Attached files
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EX-32 - CASCADE BANCORP | v194398_ex32.htm |
EX-23.1 - CASCADE BANCORP | v194398_ex23-1.htm |
EX-31.2 - CASCADE BANCORP | v194398_ex31-2.htm |
EX-31.1 - CASCADE BANCORP | v194398_ex31-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
|
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended: December 31,
2009
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ______ to
______
Commission
file number: 0-23322
CASCADE
BANCORP
(Name of
registrant as specified in its charter)
Oregon
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93-1034484
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(State
of Incorporation)
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(IRS
Employer Identification #)
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1100
N.W. Wall Street, Bend, Oregon
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97701
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(Address
of principal executive offices)
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(Zip
Code)
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(541)
385-6205
(Registrant’s
telephone number)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, no par value
|
The
NASDAQ Stock Market, LLC
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(Title
of Class)
|
(Name
of Exchange on Which Listed)
|
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 Exchange 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 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. ¨
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 definition of “large accelerated filer, accelerated filer and
smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one):
Large
Accelerated Filer ¨
Accelerated Filer x
Non-accelerated Filer ¨
Smaller Reporting Company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): Yes ¨ No x
The
aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 30, 2009 (the last business day of the most recent second
quarter) was $38,314,205 (based on the closing price as quoted on the NASDAQ
Capital Market on that date).
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. 28,174,163 shares of no par value Common
Stock on March 8, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement on Schedule 14A for its 2010
Annual Meeting of Shareholders to be held on April 26, 2010 are incorporated by
reference in this Form 10-K in response to Part III, Items 9, 10, 11, 12 and
13.
EXPLANATORY
NOTE
Cascade
Bancorp (the “Company”) is filing this Amendment No. 1 to its Annual Report on
Form 10−K for the year ended December 31, 2009, originally filed with the
Securities and Exchange Commission (the “SEC”) on March 15, 2010 (the “Original
Filing”), to restate the Company’s audited consolidated financial statements as
of and for the year ended December 31, 2009, and amend related disclosures in
the Selected Financial Data, Risk Factors, Management’s Discussion and Analysis,
and the Disclosure Controls and Procedures sections. In addition, the Company
updated the exhibits list to correct administrative/clerical error. This
Amendment is primarily related to an examination by banking regulators of Bank
of the Cascades, the Company’s wholly-owned subsidiary (the “Bank”) and is being
filed in order to revise the Company’s previously reported results of operations
and financial condition primarily related to the allowance for loan losses and
loan loss provision. The restatement is in response to additional
information received from banking regulators on July 29, 2010, in connection
with a regulatory examination of the Bank that commenced on March 15,
2010. As a result of the findings of the regulatory examination, the
regulators have required the Bank to amend its Call Report of Condition (“Call
Report”) as of and for the year ended December 31, 2009.
On August
3, 2010, the Audit Committee of the Company’s Board of Directors concluded,
based upon the additional information received from banking regulators and
recommendation of management, that the Company’s previously issued financial
statements as of and for the year ended December 31, 2009 as reported in the
Company’s Annual Report on Form 10-K, could no longer be relied
upon.
The
restatement resulted in:
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·
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An
increase of $21.0 million in the provision for loan losses and the
allowance for loan losses and an increase of $749 thousand in other real
estate owned (OREO) expenses and the valuation allowance for OREO at
December 31, 2009;
|
|
·
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The
Company’s net loss after tax for the year ended December 31, 2009
increased from $93.1 million to $114.8
million;
|
|
·
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Earnings
per share for the year, previously reported to be a loss of $3.32,
increased to a loss of $4.10;
|
|
·
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The
loan loss provision increased from $113.0 million to $134.0
million;
|
|
·
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The
allowance for loan losses increased to $58.6 million from the previously
reported $37.6 million; and
|
|
·
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Stockholders’
equity at December 31, 2009 decreased to $23.3 million compared to the
previously reported $45.1 million.
|
The
Company has not modified or updated disclosures presented in the Original
Filing, except as required to specifically reflect the effects of the
restatement in this Amendment. Accordingly, this Amendment does not
reflect other events occurring after the Original Filing nor does it modify or
update those disclosures affected by other subsequent
events. Information not affected by the restatement is unchanged and
reflects the disclosures made at the time of the Original Filing.
In
addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934,
as amended, new, currently dated certifications of our principal executive
officer and principal financial officer are filed herewith as Exhibits 31.1,
31.2 and 32.
For the
convenience of the reader, this Amendment sets forth the Original Filing in its
entirety, although the Company is only restating the portions affected by the
corrected financial information.
2
CASCADE
BANCORP
FORM
10-K/A
ANNUAL
REPORT
TABLE OF
CONTENTS
Page
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|||
PART I
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|||
Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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19
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Item
1B.
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Unresolved
Staff Comments
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30
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Item
2.
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Properties
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30
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Item
3.
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Legal
Proceedings
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30
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PART II
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|||
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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31
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Item
6.
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Selected
Financial Data
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34
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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37
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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62
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Item
8.
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Financial
Statements and Supplementary Data
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65
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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116
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Item
9A.
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Controls
and Procedures
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116
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Item
9B.
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Other
Information
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116
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PART III
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|||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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119
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Item
11.
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Executive
Compensation
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119
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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119
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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119
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Item
14.
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Principal
Accountant Fees and Services
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119
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PART IV
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|||
Item
15.
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Exhibits
and Financial Statement Schedules
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120
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Signatures
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122
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3
PART I
ITEM
1. BUSINESS
The disclosures in this Item are
qualified by the Risk Factors set forth in Item 1A and the Section entitled
“Cautionary Information Concerning Forward-Looking Statements” included in Item
6, Management’s Discussion and Analysis of Financial Condition and Results of
Operations in this report and any other cautionary statements contained herein
or incorporated herein by reference.
Cascade
Bancorp
The Company
Cascade Bancorp (NASDAQ: CACB),
headquartered in Bend, Oregon and its wholly owned subsidiary, Bank of the
Cascades (the “Bank”, and collectively referred to with Cascade Bancorp as “the
Company” or “Cascade”) operates in Oregon and Idaho markets. Founded in 1977,
the Bank offers full-service community banking through 32 branches in Central
Oregon, Southern Oregon, Portland/Salem Oregon and Boise/Treasure Valley Idaho.
At December 31, 2009, the Company had total consolidated assets of approximately
$2.17 billion, net loans of approximately $1.49 billion and deposits of
approximately $1.82 billion. Cascade Bancorp has no significant assets or
operations other than the Bank.
Priorities
The
Company and Bank have implemented the following priorities and have developed
related plans in response to the adverse economic conditions and to comply with
terms of its regulatory Order and Written Agreement as discussed under
“Supervision and Regulation” below.
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1.
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Strive
to execute a substantial capital raise as soon as
possible
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2.
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Proactively
work to manage credit quality risk and minimize credit and loan quality
related costs
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3.
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Continue
to reduce loan balances outstanding to mitigate credit risk and conserve
capital and liquidity
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4.
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Focus
on retention and expansion of core
deposits
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5.
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Maintain
ample liquidity reserves
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6.
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Maximize
revenue sources within the context of the
plan
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7.
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Continue
to reduce controllable non-interest
expense
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8.
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Retain
high performing human resources
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The
Company believes that within the limits of its control over current and
prospective economic conditions it can reasonably execute on the plans and
objectives it has set. However it is uncertain that the Company will
be able to achieve desired results and outcomes.
Overview & Business
Strategy
Since
December 2007, the United States has been in a severe recession. Business
activity across a wide range of industries and regions is greatly reduced and
many businesses are struggling due to the lack of consumer spending and the lack
of liquidity in the credit markets. Idaho and Oregon have experienced
significant declines in real estate values and unemployment levels are high.
This economic adversity has had a direct and adverse effect on the financial
condition and results of operations of the Company, making near-term execution
of its long-term strategies problematic until such time as economic conditions
stabilize and/or improve. The Company and Bank are also operating
under joint regulatory agreements with the Federal Deposit Insurance Corporation
(“FDIC”), Federal Reserve Bank of San Francisco (”FRB”) and State of Oregon
banking authorities which contain restrictions and requirements consistent with
the actions described. More information about the regulatory
agreements is provided under “Supervision and Regulation”
below.
4
Accordingly,
the Company and Bank have implemented strategies and have developed related
plans in response to the adverse economic conditions and to comply with terms of
its regulatory Order. The Company continues its efforts to raise
additional capital through a sale of its common stock in one or more related
private offerings. The Company has implemented strategies and plans to
stabilize and improve its condition by reducing the level of problem loans and
minimizing the severity of associated credit losses to the extent
possible. At the same time the Company has worked to reduce the size
of the loan portfolio to mitigate credit risk and conserve capital and
liquidity. The reduction in loans has targeted loans to customers
where the deposit relationship with such customer is not material to the overall
banking relationship. To manage liquidity risk the Company has
focused primarily on maintaining and expanding core deposits and has funded a
significant contingent liquidity reserve. To further conserve capital
the Bank has implemented plans to manage revenues and reduce controllable non-
interest expense.
Once
stable or improving economic conditions return, Cascade intends to return to its
long-term goals and strategies, targeting sustainable, above peer diluted
earnings per share growth for its shareholders while progressively serving the
banking and financial needs of its customers and communities. The Company’s
business strategies include: 1) operate in and expand into growth markets; 2)
strive to recruit and retain the best relationship bankers in such markets; 3)
consistently deliver the highest levels of customer service; and 4) apply
state-of-the-art technology for the convenience of customers. Cascade’s mission
statement is to “deliver the best in community banking for the financial
well-being of customers and shareholders.”
The
Company’s original market was Central Oregon where in past years, according to
the Environmental Systems Research Institute, Inc. and based primarily on U.S.
Census data, population has grown in the 96th
percentile nationally due largely to in-migration of those seeking the
quality of life offered by the region. The Company has grown with the community
to a point of holding 26% (excluding broker and internet CDs) deposit market
share of the Central Oregon market as of June 30, 2009. In past years,
management has sought to augment its banking footprint by expanding into other
attractive Northwest markets, including Northwest Oregon, Southern Oregon and
Boise/Treasure Valley. At December 31, 2009, loans and deposits in the Northwest
and Southern Oregon markets total a combined 38% and 26%, respectively of total
Company balances. At December 31, 2009, the Company’s Idaho region branches held
loans and deposits of approximately 26% and 20%, respectively, of total Company
balances. This expansion furthered the diversification of the Company’s banking
business into two states and multiple markets.
Subsidiaries
Bank
of the Cascades
The Bank
is an Oregon State chartered bank, opened for business in 1977 and now operates
32 branches serving communities in Central, Southwest and Northwest Oregon, as
well as in the greater Boise, Idaho area. The Bank offers a broad range of
commercial and retail banking services to its customers. Lending
activities serve small to medium-sized businesses, municipalities and public
organizations, professional and consumer relationships. The Bank provides
commercial real estate loans, real estate construction and development loans,
commercial and industrial loans as well as consumer installment, line-of-credit,
credit card, and home equity loans. It originates and services residential
mortgage loans that are typically 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 investment and trust related services to its
clientele.
The
principal office of the Bank is at 1100 NW Wall Street, Bend, Oregon 97701,
541-385-6205.
Cascade
Bancorp Statutory Trusts I, II, III and IV
Cascade
Bancorp Statutory Trusts I, II, III and IV are wholly-owned subsidiary trusts of
Bancorp formed to facilitate the issuance of pooled trust preferred securities
(“trust preferred securities”).The trusts were organized in December 2004 (I),
March 2006 (II and III), and June 2006 (IV), respectively, in connection with
four offerings of trust preferred securities. For more information regarding
Bancorp’s issuance of trust preferred securities, see Note 12 “Junior
Subordinated Debentures” to the Company’s audited consolidated financial
statements included in Item 7 of this report.
5
Employees
The Company 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 482 full-time equivalent employees as of December 31, 2009, down from
545 at the prior year-end. This modest decrease primarily resulted from
attrition of non-essential staff positions and realignment of positions to
respond to current market conditions.
Executive
Officers of the Registrant
The
names, ages as of December 31, 2009, and positions of the current executive
officers of Bancorp are listed below.
Officer’s
Name
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Age
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Position
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||
Patricia
Moss
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56
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President
and CEO of Cascade Bancorp since 1998.
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||
CEO
of Bank of the Cascades since 1998.
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||||
Michael
Delvin
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61
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Executive
Vice President and Chief Operating Officer of Cascade Bancorp since 1998
and President and Chief Operating Officer of Bank of the Cascades since
2004.
|
||
Gregory
Newton
|
58
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Executive
Vice President, Chief Financial Officer and Secretary of Cascade Bancorp
and Bank of the Cascades since 2002.
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||
Peggy Biss
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52
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Executive
Vice President, Chief Human Resources Officer of Cascade Bancorp and Bank
of the Cascades since 2002.
|
||
Michael
Allison
|
53
|
Executive
Vice President and Chief Credit Officer of Cascade Bancorp and Bank of the
Cascades since
2009.
|
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.
Credit
risk management objectives include loan policies and underwriting practices
designed to prudently manage credit risk, and monitoring processes to identify
and manage loan portfolio concentrations. Funding 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 its loan
and investment activities. Historically the Company has utilized borrowings
from reliable counterparties such as the Federal Home Loan Bank of Seattle
(“FHLB”) and the FRB to augment its liquidity. However, pursuant to the terms of
the regulatory Order and the written agreement described elsewhere in this
report, the Company is presently restricted from renewing brokered
deposits. Consequently the Company has been reducing its loan
portfolio and managing core deposits to mitigate liquidity
risk.
6
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 related risks
are managed through implementation of and adherence to a system of internal
controls. Key control processes and procedures are subject to internal and
external testing in the course of internal audit and regulatory compliance
activities and the Company is subject to the requirements of Sarbanes Oxley Act
of 2002. The present adverse economic climate has caused elevated risk
levels in all banks, including the Company, thereby stressing risk management
capabilities. The Company strives to augment and enhance its risk management
strategies and processes as prudent and appropriate in managing the wide range
of risks inherent in its business. However, there can be no assurance that such
strategies and processes will detect, contain, eliminate or prevent risks that
could result in adverse financial results in the future.
Competition
Commercial
and consumer banking in Oregon and Idaho are highly competitive businesses. The
Bank competes principally with other commercial banks, savings and loan
associations, credit unions, mortgage companies, brokers and other non-bank
financial service providers. In addition to price competition for
deposits and loans, competition exists with respect to the scope and type of
services offered, customer service levels, convenience, as well as competition
in fees and service charges. Improvements in technology, communications and the
internet have intensified delivery channel competition. Competitor behavior may
result in heightened competition for banking and financial services and thus
affect future profitability.
The Bank
competes for customers principally through the effectiveness and professionalism
of its bankers and its commitment to customer service. In addition, it competes
by offering attractive financial products and services, and by the convenient
and flexible delivery of those products and services. The Company believes its
community banking philosophy, technology investments and focus on small and
medium-sized business, professional and consumer accounts, enables it to compete
effectively with other financial service providers. In addition, the Company’s
lending and deposit officers have significant experience in their respective
marketplaces. This enables them to maintain close working relationships with
their customers. To compete for larger loans, the Bank may participate loans to
other financial institutions for customers whose borrowing requirements exceed
the Company’s internal lending limits.
Government
Policies
The
operations of Bancorp’s subsidiary are affected by state and federal legislative
changes and by policies of various regulatory authorities. These policies
include, for example, statutory maximum legal lending rates, domestic monetary
policies of the Board of Governors of the Federal Reserve System and U.S.
Department of Treasury fiscal policy, and capital adequacy and liquidity
constraints imposed by federal and state regulatory agencies.
Supervision
and Regulation
Regulatory
Order
On August
27, 2009, the Bank entered into an agreement (the “Order”) with the FDIC, its
principal federal banking regulator, and the Oregon Division of Finance and
Corporate Securities (“DFCS”) which requires the Bank to take certain measures
to improve its safety and soundness.
In
connection with this agreement, the Bank stipulated to the issuance by the FDIC
and the DFCS of the Order against the Bank based on certain findings from
an examination of the Bank conducted in February 2009 based upon financial and
lending data measured as of December 31, 2008. In entering into the stipulation
and consenting to entry of the Order, the Bank did not concede the findings or
admit to any of the assertions therein.
Under the
Order, the Bank is required to take certain measures to improve its capital
position, maintain liquidity ratios, reduce its level of non-performing assets,
reduce its loan concentrations in certain portfolios, improve management
practices and board supervision and to assure that its reserve for loan losses
is maintained at an appropriate level. While the Bank successfully
completed several of the measures under the Order, it was unable to implement
certain measures in the time frame provided, particularly those related to
raising capital levels more fully described below.
7
Among the
corrective actions required are for the Bank to develop and adopt a plan to
maintain the minimum capital requirements for a “well-capitalized” bank,
including a Tier 1 leverage ratio of at least 10% at the Bank level beginning
150 days from the issuance of the Order. As of December 31, 2009 and through the
date of this report, the requirement relating to increasing the Bank’s Tier 1
leverage ratio has not been met.
Bank
level capital ratios set forth below are substantially higher than the capital
ratios at the Company level. This is mainly because regulatory
calculations give different treatment to the $66.5 million in Trust Preferred
debt proceeds. At the Company level a substantial percentage of Trust
Preferred debt is excluded from regulatory capital; while it is fully included
at the Bank level. At December 31, 2009, the Company’s Tier 1
leverage, Tier 1 risk-based capital and total risk-based capital ratios were
1.11%, 1.48% and 2.95%, respectively, and the Bank’s Tier 1 leverage, Tier 1
risk-based capital and total risk-based capital ratios were 3.75%, 4.97% and
6.25%, respectively, which do not meet regulatory benchmarks for
“adequately-capitalized”. Regulatory benchmarks for an “adequately-capitalized”
designation are 4%, 4% and 8% for Tier 1 leverage, Tier 1 risk-based capital and
total risk-based capital, respectively; “well-capitalized” benchmarks are 5%,
6%, and 10% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based
capital, respectively. However, as mentioned above, pursuant to the Order, the
Bank is required to maintain a Tier 1 leverage ratio of at least 10% to be
considered “well-capitalized.”
In
October 2009, the Company filed a registration statement on Form S-1 with the
SEC pursuant to which it intended to offer up to $108 million of its Common
Stock in a public offering, subject to market and other conditions including
consummation of the previously announced private offerings with Mr. David F.
Bolger (“Bolger”) and an affiliate of Lightyear Fund II, L.P. (“Lightyear”). On
December 23, 2009, the Company announced the withdrawal of the registration
statement due to market and other conditions. On February 16, 2010,
the Company entered into amendments to the stock purchase agreements with each
of Bolger and Lightyear which, among other things, extended the stock purchase
agreements to May 31, 2010 in order to provide the Company additional time to
implement a capital raise. It remains uncertain whether the Bank will be able to
increase its capital to required levels.
On
October 24, 2009, the Board adopted a three year strategic plan (the “Three Year
Financial Plan”) to satisfy certain requirements of the Order. The Three Year
Financial Plan includes required comprehensive plans to address capital, credit,
liquidity and profitability, with related strategies, action steps and goals for
each, as well as targeted financial outcomes as required by the Order. Certain
modifications to that plan have been made to reflect fourth quarter 2009
financial results and trends and revisions as to capital raise strategies and
timeframes in response to changing capital market conditions. These
revisions have been approved by Board and provided to regulators.
In
addition, pursuant to the Order, the Bank must retain qualified management and
must notify the FDIC and the DFCS in writing when it proposes to add any
individual to its board of directors or to employ any new senior executive
officer. On August 25, 2009, the Company received regulatory approval to hire
Michael Allison as its Chief Credit Officer. In addition, management has
augmented resources in the areas of liquidity management, special assets, credit
risk management, and preparation of minutes for board of directors and executive
meetings to ensure executives can focus on their priorities. The board of
directors also approved a corporate resolution on September 21, 2009 providing
each member of management with any and all authority deemed necessary to
implement the provisions of the Order. Under the Order the Bank’s board of
directors must also increase its participation in the affairs of the Bank,
assuming full responsibility for the approval of sound policies and objectives
and for the supervision of all the Bank’s activities. The board of directors has
increased the frequency and duration and the scope and depth of matters covered
at its board meetings and the board of directors is prepared to meet more
frequently as circumstances require. In addition, the chief executive officer is
providing a written report in advance of each meeting articulating progress on
each major key risk area so that directors are better informed and prepared for
more effective deliberations regarding these topics. Additionally, the board of
directors has increased its level of oversight in a number of areas, including
review of risk management reports, loan portfolio and credit risk reporting and
updates, liquidity updates and capital updates.
8
The Order
further requires the Bank to ensure the level of the reserve for loan losses is
maintained at appropriate levels to safeguard the book value of the Bank’s loans
and leases, and to reduce the amount of classified loans as of the date of the
Order to no more than 75% of capital. On September 21, 2009, the board of
directors revised, adopted and implemented its policy for determining the
adequacy of the reserve for loan losses to include an assessment of market
conditions and other qualitative factors. The Bank’s policy otherwise continues
to provide for a comprehensive determination of the adequacy of its reserve for
loan losses which is to be reviewed promptly and regularly at least once each
calendar quarter and be properly reported, and any deficiency in the allowance
must be remedied in the calendar quarter it is discovered, by a charge to
current operating earnings. As of December 31, 2009 and through the date of this
report, the requirement that the amount of classified loans as of the date of
the Order be reduced to no more than 75% of capital has not been
met. However, as required by the Order, all assets classified as
“Loss” in the Bank’s report of examination from February 2009 (the “ROE”) have
been charged-off. The Bank has also developed and implemented a process for the
review and approval of all applicable asset disposition plans.
The Bank
also must adopt and implement plans to reduce delinquent loans and reduce loans
and other extensions of credit to borrowers in the troubled commercial real
estate market sector. The Order also requires the Bank to develop a written
three-year strategic plan, a plan for improving and sustaining earnings, and a
plan to preserve liquidity. The Three Year Financial Plan adopted by the board
of directors addresses these items.
The Order
restricts the Bank from taking certain actions without the consent of the FDIC
and the DFCS, including paying cash dividends, and from extending additional
credit to certain types of borrowers. The Bank has not paid cash dividends since
the third quarter of 2008. In addition, the Bank has put processes and controls
in place to ensure extensions of credit, directly or indirectly, are not granted
to those who are related to borrowers of loans charged-off or classified as
“Loss”, “Substandard” or “Doubtful” in the ROE. The Bank has also acknowledged
that neither the loan committee nor the board of directors will approve any
extension to a borrower classified “Substandard” or “Doubtful” in the ROE
without first collecting all past due interest in cash.
The Order
further requires the Bank to maintain a primary liquidity ratio (net cash, net
short-term and marketable assets divided by net deposits and short-term
liabilities) of at least 15%. During the third quarter of 2009, the Company
substantially increased its interest bearing balances held mainly at the FRB.
This action was taken to bolster the Bank’s liquidity as part of its contingency
planning to help ensure ample and sufficient liquidity under a wide variety of
adverse stress-test conditions. On September 21, 2009, the board of directors
adopted a written liquidity and funds management policy, and adopted a plan to
comply with the Order with respect to liquidity. The implementation of the plan
has resulted in a primary liquidity ratio exceeding 15% and a reduction in
reliance on non-core funding. At December 31, 2009, the balances held at the FRB
were $314.6 million or approximately 14% of total assets and our primary
liquidity ratio was 22.5%. This contingent liquidity has the effect
of lowering the Company’s net interest income because such assets presently earn
only an overnight rate of approximately 0.25%, which is below the cost of
deposits. Subject to the restriction on liquidity ratios in the Order, the
Company intends to redeploy such assets into higher earning loans and
investments at such time as management and the board of directors believe is
prudent and within the context of the Order. The board of directors has adopted
a liquidity contingency policy and will undertake an ongoing assessment of the
adequacy of current and prospective liquidity of the Bank on a monthly basis and
will consider results of liquidity stress test analyses at least
quarterly.
In order
for the Bank to meet the capital requirements of the Order, as of December 31,
2009, the Bank is targeting a minimum of approximately $150 million of
additional equity capital. The economic environment in our market
areas and the duration of the downturn in the real estate market will continue
to have a significant impact on the implementation of the Bank’s business plans.
While the Company plans to continue its efforts to aggressively pursue and
evaluate opportunities to raise capital, there can be no assurance that such
efforts will be successful or that the Bank’s plans to achieve objectives set
forth in the Order will successfully improve the Bank’s results of operation or
financial condition or result in the termination of the Order from the FDIC and
the DFCS. In addition, failure to increase capital levels consistent with the
requirements of the Order could result in further enforcement actions by the
FDIC and/or DFCS or the placing of the Bank into conservatorship or
receivership. The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the discharge of liabilities in the normal course of business for the
foreseeable future, and do not include any adjustments to reflect the possible
future effects on the recoverability or classification of assets, and the
amounts or classification of liabilities that may result from the outcome of any
regulatory action, which would affect the Company’s ability to continue as a
going concern.
9
On
October 26, 2009, the Company entered into a written agreement with the FRB and
DFCS (the “Written Agreement”), which requires the Company to take certain
measures to improve its safety and soundness. Under the Written Agreement, the
Company is required to develop and submit for approval, a plan to maintain
sufficient capital at the Company and the Bank within 60 days of the date of the
Written Agreement. The Company submitted a strategic plan on October
28, 2009 and as of December 31, 2009 and through the date of this report the
Company is in compliance with the terms of the Written Agreement with
the exception of requirements tied to or dependent upon execution of
a capital raise.
Federal and State Law
Bancorp
and the Bank are extensively regulated under Federal and Oregon law. These
laws and regulations are primarily intended to protect depositors and the
deposit insurance fund, not shareholders. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory or regulatory
provisions. The operations of the Company 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 description set forth
below of the significant elements of the laws and regulations that apply to the
Company is qualified in its entirety by reference to the full statutes,
regulations and policies that are described.
Bank
Holding Company Regulation
Bancorp
is a one-bank holding company within the meaning of the Bank Holding Company Act
(“Act”), and as such, is subject to regulation, supervision and examination by
the Federal Reserve Bank (“FRB”). Bancorp is required to file annual
reports with the FRB and to provide the FRB such additional information as the
FRB may require.
The Act
requires every bank holding company to obtain the prior approval of the FRB
before (1) 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% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company. The
FRB 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 FRB
also considers capital adequacy and other financial and managerial factors in
reviewing acquisitions or mergers.
With
certain exceptions, the Act also prohibits a bank holding company from acquiring
or retaining direct or indirect ownership or control of more than 5% 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 FRB 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 FRB 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.
State
Regulations Concerning Cash Dividends
The
principal source of Bancorp’s cash revenues have been provided from dividends
received from the Bank. The Oregon banking laws impose certain limitations
on the payment of dividends by Oregon state chartered banks. The amount of
the dividend may not be greater than the Bank’s unreserved retained earnings,
deducting from that, to the extent not already charged against earnings or
reflected in a reserve, the following: (1) all bad debts, which are debts
on which interest is past due and unpaid for at least six months, unless the
debt is fully secured and in the process of collection; (2) all other
assets charged off as required by the Director of the Department of Consumer and
Business Services or a state or federal examiner; (3) all accrued expenses,
interest and taxes of the institution.
10
In
addition, 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. Because of the elevated credit risk
and associated loss incurred in 2008 and 2009, the Company suspended payment of
cash dividends beginning in the fourth quarter of 2008. Meanwhile
regulators have required the Company to seek permission prior to payment of
dividends on common stock or on Trust Preferred Securities. In
addition, the Bank is required to seek permission prior to payment of cash
dividends from the Bank to Bancorp.
Federal
and State Bank Regulation
The Bank
is a FDIC insured bank which is not a member of the Federal Reserve System, is
subject to the supervision and regulation of the DFCS, respectively, and to the
supervision and regulation of the FDIC. These agencies may prohibit the
Bank from engaging in what they believe constitute unsafe or unsound banking
practices.
The
Community Reinvestment Act (“CRA”) requires that, in connection with
examinations of financial institutions within their jurisdiction, the FRB or the
FDIC evaluate the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those
banks. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. The current
CRA rating of the Bank is “satisfactory.”
The Bank
is subject to certain restrictions imposed by the Federal Reserve Act on
extensions of credit to executive officers, directors, principal shareholders or
any related interest of such persons. Extensions of credit:
(1) must be made on substantially the same terms, collateral and following
credit underwriting procedures that are not less stringent than those prevailing
at the time for comparable transactions with persons not described above; and
(2) must not involve more than the normal risk of repayment or present
other unfavorable features. 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.
Under the
Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), 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 and 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 standards that
have been adopted.
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.
11
The Federal Reserve Board, the Office
of the Comptroller of the Currency (“OCC”) and the FDIC have substantially
similar risk-based capital ratio and leverage ratio guidelines for banking
organizations. The guidelines are intended to ensure that banking organizations
have adequate capital given the risk levels of assets and off-balance sheet
financial instruments. Under the guidelines, banking organizations are required
to maintain minimum ratios for Tier 1 capital and total capital to
risk-weighted assets (including certain off-balance sheet items, such as letters
of credit). For 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 institutions or holding
company’s capital, in turn, is classified in one of three 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.
|
|
•
|
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.
|
|
•
|
Market Risk Capital
(Tier 3). Tier 3 capital includes qualifying
unsecured subordinated debt.
|
Bancorp,
like other bank holding companies, currently is required to maintain Tier 1
capital and “total capital” (the sum of Tier 1, Tier 2 and Tier 3
capital) equal to at least 4.0% and 8.0%, respectively, of its total
risk-weighted assets (including various off-balance-sheet items, such as letters
of credit). The Bank, like other depository institutions, is required to
maintain similar capital levels under capital adequacy guidelines. For a
depository institution to be considered “well-capitalized” under the regulatory
framework for prompt corrective action, its Tier 1 and total capital ratios
must be at least 6.0% and 10.0% on a risk-adjusted basis,
respectively.
Bank
holding companies and banks subject to the market risk capital guidelines are
required to incorporate market and interest rate risk components into their
risk-based capital standards. Under the market risk capital guidelines, capital
is allocated to support the amount of market risk related to a financial
institution’s ongoing trading activities.
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 necessitate a minimum leverage ratio
of 3.0% for financial holding companies and national banks that either have the
highest supervisory rating or have implemented the appropriate federal
regulatory authority’s risk-adjusted measure for market risk. All other
financial holding companies and national banks are required to maintain a
minimum leverage ratio of 4.0%, unless a different minimum is specified by an
appropriate regulatory authority. For a depository institution to be considered
“well-capitalized” under the regulatory framework for prompt corrective action,
its leverage ratio must be at least 5.0%. The FDIC has advised the Bank that a
minimum leverage ratio of 10.0% was required to be maintained within 150 days of
the Order in order for the Bank to be considered “well-capitalized” for
regulatory purposes. As of December 31, 2009, and through the date of
this report, this requirement has not been met.
The
federal regulatory authorities’ risk-based capital guidelines are based upon the
1988 capital accord (“Basel I”) of the Basel Committee on Banking
Supervision (the “Basel Committee”). The Basel Committee is a committee of
central banks and bank supervisors/regulators from the major industrialized
countries that develops broad policy guidelines for use by each country’s
supervisors in determining the supervisory policies they apply. In 2004, the
Basel Committee published a new capital accord (“Basel II”) to replace
Basel I. Basel II provides two approaches for setting capital
standards for credit risk – an internal ratings-based approach tailored to
individual institutions’ circumstances and a standardized approach that bases
risk weightings on external credit assessments to a much greater extent than
permitted in existing risk-based capital guidelines. Basel II also would set
capital requirements for operational risk and refine the existing capital
requirements for market risk exposures.
12
The U.S.
banking and thrift agencies are developing proposed revisions to their existing
capital adequacy regulations and standards based on Basel II. A definitive
final rule for implementing the advanced approaches of Basel II in the
United States, which applies only to certain large or internationally active
banking organizations, or “core banks” – defined as those with consolidated
total assets of $250 billion or more or consolidated on-balance sheet foreign
exposures of $10 billion or more, became effective as of April 1,
2008. Other U.S. banking organizations may elect to adopt the requirements of
this rule (if they meet applicable qualification requirements), but they are not
required to apply them. The rule also allows a banking organization’s primary
federal supervisor to determine that the application of the rule would not be
appropriate in light of the bank’s asset size, level of complexity, risk
profile, or scope of operations. The Company is not required to comply with the
advanced approaches of Basel II.
In July
2008, the agencies issued a proposed rule that would give banking organizations
that do not use the advanced approaches the option to implement a new risk-based
capital framework. This framework would adopt the standardized approach of
Basel II for credit risk, the basic indicator approach of Basel II for
operational risk, and related disclosure requirements. While this proposed rule
generally parallels the relevant approaches under Basel II, it diverges
where United States markets have unique characteristics and risk profiles, most
notably with respect to risk weighting residential mortgage exposures. Comments
on the proposed rule were due to the agencies by October 27, 2008, but a
definitive final rule has not been issued. The proposed rule, if adopted, would
replace the agencies’ earlier proposed amendments to existing risk-based capital
guidelines to make them more risk sensitive (formerly referred to as the
“Basel I-A” approach).
On
September 3, 2009, the United States Treasury Department issued a policy
statement (the “Treasury Policy Statement”) entitled “Principles for Reforming
the U.S. and International Regulatory Capital Framework for Banking Firms.” The
Treasury Policy Statement was developed in consultation with the U.S. bank
regulatory agencies and contemplates changes to the existing regulatory capital
regime that would involve substantial revisions to, if not replacement of, major
parts of the Basel I and Basel II capital frameworks and affect all
regulated banking organizations and other systemically important institutions.
