the left side of the page). The Board has determined that Mr. Keen, Mr. Andres, Mr. Connolly, Ms. Elg and Mr. Patrick qualify as audit committee financial experts as defined in Item 407(d)(5)(ii) of Regulation S-K. The Audit Committee met 13 times during 2016.
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EXECUTIVE OFFICERS
The following table sets forth certain information about the Company’s executive officers. Biographical information about Mr. Zink is given under “Board Composition” above.
Name | Age | Position | ||
Terry E. Zink | 65 | President and Chief Executive Officer of Cascade Bancorp and Chief Executive Officer of Bank of the Cascades since January 1, 2012. | ||
Gregory D. Newton(1) | 66 | Executive Vice President and Chief Financial Officer of Cascade Bancorp and Bank of the Cascades since 2002. | ||
Charles N. Reeves(2) | 49 | Executive Vice President and Chief Operating Officer of Cascade Bancorp and President and Chief Operating Officer of Bank of the Cascades since February 2016. | ||
Daniel J. Lee(3) | 60 | Executive Vice President and Chief Credit Officer of Cascade Bancorp and Bank of the Cascades since April 2012. | ||
Peggy Biss(4) | 59 | Executive Vice President and Chief Administrative Officer of Cascade Bancorp and Bank of the Cascades since 2014. | ||
________________
(1) | Gregory D. Newton. Mr. Newton’s extensive 30 year banking experience includes treasury and accounting experience spanning asset and liability management, investments, funding and derivative management. He has served in key treasury and controllership roles with banks in Seattle, as well as the Federal Reserve. Mr. Newton joined Cascade Bancorp in 1997. He currently serves as investor relations contact. Mr. Newton earned a Bachelor’s Degree at the University of Washington and completed MBA coursework at Seattle University and is a non-public CPA. He is active in the community and the Oregon Bankers Association. |
(2) | Charles N. Reeves. Mr. Reeves was appointed President and Chief Operating Officer of Bank of the Cascades in February 2016, having served as Chief Banking Officer since joining Cascade in August 2012. Mr. Reeves has over 20 years of banking and financial expertise, most recently as Bancorp Senior Vice President of Special Assets at Fifth Third Bank, a $115 billion bank in the Midwest. Prior to his Special Assets role, Mr. Reeves served as President of Fifth Third Bank’s Chicago region from 2008 through 2010, overseeing all lines of business. Reeves holds a Bachelor of Arts from Miami University in Oxford, Ohio. Throughout his career Reeves has been actively involved with community and industry leadership programs, including serving on the board of directors for several organizations. |
(3) | Daniel J. Lee. Mr. Lee joined Bank of the Cascades in April 2012 as Chief Credit Officer. He has over 30 years of banking and financial expertise. Prior to joining Cascade, Mr. Lee served in executive positions with a number of community and regional banks including District Head of Corporate Banking for KeyBank, Regional President for Irwin Union Bank, and Chief Credit Officer for Union Federal Bank. Mr. Lee holds a Bachelor’s Degree and MBA from Indiana University, attended the Stonier Graduate School of Banking and has been designated a Certified Turnaround Professional through the Turnaround Management Association. Throughout his career, Mr. Lee has been actively involved with his community and served on the board of Government Relations Council of the American Bankers Association. |
(4) | Peggy Biss. Ms. Biss began working for the Bank in 1978 and held the position of Chief Human Resources Officer until 2014 when she was named Chief Administrative Officer. In her current role, Ms. Biss oversees the Bank’s branch operations support and customer service functions in addition to the human resources and training departments. Prior to establishing the human resources department in 1988, Ms. Biss held positions in operations, lending and branch management. Ms. Biss is a Society for Human Resource Management Senior Certified Professional (SHRM-SCP), a Senior Professional in Human Resources (SPHR) as certified by the Human Resources Certification Institute and is a graduate of Pacific Coast Banking School. For more than 30 years, Ms. Biss has been actively involved with community and industry programs. She is a member of the Society of Human Resource Managers and the Oregon Bankers Association. |
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon the Company’s review of the copies of the Section 16(a) filings that it received with respect to the fiscal year ended December 31, 2016, and written representations from certain reporting persons that no other reports were required,
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during fiscal year 2016 all of its officers, directors and 10% shareholders complied with all applicable Section 16(a) filing requirements.
Code of Conduct and Ethics
We have adopted a written Code of Conduct and Ethics that applies to all of the Company’s directors, officers and employees, including its principal executive officer, principal financial officer, principal accounting officer and controller. If we make any substantive amendments to the Code of Conduct and Ethics or grant any waiver, including any implicit waiver, from a provision of the Code of Conduct and Ethics to our principal executive officer, principal financial officer, principal accounting officer or controller, we will disclose the nature of the amendment or waiver in a report on Form 8-K. The Code of Conduct and Ethics is available at www.botc.com.
ITEM 11. EXECUTIVE COMPENSATION.
Director Compensation
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||
(a) | (b) | (c) | (d) | (e) | (f) | (g) | ||||||||||||
Jerol E. Andres | 51,503 | 25,998 | — | — | — | 77,501 | ||||||||||||
Chris C. Casciato | — | — | — | — | — | — | ||||||||||||
Michael J. Connolly | 59,500 | 25,998 | — | — | — | 85,498 | ||||||||||||
Annette G. Elg | 42,997 | 25,998 | — | — | — | 68,995 | ||||||||||||
Dennis L. Johnson | 45,997 | — | — | — | — | 45,997 | ||||||||||||
J. LaMont Keen | 51,997 | 25,998 | — | — | — | 77,995 | ||||||||||||
James B. Lockhart III | — | — | — | — | — | — | ||||||||||||
Patricia L. Moss | 50,003 | 25,998 | — | — | 241,650 | 317,651 | ||||||||||||
Ryan R. Patrick | 63,000 | 25,998 | — | — | — | 88,998 | ||||||||||||
Thomas M. Wells | 42,997 | 25,998 | — | — | — | 68,995 | ||||||||||||
Lightyear Capital LLC | 40,000 | 25,998 | — | — | — | 65,998 | ||||||||||||
WL Ross and Co. LLC | 45,000 | 25,998 | — | — | — | 70,998 | ||||||||||||
Fees Earned or Paid in Cash (column b): Each Company director received an annual cash retainer of $26,000 in 2016. Directors also received $9,000 cash to compensate them for their expected attendance at 12 board meetings. The Chairman of the Board (Mr. Patrick) received an additional fee of $20,000. The following Directors received cash compensation for acting as Committee Chairs: Andres (Compensation) $7,500, Connolly (Loan) $7,500, Moss (Trust) $4,000, Wells (Nominating & Corporate Governance) $4,000, Keen (Audit) $9,000. The Loan and Trust committees are Bank-level committees. Directors also received cash compensation for their anticipated attendance at various committee meetings. The fee schedule for attending committee meetings was $500. At the start of the year, fees are calculated based on anticipated number of committee meetings and fees are then paid out pro-rata on a monthly basis. Employee directors do not receive fees for serving on the Board.
Stock Awards (column c): Amounts in this column represent the aggregate grant date fair value of the stock awards granted to the directors in 2016. The amounts were calculated based on the closing price of our common stock on the Nasdaq on the date of grant. On May 26, 2016, each director each received 4,569 shares of common stock at a $5.69 stock price. Mr. Johnson elected to defer his stock award and entered into a Restricted Stock Unit Agreement whereby the stock will be held until his retirement or separation from the Board.
Option Awards (column d): The Company did not grant any stock options to the directors in 2016.
All Other Compensation (column f): Messrs. Andres, Patrick, and Wells are parties to Deferred Fee Agreements, with interest credited annually at a rate of 4.32%.
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Ms. Moss is party to the Supplemental Executive Retirement Plan (“SERP”) and Deferred Bonus Plan, each of which was initiated while Ms. Moss was CEO of the Company before becoming a director. The SERP provides for a benefit starting at $18,892 per month, escalating at 2.5% per year with payments continuing for 20 years. The deferred bonus plan has interest credited annually at a rate of 4.32%.
Messrs. Andres and Patrick are parties to a director emeritus agreement. The director emeritus agreement provides for a benefit of $18,000 per year for a minimum of 10 years. The benefit will be paid from the director’s normal retirement date until the later of the director’s death or 120 months. The annual benefit payments are subject to a 2.5% annual increase during retirement.
Executive Compensation
Compensation Discussion & Analysis (“CD&A”)
This CD&A explains our executive compensation program for our named executive officers (“NEOs”) listed below. The CD&A also describes the Compensation Committee’s (“the Committee”) process for making compensation decisions, as well as its rationale for specific decisions related to fiscal 2016.
NEO | Title | |
Terry E. Zink | President & Chief Executive Officer | |
Gregory D. Newton | Executive Vice President, Chief Financial Officer | |
Charles N. Reeves | Executive Vice President, Chief Banking Officer | |
Daniel Lee | Executive Vice President, Chief Credit Officer | |
Peggy L. Biss | Executive Vice President, Chief Administrative Officer | |
Executive Summary
Board Review of 2016 Business Strategy & Results
Cascade’s mission statement is “dedicated to delivering the best in banking for the financial well-being of our customers and stockholders.” The Company’s primary business objective is to continue to improve and diversify revenue resulting in sustainable profitability consistent with safe and sound business principals and its risk management appetite. Growth in franchise value, net income and earnings per share are considered primary metrics for which management goals are established. The achievement of growth in deposits, loans and customer relationships support these metrics. In addition, Cascade seeks accretive merger and acquisition transactions to profitably leverage its existing infrastructure and enhance franchise value.
Consistent with this business objective, our NEOs are compensated through pay elements designed to drive sustained business performance, build an internal culture of ownership and create long-term value for our shareholders. The continued focus of Cascade’s leadership team on efficient execution of the Company’s strategic priorities directly contributed to the following key strategic and financial achievements during 2016:
• | The announcement of the First Interstate merger agreement. The merger consideration represents a premium of 9.6% per share, based on the cash portion of the merger consideration and the closing prices of Cascade common stock and First Interstate Class A common stock on November 16, 2016, the day before the public announcement of the execution of the First Interstate merger agreement. Upon completion of the First Interstate merger, which is expected to occur early in the third quarter of 2017, the combined organization will be a regional community bank with $12 billion in total assets and strong deposit market share in its unique geographic footprint spanning Montana, Wyoming, South Dakota, Idaho, Oregon, and Washington. |
• | The closing and integration of two acquisitions by Cascade. During the first quarter of 2016, Cascade purchased and integrated $469 million of deposits and 15 branches from Bank of America. This transaction expanded the Cascade franchise footprint in Southern Oregon and coastal communities in Oregon and Washington. Cascade also acquired and integrated the $122.4 million asset Prime Pacific Bank in Lynnwood, Washington to expand its Seattle metro lending footprint. |
• | Successful organic loan growth was evident across all geographies within the Cascade footprint. For full year 2016, organic loan growth was 17.8%, which exceeded peer bank levels. (See non-GAAP reconciliation of organic loan growth in Item 6 of this report.) |
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• | The combination of acquired and organic growth during 2016 resulted in a year-over-year increase in total assets of 24.8% to $3.1 billion. |
• | Net interest income was $93.1 million for 2016, up $14.6 million, or 18.6%, from 2015. |
• | Non-interest income improved $4.5 million, or 17.9%. |
• | Gross loans increased $416.1 million, or 24.7%. |
• | Total deposits increased $578.7 million, or 27.8%. |
2016 Compensation Actions At-A-Glance
The Committee took the following compensation-related actions for fiscal 2016:
• | Base Salaries: None of our NEOs received salary adjustments in 2016. |
• | Annual Cash Incentives: Consistent with our business achievements and the contributions of our NEOs, the Committee approved annual incentive payouts for each of the NEOs of 164% of 2016 targets. 2016 targets were established by the Board at the beginning of the year. |
• | Long-Term Incentives: The Committee approved restricted stock awards for each of the NEOs in 2016 based on evaluation of performance in 2015. Information about these awards can be found under “Long-Term Incentives: Equity Awards.” |
2016 Say-On-Pay
At the Company’s 2016 Annual Meeting of Shareholders, approximately 76% of the shareholders who voted on the “say on pay” proposal approved the compensation of our NEOs. Based on the favorable vote result, we did not make material changes to the structure of our compensation program for 2016.