The Treasury Policy Statement calls for, among other things, higher and stronger
capital requirements for all banking firms. The Treasury Policy Statement
suggested that changes to the regulatory capital framework be phased in over a
period of several years. The recommended schedule provides for a comprehensive
international agreement by December 31, 2010, with the implementation of
reforms by December 31, 2012, although it does remain possible that U.S.
bank regulatory agencies could officially adopt, or informally implement, new
capital standards at an earlier date.
On
December 17, 2009, the Basel Committee issued a set of proposals (the
“Capital Proposals”) that would significantly revise the definitions of
Tier 1 capital and Tier 2 capital, with the most significant changes
being to Tier 1 capital. Most notably, the Capital Proposals would
disqualify certain structured capital instruments, such as trust preferred
securities, from Tier 1 capital status. The Capital Proposals would also
re-emphasize that common equity is the predominant component of Tier 1
capital by adding a minimum common equity to risk-weighted assets ratio and
requiring that goodwill, general intangibles and certain other items that
currently must be deducted from Tier 1 capital instead be deducted from
common equity as a component of Tier 1 capital. The Capital Proposals also
leave open the possibility that the Basel Committee will recommend changes to
the minimum Tier 1 capital and total capital ratios of 4.0% and 8.0%,
respectively.
Concurrently
with the release of the Capital Proposals, the Basel Committee also released a
set of proposals related to liquidity risk exposure (the “Liquidity Proposals,”
and together with the Capital Proposals, the “2009 Basel Committee Proposals”).
The Liquidity Proposals have three key elements, including the implementation of
(i) a “liquidity coverage ratio” designed to ensure that a bank maintains
an adequate level of unencumbered, high-quality assets sufficient to meet the
bank’s liquidity needs over a 30-day time horizon under an acute liquidity
stress scenario, (ii) a “net stable funding ratio” designed to promote more
medium and long-term funding of the assets and activities of banks over a
one-year time horizon, and (iii) a set of monitoring tools that the Basel
Committee indicates should be considered as the minimum types of information
that banks should report to supervisors and that supervisors should use in
monitoring the liquidity risk profiles of supervised entities.
Comments
on the 2009 Basel Committee Proposals are due by April 16, 2010, with the
expectation that the Basel Committee will release a comprehensive set of
proposals by December 31, 2010 and that final provisions will be
implemented by December 31, 2012. The U.S. bank regulators have urged
comment on the 2009 Basel Committee Proposals. Ultimate implementation of such
proposals in the U.S. will be subject to the discretion of the U.S. bank
regulators and the regulations or guidelines adopted by such agencies may, of
course, differ from the 2009 Basel Committee Proposals and other proposals that
the Basel Committee may promulgate in the future.
13
Prompt Corrective Action
The
Federal Deposit Insurance Act, as amended (“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.
Under the
regulations adopted by the federal regulatory authorities, a bank will be:
(i) “well-capitalized” if the institution has a total risk-based capital
ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater,
and a leverage ratio of 5.0% 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 8.0% or
greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage
ratio of 4.0% or greater and is not “well-capitalized”;
(iii) “undercapitalized” if the institution has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than
4.0% or a leverage ratio of less than 4.0%; (iv) “significantly
undercapitalized” if the institution has a total risk-based capital ratio of
less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a
leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if
the institution’s tangible equity is equal to or less than 2.0% 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 parent 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 parent 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 parent holding company is limited to
the lesser of (i) an amount equal to 5.0% 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 as 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.
14
At
December 31, 2009, the Company’s Tier 1 leverage, Tier 1 risk-based capital and
total risk-based capital ratios were 1.11%, 1.48% and 2.95%, respectively, and
the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based
capital ratios were 3.75%, 4.97% and 6.25%, respectively, which do not meet
regulatory benchmarks for “adequately-capitalized”. Regulatory benchmarks for an
“adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier
1 risk-based capital and total risk-based capital, respectively;
“well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1
risk-based capital and total risk-based capital, respectively.
For
information regarding the capital ratios and leverage ratios of Bancorp and the
Bank see the discussion under the section captioned “Liquidity and Sources of
Funds” included in Item 6 Management’s Discussion and Analysis of Financial
Condition and Results of Operation and Note 21 — Regulatory Matters in
the notes to consolidated financial statements included in Item 7 Financial
Statements and Supplementary Data, elsewhere in this report.
Deposit Insurance
The
deposits of the Bank are insured up to applicable limits by the Deposit
Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance
assessments to maintain the DIF. The FDIC utilizes a risk-based assessment
system that imposes insurance premiums based upon a risk matrix that takes into
account a bank’s capital level and supervisory rating (“CAMELS rating”). The
risk matrix utilizes four risk categories which are distinguished by capital
levels and supervisory ratings.
In
December 2008, the FDIC issued a final rule that raised the then current
assessment rates uniformly by 7 basis points for the first quarter of 2009
assessment, which resulted in annualized assessment rates for institutions in
the highest risk category (“Risk Category 1 institutions”) ranging from
12 to 14 basis points (basis points representing cents per $100
of assessable deposits). In February 2009, the FDIC issued final rules to
amend the DIF restoration plan, change the risk-based assessment system and set
assessment rates for Risk Category 1 institutions beginning in the second
quarter of 2009. For Risk Category 1 institutions that have long-term debt
issuer ratings, the FDIC determines the initial base assessment rate using a
combination of weighted-average CAMELS component ratings, long-term debt issuer
ratings (converted to numbers and averaged) and the financial ratios method
assessment rate (as defined), each equally weighted. The initial base assessment
rates for Risk Category 1 institutions range from 12 to 16 basis points, on
an annualized basis. After the effect of potential base-rate adjustments, total
base assessment rates range from 7 to 24 basis points. The potential
adjustments to a Risk Category 1 institution’s initial base assessment
rate, include (i) a potential decrease of up to 5 basis points for
long-term unsecured debt, including senior and subordinated debt and (ii) a
potential increase of up to 8 basis points for secured liabilities in
excess of 25% of domestic deposits.
In May
2009, the FDIC issued a final rule which levied a special assessment applicable
to all insured depository institutions totaling 5 basis points of each
institution’s total assets less Tier 1 capital as of June 30, 2009,
not to exceed 10 basis points of domestic deposits. The special assessment was
part of the FDIC’s efforts to rebuild the DIF. Deposit insurance expense during
2009 included $1.1 million recognized in the second quarter related to the
special assessment.
In
November 2009, the FDIC issued a rule that required all insured depository
institutions, with limited exceptions, to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011
and 2012. The FDIC also adopted a uniform three-basis point increase in
assessment rates effective on January 1, 2011. The Bank received a letter
of exemption from the FDIC regarding this prepayment assessment and therefore
will continue to be assessed on a quarterly basis.
FDIC
insurance expense for the Company totaled $6.9 million, $1.7 million
and $0.8 million in 2009, 2008 and 2007, respectively. FDIC insurance
expense includes deposit insurance assessments and Financing Corporation
(“FICO”) assessments related to outstanding FICO bonds. The FICO is a
mixed-ownership government corporation established by the Competitive Equality
Banking Act of 1987 whose sole purpose was to function as a financing vehicle
for the now defunct Federal Savings & Loan Insurance Corporation. Under
the Federal Deposit Insurance Reform Act of 2005, which became law in 2006, the
Bank received a one-time assessment credit of $0.3 million. This
credit was utilized to partially offset $1.1 million of assessments during
2007. Under the FDIA, the FDIC may terminate deposit insurance upon a finding
that the institution has engaged in unsafe and unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the
FDIC.
15
Temporary Liquidity Guarantee
Program
In
November 2008, the Board of Directors of the FDIC adopted a final rule relating
to the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP was
announced by the FDIC in October 2008, preceded by the determination of systemic
risk by the Secretary of the Department of Treasury (after consultation with the
President), as an initiative to counter the system-wide crisis in the nation’s
financial sector. Under the TLGP, the FDIC will (i) guarantee, through the
earlier of maturity or December 31, 2012 (extended from June 30, 2012
by subsequent amendment), certain newly issued senior unsecured debt issued by
participating institutions on or after October 14, 2008, and before
October 31, 2009 (extended from June 30, 2009 by subsequent amendment)
and (ii) provide full FDIC deposit insurance coverage for non-interest
bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”)
accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust
Accounts held at participating FDIC insured institutions through June 30,
2010 (extended from December 31, 2009, subject to an opt-out provision, by
subsequent amendment). The Company elected to participate in both guarantee
programs and did not opt out of the six-month extension of the transaction
account guarantee program. Coverage under the TLGP was available for the first
30 days without charge. The fee assessment for coverage of senior unsecured
debt ranged from 50 basis points to 100 basis points per annum,
depending on the initial maturity of the debt. The fee assessment for deposit
insurance coverage was 10 basis points per quarter during 2009 on amounts
in covered accounts exceeding $250,000. During the six-month extension period in
2010, the fee assessment increases to 15 basis points per quarter for
institutions that are in Risk Category 1 of the risk-based premium
system.
Regulatory
Reform
In June
2009, the U.S. President’s administration proposed a wide range of regulatory
reforms that, if enacted, may have significant effects on the financial services
industry in the United States. Significant aspects of the administration’s
proposals that may affect the Company included, among other things, proposals:
(i) to reassess and increase capital requirements for banks and bank
holding companies and examine the types of instruments that qualify as
regulatory capital; (ii) to combine the OCC and the Office of Thrift
Supervision into a National Bank Supervisor with a unified federal bank charter;
(iii) to expand the current eligibility requirements for financial holding
companies such as Bancorp so that the financial holding company must be “well
capitalized” and “well managed” on a consolidated basis; (iv) to create a
federal consumer financial protection agency to be the primary federal consumer
protection supervisor with broad examination, supervision and enforcement
authority with respect to consumer financial products and services; (v) to
further limit the ability of banks to engage transactions with affiliates; and
(vi) to subject all “over-the-counter” derivatives markets to comprehensive
regulation.
The U.S.
Congress, state lawmaking bodies and federal and state regulatory agencies
continue to consider a number of wide-ranging and comprehensive proposals for
altering the structure, regulation and competitive relationships of the nation’s
financial institutions, including rules and regulations related to the
administration’s proposals. Separate comprehensive financial reform bills
intended to address the proposals set forth by the administration were
introduced in both houses of Congress in the second half of 2009 and remain
under review by both the U.S. House of Representatives and the U.S. Senate. In
addition, both the U.S. Treasury Department and the Basel Committee have issued
policy statements regarding proposed significant changes to the regulatory
capital framework applicable to banking organizations as discussed above. The
Company cannot predict whether or in what form further legislation or
regulations may be adopted or the extent to which the Company may be affected
thereby.
16
Incentive
Compensation
On
October 22, 2009, the Federal Reserve issued a comprehensive proposal on
incentive compensation policies (the “Incentive Compensation Proposal”) 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 Incentive Compensation Proposal, 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. Banking
organizations are instructed to begin an immediate review of their incentive
compensation policies to ensure that they do not encourage excessive risk-taking
and implement corrective programs as needed. Where there are deficiencies in the
incentive compensation arrangements, they must be immediately
addressed.
The
Federal Reserve 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.” These
reviews will be tailored to each organization based on the scope and complexity
of the organization’s activities and the prevalence of incentive compensation
arrangements. The findings of the supervisory initiatives will be included in
reports of examination. Deficiencies will be incorporated into the
organization’s supervisory ratings, which can affect the organization’s ability
to make acquisitions and take other actions. 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, on January 12, 2010, the FDIC announced that it would seek public
comment on whether banks with compensation plans that encourage risky behavior
should be charged at higher deposit assessment rates than such banks would
otherwise be charged.
The scope
and content of the U.S. banking regulators’ policies on executive compensation
are continuing to develop and are likely to continue evolving in the near
future. It cannot be determined at this time whether compliance with such
policies will adversely affect the Company’s ability to hire, retain and
motivate its key employees.
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
any of its subsidiaries could have a material effect on the business of the
Company.
Community
Reinvestment Act
The
Community Reinvestment Act of 1977 (“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 financial 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 the financial 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 current CRA rating of the Bank is
“satisfactory.”
17
Financial
Privacy
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, in some circumstances, 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.
Anti-Money Laundering and the USA
Patriot Act
A major
focus of governmental policy on financial institutions in recent years has been
aimed at combating money laundering and terrorist financing. The USA PATRIOT Act
of 2001 (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 controls to detect, prevent and
report money laundering and terrorist financing and to verify the identity of
their customers. 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. 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 for
the institution.
Office
of Foreign Assets Control Regulation
The
United States has imposed economic sanctions that affect transactions with
designated foreign countries, nationals and others. These are typically known as
the “OFAC” rules based on their administration by the U.S. Treasury Department
Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions
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.
Interstate
Banking Legislation
Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(“Riegle-Neal Act”), as amended, a bank holding company may acquire banks in
states other than its home state, subject to certain limitations. The
Riegle-Neal Act also authorizes banks to merge across state lines, thereby
creating interstate branches. Banks are also permitted to acquire and to
establish de novo branches in other states where authorized under the laws of
those states.
Available
Information
Bancorp’s
filings with the Securities and Exchange Commission (“SEC”), including its
annual report on Form 10-K, quarterly reports on Form 10-Q, periodic reports on
Form 8-K and amendments to these reports, are accessible free of charge at our
website at http://www.botc.com as soon as reasonably practicable after filing
with the SEC. By making this reference to our website, Bancorp does not
intend to incorporate into this report any information contained in the
website. The website should not be considered part of this
report.
The SEC
maintains a website at http://www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers including
Bancorp that file electronically with the SEC.
18
ITEM
1A. RISK
FACTORS
There are
a number of risks and uncertainties, many of which are beyond the Company's
control that could have a material adverse impact on the Company's financial
condition or results of operations. The Company describes below the most
significant of these risks and uncertainties. These should not be
viewed as an all inclusive list or in any particular
order. Additional risks that are not currently considered material
may also have an adverse effect on the Company. This report is
qualified in its entirety by these risk factors.
Before
making an investment decision investors should carefully consider the specific
risks detailed in this section and other risks facing the Company including,
among others, those certain risks, uncertainties and assumptions identified
herein by management that are difficult to predict and that could materially
affect the Company’s financial condition and results of operations and other
risks described in this Form 10-K, the information in Part I,
Item 1 “Business,” Part II, Item 6 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the Company’s
cautionary statements as to “Forward-Looking Statements” contained
therein.
Risks
Related to Our Business
The
Bank was issued a regulatory order from the FDIC and the DCFS which prohibits
the Bank from paying dividends to the Company without the consent of the FDIC
and the DCFS and places other limitations and obligations on the
Bank.
On August
27, 2009, the Bank entered into an agreement with the FDIC, its principal
federal banking regulator, and the DFCS which requires the Bank to take certain
measures to improve its safety and soundness.
In
connection with this agreement, the Bank stipulated to the issuance by the FDIC
and the DFCS of a regulatory order against the Bank based on certain findings
from an examination of the Bank conducted in February 2009 based upon financial
and lending data measured as of December 31, 2008 (the “Order”). In entering
into the stipulation and consenting to entry of the order, the Bank did not
concede the findings or admit to any of the assertions therein.
Under the
Order, the Bank is required to take certain measures to improve its capital
position, maintain liquidity ratios, reduce its level of non-performing assets,
reduce its loan concentrations in certain portfolios, improve management
practices and board supervision and to assure that its Reserve for Loan Losses
is maintained at an appropriate level. While the Bank successfully
completed several of the measures under the Order as of December 31, 2009, it
was unable to implement certain measures in the time frame provided,
particularly those related to raising capital levels.
Among the
corrective actions required are for the Bank to develop and adopt a plan to
maintain the minimum capital requirements for a “well-capitalized” bank,
including a Tier 1 leverage ratio of at least 10% at the Bank level beginning
150 days from the issuance of the Order. As of December 31, 2009 and through the
date of this report, the requirement relating to increasing the Bank’s Tier 1
leverage ratio has not been met.
In
addition, pursuant to the Order, the Bank must retain qualified management and
must notify the FDIC and the DFCS in writing when it proposes to add any
individual to its board of directors or to employ any new senior executive
officer. Under the Order the Bank’s board of directors must also increase its
participation in the affairs of the Bank, assuming full responsibility for the
approval of sound policies and objectives and for the supervision of all the
Bank’s activities.
The Order
further requires the Bank to ensure the level of the reserve for loan losses is
maintained at appropriate levels to safeguard the book value of the Bank’s loans
and leases, and to reduce the amount of classified loans as of the date of the
Order to no more than 75% of capital. As of December 31, 2009 and through the
date of this report, the requirement that the amount of classified loans as of
the date of the Order be reduced to no more than 75% of capital has not been
met. However, as required by the Order, all assets classified as
“Loss” in the Bank’s report of examination from February 2009 (the “ROE”) have
been charged-off. The Bank has also developed and implemented a process for the
review and approval of all applicable asset disposition plans.
19
The Order
restricts the Bank from taking certain actions without the consent of the FDIC
and the DFCS, including paying cash dividends, and from extending additional
credit to certain types of borrowers.
The Order
further requires the Bank to maintain a primary liquidity ratio (net cash, net
short-term and marketable assets divided by net deposits and short-term
liabilities) of at least 15%.
The Bank was required to implement
these measures under various time frames, all of which have expired. While the
Bank successfully completed several of the measures, it was unable to implement
certain measures in the time frame provided, particularly those related to
raising capital levels. In order for the Bank to meet the 10% capital
requirement of the Order, as of December 31, 2009, the Bank is targeting a
minimum of approximately $150 million of additional equity
capital. The economic environment in our market areas and the
duration of the downturn in the real estate market will continue to have a
significant impact on the implementation of the Bank’s business plans. While the
Company plans to continue its efforts to aggressively pursue and evaluate
opportunities to raise capital, there can be no assurance that such efforts will
be successful or that the Bank’s plans to achieve objectives set forth in the
Order will successfully improve the Bank’s results of operation or financial
condition or result in the termination of the Order from the FDIC and the DFCS.
In addition, failure to increase capital levels consistent with the requirements
of the Order could result in further enforcement actions by the FDIC and/or DFCS
or the placing of the Bank into conservatorship or receivership.
On October 26, 2009, the Company
entered into a written agreement with the FRB and DFCS (the “Written
Agreement”), which requires the Company to take certain measures to improve its
safety and soundness. Under the Written Agreement, the Company is required to
develop and submit for approval, a plan to maintain sufficient capital at the
Company and the Bank within 60 days of the date of the Written
Agreement. The Company submitted a strategic plan on October 28, 2009
and as of December 31, 2009 and through the date of this report the Company is
in compliance with the terms of the Written Agreement with the exception of
requirements tied to or dependent upon execution of a capital
raise.
We have failed to
comply with certain provisions of our regulatory order.
The Order to which the Bank is subject
requires, among other obligations described elsewhere in this report, that we
increase our regulatory capital and reduce our troubled assets. Our obligation
to increase regulatory capital was subject to a deadline of January 26,
2010. As of the date of this report, we have been unable to raise
capital or achieve this goal by other means.
At
December 31, 2009, the Company’s Tier 1 leverage, Tier 1 risk-based capital and
total risk-based capital ratios were 1.11%, 1.48% and 2.95%, respectively, and
the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based
capital ratios were 3.75%, 4.97% and 6.25%, respectively, which do not meet
regulatory benchmarks for “adequately-capitalized”. Regulatory benchmarks for an
“adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier
1 risk-based capital and total risk-based capital, respectively;
“well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1
risk-based capital and total risk-based capital, respectively. However, as
mentioned above, pursuant to the Order, the Bank is required to maintain a Tier
1 leverage ratio of at least 10% to be considered
“well-capitalized.” We can provide no assurances that we will be able
to raise additional capital in the foreseeable future given the present
condition of financial markets. If we fail to raise additional capital or take
other measures that will cause our regulatory capital levels to increase,
regulators may take additional measures that could include receivership or a
forced divestiture of our assets and deposits. Any such measures, if taken, may
have a material adverse effect upon the value of our common stock.
Because
of our condition and uncertainties as to the implementation of management plans
there is doubt about our ability to continue as a going concern.
The
consolidated financial statements have been prepared based upon the Company’s
judgment that the Company will continue as a going concern, which contemplates
the realization of assets and the discharge of liabilities in the normal course
of business. Accordingly, the consolidated financial statements do not include
any adjustments to reflect the possible future effects that may result from the
outcome of various uncertainties as discussed below.
20
The
effects of the severe economic contraction caused the Company to incur net
losses for the years ended December 31, 2009 and 2008. The Company
and the Bank do not currently meet the definition of an “adequately capitalized
institution” and are thus operating under significant regulatory restrictions
including a requirement to achieve certain capital requirements, enhance
liquidity and improve the credit quality of the Bank’s assets (see Note
21). In response, the Company has implemented plans to meet the
requirements of the August 27, 2009 agreement with the FDIC, its principal
federal banking regulator, and the DFCS which requires the Bank to take certain
measures to improve its safety and soundness (the Order) including an ongoing
effort to raise capital. Additional plans and actions to preserve
existing capital and to conserve liquidity include (1) improve asset quality and
reduce non performing asset totals; (2) reduce loan portfolio totals and thereby
reduce required capital; (3) retain core deposits while reducing brokered
deposits; and (4) continued reduction of discretionary expenses.
Based
upon its plans and expectations management believes the Company has sufficient
capital and liquidity to achieve realization of assets and the discharge of
liabilities in the normal course of business. However, uncertainties
exist as to future economic conditions and regulatory actions, and the
successful implementation of plans to improve the Company’s financial condition
and meet the requirements of the Order. These uncertainties raise
doubt about the Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the lack of success in implementing its plans or the occurrence of
other events that could adversely affect its condition or
operations.
The
Company expects to continue to be adversely affected by current economic and
market conditions.
The
Company’s business is closely tied to the economies of Idaho and Oregon in
general and is particularly affected by the economies of Central, Southern and
Northwest Oregon, as well as the Greater Boise, Idaho area. Since mid-2007 the
country has experienced a significant economic downturn. Business activity
across a wide range of industries and regions has been negatively impacted and
local governments and many businesses are being challenged due to the lack of
consumer spending and the lack of liquidity in the credit markets. Unemployment
has increased significantly in Idaho and Oregon, and may remain elevated for
some time.
The
Company’s financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
value of collateral securing those loans, is highly dependent upon the business
environment in the markets where the Company operates. The current downturn in
the economy and declining real estate values have had a direct and adverse
effect on the financial condition and results of operations for the Company.
This is particularly evident in the residential land development and residential
construction segments of the Bank’s loan portfolio. Developers or home builders
whose cash flows are dependent on sale of lots or completed residences have
experienced reduced ability to service their loan obligations and the market
value of underlying collateral has decreased dramatically. The impact on the
Company has been an elevated level of impaired loans, an associated increase in
provisioning expense and charge-offs for the Company, leading to a net loss for
2008 and 2009. It is expected that the level of provisioning expense and
charge-offs will significantly decrease in 2010 as compared to
2009.
In order
to reduce our exposure in the residential land development and residential
construction development category of loans the Company has formalized collateral
valuation practices to ensure timely recognition of asset collateral support,
redefined the roles and responsibility of key credit risk officers to focus on
problem portfolios, designed and executed multiple stress test scenarios to
identify problem assets and potential problem assets and initiated weekly asset
review on residential land development and residential construction development
problem assets. The Company has also improved documentation standards to verify
borrower’s financial condition and collateral values, improved management
information systems and internal controls to track performance and value of such
portfolios, created a Special Assets Group to manage and monitor the residential
land development and residential construction development portfolio and created
an oversight committee to review resolution and sales of the
construction/lot/land development portfolio. In addition, the Company has
significantly reduced loan limits in the portfolio.
21
On August
25, 2009, the Company replaced its Chief Credit Officer, and we have hired an
Other Real Estate Owned specialist. The Company continues to re-evaluate and
re-appraise the properties in the residential land development and residential
construction development portfolio on a frequent basis, and to track sales for
contingent properties to monitor sales values.
In
addition, the Company has aggressively collected on guarantees and improved
overall collection procedures. The Company has also aggressively pursued
portfolio exposure reduction through active curtailment of additional advances
on existing facilities when able and proactively recognized and resolved problem
exposures through, among other things, write-offs, write-downs, and note
sales.
The
Company also established clear guidance on asset concentration targets as a
percentage of capital for the residential land development and residential
construction development category of loans which we expect will result in much
lower exposure in the future.
In 2009
deposits stabilized and together with loan reductions enabled the Company to
build a substantial contingent liquidity reserve. However, the
Company’s condition, regulatory restrictions and ongoing economic uncertainty
may affect deposit resources and access to borrowings in the future. These
conditions may also increase the Company’s need for additional capital which may
not be available on terms acceptable to the Company, if at all.
The
banking industry and the Company operate under certain regulatory requirements
that are expected to further impair our revenues, operating income and financial
condition.
The
Company operates in a highly regulated industry and are subject to examination,
supervision, and comprehensive regulation by the DFCS, the FDIC, and the Federal
Reserve. Our compliance with these laws and regulations is costly and restricts
certain of our activities, including payment of dividends, mergers and
acquisitions, investments, loans and interest rates charged, interest rates paid
on deposits, access to capital and brokered deposits and locations of banking
offices. If we are unable to meet these regulatory requirements, our financial
condition, liquidity and results of operations would be materially and adversely
affected.
The
Company has a significant concentration in real estate lending. The sustained
downturn in real estate within the Company’s markets has had and is expected to
continue to have a negative impact on the Company.
Approximately
70% of the Bank’s loan portfolio at December 31, 2009 consisted of loans secured
by real estate located in Oregon and Idaho. Declining real estate values and a
severe constriction in the availability of mortgage financing have negatively
impacted real estate sales, which has resulted in customers’ inability to repay
loans. In addition, the value of collateral underlying such loans has decreased
materially. During 2008 and 2009, we experienced significant increases in
non-performing assets relating to our real estate lending, primarily in our
residential real estate portfolio. We will see a further increase in
non-performing assets if more borrowers fail to perform according to loan terms
and if we take possession of real estate properties. Additionally, if real
estate values continue to further decline, the value of real estate collateral
securing our loans could be significantly reduced. If any of these effects
continue or become more pronounced, loan losses will increase more than we
expect and our financial condition and results of operations would be adversely
impacted.
In
addition, the Bank’s loans in other real estate portfolios including commercial
construction and commercial real estate have experienced and are expected to
continue to experience reduced cash flow and reduced collateral value.
Approximately 44% of the Bank’s loan portfolio at December 31, 2009 consisted of
loans secured by commercial real estate. Nationally, delinquencies in
these types of portfolios are increasing significantly. While our portfolios of
these types of loans have not been as adversely impacted as residential loans,
there can be no assurance that the credit quality in these portfolios will not
decrease significantly and may result in losses that exceed the estimates that
are currently included in the reserve for credit losses, which could adversely
affect the Company’s financial conditions and results of operations. See also
“Financial Condition — Loan Portfolio and Credit Quality” in Item 6
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this report for further information.
22
The
Company may be required to make further increases to its reserve for credit
losses and to charge off additional loans in the future, which could adversely
affect our results of operations.
The
Company maintains a reserve for credit losses, which is a reserve established
through a provision for loan losses charged to expense, that represents
management’s best estimate of probable incurred losses within the existing
portfolio of loans. The allowance, in the judgment of management, is necessary
to reserve for estimated loan losses and risks inherent in the loan portfolio.
The level of the allowance reflects management’s continuing evaluation of
specific credit risks; loan loss experience; current loan portfolio quality;
present economic, political and regulatory conditions; industry concentrations
and other unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the reserve for credit losses
inherently involves a high degree of subjectivity and judgment and requires us
to make significant estimates of current credit risks and future trends, all of
which may undergo material changes. Changes in economic conditions affecting
borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of our
control, may require an increase in the reserve for loan losses. Increases in
nonperforming loans have a significant impact on our allowance for loan losses.
Generally, our non-performing loans and assets reflect operating difficulties of
individual borrowers resulting from weakness in the economy of the markets we
serve. Our reserve for loan losses was 44.3% and 39.2% of NPLs at December
31, 2009 and 2008, respectively. If real estate markets deteriorate further, we
expect that we may continue to experience increased delinquencies and credit
losses. While economic conditions have stabilized on a national
level, conditions could worsen, potentially resulting in higher delinquencies
and credit losses. There can be no assurance that the reserve for credit losses
will be sufficient to cover actual loan related losses.
Representatives
of the Federal Reserve Board, the FDIC, and the DFCS, our principal regulators,
have publicly expressed concerns about the banking industry’s lending practices
and have particularly noted concerns about real estate-secured lending. Further,
state and federal regulatory agencies, as an integral part of their examination
process, review our loans and our allowance for loan losses. Additional
provision for loan losses or charge-off of loans could adversely impact our
results of operations and financial condition. See also “Financial
Condition — Loan Portfolio and Credit Quality” in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of
this report.
The
Company’s reserve for credit losses may not be adequate to cover future loan
losses, which could adversely affect our earnings.
The
Company maintains a reserve for credit losses in an amount that we believe is
adequate to provide for losses inherent in our portfolio. While we strive to
carefully monitor credit quality and to identify loans that may become
non-performing, at any time there are loans in the portfolio that could result
in losses that have not been identified as non-performing or potential problem
loans. Estimation of the allowance requires us to make various assumptions and
judgments about the collectability of loans in our portfolio. These assumptions
and judgments include historical loan loss experience, current credit profiles
of our borrowers, adverse situations that have occurred that may affect a
borrower’s ability to meet its financial obligations, the estimated value of
underlying collateral and general economic conditions. Determining the
appropriateness of the reserve is complex and requires judgment by management
about the effect of matters that are inherently uncertain. We cannot be certain
that we will be able to identify deteriorating loans before they become
non-performing assets, or that we will be able to limit losses on those loans
that have been identified. As a result, future significant increases to the
reserve for credit losses may be necessary. Additionally, future increases to
the reserve for credit losses may be required based on changes in the
composition of the loans comprising our loan portfolio, deteriorating values in
underlying collateral (most of which consists of real estate in the markets we
serve) and changes in the financial condition of borrowers, such as may result
from changes in economic conditions, or as a result of incorrect assumptions by
management in determining the reserve for credit loss. Additionally, banking
regulators, as an integral part of their supervisory function, periodically
review our reserve for credit losses. These regulatory agencies may require us
to increase the reserve for credit losses which could have a negative effect on
our financial condition and results of operations.
23
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.
Liquidity
is essential to our business. Our primary funding source is commercial and
retail deposits of our customers, brokered deposits, advances from the FHLB, FRB
discount window and other borrowings to fund our operations. Although we have
historically been able to replace maturing deposits and advances as necessary,
we might not be able to replace such funds in the future depending on adverse
results of operations, financial condition or capital ratings or regulatory
restrictions. An inability to raise funds through traditional deposits, brokered
deposits, borrowings, the sale of securities or loans and other sources could
have a substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities on terms which are
acceptable to us could be impaired by factors that affect us specifically or the
financial services industry or economy in general. At the onset of the economic
downturn in 2007 and through 2008 and early 2009 core deposits declined because
customers in general experienced reduced funds available for core
deposits. As a result, the amount of our wholesale funding increased.
Core deposits stabilized in late 2009, and the Company has established a
significant liquidity reserve as of December 31, 2009. However our
ability to borrow or attract and retain deposits in the future could be
adversely affected by our financial condition, regulatory restrictions, or
impaired by factors that are not specific to us, such as FDIC insurance changes
including the expiration of TAG program, or further disruption in the financial
markets or negative views and expectations about the prospects for the banking
industry. We are presently restricted from accepting additional brokered
deposits, including the Bank’s reciprocal Certificate of Deposit Account
Registry Service (CDARs) program. As of December 31, 2009, we had outstanding
brokered deposits totaling $116.5 million, 100% of which will mature in
2010.
The
Bank’s primary counterparty for borrowing purposes is the FHLB, and liquid
assets are mainly balances held at the FRB. Available borrowing capacity has
been reduced as we drew on our available sources. Borrowing capacity from the
FHLB of Seattle or FRB may fluctuate based upon the condition of the bank or the
acceptability and risk rating of loan collateral, and counterparties could
adjust discount rates applied to such collateral at their discretion, and the
FRB or FHLB of Seattle could restrict or limit our access to secured borrowings.
As with many community banks, correspondent banks have withdrawn unsecured lines
of credit or now require collateralization for the purchase of fed funds on a
short-term basis due to the present adverse economic environment. In addition,
collateral pledged against public deposits held at the Bank has been increased
under Oregon law to more than 110% of such balances. The Bank is a public
depository and, accordingly, accepts deposit funds that belong to, or are held
for the benefit of, the State of Oregon, political subdivisions thereof,
municipal corporations and other public funds. In accordance with applicable
state law, in the event of default of one bank, all participating banks in the
state collectively assure that no loss of funds is suffered by any public
depositor. Generally in the event of default by a public depository, the
assessment attributable to all public depositories is allocated on a pro rata
basis in proportion to the maximum liability of each public depository as it
existed on the date of loss. The maximum liability is dependent upon potential
changes in regulations, bank failures and the level of public fund deposits, all
of which cannot be presently determined. Liquidity also may be affected by the
Bank’s routine commitments to extend credit. These circumstances have the effect
of reducing secured borrowing capacity.
There can
be no assurance that our sources of funds will remain adequate for our liquidity
needs and we may be compelled to seek additional sources of financing in the
future. There can be no assurance additional borrowings, if sought, would be
available to us or, if available, would be on favorable terms. The Company’s
stock price has been negatively affected by the recent adverse economic trend,
as has the ability of banks and holding companies to raise capital or borrow in
the debt markets compared to recent years. If additional financing sources are
unavailable or not available on reasonable terms to provide necessary liquidity,
our financial condition, results of operations and future prospects could be
materially adversely affected.
24
The
Company is seeking additional capital to improve capital ratios, but capital may
not be available when it is needed.
The
Company is required by federal and state regulatory authorities, including under
the obligations placed on the Bank by the Order, to maintain adequate levels of
capital to support our operations. In addition, we may elect to raise additional
capital to offset elevated risks arising from adverse economic conditions, support
our business, finance acquisitions, if any, or we may otherwise elect to raise
additional capital. Our ability to raise additional capital, if needed, will
depend on conditions in the capital markets, economic conditions and a number of
other factors, many of which are outside our control, and on our financial
performance. In that regard, current market conditions and investor uncertainty
have made it very challenging for financial institutions in general to raise
capital. Market conditions and investor sentiment prevented the
Company from raising capital through public and private offerings in the fourth
quarter of 2009. If we cannot raise additional capital when needed,
it may have a material adverse effect on our financial condition, results of
operations and prospects, in addition to any possible action discussed above,
that the FDIC or DFCS could take in connection with a failure to comply with or
a violation of the Order.
The
Company may not be able to obtain such financing or it may be only available on
terms that are unfavorable to the Company and its shareholders. In the case of
equity financings, dilution to the Company’s shareholders could result and
securities issued in such financings may have rights, preferences and privileges
that are senior to those of the Company’s current shareholders. Under the
Company’s articles of incorporation, the Company may issue preferred equity
without first obtaining shareholder approval. In addition, debt financing may
include covenants that restrict our operations, and interest charges would
detract from future earnings Further, in the event additional capital is not
available on acceptable terms through available financing sources, the Company
may instead take additional steps to preserve capital, including reducing loans
outstanding, selling certain assets and increasing loan
participations. The Company reduced its dividend to $.01 in the third quarter of
2008, and eliminated its cash dividend at year end 2008 as part of its effort to
preserve capital under current adverse economic conditions. There can be no
assurance that dividends on our common stock will be paid in the future, and if
paid, at what amount.
Real
estate values may continue to decrease leading to additional and greater than
anticipated loan charge-offs and valuation write downs on our other real estate
owned (“OREO”) properties.
Real
estate owned by the Bank and not used in the ordinary course of its operations
is referred to as “other real estate owned” or “OREO” property. We foreclose on
and take title to the real estate serving as collateral for many of our loans as
part of our business. At December 31, 2009, we had OREO with a carrying value of
$28.9 million relating to loans originated in the raw land and land development
portfolio and to a lesser extent, other loan portfolios. Increased OREO balances
lead to greater expenses as we incur costs to manage and dispose of the
properties. We expect that our earnings in 2010 will continue to be negatively
affected by various expenses associated with OREO, including personnel costs,
insurance and taxes, completion and repair costs, and other costs associated
with property ownership, as well as by the funding costs associated with assets
that are tied up in OREO. Moreover, our ability to sell OREO properties is
affected by public perception that banks are inclined to accept large discounts
from market value in order to quickly liquidate properties. Any decrease in
market prices may lead to OREO write downs, with a corresponding expense in our
statement of operations. We evaluate OREO property values periodically and write
down the carrying value of the properties if the results of our evaluations
require it. Further write-downs on OREO or an inability to sell OREO properties
could have a material adverse effect on our results of operations and financial
condition.
The
Company is not in compliance with certain continued listing requirements of the
NASDAQ Stock Market.
On December 17, 2009, the Company
received a notice letter from The NASDAQ Stock Market regarding its
non-compliance with Rule 5550(a)(2) of the NASDAQ Marketplace Rules with respect
to the minimum bid price requirement of $1.00 per share. The Company’s common
stock has failed to meet the $1.00 minimum bid price for 30 consecutive business
days. In accordance with Rule 5810(b) of the NASDAQ Marketplace Rules, the
Company has a 180 calendar day grace period, or until June 15, 2010, to comply
with the minimum bid price requirement. To regain compliance, the bid price must
meet or exceed $1.00 per share for at least ten consecutive business days prior
to June 15, 2010. The Company will continue to evaluate its options with respect
to meeting this listing qualification within the time period required. If
the Company does not regain compliance with the minimum bid price rule by June
15, 2010, NASDAQ will again provide written notification that the Company's
securities are subject to potential delisting. At that time, the
Company may appeal the delisting determination to a NASDAQ listing
qualifications hearings panel. A delisting of the Company’s common
stock from the NASDAQ Stock Market would have a material adverse effect on its
financial condition.
25
The
Bank’s deposit insurance premium could be substantially higher in the future,
which could have a material adverse effect on our future earnings.
The FDIC
insures deposits at FDIC insured financial institutions, including the Bank. The
FDIC charges the insured financial institutions premiums to maintain the Deposit
Insurance Fund at a certain level. Current economic conditions have increased
bank failures and expectations for further failures, in which case the FDIC
ensures payments of deposits up to insured limits from the Deposit Insurance
Fund. Either an increase in the risk category of the Bank or adjustments to the
base assessment rates, and/or a significant special assessment could have a
material adverse effect on our earnings. In addition, the deposit insurance
limit on FDIC deposit insurance coverage generally has increased to $250,000
through December 31, 2013. These developments will cause the premiums assessed
on us by the FDIC to increase and will materially increase our noninterest
expense.
On
February 27, 2009, the FDIC issued a final rule that revises the way the FDIC
calculates federal deposit insurance assessment rates beginning in the second
quarter of 2009. Under the new rule, the FDIC first establishes an institution’s
initial base assessment rate. This initial base assessment rate will range,
depending on the risk category of the institution, from 12 to 45 basis points.
The FDIC will then adjust the initial base assessment (higher or lower) to
obtain the total base assessment rate. The adjustments to the initial base
assessment rate will be based upon an institution’s levels of unsecured debt,
secured liabilities, and certain brokered deposits. The total base assessment
rate will range from 7 to 77.5 basis points of the institution’s
deposits.
Additionally,
on May 22, 2009, the FDIC announced a final rule imposing a special emergency
assessment as of June 30, 2009, payable September 30, 2009, of 5 basis points on
each FDIC insured deposit any institution’s assets, less Tier 1 capital, as of
June 30, 2009, but the amount of the assessment is capped at 10 basis points of
domestic deposits. The final rule also allows the FDIC to impose additional
special emergency assessments on or after September 30, 2009, of up to 5 basis
points per quarter, if necessary to maintain public confidence in FDIC
insurance. These higher FDIC assessment rates and special assessments will have
an adverse impact on our results of operations. We are unable to predict the
impact in future periods; including whether and when additional special
assessments will occur, in the event the economic crisis continues. However, the
FDIC has indicated that for now it will not impose additional special
assessments but instead is requiring institutions to prepay certain
assessments.
On
November 12, 2009, the FDIC issued a final rule pursuant to which all insured
depository institutions were required to prepay on December 31, 2009 their
estimated assessments for the fourth quarter of 2009 and for all of 2010, 2011
and 2012. Under the rule, however, the FDIC has the authority to exempt an
institution from the prepayment requirements if the FDIC determines that the
prepayment would adversely affect the safety and soundness of the institution.
The Bank has received an exemption from the prepayment requirements. The Bank
will continue to pay its insurance assessments on a quarterly
basis.
We also
participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLGP, for
noninterest-bearing transaction deposit accounts. Banks that participate in the
TLGP’s noninterest-bearing transaction account guarantee program in 2009
generally paid the FDIC an annual assessment of 10 basis points on the amounts
in such accounts above the amounts covered by FDIC deposit insurance. The
guarantee program has been extended through December 31, 2013. Beginning in
2010, participants will be assessed at an annual rate of between 15 and 25 basis
points on the amounts in the guaranteed accounts in excess of the amounts
covered by the FDIC deposit insurance. To the extent that these TLGP assessments
are insufficient to cover any loss or expenses arising from the TLGP program,
the FDIC is authorized to impose an emergency special assessment on all
FDIC-insured depository institutions. The FDIC has authority to impose charges
for the TLGP program upon depository institution holding companies as well.
These charges, along with the full utilization of our FDIC deposit insurance
assessment credit in early 2009, will cause the premiums and TLGP assessments
charged by the FDIC to increase. These actions have significantly increased our
noninterest expense in 2009 and will likely do so for the foreseeable
future.
26
Changes
in interest rates could adversely impact the Company.
The
Company’s earnings are highly dependent on the difference between the interest
earned on loans and investments and the interest paid on deposits and
borrowings. Changes in market interest rates impact the rates earned on loans
and investment securities and the rates paid on deposits and borrowings. In
addition, changes to the market interest rates may impact the level of loans,
deposits and investments, and the credit quality of existing loans. These rates
may be affected by many factors beyond the Company’s control, including general
and economic conditions and the monetary and fiscal policies of various
governmental and regulatory authorities. Changes in interest rates may
negatively impact the Company’s ability to attract deposits, make loans and
achieve satisfactory interest rate spreads, which could adversely affect the
Company’s financial condition or results of operations.
The
Company is subject to extensive regulation which undergoes frequent and often
significant changes.
The
Company’s operations are subject to extensive regulation by federal and state
banking authorities which impose requirements and restrictions on the Company’s
operations. The regulations affect the Company’s and the Bank’s investment
practices, lending activities, and dividend policy, among other things.
Moreover, federal and state banking laws and regulations undergo frequent and
often significant changes and have been subject to significant change in recent
years, sometimes retroactively applied, and may change significantly in the
future. Changes to these laws and regulations or other actions by regulatory
agencies could, among other things, make regulatory compliance more difficult or
expensive for the Company, could limit the products the Company and the Bank can
offer or increase the ability of non-banks to compete and could adversely affect
the Company in significant but unpredictable ways which in turn could have a
material adverse effect on the Company’s financial condition or results of
operations. Failure to comply with the laws or regulations could result in
fines, penalties, sanctions and damage to the Company’s reputation which could
have an adverse effect on the Company’s business and financial
results.
The
financial services business is intensely competitive and our success will depend
on our ability to compete effectively.
The
Company faces competition for its services from a variety of competitors. The
Company’s future growth and success depends on its ability to compete
effectively. The Company competes for deposits, loans and other financial
services with numerous financial service providers including banks, thrifts,
credit unions, mortgage companies, broker dealers, and insurance companies. To
the extent these competitors have less regulatory constraints, lower cost
structures, or increased economies of scale they may be able to offer a greater
variety of products and services or more favorable pricing for such products and
services. Improvements in technology, communications and the internet have
intensified competition. As a result, the Company’s competitive position could
be weakened, which could adversely affect the Company’s financial condition and
results of operations.
Our
information systems may experience an interruption or breach in
security.
The
Company relies on its computer information systems in the conduct of its
business. The Company has policies and procedures in place to protect against
and reduce the occurrences of failures, interruptions, or breaches of security
of these systems, however, there can be no assurance that these policies and
procedures will eliminate the occurrence of failures, interruptions or breaches
of security or that they will adequately restore or minimize any such events.
The occurrence of a failure, interruption or breach of security of the Company’s
computer information systems could result in a loss of information, business or
regulatory scrutiny, or other events, any of which could have a material adverse
effect on the Company’s financial condition or results of
operations.
27
We
continually encounter technological change.
Frequent
introductions of new technology-driven products and services in the financial
services industry result in the need for rapid technological change. In
addition, the effective use of technology may result in improved customer
service and reduced costs. The Company’s future success depends, to a certain
extent, on its ability to identify the needs of our customers and address those
needs by using technology to provide the desired products and services and to
create additional efficiencies in its operations. Certain competitors may have
substantially greater resources to invest in technological improvements. We may
not be able to successfully implement new technology-driven products and
services or to effectively market these products and services to our customers.
Failure to implement the necessary technological changes could have a material
adverse impact on our business and, in turn, our financial condition and results
of operations.
The
Company’s controls and procedures may fail or be circumvented.
Management
regularly reviews and updates the Company’s internal controls, disclosure
controls and procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of the
Company’s controls and procedures or failure to comply with regulations related
to controls and procedures could have a material adverse effect on the Company’s
business, results of operations and financial condition. See “Item 9A Controls
and Procedures” of this report for a more detailed discussion of our controls
and procedures.
Cascade
Bancorp relies on dividends from the Bank.
Cascade
Bancorp is a separate legal entity from the Bank and substantially all of our
revenues are derived from Bank dividends. These dividends may be limited by
certain federal and state laws and regulations. In addition, any distribution of
assets of the Bank upon a liquidation or reorganization would be subject to the
prior liens of the Bank’s creditors. Because of the elevated credit risk and
associated loss incurred in 2008 and 2009, regulators have required the Company
to seek permission prior to payment of dividends on common stock or on Trust
Preferred Securities. In addition, pursuant to the Order, the Bank is required
to seek permission prior to payment of cash dividends on its common stock. The
Company cut its dividend to zero in the fourth quarter of 2008 and deferred
payments on its Trust Preferred Securities beginning in the second quarter of
2009. We do not expect the Bank to pay dividends to Cascade Bancorp for the
foreseeable future. Cascade Bancorp does not expect to pay any dividends for the
foreseeable future. Cascade Bancorp is unable to pay dividends on its common
stock until it pays all accrued payments on its Trust Preferred Securities. As
of October 31, 2009, we had $66.5 million of TPS outstanding with a weighted
average interest rate of 2.83%. The Company elected to defer payments on its TPS
beginning in the second quarter of 2009 and as of October 31, 2009, accrued
dividends were $1.38 million. If the Bank is unable to pay dividends to Cascade
Bancorp in the future, Cascade Bancorp may not be able to pay dividends on its
stock or pay interest on its debt, which could have a material adverse effect on
the Company’s financial condition and results of operations.
The
Company may not be able to attract or retain key banking employees.
We expect
our future success to be driven in large part by the relationships maintained
with our clients by our executives and senior lending officers. We have entered
into employment agreements with several members of senior management. The
existence of such agreements, however, does not necessarily ensure that we will
be able to continue to retain their services. The unexpected loss of key
employees could have a material adverse effect on our business and possibly
result in reduced revenues and earnings.
The
Company strives to attract and retain key banking professionals, management and
staff. Competition to attract the best professionals in the industry can be
intense which will limit the Company’s ability to hire new professionals.
Banking related revenues and net income could be adversely affected in the event
of the unexpected loss of key personnel.
28
The
value of certain securities in our investment securities portfolio may be
negatively affected by disruptions in the market for these
securities.
The
Company’s investment portfolio securities are mainly mortgage backed securities
guaranteed by government sponsored enterprises such as FNMA, GNMA, FHLMC and
FHLB, or otherwise backed by FHA/VA guaranteed loans; however, volatility or
illiquidity in financial markets may cause certain investment securities held
within our investment portfolio to become less liquid. This coupled with
the uncertainty surrounding the credit risk associated with the underlying
collateral or guarantors may cause material discrepancies in valuation estimates
obtained from third parties. Volatile market conditions may affect the value of
securities through reduced valuations due to the perception of heightened credit
and liquidity risks in addition to interest rate risk typically associated with
these securities. There can be no assurance that the declines in market value
associated with these disruptions will not result in impairments of these
assets, which would lead to accounting charges that could have a material
adverse effect on our results of operations, equity, and capital
ratios.
We
are exposed to risk of environmental liabilities with respect to properties to
which we take title.
In the
course of our business, we may foreclose and take title to real estate, and
could be subject to environmental liabilities with respect to these properties.
We may be held liable to a governmental entity or to third parties for property
damage, personal injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or may be required to
investigate or clean-up hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation activities
could be substantial. In addition, if we are the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
the property. If we become subject to significant environmental liabilities, our
business, financial condition, results of operations and prospects could be
adversely affected.
FNMA
is no longer allowing the Bank to sell its mortgages to FNMA and may potentially
force the sale of our MSR’s
On November 13, 2009, FNMA informed the
Bank that as a result of the Bank’s capital ratios falling below contractual
requirements the Bank no longer qualified as a FNMA designated mortgage loan
seller or servicer and the Bank had until December 31, 2009 to improve its
capital ratios to meet FNMA’s requirements. As of December 31, 2009,
the Bank had not met such requirements, and, accordingly, FNMA has
terminated the Bank’s rights to originate and sell mortgage loans directly to
FNMA. In addition, FNMA now has the option to terminate its mortgage
servicing agreement with the Bank, upon which occurrence the Bank would no
longer be allowed to service FNMA loans in the future. Management is in
the process of discussing such issues with FNMA and has been evaluating the
prospective impact of this development. Possible outcomes include a reduction of
the Company’s mortgage banking and mortgage servicing revenues in the future and
sale or forced transfer of its mortgage servicing business to a third-party by
FNMA. As a result of the actions by FNMA, the Company anticipates that the
majority of mortgage loans originated in future periods will be sold to other
third-parties and that the Bank will not retain servicing rights. The
Company expects that this may result in a significant decrease to future net
mortgage servicing income. Management believes that under the
circumstances, FNMA will provide the Company with sufficient time to accomplish
an orderly disposition of its MSRs. However, there can be no assurance
that FNMA will provide for an orderly process nor that a reduction of
mortgage banking revenues or possible impairment of MSRs will not occur. Because
the estimated fair value of the Company’s MSRs exceeds book value at December
31, 2009, and because management believes it is unlikely FNMA will preemptively
transfer the Company’s MSRs to a third-party, no impairment adjustment has been
made in connection with this issue as of December 31, 2009. In addition, no
valuation allowance for MSRs was recorded as of December 31, 2008 and
2007.
29
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None
ITEM
2. PROPERTIES
At
December 31, 2009, the Company conducted full-service community banking through
32 branches, including eleven in Central Oregon, three in the Salem/Keizer area,
five in Southern Oregon, one office in Portland, and 12 branches serving the
greater Boise area.
In
Oregon, three branch buildings are owned and are situated on leased
land. The Bank owns the land and buildings at six branch
locations. The Bank leases the land and buildings at eleven branch
locations. In addition, the Bank leases space for the Operations and
Information Systems departments located in Bend. All leases include
multiple renewal options.
In Idaho,
the Company owns the land and buildings at nine branch locations and leases the
land and building at three branch locations.
The
Company’s main office is located at 1100 NW Wall Street, Bend, Oregon, and
consists of approximately 15,000 square feet. The building is owned
by the Bank and is situated on leased land. The ground lease term is
for 30 years and commenced June 1, 1989. There are ten renewal
options of five years each. The current rent is $6,084 per month with
adjustments every five years by mutual agreement of landlord and
tenant. The main bank branch occupies the ground floor. A
separate drive-up facility is also located on this site.
In 2004,
the Bank purchased the Boyd Building with 26,035 square feet in downtown
Bend. This building is occupied by Credit Services, Mortgage
Division, Deposit Services and Administrative/Executive offices.
In December 2008, the Bank opened a new
Salem regional office, which houses branch banking services, a mortgage center,
commercial lending, professional banking advisors and a trust department. In
addition, during 2008 the Bank closed its West Salem branch.
In the
opinion of management, all of the Bank’s properties are adequately insured, its
facilities are in good condition and together with any anticipated improvements
and additions, are adequate to meet it operating needs for the foreseeable
future.
ITEM
3. LEGAL
PROCEEDINGS
The
Company is from time to time a party to various legal actions arising in the
normal course of business. Management does not expect the ultimate
disposition of these matters to have a material adverse effect on the business
or financial position of the Company.
30
PART
II
ITEM
5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
Cascade
Bancorp 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 and
the cash dividends declared on the common stock.
On
December 17, 2009, the Company received a notice letter from The NASDAQ Stock
Market regarding its non-compliance with Rule 5550(a)(2) of the NASDAQ
Marketplace Rules with respect to the minimum bid price requirement of $1.00 per
share. The Company's common stock has failed to meet the $1.00 minimum bid price
for 30 consecutive business days. The notice letter has no immediate
effect on the listing of the Company's common stock on The NASDAQ Capital
Market. In accordance with Rule 5810(b) of the NASDAQ Marketplace Rules, the
Company has a 180 calendar day grace period, or until June 15, 2010, to comply
with the minimum bid price requirement. To regain compliance, the bid price must
meet or exceed $1.00 per share for at least ten consecutive business days prior
to June 15, 2010. If the Company does not regain compliance with the minimum bid
price rule by June 15, 2010, NASDAQ will again provide written notification that
the Company's securities are subject to potential delisting. At that
time, the Company may appeal the delisting determination to a NASDAQ listing
qualifications hearings panel.
The sales
price and cash dividends shown below are retroactively adjusted for stock
dividends and splits and are based on actual trade statistical information
provided by the NASDAQ Capital Market for the periods indicated. Prices do not
include retail mark-ups, mark-downs or commissions. As of December 31, 2009 we
had approximately 28,174,163 shares of common stock outstanding, held of
record by approximately 479 holders of record. The last reported sales
price of our common stock on the NASDAQ Capital Market on March 5, 2010 was
$0.57 per share.
Quarter Ended
|
High
|
Low
|
Dividend per share
|
|||||||||
2009
|
||||||||||||
December
31
|
$ | 1.23 | $ | 0.68 | N/A | |||||||
September
30
|
$ | 2.39 | $ | 1.05 | N/A | |||||||
June
30
|
$ | 2.84 | $ | 1.26 | N/A | |||||||
March
31
|
$ | 7.25 | $ | 0.61 | N/A | |||||||
2008
|
||||||||||||
December
31
|
$ | 10.00 | $ | 5.07 | $ | 0.01 | ||||||
September
30
|
$ | 18.50 | $ | 6.26 | $ | 0.01 | ||||||
June
30
|
$ | 10.35 | $ | 7.43 | $ | 0.10 | ||||||
March
31
|
$ | 14.48 | $ | 9.01 | $ | 0.10 |
Dividend
Policy
The
amount of future dividends will depend upon our earnings, financial conditions,
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. Because of the elevated credit risk and
associated loss incurred in 2008, the Company cut its dividend to zero in the
fourth quarter of 2008 and deferred payments on its Trust Preferred Securities
in the second quarter of 2009. Cascade Bancorp is unable to pay dividends on its
common stock until it makes all accrued payments on its Trust Preferred
Securities. Pursuant to the Order, the Bank cannot
pay dividends on its common stock without the permission of its
regulators. There can be no assurance as to future dividends because they are
dependent on the Company’s future earnings, including dividends from the Bank,
capital requirements and financial conditions.
31
The
following table sets forth Information regarding securities authorized for
issuance under the Company’s equity plans as of December 31,
2009. Additional information regarding the Company’s equity plans is
presented in Note 19 of the Notes to Consolidated Financial
Statements included in Item 7 of this report.
Plan Category
|
# of securities to be
issued on exercise of
outstanding options
(a)
|
Weighted average
exercise price of
outstanding options
(b)
|
# of securities
remaining available
for future issuance
under plan (excluding
securities in colum
(a)(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
990,618 | $ | 12.18 | 1,353,217 | ||||||||
Equity
compensation plans not approved by security holders
|
None
|
N/A | N/A | |||||||||
Total
|
990,618 | $ | 12.18 | 1,353,217 |
32
Five-Year
Stock Performance Graph
The graph below compares the yearly percentage change in
the cumulative shareholder return on the Company’s common stock during the five
years ended December 31, 2009 with: (i) the Total Return Index for the
NASDAQ Stock Market (U.S. Companies) as reported by the Center for Research in
Securities Prices; (ii) the Total Return Index for NASDAQ Bank Stocks as
reported by the Center for Research in Securities Prices; and (iii) a peer-group
of publicly traded commercial banks. This comparison assumes $100.00
was invested on December 31, 2004, in the Company’s common stock and the
comparison groups and assumes the reinvestment of all cash dividends prior to
any tax effect and adjusted to give retroactive effect to material changes
resulting from stock dividends and splits.
Period Ending
|
||||||||||||||||||||||||
Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||||||||
Cascade
Bancorp
|
100.00 | 115.63 | 197.34 | 90.08 | 44.60 | 4.49 | ||||||||||||||||||
NASDAQ
Composite
|
100.00 | 101.37 | 111.03 | 121.92 | 72.49 | 104.31 | ||||||||||||||||||
SNL
Bank NASDAQ
|
100.00 | 96.95 | 108.85 | 85.45 | 62.06 | 50.34 | ||||||||||||||||||
Cascade
Bancorp 2009 Peer Group*
|
100.00 | 112.11 | 141.82 | 100.91 | 45.33 | 31.19 |
*Cascade
Bancorp 2009 Peer Group consists of publicly traded commercial banks, excluding
Cascade Bancorp, headquartered in Oregon and Washington with total assets
between $700 million and $3 billion in 2009, including AmericanWest
Bancorporation, Cascade Financial Corporation, Cashmere Valley Financial
Corporation, City Bank, Columbia Bancorp, Heritage Financial Corporation,
Pacific Continental Corporation, PremierWest Bancorp, Washington Banking
Company, and West Coast Bancorp.
33
ITEM
6. SELECTED FINANCIAL
DATA
The
following consolidated selected financial data is derived from the Company’s
audited consolidated financial statements as of and for the five years ended
December 31, 2009. The following consolidated financial data should be read
in conjunction with Management’s Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and related
notes included elsewhere in this report. All of the Company’s acquisitions
during the five years ended December 31, 2009 were accounted for using the
purchase method. Accordingly, the operating results of the acquired companies
are included with the Company’s results of operations since their respective
dates of acquisition.
(In
thousands, except per share data and ratios; unaudited)
|
Years ended December 31,
|
|||||||||||||||||||
Balance
Sheet Data (at period end)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
(Restated)
|
||||||||||||||||||||
Investment
securities
|
$ | 135,763 | $ | 109,691 | $ | 87,015 | $ | 106,923 | $ | 59,286 | ||||||||||
Loans,
gross
|
1,547,676 | 1,956,184 | 2,041,478 | 1,887,263 | 1,049,704 | |||||||||||||||
Reserve
for loan losses
|
58,586 | 47,166 | 33,875 | 23,585 | 14,688 | |||||||||||||||
Loans,
net
|
1,489,090 | 1,909,018 | 2,007,603 | 1,863,678 | 1,035,016 | |||||||||||||||
Total
assets
|
2,172,128 | 2,278,307 | 2,394,492 | 2,249,314 | 1,269,671 | |||||||||||||||
Total
deposits
|
1,815,348 | 1,794,611 | 1,667,138 | 1,661,616 | 1,065,379 | |||||||||||||||
Non-interest
bearing deposits
|
394,583 | 364,146 | 435,503 | 509,920 | 430,463 | |||||||||||||||
Total
common shareholders' equity (book) (1)
|
23,318 | 135,239 | 275,286 | 261,076 | 104,376 | |||||||||||||||
Tangible
common shareholders' equity (tangible) (2)
|
16,930 | 127,318 | 160,737 | 144,947 | 97,653 | |||||||||||||||
Income
Statement Data
|
||||||||||||||||||||
Interest
income
|
$ | 106,811 | $ | 137,772 | $ | 171,228 | $ | 138,597 | $ | 72,837 | ||||||||||
Interest
expense
|
34,135 | 42,371 | 62,724 | 40,321 | 13,285 | |||||||||||||||
Net
interest income
|
72,676 | 95,401 | 108,504 | 98,276 | 59,552 | |||||||||||||||
Loan
loss provision
|
134,000 | 99,593 | 19,400 | 6,000 | 3,050 | |||||||||||||||
Net
interest income (loss) after loan loss provision
|
(61,324 | ) | (4,192 | ) | 89,104 | 92,276 | 56,502 | |||||||||||||
Noninterest
income
|
21,626 | 19,991 | 21,225 | 18,145 | 13,069 | |||||||||||||||
Noninterest
expense (3)
|
94,716 | 173,671 | 62,594 | 52,953 | 34,201 | |||||||||||||||
Income
(loss) before income taxes
|
(134,414 | ) | (157,872 | ) | 47,735 | 57,468 | 35,370 | |||||||||||||
Provision
(credit) for income taxes
|
(19,585 | ) | (23,306 | ) | 17,756 | 21,791 | 12,934 | |||||||||||||
Net
income (loss)
|
(114,829 | ) | $ | (134,566 | ) | $ | 29,979 | $ | 35,677 | $ | 22,436 | |||||||||
Share
Data (1)
|
||||||||||||||||||||
Basic
earnings (loss) per common share
|
$ | (4.10 | ) | $ | (4.82 | ) | $ | 1.06 | $ | 1.37 | $ | 1.06 | ||||||||
Diluted
earnings (loss) per common share
|
$ | (4.10 | ) | $ | (4.82 | ) | $ | 1.05 | $ | 1.34 | $ | 1.03 | ||||||||
Book
value per common share
|
$ | 0.83 | $ | 4.81 | $ | 9.82 | $ | 9.22 | $ | 4.93 | ||||||||||
Tangible
value per common share
|
$ | 0.60 | $ | 4.53 | $ | 5.73 | $ | 5.11 | $ | 4.61 | ||||||||||
Cash
dividends paid per common share
|
$ | 0.00 | $ | 0.22 | $ | 0.37 | $ | 0.31 | $ | 0.26 | ||||||||||
Ratio
of dividends declared to net income
|
0.00 | % | -4.56 | % | 34.86 | % | 22.65 | % | 24.79 | % | ||||||||||
Basic
Average shares outstanding
|
28,001 | 27,936 | 28,243 | 26,062 | 21,070 | |||||||||||||||
Fully
Diluted average shares outstanding
|
28,001 | 27,936 | 28,577 | 26,664 | 21,780 | |||||||||||||||
Key
Ratios
|
||||||||||||||||||||
Return
on average total shareholders' equity (book)
|
-102.88 | % | -47.90 | % | 10.92 | % | 17.48 | % | 24.04 | % | ||||||||||
Return
on average total shareholders' equity (tangible)
|
-109.94 | % | -80.51 | % | 18.83 | % | 29.81 | % | 25.93 | % | ||||||||||
Return
on average total assets
|
-5.01 | % | -5.58 | % | 1.28 | % | 1.86 | % | 1.97 | % | ||||||||||
Pre-tax
pre provision return on average assets
|
-1.49 | % | 1.94 | % | 2.87 | % | 3.31 | % | 3.37 | % | ||||||||||
Net
interest spread
|
3.11 | % | 3.90 | % | 4.20 | % | 4.65 | % | 4.85 | % | ||||||||||
Net
interest margin
|
3.43 | % | 4.44 | % | 5.21 | % | 5.73 | % | 5.67 | % | ||||||||||
Total
revenue (net int inc + non int inc)
|
$ | 94,302 | $ | 115,153 | $ | 129,644 | $ | 116,431 | $ | 72,621 | ||||||||||
Efficiency
ratio (3)
|
100.44 | % | 150.61 | % | 48.22 | % | 45.49 | % | 47.10 | % |
Notes:
(1)
Adjusted to reflect a 25% (5:4) stock split declared in October
2006.
(2)
Excludes goodwill, core deposit intangible and other identifiable
intangible assets, related to the acquisitions of Community Bank of Grants Pass
and F&M Holding Company.
(3)
2008 noninterest expense includes $105,047 of goodwill
impairment.
34
(In
thousands, except per share data and ratios; unaudited)
|
Years ended December 31,
|
|||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(Restated)
|
|||||||||||||||||||
Credit
Quality Ratios
|
||||||||||||||||||||
Reserve
for credit losses
|
$ | 59,290 | $ | 48,205 | $ | 37,038 | $ | 26,798 | $ | 14,688 | ||||||||||
Reserve
to ending total loans
|
3.83 | % | 2.46 | % | 1.81 | % | 1.42 | % | 1.40 | % | ||||||||||
Non-performing
assets (4)
|
$ | 160,970 | $ | 173,200 | $ | 55,681 | $ | 3,005 | $ | 40 | ||||||||||
Non-performing
assets to total gross loans and OREO
|
10.21 | % | 7.94 | % | 2.71 | % | 0.16 | % | 0.00 | % | ||||||||||
Non-performing
assets to total assets
|
7.41 | % | 7.00 | % | 2.33 | % | 0.13 | % | 0.00 | % | ||||||||||
Delinquent
loans >30 days
|
$ | 10,085 | $ | 6,249 | $ | 9,622 | $ | 3,397 | $ | 205 | ||||||||||
Delinquent
>30 days to total loans
|
0.65 | % | 0.33 | % | 0.47 | % | 0.18 | % | 0.02 | % | ||||||||||
Net
Charge off's (NCOs)
|
$ | 122,580 | $ | 86,302 | $ | 9,110 | $ | 1,282 | $ | 773 | ||||||||||
Net
loan charge-offs (annualized)
|
6.81 | % | 4.20 | % | 0.46 | % | 0.08 | % | 0.08 | % | ||||||||||
Provision
for loan losses to NCOs
|
109 | % | 115 | % | 213 | % | 468 | % | 395 | % | ||||||||||
Mortgage
Activity
|
||||||||||||||||||||
Mortgage
Originations
|
$ | 177,206 | $ | 121,663 | $ | 170,095 | $ | 176,558 | $ | 158,775 | ||||||||||
Total
Servicing Portfolio (sold loans)
|
$ | 542,905 | $ | 512,163 | $ | 493,969 | $ | 494,882 | $ | 498,668 | ||||||||||
Capitalized
Mortgage Servicing Rights (MSR's)
|
$ | 3,947 | $ | 3,605 | $ | 3,756 | $ | 4,096 | $ | 4,439 | ||||||||||
Capital
Ratios
|
||||||||||||||||||||
Bancorp
|
||||||||||||||||||||
Shareholders'
equity to ending assets
|
1.07 | % | 5.94 | % | 11.50 | % | 11.61 | % | 8.22 | % | ||||||||||
Leverage
ratio (4)
|
1.11 | % | 8.19 | % | 9.90 | % | 9.82 | % | 9.30 | % | ||||||||||
Tier
1 risk-based capital (4)
|
1.48 | % | 8.94 | % | 10.00 | % | 9.99 | % | 9.83 | % | ||||||||||
Total
risk-based capital (4)
|
2.95 | % | 10.22 | % | 11.27 | % | 11.26 | % | 10.72 | % | ||||||||||
Bank
|
||||||||||||||||||||
Shareholders'
equity to ending assets
|
4.18 | % | 8.80 | % | 14.11 | % | 14.42 | % | 9.60 | % | ||||||||||
Leverage
ratio (4)
|
3.75 | % | 8.09 | % | 9.74 | % | 9.67 | % | 9.17 | % | ||||||||||
Tier
1 risk-based capital (4)
|
4.97 | % | 8.83 | % | 9.82 | % | 9.82 | % | 9.69 | % | ||||||||||
Total
risk-based capital (4)
|
6.25 | % | 10.09 | % | 11.08 | % | 11.07 | % | 10.93 | % |
Notes:
(4)
Computed in accordance with FRB and FDIC guidelines.