Compensation Practices & Policies
Our executive compensation program is designed to encourage prudent decision-making and prevent excessive risk-taking behaviors through the following processes, policies and practices, which we believe reflect corporate governance best practices.
What We Do | What We Don’t Do | |||
a | Emphasis on variable compensation | x | No single-trigger vesting upon a change in control | |
a | Stock ownership guidelines | x | No repricing of stock options without shareholder approval | |
a | Annual risk assessment | x | No tax gross ups | |
a | Independent compensation consultant | x | No special perquisites | |
a | Clawback policy | x | No bonus guarantees | |
Our Compensation Philosophy
Our executive compensation program is designed to motivate our NEOs to execute on our strategic goal - to grow the Company to $5 billion in assets over time through both organic loan growth and value-enhancing bank acquisitions in the Pacific Northwest and deliver region-leading returns and profitability. This is the core of our compensation philosophy - driven by the following guiding principles that underpin the critical connections between business performance, shareholder value creation, talent management and sound decision making:
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Principal Elements of Pay
Our compensation philosophy is supported by the following principal elements of pay:
Pay Element | How Its Paid | Purpose | ||
Base Salary | Cash (Fixed) | Provide a competitive base salary rate relative to similar positions in the market and enable the Company to attract and retain critical executive talent | ||
Annual Executive Incentive Program | Cash (Variable) | Reward executives for delivering on annual strategic objectives that contribute to shareholder value creation | ||
Long-Term Incentive Plan | Equity (Variable) | Provide incentives for executives to execute on longer-term financial goals that drive organic growth, shareholder value creation and support the Company’s retention strategy | ||
Our Decision Making Process
Role of the Compensation Committee
The Committee is responsible for overseeing that the executive compensation program is designed and administered consistent with our compensation philosophy. The Committee reviews compensation levels for all of our executive officers, including our NEOs, as well as all other programs applicable to such officers. The Committee also makes all final compensation decisions regarding our NEOs, except for the CEO, whose compensation is reviewed and approved by the full Board, based upon recommendations of the Committee.
Details of the Committee’s authority and responsibilities are specified in the Committee’s charter, which is available on the Company’s website at www.botc.com (click on “About Us,” “Investor Information” and then “Governance Documents” on the left side of the page).
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Role of Management
The Committee frequently requests the attendance of the CEO and the Executive Vice President and Chief Administrative Officer at Compensation Committee meetings to discuss executive compensation and evaluate Company and individual performance. Occasionally other executives may be invited to attend a Committee meeting to provide financial or human resources information. NEOs or other key executive officers in attendance may provide their insights and suggestions, but only independent Committee members may vote on decisions regarding NEO compensation. The Committee discusses the CEO’s compensation with the CEO, but final deliberations and all votes regarding the CEO’s compensation both by the Committee and the Board are made without the CEO present. The Committee makes recommendations to the Board for final approval regarding all compensation matters for the CEO. The Committee makes decisions related to compensation for the NEOs (other than the CEO) and other key executive officers after receiving recommendations from the CEO and any input requested from the independent compensation consultants. A NEO or key executive officer is not present at the Committee meeting when his or her compensation is being approved.
Role of the Independent Consultant
The Committee also seeks advice and assistance from third party compensation consultants and outside counsel. The Committee has engaged Pearl Meyer to provide advice, relevant market data and best practices to consider when making compensation decisions, including decisions involving our CEO and the programs applicable to senior executives generally. Pearl Meyer also provides the Committee with input on program design features and the balance of pay among the various components of executive compensation. Pearl Meyer provides no additional services to the Committee. The Committee has assessed the independence of Pearl Meyer against the specific criteria under applicable SEC and Nasdaq rules and determined no conflict of interest is raised by Pearl Meyer’s work for the Committee.
Assessing External Market Practice
As part of our compensation philosophy, our executive compensation program is designed to attract, motivate and retain our NEOs in an increasingly competitive and complex talent market. As such, the Committee evaluates industry-specific and general market compensation practices and trends to ensure that our program remains appropriately competitive. The Committee periodically considers publicly-available data for informational purposes when making its compensation-related decisions. However, market data are not the sole determinants of the Company’s practices or executive compensation levels. When determining base salaries, incentive opportunities and annual equity grants for NEOs, the Committee also considers the performance of the Company and the individual, the nature of an individual’s role within the Company, as well as experience and contributions to his or her current role.
Our 2016 Executive Compensation Program in Detail
Base Salary
We provide each of our NEOs with a competitive fixed annual base salary. The base salaries for our NEOs are reviewed annually by the Committee by taking into account the results achieved by each executive, his or her future potential, scope of responsibilities and experience, and competitive pay practices. As shown in the following table, the Committee did not make adjustments to the base salaries of any of the NEOs for 2016.
NEO | 2015 | 2016 | % Increase | |||
Terry E. Zink | $550,000 | $550,000 | —% | |||
Gregory D. Newton | 252,350 | 252,350 | —% | |||
Charles N. Reeves | 275,000 | 275,000 | —% | |||
Daniel Lee | 235,000 | 235,000 | —% | |||
Peggy L. Biss | 225,000 | 225,000 | —% | |||
2016 Annual Executive Incentive Program
The 2016 Annual Executive Incentive Program provided our NEOs the opportunity to earn a performance-based annual cash bonus. Target annual bonus opportunities were established based on the NEO’s level of responsibility and his or her ability to impact overall results and are expressed as a percentage of base salary and are awarded as a percentage of target.
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Actual bonus payouts, which can range from 0% to 200% of target award amounts, are determined based on performance against pre-established goals designed to consider both quantitative and qualitative objectives. The Committee establishes goals at the beginning of the fiscal year based upon the business conditions and areas of opportunity that exist. The factors taken into account by the Committee in determining actual bonus payouts for fiscal 2016 were performance against the below-described financial and strategic quantitative and qualitative goals.
2016 Performance Goals | |||||||
Goal | Weight | Threshold | Target | Stretch / Max | 2016 Result | % of Target | Weighted % of Target |
Fourth Quarter Core EPS (1) | 25% | $0.075 | $0.090 | $0.105 | $0.090 | 100.0% | 25% |
Branch Acquisition Deposit Retention (2) | 15% | 80.0% | 90.0% | 100.0% | 97.1% | 171.3% | 26% |
Organic Loan Growth (3) | 15% | $100 MM | $157 MM | $215 MM | $253 MM | 150.0% | 23% |
Risk Management Objectives (4) | 20% | Max | 200.0% | 40% | |||
Strategic Business Objectives (5) | 25% | Max | 200.0% | 50% | |||
Weighted Performance Result | 100% | 164% | |||||
(1) | EPS for the period 10/1/2016 - 12/31/2016, adjusted to remove one-time expenses related to merger and acquisition activity and one-quarter of annual incentive expense in excess of budgeted levels. The result shown above is calculated as follows: $0.079 (unadjusted EPS) plus $0.009 (one-time expenses associated with the First Interstate transaction) plus $0.002 (one-quarter of annual incentive expense in excess of budgeted levels). |
(2) | Core deposits at the acquired Bank of America branches as of 12/31/2016 ($380.9 MM), divided by core deposits at these branches as of 6/30/2016 ($392.2 MM). |
(3) | Excludes change in wholesale portfolio. As a percentage of beginning of year balance, the goals represent organic loan growth of 7%, 11% and 15% at threshold, target and stretch/max, respectively. Actual organic loan growth was 17.8%, or $253.0 million. Organic loan growth is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures in Item 6 of this report. Maximum payout for this goal was capped at 150% of target in order to mitigate the likelihood of encouraging unnecessary or excessive risk-taking. |
(4) | Objective goals were established at each level in terms of regulatory examination results. |
(5) | Examples of strategic objectives identified by the Compensation Committee included merger & acquisition activities, execution of branch network objectives, integration of Bank of America branches and revenue diversification. |
Based on the above performance results as assessed and approved by the Committee, each NEO received 164% of his or her target award as outlined in the table below:
NEO | Target Award (%) | Target Award ($) | Actual Award ($) | |||
Terry E. Zink | 60% | $330,000 | $541,200 | |||
Gregory D. Newton | 45% | 113,558 | 186,234 | |||
Charles N. Reeves | 45% | 123,750 | 202,950 | |||
Daniel Lee | 45% | 105,750 | 173,430 | |||
Peggy L. Biss | 45% | 101,250 | 166,050 | |||
Long-Term Incentives: Equity Awards
The Committee believes executives, including NEOs, should have a meaningful portion of their total compensation opportunity linked to shareholder return. For that reason, our long-term incentives take the form of equity awards that are intended to align the interests of the executive with those of our shareholders. These awards promote an executive’s continued service to the organization by vesting over a period of years and encourage a balanced view of performance and long-term risk management. To this end, and in consideration of Company and executive performance during 2015, the Committee approved the following restricted stock awards in 2016:
NEO | Number of RSAs | |
Terry E. Zink | 104,393 | |
Gregory D. Newton | 35,923 | |
Charles N. Reeves | 39,147 | |
Daniel Lee | 33,453 | |
Peggy L. Biss | 32,029 | |
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The fair market value of the stock granted under the 2016 award was $5.69 per share, which was the closing price of Cascade’s common stock on the date of the grant (May 26, 2016). These stock grants are contingent upon the continued employment of the NEO through each vesting date. The vesting schedule is as follows:
Percentage of Award that Vests | When It Vests | |
20% | May 26, 2017 | |
20% | May 26, 2018 | |
20% | May 26, 2019 | |
20% | May 26, 2020 | |
20% | May 26, 2021 | |
Voluntary termination of employment before May 26, 2017, results in the forfeiture of 100% of the grant. Vesting of unvested shares can accelerate under special circumstances such as death, disability and involuntary termination associated with a change in control. Additional details can be found in the Summary Compensation Table, Plan-Based Awards Table and the Post-Termination Tables in this report.
Other Practices, Policies and Guidelines
Retirement Benefits
The Company sponsors a 401(k) Retirement Savings Plan (the “401(k) Plan”) pursuant to which all employees, including the NEOs, may make deferrals (“Employee Deferrals”) and the Company may make matching contributions (“Matching Contributions”) and profit-sharing contributions (“Profit Sharing Contributions”). All contributions are subject to certain limitations on contributions under the Internal Revenue Code and the 401(k) Plan provisions. The Matching Contribution formula is equal to 100% of Employee Deferrals up to 4% of base salary. Participants actively employed at year-end and with over 1,000 hours of paid time in the calendar year are eligible to receive Profit Sharing Contributions.
The Company also maintains nonqualified deferred compensation arrangements for certain NEOs. Mr. Zink participates in a Deferred Compensation Agreement (“DCA”) and Mr. Newton and Ms. Biss each participate in a Deferred Bonus Agreement (“DBA”). No Company contributions were made to these arrangements during 2016 and all three participants were fully vested in their account balances prior to 2016. The DCA and DBA agreements allow for elective deferral of compensation by the participants; no such elections were made by any of the participants for compensation earned in 2016. Account balances under the DCA and DBA arrangements were credited with interest at the annual rate of 4.32% in 2016. Additional details for the DCA and DBA arrangements can be found in the Nonqualified Deferred Compensation Plans Table and related narrative on in this report.
The Company has nonqualified, unfunded Supplemental Employee Retirement Plans (“SERPs”) in place for Mr. Newton and Ms. Biss. Mr. Newton is fully vested in his annual normal retirement benefit amount of $77,150 and Ms. Biss is fully vested in her annual normal retirement benefit amount of $94,250. The annual benefit payments are subject to a 2.5% annual increase during retirement and will be paid in 12 equal monthly installments commencing upon termination for any reason (other than Termination for Cause, as defined in the SERP) for a period of 20 years. Additional details for the SERP arrangements can be found in the Pension Benefits Table and related narrative in this report.