35
The following table sets forth the
Company’s unaudited data regarding operations for each quarter of 2009 and 2008.
This information, in the opinion of management, includes all normal recurring
adjustments necessary to fairly state the information set forth:
2009
|
||||||||||||||||
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
|||||||||||||
(Restated)
|
||||||||||||||||
Interest
income
|
$ | 24,722 | $ | 26,091 | $ | 27,663 | $ | 28,335 | ||||||||
Interest
expense
|
7,895 | 8,817 | 8,812 | 8,611 | ||||||||||||
Net
interest income
|
16,827 | 17,274 | 18,851 | 19,724 | ||||||||||||
Loan
loss provision
|
49,000 | 22,000 | 48,000 | 15,000 | ||||||||||||
Net
interest income (loss) after loan loss provision
|
(32,173 | ) | (4,726 | ) | (29,149 | ) | 4,724 | |||||||||
Noninterest
income
|
3,536 | 8,077 | 4,956 | 5,057 | ||||||||||||
Noninterest
expenses
|
29,782 | 25,739 | 22,625 | 16,570 | ||||||||||||
Loss
before income taxes
|
(58,419 | ) | (22,388 | ) | (46,818 | ) | (6,789 | ) | ||||||||
Provision
(credit) for income taxes
|
11,782 | (9,744 | ) | (18,750 | ) | (2,873 | ) | |||||||||
Net
loss
|
$ | (70,201 | ) | $ | (12,644 | ) | $ | (28,068 | ) | $ | (3,916 | ) | ||||
Basic
net loss per common share
|
$ | (2.50 | ) | $ | (0.45 | ) | $ | (1.00 | ) | $ | (0.14 | ) | ||||
Diluted
net loss per common share
|
$ | (2.50 | ) | $ | (0.45 | ) | $ | (1.00 | ) | $ | (0.14 | ) | ||||
2008
|
||||||||||||||||
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First Quarter
|
|||||||||||||
Interest
income
|
$ | 31,260 | $ | 34,111 | $ | 34,260 | $ | 38,141 | ||||||||
Interest
expense
|
9,130 | 10,146 | 10,014 | 13,081 | ||||||||||||
Net
interest income
|
22,130 | 23,965 | 24,246 | 25,060 | ||||||||||||
Loan
loss provision
|
61,339 |
(1)
|
15,390 | 18,364 | 4,500 | |||||||||||
Net
interest income (loss) after loan loss provision
|
(39,209 | ) | 8,575 | 5,882 | 20,560 | |||||||||||
Noninterest
income
|
3,951 | 5,530 | 5,008 | 5,502 | ||||||||||||
Noninterest
expenses
|
125,724 |
(2)
|
13,809 | 16,763 | 17,375 | |||||||||||
Income
(loss) before income taxes
|
(160,982 | ) | 296 | (5,873 | ) | 8,687 | ||||||||||
Provision
(credit) for income taxes
|
(23,422 | ) | (51 | ) | (2,480 | ) | 2,647 | |||||||||
Net
income (loss)
|
$ | (137,560 | ) | $ | 347 | $ | (3,393 | ) | $ | 6,040 | ||||||
Basic
net income (loss) per common share
|
$ | (4.92 | ) | $ | 0.01 | $ | (0.12 | ) | $ | 0.22 | ||||||
Diluted
net income (loss) per common share
|
$ | (4.92 | ) | $ | 0.01 | $ | (0.12 | ) | $ | 0.22 |
(1)
Increase in fourth quarter provision to increase level of credit reserves
primarily related to deterioration within the Company's residential land
development loan portfolio.
36
ITEM
7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
discussion highlights key information as determined by management but may not
contain all of the information that is important to you. For a more
complete understanding, the following should be read in conjunction with the
Company’s audited consolidated financial statements and the notes thereto as of
December 31, 2009 and 2008 and for each of the years in the three-year period
ended December 31, 2009 included in Item 7 of this report.
Cautionary
Information Concerning Forward-Looking Statements
This annual report on Form 10-K
contains forward-looking statements, which are not historical facts and pertain
to our future operating results. These statements include, but are
not limited to, our plans, objectives, expectations and intentions and are not
statements of historical fact. When used in this report, the word
"expects," "believes," "anticipates,” “could,” “may,” “will,” “should,” “plan,”
“predicts,” “projections,” “continue” and other similar expressions constitute
forward-looking statements, as do any other statements that expressly or
implicitly predict future events, results or performance, and such statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Certain risks and uncertainties and
the Company’s success in managing such risks and uncertainties may cause actual
results to differ materially from those projected, including among others, the
risk factors described in this as well as the following factors: our
inability to comply in a timely manner with the Order with the FDIC and the
DFCS, under which we are currently operating, could lead to further regulatory
sanctions or orders, which could further restrict our operations and negatively
affect our results of operations and financial condition; local and national
economic conditions could be less favorable than expected or could have a more
direct and pronounced effect on us than expected and adversely affect our
results of operations and financial condition; the local housing/real estate
market could continue to decline for a longer period than we anticipate; the
risks presented by a continued economic recession, which could continue to
adversely affect credit quality, collateral values, including real estate
collateral and OREO properties, investment values, liquidity and loan
originations, reserves for loan losses and charge offs of loans and loan
portfolio delinquency rates and may be exacerbated by our concentration of
operations in the States of Oregon and Idaho generally, and the Oregon
communities of Central Oregon, Northwest Oregon, Southern Oregon and the greater
Boise area, specifically; we will be seeking additional capital in the future to
improve capital ratios, but capital may not be available when needed or on
acceptable terms; interest rate changes could significantly reduce net interest
income and negatively affect funding sources; competition among financial
institutions could increase significantly; competition or changes in interest
rates could negatively affect net interest margin, as could other factors listed
from time to time in the Company’s SEC reports; the reputation of the financial
services industry could further deteriorate, which could adversely affect our
ability to access markets for funding and to acquire and retain customers; and
existing regulatory requirements, changes in regulatory requirements and
legislation and our inability to meet those requirements, including capital
requirements and increases in our deposit insurance premium, could adversely
affect the businesses in which we are engaged, our results of operations and
financial condition.
These
forward-looking statements speak only as of the date of this annual report on
Form 10-K. The Company undertakes no obligation to publish revised
forward-looking statements to reflect the occurrence of unanticipated events or
circumstances after the date hereof. Readers should carefully review
all disclosures filed by the Company from time to time with the
SEC.
Recent
Developments
In
October 2009, the Company filed a registration statement on Form S-1 with the
SEC pursuant to which it intended to offer up to $108 million of its Common
Stock in a public offering, subject to market and other conditions including
consummation of the previously announced private offerings with Mr. David F.
Bolger (“Bolger”) and an affiliate of Lightyear Fund II, L.P. (“Lightyear”). On
December 23, 2009, the Company announced the withdrawal of the registration
statement due to market and other conditions. On February 16, 2010,
the Company entered into amendments to the stock purchase agreements with each
of Bolger and Lightyear which, among other things, extended the stock purchase
agreements to May 31, 2010 in order to provide the Company additional time to
implement a capital raise. Because capital raising in the current economic
environment is very limited, it is uncertain whether the Bank will be able to
increase its capital to required levels.
37
On
November 13, 2009, FNMA informed the Bank that – as a result of the Bank’s
capital ratios falling below contractual requirements – the Bank no longer
qualified as a FNMA designated mortgage loan seller or servicer and the Bank had
until December 31, 2009 to improve its capital ratios to meet FNMA’s
requirements. As of December 31, 2009, the Bank had not met such
requirements, and, accordingly, FNMA has terminated the Bank’s rights to
originate and sell mortgage loans directly to FNMA. In addition, FNMA
now has the option to terminate its mortgage servicing agreement with the Bank,
upon which occurrence the Bank would no longer be allowed to service FNMA loans
in the future. Management is in the process of discussing such issues with
FNMA and has been evaluating the prospective impact of this development.
Possible outcomes include a reduction of the Company’s mortgage banking and
mortgage servicing revenues in the future and sale or forced transfer of its
mortgage servicing business to a third-party by FNMA. As a result of the actions
by FNMA, the Company anticipates that the majority of mortgage loans originated
in future periods will be sold to other third-parties and that the Bank will not
retain servicing rights. The Company expects that this may result in
a significant decrease to future net mortgage servicing
income. Management believes that under the circumstances, FNMA will
provide the Company with sufficient time to accomplish an orderly disposition of
its MSRs. However, there can be no assurance that FNMA will provide
for an orderly process nor that a reduction of mortgage banking revenues or
possible impairment of MSRs will not occur. Because the estimated fair value of
the Company’s MSRs exceeds book value at December 31, 2009, and because
management believes it is unlikely FNMA will preemptively transfer the Company’s
MSRs to a third-party, no impairment adjustment has been made in connection with
this issue as of December 31, 2009. In addition, no valuation allowance for MSRs
was recorded as of December 31, 2008 and 2007.
On December 17, 2009, the Company
received a notice letter from The NASDAQ Stock Market regarding its
non-compliance with Rule 5550(a)(2) of the NASDAQ Marketplace Rules with respect
to the minimum bid price requirement of $1.00 per share. The Company’s common
stock has failed to meet the $1.00 minimum bid price for 30 consecutive business
days. The notice letter has no immediate effect on the listing of the Company’s
common stock on The NASDAQ Capital Market. The Company has a 180 calendar day
grace period, or until June 15, 2010, to comply with the minimum bid price
requirement. To regain compliance, the bid price must meet or exceed $1.00 per
share for at least ten consecutive business days prior to June 15, 2010. The
Company will continue to evaluate its options with respect to meeting this
listing qualification within the time period required.
Critical
Accounting Policies and Accounting Estimates
Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. We
believe that our most critical accounting policies upon which our financial
condition depends, and which involve the most complex or subjective decisions or
assessments are as follows:
Reserve for Credit Losses:
The Company’s reserve for credit losses provides for possible losses based upon
evaluations of known and inherent risks in the loan portfolio and related loan
commitments. Arriving at an estimate of the appropriate level of reserve for
credit losses (reserve for loan losses and loan commitments) involves a high
degree of judgment and assessment of multiple variables that result in a
methodology with relatively complex calculations and analysis. Management uses
historical information to assess the adequacy of the reserve for loan losses as
well as consideration of the prevailing business environment. On an ongoing
basis the Company seeks to refine its methodology such that the reserve is
responsive to the effect that qualitative and environmental factors have upon
the loan portfolio. However, external factors and changing economic conditions
may impact the portfolio and the level of reserves in ways currently
unforeseen.
38
On August
3, 2010, the Company determined that it would restate its audited consolidated
financial statements as of and for the year ended December 31, 2009 primarily
related to the reserve for loan losses and loan loss provision (see
explanatory note on page 3 of this Amendment). As a result of the
restatement, the December 31, 2009 reserve for loan losses increased to $58.6
million from the previously reported $37.6 million. The loan loss
provision for the year ended December 31, 2009 increased from $113.0 million to
$134.0 million. This restatement is related to an examination by banking
regulators of the Bank that commenced on March 15, 2010 and is related to the
reserve for loan losses and loan loss provision. In connection with
the examination the regulators provided additional information to the
Company on July 29, 2010 which resulted in management refining and
enhancing its model for calculating the reserve for loan losses by considering
an expanded scope of information and augmenting the qualitative and judgmental
factors used to estimate potential losses inherent in the loan
portfolio.
The
reserve for loan losses is increased by provisions for loan losses and by
recoveries of loans previously charged-off and reduced by loans
charged-off. The reserve for loan commitments is increased and
decreased through non-interest expense. For a full discussion of the
Company’s methodology of assessing the adequacy of the reserve for credit
losses, see "Reserve for Credit Losses" later in this report.
Other Real Estate Owned and
Foreclosed Assets: Other real estate owned or 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 loans
losses. Due to the subjective nature of establishing the fair value when the
asset is acquired, the actual fair value of the other real estate owned or
foreclosed asset could differ from the original estimate. If it is determined
that fair value declines subsequent to foreclosure, a valuation allowance is
recorded through noninterest expense. Operating costs associated with the assets
after acquisition are also recorded as noninterest expense. Gains and losses on
the disposition of other real estate owned and foreclosed assets are netted and
posted to other noninterest expenses.
Mortgage Servicing Rights
(MSRs): Determination of the fair value of MSRs requires the
estimation of multiple interdependent variables, the most impactful of which is
mortgage prepayment speeds. Prepayment speeds are estimates of the
pace and magnitude of future mortgage payoff or refinance behavior of customers
whose loans are serviced by the Company. Errors in estimation of
prepayment speeds or other key servicing variables could subject MSRs to
impairment risk. On a quarterly basis, the Company engages a
qualified third party to provide an estimate of the fair value of MSRs using a
discounted cash flow model with assumptions and estimates based upon observable
market-based data and methodology common to the mortgage servicing
market. Management believes it applies reasonable assumptions under
the circumstances, however, because of possible volatility in the market price
of MSRs, and the vagaries of any relatively illiquid market, there can be no
assurance that risk management and existing accounting practices will result in
the avoidance of possible impairment charges in future
periods. Please see “Recent Developments” above for additional
information related to FNMA and the Bank’s designation as a
seller/servicer. See also “Non-Interest Income” below and Note 7 of
the Company’s Condensed Consolidated Financial Statements included in Item 7 of
this report.
Deferred Income
Taxes: The Company evaluates deferred income tax assets for
recoverability based on all available evidence. This process involves
significant management judgment about assumptions that are subject to change
from period to period based on changes in tax laws, our ability to successfully
implement tax planning strategies, or variances between our future projected
operating performance and our actual results. The Company is required to
establish a valuation allowance for deferred income tax assets if we determine,
based on available evidence at the time the determination is made, that it is
more likely than not that some portion or all of the deferred income tax assets
will not be realized. In determining the more-likely-than-not criterion, we
evaluate all positive and negative available evidence as of the end of each
reporting period. Future adjustments to the deferred income tax asset valuation
allowance, if any, will be determined based upon changes in the expected
realization of the net deferred income tax assets. The realization of the
deferred income tax assets ultimately depends on the existence of sufficient
taxable income in either the carry back or carry forward periods under the tax
law. Due to the Company’s cumulative tax losses in 2008 and 2009 it was
determined that as of December 31, 2009, the Company was not able to meet the
‘more likely than not” standard as to realization of the Deferred Tax asset and
accordingly established an allowance against such asset.
39
Economic
Conditions
The
Company's business is closely tied to the economies of Idaho and Oregon in
general and is particularly affected by the economies of Central, Southern and
Northwest Oregon, as well as the Greater Boise, Idaho area. The uncertain depth
and duration of the present economic downturn could continue to cause further
deterioration of these local economies, resulting in an adverse effect on the
Company's financial condition and results of operations. Real estate values in
these areas have declined and may continue to fall. Unemployment
rates in these areas have increased significantly and could increase further.
Business activity across a wide range of industries and regions has been
impacted and local governments and many businesses are facing serious challenges
due to the lack of consumer spending driven by elevated unemployment and
uncertainty.
The
Company’s financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
declining value of collateral securing those loans, is reflective of the
business environment in the markets where the Company operates. The present
significant downturn in economic activity and declining real estate values has
had a direct and adverse effect on the condition and results of operations of
the Company. This is particularly evident in the residential land development
and residential construction segments of the Company’s loan portfolio.
Developers or home builders whose cash flows are dependent on the sale of lots
or completed residences have reduced ability to service their loan obligations
and the market value of underlying collateral has been and continues to be
adversely affected. The impact on the Company has been an elevated level of
impaired loans, an associated increase in provisioning expense and charge-offs
for the Company leading to a net loss in 2009 and 2008 of $114.8 million and
$134.6 million, respectively. The local and regional economy also has
a direct impact on the volume of bank deposits. Core deposits have
declined since mid-2006 because business and retail customers have realized a
reduction in cash available to deposit in the Bank. However, core deposits
showed signs of stabilization in the latter part of 2009.
Financial Highlights and Summary
of Q4 and Full Year
2009
2010
Plan
Given the
economic environment and its affect on the financial condition of the Company,
the following objectives and plans have been implemented and are expected to be
continued in 2010: 1) the Company continues its efforts to raise
additional capital through the sale of its common stock in one or more private
offerings; 2) the Company has implemented strategies and plans to stabilize
and reduce its the level of problem loans and minimizing the severity of
associated credit losses to the extent possible; 3) the Company
has reduced the size of the loan portfolio to lower credit risk and
conserve capital and liquidity; 4) the Company has worked to stabilize its core
deposits and has funded a significant contingent liquidity reserve; and 5) the
Company has implemented plans to reduce controllable non- interest
expense.
Fourth Quarter
2009:
The
Company recorded a net loss of ($2.50) per share or ($70.2) million in the
fourth quarter of 2009 as compared to a net loss of ($137.6) million or ($4.92)
per share for the year ago quarter. The quarterly loss was mainly
attributable to a $49.0 million provision for loan losses, a $35.5 million
charge to create a full allowance against the deferred tax assets at December
31, 2009, $8.2 million in OREO disposition costs and expenses, and a $2.1
million prepayment penalty to extinguish certain higher rate FHLB borrowings.
Additionally, net interest income was $1.4 million lower than in the
linked-quarter due to reduced average loans outstanding and $0.4 million
interest reversed on non performing loans. During the quarter the
Company took significant steps to maximize the benefit of recent legislation
that extended (for 2009 losses only) net operating loss tax carryback to 5
years. These actions resulted in the Company recording a $43.3
million tax receivable at year-end, which is expected to be realized upon filing
of our 2009 tax return. Tax optimization related endeavors included
proactive sales of OREO properties, charge-offs and note sales on troubled
loans, and prepayment of certain FHLB advances. Linked-quarter credit
metrics improved with NPA’s including OREO down 18.4% along with
reduced levels of classified and criticized assets. The net interest
margin for the quarter was up at 3.25% compared to 3.13% in the linked-quarter
primarily resulting from lower average NPA’s and lower levels of interest
reversals on non performing loans compared to the prior
quarter.
40
In
October 2009, the Company filed a registration statement on Form S-1 with the
SEC pursuant to which it intended to offer up to $108 million of its Common
Stock in a public offering, subject to market and other conditions including
consummation of the previously announced private offerings with Bolger and
Lightyear. On December 23, 2009, the Company announced the withdrawal of the
registration statement due to market and other conditions. On
February 16, 2010, the Company entered into amendments to the stock purchase
agreements with each of Bolger and Lightyear which, among other things, extended
the stock purchase agreements to May 31, 2010 in order to provide the Company
additional time to implement a capital raise. Because of the Company’s financial
condition and challenging capital market conditions it is uncertain whether the
Bank will be able to increase its capital to required levels.
Full Year
2009:
The
Company recorded a net loss of ($114.8) million or ($4.10) per share compared to
a net loss of ($134.6) million or ($4.82) per share for 2008. The
annual loss was mainly attributable to 1) elevated credit quality related
expenses; 2) a substantial charge against existing deferred tax assets; and 3)
lower net interest income primarily because of lower average loan yields and a
decline in loans outstanding coupled with a higher volume of non-performing
assets. For the year, the Company recorded $134.0 million provision
for loan losses and $23.1 million in OREO valuation and disposition costs and
related expenses reflecting adverse economic conditions effect on borrower’s
ability to repay loan obligations. This compares with $99.6 million
in provision for loan losses expense and $8.4 million OREO costs in
2008. In addition, the Company recorded a $35.5 million charge to
create a full allowance against the Company’s deferred tax assets at December
31, 2009. In order to mitigate credit risk and conserve capital and
liquidity, the Bank reduced its loan balances by $408.5 million for the year,
but as a consequence net interest income for the year was down $22.7 million due
to lower earning asset volumes and the effect of interest reversals and interest
foregone on non performing loans. Core deposits appeared to stabilize
in the latter half of 2009 and balances were near levels from the prior year
end. Non- interest income was up $1.6 million in 2009 compared to
2008 largely because of our gain on sale of merchant services
business. Meanwhile human resource costs and
controllable/discretionary non-interest expenses were decreased in 2009 compared
to the prior year. However, total non-interest expense increased year
over year because of a $23.1 million in OREO related expenses including
valuation charges and loss on sale compared to $8.4 million in the prior
year.
Results
of Operations - Years ended December 31, 2009, 2008 and 2007
Net Income/Loss
The
Company recorded a net loss of ($114.8) million (or $4.10) per share in 2009
compared to a net loss of ($134.6) million or ($4.82) per share for 2008 and net
income of $30.0 million in 2007 or $1.05 per share. The loss in 2009
primarily resulted from a decrease in net interest income of $22.7 million,
$134.0 million loan loss provision, a valuation allowance against our deferred
tax assets of $35.5 million, and OREO expenses of $23.1 million. The loss in
2008 mainly resulted from the Company’s non-cash impairment of goodwill in the
amount of $105.0 million, a $99.6 million loan loss provision as well as a
decrease in net interest income of $13.1 million.
Net
Interest Income / Net Interest Margin
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 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.
41
Total
interest income decreased approximately $31.0 million (or 22.5%) for 2009 due
mainly to lower average earning assets and interest reversals and interest
foregone on non-performing loans. In 2008 interest income was down by
$33.5 million (or 19.5%) as compared to 2007 primarily because of lower average
yields, including interest reversed, and interest foregone on non-performing
loans. Total interest expense declined by approximately $8.2 million (or 19.4%)
for 2009 primarily due to lower rates. Interest expense dropped $20.4
million (or 32.4%) for 2008 as compared to 2007 as a result of lower rates and
reduced volumes of interest bearing deposits and borrowings. Accordingly, net
interest income decreased to $72.7 million or 23.8% in 2009 over
2008. Net interest income decreased $13.1 million or 12.1% in 2008
over 2007. Yields earned on assets decreased to 5.03% for 2009 as compared to
6.40% in 2008 and 8.21% in 2007. Meanwhile, the average rates paid on interest
bearing liabilities for 2009 decreased to 1.93% compared to 2.49% in 2008 and
4.01% in 2007.
The Company’s net interest margin (NIM)
decreased to 3.43% for 2009 as compared to 4.44% for 2008. Three factors
contributed to the lower NIM for the year ended December 31, 2009, including
interest forgone and reversed on NPA’s, an elevated level of assets held at the
FRB for contingent liquidity purposes, lower average customer balances in
non-interest bearing deposit accounts, and the effect of lower market interest
rates on the Company’s asset and liability mix. The margin can also be affected
by factors beyond market interest rates, including loan or deposit volume shifts
and/or aggressive rate offerings by competitor institutions. The Company’s
financial model indicates a relatively stable interest rate risk profile within
a reasonable range of rate movements around the forward rates currently
predicted by financial markets.
Components of Net Interest
Margin
The
following table presents further analysis of the components of Cascade’s net
interest margin and sets forth for 2009, 2008, and 2007 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, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities for the
Company:
42
(dollars in thousands)
|
Year ended
|
Year ended
|
Year ended
|
|||||||||||||||||||||||||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||||||||||||||||||||||||||
Interest
|
Average
|
Interest
|
Average
|
Interest
|
Average
|
|||||||||||||||||||||||||||||||
Average
|
Income/
|
Yield or
|
Average
|
Income/
|
Yield or
|
Average
|
Income/
|
Yield or
|
||||||||||||||||||||||||||||
Balance
|
Expense
|
Rates
|
Balance
|
Expense
|
Rates
|
Balance
|
Expense
|
Rates
|
||||||||||||||||||||||||||||
|
(Restated)
|
|||||||||||||||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||||||||||
Taxable
securities
|
$ | 101,033 | $ | 5,085 | 5.03 | % | $ | 85,034 | $ | 4,462 | 5.25 | % | $ | 93,793 | $ | 5,259 | 5.61 | % | ||||||||||||||||||
Non-taxable
securities (1)
|
3,643 | 186 | 5.11 | % | 5,211 | 255 | 4.89 | % | 7,952 | 283 | 3.56 | % | ||||||||||||||||||||||||
Interest
bearing balances due from FRB and FHLB
|
209,451 | 486 | 0.23 | % | 13 | - | 0.00 | % | 3,735 | 195 | 5.22 | % | ||||||||||||||||||||||||
Federal
funds sold
|
7,454 | 17 | 0.23 | % | 2,026 | 31 | 1.53 | % | 3,910 | 187 | 4.78 | % | ||||||||||||||||||||||||
Federal
Home Loan Bank stock
|
10,472 | - | 0.00 | % | 11,458 | 111 | 0.97 | % | 6,991 | 42 | 0.60 | % | ||||||||||||||||||||||||
Loans
(1)(2)(3)(4)
|
1,798,723 | 101,507 | 5.64 | % | 2,054,199 | 133,346 | 6.49 | % | 1,974,435 | 165,690 | 8.39 | % | ||||||||||||||||||||||||
Total
earning assets
|
2,130,776 | 107,281 | 5.03 | % | 2,157,941 | 138,205 | 6.40 | % | 2,090,816 | 171,656 | 8.21 | % | ||||||||||||||||||||||||
Reserve
for loan losses
|
(57,268 | ) | (38,827 | ) | (24,498 | ) | ||||||||||||||||||||||||||||||
Cash
and due from banks
|
37,836 | 48,341 | 55,427 | |||||||||||||||||||||||||||||||||
Premises
and equipment, net
|
38,805 | 37,273 | 38,307 | |||||||||||||||||||||||||||||||||
Other
Assets
|
145,440 | 207,094 | 178,682 | |||||||||||||||||||||||||||||||||
Total
assets
|
$ | 2,295,589 | $ | 2,411,822 | $ | 2,338,734 | ||||||||||||||||||||||||||||||
Liabilities and Stockholders'
Equity
|
||||||||||||||||||||||||||||||||||||
Int.
bearing demand deposits
|
$ | 735,667 | 7,267 | 0.99 | % | $ | 844,136 | 15,540 | 1.84 | % | $ | 889,069 | 30,727 | 3.46 | % | |||||||||||||||||||||
Savings
deposits
|
33,275 | 73 | 0.22 | % | 36,761 | 135 | 0.37 | % | 41,327 | 202 | 0.49 | % | ||||||||||||||||||||||||
Time
deposits
|
688,430 | 17,915 | 2.60 | % | 386,990 | 12,850 | 3.32 | % | 340,324 | 15,804 | 4.64 | % | ||||||||||||||||||||||||
Other
borrowings
|
312,301 | 8,880 | 2.84 | % | 434,112 | 13,846 | 3.19 | % | 294,854 | 15,991 | 5.42 | % | ||||||||||||||||||||||||
Total
interest bearing liabilities
|
1,769,673 | 34,135 | 1.93 | % | 1,701,999 | 42,371 | 2.49 | % | 1,565,574 | 62,724 | 4.01 | % | ||||||||||||||||||||||||
Demand
deposits
|
407,344 | 407,980 | 469,015 | |||||||||||||||||||||||||||||||||
Other
liabilities
|
8,659 | 20,904 | 29,590 | |||||||||||||||||||||||||||||||||
Total
liabilities
|
2,185,676 | 2,130,883 | 2,064,179 | |||||||||||||||||||||||||||||||||
Stockholders'
equity
|
109,913 | 280,939 | 274,555 | |||||||||||||||||||||||||||||||||
Total
liabilities & equity
|
$ | 2,295,589 | $ | 2,411,822 | $ | 2,338,734 | ||||||||||||||||||||||||||||||
Net
interest income
|
$ | 73,146 | $ | 95,834 | $ | 108,932 | ||||||||||||||||||||||||||||||
Net
interest spread
|
3.11 | % | 3.92 | % | 4.20 | % | ||||||||||||||||||||||||||||||
Net
interest income to earning assets
|
3.43 | % | 4.44 | % | 5.23 | % |
(1)
|
Tax-exempt
income has been adjusted to a tax-equivalent basis at a rate of
35%.
|
(2)
|
Average
non-accrual loans included in the computation of average loans for 2009
was $156.9 million, $86.3 million for 2008 and $5.8 million in
2007.
|
(3)
|
Loan
related fees recognized during the period and included in the yield
calculation were $3.2 million in 2009, $4.6 million in 2008 and $5.8
million in 2007.
|
(4)
|
Includes
mortgage loans held for sale.
|
Changes
in Interest Income and Expense
The following table shows the dollar
amount of the increase (decrease) in the Company’s consolidated interest income
and expense, and attributes such variance to “volume” or “rate” changes.
Variances that were immaterial have been allocated equally between rate and
volume categories:
43
(dollars in thousands)
|
Year ended December 31,
|
|||||||||||||||||||||||
2009 over 2008
|
2008 over 2007
|
|||||||||||||||||||||||
Total
|
Amount of Change
|
Total
|
Amount of Change
|
|||||||||||||||||||||
Increase
|
Attributed to
|
Increase
|
Attributed to
|
|||||||||||||||||||||
(Decrease)
|
Volume
|
Rate
|
(Decrease)
|
Volume
|
Rate
|
|||||||||||||||||||
Interest
income:
|
||||||||||||||||||||||||
Interest
and fees on loans
|
$ | (31,839 | ) | $ | (16,584 | ) | $ | (15,255 | ) | $ | (32,344 | ) | $ | 6,694 | $ | (39,038 | ) | |||||||
Taxable
securities
|
627 | 840 | (213 | ) | (797 | ) | (491 | ) | (306 | ) | ||||||||||||||
Non-taxable
securities
|
(69 | ) | (77 | ) | 8 | (28 | ) | (98 | ) | 70 | ||||||||||||||
Interest
bearing balances due from FRB and FHLB
|
482 | 0 | 482 | (195 | ) | (194 | ) | (1 | ) | |||||||||||||||
Federal
Home Loan Bank stock
|
(111 | ) | (10 | ) | (101 | ) | 69 | 27 | 42 | |||||||||||||||
Federal
funds sold
|
(14 | ) | 83 | (97 | ) | (156 | ) | (90 | ) | (66 | ) | |||||||||||||
Total
interest income
|
(30,924 | ) | (15,748 | ) | (15,176 | ) | (33,451 | ) | 5,848 | (39,299 | ) | |||||||||||||
Interest
expense:
|
||||||||||||||||||||||||
Interest
on deposits:
|
||||||||||||||||||||||||
Interest
bearing demand
|
(8,273 | ) | (1,997 | ) | (6,276 | ) | (15,187 | ) | (1,553 | ) | (13,634 | ) | ||||||||||||
Savings
|
(62 | ) | (13 | ) | (49 | ) | (67 | ) | (22 | ) | (45 | ) | ||||||||||||
Time
|
5,065 | 10,009 | (4,944 | ) | (2,954 | ) | 2,167 | (5,121 | ) | |||||||||||||||
Other
borrowings
|
(4,966 | ) | (3,885 | ) | (1,081 | ) | (2,145 | ) | 7,552 | (9,697 | ) | |||||||||||||
Total
interest expense
|
(8,236 | ) | 4,114 | (12,350 | ) | (20,353 | ) | 8,144 | (28,497 | ) | ||||||||||||||
Net
interest income
|
$ | (22,688 | ) | $ | (19,862 | ) | $ | (2,826 | ) | $ | (13,098 | ) | $ | (2,296 | ) | $ | (10,802 | ) |
Loan Loss Provision
At December 31, 2009, the reserve for
credit losses (reserve for loan losses and reserve for unfunded commitments) was
3.83% of outstanding loans, as compared to 2.46% for 2008 and 1.81% in 2007. The
loan loss provision was $134.0 million in 2009, $99.6 million in 2008 and $19.4
million in 2007. Provision expense is determined by the Company’s
ongoing analytical and evaluative assessment of the adequacy of the reserve for
credit losses. At December 31, 2009, management believes that its
reserve for credit losses is at an appropriate level under current circumstances
and prevailing economic conditions. For further discussion, see
“Reserve for Credit Losses” below. There can be no assurance that the reserve
for credit losses will be sufficient to cover actual loan related losses or that
additional provision expense will not be required should economic conditions
remain adverse. See Item 1A “Risk Factors” and “Highlights – Loan Growth and
Credit Quality” earlier in this report.
Non-interest Income
Total
non-interest income decreased 8.1% in 2009 compared to 2008 after excluding the
one-time gain of $3.2 million on the sale of the merchant card processing
business. Service charges on deposit accounts were down $1.3 million,
card issuer and merchant service fees were down $0.7 million and earnings on
bank-owned life insurance was down $0.2 million. These decreases were partially
offset by increases in mortgage banking income, gains on sales of investment
securities available-for-sale and other income. Non-interest income
decreased 5.8% in 2008 compared to 2007 mainly due to earnings on bank-owned
life insurance resulting from lowered investment returns in the volatile
securities markets that persisted in 2008.
Mortgage
Banking Income - Home Mortgage Originations and Mortgage Related
Revenue
The Company provides residential
mortgage services on a direct to customer basis and does no business through
third party (brokerage) channels. The Company has focused its originations in
conventional mortgage products while avoiding sub-prime/option-ARM type
products. The low delinquency rate within the Company’s loan servicing portfolio
underscores this long-held discipline in mortgage origination. At December 31,
2009, the portfolio contained about 3,750 mortgage loans totaling $543 million
with a delinquency rate of loans past due >30 days of only 2.58%, notably
below the Mortgage Bankers Association (MBA) national mortgage delinquency rate
of 14.41% at September 30, 2009.
44
Residential mortgage originations
totaled $177.2 million in 2009, up 45.4% when compared to $121.7 million in
2008. Related net mortgage revenue was $2.8 million, an increase of 34.6%
compared to $2.1 million for the previous year. Non-Interest income arising from
mortgage servicing totaled approximately $2.7 million in 2007. The general level
and direction of interest rates directly influence the volume and profitability
of the yield curve in mortgage banking. A lower interest rate climate continued
in 2009 and 2008 which had the affect of decreasing the profitability of
mortgage banking due to a lower interest rate yield curve.
Historically,
the Company sold a predominant portion of its residential mortgage loans to
Fannie Mae, a U.S. Government sponsored enterprise and other secondary market
investors. The Company services such loans for Fannie Mae and is paid
approximately .25% per annum on the outstanding balances for providing this
service. Such revenues are included in the above mortgage banking
results. Mortgages serviced for Fannie Mae totaled $542.9 million at December
31, 2009, an increase over $512.2 million at December 31, 2008 and an increase
over $494.0 million at December 31, 2007. The related Mortgage Servicing Rights
(MSRs) were approximately $3.9 million in 2009 and $3.6 million in
2008.
As
described under “Recent Developments”, the Bank received a letter from FNMA
advising that the Bank failed to meet FNMA’s minimum required Total Risk Based
Capital ratio of 10% as of September 30, 2009. The letter stated that
the Bank was being suspended as a Fannie Mae Seller/Servicer effective
immediately. It was noted that failure to meet applicable standards would result
in termination of the Bank’s Selling and Servicing Contract. As of December 31,
2009, and through the date of this report, the Bank does not meet FNMA’s minimum
financial standards. As a result, the Company may not sell mortgage
loans to FNMA and FNMA may terminate its agreement to allow the Company to
service FNMA loans in the future. Mortgage loans not sold to the Federal
National Mortgage Association (“Fannie Mae” or “FNMA”), are generally sold
servicing released to other secondary market investors. Loans sold on this basis
generate no future servicing fees for the Company.
The
estimated fair value of mortgage servicing rights (“MSR”) portfolio is estimated
to exceed book value by amounts ranging from $0.8 million to $1.9 million. The
Company capitalizes the estimated market value of MSRs into income upon the sale
of each originated mortgage loan. The Company amortizes MSRs in proportion to
the servicing income it receives from Fannie Mae over the estimated life of the
underlying mortgages, considering prepayment expectations and refinancing
patterns. In addition, the Company amortizes, in full, any remaining MSRs
balance that is specifically associated with a serviced loan that is refinanced
or paid-off. At
December 31, 2009, expressed as a percentage of loans serviced, the book value
of MSR was .73% of serviced mortgage loans, while fair value was approximately
.97% of serviced mortgages. Fair value as a percentage of loans serviced was
estimated at .89% a year earlier.
Non-interest
Expenses
Non-interest
expense for 2009 decreased 45.5% to $94.7 million as compared to 2008. After
adjusting for the non-cash goodwill impairment charge recorded in 2008,
non-interest expense for 2009 increased $26.1 million or 38.0%. The increases in
2009 are attributable to increases in OREO related costs, FDIC insurance, and
other professional services, partially offset by a reduction in salaries and
employee benefits expense.
OREO
expenses were $23.1 million in 2009 compared to $8.4 million in 2008 and were
only $0.1 million in 2007. OREO costs and valuation adjustments increased $14.7
million for 2009 compared to 2008, primarily due to depressed real estate values
on foreclosed land development properties. In addition, FDIC deposit
insurance assessments increased $5.2 million or 305.7% in 2009 when compared to
2008, reflecting the FDIC’s higher base assessment rate for 2009 and expenses
related to the FDIC’s industry-wide emergency special assessment in the second
quarter. FDIC premiums have increased due to the rise in financial institution
failures in 2008 and 2009, the Company’s voluntary participation in the
Temporary Liquidity Guarantee Program and the FDIC’s rates applicable to banks
in the Company’s regulatory classification. Professional fees
increased $4.5 million or 175.3% which includes legal, accounting and other
professional services in connection with the Company’s efforts to raise capital
in the fourth quarter of 2009. Meanwhile, the Company continued to see a
reduction in salary expenses, and employee benefits expenses declined as
staffing continues to be trimmed in response to the slowing economy, no
executive bonuses were paid in 2008, or 2009. Total non-interest expense for
2008 increased 177.5% to $173.7 million as compared to 2007 primarily due to the
noncash after-tax goodwill impairment charge and expenses related to the
Company’s OREO properties. Human resource costs were down in 2008 compared to
2007 as executive bonuses were foregone in both 2007 and 2008.The Company’s
efficiency ratio was 99.9% in 2009 compared to 150.6% in 2008.
45
Income Taxes
As of
December 31, 2009, the Company had recorded refundable income taxes receivable
of approximately $43.3 million related to the carryback of operating losses to
prior years and had provided a $35.5 million charge to create a full valuation
allowance against its deferred tax assets. For discussion of the
Company’s deferred income tax assets see “Critical Accounting Policies –
Deferred Income Taxes” above.
Financial
Condition
Balance Sheet
Overview
At
December 31, 2009 total assets were down 4.7% to $2.17 billion compared to
year-end 2008. Cash and cash equivalents increased $310.4 million or
14.3% of total assets at December 31, 2009 compared to a negligible percentage
at year-end 2008. Total loans have been reduced by $408.5 million to $1.5
billion at December 31, 2009 compared to $1.9 billion at year-end 2008,
primarily due to initiative to reduce loans to customers where deposit
relationships are not a meaningful part of the overall banking
relationship. A portion of the reduction in loan balances was the
result of net loan charge-offs of $122.6 million for 2009. The
reduction in loan balances has resulted in lower credit risk exposure and has
helped to support the Bank’s regulatory capital ratios.
Funding
sources have increased in 2009, including TLGP debt issuance and internet
listing service deposits. These increases also offset reduced core
deposits that have trended down due to the ongoing effects of an adverse economy
on local markets. Deposits have also been impacted due to provisions
of the Order limiting the use of brokered deposits with deposits showing an
increase of only 1.2% in 2009 over 2008.
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 shows the carrying value of the Company’s portfolio of
investments at December 31, 2009, 2008, and 2007:
December 31,
|
||||||||||||
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
U.S.
Agency and non-agency mortgage-backed securities (MBS)
|
$ | 116,639 | $ | 93,534 | $ | 65,202 | ||||||
U.S.
Government and agency securities
|
7,481 | 8,726 | 10,497 | |||||||||
Obligations
of state and political subdivisions
|
3,606 | 3,741 | 6,917 | |||||||||
U.S.
Agency asset-backed securities
|
7,586 | 3,260 | 3,538 | |||||||||
Total
debt securities
|
135,312 | 109,261 | 86,154 | |||||||||
Mutual
fund
|
451 | 430 | 412 | |||||||||
Equity
securities
|
- | - | 449 | |||||||||
Total
investment securities
|
$ | 135,763 | $ | 109,691 | $ | 87,015 |
MBS are
mainly adjustable rate (ARM) MBS. Prepayment speeds on mortgages underlying MBS
may cause the average life of such securities to be shorter (or longer) than
expected.
The
Company’s investment portfolio increased by $26.1 million, or 23.8% from
December 31, 2008 to December 31, 2009 as a result of increased purchase
activity during the year. The following is a summary of the contractual
maturities and weighted average yields of investment securities at December 31,
2009:
46
(dollars
in thousands)
|
Weighted
|
|||||||
Carrying
|
Average
|
|||||||
Type and maturity
|
Value
|
Yield (1)
|
||||||
U.S.
Agency and non-agency mortgage-backed securities
|
||||||||
Due
after 5 but within 10 years
|
$ | 875 | 5.19 | % | ||||
Due
after 10 years
|
115,764 | 4.49 | % | |||||
Total
U.S. Agency mortgage-backed securities
|
116,639 | 4.49 | % | |||||
U.S.
Government and Agency Securities
|
||||||||
Due
after 5 but within 10 years
|
7,481 | 2.25 | % | |||||
Total
U.S. Government and Agency Securities
|
7,481 | 2.25 | % | |||||
State
and Political Subdivisions (1)
|
||||||||
Due
within 1 year
|
200 | 3.25 | % | |||||
Due
after 1 but within 5 years
|
2,202 | 3.87 | % | |||||
Due
after 5 but within 10 years
|
1,204 | 4.04 | % | |||||
Total
State and Political Subdivisions
|
3,606 | 3.89 | % | |||||
U.S.
Agency asset-backed securities
|
||||||||
Due
within 1 year
|
1,336 | 5.24 | % | |||||
Due
after 1 but within 5 years
|
677 | 5.39 | % | |||||
Due
after 10 years
|
5,573 | 6.50 | % | |||||
Total
U.S. Agency asset-backed securities
|
7,586 | 6.18 | % | |||||
Total
debt securities
|
135,312 | 4.45 | % | |||||
Mutual
fund
|
451 | 4.57 | % | |||||
Total
Securities
|
$ | 135,763 | 4.45 | % |
(1) Yields
on tax-exempt securities have been stated on a tax equivalent
basis.
The
average years to maturity of the Company’s investment portfolio was 7.9 years at
December 31, 2009 compared to 6.5 years at December 31, 2008. Duration of the
portfolio is lower than average life since many of the securities are adjustable
rate mortgage securities (ARM’s) with annual interest rate
adjustments.
Investments
are mainly classified as “available for sale” and consist mainly of MBS and
Agency notes backed by government sponsored enterprises, such as the Government
National Mortgage Association (“Ginnie Mae”), FNMA and FHLB. The Company
regularly reviews its investment portfolio to determine whether any securities
are other than temporarily impaired. The Company did not invest in securities
backed by sub-prime mortgages and believes its investment portfolio has
negligible exposure to such risk at this date. At December 31, 2009,
the investment portfolio had gross unrealized losses on available-for-sale
securities of approximately $1.4 million and management does not believe that
these unrealized losses are other-than-temporary.
Loan
Portfolio and Credit Quality
Loan Portfolio Composition.
Net loans represented 69% of total assets as of December 31, 2009. The Company
makes substantially all of its loans to customers located within the Company’s
service areas. As a result of the economic conditions and characteristics of the
Company’s primary markets, including among others, the historical rapid growth
in population and the nature of the tourism and service industry found in much
of its market areas, Cascade’s loan portfolio has historically been concentrated
in real estate related loans. The Company is presently working to reduce its
construction/lot portfolio in response to the challenging real estate economy.
However achieving significant reduction could prove problematic without some
improvement in economic conditions and market liquidity as well as in pricing of
related real estate assets. Because of the nature of its markets, real estate
lending is expected to continue as a major concentration within the loan
portfolio. The Company has no significant agricultural loans.
47
The
following table presents the composition of the Company’s loan portfolio, at the
dates indicated:
(dollars in thousands)
|
2009
|
% of
gross
loans
|
2008
|
% of
gross
loans
|
2007
|
% of
gross
loans
|
2006
|
% of
gross
loans
|
2005
|
% of
gross
loans
|
||||||||||||||||||||||||||||||
(Restated)
|
||||||||||||||||||||||||||||||||||||||||
Commercial
|
$ | 420,155 | 27 | % | $ | 582,831 | 30 | % | $ | 606,408 | 30 | % | $ | 560,728 | 30 | % | $ | 320,619 | 31 | % | ||||||||||||||||||||
Real
Estate:
|
||||||||||||||||||||||||||||||||||||||||
Construction/lot:
|
308,346 | 20 | % | 517,721 | 26 | % | 686,829 | 34 | % | 588,251 | 31 | % | 220,230 | 21 | % | |||||||||||||||||||||||||
Mortgage
|
93,465 | 6 | % | 96,248 | 5 | % | 88,509 | 4 | % | 80,860 | 4 | % | 56,724 | 5 | % | |||||||||||||||||||||||||
Commercial
|
675,728 | 44 | % | 703,149 | 36 | % | 612,694 | 30 | % | 606,340 | 32 | % | 417,580 | 40 | % | |||||||||||||||||||||||||
Consumer
|
49,982 | 3 | % | 56,235 | 3 | % | 47,038 | 2 | % | 51,083 | 3 | % | 34,551 | 3 | % | |||||||||||||||||||||||||
Total
loans
|
1,547,676 | 100 | % | 1,956,184 | 100 | % | 2,041,478 | 100 | % | 1,887,262 | 100 | % | 1,049,704 | 100 | % | |||||||||||||||||||||||||
Less:
|
||||||||||||||||||||||||||||||||||||||||
Reserve
for loan losses
|
58,586 | 47,166 | 33,875 | 23,585 | 14,688 | |||||||||||||||||||||||||||||||||||
Total
loans, net
|
$ | 1,489,090 | $ | 1,909,018 | $ | 2,007,603 | $ | 1,863,677 | $ | 1,035,016 |
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, 2009:
(dollars in thousands)
|
Central
Oregon
|
% of
gross
loans
|
Northwest
Oregon
|
% of
gross
loans
|
Southern
Oregon
|
% of
gross
loans
|
Idaho
|
% of
gross
loans
|
Total
|
% of
gross
loans
|
||||||||||||||||||||||||||||||
Commercial
|
$ | 146,640 | 26 | % | $ | 108,635 | 30 | % | $ | 42,811 | 20 | % | $ | 122,069 | 30 | % | $ | 420,155 | 27 | % | ||||||||||||||||||||
Real
Estate:
|
||||||||||||||||||||||||||||||||||||||||
Construction/lot
|
97,496 | 17 | % | 93,192 | 25 | % | 41,982 | 19 | % | 75,676 | 19 | % | 308,346 | 20 | % | |||||||||||||||||||||||||
Mortgage
|
39,018 | 7 | % | 8,874 | 2 | % | 8,318 | 4 | % | 37,255 | 9 | % | 93,465 | 6 | % | |||||||||||||||||||||||||
Commercial
|
255,286 | 46 | % | 151,683 | 41 | % | 118,476 | 55 | % | 150,283 | 38 | % | 675,728 | 44 | % | |||||||||||||||||||||||||
Consumer
|
23,119 | 4 | % | 5,853 | 2 | % | 3,915 | 2 | % | 17,095 | 4 | % | 49,982 | 3 | % | |||||||||||||||||||||||||
Total
loans
|
$ | 561,559 | 100 | % | $ | 368,237 | 100 | % | $ | 215,502 | 100 | % | $ | 402,378 | 100 | % | $ | 1,547,676 | 100 | % |
At
December 31, 2009, the contractual maturities of all loans by category were as
follows:
(dollars in thousands) Loan
Category
|
Due within
one year
|
Due after one
year, but within
five years
|
Due after five
years
|
Total
|
||||||||||||
Commercial
|
$ | 195,145 | $ | 174,265 | $ | 50,745 | $ | 420,155 | ||||||||
Real
Estate:
|
||||||||||||||||
Construction/Lot
|
225,224 | 57,273 | 25,849 | 308,346 | ||||||||||||
Mortgage
|
5,344 | 29,634 | 58,487 | 93,465 | ||||||||||||
Commercial
|
16,610 | 202,561 | 456,557 | 675,728 | ||||||||||||
Consumer
|
2,807 | 20,989 | 26,186 | 49,982 | ||||||||||||
$ | 445,130 | $ | 484,722 | $ | 617,824 | $ | 1,547,676 |
At
December 31, 2009, variable and adjustable rate loans contractually due after
one year totaled $991.7 million and loans with predetermined or fixed rates due
after one year totaled $110.8 million.
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.
Approximately two-thirds of total loans have exposure to real estate, including
construction and lot loans (comprised of land development plus residential and
commercial construction loan types), commercial real estate loans, residential
mortgage loans, and consumer real estate. 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.
48
The
following paragraphs provide information on portions of the Company’s real
estate loan portfolio, specifically Construction/lot and Commercial Real
Estate. All such lending activities are subject to the varied risks
of real estate lending. The Company’s loan origination process requires
specialized underwriting, collateral and approval procedures, which mitigates,
but does not eliminate the risk that loans may not be repaid. Note that the
minor balance differences between the preceding and following tables are a
result of the inclusion of net deferred loan fees in the above
tables.
(a) Residential land development
category. This category is included in the construction/lot portfolio
balances above, and represents loans made to developers for the purpose of
acquiring raw land and/or for the subsequent development and sale of residential
lots. Such loans typically finance land purchase and infrastructure development
of properties (i.e. roads, utilities, etc.) with the aim of making improved lots
ready for subsequent sale to consumers or builders for ultimate construction of
residential units. The primary source of repayment of such loans is generally
the cash flow from developer sale of lots or improved parcels of land while real
estate collateral, secondary sources and personal guarantees may provide an
additional measure of security for such loans. The nationwide downturn in real
estate has continued to slow down lot and home sales within the Company's
markets. This has adversely impacted certain developers by lengthening the
marketing period of their projects and negatively affecting borrower liquidity
and collateral values. Weakness in this category of loans has contributed
significantly to the elevated level of provision for loan losses in 2009 and
2008. The situation continues to be closely monitored and an elevated level of
provisioning may be required should deterioration continue.
(dollars in thousands)
|
2009
|
% of
category
|
% of
Constr /
lot
portfolio
|
% of
gross
loans
|
2008
|
|||||||||||||||
Residential
Land Development:
|
||||||||||||||||||||
Raw
Land
|
$ | 35,258 | 37 | % | 11 | % | 2 | % | $ | 72,329 | ||||||||||
Land
Development
|
51,240 | 54 | % | 16 | % | 3 | % | 112,234 | ||||||||||||
Speculative
Lots
|
7,981 | 9 | % | 3 | % | 1 | % | 14,855 | ||||||||||||
$ | 94,479 | 100 | % | 30 | % | 6 | % | $ | 199,418 | |||||||||||
Geographic
distribution by region:
|
||||||||||||||||||||
Central
Oregon
|
$ | 48,176 | 51 | % | 15 | % | 3 | % | $ | 74,209 | ||||||||||
Northwest
Oregon
|
4,095 | 4 | % | 1 | % | 0 | % | 4,670 | ||||||||||||
Southern
Oregon
|
8,437 | 9 | % | 3 | % | 1 | % | 12,723 | ||||||||||||
Total
Oregon
|
60,708 | 64 | % | 19 | % | 4 | % | 91,602 | ||||||||||||
Idaho
|
33,771 | 36 | % | 11 | % | 2 | % | 107,816 | ||||||||||||
Grand
total
|
$ | 94,479 | 100 | % | 30 | % | 6 | % | $ | 199,418 |
|
(b)
|
Residential construction
category. This category is included in the
construction/lot portfolio balances above, and represents financing of
homeowner or builder construction of new residences and condominiums where
the obligor generally intends to own the home upon construction
(pre-sold), or builder construction of homes for resale (speculative
construction).
|
Pre-sold
construction loans are underwritten to facilitate permanent mortgage (take-out)
financing at the end of the construction phase. Especially with the turmoil in
mortgage markets of the last year, no assurance can be made that committed
take-out financing will be available at conclusion of construction.
Speculative
construction lending finances builders/contractors who rely on the sale of
completed homes to repay loans. The Bank may finance construction costs within
residential subdivisions or on a custom site basis. Speculative construction
loans decreased in 2009 as a result of the nationwide downturn in residential
real estate. This may impact certain builders by lengthening the marketing
period for constructed homes and negatively affecting borrower liquidity
and collateral values.
49
(dollars in thousands)
|
2009
|
% of
category
|
% of
Constr /
lot
portfolio
|
% of
gross
loans
|
2008
|
|||||||||||||||
Residential
Construction
|
||||||||||||||||||||
Pre
sold
|
$ | 10,115 | 21 | % | 3 | % | 0 | % | $ | 62,153 | ||||||||||
Lots
|
11,493 | 24 | % | 4 | % | 1 | % | 17,331 | ||||||||||||
Speculative
Construction
|
26,819 | 55 | % | 9 | % | 2 | % | 28,461 | ||||||||||||
$ | 48,427 | 100 | % | 16 | % | 3 | % | $ | 107,945 | |||||||||||
Geographic
distribution by region:
|
||||||||||||||||||||
Central
Oregon
|
$ | 24,304 | 50 | % | 8 | % | 2 | % | $ | 43,593 | ||||||||||
Northwest
Oregon
|
7,246 | 15 | % | 2 | % | 0 | % | 30,445 | ||||||||||||
Southern
Oregon
|
3,124 | 6 | % | 1 | % | 0 | % | 5,798 | ||||||||||||
Total
Oregon
|
34,674 | 72 | % | 11 | % | 2 | % | 79,836 | ||||||||||||
Idaho
|
13,753 | 28 | % | 4 | % | 1 | % | 28,109 | ||||||||||||
Grand
total
|
$ | 48,427 | 100 | % | 16 | % | 3 | % | $ | 107,945 |
(c) Commercial
construction category. This category is included in the construction/lot
portfolio balances above, and represents lending to finance the construction or
development of commercial properties. Obligors may be the business
owner/occupier of the building who intends to operate its business from the
property upon construction, or non owner (speculative) developers. The expected
source of repayment of these loans is typically the sale or refinancing of the
project upon completion of the construction phase. In certain circumstances, the
Company may provide or commit to take-out financing upon construction. Take-out
financing is subject to the project meeting specific underwriting
guidelines.
The
overall decline in 2009 in our commercial construction portfolio is mainly
related to project completions. While our portfolios of these types of loans
have not experienced the severe credit quality challenges experienced in
residential construction projects, there can be no assurance that the credit
quality in these portfolios will not be impacted should present challenging
economic conditions persist. No assurance can be given that losses will not
exceed the estimates that are currently included in the reserve for credit
losses, which could adversely affect the Company’s financial conditions and
results of operations.
(dollars
in thousands)
|
2009
|
% of
category
|
% of
Constr /
lot
portfolio
|
% of
gross
loans
|
2008
|
|||||||||||||||
Commercial
Construction:
|
||||||||||||||||||||
Pre
sold
|
$ | 29,080 | 18 | % | 9 | % | 2 | % | $ | 27,826 | ||||||||||
Lots
|
9,822 | 6 | % | 3 | % | 1 | % | 16,404 | ||||||||||||
Speculative
|
99,957 | 60 | % | 33 | % | 6 | % | 143,719 | ||||||||||||
Speculative
Lots
|
26,581 | 16 | % | 9 | % | 2 | % | 22,409 | ||||||||||||
$ | 165,440 | 100 | % | 54 | % | 11 | % | $ | 210,358 | |||||||||||
Geographic
distribution by region:
|
||||||||||||||||||||
Central
Oregon
|
$ | 24,674 | 15 | % | 8 | % | 2 | % | $ | 49,817 | ||||||||||
Northwest
Oregon
|
82,059 | 50 | % | 27 | % | 5 | % | 83,720 | ||||||||||||
Southern
Oregon
|
30,467 | 18 | % | 10 | % | 2 | % | 33,837 | ||||||||||||
Total
Oregon
|
137,200 | 83 | % | 45 | % | 9 | % | 167,374 | ||||||||||||
Idaho
|
28,240 | 17 | % | 9 | % | 2 | % | 42,984 | ||||||||||||
Grand
total
|
$ | 165,440 | 100 | % | 54 | % | 11 | % | $ | 210,358 |
50
(d) Commercial real
estate (CRE) portfolio. This $675.7 million 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 44% of total loans
outstanding as of December 31, 2009. Approximately 52% of CRE loans
are made to owner-occupied users of the commercial property, while 48% 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. The
average loan in the CRE portfolio is only about $0.6 million and 86% of balances
are represented in loans under $5 million. This granular and well
diversified portfolio has maintained low delinquency and only modest
deterioration in the present downturn. However no assurance can be
given that residential real estate or other economic factors will not adversely
impact the CRE portfolio.
Commercial
Real Estate:
|
2009
|
% of
total
CRE
|
% of
gross
loans
|
2008
|
||||||||||||
Owner
occupied
|
$ | 348,732 | 52 | % | 22 | % | $ | 358,232 | ||||||||
Non-owner
occupied
|
326,996 | 48 | % | 21 | % | 344,917 | ||||||||||
$ | 675,728 | 100 | % | 44 | % | $ | 703,149 |
The following table provides the
geographic distribution of the Company’s CRE loan portfolio by region as a
percent of total company-wide CRE loans at December 31, 2009:
Commercial Real Estate:
|
Central
Oregon
|
% of
total
CRE
loans
|
Northwest
Oregon
|
% of
total
CRE
loans
|
Southern
Oregon
|
% of
total
CRE
loans
|
Idaho
|
% of
total
CRE
loans
|
Total
|
|||||||||||||||||||||||||||
Owner
occupied
|
$ | 148,993 | 10 | % | $ | 42,290 | 3 | % | $ | 71,006 | 5 | % | $ | 86,443 | 6 | % | $ | 348,732 | ||||||||||||||||||
Non-owner
occupied
|
105,122 | 7 | % | 109,911 | 7 | % | 47,654 | 3 | % | 64,309 | 4 | % | $ | 326,996 | ||||||||||||||||||||||
Total
loans
|
$ | 254,115 | 17 | % | $ | 152,201 | 10 | % | $ | 118,660 | 8 | % | $ | 150,752 | 10 | % | $ | 675,728 |
Lending and Credit
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
assessment, 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. Internal and external 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. On August 3, 2010, the Company determined that it
would restate its audited consolidated financial statements as of and for the
year ended December 31, 2009 primarily related to the reserve for loan losses
and loan loss provision. See explanatory note on page 3 of this Amendment.
As a result of the restatement, the December 31, 2009 reserve for loan
losses increased to $58.6 million from the previously reported $37.6
million. The loan loss provision for the year ended December 31, 2009
increased from $113.0 million to $134.0 million. This restatement is
related to an examination by banking regulators of the Bank that commenced on
March 15, 2010 and is related to the reserve for loan losses and loan loss
provision. In connection with the examination, the regulators
provided additional information to the Company on July 29, 2010 which resulted
in management refining and enhancing its model for calculating the reserve for
loan losses by considering an expanded scope of information and augmenting the
qualitative and judgmental factors used to estimate potential losses inherent in
the loan portfolio.
51
The
reserve for credit losses (reserve for loan losses and reserve for unfunded
commitments) represents management's recognition of the assumed and present
risks of extending credit and the possible inability or failure of the obligors
to make repayment. The reserve is maintained at a level considered adequate to
provide for losses on loans and unfunded commitments based on management's
current assessment of a variety of current factors affecting the loan portfolio.
Such factors include loss experience, review of problem loans, current economic
conditions, and an overall evaluation of the quality, risk characteristics and
concentration of loans in the portfolio. The level of reserve for credit losses
is also subject to review by the bank regulatory authorities who may require
increases to the reserve based on their evaluation of the information available
to it at the time of its examination of the Bank. The reserve 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. The reserve is increased by provisions charged to operations
and reduced by loans charged-off, net of recoveries. As stated above,
as a result of the regulatory examination of the Bank, which required a
restatement of the Bank’s Call Report for the year ended December 31, 2009,
management is refining and enhancing its model for calculating the reserve for
loan losses by considering an expanded scope of information and augmenting the
qualitative and judgmental factors used to estimate potential losses inherent in
the loan portfolio. See “Income Statement Overview – Loan Loss
Provision” above.
The
following describes the Company’s methodology for assessing the appropriate
level of the reserve for loan losses. For this purpose, loans and related
commitments to loan are analyzed and reserves categorized into the allocated
reserve, specifically identified reserves for impaired loans, the unallocated
reserve, or the reserve for unfunded loan commitments.
The
allocated portions of the reserve and the reserve for unfunded loan commitments
are calculated by applying loss factors to outstanding loan balances and
commitments to loan, segregated by differing risk categories. Loss factors are
based on historical loss experience, adjusted for current economic trends, loss
severity factors arising from volatile market conditions, and other conditions
affecting the portfolio. Note that market conditions loss severity factors were
an enhancement to methodology arising from review of actual loss experience and
is applied prospectively beginning with this Annual Report on Form
10-K/A. In certain circumstances with respect to adversely risk rated
loans, reserves may be allocated for individual loans or groupings of loans, and
loss factors are estimated utilizing information as to estimated collateral
values, secondary sources of repayment, guarantees and other relevant factors,
including consideration of information that becomes available subsequent to
year-end. The allocated portion of the consumer loan reserve is estimated based
mainly upon a quarterly credit scoring analysis.
Impaired
loans are either specifically allocated for in 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 either the
present value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s observable market price or the estimated fair value of
the loan’s underlying collateral or related guaranty. Since a
significant portion of the Bank’s loans are collateralized by real estate, the
Bank primarily measures impairment based on the estimated fair value of the
underlying collateral or related guaranty. In certain other cases,
impairment is measured based on the present value of expected future cash flows
discounted at the loan’s effective interest rate. Smaller balance homogeneous
loans (typically installment loans) are collectively evaluated for impairment.
Accordingly, the Bank does not separately identify individual installment loans
for impairment disclosures. Generally, the Bank evaluates a loan for impairment
when a loan is determined to be adversely risk rated.
The unallocated portion of the reserve
is based upon management’s evaluation of various qualitative factors that are
not directly measured in the determination of the allocated and specific
reserves. Such factors include uncertainties in economic conditions,
uncertainties in identifying triggering events that directly correlate to
subsequent loss rates, risk factors that have not yet manifested themselves in
loss allocation factors, regulatory examinations, and historical loss experience
data that may not precisely correspond to the current portfolio. In addition,
the unallocated reserve may be further adjusted based upon the direction of
various risk indicators. Examples of such factors include the risk as to current
and prospective economic conditions, the level and trend of charge offs or
recoveries, levels and trends in delinquencies or non-accrual loans, risks in
originating loans in new or unfamiliar markets, risk of heightened imprecision
of appraisals used in estimating real estate values, or initiating specialty
lending to industry sectors that may be new to the Company. Although this
allocation process may not accurately predict credit losses by loan type or in
aggregate, the total reserve for credit losses is available to absorb losses
that may arise from any loan type or category. Due to the subjectivity involved
in the determination of the unallocated portion of the reserve for loan losses,
the relationship of the unallocated component to the total reserve for loan
losses may fluctuate from period to period. As of year-end 2009 the Company’s
unallocated reserve balance was approximately 16% of its calculated reserve
based upon management’s assessment of the elevated risk factors mainly relating
to uncertain and adverse economic conditions and the level and trend of
delinquencies, nonaccrual loans and charge-offs and information made available
from regulatory authorities.
52
The Bank's ratio of reserve for credit
losses to total loans was 3.83% at December 31, 2009 compared to 2.46% at
December 31, 2008 and 1.81% at December 31, 2007. At this date, management
believes that the Company’s reserve is at an appropriate level under current
circumstances and prevailing economic conditions. The total amount of
actual loan losses may vary significantly from the estimated amount. No
assurance can be given that in any particular period, the reserve for credit
losses will be sufficient, or that loan losses will not be sustained that are
sizable in relation to the amount reserved, or that changing economic factors or
other environmental conditions could cause increases in the loan loss
provision.
The
Company classifies reserves for unfunded commitments as a liability on the
consolidated balance sheet. Such reserves are included as part of the
overall reserve for credit losses. Reserves for unfunded commitments totaled
approximately $704 and $1,039 at December 31, 2009 and 2008,
respectively.
Allocation of Reserve for Credit
Losses.
The
higher reserve for loan losses in recent years is attributable to the affect the
adverse economy has had on obligor’s ability to repay loans. The
unallocated portion of the reserve reflects the level of uncertainty as to the
future direction and severity of the economic environment. While a
combination of evidence demonstrating greater clarity on construction/lot
exposure and reduced exposure levels has lessened concern in this loan
portfolio, risk in other asset categories continues. Typical factors
leading to changes in reserve allocation include changes in debt service
coverage ratios, guarantor and/or collateral valuation as well as economic
conditions that may have a specific or generalized impact on the relative risks
inherent in various loan portfolios. Although this allocation process may
not accurately predict credit losses by loan type or in aggregate, the total
reserve for loan losses is available to absorb losses that may arise from any
loan type or category.
The
following table allocates the reserve for credit losses among major loan
types.