Other Benefits and Perquisites
The NEOs participate in the Bank’s broad-based employee welfare benefit plans, such as medical, dental, vision, supplemental disability and term life insurance. The NEOs are provided the same benefits, and participate in the cost at the same rate, as all other employees. No perquisites are provided to our NEOs.
Employment Agreements, Severance Benefits and Change In Control Arrangements
The Company maintains Employment Agreements with each of the NEOs that provide payments upon certain termination events. The Committee believes the Employment Agreements play a critical role in support of the Company’s leadership strategy and help to ensure that we retain the talent necessary to deliver on our key business objectives and maximize shareholder value. The Employment Agreements also provide important protection to the Company by subjecting the executives to certain non-competition, non-solicitation and other restrictions following their termination of employment.
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Each of the NEO Employment Agreements was amended on February 4, 2015. The term of each agreement is two years commencing on the effective date, and will automatically renew for additional one year periods thereafter unless the Company gives notice of termination 90 days prior to the expiration of the immediately preceding term. Details for the Employment Agreements can be found in the Post-Termination Tables and related narratives in this report.
Stock Ownership Requirements
The Company maintains stock ownership guidelines that are designed to promote our ownership culture and further align the interests of our shareholders, directors and top executives.
Our NEOs are expected to acquire and hold a minimum of Company stock equal to a multiple of his or her annual base salary within five years from the award of his or her title. Officers not meeting the ownership requirements are not eligible for promotion unless there is a plan approved by the CEO and the Chairman of the Committee.
Title | Guideline as a Multiple of Salary | |
CEO | 3x | |
Other NEOs | 2x | |
Directors are also expected to acquire and hold a minimum of Company stock totaling four times the approximate annual value of cash compensation received (retainer and regular board meeting fees). They are expected to meet this guideline within their first four year period of service and each member is encouraged to reach the minimum as soon as possible.
The following ownership interests are considered when determining compliance with stock ownership requirements:
• | common shares held directly or indirectly; |
• | common shares (on an as converted full value basis) held in our 401(k) or other benefit plan; and |
• | all vested or unvested stock options, restricted stock or stock units. |
All of our NEOs and directors are currently in compliance with the requirements.
Clawback Policy
The Company reserves the right to correct or recover overpayments made incorrectly or unintentionally. The Company also reserves the right to clawback payments if the Board determines an officer engaged in fraud or willful misconduct. Any recoupment under this policy may be in addition to, and is not limited by, any other remedies that may be available to the Company under applicable law, including disciplinary actions up to and including termination of employment.
2016 Risk Assessment
Each year, the Company performs a detailed risk analysis of each of its compensation programs. If warranted, the Committee will recommend changes to address concerns or considerations raised in the risk review process. Changes may be recommended for the program design or its oversight and administration in order to mitigate unreasonable risk, if any is determined to exist. The Committee has concluded that the Company’s compensation arrangements do not encourage employees to take unnecessary and excessive risks. We do not believe that any risks arising from our compensation policies and practices are reasonably likely to have a material adverse effect on the Company.
Tax and Accounting Considerations
The Company takes tax and accounting implications into consideration in choosing the particular elements of our compensation and in the procedures we use to set and pay those elements. In the selection and design of executive pay instruments, the Committee reviews extensive modeling analyses of the various alternatives and considers the related tax and accounting impact.
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We seek to pay compensation in the most tax-effective manner reasonably possible and therefore take tax considerations into account.
• | Section 162(m) of the Internal Revenue Code (“Section 162(m)”) provides that payments of compensation in excess of $1,000,000 annually to a covered employee (the Chief Executive Officer and each of the three-highest paid executive officers other than the Chief Financial Officer) will not be deductible for purposes of U.S. corporate income taxes unless it is “performance-based” compensation and is paid pursuant to a plan and procedures meeting certain requirements of the Code. Under our incentive plans, our Compensation Committee may issue awards which qualify as deductible performance-based compensation under Section 162(m). However, we may pay compensation that does not satisfy the requirements of Section 162(m) where we believe that it is in the best overall interests of the Company. |
• | Section 409A of the Internal Revenue Code provides that deferred compensation (including certain forms of equity awards) is subject to additional income tax and interest unless it is paid pursuant to a plan and procedures meeting certain requirements. It is our intention to deliver compensation which complies with the requirements under Section 409A. |
• | We have generally granted stock options to NEOs first as incentive stock options under Section 422 of the Internal Revenue Code, up to the volume limitations contained in the Internal Revenue Code, and nonqualified stock options thereafter. Generally, for stock options that do not qualify as incentive stock options, upon exercise of the options, the holders of the stock options recognize taxable income and we are entitled to a tax deduction. For stock options that qualify as incentive stock options, we do not receive a tax deduction and the holder of the stock option may receive more favorable tax treatment than he or she would for a non-qualified stock option. For federal income tax purposes, the NEO will generally be deemed to have received compensation income on each vesting date equal to the fair market value of restricted shares vesting on such date, and the Company will generally be entitled to a tax deduction for such amount as compensation expense unless limited by tax rules. |
Compensation Tables
The following table sets forth all compensation received from the Company for the fiscal year ended December 31, 2016 by our NEOs. In this table and the tables that follow, columns required by the SEC rules may be omitted where there is no amount to report.
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SUMMARY COMPENSATION TABLE
Name and principal position | Year | Salary ($) | Bonus ($) | Stock awards ($) (12) | Options awards ($) | Non-equity incentive plan compensation ($) (13) | Change in pension value and nonqualified deferred compensation earnings ($) | All other compensation ($) | Total ($) | |||||||||||||||||||||||
Terry E. Zink President and Chief Executive Officer | 2016 | 550,000 | — | 593,996 | — | 541,200 | 9,523 | 9 | 10,600 | 3 | 1,705,319 | |||||||||||||||||||||
2015 | 550,000 | 594,000 | — | 2,445,000 | 1 | — | 1,687 | 9 | 10,600 | 3 | 3,601,287 | |||||||||||||||||||||
2014 | 550,000 | 544,500 | 495,000 | — | — | 376 | 9 | 125,792 | 2, 3 | 1,715,668 | ||||||||||||||||||||||
Gregory D. Newton Executive Vice President Chief Financial Officer | 2016 | 252,350 | — | 204,402 | — | 186,234 | 18,775 | 10 | 10,094 | 3 | 671,855 | |||||||||||||||||||||
2015 | 249,900 | 4 | 228,904 | 5 | — | 978,000 | 1 | — | 73,662 | 10 | 10,600 | 3 | 1,541,066 | |||||||||||||||||||
2014 | 245,000 | 181,913 | 165,375 | — | — | 37,252 | 10 | 7,554 | 3 | 637,094 | ||||||||||||||||||||||
Charles N. Reeves Executive Vice President Chief Banking Officer | 2016 | 275,000 | — | 222,746 | — | 202,950 | — | 10,600 | 3 | 711,296 | ||||||||||||||||||||||
2015 | 275,000 | 222,750 | — | 978,000 | 1 | — | — | 10,600 | 3 | 1,486,350 | ||||||||||||||||||||||
2014 | 275,000 | 204,188 | 185,621 | — | — | — | 7,562 | 3 | 672,371 | |||||||||||||||||||||||
Peggy L. Biss Executive Vice President Chief Administrative Officer | 2016 | 225,000 | — | 182,245 | — | 166,050 | 28,272 | 11 | 9,002 | 3 | 610,569 | |||||||||||||||||||||
2015 | 225,000 | 189,000 | 6 | — | 570,500 | 1 | — | 123,646 | 11 | 10,600 | 3 | 1,118,746 | ||||||||||||||||||||
2014 | 213,083 | 7 | 157,410 | 143,098 | — | — | 78,368 | 11 | 6,890 | 3 | 598,849 | |||||||||||||||||||||
Daniel J. Lee Executive Vice President Chief Credit Officer | 2016 | 235,000 | — | 190,348 | — | 173,430 | — | 9,400 | 3 | 608,178 | ||||||||||||||||||||||
2015 | 235,000 | 197,400 | 8 | — | 407,500 | 1 | — | — | 10,600 | 3 | 850,500 | |||||||||||||||||||||
2014 | 235,000 | 105,750 | 158,621 | — | — | — | 7,677 | 3 | 507,048 | |||||||||||||||||||||||
(1) Value of option award based on Black Scholes value of $1.63 per share. The assumptions used to determine this value can be found on page 99 of our Annual Report on Form 10-K for the year ended December 31, 2015. | ||||||||||||||||||||||||||||||||
(2) Includes the $118,000 contribution by the Company to Mr. Zink’s DCA account, as per his employment agreement. | ||||||||||||||||||||||||||||||||
(3) Includes the company matching contribution to executives’ 401(k) retirement savings plan; Mr. Zink’s match included in this amount was $7,792 in 2014. | ||||||||||||||||||||||||||||||||
(4) Represents actual base salary earned in 2015. Mr. Newton’s pay was increased from $245,000 to $252,350 effective May 1, 2015. | ||||||||||||||||||||||||||||||||
(5) Represents Mr. Newton’s 2015 annual bonus of $204,404 and bonus in lieu of merit of $24,500. | ||||||||||||||||||||||||||||||||
(6) Represents Ms. Biss’s 2015 annual bonus of $182,250 and bonus in lieu of merit of $6,750. | ||||||||||||||||||||||||||||||||
(7) Ms. Biss received a promotion and pay adjustment effective December 1, 2014. Salary represents one month at her increased rate of pay. | ||||||||||||||||||||||||||||||||
(8) Represents Mr. Lee’s 2015 annual bonus of $190,350 and bonus in lieu of merit of $7,050. | ||||||||||||||||||||||||||||||||
(9) Represents above market earnings credited to Mr. Zink’s DCA of $9,523 in 2016, $1,687 in 2015, and $376 in 2014. | ||||||||||||||||||||||||||||||||
(10) Represents Mr. Newton’s change in Supplemental Employee Retirement Plan value of $14,165 in 2016, $69,322 in 2015, and $35,249 in 2014, as well as above market earnings credited to Mr. Newton’s Deferred Bonus Agreement of $4,610 in 2016, $4,340 in 2015, and $2,003 in 2014. | ||||||||||||||||||||||||||||||||
(11) Represents Ms. Biss’s change in Supplemental Employee Retirement Plan value of $24,550 in 2016, $120,142 in 2015, and $76,888 in 2014, as well as above market interest earnings credited to Ms. Biss’s Deferred Bonus Agreement of $3,722 in 2016, $3,504 in 2015, and $1,480 in 2014. | ||||||||||||||||||||||||||||||||
(12) Represents the aggregate grant date fair value of awards, computed in accordance with FASB ASC Topic 718. | ||||||||||||||||||||||||||||||||
(13) Represents the awards earned under our 2016 Annual Executive Incentive Program. The performance goals and measurements associated with this Plan that generated the awards set forth above are provided in the “2016 Annual Executive Incentive Program” section of Item 11 of this report. | ||||||||||||||||||||||||||||||||