53
2009
|
2008
|
|||||||||||||||||||||||
(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
|
||||||||||||||||||
(Restated)
|
||||||||||||||||||||||||
Commercial
|
$ | 18,339 | 4.33 | % | 27.14 | % | $ | 11,614 | 1.99 | % | 29.79 | % | ||||||||||||
Real
Estate:
|
||||||||||||||||||||||||
Construction/lot
|
14,480 | 4.70 | % | 19.95 | % | 18,722 | 3.62 | % | 26.47 | % | ||||||||||||||
Mortgage
|
3,092 | 3.31 | % | 6.03 | % | 1,696 | 1.76 | % | 4.92 | % | ||||||||||||||
Commercial
|
10,662 | 1.60 | % | 43.58 | % | 7,064 | 1.00 | % | 35.95 | % | ||||||||||||||
Consumer
|
2,807 | 5.62 | % | 3.30 | % | 1,893 | 3.37 | % | 2.87 | % | ||||||||||||||
Committed/unfunded
|
423 | - | - | 735 | - | - | ||||||||||||||||||
Unallocated
|
9,487 | - | - | 6,481 | - | - | ||||||||||||||||||
Total
reserve for credit losses
|
$ | 59,290 | 3.83 | % | 100.00 | % | $ | 48,205 | 2.46 | % | 100.00 | % |
2007
|
2006
|
|||||||||||||||||||||||
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
|
$ | 10,388 | 1.71 | % | 29.70 | % | $ | 7,818 | 1.39 | % | 29.71 | % | ||||||||||||
Real
Estate:
|
||||||||||||||||||||||||
Construction/lot
|
13,433 | 1.96 | % | 33.64 | % | 6,328 | 1.08 | % | 31.17 | % | ||||||||||||||
Mortgage
|
1,521 | 1.72 | % | 4.34 | % | 1,112 | 1.38 | % | 4.28 | % | ||||||||||||||
Commercial
|
3,901 | 0.64 | % | 30.02 | % | 3,986 | 0.66 | % | 32.13 | % | ||||||||||||||
Consumer
|
1,684 | 3.58 | % | 2.30 | % | 2,050 | 4.01 | % | 2.71 | % | ||||||||||||||
Committed/unfunded
|
2,414 | - | - | 3,213 | - | - | ||||||||||||||||||
Unallocated
|
3,697 | - | - | 2,291 | - | - | ||||||||||||||||||
Total
reserve for credit losses
|
$ | 37,038 | 1.81 | % | 100.00 | % | $ | 26,798 | 1.42 | % | 100.00 | % |
2005
|
||||||||||||
Reserve for
loan and
commitment
losses
|
Allocated
reserve as a
% of loan
category
|
Loan
category as
a % of total
loans
|
||||||||||
Commercial
|
$ | 3,526 | 1.10 | % | 30.51 | % | ||||||
Real
Estate:
|
||||||||||||
Construction/lot
|
2,445 | 1.11 | % | 21.01 | % | |||||||
Mortgage
|
567 | 1.00 | % | 5.39 | % | |||||||
Commercial
|
821 | 0.68 | % | 39.81 | % | |||||||
Consumer
|
1,281 | 3.71 | % | 3.28 | % | |||||||
Committed/unfunded
|
2,753 | - | - | |||||||||
Unallocated
|
1,295 | - | - | |||||||||
Total
reserve for credit losses
|
$ | 12,688 | 1.40 | % | 100.00 | % |
54
The
following table summarizes the Company’s reserve for credit losses and
charge-off and recovery activity for each of the last five years:
(dollars in thousands)
|
Year ended December 31,
|
|||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Loans
outstanding at end of period
|
$ | 1,547,676 | $ | 1,956,184 | $ | 2,041,478 | $ | 1,887,262 | $ | 1,049,705 | ||||||||||
Average
loans outstanding during the period
|
$ | 1,798,723 | $ | 2,054,199 | $ | 1,974,435 | $ | 1,590,315 | $ | 962,514 | ||||||||||
Reserve
for loan losses, balance beginning of period
|
$ | 47,166 | $ | 33,875 | $ | 23,585 | $ | 14,688 | $ | 12,412 | ||||||||||
Recoveries:
|
||||||||||||||||||||
Commercial
|
1,033 | 800 | 378 | 122 | 241 | |||||||||||||||
Real
Estate:
|
||||||||||||||||||||
Construction
|
1,110 | 581 | 12 | - | - | |||||||||||||||
Mortgage
|
113 | 50 | 288 | 4 | 25 | |||||||||||||||
Commercial
|
949 | 62 | - | 37 | - | |||||||||||||||
Consumer
|
540 | 487 | 612 | 527 | 227 | |||||||||||||||
3,745 | 1,980 | 1,290 | 690 | 493 | ||||||||||||||||
Loans
charged off:
|
||||||||||||||||||||
Commercial
|
(18,403 | ) | (10,411 | ) | (4,634 | ) | (529 | ) | (405 | ) | ||||||||||
Real
Estate:
|
||||||||||||||||||||
Construction
|
(92,449 | ) | (71,833 | ) | (2,986 | ) | - | - | ||||||||||||
Mortgage
|
(2,560 | ) | (650 | ) | (941 | ) | (45 | ) | - | |||||||||||
Commercial
|
(7,875 | ) | (2,139 | ) | - | (7 | ) | - | ||||||||||||
Consumer
|
(5,038 | ) | (3,249 | ) | (1,839 | ) | (1,391 | ) | (861 | ) | ||||||||||
(126,325 | ) | (88,282 | ) | (10,400 | ) | (1,972 | ) | (1,266 | ) | |||||||||||
Net
loans charged-off
|
(122,580 | ) | (86,302 | ) | (9,110 | ) | (1,282 | ) | (773 | ) | ||||||||||
Provision
charged to operations
|
134,000 | 99,593 | 19,400 | 6,000 | 3,050 | |||||||||||||||
Reserve
for unfunded commitments
|
- | - | - | - | - | |||||||||||||||
reclassified
to other liabilities
|
- | - | - | (3,213 | ) | - | ||||||||||||||
Reserves
acquired from F&M
|
- | - | - | 7,392 | - | |||||||||||||||
Reserve
balance, end of period
|
$ | 58,586 | $ | 47,166 | $ | 33,875 | $ | 23,585 | $ | 14,688 | ||||||||||
Ratio
of net loans charged-off to average loans outstanding
|
6.81 | % | 4.20 | % | .46 | % | .08 | % | .08 | % | ||||||||||
Ratio
of reserve for loan losses to loans at end of period
|
3.79 | % | 2.41 | % | 1.66 | % | 1.25 | % | 1.40 | % |
55
The
following table presents information with respect to non-performing assets
(NPAs): As of December 31, 2009 residential land development and
construction represented about 59% of NPAs; Commercial construction 7%;
commercial real estate 15% and Commercial and Industrial loans & other
19%.
(dollars
in thousands)
|
December 31,
|
|||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(Restated)
|
||||||||||||||||||||
Loans
on nonaccrual status
|
$ | 132,110 | $ | 120,468 | $ | 45,865 | $ | 2,679 | $ | 40 | ||||||||||
Loans
past due 90 days or more but not on nonaccrual status
|
- | 5 | 51 | - | - | |||||||||||||||
OREO
|
28,860 | 52,727 | 9,765 | 326 | - | |||||||||||||||
Total
non-performing assets
|
$ | 160,970 | $ | 173,200 | $ | 55,681 | $ | 3,005 | $ | 40 | ||||||||||
Selected
ratios:
|
||||||||||||||||||||
NPLs
to total gross loans
|
8.54 | % | 6.16 | % | 2.25 | % | 0.14 | % | 0.00 | % | ||||||||||
NPAs
to total gross loans and OREO
|
10.21 | % | 8.85 | % | 2.73 | % | 0.16 | % | 0.00 | % | ||||||||||
NPAs
to total assets
|
7.41 | % | 7.60 | % | 2.33 | % | 0.13 | % | 0.00 | % |
The
following table presents the composition of NPAs for the years
presented:
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(Restated)
|
||||||||||||||||||||
Commercial
|
$ | 28,964 | $ | 16,877 | $ | 8,306 | $ | 645 | $ | 40 | ||||||||||
Real
Estate:
|
||||||||||||||||||||
Construction/lot
|
106,752 | 128,053 | 42,251 | 1,958 | - | |||||||||||||||
Commercial
|
24,749 | 25,799 | 4,135 | 389 | - | |||||||||||||||
Consumer/other
|
505 | 2,471 | 989 | 13 | - | |||||||||||||||
Total
non-performing assets
|
$ | 160,970 | $ | 173,200 | $ | 55,681 | $ | 3,005 | $ | 40 |
The
increase in NPAs at year-end is a result of the nationwide downturn in real
estate which has slowed lot and home sales within the Company's markets.
This has impacted certain developers by lengthening the marketing period of
their projects and negatively affecting borrower liquidity and collateral
values (for further discussion, see “Real Estate Loan Concentration Risk”
above).
The
accrual of interest on a loan is discontinued when, in management’s judgment,
the future collectibility 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 collectibility of principal is
doubtful. Interest income that was reversed and charged against
income for 2009 was $2.4 million, $2.7 million in 2008 and $1.2 in
2007.
During our normal loan review
procedures, a loan is considered to be impaired when it is probable that we 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 lower of cost or fair value. Certain large
groups of smaller balance homogeneous loans, collectively measured for
impairment, are excluded. 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. In addition, net
overdraft losses are included in the calculation of the allowance for loan
losses per the guidance provided by regulatory authorities early in 2005, in
“Joint Guidance on Overdraft Protection Programs.” At December 31,
2009, the Company’s recorded investment in certain loans that were considered to
be impaired was $147.6 million and specific valuation allowances were $0.1
million. Impaired loans were $120.5 million with specific valuation allowances
of $2.7 at year-end 2008.
56
At December 31, 2009, the Company had
three borrowers with loans accounted for as troubled debt restructurings
("TDRs") totaling $27.3 million, or 1.24% of total assets. The
Company had no TDRs at December 31, 2008. The TDRs at December 31, 2009
are classified as impaired loans and, in the opinion of management,
are reserved appropriately. At December 31, 2009, the Company had remaining
commitments to lend of $328 related to the TDRs.
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 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 located under item 8 of this report. During 2009 and 2008
the Bank did not purchase any new BOLI. The cash surrender value of the Bank’s
total life insurance policies was $33.6 at December 31, 2009 and 2008. The Bank
recorded income from the BOLI policies of $0.1 million in 2009, $0.3 million in
2008 and $1.6 million in 2007.
The
Company owns both general account and separate account BOLI. The separate
account BOLI was purchased 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 investment
against changes in the fair market value depending on severity and duration of
possible market price disruption.
Liabilities
Deposit
Liabilities and Time Deposit Maturities.
At
December 31, 2009, total deposits were $1.82 billion, up 1.2% from year-end
2008. Average deposits totaled $1.87 billion for the full year 2009, up 11.3% or
$189.0 million on average from the prior year. Average
non-interest-bearing demand deposits in 2009 were $407.3 million, basically
unchanged from the 2008 average of $408.0 million. Consistent efforts to retain
and serve customers have proven successful with the number of total customer
relationships consistent in 2009. In order to augment aggregate
deposits the Company utilized brokered, internet listing service deposits and
Certificate of Deposit Registry Program (CDARS™) deposits.
At
December 31, 2009 wholesale brokered deposits totaled $116.5 million compared to
$147.9 million at December 31, 2008. The internet listing service deposits at
December 31, 2009 were approximately $195.1 million compared to a de minimus
balance at year-end 2008. Such deposits are sourced by posting time deposit
rates on an internet site where institutions seeking to deploy funds contact the
Bank directly to open a deposit account. In addition, local
relationship based reciprocal CDARS deposits totaled $47.3 million at December
31, 2009 and $168.3 million at December 31, 2008. However, banks that fail to be
“well-capitalized” are restricted from accessing wholesale brokered
deposits. Further, the Order restricts the Bank’s ability to accept
additional brokered deposits, including the Bank’s reciprocal CDAR’s program,
for which it previously had a temporary waiver from the FDIC.
To provide customer assurances, the
Bank is participating in the FDIC’s Transaction Account Guarantee (TAG) program
which provides temporary 100% guarantee of non-interest bearing checking
accounts, including NOW accounts paying up to 0.50%. The Company did not opt out
of the six-month extension of the transaction account guarantee program which
will continue through June 30, 2010. Additionally, under recent changes from the
FDIC, all interest bearing deposit accounts are insured up to $250,000 through
December 31, 2013.
The following table summarizes the
average amount of, and the average rate paid on, each of the deposit categories
for the periods shown:
57
(dollars in thousands)
|
Years ended December 31,
|
|||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
Deposit Liabilities
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Rate
|
Rate
|
Rate
|
||||||||||||||||||||||
Amount
|
Paid
|
Amount
|
Paid
|
Amount
|
Paid
|
|||||||||||||||||||
Demand
|
$ | 407,344 | N/A | $ | 407,980 | N/A | $ | 469,015 | N/A | |||||||||||||||
Interest-bearing
demand
|
735,677 | 0.99 | % | 844,136 | 1.84 | % | 889,069 | 3.46 | % | |||||||||||||||
Savings
|
33,275 | 0.22 | % | 36,761 | 0.37 | % | 41,327 | 0.49 | % | |||||||||||||||
Time
|
688,430 | 2.60 | % | 386,990 | 3.32 | % | 340,324 | 4.64 | % | |||||||||||||||
Total
Deposits
|
$ | 1,864,726 | $ | 1,675,867 | $ | 1,739,735 |
As of
December 31, 2009, the Company’s time deposit liabilities had the following
times remaining to maturity:
(dollars in thousands)
|
Time deposits of
$100,000 or more (1)
|
All other Time deposits (2)
|
||||||||||||||
Remaining time to maturity
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||
3 months or less
|
$ | 22,151 | 8.98 | % | $ | 121,850 | 38.73 | % | ||||||||
Due after 3 months through
6 months
|
55,094 | 19.66 | % | 72,246 | 22.97 | % | ||||||||||
Due after 6 months through
12 months
|
77,539 | 27.68 | % | 67,605 | 21.49 | % | ||||||||||
Due after 12 months
|
122,383 | 43.68 | % | 52,889 | 16.81 | % | ||||||||||
Total
|
$ | 280,167 | 100.00 | % | $ | 314,590 | 100.00 | % |
(1) Time deposits of $100,000 or more represents 15.4% of total deposits as of December 31, 2009.
(2) All other time deposits represent
17.3% of total deposits as of December 31,
2009.
Junior Subordinated Debentures.
The purpose of the Company’s $68.6 million of trust preferred securities
was to fund the cash portion of the F&M Holding Company acquisition in 2006,
to support general corporate purposes and to augment regulatory
capital. Management believes that at December 31, 2009, the TPS meet
applicable regulatory guidelines to qualify as Tier I capital in the amount of
$14.5 million and Tier 2 capital in the amount of $32.3 million. At
December 31, 2008, the TPS met applicable regulatory guidelines to qualify as
Tier I capital and Tier 2 capital in the amounts of $43.5 million and $23.0
million, respectively. The Company’s obligations under the Junior
Subordinated Debentures (the “Debentures”) and related agreements, taken
together, constitute a full and irrevocable guarantee by the Company of the
obligations of the trusts. The trust preferred securities are subject to
mandatory redemption upon the maturity of the Debentures, or upon earlier
redemption as provided in the Indenture related to the
Debentures. The trust preferred securities may be called by the
Company at par at varying times subsequent to September 15, 2011, and may be
redeemed earlier upon the occurrence of certain events that impact the income
tax or the regulatory capital treatment of the trust preferred securities. In
October 2009, the Company entered into a binding letter agreement with Cohen
& Company Financial Management, LLC for the restructuring of the Company’s
TPS. Pursuant to the Letter Agreement, at such time that a capital
raise transaction is agreed, the Company will exchange the TPS for senior notes
in the aggregate principal amount of $13.3 million representing 20% of the
original balance of the TPS. Subsequent to the capital raise the
notes will be extinguished for cash and liability for TPS debt will be fully
extinguished, resulting in an after tax gain of approximately $31 million for
the Company. The agreements with Bolger and Lightyear – including
their respective contributions of capital – are contingent upon the execution of
this transaction. The exchange of the TPS for the Notes will have no
effect on capital at the Bank and does not impact the amount of capital needed
by the Bank to comply with the Order.
See Note
12 and Note 21 of the consolidated financial statements included in Item 7 of
this report for additional details.
58
Other Borrowings. At December
31, 2009 the Bank had a total of $195.0 million in long-term borrowings from
FHLB of Seattle with maturities ranging from 2011 to 2017, bearing a
weighted-average rate of 1.92% and short-term borrowings with FRB of
approximately $0.2 million Also, the Bank had $41.0 million of senior unsecured
debt issued in connection with the FDIC’s Temporary Liquidity Guarantee Program
(TLGP) maturing February 12, 2012 bearing a weighted average rate of 2.00%,
exclusive of net issuance costs and 1% per annum FDIC insurance assessment
applicable to TLGP debt which are being amortized straight line over the term of
the debt. At year-end 2008, the Bank had a total of $128.5 million in
long-term borrowings from FHLB of Seattle with maturities from 2009 to
2025. In addition, at December 31, 2008, the Bank had short-term
borrowings with FRB of approximately $120.5 million. The FHLB has
also issued $138.0 million in letters of credit on behalf of the Company which
are pledged to collateralize Oregon public deposits held at the Bank. (See
the discussion under “Liquidity and Sources of Funds” in this Item 6 for further
discussion).
Contractual
Obligations. As of December 31, 2009, the
Company has entered into the contractual obligations to make future payments as
listed below:
(dollars
in thousands)
|
Payments Due by Period
|
|||||||||||||||||||
Total
|
Less Than
1 Year
|
1 to 3 Years
|
3 to 5
Years
|
More
Than
5 Years
|
||||||||||||||||
Time
deposits of $100,000 and over
|
$ | 280,167 | $ | 157,784 | $ | 122,383 | $ | - | $ | - | ||||||||||
Federal
Home Loan Bank advances
|
195,000 | - | 135,000 | 10,000 | 50,000 | |||||||||||||||
Junior
subordinated debentures
|
68,558 | - | - | - | 68,558 | |||||||||||||||
Operating
leases
|
13,734 | 1,813 | 3,301 | 2,534 | 6,086 | |||||||||||||||
Total
contractual obligations
|
$ | 557,459 | $ | 159,597 | $ | 260,684 | $ | 12,534 | $ | 124,644 |
Off-Balance Sheet
Arrangements. A schedule of significant off-balance sheet
commitments at December 31, 2009 is included in the following table (dollars in
thousands):
Commitments
to extend credit
|
$ | 253,362 | ||
Commitments
under credit card lines of credit
|
28,455 | |||
Standby
letters of credit
|
6,932 | |||
Total
off-balance sheet commitments
|
$ | 288,749 |
See Note
14 of the Notes to
Consolidated Financial Statements included in Item 8 hereof for a
discussion of the nature, business purpose, and importance of off-balance sheet
arrangements.
Stockholder’s
Equity
The
Company’s total stockholders’ equity at December 31, 2009 was $23.3 million, a
decrease of $111.9 million from December 31, 2008. The decrease
primarily resulted from the net loss for the year ended December 31, 2009 of
$114.8 million, which was partially offset by an increase other comprehensive
income of approximately $1.8 million.
Capital
Resources
At
December 31, 2009, the Company’s Tier 1 leverage, Tier 1 risk-based capital and
total risk-based capital ratios were 1.11%, 1.48% and 2.95%, respectively, and
the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based
capital ratios were 3.75%, 4.97% and 6.25%, respectively, which do not meet
regulatory benchmarks for “adequately-capitalized”. Regulatory benchmarks for an
“adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier
1 risk-based capital and total risk-based capital, respectively;
“well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1
risk-based capital and total risk-based capital, respectively. However, as
mentioned elsewhere in this report, pursuant to the Order, the Bank is required
to maintain a Tier 1 leverage ratio of at least 10% to be considered
“well-capitalized.” Additional information regarding capital resources are
located in Note 21 of the Notes to the Consolidated Financial Statements
included in item 7 this report.
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, 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. At December 31, 2009, the Company does not
meet the regulatory benchmarks for “adequately-capitalized” institutions. As
mentioned earlier in this report the Bank is under a regulatory
Order.
59
Under the Order, the Bank is required
to take certain measures to improve its capital position, maintain liquidity
ratios, reduce its level of non-performing assets, reduce its loan
concentrations in certain portfolios, improve management practices and board
supervision and to assure that its reserve for loan losses is maintained at an
appropriate level. While the Bank
successfully completed several of the measures under the Order, it was unable to
implement certain measures in the time frame provided, particularly those
related to raising capital levels.
Among the
corrective actions required are for the Bank to develop and adopt a plan to
maintain the minimum capital requirements for a “well-capitalized” bank,
including a Tier 1 leverage ratio of at least 10% at the Bank level beginning
150 days from the issuance of the Order. As of December 31, 2009 and through the
date of this report, the requirement relating to increasing the Bank’s Tier 1
leverage ratio has not been met. Bank level capital ratios set
forth below are substantially higher than the capital ratios at the Company
level. This is mainly because regulatory calculations give different
treatment to the $66.5 million in Trust Preferred debt proceeds. At
the Company level substantial percentage of Trust Preferred debt is excluded
from regulatory capital; while it is fully included at Bank level. At
December 31, 2009, the Company’s Tier 1 leverage, Tier 1 risk-based capital and
total risk-based capital ratios were 1.11%, 1.48% and 2.95%, respectively, and
the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based
capital ratios were 3.75%, 4.97% and 6.25%, respectively, which do not meet
regulatory benchmarks for “adequately-capitalized”. Regulatory benchmarks for an
“adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier
1 risk-based capital and total risk-based capital, respectively;
“well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1
risk-based capital and total risk-based capital, respectively. However, as
mentioned above, pursuant to the Order, the Bank is required to maintain a Tier
1 leverage ratio of at least 10% to be considered
“well-capitalized.”
From time
to time the Company makes commitments to acquire banking properties or to make
equipment or technology related investments of capital. At December 31, 2009,
the Company had no material capital expenditure commitments apart from those
incurred in the ordinary course of business.
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, fund the borrowing needs of loan
customers, and to fund ongoing operations. Core relationship deposits are the
primary source of the Bank’s liquidity. 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.
Bancorp
is a single bank holding company and its primary ongoing source of liquidity is
from dividends received from the Bank. Such dividends arise from the
cash flow and earnings of the bank. Banking regulations and
authorities may limit the amount or require certain approvals of the dividend
that the Bank may pay to Bancorp. Pursuant to the Order, the Bank is
required to seek permission from its regulators prior to payment of cash
dividends on its common stock. The Company cut its dividend to zero in the
fourth quarter of 2008 and deferred payments on its Trust Preferred Securities
beginning in the second quarter of 2009. We do not expect the Bank to pay
dividends to Cascade Bancorp for the foreseeable future. Cascade Bancorp does
not expect to pay any dividends for the foreseeable future. Cascade Bancorp is
unable to pay dividends on its common stock until it pays all accrued payments
on its Trust Preferred Securities. As of October 31, 2009, we had $66.5 million
of TPS outstanding with a weighted average interest rate of 2.83%. The Company
elected to defer payments on its TPS beginning in the second quarter of 2009 and
as of October 31, 2009, accrued dividends were $1.38 million.
60
To build
contingent liquidity in response to challenging deposit market conditions
including restrictions on acceptance or renewal of brokered deposits, the Bank
has worked to stabilize and retain local deposits, by accessing internet listing
service deposits, and by reducing its loan balances. At December 31,
2009, liquid assets of the Bank are mainly balances held at FRB totaling $314.6
million compared to $294.3 million at prior quarter end and a negligible amount
at December 31, 2008. Because of the economic situation, the
condition of the bank and other uncertainties no assurance can be given as to
the Company’s ability to maintain sufficient liquidity.
At
December 31, 2009 the internet sourced deposits were approximately $195.1
million compared to a de minimus balance at year-end 2008. Such deposits are
sourced by posting time deposit rates on an internet site where institutions
seeking to deploy funds contact the Bank directly to open a deposit
account. At December 31, 2009 wholesale brokered deposits totaled
$116.5 million down from $147.9 million at December 31, 2008 and local
relationship based reciprocal CDARS deposits totaled $47.3 million at December
31, 2009 and $168.3 million at December 31, 2008 which are also technically
classified as brokered deposits. The Bank is currently restricted
from accepting or renewing brokered deposits.
Available borrowing capacity has been
reduced as the Company drew on its available sources. At December 31,
2009, the FHLB had extended the Bank a secured line of credit of $767.1 million
that may be accessed for short or long-term borrowings given sufficient
qualifying collateral. As of December 31, 2009, the Bank had qualifying
collateral pledged for FHLB borrowings totaling $341.9 million which was largely
utilized by approximately $195.0 million in secured borrowings and $138.0
million FHLB letter of credit used for collateralization of Oregon public
deposits held by the Bank. In addition, at December 31, 2009, the
Bank had short-term borrowings from the FRB of approximately $0.2 million and
the Bank also had undrawn borrowing capacity at FRB of approximately $83.2
million at December 31, 2009 that is currently supported by specific qualifying
collateral. Borrowing capacity from FHLB or FRB may fluctuate based
upon the acceptability and risk rating of loan collateral, and counterparties
could adjust discount rates applied to such collateral at their
discretion. Also, FRB or FHLB could restrict or limit our access to
secured borrowings. As with many community banks, correspondent banks
have withdrawn unsecured lines of credit or now require collateralization for
the purchase of fed funds on a short-term basis due to the present adverse
economic environment.
In 2008,
the U.S. TLGP under which the FDIC would temporarily provide a guarantee of the
senior debt of FDIC-insured institutions and their holding companies. On
February 12, 2009 the Bank issued $41 million of notes under the
TLGP. The issuance included $16 million floating rate and $25 million
fixed rate notes maturing February 12, 2012.
Liquidity
may be affected by the Bank’s routine commitments to extend
credit. Historically a significant portion of such commitments (such
as lines of credit) have expired or terminated without funding. In addition,
more than one-third of total commitments pertain to various construction
projects. Under the terms of such construction commitments, completion of
specified project benchmarks must be certified before funds may be drawn. At
December 31, 2009, the Bank had approximately $288.7 million in outstanding
commitments to extend credit, compared to approximately $514.6 million at
year-end 2008. At this time, management believes that the Bank’s available
resources will be sufficient to fund its commitments in the normal course of
business.
Inflation
The effect of changing prices on
financial institutions is typically different than on non-banking companies
since virtually all of a bank's assets and liabilities are monetary in nature.
In particular, interest rates are significantly affected by inflation, but
neither the timing nor magnitude of the changes are directly related to price
level indices; therefore, the Company can best counter inflation over the long
term by managing net interest income and controlling net increases in
noninterest income and expenses.
61
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures in this item are
qualified by the Risk Factors set forth in Item 1A and the Section entitled
“Cautionary Information Concerning Forward-Looking Statements” included in Item
6. Management’s Discussion and Analysis of Financial Condition and Results of
Operations in this report and any other cautionary statements contained
herein.
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 the 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 Board of Directors oversees
implementation of strategies to control interest rate risk. Management hires and
engages a qualified independent service provider to assist in modeling, monthly
reporting and assessing interest rate risk. The Company’s methodology for
analyzing interest rate risk includes simulation modeling as well as traditional
interest rate gap analysis. While both methods provide an indication of risk for
a given change in interest rates, it is management’s opinion that simulation is
the more effective tool for asset and liability management. The Bank has
historically adjusted its sensitivity to changing interest rates by
strategically 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 interest rate risk, the Company utilizes a
sophisticated simulation model that estimates the possible volatility of Company
earnings resulting from changes in interest rates. Management first
establishes a wide range of possible 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 more dramatic rate movements that are perceived as
less likely, but may still possibly occur. Next, net interest income and net
income are simulated in each scenario. Note that 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.
Note also that the downturn in real estate has caused elevated levels of
non-performing loans which lower reported NIM depending on the absolute volume
of such assets. Simulated earnings are compared over a two-year time horizon.
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.
Actual Market
Rates at
December 2009
|
Estimated Rates at
December
2010
|
Declining Rates at
December 2010
|
Alt. Rising
Rates
at December
2010
|
Rising Rates at
December
2010
|
||||||||||||||||
Federal
Funds Rate
|
0.25 | % | 0.75 | % | .063 | % | 1.50 | % | 3.25 | % | ||||||||||
Prime
Rate
|
3.25 | % | 3.75 | % | 3.063 | % | 4.50 | % | 6.50 | % | ||||||||||
Yield
Curve Spread
Fed
Funds to 10-year Treas.
|
3.78 | % | 1.90 | % | 1.94 | % | 1.25 | % | 0.55 | % |
The
following table presents percentage changes in simulated future earnings under
the above-described scenarios as compared to earnings under the “Estimated” rate
scenario calculated as of this year end. The effect on earnings assumes no
changes in non-interest income or expense between scenarios.
62
Estimated Rate Scenario
compared to:
|
First Twelve Month Average
% Change in Pro-forma
Net Interest Income
|
Second Twelve Month
Average % Change in Pro-
forma Net Interest Income
|
24th Month annualized %
Change in Pro-forma Net
Interest Income
|
|||||||||
Declining
Rate Scenario
|
(2.83 | )% | (8.04 | )% | (10.44 | )% | ||||||
Alternate
Rising Rate Scenario
|
0.00 | % | (0.01 | )% | 0.00 | % | ||||||
Rising
Rate Scenario
|
0.00 | % | (0.00 | )% | 2.53 | % |
Management’s
assessment of interest rate risk and scenario analysis must be considered in the
context of market interest rates and overall economic conditions. The
Federal Reserve is holding short term rates low in an effort to stimulate
economic growth. The yield curve is unusually steep as a
result. Rates are expected to rise toward the end of 2010 as the Fed
reduces the excess liquidity in the monetary system.
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 3.40% and 3.66% all else being equal. However, with the more
dramatic changes reflected in the “rising” or “declining” scenarios, the model
suggests the margin would likely fall 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 21% 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 to the low levels assumed in
the declining scenario, yields on loans and securities would compress against an
already low cost of funds. Also in this declining rate scenario, the
model assumes an annualized 35% prepayment rate on loans currently outstanding
that would refinance to lower rates, contributing to margin compression. Thus in
the declining rate scenario where the federal fund rates fall to just 0.063%,
the model indicates that the net interest margin could be 3.48% or less during
the first 12 months of the forecast horizon, and 3.22% below during the second
twelve months. 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.
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 substantially, 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.
63
Interest
Rate Gap Table
In the
opinion of management, the use of interest rate gap analysis is less valuable
than the simulation method discussed above as a means to measure and manage
interest rate risk. This is because it is a static measure of rate
sensitivity and does not capture the possible magnitude or pace of rate
changes. At year-end 2009, the Company’s one-year cumulative interest
rate gap analysis indicates that rate sensitive liabilities maturing or
available for re-pricing within one-year exceeded rate sensitive assets by
approximately $277.7 million.
The
Company considers its rate-sensitive assets to be those that either contains a
provision to adjust the interest rate periodically or matures within one year.
These assets include certain loans and leases and investment securities and
interest bearing balances with FHLB. Rate-sensitive liabilities are
those liabilities that are considered sensitive to periodic interest rate
changes within one year, including maturing time certificates, savings deposits,
interest-bearing demand deposits and junior subordinated
debentures.
Set forth
below is a table showing the interest rate sensitivity gap of the Company's
assets and liabilities over various re-pricing periods and maturities, as of
December 31, 2009:
(Dollars in thousands)
|
Within 90
Days
|
After 90
days within
one year
|
After one
year within
five years
|
After five
years
|
Total
|
|||||||||||||||
INTEREST
EARNING ASSETS:
|
||||||||||||||||||||
Investments
& fed funds sold
|
$ | 24,190 | $ | 13,682 | $ | 42,201 | $ | 56,626 | $ | 136,699 | ||||||||||
Interest
bearing balances with FRB
|
319,627 | - | - | - | 319,627 | |||||||||||||||
Loans
|
646,932 | 148,440 | 646,901 | 105,403 | 1,547,676 | |||||||||||||||
Total
interest earning assets
|
$ | 990,749 | $ | 162,122 | $ | 689,102 | $ | 162,029 | $ | 2,004,002 | ||||||||||
INTEREST
BEARING LIABILITIES:
|
||||||||||||||||||||
Interest-bearing
demand deposits
|
$ | 796,628 | $ | - | $ | - | $ | - | $ | 796,628 | ||||||||||
Savings
deposits
|
29,380 | - | - | - | 29,380 | |||||||||||||||
Time
deposits
|
147,019 | 272,484 | 160,173 | 15,081 | 594,757 | |||||||||||||||
Total
interest bearing deposits
|
973,027 | 272,484 | 160,173 | 15,081 | 1,420,765 | |||||||||||||||
Junior
subordinated debentures
|
54,898 | - | - | 13,660 | 68,558 | |||||||||||||||
Other
borrowings
|
130,207 | - | 66,000 | 40,000 | 236,207 | |||||||||||||||
Total
interest bearing liabilities
|
$ | 1,158,132 | $ | 272,484 | $ | 226,173 | $ | 68,741 | $ | 1,725,530 | ||||||||||
Interest
rate sensitivity gap
|
$ | (167,383 | ) | $ | (110,362 | ) | $ | 462,929 | $ | 93,288 | $ | 278,472 | ||||||||
Cumulative
interest rate sensitivity gap
|
$ | (167,383 | ) | $ | (277,745 | ) | $ | 185,184 | $ | 278,472 | $ | 278,472 | ||||||||
Interest
rate gap as a percentage of total interest earning assets
|
-8.35 | % | -5.51 | % | 23.10 | % | 4.66 | % | 13.90 | % | ||||||||||
Cumulative
interest rate gap as a percentage of total earning assets
|
-8.35 | % | -13.86 | % | 9.24 | % | 13.90 | % | 13.90 | % |
64
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The
following reports, audited consolidated financial statements and the notes
thereto are set forth in this Annual Report on Form 10-K on the pages
indicated:
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
66
|
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
67
|
|
For
the Years Ended December 31, 2009, 2008 and 2007:
|
||
Consolidated
Statements of Operation
|
68
|
|
Consolidated
Statements of Changes in Stockholders' Equity
|
69
|
|
Consolidated
Statements of Cash Flows
|
72
|
|
Notes
to Consolidated Financial Statements
|
73
|
65
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Cascade Bancorp
We have
audited the accompanying consolidated balance sheet of Cascade Bancorp and its
subsidiary, Bank of the Cascades (collectively, “the Company”), as of December
31, 2009, and the related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for the year then ended. The
Company’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The
consolidated financial statements as of December 31, 2008, and for the years
ended December 31, 2008 and 2007, were audited by Symonds, Evans & Company,
P.C., who merged with Delap LLP as of June 1, 2009, and whose report dated March
10, 2009, expressed an unqualified opinion on those consolidated financial
statements with an explanatory paragraph that emphasized the Company’s current
operating environment and financial condition.