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GRANTS OF PLAN-BASED AWARDS | |||||||||||||||||||||||
Name and principal position | Grant Date | Estimated future payouts under non-equity incentive plan awards (1) | Estimated future payouts under equity incentive plan awards | All other stock awards: number of shares of stock(2) (#) | Grant date fair value of stock awards(3) ($) | ||||||||||||||||||
Threshold ($) | Target ($) | Maximum ($) | Threshold ($) | Target ($) | Maximum ($) | ||||||||||||||||||
Terry E. Zink | 5/26/2016 | — | 330,000 | 660,000 | n/a | n/a | n/a | 104,393 | 593,996 | ||||||||||||||
Gregory D. Newton | 5/26/2016 | — | 113,558 | 227,116 | n/a | n/a | n/a | 35,923 | 204,402 | ||||||||||||||
Charles N. Reeves | 5/26/2016 | — | 123,750 | 247,500 | n/a | n/a | n/a | 39,147 | 222,746 | ||||||||||||||
Peggy L. Biss | 5/26/2016 | — | 101,250 | 202,500 | n/a | n/a | n/a | 32,029 | 182,245 | ||||||||||||||
Daniel J. Lee | 5/26/2016 | — | 105,750 | 211,500 | n/a | n/a | n/a | 33,453 | 190,348 | ||||||||||||||
(1) Represents the potential range of awards payable under the 2016 Annual Executive Incentive Program. The performance goals and measurements associated with this Plan are provided in the “2016 Annual Executive Incentive Program” section included in Item 11 of this report. | |||||||||||||||||||||||
(2) Represents the number of restricted shares granted on May 26, 2016, which vest 20% per year beginning with the first anniversary of the award. | |||||||||||||||||||||||
(3) Represents the aggregate grant date fair value of awards, computed in accordance with FASB ASC Topic 718, and based on the closing price of Cascade’s common stock on NASDAQ on the grant date, May 26, 2016 ($5.69 per share). | |||||||||||||||||||||||
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END | |||||||||||||||||||||
Name and principal position | Option Awards | Stock Awards | |||||||||||||||||||
Number of securities underlying unexercised options exercisable (#) | Number of securities underlying unexercised options unexercisable (1) (#) | Option exercise price ($) | Option Expiration Date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested (4) ($) | Date equity fully vests | |||||||||||||||
Terry E. Zink | 19,412 | — | 5.95 | 2/13/2022 | 61,875 | (2) | 502,425 | 6/11/2019 | |||||||||||||
— | 20,876 | 4.79 | 2/3/2025 | 104,393 | (3) | 847,671 | 5/26/2021 | ||||||||||||||
— | 1,479,124 | 4.79 | 2/3/2025 | — | — | — | |||||||||||||||
Gregory D. Newton | 366 | — | 273.20 | 2/1/2017 | 20,672 | (2) | 167,857 | 6/11/2019 | |||||||||||||
364 | — | 273.20 | 2/1/2017 | 35,923 | (3) | 291,695 | 5/26/2021 | ||||||||||||||
1,300 | — | 101.30 | 3/3/2018 | — | — | — | |||||||||||||||
6,000 | — | 5.70 | 3/16/2020 | — | — | — | |||||||||||||||
— | 20,876 | 4.79 | 2/3/2025 | — | — | — | |||||||||||||||
— | 579,124 | 4.79 | 2/3/2025 | — | — | — | |||||||||||||||
Charles N. Reeves | 12,987 | — | 5.55 | 10/15/2022 | 23,203 | (2) | 188,408 | 6/11/2019 | |||||||||||||
— | 20,876 | 4.79 | 2/3/2025 | 39,147 | (3) | 317,874 | 5/26/2021 | ||||||||||||||
— | 579,124 | 4.79 | 2/3/2025 | — | — | — | |||||||||||||||
Peggy L. Biss | 366 | — | 273.20 | 2/1/2017 | 17,887 | (2) | 145,242 | 6/11/2019 | |||||||||||||
303 | — | 273.20 | 2/1/2017 | 32,029 | (3) | 260,075 | 5/26/2021 | ||||||||||||||
1,150 | — | 101.30 | 3/3/2018 | — | — | — | |||||||||||||||
5,250 | — | 5.70 | 3/16/2020 | — | — | — | |||||||||||||||
— | 20,876 | 4.79 | 2/3/2025 | — | — | — | |||||||||||||||
— | 329,124 | 4.79 | 2/3/2025 | — | — | — | |||||||||||||||
Daniel J. Lee | — | 20,876 | 4.79 | 2/3/2025 | 19,828 | (2) | 161,003 | 6/11/2019 | |||||||||||||
— | 229,124 | 4.79 | 2/3/2025 | 33,453 | (3) | 271,638 | 5/26/2021 | ||||||||||||||
(1) These stock options were granted on February 3, 2015, and are subject to graduated vesting as follows: 50% vest on February 3, 2018; 25% on February 3, 2019, and 25% on February 3, 2020. | |||||||||||||||||||||
(2) These shares of restricted stock were awarded on June 11, 2014, and are subject to five year graduated vesting at 20% per year over five years. Shares will be fully vested on June 11, 2019. | |||||||||||||||||||||
(3) These shares of restricted stock were awarded on May 26, 2016, and are subject to five year graduated vesting at 20% per year over five years. Shares will be fully vested on May 26, 2021. | |||||||||||||||||||||
(4) Equity awards valued using the closing price of our common stock as of December 31, 2016, which was $8.12. | |||||||||||||||||||||
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OPTION EXERCISES AND STOCK VESTED | ||||||
Name and principal position | Stock awards | |||||
Number of shares acquired on vesting (#) | Value realized on vesting ($) | |||||
Terry E. Zink | 19,031 | 108,286 | ||||
20,625 | 116,944 | |||||
Gregory D. Newton | 11,534 | 65,628 | ||||
6,890 | 39,066 | |||||
Charles N. Reeves | 5,767 | 32,814 | ||||
7,734 | 43,852 | |||||
Peggy L. Biss | 10,092 | 57,423 | ||||
5,963 | 33,810 | |||||
Daniel J. Lee | 5,767 | 32,814 | ||||
6,609 | 37,473 | |||||
Pension Benefits
PENSION BENEFITS | ||||||||||
Name and principal position | Plan name | Number of years credited service (1) (#) | Present value of accumulated benefit (2) ($) | Payments during last fiscal year ($) | ||||||
Terry E. Zink | — | — | — | — | ||||||
Gregory D. Newton | Bank of the Cascades Supplemental Employee Retirement Plan | 19 | 1,273,470 | — | ||||||
Charles N. Reeves | — | — | — | — | ||||||
Peggy L. Biss | Bank of the Cascades Supplemental Employee Retirement Plan | 38 | 1,553,870 | — | ||||||
Daniel J. Lee | — | — | — | — | ||||||
(1) Mr. Newton and Ms. Biss are fully eligible for their respective normal retirement benefit and, therefore, years of credited service is no longer applicable.
(2) The present value of accumulated benefit amounts shown above were calculated based on an assumed discount rate of 4.32% and an assumed retirement date for Mr. Newton and Ms. Biss of July 5, 2017; these amounts are consistent with the liabilities reported in our financial statements
Supplemental Employee Retirement Plan (“SERP”)
The Bank has SERP agreements in place for Mr. Newton and Ms. Biss. Mr. Newton and Ms. Biss are general unsecured creditors of the Bank regarding the payment of benefits.
Mr. Newton and Ms. Biss are fully eligible for normal retirement benefits upon separation from service except in the case of a Termination for Cause (as defined in the agreement). The annual benefit payable to Mr. Newton is $77,150 and the annual benefit payable to Ms. Biss is $94,250. Commencing on the first anniversary after payments begin, benefits are increased annually by 2.50%. Benefits are payable monthly for a period of 20 years.
If the participant dies during active employment, the benefit is payable to the participant’s beneficiary beginning on the first day of the fourth month after death.
If the participant experiences a Termination for Cause, no benefits are payable from the plan. Per Section 409A of the Internal Revenue Code, certain payments to Mr. Newton and Ms. Biss would not commence for six months following a separation from service.
The SERP agreements include non-competition and non-solicitation provisions which result in forfeiture (and repayment, if applicable) of all benefits if the participant competes with the Bank or violates non-solicitation requirements during employment or within 18 months following separation from service.
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NONQUALIFIED DEFERRED COMPENSATION PLANS | ||||||||||||||||
Name and principal position | Executive contributions in last FY ($) | Registrant contributions in last FY ($) | Aggregate earnings in last FY (1) ($) | Aggregate withdrawals/ distributions ($) | Aggregate balance at last FYE (2) ($) | |||||||||||
Terry E. Zink | — | — | 37,062 | — | 894,979 | (3) | ||||||||||
Gregory D. Newton | — | — | 16,876 | — | 399,843 | (4) | ||||||||||
Charles N. Reeves | — | — | — | — | — | |||||||||||
Peggy L. Biss | — | — | 13,627 | — | 322,859 | (5) | ||||||||||
Daniel J. Lee | — | — | — | — | — | |||||||||||
(1) Reflects interest credited in January 2016 for the year ending December 31, 2015 at annual rate of 4.32% for Mr. Zink. Account balances for Mr. Newton and Ms. Biss were credited with interest at 4.32% (compounded monthly) for the fiscal year ending December 31, 2016. Interest in the amounts of $9,523, $4,610 and $3,722 for Messrs. Zink and Newton and Ms. Biss, respectively, are reported in the Summary Compensation Table as above market interest. | ||||||||||||||||
(2) Reflects contributions by our NEOs, contributions by the Company and interest on balances prior to 2016 plus interest for 2016 (with amounts that are included in the Summary Compensation Table for 2013-2016 shown in notes 3, 4 and 5 below). | ||||||||||||||||
(3) $851,636 of Mr. Zink’s aggregate balance is reported in the Summary Compensation Table for the years 2013-2016, reflecting the aggregate contributions made by the Company, deferrals by Mr. Zink, and above market interest for those years. | ||||||||||||||||
(4) $14,418 of Mr. Newton’s aggregate balance is reported in the Summary Compensation Table for the years 2013-2016 which reflects above market interest for those years. There were no contributions made by the Company or deferrals by Mr. Newton for 2013-2016. | ||||||||||||||||
(5) $36,328 of Ms. Biss’s aggregate balance is reported in the Summary Compensation Table for the years 2013-2016 which reflects deferrals made by Ms. Biss in the amount of $25,060 and above market interest of $11,268. | ||||||||||||||||
Deferred Bonus Agreements (“DBA”)
The Bank has DBA agreements in place for Mr. Newton and Ms. Biss that allow them to elect to defer a portion of their annual cash bonus payments. The Bank has established deferral accounts on its balance sheet that track the annual deferrals and credited interest. The deferral accounts are solely used as a measuring device, and Mr. Newton and Ms. Biss are general unsecured creditors of the Bank regarding the payment of benefits. The DBA agreements allow Mr. Newton and Ms. Biss to defer up to 25% of his or her annual cash bonus into the plan. No contributions were made by either Mr. Newton or Ms. Biss in 2016. Interest was credited to DBA balances in 2016 at an annual rate of 4.32%, compounded monthly, and will be credited at same rate in 2017; the interest rate is reviewed annually and updated, as appropriate.
The DBA agreements provide payouts in the event of termination for any reason. If Mr. Newton dies while actively employed with the Bank, his account balance will be paid to his named beneficiary in the form of 120 monthly payments. If Ms. Biss dies while actively employed with the Bank, her account balance (projected to age 62, if death occurs prior to that date) will be paid to her named beneficiary in the form of 120 monthly payments. If termination is due to reasons other than death, the account balance will be paid in equal monthly installments or in a lump sum according to the participant’s election under his or her agreement. If either participant experiences a Termination for Cause (as defined in the agreements), payouts will not exceed cumulative deferrals. If an unforeseeable emergency (as defined in the agreements) occurs, the participant may petition to receive a distribution from the agreement (a “Hardship Distribution”). Per Section 409A of the Internal Revenue Code, certain payments to Mr. Newton and Ms. Biss would not commence for six months following a termination of employment.
The DBA agreements include a non-competition provision which results in forfeiture (and repayment, if applicable) of interest credited to the account if the participant competes with the Bank in Oregon or Idaho during employment or within 18 months following termination of employment.
Deferred Compensation Agreement (“DCA”)
The Bank has a DCA agreement in place for Mr. Zink that allows him to elect to defer a portion of his annual cash bonus payment. Mr. Zink’s DCA was credited an initial grant by the Bank, in two installments totaling $350,000 (the “Initial Grant”). Mr. Zink is fully vested in the Initial Grant. The Bank has established a deferral account on its balance sheet that tracks the Initial Grant, annual deferrals, and credited interest. The deferral accounts are solely used as a measuring device, and Mr. Zink is a general unsecured creditor of the Bank regarding the payment of benefits. The DCA agreement allows Mr. Zink to defer up
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to 25% of his annual cash bonus into the plan. No contributions were made by Mr. Zink in 2016. Interest was credited to DCA balances in January 2016 for the year 2015 at an annual rate of 4.32%, and was credited at an annual rate of 4.32% in January 2017 for the year 2016. The interest rate is reviewed annually and updated, as appropriate.
The DCA agreement provides payouts in the event of termination for any reason. If Mr. Zink dies while actively employed with the Bank, his account balance will be paid to his named beneficiary in the form of 36 monthly payments. If termination is due to reasons other than death, the account balance will be paid in equal monthly installments or in a lump sum according to his election under the agreement. If Mr. Zink experiences a Separation for Cause (as defined in the agreement), payouts will not exceed his cumulative deferrals. If an unforeseeable emergency (as defined in the agreements) occurs, Mr. Zink may petition to receive a distribution from the agreement (a “Hardship Distribution”). Per Section 409A of the Internal Revenue Code, certain payments to Mr. Zink would not commence for six months following a termination of employment.
The DCA agreement includes a non-competition provision which results in forfeiture (and repayment, if applicable) of interest credited to the account if Mr. Zink competes with the Bank in Oregon or Idaho during employment or within 18 months following termination of employment.
Potential Payments upon Termination or Change in Control
This section and the various tables summarize the estimated compensation that would be paid to each of the NEOs in the event of various termination scenarios.
Employment Agreements, Severance Benefits and Change In Control Arrangements
Effective October 29, 2013, the Company entered into Executive Employment Agreements with Messrs. Zink, Newton and Lee and Ms. Biss. Effective November 1, 2013, the Company also entered into an Executive Employment Agreement with Mr. Reeves. These agreements include payments upon certain termination events. Each of these agreements was amended on February 4, 2015.
The original term of each agreement was for two years, commencing on the effective date. After the initial two-year term, the agreements automatically renew for an additional one year period on each anniversary of the effective date, unless the Company gives notice of termination 90 days prior to expiration.
The agreements outline the duties of each employee and forms of remuneration awarded for the performance of such duties, including base salary, bonuses and various other employer provided benefits. In addition, the agreements outline specific duties and payments to be made upon termination of employment under various conditions.
Termination in connection with a change in control: In the event of an involuntary termination of employment without cause (as defined in each executive’s agreement) or voluntary termination by the executive for good reason (as defined in each executive’s agreement) within 12 months before or 18 months after a change in control (as defined in each executive’s agreement), the executive will receive an amount equal to 2.99 times their base salary plus an amount equal to 2.99 times their annual cash incentive in effect for the year in which the change in control occurs (the “Change in Control Payment”). In addition, all outstanding unvested restricted stock and stock options will fully vest upon termination and the Company will provide certain employment benefits for a period of 18 months following the date of termination. The benefits may be limited, however, if the executive is initially determined to be subject to excise taxes under Section 4999 of the Internal Revenue Code but would be better off on a net-after tax basis by reducing the Change in Control Payments to avoid being subject to the excise tax. A participant would also be entitled to the Change in Control Payment if terminated in connection with a “business combination” (as defined in each executive’s agreement) that does not rise to the level of a change in control.
Involuntary or good reason termination unrelated to a change in control: In the event of an involuntary termination by the Company without cause or voluntary termination by the executive for good reason, the agreement provides that the executive will receive an amount equal to 18 months base salary plus an amount equal to the target cash incentive in effect in the year in which the termination occurs, pro-rated for the portion of the year prior to the date of termination. In addition, the Company will provide certain employment benefits for a period of 18 months following the date of termination.
Voluntary termination without good reason: In the event of a voluntary termination without good reason, the executive shall provide up to 120 hours of consulting services to the Company within the first three months following his termination. Each NEO will be paid for the consulting services at an hourly rate equal to the annual base salary at the time of termination
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divided by 2,080 for each hour worked. As of December 31, 2016, the maximum consulting services that each NEO could earn following a voluntary termination without good reason was $31,731, $14,559, $15,865, $13,558 for Messrs. Zink, Newton, Reeves, and Lee, respectively, and $12,981 for Ms. Biss.
In the case of Messrs. Zink and Newton and Ms. Biss, the amended Executive Employment Agreements provide that, upon the applicable executive’s retirement from the Company, any unvested grants of restricted stock and stock options awarded to the executive under the 2008 Performance Incentive Plan will continue to vest following retirement in accordance with the vesting schedules set forth in the respective restricted stock award agreements and stock option grant agreements, with the exception of the stock options granted to such executives on February 3, 2015, which would not continue to vest following retirement.
The employment agreements include a non-competition provision which prohibits each NEO from competing with the Company or the Bank (in any county in which the Company operates or does business, or within 50 miles of Bend, Oregon) and soliciting any employee or customer of the Company or the Bank during the term of the employment agreement and for 18 months following termination of employment.
Other Change in Control and Employment Termination Provisions: The individual award agreements governing outstanding unvested stock options and restricted stock provide for accelerated vesting upon the recipient’s death or disability, as defined under the agreements. The award agreements for stock options granted to NEOs on February 3, 2015, also provide for accelerated vesting upon termination in connection with a “business combination” (as defined in each executive’s award agreement) that does not rise to the level of a change in control. In addition, different provisions govern the length of time a recipient has to exercise a stock option after termination of employment, depending on the reason for termination. For example, in some cases the exercise period is limited to 30 days for a termination for reasons other than death or disability, while for death or disability, the exercise period may be extended to the earlier of 12 months or the original term.
Per Section 409A of the Internal Revenue Code, certain payments to the NEOs would not commence for six months following a termination of employment. Any payment delayed under the Executive Employment Agreements, will be credited with interest at the prime rate as published in the Wall Street Journal until the payment is made.
The following tables show payments our NEOs may receive assuming various employment termination and change-in-control scenarios had occurred on December 31, 2016. The amounts shown in the tables reflect estimated amounts. The actual amounts would need to be calculated upon the actual termination of employment. The amounts shown do not include the value of vested and unexercised stock options reported above in the Outstanding Equity Awards at Fiscal Year-End 2016 table, vested accrued DBA and DCA amounts reported above in the Non-Qualified Deferred Compensation table, vested accrued SERP amounts reported above in the Pension Benefits table, term life insurance benefits, or generally available employee benefits. Some amounts below have been rounded up to the nearest whole number.
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Post-employment Payments - Mr. Zink | |||||||||||||||||||||||||||
Executive Payments and Benefits upon Termination or Change in Control | Retirement | Involuntary Termination for Cause | Involuntary Termination Without Cause/ Termination for Good Reason | Change in Control With Termination for Good Reason or Without Cause | Death | Disability | |||||||||||||||||||||
Compensation: | |||||||||||||||||||||||||||
Severance | $ | — | $ | — | $ | 825,000 | (1) | $ | 2,631,200 | (2), (3) | $ | — | $ | — | |||||||||||||
Pro-rata Bonus | — | — | 330,000 | (4) | — | — | — | ||||||||||||||||||||
Long-term Incentives (5) | |||||||||||||||||||||||||||
Stock Options | — | — | — | 4,995,000 | (3) | 4,995,000 | 4,995,000 | ||||||||||||||||||||
Restricted Stock | 1,350,096 | (6) | — | — | 1,350,096 | 1,350,096 | 1,350,096 | ||||||||||||||||||||
Benefits & Perquisites: | |||||||||||||||||||||||||||
Health Benefits | — | — | 24,336 | (7) | 24,336 | (7) | — | — | |||||||||||||||||||
Total | $ | 1,350,096 | $ | — | $ | 1,179,336 | $ | 9,000,632 | $ | 6,345,096 | $ | 6,345,096 | |||||||||||||||
(1) Severance amount is equal to eighteen months of Mr. Zink's base salary, payable in a lump sum. | |||||||||||||||||||||||||||
(2) Severance amount is equal to 2.99 times the sum of Mr. Zink's base salary and target bonus, payable in a lump sum. | |||||||||||||||||||||||||||
(3) These amounts would also be payable to Mr. Zink in the event of a qualifying termination following a business combination that does not rise to the level of a Change in Control as defined in the applicable agreements. | |||||||||||||||||||||||||||
(4) Mr. Zink would be entitled to his target cash incentive award pro-rated for the portion of the year prior to termination. Because termination is assumed to take place on December 31, 2016, the amount reflects the full target bonus. | |||||||||||||||||||||||||||
(5) Equity awards valued using the closing price of our common stock as of December 30, 2016, which was $8.12. Award values for stock options were calculated based on the difference between each option's exercise price and the closing price. Stock options and restricted stock vest upon death, disability, and termination in connection with a change in control. | |||||||||||||||||||||||||||
(6) Under the terms of Mr. Zink's employment agreement, any unvested grants of restricted stock and stock options awarded to the executive will continue to vest in accordance with the vesting schedules set forth in the award agreements, with the exception of the stock options granted to Mr. Zink on February 3, 2015, which would not continue to vest following retirement. | |||||||||||||||||||||||||||
(7) Estimates costs for continuation of medical, dental, vision, life insurance, and disability benefits for 18 months following termination, using 2017 costs. | |||||||||||||||||||||||||||
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Post-employment Payments - Mr. Newton | |||||||||||||||||||||||||||
Executive Payments and Benefits upon Termination or Change in Control | Retirement | Involuntary Termination for Cause | Involuntary Termination Without Cause/ Termination for Good Reason | Change in Control With Termination for Good Reason or Without Cause | Death | Disability | |||||||||||||||||||||
Compensation: | |||||||||||||||||||||||||||