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 the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our
opinion, the 2009 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cascade Bancorp and
its subsidiary as of December 31, 2009, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2
to the consolidated financial statements, the Company incurred net losses in
2009 and 2008, has a significant level of nonperforming assets, and is currently
operating under written agreements with its principal banking regulators which
require management to take a number of actions, including, among other things,
restoring and maintaining capital levels to amounts that are in excess of the
Company’s current capital levels. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern as of
December 31, 2009. Management’s plans to address these matters
are described in Notes 2 and 21. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As
discussed in Note 23 to the consolidated financial statements, the accompanying
2009 consolidated financial statements have been restated to correct a material
misstatement primarily related to the Company’s reserve for loan losses and loan
loss provision.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 12, 2010, except for the effects
of the material weakness described in the sixth paragraph of that report, as to
which the date is August 20, 2010, expressed an adverse opinion
thereon.
/s/ Delap
LLP
Lake
Oswego, Oregon
as to
which the date is August 20, 2010
66
CASCADE
BANCORP AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2009 AND 2008
(Dollars
in thousands)
2009
|
2008
|
|||||||
(Restated)
|
||||||||
ASSETS
|
||||||||
Cash
and cash equivalents:
|
||||||||
Cash
and due from banks
|
$ | 38,759 | $ | 46,554 | ||||
Interest
bearing deposits
|
319,627 | 162 | ||||||
Federal
funds sold
|
936 | 2,230 | ||||||
Total
cash and cash equivalents
|
359,322 | 48,946 | ||||||
Investment
securities available-for-sale
|
133,755 | 107,480 | ||||||
Investment
securities held-to-maturity, estimated fair value of $2,143 ($2,247 in
2008)
|
2,008 | 2,211 | ||||||
Federal
Home Loan Bank (FHLB) stock
|
10,472 | 10,472 | ||||||
Loans,
net
|
1,489,090 | 1,909,018 | ||||||
Premises
and equipment, net
|
37,367 | 39,763 | ||||||
Core
deposit intangibles
|
6,388 | 7,921 | ||||||
Bank-owned
life insurance (BOLI)
|
33,635 | 33,568 | ||||||
Other
real estate owned (OREO), net
|
28,860 | 52,727 | ||||||
Income
taxes receivable
|
43,256 | 21,230 | ||||||
Accrued
interest and other assets
|
27,975 | 44,971 | ||||||
Total
assets
|
$ | 2,172,128 | $ | 2,278,307 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Liabilities:
|
||||||||
Deposits:
|
||||||||
Demand
|
$ | 394,583 | $ | 364,146 | ||||
Interest
bearing demand
|
796,628 | 816,693 | ||||||
Savings
|
29,380 | 33,203 | ||||||
Time
|
594,757 | 580,569 | ||||||
Total
deposits
|
1,815,348 | 1,794,611 | ||||||
Junior
subordinated debentures
|
68,558 | 68,558 | ||||||
Other
borrowings
|
195,207 | 248,975 | ||||||
Temporary
Liquidity Guarantee Program (TLGP) senior unsecured debt
|
41,000 | - | ||||||
Customer
repurchase agreements
|
- | 9,871 | ||||||
Accrued
interest and other liabilities
|
28,697 | 21,053 | ||||||
Total
liabilities
|
2,148,810 | 2,143,068 | ||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, no par value; 5,000,000 shares authorized; none issued or
outstanding
|
- | - | ||||||
Common
stock, no par value; 45,000,000 shares authorized; 28,174,163 shares
issued and outstanding (28,088,110 in 2008)
|
159,617 | 158,489 | ||||||
Accumulated
deficit
|
(137,953 | ) | (23,124 | ) | ||||
Accumulated
other comprehensive income (loss)
|
1,654 | (126 | ) | |||||
Total
stockholders' equity
|
23,318 | 135,239 | ||||||
Total
liabilities and stockholders' equity
|
$ | 2,172,128 | $ | 2,278,307 |
See
accompanying notes.
67
CASCADE
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars
in thousands, except per share amounts)
2009
|
2008
|
2007
|
||||||||||
(Restated)
|
||||||||||||
Interest
and dividend income:
|
||||||||||||
Interest
and fees on loans
|
$ | 101,081 | $ | 132,979 | $ | 165,361 | ||||||
Taxable
interest on investment securities
|
5,089 | 4,451 | 5,160 | |||||||||
Nontaxable
interest on investment securities
|
138 | 189 | 283 | |||||||||
Interest
on interest bearing deposits
|
486 | 11 | 195 | |||||||||
Interest
on federal funds sold
|
17 | 31 | 187 | |||||||||
Dividends
on FHLB stock
|
- | 111 | 42 | |||||||||
Total
interest and dividend income
|
106,811 | 137,772 | 171,228 | |||||||||
Interest
expense:
|
||||||||||||
Deposits:
|
||||||||||||
Interest
bearing demand
|
7,267 | 15,541 | 30,727 | |||||||||
Savings
|
73 | 135 | 202 | |||||||||
Time
|
17,915 | 12,850 | 15,804 | |||||||||
Junior
subordinated debentures, other borrowings, and TLGP senior unsecured
debt
|
8,880 | 13,845 | 15,991 | |||||||||
Total
interest expense
|
34,135 | 42,371 | 62,724 | |||||||||
Net
interest income
|
72,676 | 95,401 | 108,504 | |||||||||
Loan
loss provision
|
134,000 | 99,593 | 19,400 | |||||||||
Net
interest income (loss) after loan loss provision
|
(61,324 | ) | (4,192 | ) | 89,104 | |||||||
Noninterest
income:
|
||||||||||||
Service
charges on deposit accounts, net
|
8,582 | 9,894 | 9,710 | |||||||||
Mortgage
banking income, net
|
2,827 | 2,100 | 2,730 | |||||||||
Card
issuer and merchant service fees, net
|
3,027 | 3,705 | 3,930 | |||||||||
Earnings
on BOLI
|
68 | 264 | 1,574 | |||||||||
Gains
on sales of investment securities available-for sale
|
648 | 436 | 260 | |||||||||
Gain
on sale of merchant card processing business
|
3,247 | - | - | |||||||||
Other
income
|
3,227 | 3,592 | 3,021 | |||||||||
Total
noninterest income
|
21,626 | 19,991 | 21,225 | |||||||||
Noninterest
expenses:
|
||||||||||||
Salaries
and employee benefits
|
33,149 | 33,708 | 36,344 | |||||||||
Equipment
|
2,153 | 2,156 | 2,250 | |||||||||
Occupancy
|
4,682 | 4,767 | 4,438 | |||||||||
Communications
|
1,982 | 2,038 | 1,988 | |||||||||
FDIC
insurance
|
6,933 | 1,709 | 777 | |||||||||
OREO
|
23,140 | 8,442 | 123 | |||||||||
Professional
services
|
7,362 | 2,896 | 2,296 | |||||||||
Prepayment
penalties on FHLB borrowings
|
2,081 | - | - | |||||||||
Reduction
in reserve for unfunded loan commitments
|
(335 | ) | (2,124 | ) | (50 | ) | ||||||
Goodwill
impairment
|
- | 105,047 | - | |||||||||
Other
expenses
|
13,569 | 15,032 | 14,428 | |||||||||
Total
noninterest expenses
|
94,716 | 173,671 | 62,594 | |||||||||
Income
(loss) before income taxes
|
(134,414 | ) | (157,872 | ) | 47,735 | |||||||
Provision
(credit) for income taxes
|
(19,585 | ) | (23,306 | ) | 17,756 | |||||||
Net
income (loss)
|
$ | (114,829 | ) | $ | (134,566 | ) | $ | 29,979 | ||||
Basic
earnings (loss) per common share
|
$ | (4.10 | ) | $ | (4.82 | ) | $ | 1.06 | ||||
Diluted
earnings (loss) per common share
|
$ | (4.10 | ) | $ | (4.82 | ) | $ | 1.05 |
See
accompanying notes.
68
CASCADE
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars
in thousands, except per share amounts)
Number of
shares
|
Comprehensive
income (loss)
|
Common
stock
|
Retained
earnings
|
Accumulated
other
comprehensive
income (loss)
|
Total
stockholders'
equity
|
|||||||||||||||||||
Balances
at December 31, 2006
|
28,330,259 | $ | - | $ | 162,199 | $ | 98,112 | $ | 765 | $ | 261,076 | |||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
income
|
- | 29,979 | - | 29,979 | - | 29,979 | ||||||||||||||||||
Other
comprehensive loss -
|
||||||||||||||||||||||||
unrealized
losses on investment securities
|
||||||||||||||||||||||||
available-for-sale
of approximately $70 (net of
|
||||||||||||||||||||||||
income
taxes of approximately $43), net of
|
||||||||||||||||||||||||
reclassification
adjustment for net gains
|
||||||||||||||||||||||||
on
sales of investment securities
|
||||||||||||||||||||||||
available-for-sale
included in net income of
|
||||||||||||||||||||||||
approximately
$162 (net of income taxes
|
||||||||||||||||||||||||
of
approximately $98)
|
- | (232 | ) | - | - | (232 | ) | (232 | ) | |||||||||||||||
Total
comprehensive income, net
|
- | $ | 29,747 | - | - | - | - | |||||||||||||||||
Nonvested
restricted stock grants, net
|
40,904 | - | - | - | - | |||||||||||||||||||
Stock-based
compensation expense
|
- | 1,632 | - | - | 1,632 | |||||||||||||||||||
Cash
dividends paid (aggregating $.37 per share)
|
- | - | (10,491 | ) | - | (10,491 | ) | |||||||||||||||||
Stock
options exercised
|
146,109 | 1,979 | - | - | 1,979 | |||||||||||||||||||
Tax
effect from non-qualified stock options exercised
|
- | 548 | - | - | 548 | |||||||||||||||||||
Repurchases
of common stock
|
(483,100 | ) | (9,205 | ) | - | - | (9,205 | ) | ||||||||||||||||
Balances
at December 31, 2007
|
28,034,172 | 157,153 | 117,600 | 533 | 275,286 |
See
accompanying notes.
69
CASCADE
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars
in thousands, except per share amounts)
Number of
shares
|
Comprehensive
income (loss)
|
Common
stock
|
Retained
earnings
(accumulated
deficit)
|
Accumulated
other
comprehensive
income (loss)
|
Total
stockholders'
equity
|
|||||||||||||||||||
Balances
at December 31, 2007
|
28,034,172 | $ | - | $ | 157,153 | $ | 117,600 | $ | 533 | $ | 275,286 | |||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||
Net
loss
|
- | (134,566 | ) | - | (134,566 | ) | - | (134,566 | ) | |||||||||||||||
Other
comprehensive loss -
|
||||||||||||||||||||||||
unrealized
losses on investment securities
|
||||||||||||||||||||||||
available-for-sale
of approximately $385 (net of
|
||||||||||||||||||||||||
income
taxes of approximately $242), net of
|
||||||||||||||||||||||||
reclassification
adjustment for net gains
|
||||||||||||||||||||||||
on
sales of investment securities
|
||||||||||||||||||||||||
available-for-sale
included in net loss of
|
||||||||||||||||||||||||
approximately
$274 (net of income taxes
|
||||||||||||||||||||||||
of
approximately $162)
|
- | (659 | ) | - | - | (659 | ) | (659 | ) | |||||||||||||||
Total
comprehensive loss
|
- | $ | (135,225 | ) | - | - | - | - | ||||||||||||||||
Nonvested
restricted stock grants, net
|
42,433 | - | - | - | - | |||||||||||||||||||
Stock-based
compensation expense
|
- | 1,566 | - | - | 1,566 | |||||||||||||||||||
Cash
dividends paid (aggregating $0.22 per share)
|
- | - | (6,158 | ) | - | (6,158 | ) | |||||||||||||||||
Stock
options exercised
|
11,505 | 67 | - | - | 67 | |||||||||||||||||||
Tax
effect from non-qualified stock options exercised
|
- | (297 | ) | - | - | (297 | ) | |||||||||||||||||
Balances
at December 31, 2008
|
28,088,110 | 158,489 | (23,124 | ) | (126 | ) | 135,239 |
See
accompanying notes.
70
CASCADE
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars
in thousands, except per share amounts)
Number of
shares
|
Comprehensive
income (loss)
|
Common
stock
|
Retained
earnings
(accumulated
deficit)
|
Accumulated
other
comprehensive
income (loss)
|
Total
stockholders'
equity
|
|||||||||||||||||||
(Restated)
|
(Restated)
|
(Restated)
|
||||||||||||||||||||||
Balances
at December 31, 2008
|
28,088,110 | $ | - | $ | 158,489 | $ | (23,124 | ) | $ | (126 | ) | $ | 135,239 | |||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||
Net
loss
|
- | (114,829 | ) | - | (114,829 | ) | - | (114,829 | ) | |||||||||||||||
Other
comprehensive income -
|
||||||||||||||||||||||||
unrealized
gains on investment securities
|
||||||||||||||||||||||||
available-for-sale
of approximately $2,183 (net of
|
||||||||||||||||||||||||
income
taxes of approximately $1,337), net of
|
||||||||||||||||||||||||
reclassification
adjustment for net gains
|
||||||||||||||||||||||||
on
sales of investment securities
|
||||||||||||||||||||||||
available-for-sale
included in net loss of
|
||||||||||||||||||||||||
approximately
$402 (net of income taxes
|
||||||||||||||||||||||||
of
approximately $246)
|
- | 1,780 | - | - | 1,780 | 1,780 | ||||||||||||||||||
Total
comprehensive loss, net
|
- | $ | (113,049 | ) | - | - | - | - | ||||||||||||||||
Nonvested
restricted stock grants, net
|
86,053 | - | - | - | - | |||||||||||||||||||
Stock-based
compensation expense
|
- | 1,258 | - | - | 1,258 | |||||||||||||||||||
Income
taxes withheld on vested restricted stock
|
- | (130 | ) | - | - | (130 | ) | |||||||||||||||||
Balances
at December 31, 2009
|
28,174,163 | $ | 159,617 | $ | (137,953 | ) | $ | 1,654 | $ | 23,318 |
See
accompanying notes.
71
CASCADE
BANCORP AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars
in thousands)
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
(Restated)
|
|||||||||||
Net
income (loss)
|
$ | (114,829 | ) | $ | (134,566 | ) | $ | 29,979 | ||||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
6,185 | 5,443 | 4,541 | |||||||||
Goodwill
impairment
|
- | 105,047 | - | |||||||||
Loan
loss provision
|
134,000 | 99,593 | 19,400 | |||||||||
Writedown
of OREO
|
17,981 | 5,460 | - | |||||||||
Provision
(credit) for deferred income taxes
|
22,168 | (11,870 | ) | (6,841 | ) | |||||||
Discounts
(gains) on sales of mortgage loans, net
|
(737 | ) | 367 | (102 | ) | |||||||
Gains
on sales of investment securities available-for-sale
|
(648 | ) | (436 | ) | (260 | ) | ||||||
Deferred
benefit plan expenses
|
1,744 | 1,762 | 2,690 | |||||||||
Stock-based
compensation expense
|
1,258 | 1,566 | 1,632 | |||||||||
Gains
on sales of premises and equipment, net
|
(270 | ) | (574 | ) | (342 | ) | ||||||
Losses
on sales of OREO
|
3,504 | 662 | - | |||||||||
Increase
in accrued interest and other assets
|
(29,099 | ) | (21,625 | ) | (2,569 | ) | ||||||
Increase
(decrease) in accrued interest and other liabilities
|
4,809 | (2,796 | ) | (7,900 | ) | |||||||
Originations
of mortgage loans
|
(177,206 | ) | (121,663 | ) | (170,095 | ) | ||||||
Proceeds
from sales of mortgage loans
|
178,948 | 124,186 | 168,917 | |||||||||
Net
cash provided by operating activities
|
47,808 | 50,556 | 39,050 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of investment securities available-for-sale
|
(54,956 | ) | (48,100 | ) | (14,859 | ) | ||||||
Proceeds
from maturities, calls and prepayments of investment securities
available-for-sale
|
21,670 | 23,329 | 34,137 | |||||||||
Proceeds
from sales of investment securities available-for-sale
|
10,137 | 425 | 525 | |||||||||
Proceeds
from maturities and calls of investment securities
held-to-maturity
|
200 | 965 | 505 | |||||||||
Purchases
of FHLB stock
|
- | (3,481 | ) | - | ||||||||
Loan
reductions (originations), net
|
258,864 | (59,658 | ) | (173,712 | ) | |||||||
Purchases
of premises and equipment, net
|
244 | (3,555 | ) | 458 | ||||||||
Proceeds
from sales of OREO
|
28,441 | 6,676 | 2,227 | |||||||||
Net
cash provided by (used in) investing activities
|
264,600 | (83,399 | ) | (150,719 | ) | |||||||
Cash
flows from financing activities:
|
||||||||||||
Net
increase in deposits
|
20,737 | 127,473 | 5,522 | |||||||||
Increase
in TLGP senior unsecured debt
|
41,000 | - | - | |||||||||
Net
decrease in customer repurchase agreements
|
(9,871 | ) | (8,743 | ) | (25,404 | ) | ||||||
Net
decrease in federal funds purchased
|
- | (14,802 | ) | (375 | ) | |||||||
Proceeds
from FHLB advances
|
140,000 | 1,353,477 | 505,000 | |||||||||
Repayment
of FHLB advances
|
(73,457 | ) | (1,412,449 | ) | (437,947 | ) | ||||||
Net
increase (decrease) in other borrowings
|
(120,311 | ) | (19,920 | ) | 89,524 | |||||||
Cash
dividends paid
|
- | (6,158 | ) | (10,491 | ) | |||||||
Proceeds
from stock options exercised
|
- | 67 | 1,979 | |||||||||
Repurchases
of common stock
|
- | - | (9,205 | ) | ||||||||
Tax
benefit (cost) from non-qualified stock options exercised
|
- | (297 | ) | 548 | ||||||||
Income
taxes withheld on vested restricted stock
|
(130 | ) | - | - | ||||||||
Net
cash provided by financing activities
|
(2,032 | ) | 18,648 | 119,151 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
310,376 | (14,195 | ) | 7,482 | ||||||||
Cash
and cash equivalents at beginning of year
|
48,946 | 63,141 | 55,659 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 359,322 | $ | 48,946 | $ | 63,141 |
See
accompanying notes.
72
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
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.
Bancorp
has also established four subsidiary grantor trusts in connection with the
issuance of trust preferred securities (see Note 12). In accordance
with accounting principles generally accepted in the United States (GAAP), the
accounts and transactions of these trusts are not included in the accompanying
consolidated financial statements.
Effective
July 1, 2009, the Financial Accounting Standards Board’s (FASB’s) Accounting
Standards Codification (the ASC) became the FASB’s single source of
authoritative GAAP for all public and non-public non-governmental
entities. While the ASC does not change GAAP, all existing FASB and
American Institute of Certified Public Accountants (AICPA) accounting
literature, with certain exceptions, was superseded by and incorporated into the
ASC. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under the authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. All other accounting literature is
considered non-authoritative. The switch to the ASC affects the way companies
refer to GAAP in financial statements and accounting policies. Accordingly, all
references to specific GAAP literature in these consolidated financial
statements have been modified to reflect this change. Subsequent
changes to GAAP will be incorporated into the ASC through the issuance of
Accounting Standards Updates (ASUs). The adoption of the ASC did not
impact the Company’s consolidated financial condition, results of operations or
cash flows.
Certain
amounts in 2008 and 2007 have been reclassified to conform with the 2009
presentation.
|
Description of
business
|
The Bank
conducts a general banking business, operating branches in Central, Southern and
Northwest Oregon, as well as the Boise, Idaho area. Its activities include the
usual lending and deposit functions of a commercial 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.
During
2009, the Company sold its merchant card processing business and certain
miscellaneous assets utilized in connection with that
business. Accordingly, the Company recognized a pre-tax net gain
resulting from the sale of the merchant card processing business of
approximately $3,247 during 2009.
73
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Method of
accounting
The
Company prepares its consolidated financial statements in conformity with 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, 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 banking industry and
consist of traditional community 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 and
the Bank 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 the
Company 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 Federal Reserve Bank of San Francisco (FRB) and
Federal Home Loan Bank of Seattle (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.
Supplemental disclosures of
cash flow information
Noncash
transactions resulted from 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 7;
the transfer of approximately $26,059, $55,760 and $11,651 of loans to other
real estate owned (OREO) in 2009, 2008 and 2007, respectively, and a $105,047
impairment of goodwill in 2008.
|
During
2009, 2008 and 2007, the Company paid approximately $32,279, $42,521 and
$62,902, respectively, in interest
expense.
|
|
During
2009, the Company did not make any income tax payments, and received
income tax refunds of approximately $19,951. During 2008 and 2007, the
Company made income tax payments of approximately $7,338 and $24,940,
respectively.
|
74
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
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
them in the near term are classified as trading securities and are reported at
fair value, with unrealized gains and losses included in noninterest
income. The Company had no trading securities during 2009, 2008 or
2007.
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.
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.
Management
determines the appropriate classification of securities at the time of
purchase.
|
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.
|
|
Declines
in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are deemed to be other-than-temporary
impairment (OTTI) would result in write-downs of the individual securities
to their fair value. In estimating other-than-temporary
impairment losses, management considers, among other things, (i) the
length of time and the extent to which the fair value has been less than
cost, (ii) the financial condition and near term prospects of the issuer,
and (iii) 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. The related write-downs would be
included in earnings as realized losses. Management believes
that all unrealized losses on investment securities at December 31, 2009
and 2008 are temporary (see Note
4).
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FHLB
stock
As a
member of the FHLB system, the Bank is required to maintain a minimum level of
investment in FHLB stock based on specific percentages of its outstanding
mortgages, total assets or FHLB advances. At December 31, 2009 and
2008, 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.
The
Bank’s investment in FHLB stock – which has limited marketability – is carried
at cost, which approximates fair value. GAAP provides that, for
impairment testing purposes, the value of long-term investments such as FHLB
stock is based on the “ultimate recoverability” of the par value of the security
without regard to temporary declines in value. The determination of
whether a decline affects the ultimate recovery is influenced by criteria such
as: 1) the significance of the decline in net assets of the FHLB as compared to
the capital stock amount and length of time a decline has persisted; 2) the
impact of legislative and regulatory changes on the FHLB and 3) the liquidity
position of the FHLB. As of December 31, 2009, the FHLB reported that
it had met all of its regulatory capital requirements, but remained classified
as “undercapitalized” by its regulator. The FHLB will not repurchase capital
stock or pay a dividend while it is classified as
undercapitalized. The FHLB has noted that its primary concern with
meeting its risk-based capital requirements relates to the potential impact of
OTTI charges that they may be required to record on their private label
mortgage-backed securities. While the FHLB was undercapitalized as of December
31, 2009, the Company does not believe that its investment in FHLB stock is
impaired. However, this estimate could change if: 1) significant OTTI
losses are incurred on the FHLB’s mortgage-backed securities causing a
significant decline in its regulatory capital status; 2) the economic losses
resulting from credit deterioration on the FHLB’s mortgage-backed securities
increases significantly or 3) capital preservation strategies being utilized by
the FHLB become ineffective.
75
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Loans
Loans are
stated at the amount of unpaid principal, 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 collectibility 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 collectibility 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 recognition of the assumed risks
of extending credit. The reserve is established to absorb
management’s best estimate of known and inherent losses in the loan portfolio as
of the consolidated balance sheet date. The reserve requires complex subjective
judgments as a result of the need to make estimates about matters that are
uncertain. The reserve is maintained at a level currently considered adequate to
provide for potential loan losses based on management’s assessment of various
factors affecting the portfolio.
The
reserve 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 reserve for
loan losses is also subject to review by the bank 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 (see
Note 23). The reserve is increased by provisions charged to operations and
reduced by loans charged-off, net of recoveries.
76
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
The
following describes the Company’s methodology for assessing the appropriate
level of the reserve for loan losses. For this purpose, loans and
related commitments to loan are analyzed – and reserves are categorized – into
the allocated reserve, specifically identified reserves for impaired loans, the
unallocated reserve, or the reserve for unfunded loan commitments.
The
allocated portions of the reserve and the reserve for unfunded loan commitments
are calculated by applying loss factors to outstanding loan balances and
commitments to loan, segregated by differing risk categories. Loss
factors are based on historical loss experience, adjusted for current economic
trends, loss severity factors arising from volatile market conditions and other
conditions affecting the portfolio. In certain circumstances with respect to
adversely risk rated loans, reserves may be allocated for individual or
groupings of loans, whereby loss factors may utilize information as to estimated
collateral values, secondary sources of repayment, guarantees and other relevant
factors, including consideration of information that becomes available
subsequent to year-end (see Note 23). The
allocated portion of the consumer loan reserve is estimated based mainly upon a
quarterly credit scoring analysis.
Impaired
loans are either specifically allocated for in 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 either the present value of expected future cash flows discounted at the
loan’s effective interest rate, the loan’s observable market price or the
estimated fair value of the loan’s underlying collateral or related
guaranty. Since a significant portion of the Bank’s loans are
collateralized by real estate, the Bank primarily measures impairment based on
the estimated fair value of the underlying collateral or related
guaranty. In certain other cases, impairment is measured based on the
present value of expected future cash flows discounted at the loan’s effective
interest rate. Smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual installment loans for impairment
disclosures. Generally, the Bank evaluates a loan for impairment when
a loan is determined to be adversely risk rated.
The
unallocated portion of the reserve is based upon management’s evaluation of
various factors that are not directly measured in the determination of the
allocated and specific reserves. Such factors include uncertainties
in economic conditions, uncertainties in identifying triggering events that
directly correlate to subsequent loss rates, internal and external risk factors
that have not yet manifested themselves in loss allocation factors and
historical loss experience data that may not precisely correspond to the current
portfolio. The unallocated reserve may also be affected by review by
the bank regulatory authorities who may require increases or decreases to the
unallocated reserve based on their evaluation of the information available to
them at the time of their examinations. Also, loss data representing a complete
economic cycle is not available for all sections of the loan
portfolio. Accordingly, the unallocated reserve helps to minimize the
risk related to the margin of imprecision inherent in the estimation of
allocated loan losses. Due to the subjectivity involved in the
determination of the unallocated portion of the reserve for loan losses, the
relationship of the unallocated component to the total reserve for loan losses
may fluctuate from period to period.
Reserve for unfunded loan
commitments
The
Company maintains a separate reserve for losses related to 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 $704
and $1,039 at December 31, 2009 and 2008, respectively, and these amounts are
included in accrued interest and other liabilities in the accompanying
consolidated balance sheets. Increases (decreases) in the reserve for
unfunded loan commitments are recorded in noninterest expenses in the
accompanying consolidated statements of operations.
77
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Mortgage servicing rights
(MSRs)
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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. MSRs are capitalized at their allocated
carrying value and amortized in proportion to, and over the period of,
estimated future net servicing revenue. 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 (see also Note 7). Impairment adjustments, if any, are
recorded through a valuation
allowance.
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Fees
earned for servicing mortgage loans are reported as income when the related
mortgage loan payments are received. The Company classifies MSRs as
accrued interest and other assets in the accompanying consolidated balance
sheets.
Premises and
equipment
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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. Amortization of leasehold
improvements is included in depreciation and amortization expense in the
accompanying consolidated financial
statements.
|
Goodwill and other
intangible assets
Goodwill
and other intangible assets represent the excess of the purchase price and
related costs over the fair value of net assets acquired in business
combinations under the purchase method of accounting.
Based on
the results of an interim goodwill impairment test performed at December 31,
2008, the Company concluded that the estimated fair value of the Company’s
reporting unit was less than its book value and the carrying amount of the
Company’s reporting unit goodwill exceeded its implied fair
value. Accordingly, this resulted in a noncash after-tax impairment
charge of $105,047 during 2008, eliminating all previously recorded goodwill.
Goodwill impairment was a noncash accounting adjustment that did not affect the
Company’s reported cash flows, and the Company’s Tier 1 and total regulatory
capital ratios were unaffected by this adjustment. The Company did
not experience any goodwill impairment during 2009 or 2007.
Other
intangible assets include core deposit intangibles (CDI) and other identifiable
finite-life intangible assets which are being amortized over their estimated
useful lives primarily under the straight-line method. The CDI arose from the
acquisitions of F&M Holding Company (F&M) and Community Bank of Grants
Pass (CBGP), and totaled approximately $6,388 and $7,921 at December 31, 2009
and 2008, respectively. The CDI is included in accrued interest and
other assets in the accompanying consolidated balance sheets and is being
amortized over an eight-year period for F&M and over a seven-year period for
CBGP. Other intangible assets, exclusive of CDI, are not significant at December
31, 2009 and 2008.
78
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
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, 2009 and 2008, the
Company had $26,105 and $26,315, respectively, of separate account BOLI and
$7,530 and $7,253, respectively, of general account BOLI.
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. During 2009 and 2007, the fair value of the
underlying investments plus the stable value wrap protection supported the cash
surrender value of the separate account BOLI. During 2008, losses on
the underlying investments in the separate account BOLI exceeded the support of
the stable value wrap. As a result, the Company incurred
losses of approximately $648 on the separate account BOLI in 2008, which is
included in other noninterest expenses in the accompanying 2008 consolidated
statement of operations. There can be no assurance that additional
losses in excess of the stable value wrap protection will not occur on separate
account BOLI in the future.
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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; or any disposition gains or losses
are included in noninterest 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 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 (see Note 23). 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. Net OREO was approximately $28,860 and $52,727
at December 31, 2009 and 2008, respectively, which is net of an allowance for
losses in OREO of $6,230 and $5,340 as of December 31, 2009 and
2008.
Customer repurchase
agreements
Prior to
December 31, 2009, the Bank entered into repurchase agreements with customers
who wished to deposit amounts in excess of the Federal Insurance Deposit
Corporation (FDIC) insured limits. The Bank no longer offers this
service and, therefore, there were no customer repurchase agreements outstanding
as of December 31, 2009. At December 31, 2008, the Bank had $9,871 in
customer repurchase agreements outstanding.
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Advertising
|
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Advertising
costs are generally charged to expense during the year in which they are
incurred.
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79
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Income
taxes
The
provision (credit) for income taxes is based on income and expenses as reported
for 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 (credit) for income
taxes. A valuation allowance, if needed, reduces deferred tax assets to the
expected amount to be realized. At December 31, 2009 the Company
established a valuation allowance against its deferred tax assets (see Note
15).
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
$121,000 and $130,000 were held in trust as of December 31, 2009 and 2008,
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 (i) the assets have been isolated from the Company,
(ii) 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 (iii) the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
Cash dividend
restriction
Payment
of dividends by the Company and the Bank is subject to restriction by state and
federal regulators and the availability of retained earnings (see Note
21).
Preferred
stock
Beginning
in 2008, the Company may issue preferred stock in one or more series, up to a
maximum of 5,000,000 shares. Each series shall include the number of
shares issued, preferences, special rights and limitations, as determined by the
Board. Preferred stock may be issued with or without voting rights,
not to exceed one vote per share, and the shares of preferred stock will not
vote as a separate class or series except as required by state
law. At December 31, 2009 and 2008, there were no shares of preferred
stock issued and outstanding.
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
change in net unrealized appreciation or depreciation in the fair value of
investment securities available-for-sale, net of taxes.
New authoritative accounting
guidance
As previously discussed, on July
1, 2009, the ASC became FASB’s officially recognized source of authoritative
GAAP applicable to all public and non-public non-governmental entities,
superseding existing FASB, AICPA and related literature. Rules and
interpretive releases of the SEC under the authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered non-authoritative. The switch to the ASC affects the
way companies refer to GAAP in financial statements and accounting policies.
Citing particular content in the ASC involves specifying the unique numeric path
to the content through the Topic, Subtopic, Section and Paragraph
structure.
80
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
In
December 2007, the FASB issued new authoritative guidance under ASC Topic 805,
“Business Combinations”. The new authoritative guidance under ASC Topic 805
applies to all transactions and other events in which one entity obtains control
over one or more other businesses. ASC Topic 805 requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values
as of the acquisition date. ASC Topic 805 also requires an acquirer to recognize
assets acquired and liabilities assumed arising from contractual contingencies
as of the acquisition date, measured at their acquisition-date fair values. ASC
Topic 805 requires acquirers to expense acquisition-related costs as incurred
rather than require allocation of such costs to the assets acquired and
liabilities assumed. The new authoritative guidance in ASC Topic 805 was
effective for business combination reporting for fiscal years beginning on or
after December 15, 2008. The adoption of the new authoritative guidance in ASC
Topic 805 as of January 1, 2009 did not have a significant effect on the
Company’s consolidated financial statements.
In
December 2007, the FASB issued new authoritative guidance under ASC Topic 810,
“Consolidation”. ASC Topic 810 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. ASC Topic 810 also clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. ASC Topic 810 requires consolidated net income (loss) to
be reported at amounts that include the amounts attributable to both the parent
and the noncontrolling interest. Under prior guidance in ASC Topic 810, net
income (loss) attributable to the noncontrolling interest generally was reported
as expense (income) in arriving at consolidated net income (loss). Additional
disclosures are required as a result of the new authoritative guidance in ASC
Topic 810 to clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary.