Severance | $ | — | $ | — | $ | 378,525 | (1) | $ | 1,094,063 | (2), (3) | $ | — | $ | — | |||||||||||||
Pro-rata Bonus | — | — | 113,558 | (4) | — | — | — | ||||||||||||||||||||
Long-term Incentives (5) | |||||||||||||||||||||||||||
- Stock Options | — | — | — | 1,998,000 | (3) | 1,998,000 | 1,998,000 | ||||||||||||||||||||
- Restricted Stock | 459,551 | (6) | — | — | 459,551 | 459,551 | 459,551 | ||||||||||||||||||||
Benefits & Perquisites: | |||||||||||||||||||||||||||
Health Benefits | — | — | 10,582 | (7) | 10,582 | (7) | — | — | |||||||||||||||||||
Total | $ | 459,551 | $ | — | $ | 502,665 | $ | 3,562,196 | $ | 2,457,551 | $ | 2,457,551 | |||||||||||||||
(1) Severance amount is equal to eighteen months of Mr. Newton’s base salary, payable in a lump sum. | |||||||||||||||||||||||||||
(2) Severance amount is equal to 2.99 times the sum of Mr. Newton's base salary and target bonus, payable in a lump sum. | |||||||||||||||||||||||||||
(3) These amounts would also be payable to Mr. Newton in the event of a qualifying termination following a business combination that does not rise to the level of a Change in Control as defined in the applicable agreements. | |||||||||||||||||||||||||||
(4) Mr. Newton would be entitled to his target cash incentive award pro-rated for the portion of the year prior to termination. Because termination is assumed to take place on December 31, 2016, the amount reflects the full target bonus. | |||||||||||||||||||||||||||
(5) Equity awards valued using the closing price of our common stock as of December 30, 2016, which was $8.12. Award values for stock options were calculated based on the difference between each option's exercise price and the closing price. Stock options and restricted stock vest upon death, disability, and termination in connection with a change in control. | |||||||||||||||||||||||||||
(6) Under the terms of Mr. Newton's employment agreement, any unvested grants of restricted stock and stock options awarded to the executive will continue to vest in accordance with the vesting schedules set forth in the award agreements, with the exception of the stock options granted to Mr. Newton on February 3, 2015, which would not continue to vest following retirement. | |||||||||||||||||||||||||||
(7) Estimates costs for continuation of medical, dental, vision, life insurance, and disability benefits for 18 months following termination, using 2017 costs. | |||||||||||||||||||||||||||
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Post-employment Payments - Mr. Reeves | ||||||||||||||||||||||||
Executive Payments and Benefits upon Termination or Change in Control | Voluntary Termination | Involuntary Termination for Cause | Involuntary Termination Without Cause/ Termination for Good Reason | Change in Control With Termination for Good Reason or Without Cause | Death | Disability | ||||||||||||||||||
Compensation: | ||||||||||||||||||||||||
Severance | $ | — | $ | — | $ | 412,500 | (1) | $ | 1,192,263 | (2), (3) | $ | — | $ | — | ||||||||||
Pro-rata Bonus | — | — | 123,750 | (4) | — | — | — | |||||||||||||||||
Long-term Incentives (5) | ||||||||||||||||||||||||
- Stock Options | — | — | — | 1,998,000 | (3) | 1,998,000 | 1,998,000 | |||||||||||||||||
- Restricted Stock | — | — | — | 506,282 | 506,282 | 506,282 | ||||||||||||||||||
Benefits & Perquisites: | ||||||||||||||||||||||||
Health Benefits | — | — | 28,961 | (6) | 28,961 | (6) | — | — | ||||||||||||||||
Total | $ | — | $ | — | $ | 565,211 | $ | 3,725,506 | $ | 2,504,282 | $ | 2,504,282 | ||||||||||||
(1) Severance amount is equal to eighteen months of Mr. Reeves' base salary, payable in a lump sum. | ||||||||||||||||||||||||
(2) Severance amount is equal to 2.99 times the sum of Mr. Reeves' base salary and target bonus, payable in a lump sum. | ||||||||||||||||||||||||
(3) These amounts would also be payable to Mr. Reeves in the event of a qualifying termination following a business combination that does not rise to the level of a Change in Control as defined in the applicable agreements. | ||||||||||||||||||||||||
(4) Mr. Reeves would be entitled to his target cash incentive award pro-rated for the portion of the year prior to termination. Because termination is assumed to take place on December 31, 2016, the amount reflects the full target bonus. | ||||||||||||||||||||||||
(5) Equity awards valued using the closing price of our common stock as of December 30, 2016, which was $8.12. Award values for stock options were calculated based on the difference between each option's exercise price and the closing price. Stock options and restricted stock vest upon death, disability, and termination in connection with a change in control. | ||||||||||||||||||||||||
(6) Estimates costs for continuation of medical, dental, vision, life insurance, and disability benefits for 18 months following termination, using 2017 costs. | ||||||||||||||||||||||||
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Post-employment Payments - Ms. Biss | ||||||||||||||||||||||||||||
Executive Payments and Benefits upon Termination or Change in Control | Retirement | Involuntary Termination for Cause | Involuntary Termination Without Cause/ Termination for Good Reason | Change in Control With Termination for Good Reason or Without Cause | Death | Disability | ||||||||||||||||||||||
Compensation: | ||||||||||||||||||||||||||||
Severance | $ | — | $ | — | $ | 337,500 | (1) | $ | 975,488 | (2), (3) | $ | — | $ | — | ||||||||||||||
Pro-rata Bonus | — | — | 101,250 | (4) | — | — | — | |||||||||||||||||||||
Long-term Incentives (5) | ||||||||||||||||||||||||||||
- Stock Options | — | — | — | 1,165,500 | (3) | 1,165,500 | 1,165,500 | |||||||||||||||||||||
- Restricted Stock | 405,318 | (6) | — | — | 405,318 | 405,318 | 405,318 | |||||||||||||||||||||
Benefits & Perquisites: | ||||||||||||||||||||||||||||
Deferred Bonus Plan | — | — | — | — | 8,189 | (7) | — | |||||||||||||||||||||
Health Benefits | — | — | 33,478 | (8) | 33,478 | (8) | — | — | ||||||||||||||||||||
Total | $ | 405,318 | $ | — | $ | 472,228 | $ | 2,579,784 | $ | 1,579,007 | $ | 1,570,818 | ||||||||||||||||
(1) Severance amount is equal to eighteen months of Ms. Biss' base salary, payable in a lump sum. | ||||||||||||||||||||||||||||
(2) Severance amount is equal to 2.99 times the sum of Ms. Biss' base salary and target bonus, payable in a lump sum. | ||||||||||||||||||||||||||||
(3) These amounts would also be payable to Ms. Biss in the event of a qualifying termination following a business combination that does not rise to the level of a Change in Control as defined in the applicable agreements. | ||||||||||||||||||||||||||||
(4) Ms. Biss would be entitled to his target cash incentive award pro-rated for the portion of the year prior to termination. Because termination is assumed to take place on December 31, 2016, the amount reflects the full target bonus. | ||||||||||||||||||||||||||||
(5) Equity awards valued using the closing price of our common stock as of December 30, 2016, which was $8.12. Award values for stock options were calculated based on the difference between each option's exercise price and the closing price. Stock options and restricted stock vest upon death, disability, and termination in connection with a change in control. | ||||||||||||||||||||||||||||
(6) Under the terms of Ms. Biss' employment agreement, any unvested grants of restricted stock and stock options awarded to the executive will continue to vest in accordance with the vesting schedules set forth in the award agreements, with the exception of the stock options granted to Ms. Biss on February 3, 2015, which would not continue to vest following retirement. | ||||||||||||||||||||||||||||
(7) Upon death, Ms. Biss’s heirs would be entitled to her projected account balance as of age 65 using an interest rate of 4.32%, payable in monthly installments over 10 years. The amount above reflects the projected increase in her account balance over her current balance as reflected under "Aggregate balance at last FYE" in the Nonqualified Deferred Compensation Plans table included in this report. | ||||||||||||||||||||||||||||
(8) Estimates costs for continuation of medical, dental, vision, life insurance, and disability benefits for 18 months following termination, using 2017 costs. | ||||||||||||||||||||||||||||
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Post-employment Payments - Mr. Lee | ||||||||||||||||||||||||||
Executive Payments and Benefits upon Termination or Change in Control | Voluntary Termination | Involuntary Termination for Cause | Involuntary Termination Without Cause/ Termination for Good Reason | Change in Control With Termination for Good Reason or Without Cause | Death | Disability | ||||||||||||||||||||
Compensation: | ||||||||||||||||||||||||||
Severance | $ | — | $ | — | $ | 352,500 | (1) | $ | 1,018,843 | (2), (3) | $ | — | $ | — | ||||||||||||
Pro-rata Bonus | — | — | 105,750 | (4) | — | — | — | |||||||||||||||||||
Long-term Incentives (5) | ||||||||||||||||||||||||||
- Stock Options | — | — | — | 832,500 | (3) | 832,500 | 832,500 | |||||||||||||||||||
- Restricted Stock | — | — | — | 432,642 | 432,642 | 432,642 | ||||||||||||||||||||
Benefits & Perquisites: | ||||||||||||||||||||||||||
Health Benefits | — | — | 36,883 | (6) | 36,883 | (6) | — | — | ||||||||||||||||||
Total | $ | — | $ | — | $ | 495,133 | $ | 2,320,868 | $ | 1,265,142 | $ | 1,265,142 | ||||||||||||||
(1) Severance amount is equal to eighteen months of Mr. Lee's base salary, payable in a lump sum. | ||||||||||||||||||||||||||
(2) Severance amount is equal to 2.99 times the sum of Mr. Lee's base salary and target bonus, payable in a lump sum. | ||||||||||||||||||||||||||
(3) These amounts would also be payable to Mr. Lee in the event of a qualifying termination following a business combination that does not rise to the level of a Change in Control as defined in the applicable agreements. | ||||||||||||||||||||||||||
(4) Mr. Lee would be entitled to his target cash incentive award pro-rated for the portion of the year prior to termination. Because termination is assumed to take place on December 31, 2016, the amount reflects the full target bonus. | ||||||||||||||||||||||||||
(5) Equity awards valued using the closing price of our common stock as of December 30, 2016, which was $8.12. Award values for stock options were calculated based on the difference between each option's exercise price and the closing price. Stock options and restricted stock vest upon death, disability, and termination in connection with a change in control. | ||||||||||||||||||||||||||
(6) Estimates costs for continuation of medical, dental, vision, life insurance, and disability benefits for 18 months following termination, using 2017 costs. | ||||||||||||||||||||||||||
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COMPENSATION COMMITTEE REPORT
This report is submitted by the Compensation Committee of the Board of Directors. The Compensation Committee has reviewed and discussed with management the CD&A contained in this Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”). Based on its review of the CD&A and its discussions with management, the Compensation Committee recommended to the Board of Directors, and the Board of Directors has agreed, that the CD&A be included in this 2016 Form 10-K.
Respectfully submitted by the Compensation Committee,
Jerol E. Andres (Chair)
Michael J. Connolly
Dennis L. Johnson
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of December 31, 2016, regarding the number of shares that may be issued upon the exercise of options and other rights that have been granted under all of the Company’s existing equity compensation plans, as well as the number of securities remaining available for issuance under such equity plans.
# of securities to be issued on exercise of outstanding options | Weighted average exercise price of outstanding options | # of securities remaining available for future issuance under plan (excluding securities in column (a)) | ||||||||||
Plan Category | (a) | (b) | (c)(1) | |||||||||
Equity compensation plans approved by security holders | 3,383,972 | $ | 5.32 | 1,623,875 | ||||||||
Equity compensation plans not approved by security holders | None | N/A | N/A | |||||||||
Total | 3,383,972 | $ | 5.32 | 1,623,875 | ||||||||
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Security Ownership of Certain Beneficial Owners and Management
The following table describes, as of March 1, 2017, the beneficial ownership of our common stock by each director, each of our NEOs, all of our directors, and executive officers as a group, and those persons known to beneficially own more than 5% of our common stock.
Beneficial Owner’s Name | Shares of Common Stock | Nonvested Restricted Stock | Stock Options Exercisable | Shares held in 401(K) Plan | Total Shares of Common Stock Owned(1) | Percent of Class | ||||||||||||
5% Owners: | ||||||||||||||||||
Green Equity Investors V, L.P.(2) 11111 Santa Monica Blvd., Suite 2000 Los Angeles, CA 90025 | 11,473,443 | — | — | — | 11,473,443 | 15.04 | % | |||||||||||
Green Equity Investors Side V, L.P.(2) 11111 Santa Monica Blvd., Suite 2000 Los Angeles, CA 90025 | 11,473,443 | — | — | — | 11,473,443 | 15.04 | % | |||||||||||
WL Ross & Co. LLC(3) 1166 Avenue of the Americas New York, NY 10036 | 11,478,529 | — | — | — | 11,478,529 | 15.05 | % | |||||||||||
Lightyear Fund II, L.P.(4) 9 West 57th Street, 31st Floor New York, NY 10019 | 11,496,411 | — | — | — | 11,496,411 | 15.07 | % | |||||||||||
Lightyear Co-Invest Partnership II, L.P.(4) 9 West 57th Street, 31st Floor New York, NY 10019 | 11,496,411 | — | — | — | 11,496,411 | 15.07 | % | |||||||||||
David F. Bolger 79 Chestnut Street Ridgewood, NJ 07450-2533 | 6,577,072 | — | — | — | 6,577,072 | 8.62 | % | |||||||||||
Officers and Directors: | ||||||||||||||||||
Jerol E. Andres, Director | 27,237 | — | — | — | 27,237 | 0.04 | % | |||||||||||
Michael J. Connolly, Director | 22,968 | — | — | — | 22,968 | 0.03 | % | |||||||||||
Annette G. Elg, Director | 12,348 | — | — | — | 12,348 | 0.02 | % | |||||||||||
Dennis L. Johnson, Director | 12,348 | — | — | — | 12,348 | 0.02 | % | |||||||||||
J. LaMont Keen, Director | 24,386 | — | — | — | 24,386 | 0.03 | % | |||||||||||
James B. Lockhart III, Director | 17,882 | — | — | — | 17,882 | 0.02 | % | |||||||||||
Patricia L. Moss, Vice Chairman | 48,454 | — | — | 1,804 | 50,258 | 0.07 | % | |||||||||||
Ryan R. Patrick, Chairman | 43,577 | — | — | — | 43,577 | 0.06 | % | |||||||||||
Thomas M. Wells, Director(5) | 6,628,885 | — | — | — | 6,628,885 | 8.69 | % | |||||||||||
Terry E. Zink, Director and Officer | 88,563 | 166,268 | 19,412 | — | 274,243 | 0.36 | % | |||||||||||
Gregory D. Newton, Officer | 43,643 | 56,595 | 7,300 | — | 107,538 | 0.14 | % | |||||||||||
Charles N. Reeves, Officer | 56,475 | 62,350 | 12,987 | — | 131,812 | 0.17 | % | |||||||||||
Peggy L. Biss, Officer | 38,769 | 49,916 | 6,400 | 1,200 | 96,285 | 0.13 | % | |||||||||||
Daniel J. Lee, Officer | 82,411 | 53,281 | — | 43,467 | 179,159 | 0.23 | % | |||||||||||
All Directors and Executive Officers as a Group (15) | 7,147,946 | 388,410 | 46,099 | 46,471 | 7,628,926 | 10.00 | % | |||||||||||
________________
(1) | The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the person has sole or shared voting power or investment power and also any shares which the person has the right to acquire within 60 days through the exercise of any stock option or other right. Unless otherwise indicated below or in the table above, each person has sole voting and investment power with respect to the shares shown as beneficially owned. Percentage of beneficial ownership is based on 76,264,047 shares of common stock outstanding as of March 1, 2017. |
(2) | Green Equity Investors V, L.P., a Delaware limited partnership (“GEI V”) is the record owner of 8,822,279 shares of Common Stock, Green Equity Investors Side V, L.P., a Delaware limited partnership (“GEI Side V”) is the record owner of 2,646,471 shares of Common Stock, and Leonard Green & Partners, L.P., a Delaware limited partnership ("LGP") is the record owner of 4,693 shares of Common Stock. GEI Capital V, LLC, a Delaware limited liability company (“Capital”) is the general partner of GEI V and GEI Side V. Capital’s principal business is to act as the general partner of GEI V and GEI |
143
Side V. Green V Holdings, LLC, a Delaware limited liability company (“Holdings”) is a limited partner of GEI V and GEI Side V. Holdings’ principal business is to serve as a limited partner of GEI V and GEI Side V. LGP is an affiliate of Capital. LGP’s principal business is to act as the management company of GEI V, GEI Side V and other affiliated funds. LGP Management, Inc., a Delaware corporation (“LGPM”) is the general partner of LGP. LGPM’s principal business is to act as the general partner of LGP. Due to their relationships with GEI V and GEI Side V, each of Capital, Holdings, LGP and LGPM may be deemed to have shared voting power with respect to the common stock deemed to be beneficially owned by GEI V and GEI Side V. As such, GEI V, GEI Side V, Capital, Holdings, LGP and LGPM may be deemed to have shared beneficial ownership over such shares of common stock. Each of GEI V, GEI Side V, Capital, Holdings, LGP and LGPM, however, disclaims beneficial ownership of such shares of common stock as to which they are not the record owner.
(3) | The 11,478,529 shares of Common Stock are held directly by WLR CB Acquisition Co LLC. Wilbur L. Ross, Jr. is the managing member of El Vedado, LLC, the general partner of WL Ross Group, L.P., which in turn is the managing member of WLR Recovery Associates IV LLC. WLR Recovery Associates IV LLC is the general partner of WLR Recovery Fund IV, L.P., which is the sole manager of WLR CB Acquisition Co LLC, and WL Ross & Co. LLC is the investment manager of WL Ross Group, L.P. Accordingly, WLR Recovery Fund IV, L.P., WLR Recovery Associates IV LLC, WL Ross Group, L.P., El Vedado, LLC, Wilbur L. Ross, Jr. and WL Ross & Co. LLC may be deemed to share voting and dispositive power over the Common Stock held by WLR CB Acquisition Co LLC. |
(4) | Lightyear Fund II, L.P., a Delaware limited partnership (“Lightyear Fund II”), is the record owner of 11,438,500 shares of Common Stock. Lightyear Co-Invest Partnership II, L.P., a Delaware limited partnership (“Co-Invest”), is the record owner of 30,250 shares of Common Stock. Lightyear Capital II, LLC, a Delaware limited liability company, is the record owner of 27,661 shares of Common Stock. Lightyear Fund II GP, L.P., (“Lightyear Fund II GP”) is the general partner of Lightyear Fund II. The principal business of Lightyear Fund II GP is acting as general partner of Lightyear Fund II. Lightyear Fund II GP Holdings, LLC (“Lightyear Fund II GP Holdings”) is the general partner of Lightyear Fund II GP and Co-Invest. The principal business of Lightyear Fund II GP Holdings is acting as general partner of Lightyear Fund II GP and Co-Invest. The managing member of Lightyear Fund II GP Holdings is LY Holdings, LLC. The principal business of LY Holdings, LLC is acting as managing member of Lightyear Fund II GP Holdings. The managing member of LY Holdings, LLC is Mark F. Vassallo. The present principal occupation of Mr. Vassallo is as Managing Partner of Lightyear Capital LLC. Lightyear Capital LLC is the sole member of Lightyear Capital II, LLC. The present business of Lightyear Capital LLC is acting as an investment advisory firm. The managing member of Lightyear Capital LLC is Mr. Vassallo. Lightyear Fund II GP could be deemed to have voting or dispositive power over the shares owned by Lightyear Fund II. Each of Lightyear Fund II GP Holdings, LY Holdings, and Mr. Vassallo could be deemed to have shared voting or dispositive power over the shares owned by Lightyear Fund II and Co-Invest. Each of Lightyear Capital LLC and Mr. Vassallo could be deemed to have shared voting power over the shares owned by Lightyear Capital II, LLC. |
(5) | Mr. Wells is the record owner of 51,813 shares of common stock. “Shares of Common Stock” and “Total Shares of Common Stock Owned” columns also include 6,577,072 shares of common stock owned of record by David F. Bolger and as to which Mr. Wells has shared voting and investment power pursuant to a power of attorney. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Certain Relationship and Related Transactions
Some of the directors and officers of the Company and of the Bank, and members of their immediate families and firms and corporations with which they are associated, have had transactions with the Bank, including borrowings and investments in time deposits. All such loans and investments were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the Bank, and did not involve more than the normal risk of collectability or present other unfavorable features. As of December 31, 2016, the aggregate outstanding amount of all loans to officers and directors of the Company and to firms and corporations in which they have at least a 10% beneficial interest was approximately $1,142,443, which represented approximately 0.31% of the Company’s consolidated shareholders’ equity at that date.
Independence of Directors
The Board affirmatively determined that each of the following directors and director nominees is an “independent director” as defined under the NASDAQ rules: Mr. Andres, Mr. Casciato, Mr. Connolly, Ms. Elg, Mr. Johnson, Mr. Keen, Mr. Lockhart, Ms. Moss, Mr. Patrick and Mr. Wells.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
BDO USA, LLP served as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2016. The following table sets forth the aggregate fees for services by the independent registered public accounting firms identified above for the years ended December 31, 2016 and 2015:
2016 | 2015 | ||||||
Audit fees | $ | 504,200 | $ | 371,800 | |||
Audit-related fees | 36,000 | 27,500 | |||||
Tax fees | — | — | |||||
All other fees | — | — | |||||
$ | 540,200 | $ | 399,300 | ||||
Audit Fees
Audit fees related to the audit of the Company’s annual consolidated financial statements for the years ended December 31, 2016 and 2015, for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q for such years, and the audit of the Company’s internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act for the same periods. Also included in audit fees are fees paid in relation to the reviews of the Company’s registration statements filed with the Securities and Exchange Commission.
Audit-Related Fees
Audit-related fees include fees for services in connection with the annual audit of the 401(k) Profit Sharing Plan and HUD compliance fees.
Tax Fees
Tax fees include consulting matters in relation to the Company’s taxes.
Pre-Approval Policies and Procedures
The Audit Committee is responsible for assuring the independence of the independent registered public accounting firm, including considering whether provision of non-audit related services is compatible with maintaining the independence of the independent registered public accounting firm. Any non-audit services provided by the auditor must be pre-approved by the Audit Committee. The Audit Committee pre-approved all of the audit-related services, tax services and other services provided by BDO USA, LLP in 2016 and 2015.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as part of this Form 10-K:
(1) | Financial Statements | |
See the Index to Consolidated Financial Statement contained in Part II, Item 8 of this Form 10-K. | ||
(2) | Financial Statement Schedules | |
Financial statement schedules are omitted because they are not required or are not applicable, or the required information is provided in the consolidated financial statements or notes described in Item 15 (a)(1) above. | ||
(3) | Exhibits | |
2.1 | Agreement and Plan of Merger dated October 23, 2013, by and between Cascade Bancorp and Home Federal Bancorp Inc. (Filed as Exhibit 2.1 to the registrant’s Current Report on Form 8-K, filed with the SEC on October 24, 2013 (File No. 000-23322), and incorporated herein by reference) | |
2.2 | Purchase and Assumption Agreement, dated October 28, 2015, between Bank of the Cascades and Bank of America, National Association (Filed as Exhibit 2.1 to the registrant’s Current Report on Form 8-K, filed with the SEC on October 29, 2015 (File No. 000-23322), and incorporated herein by reference) (Exhibits and schedules to the Purchase and Assumption Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Cascade Bancorp will supplementally provide a copy of any such omitted exhibit or schedule to the SEC upon request.) | |
2.3 | Agreement and Plan of Merger by and between First Interstate BancSystem, Inc. and Cascade Bancorp, dated as of November 17, 2016 (Filed as Exhibit 2.1 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 17, 2016 (File No. 000-23322), and incorporated herein by reference) (Schedules to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Cascade Bancorp agrees to furnish supplementally to the SEC a copy of any omitted schedule upon request). | |
3.1 | Articles of Incorporation of Cascade Bancorp, as amended (Filed as Exhibit 3.1 to the registrant’s Annual Report on Form 10-K, filed with the SEC on March 15, 2011 (File No. 000-23322), and incorporated herein by reference) | |
3.2 | Amended and Restated Bylaws of Cascade Bancorp (Filed as Exhibit 3.1 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 17, 2016 (File No. 000-23322), and incorporated herein by reference) | |
†3.3 | Amendment to the Amended and Restated Bylaws of Cascade Bancorp | |
*10.1 | Deferred Compensation Plans (Established for the Board, certain key executives and managers) (Filed as Exhibit 10.5 to the registrant’s Form 10-KSB, filed with the SEC on March 28, 1996 (File No. 000-23322), and incorporated herein by reference) | |
*10.2 | 2002 Equity Incentive Plan (Filed as Exhibit 99.1 to the registrant’s Registration Statement on Form S-8/A, filed with the SEC on April 23, 2003 (File No. 333-87884), and incorporated herein by reference) | |
*10.3 | Supplemental Employee Retirement Plan between Bank of the Cascades and Patricia L. Moss entered into February 28, 2008 (Filed as Exhibit 10.8 to the registrant’s Annual Report on Form 10-K, filed with the SEC on March 27, 2012 (File No. 000-23322), and incorporated herein by reference) | |
*10.4 | Supplemental Employee Retirement Plan between Bank of the Cascades and Michael J. Delvin entered into March 3, 2008 (Filed as Exhibit 10.9 to the registrant’s Annual Report on Form 10-K, filed with the SEC on March 27, 2012 (File No. 000-23322), and incorporated herein by reference) | |
*10.5 | Supplemental Employee Retirement Plan between Bank of the Cascades and Gregory D. Newton entered into March 20, 2008 (Filed as Exhibit 10.10 to the registrant’s Annual Report on Form 10-K, filed with the SEC on March 27, 2012 (File No. 000-23322), and incorporated herein by reference) | |
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10.6 | Amended and Restated Securities Purchase Agreement between Cascade Bancorp and David F. Bolger, dated November 16, 2010 (Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 19, 2010 (File No. 000-23322), and incorporated herein by reference) | |
10.7 | Amended and Restated Securities Purchase Agreement between Cascade Bancorp and BOTC Holdings LLC, dated November 16, 2010 (Filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 19, 2010 (File No. 000-23322), and incorporated herein by reference) | |
10.8 | Securities Purchase Agreement between Cascade Bancorp and LG C-Co, LLC, dated November 16, 2010 (Filed as Exhibit 10.3 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 19, 2010 (File No. 000-23322), and incorporated herein by reference) | |
10.9 | Securities Purchase Agreement between Cascade Bancorp and WLR CB Acquisition Co, LLC, dated November 16, 2010 (Filed as Exhibit 10.4 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 19, 2010 (File No. 000-23322), and incorporated herein by reference) | |
10.10 | Securities Purchase Agreement between Cascade Bancorp and Weichert Enterprise LLC, Michael F. Rosinus R/O IRA, Keefe Ventures Fund LO, Aldent Global Value Recovery Master Fund, L.P. and Cougar Trading, LLC, dated November 16, 2010 (Filed as Exhibit 10.5 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 19, 2010 (File No. 000-23322), and incorporated herein by reference) | |
10.11 | Commercial Loan Purchase Agreement between Bank of the Cascades and NW Bend, LLC, dated September 22, 2011 (Filed as Exhibit 10.24 to the registrant’s Annual Report on Form 10-K, filed with the SEC on March 27, 2012 (File No. 000-23322), and incorporated herein by reference) | |
10.12 | Residential Loan Purchase Agreement between Bank of the Cascades and NW Bend, LLC, dated September 22, 2011 (Filed as Exhibit 10.25 to the registrant’s Annual Report on Form 10-K, filed with the SEC on March 27, 2012 (File No. 000-23322), and incorporated herein by reference) | |
10.13 | Registration Rights Agreement, dated as of April 20, 2011, by and among Cascade Bancorp and Michael F. Rosinus R/O IRA (Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed with the SEC on April 26, 2011 (File No. 000-23322), and incorporated herein by reference) | |
*10.14 | Form of Indemnification Agreement by and between Cascade Bancorp and certain of its directors (Filed as Exhibit 10.22 to the registrant’s Annual Report on Form 10-K/A filed with the SEC on March 29, 2013 (File No. 000-23322) and incorporated herein by reference) | |
*10.15 | Form of Indemnification Agreement by and between Bank of the Cascades and certain of its directors (Filed as Exhibit 10.23 to the registrant’s Annual Report on Form 10-K/A filed with the SEC on March 29, 2013 (File No. 000-23322) and incorporated herein by reference) | |
10.16 | Registration Rights Agreement, dated as of January 28, 2011, by and among Cascade Bancorp and the Investors party thereto (Filed as Exhibit 10.3 to the registrant’s Current Report on Form 8-K, filed with the SEC on January 31, 2011 (File No. 000-23322), and incorporated herein by reference) | |
10.17 | Shareholders Agreement dated December 27, 2005, by and among Cascade Bancorp, David F. Bolger and Two-Forty Associates (Filed as Exhibit 4 to the Schedule 13D filed by Mr. David Bolger and Two-Forty Associates on April 27, 2006 (File No. 005-81598), and incorporated herein by reference) | |
*10.18 | 2008 Performance Incentive Plan, as amended (Filed as Exhibit 10.26 to the registrant’s Annual Report on Form 10-K/A filed with the SEC on March 29, 2013 (File No. 000-23322) and incorporated herein by reference) | |
*10.19 | Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Terry E. Zink, entered into on October 29, 2013 (Filed as Exhibit 10.1 to the registrant’s Form 8-K, filed with the SEC on November 4, 2013 (File No. 000-23322), and incorporated herein by reference) | |
*10.20 | Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Gregory D. Newton, entered into on October 29, 2013 (Filed as Exhibit 10.2 to the registrant’s Form 8-K, filed with the SEC on November 4, 2013 (File No. 000-23322), and incorporated herein by reference). | |
*10.21 | Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Peggy L. Biss, entered into on October 29, 2013 (Filed as Exhibit 10.3 to the registrant’s Form 8-K, filed with the SEC on November 4, 2013 (File No. 000-23322), and incorporated herein by reference). | |
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*10.22 | Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Andrew Gerlicher, entered into on October 9, 2013 (Filed as Exhibit 10.30 to the registrant’s Registration Statement on Form S-4 filed with the SEC on December 16, 2013 (File No: 333-1922865) and incorporated herein by reference). | |
*10.23 | Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Daniel Lee, entered into on October 9, 2013 (Filed as Exhibit 10.31 to the registrant’s Registration Statement on Form S-4 filed with the SEC on December 16, 2013 (File No: 333-1922865) and incorporated herein by reference). | |
*10.24 | Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Charles Reeves, entered into on November 1, 2013.(Filed as Exhibit 10.32 to the registrant’s Registration Statement on Form S-4 filed with the SEC on December 16, 2013 (File No: 333-1922865) and incorporated herein by reference). | |
*10.25 | Deferred Compensation Agreement between Bank of the Cascades and Terry E. Zink, entered into on October 29, 2013 (filed as Exhibit 10.4 to the registrant’s Form 8-K, filed with the SEC on November 4, 2013 (File No. 000-23322), and incorporated herein by reference). | |
10.26 | Form of Voting Agreement, dated October 23, 2013, between Home Federal Bancorp, Inc. and certain stockholders of Cascade Bancorp (Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed with the SEC on October 24, 2013 (File No. 000-23322), and incorporated herein by reference) | |
10.27 | Form of Voting Agreement, dated October 23, 2013, between Cascade Bancorp and certain stockholders of Home Federal Bancorp, Inc. (Filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K, filed with the SEC on October 24, 2013 (File No. 000-23322), and incorporated herein by reference). | |
10.28 | Supplemental Employee Retirement Plan between Bank of the Cascades and Peggy L. Biss entered into February 28, 2008 (Filed as Exhibit 10.36 to the registrant’s Registration Statement on Form S-4/A filed with the SEC on January 22, 2014 (File No. 333-1922865), and incorporated herein by reference). | |
10.29 | Amended and Restated Deferred Bonus Agreement between Bank of the Cascades and Peggy L. Biss entered into December 30, 2008 (Filed as Exhibit 10.37 to the registrant’s Registration Statement on Form S-4/A filed with the SEC on January 22, 2014 (File No. 333-1922865), and incorporated herein by reference). | |
10.30 | Amended and Restated Deferred Bonus Agreement between Bank of the Cascades and Gregory D. Newton entered into December 29, 2008 (Filed as Exhibit 10.38 to the registrant’s Registration Statement on Form S-4/A filed with the SEC on January 22, 2014 (File No. 333-1922865), and incorporated herein by reference). | |
10.31 | First Amendment to the Supplemental Employee Retirement Plan between Bank of the Cascades and Gregory D. Newton adopted December 30, 2011 (Filed as Exhibit 10.39 to the registrant’s Registration Statement on Form S-4/A filed with the SEC on January 22, 2014 (File No. 333-1922865), and incorporated herein by reference). | |
10.32 | Executive Employment Agreement between Bank of the Cascades and Sandra R. Gianotti entered into October 11, 2013 (Filed as Exhibit 10.40 to the registrant’s Registration Statement on Form S-4/A filed with the SEC on January 22, 2014 (File No. 333-1922865), and incorporated herein by reference). | |
10.33 | Amended and Restated Deferred Bonus Agreement between Bank of the Cascades and Sandra R. Gianotti entered into December 12, 2008 (Filed as Exhibit 10.41 to the registrant’s Registration Statement on Form S-4/A filed with the SEC on January 22, 2014 (File No. 333-1922865), and incorporated herein by reference). | |
10.34 | Supplemental Employee Retirement Plan between Bank of the Cascades and Sandra R. Gianotti entered into July 10, 2008 (Filed as Exhibit 10.42 to the registrant’s Registration Statement on Form S-4/A filed with the SEC on January 22, 2014 (File No. 333-1922865), and incorporated herein by reference). | |
10.35 | First Amendment to Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Terry E. Zink (Filed as Exhibit 10.3 to the registrant’s Form 8-K filed with the SEC on February 5, 2015 (File No. 333-23322), and incorporated herein by reference) | |
10.36 | First Amendment to Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Charles Reeves (Filed as Exhibit 10.4 to the registrant’s Form 8-K filed with the SEC on February 5, 2015 (File No. 333-23322), and incorporated herein by reference) | |
10.37 | First Amendment to Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Gregory D. Newton (Filed as Exhibit 10.5 to the registrant’s Form 8-K filed with the SEC on February 5, 2015 (File No. 333-23322), and incorporated herein by reference) | |
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10.38 | First Amendment to Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Peggy L. Biss (Filed as Exhibit 10.6 to the registrant’s Form 8-K filed with the SEC on February 5, 2015 (File No. 333-23322), and incorporated herein by reference) | |
10.39 | First Amendment to Executive Employment Agreement among Cascade Bancorp, Bank of the Cascades and Daniel J. Lee (Filed as Exhibit 10.7 to the registrant’s Form 8-K filed with the SEC on February 5, 2015 (File No. 333-23322), and incorporated herein by reference) | |
*10.40 | 2008 Cascade Bancorp Performance Incentive Plan, as amended (Filed as Appendix A to the registrant’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 13, 2016 (File No. 000-23322), and incorporated by reference) | |
10.41 | Form of Company Voting Agreement (Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 17, 2016 (File No. 000-23322), and incorporated herein by reference) | |
10.42 | Form of FIBK Voting Agreement (Filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K, filed with the SEC on November 17, 2016 (File No. 000-23322), and incorporated herein by reference) | |
†21.1 | Subsidiaries of the registrant | |
†23.1 | Consent of Independent Registered Public Accounting Firm - BDO USA, LLP | |
†31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-4(a) | |
†31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-4(a) | |
††32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
†101.INS | XBRL Instance Document | |
†101.SCH | XBRL Taxonomy Extension Schema Document | |
†101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
†101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
†101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
†101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
* | Management contract or compensatory plan or arrangement. |
† | Filed herewith. |
†† | Furnished herewith. |
ITEM 16. FORM 10-K SUMMARY.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||
/s/ Gregory D. Newton Gregory D. Newton Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||
Date: March 3, 2017 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Terry E. Zink Terry E. Zink, CEO and President, Director (Principal Executive Officer) | Date: March 3, 2017 | |
/s/ Ryan R. Patrick Ryan R. Patrick, Director, Chairman | Date: March 3, 2017 | |
/s/ Patricia L. Moss Patricia L. Moss, Director, Vice Chairman | Date: March 3, 2017 | |
/s/ Jerol E. Andres Jerol E. Andres, Director | Date: March 3, 2017 | |
/s/ Michael J. Connolly Michael J. Connolly, Director | Date: March 3, 2017 | |
/s/ J. LaMont Keen J. LaMont Keen, Director | Date: March 3, 2017 | |
/s/ James B. Lockhart III James B. Lockhart III, Director | Date: March 3, 2017 | |
/s/ Thomas M. Wells Thomas M. Wells, Director | Date: March 3, 2017 | |
/s/ Annette Elg Annette Elg, Director | Date: March 3, 2017 | |
/s/ Dennis Johnson Dennis Johnson, Director | Date: March 3, 2017 | |
/s/ Gregory D. Newton Gregory D. Newton Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | Date: March 3, 2017 | |
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