The new authoritative guidance in ASC Topic 810 was effective for fiscal year’s
beginning on or after December 15, 2008. The adoption of the new authoritative
guidance in ASC Topic 810 as of January 1, 2009 did not have a significant
effect on the Company’s consolidated financial statements.
Further
new authoritative accounting guidance under ASC Topic 810 amends prior guidance
to change how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. The determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. The new authoritative accounting
guidance requires additional disclosures about the reporting entity’s
involvement with variable-interest entities and any significant changes in risk
exposure due to that involvement as well as its effect on the entity’s financial
statements. The new authoritative accounting guidance under ASC Topic 810 will
be effective January 1, 2010 and is not expected to have a significant impact on
the Company’s consolidated financial statements.
In March
2008, the FASB issued new authoritative guidance under ASC Topic 815,
“Derivatives and Hedging”. ASC Topic 815 requires disclosure regarding an
entity’s derivative instruments and hedging activities. Expanded qualitative
disclosure that is required under ASC Topic 815 includes: (1) how and why an
entity uses derivative instruments; (2) how derivative instruments and related
hedged items are accounted for under ASC Topic 815, and (3) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. The new authoritative guidance in ASC
Topic 815 also requires several added quantitative disclosures in financial
statements. The new authoritative guidance in ASC Topic 815 became effective for
the Company on January 1, 2009 and did not have a significant effect on the
Company’s consolidated financial statements.
81
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
In April
2009, the FASB issued new authoritative guidance under the following three ASC’s
intended to provide additional guidance and enhance disclosures regarding fair
value measurements and impairment of securities:
ASC Topic
320, “Investments—Debt and Equity Securities”, includes new authoritative
accounting guidance which (i) changes existing guidance for determining whether
an impairment is other-than-temporary to debt securities and (ii) replaces the
existing requirement that the entity’s management assert that it has both the
intent and ability to hold an impaired security until recovery with a
requirement that management assert: (a) it does not have the intent to sell the
security; and (b) it is more likely than not that it will not have to sell the
security before recovery of its cost basis. Under ASC Topic 320, declines in the
fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other-than-temporary are reflected in earnings as
realized losses to the extent the impairment is related to credit
losses. The amount of the impairment related to other factors is
recognized in other comprehensive income or loss. The Company adopted
the provisions of the new authoritative accounting guidance under ASC Topic 320
during the interim period ended March 31, 2009. Adoption of the new
guidance did not significantly impact the Company’s consolidated financial
statements.
ASC Topic
820, “Fair Value Measurements and Disclosures,” provides additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have decreased significantly. ASC Topic 820 also provides
guidance on identifying circumstances that indicate a transaction is not
orderly. The revised provisions of ASC Topic 820 were effective for the
period ended March 31, 2009 and did not have a significant effect on the
Company’s consolidated financial statements.
Further
new authoritative accounting guidance (ASU No. 2009-5) under ASC Topic 820
provides guidance for measuring the fair value of a liability in circumstances
in which a quoted price in an active market for the identical liability is not
available. In such instances, a reporting entity is required to measure fair
value utilizing a valuation technique that uses (i) the quoted price of the
identical liability when traded as an asset, (ii) quoted prices for similar
liabilities or similar liabilities when traded as assets, or (iii) another
valuation technique that is consistent with the existing principles of ASC Topic
820, such as an income approach or market approach. The new authoritative
accounting guidance also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. The forgoing new authoritative
accounting guidance under ASC Topic 820 became effective for the Company’s
financial statements for periods ending after October 1, 2009 and did not have a
significant impact on the Company’s consolidated financial
statements.
ASC Topic
825, “Financial Instruments,” requires disclosures
about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in
annual financial statements. The provisions of the new authoritative
guidance in ASC Topic 825 were effective for the Company’s interim period ended
on June 30, 2009, and did not have a significant effect on the Company’s
consolidated financial statements.
In May
2009, the FASB issued new authoritative guidance under ASC Topic 855 (formerly
Statement No. 165) “Subsequent Events.” ASC Topic 855 was effective
June 30, 2009 and established general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular, this
guidance sets forth (i) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements; (ii)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and (iii)
the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This topic does not apply to subsequent
events or transactions that are within the scope of other applicable GAAP
that provide different guidance on the accounting treatment for subsequent
events or transactions. This Topic applies to both interim financial statements
and annual financial statements. The adoption of the new authoritative guidance
in ASC Topic 855 as of June 30, 2009 did not have a significant effect on the
Company’s consolidated financial statements.
82
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
In June
2009, the FASB issued new authoritative guidance under ASC Topic 860, “Transfers
and Servicing,” to enhance reporting about transfers of financial assets,
including securitizations, and where companies have continuing exposure to the
risks related to transferred financial assets. ASC Topic 860 eliminates the
concept of a “qualifying special-purpose entity” and changes the requirements
for derecognizing financial assets. ASC Topic 860 also requires additional
disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the
period. The new authoritative guidance in ASC Topic 860 became effective
January 1, 2010 and is not expected to have a significant impact on the
Company’s future consolidated financial statements.
2. Going
concern
The going
concern assumption is a fundamental principle in the preparation of financial
statements. It is the responsibility of management to assess the
Company's ability to continue as a going concern. In assessing this
assumption, management has taken into account all available information about
the future, which is at least, but is not limited to, twelve months from the
balance sheet date of December 31, 2009. The consolidated financial
statements have been prepared based upon management’s judgment that the Company
will continue as a going concern, which contemplates the realization of assets
and the discharge of liabilities in the normal course of business. Accordingly,
the consolidated financial statements do not include any adjustments to reflect
the possible future effects that may result from the outcome of various
uncertainties as discussed below.
The
effects of the severe economic contraction caused the Company to incur net
losses of $114,829 and $134,566, for the years ended December 31, 2009 and 2008,
respectively. The 2008 net loss included a non-cash goodwill
impairment charge of $105,047. The Company and the Bank do not
currently meet the definition of an “adequately capitalized institution” and are
thus operating under significant regulatory restrictions including a requirement
to achieve certain capital requirements, enhance liquidity and improve the
credit quality of the Bank’s assets (see Note 21). In response, the
Company has implemented plans to meet the requirements of the August 27, 2009
agreement with the FDIC, its principal federal banking regulator, and the DFCS
(the Order) which requires the Bank to take certain measures to improve its
safety and soundness including an ongoing effort to raise
capital. Additional plans and actions to preserve existing capital
and to conserve liquidity include (1) improve asset quality and reduce non
performing asset totals; (2) reduce loan portfolio totals and thereby reduce
required capital; (3) retain core deposits while reducing brokered deposits; and
(4) continued reduction of discretionary expenses.
With
respect to its efforts to raise capital, in October 2009, the Company entered
into agreements with private investors who committed to invest $65,000 into the
Company on certain conditions. One condition was that the Company raise an
additional $93,000 such that the net aggregate capital raised (after costs)
would be at least $150,000. In early December 2009, the Company
launched a public offering to meet this condition. However, the public offering
was withdrawn in late December 2009 due to the inability to fill the minimums
required in the offering. Despite the offering setback, the $65,000 million
private equity commitments were extended through May 31, 2010 to allow the
Company time to pursue additional private or public capital. The Company is
presently in the process of discussions with several qualified private investors
regarding the additional capital. Although management is aggressively
pursuing additional capital, it is presently uncertain whether the Company will
be successful in these efforts.
83
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
During
2009, the Company has reduced its level of nonperforming assets. This
has been accomplished through sale, disposition, resolution and/or charge-off of
such assets. Management believes it has taken appropriate action to
charge-off or reserve estimated losses on loans on a timely basis, and expects
that the 2010 level of loan loss provision and net charge-offs should be
significantly lower as compared to 2009. The Company intends to
continue the actions that have led to improved credit quality but it is
presently uncertain whether the Company will be successful in these
efforts.
Under the
Order, the Bank may not generate or renew brokered
deposits. Accordingly, it has focused on maintaining its core deposit
base to help assure sufficient liquidity. Core deposits as of December 31, 2009
totaled $1,535 as compared to $1,446 as of December 31, 2008. This
stabilization was achieved by attracting and retaining business, public and
retail customers while minimizing uninsured deposit amounts. Brokered deposits
have been decreasing as they mature in compliance with the
Order. While the deposit environment remains challenging, the Company
intends to continue actions to manage its core deposits but it is presently
uncertain whether the Company will be successful in these efforts.
As
discussed above, based upon its plans and expectations management believes the
Company has sufficient capital and liquidity to achieve realization of assets
and the discharge of liabilities in the normal course of
business. However, uncertainties exist as to future economic
conditions and regulatory actions, and the successful implementation of plans to
improve the Company’s financial condition and meet the requirements of the
Order. These uncertainties raise doubt about the Company’s ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the lack of success in
implementing the Company’s plans or the occurrence of other events that could
adversely affect the Company’s condition or operations.
|
By
regulation, the Bank must meet reserve requirements as established by the
FRB (approximately $5,066 and $9,993 at December 31, 2009 and 2008,
respectively). Accordingly, the Bank complies with such
requirements by holding cash and maintaining average reserve balances with
the FRB in accordance with such
regulations.
|
4.
|
Investment
securities
|
|
Investment
securities at December 31, 2009 and 2008 consisted of the
following:
|
84
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Gross
|
Gross
|
|||||||||||||||
Amortized
|
unrealized
|
unrealized
|
Estimated
|
|||||||||||||
cost
|
gains
|
losses
|
fair value
|
|||||||||||||
2009
|
||||||||||||||||
Available-for-sale
|
||||||||||||||||
U.S.
Agency and non-agency mortgage-backed
|
||||||||||||||||
securities
(MBS)
|
$ | 114,560 | $ | 2,793 | $ | 714 | $ | 116,639 | ||||||||
U.S.
Government and agency securities
|
7,500 | - | 19 | 7,481 | ||||||||||||
Obligations
of state and political subdivisions
|
1,478 | 120 | - | 1,598 | ||||||||||||
U.S.
Agency asset-backed securities
|
7,108 | 478 | - | 7,586 | ||||||||||||
Mutual
fund
|
440 | 11 | - | 451 | ||||||||||||
$ | 131,086 | $ | 3,402 | $ | 733 | $ | 133,755 | |||||||||
Held-to-maturity
|
||||||||||||||||
Obligations
of state and political subdivisions
|
$ | 2,008 | $ | 135 | $ | - | $ | 2,143 |
Gross
|
Gross
|
|||||||||||||||
Amortized
|
unrealized
|
unrealized
|
Estimated
|
|||||||||||||
cost
|
gains
|
losses
|
fair value
|
|||||||||||||
2008
|
||||||||||||||||
Available-for-sale
|
||||||||||||||||
U.S.
Agency and non-agency MBS
|
$ | 94,292 | $ | 607 | $ | 1,365 | $ | 93,534 | ||||||||
U.S.
Government and agency securities
|
8,273 | 453 | - | 8,726 | ||||||||||||
Obligations
of state and political subdivisions
|
1,503 | 32 | 5 | 1,530 | ||||||||||||
U.S.
Agency asset-backed securities
|
3,193 | 67 | - | 3,260 | ||||||||||||
Mutual
fund
|
423 | 7 | - | 430 | ||||||||||||
$ | 107,684 | $ | 1,166 | $ | 1,370 | $ | 107,480 | |||||||||
Held-to-maturity
|
||||||||||||||||
Obligations
of state and political subdivisions
|
$ | 2,211 | $ | 36 | $ | - | $ | 2,247 |
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, 2009 and 2008:
85
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Less than 12 months
|
12 months or more
|
Total
|
||||||||||||||||||||||
Estimated
fair value
|
Unrealized
losses
|
Estimated
fair value
|
Unrealized
losses
|
Estimated
fair value
|
Unrealized
losses
|
|||||||||||||||||||
2009
|
||||||||||||||||||||||||
U.S.
Agency and non-agency MBS
|
$ | 22,931 | $ | 690 | $ | 2,581 | $ | 24 | $ | 25,512 | $ | 714 | ||||||||||||
U.S.
Government and
|
||||||||||||||||||||||||
agency
securities
|
7,481 | 19 | - | - | 7,481 | 19 | ||||||||||||||||||
$ | 30,412 | $ | 709 | $ | 2,581 | $ | 24 | $ | 32,993 | $ | 733 | |||||||||||||
2008
|
||||||||||||||||||||||||
U.S.
Agency and non-agency MBS
|
$ | 56,029 | $ | 1,362 | $ | 183 | $ | 3 | $ | 56,212 | $ | 1,365 | ||||||||||||
Obligations
of state and
|
||||||||||||||||||||||||
political
subdivisions
|
295 | 5 | - | - | 295 | 5 | ||||||||||||||||||
$ | 56,324 | $ | 1,367 | $ | 183 | $ | 3 | $ | 56,507 | $ | 1,370 |
The
unrealized losses on U.S. Agency and non-agency MBS investments are primarily
due to widening of interest rate spreads at December 31, 2009 and 2008 as
compared to yields/spread relationships prevailing at the time specific
investment securities were purchased. Management expects the fair
value of these investment securities to recover as market volatility lessens,
and/or as securities approach their maturity dates. Accordingly,
management does not believe that the above gross unrealized losses on investment
securities are other-than-temporary. Accordingly, no impairment
adjustments have been recorded for the years ended December 31, 2009 and
2008.
|
Management
of the Company has the intent and ability 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, 2009, management
does 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.
|
|
The
amortized cost and estimated fair value of investment securities at
December 31, 2009, by contractual maturity, are shown
below. 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.
|
86
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Estimated
|
||||||||
Amortized
|
fair
|
|||||||
Available-for-sale
|
cost
|
value
|
||||||
Due
one year or less
|
$ | 1,308 | $ | 1,336 | ||||
Due
after one year through five years
|
1,195 | 1,267 | ||||||
Due
after five years through ten years
|
9,257 | 9,358 | ||||||
Due
after ten years
|
118,886 | 121,343 | ||||||
Mutual
fund
|
440 | 451 | ||||||
$ | 131,086 | $ | 133,755 | |||||
Held-to-maturity
|
||||||||
Due
one year or less
|
$ | 200 | $ | 202 | ||||
Due
after one year through five years
|
1,611 | 1,726 | ||||||
Due
after five years through ten years
|
197 | 215 | ||||||
$ | 2,008 | $ | 2,143 |
|
Investment
securities with a carrying value of approximately $85,457 and $109,293 at
December 31, 2009 and 2008, respectively, were pledged to secure
public deposits, customer repurchase agreements (at December 31, 2008
only) and for other purposes as required or permitted by
law.
|
|
The
Company had no gross realized losses on sales of investment securities
during the years ended December 31, 2009, 2008 and 2007. Gross realized
gains on sales of investment securities during the years ended December
31, 2009, 2008 and 2007 are as disclosed in the accompanying consolidated
statements of operations.
|
5.
|
Loans
|
|
Loans
at December 31, 2009 and 2008 consisted of the
following:
|
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Commercial
|
$ | 420,155 | $ | 582,831 | ||||
Real
Estate:
|
||||||||
Construction/lot
|
308,346 | 517,721 | ||||||
Mortgage
|
93,465 | 96,248 | ||||||
Commercial
|
675,728 | 703,149 | ||||||
Consumer
|
49,982 | 56,235 | ||||||
Total
loans
|
1,547,676 | 1,956,184 | ||||||
Less
reserve for loan losses
|
58,586 | 47,166 | ||||||
Loans,
net
|
$ | 1,489,090 | $ | 1,909,018 |
Included
in mortgage loans at December 31, 2009 and 2008 were approximately $411 and
$1,416, respectively, in mortgage loans held for sale. In addition, the above
loans are net of deferred loan fees of approximately $3,281 and $4,697 at
December 31, 2009 and 2008, respectively.
A
substantial portion of the Bank’s loans are collateralized by real estate in
four major markets (Central, Southern and Northwest Oregon, as well as the
Boise, Idaho area), and, accordingly, the ultimate collectability of a
substantial portion of the Bank’s loan portfolio is susceptible to changes in
the local economic conditions in such markets.
87
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
In the
normal course of business, the Bank participates portions of loans to
third-parties in order to extend the Bank’s lending capability or to mitigate
risk. At December 31, 2009 and 2008, the portion of these loans
participated to third-parties (which are not included in the accompanying
consolidated financial statements) totaled approximately $61,327 and $46,432,
respectively.
6.
|
Reserve for credit
losses
|
|
Transactions
in the reserve for loan losses and unfunded loan commitments for the years
ended December 31, 2009, 2008 and 2007 were as
follows:
|
Reserve for loan losses
|
2009
|
2008
|
2007
|
|||||||||
(Restated)
|
||||||||||||
Balance
at beginning of year
|
$ | 47,166 | $ | 33,875 | $ | 23,585 | ||||||
Loan
loss provision
|
134,000 | 99,593 | 19,400 | |||||||||
Recoveries
|
3,745 | 1,980 | 1,290 | |||||||||
Loans
charged off
|
(126,325 | ) | (88,282 | ) | (10,400 | ) | ||||||
Balance
at end of year
|
$ | 58,586 | $ | 47,166 | $ | 33,875 | ||||||
Reserve
for unfunded loan commitments
|
||||||||||||
Balance
at beginning of year
|
$ | 1,039 | $ | 3,163 | $ | 3,213 | ||||||
Credit
for unfunded loan commitments
|
(335 | ) | (2,124 | ) | (50 | ) | ||||||
Balance
at end of year
|
$ | 704 | $ | 1,039 | $ | 3,163 | ||||||
Reserve
for credit losses
|
||||||||||||
Reserve
for loan losses
|
$ | 58,586 | $ | 47,166 | $ | 33,875 | ||||||
Reserve
for unfunded loan commitments
|
704 | 1,039 | 3,163 | |||||||||
Total
reserve for credit losses
|
$ | 59,290 | $ | 48,205 | $ | 37,038 |
At
December 31, 2009, the Bank had approximately $288,749 in outstanding
commitments to extend credit, compared to approximately $514,605 at December 31,
2008. During 2009 and 2008, the Company reduced its estimated
reserves for unfunded commitments by $335 and $2,124, respectively, as a result
of declining outstanding commitments and lower estimated funding
rates.
The
Bank’s operations, like those of other financial institutions operating in the
Bank’s market, are significantly influenced by various economic conditions
including local economies, the strength of the real estate market and the fiscal
and regulatory policies of the federal and state government and the regulatory
authorities that govern financial institutions. Approximately 70% of
the Bank’s loan portfolio at December 31, 2009 consisted of real estate-related
loans, including construction and development loans, commercial real estate
mortgage loans and commercial loans secured by commercial real
estate. There has been a significant slow-down in the real estate
markets due to negative economic trends and credit market disruption, the
impacts of which are not yet completely known or
quantified. Recently, there have been tighter credit underwriting and
higher premiums on liquidity, both of which may continue to place downward
pressure on real estate values. Any further downturn in the real
estate markets could materially and adversely affect the Bank’s business because
a significant portion of the Bank’s loans are secured by real
estate. The Bank’s ability to recover on defaulted loans by selling
the real estate collateral would then be diminished and the Bank would be more
likely to suffer losses on defaulted loans. Consequently, the Bank’s
results of operations and financial condition are dependent upon the general
trends in the economy, and in particular, the residential and commercial real
estate markets. If there is a further decline in real estate values,
the collateral for the Bank’s loans would provide less security. Real
estate values could be affected by, among other things, a worsening of economic
conditions, an increase in foreclosures, a decline in home sale volumes, and an
increase in interest rates. Further, 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
given a sustained weakness or a weakening 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 nonperforming assets, net charge-offs
and loan loss provision.
88
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Loans on
nonaccrual status at December 31, 2009 and 2008 were approximately $132,110 and
$120,468, respectively. Interest income which would have been realized on such
nonaccrual loans outstanding at year-end, if they had remained current, was
approximately $9,177, $4,953, and $1,307 for the years ended December 31, 2009,
2008, and 2007, respectively.
Loans
contractually past due 90 days or more on which the Company continued to
accrue interest were insignificant at December 31, 2009 and 2008.
Total
impaired loans as of December 31, 2009 and 2008 were as follows:
2009
|
2008
|
|||||||
Impaired
loans with an associated allowance
|
$ | 114,039 | $ | 120,468 | ||||
Impaired
loans without an associated allowance
|
33,543 | - | ||||||
Total
recorded investment in impaired loans
|
$ | 147,582 | $ | 120,468 | ||||
Amount
of the reserve for loan losses allocated to impaired loans
|
$ | 106 | $ | 2,699 |
The
average recorded investment in impaired loans was approximately $156,748 and
$86,332 for the years ended December 31, 2009 and 2008, respectively. Interest
income recognized for cash payments received on impaired loans for the years
ended December 31, 2009, 2008, and 2007 was insignificant.
At
December 31, 2009, the Company had remaining commitments to lend of $328 related
to loans accounted for as troubled debt restructurings (TDRs). The
Company had no TDRs at December 31, 2008.
The
following tables present information with respect to non-performing assets at
December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Loans
on nonaccrual status
|
$ | 132,110 | $ | 120,468 | ||||
Loans
past due 90 days or more but not on nonaccrual status
|
- | 5 | ||||||
OREO
|
29,609 | 52,727 | ||||||
Total
non-performing assets
|
$ | 161,719 | $ | 173,200 |
89
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
7.
|
Mortgage banking
activities
|
The Bank
sells a predominant share of the mortgage loans it originates into the secondary
market. However, it retained the right to service loans
sold to the Federal National Mortgage Association (FNMA) with principal balances
totaling approximately $543,000, $512,000 and $494,000 as of
December 31, 2009, 2008 and 2007, respectively. These balances
are not included in the accompanying consolidated balance sheets. The
sales of these mortgage loans are subject to technical underwriting requirements
and related repurchase risks. However, as of December 31, 2009
and 2008, management is not aware of any mortgage loans which will have to be
repurchased.
Mortgage
loans held for sale are carried at the lower of cost or estimated market
value. Market value is determined on an aggregate loan
basis. At December 31, 2009 and 2008, mortgage loans held for
sale were carried at cost, which was less than the estimated market
value.
On
November 13, 2009, FNMA informed the Bank that – as a result of the Bank’s
capital ratios falling below contractual requirements – the Bank no longer
qualified as a FNMA designated mortgage loan seller or servicer and the Bank had
until December 31, 2009 to improve its capital ratios to meet FNMA’s
requirements. As of December 31, 2009, the Bank had not met such
requirements, and, accordingly, FNMA has terminated the Bank’s rights to
originate and sell mortgage loans directly to FNMA. In addition, FNMA
now is in the process of terminating its mortgage servicing agreement with the
Bank, upon which occurrence the Bank would no longer be allowed to service FNMA
loans. Management is in the process of discussing such issues with FNMA and
has been evaluating the prospective impact of this development. Possible
outcomes include a reduction of the Company’s mortgage banking and mortgage
servicing revenues in the future and sale or forced transfer of its mortgage
servicing business to a third-party by FNMA. As a result of the actions by FNMA,
the Company anticipates that the majority of mortgage loans originated in future
periods will be sold to other third-parties and that the Bank will not retain
servicing rights. The Company expects that this may result in a
significant decrease to future net mortgage servicing
income. Management believes that under the circumstances, FNMA will
provide the Company with sufficient time to accomplish an orderly disposition of
its MSRs. However, there can be no assurance that FNMA will provide
for an orderly process nor that a reduction of mortgage banking revenues or
possible impairment of MSRs will not occur. Because the estimated fair value of
the Company’s MSRs exceeds book value at December 31, 2009, and because
management believes it is unlikely FNMA will preemptively transfer the Company’s
MSRs to a third-party, no impairment adjustment has been made in connection with
this issue as of December 31, 2009. In addition, no valuation allowance for MSRs
was recorded as of December 31, 2008 and 2007.
Transactions
in the Company’s MSRs for the years ended December 31, 2009, 2008 and 2007
were as follows:
2009
|
2008
|
2007
|
||||||||||
Balance
at beginning of year
|
$ | 3,605 | $ | 3,756 | $ | 4,096 | ||||||
Additions
|
1,873 | 989 | 839 | |||||||||
Amortization
|
(1,531 | ) | (1,140 | ) | (1,179 | ) | ||||||
Balance
at end of year
|
$ | 3,947 | $ | 3,605 | $ | 3,756 |
The
Company analyzes its MSRs by underlying loan type and interest rate (primarily
fixed and adjustable). The estimated fair values are obtained through
a independent third-party valuations, utilizing future cash flows which
incorporate numerous assumptions including servicing income, servicing costs,
market discount rates, prepayment speeds, default rates and other market-driven
data. Additional adjustments may be made for other factors not
directly related to the underlying cash flows of the mortgage servicing
portfolio, as described below, Accordingly, changes in such
assumptions could significantly affect the estimated fair values of the
Company’s MSRs.
90
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
At
December 31, 2009 and 2008, the estimated fair value of the Company’s MSRs was
approximately $4,229 and $4,572, respectively. As previously
discussed, the Bank is in the process of attempting to sell its
MSRs. Accordingly, at December 31, 2009, the fair value of MSRs was
estimated using the average of two discounted cash flow analyses calculated by
3rd-party
valuation experts, less estimated broker fees and other estimated costs of
disposition. The key assumptions used in estimating the fair value of MSRs at
December 31, 2008 included weighted-average mortgage prepayment rates of
approximately 318% for the first year, 258% for the second year and 219%
thereafter. A discount rate of 10% was applied in 2008.
Mortgage
banking income, net, consisted of the following for the years ended
December 31, 2009, 2008 and 2007:
2009
|
2008
|
2007
|
||||||||||
Origination
and processing fees
|
$ | 1,951 | $ | 1,363 | $ | 1,744 | ||||||
Gains
on sales of mortgage loans, net
|
1,054 | 583 | 898 | |||||||||
Servicing
fees
|
1,353 | 1,294 | 1,267 | |||||||||
Amortization
|
(1,531 | ) | (1,140 | ) | (1,179 | ) | ||||||
Mortgage
banking income, net
|
$ | 2,827 | $ | 2,100 | $ | 2,730 |
8. Premises and
equipment
|
Premises
and equipment at December 31, 2009 and 2008 consisted of the
following:
|
2009
|
2008
|
|||||||
Land
|
$ | 9,148 | $ | 9,237 | ||||
Buildings
and leasehold improvements
|
30,420 | 30,796 | ||||||
Furniture
and equipment
|
15,094 | 14,684 | ||||||
54,662 | 54,717 | |||||||
Less
accumulated depreciation and amortization
|
17,295 | 15,212 | ||||||
37,367 | 39,505 | |||||||
Construction
in progress
|
- | 258 | ||||||
Premises
and equipment, net
|
$ | 37,367 | $ | 39,763 |
9. Core deposit intangibles
(CDI)
Net
unamortized CDI totaled $6,388 and $7,921 at December 31, 2009 and 2008,
respectively. Amortization expense related to the CDI during the years ended
December 31, 2009, 2008 and 2007 totaled $1,533, $1,581 and $1,580,
respectively.
At
December 31, 2009, the forecasted CDI annual amortization expense for each of
the next five years is as follows:
2010
|
$ | 1,476 | ||
2011
|
1,476 | |||
2012
|
1,476 | |||
2013
|
1,476 | |||
2014
|
484 | |||
$ | 6,388 |
91
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
10. OREO
Transactions
in the Company’s OREO for the years ended December 31, 2009, 2008 and 2007 were
as follows:
2009
|
2008
|
2007
|
||||||||||
(Restated)
|
||||||||||||
Balance
at beginning of year
|
$ | 52,727 | $ | 9,765 | $ | 326 | ||||||
Additions
|
26,059 | 55,760 | 11,651 | |||||||||
Dispositions
|
(49,036 | ) | (7,458 | ) | (2,212 | ) | ||||||
Change
in valuation allowance
|
(890 | ) | (5,340 | ) | - | |||||||
Balances
at end of year
|
$ | 28,860 | $ | 52,727 | $ | 9,765 |
OREO
valuation adjustments have been recorded on certain OREO properties in 2009 and
2008. These expenses are included in OREO expense in the accompanying 2009 and
2008 consolidated statements of operations.
The
following table summarizes activity in the OREO valuation allowance for the
years ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Balance
at beginning of year
|
$ | 5,340 | $ | - | ||||
Additions
to the valuation allowance
|
17,981 | 5,460 | ||||||
Reductions
due to sales of OREO
|
(17,091 | ) | (120 | ) | ||||
Balance
at end of year
|
$ | 6,230 | $ | 5,340 |
OREO
expenses for the year ended December 31, 2009 consisted of $1,655 of OREO
operating costs, $3,504 of losses on dispositions of OREO, and $17,981 of
valuation allowances. OREO expenses for the year ended December 31,
2008 primarily consisted of $2,742 of OREO operating costs and $5,460 of
valuation allowances. OREO expenses for the year ended December 31,
2007 were insignificant.
11.
|
Time
deposits
|
|
Time
deposits in amounts of $100,000 or more aggregated approximately $280,000
and $349,000 at December 31, 2009 and 2008,
respectively.
|
|
At
December 31, 2009, the scheduled annual maturities of all time
deposits were approximately as
follows:
|
2010
|
$ | 419,485 | ||
2011
|
91,950 | |||
2012
|
44,323 | |||
2013
|
22,318 | |||
2014
|
1,543 | |||
Thereafter
|
15,138 | |||
$ | 594,757 |
92
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Included
in the total time deposits are national market brokered time deposits that were
part of the Company’s wholesale funding strategies in 2008. Also, the Bank
utilizes the Certificate of Deposit Registry Program (CDARS™) to
meet the needs of certain customers whose investment policies may necessitate or
require FDIC insurance. At December 31, 2009 and 2008, brokered time
deposits were $116,476 and $147,900, respectively, and CDARS deposits totaled
$47,287 and $168,246, respectively. The Company is restricted from
renewing any brokered deposits under terms of the Order (see Note
21).
In
addition, the Bank’s internet listing service deposits at December 31, 2009 and
2008 totaled $195,077 and $740, respectively, and are included in the above
total time deposits. Such deposits are generated by posting time
deposit rates on an internet site where institutions seeking to deploy funds
contact the Bank directly to open a deposit account.
12.
|
Junior subordinated
debentures
|
The
Company has established four subsidiary grantor trusts for the purpose of
issuing trust preferred securities (TPS) and common securities. The common
securities were purchased by the Company, and the Company’s investment in the
common securities of $2,058 at both December 31, 2009 and 2008, is included in
accrued interest and other assets in the accompanying consolidated balance
sheets.
The
interest on TPS may be deferred at the sole determination of the
issuer. Under such circumstances, the Company would continue to
accrue interest but not make payments on the TPS. On April 27, 2009,
the Company’s Board of Directors (the Board) elected to defer payment of
interest on TPS until such time as resumption is deemed
appropriate. Accrued interest on the TPS at December 31, 2009 was
$1,704, and is included in accrued interest and other liabilities in the
accompanying 2009 consolidated balance sheet.
The TPS
are subordinated to any other borrowings of the Company, and no principal
payments are required until the related maturity dates (unless conditions are
met as described below). The significant terms of each individual trust are as
follows:
Junior
|
Effective rate at
|
||||||||||||||
Issuance
|
Maturity
|
subordinated
|
Interest
|
December 31,
|
|||||||||||
Issuance
Trust
|
date
|
date
|
debentures (A)
|
rate
|
2009
|
||||||||||
3-month
|
|||||||||||||||
LIBOR
|
|||||||||||||||
Cascade
Bancorp Trust I (D)
|
12/31/2004
|
3/15/2035
|
$ | 20,619 | + 1.80 | % (C) | 2.054 | % | |||||||
Cascade
Bancorp Statutory Trust II (E)
|
3/31/2006
|
6/15/2036
|
13,660 | 6.619 | % (B) | 6.619 | % | ||||||||
3-month
|
|||||||||||||||
LIBOR
|
|||||||||||||||
Cascade
Bancorp Statutory Trust III (E)
|
3/31/2006
|
6/15/2036
|
13,660 | + 1.33 | % (C) | 1.584 | % | ||||||||
3-month
|
|||||||||||||||
LIBOR
|
|||||||||||||||
Cascade
Bancorp Statutory Trust IV (F)
|
6/29/2006
|
9/15/2036
|
20,619 | + 1.54 | % (C) | 1.794 | % | ||||||||
Weighted-
|
|||||||||||||||
Totals
|
$ | 68,558 |
average
rate
|
2.792 | % |
93
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
|
(A)
|
The
Junior Subordinated Debentures (Debentures) were issued with substantially
the same terms as the TPS and are the sole assets of the related trusts.
The Company's obligations under the Debentures and related agreements,
taken together, constitute a full and irrevocable guarantee by the Company
of the obligations of the trusts.
|
|
(B)
|
The
Debentures bear a fixed quarterly interest rate for 20 quarters, at which
time the rate begins to float on a quarterly basis based on the
three-month London Inter-Bank Offered Rate (LIBOR) plus 1.33% thereafter
until maturity.
|
|
(C)
|
The
three-month LIBOR in effect as of December 31, 2009 was
0.25363%.
|
|
(D)
|
The
TPS may be called by the Company at par at any time subsequent to March
15, 2010 and may be redeemed earlier upon the occurrence of certain events
that impact the income tax or the regulatory capital treatment of the
TPS.
|
|
(E)
|
The
TPS may be called by the Company at par at any time subsequent to June 15,
2011 and may be redeemed earlier upon the occurrence of certain events
that impact the income tax or the regulatory capital treatment of the
TPS.
|
|
(F)
|
The
TPS may be called by the Company at par at any time subsequent to
September 15, 2011 and may be redeemed earlier upon the occurrence of
certain events that impact the income tax or the regulatory capital
treatment of the TPS.
|
In
accordance with industry practice, the Company’s liability for the common
securities has been included with the Debentures in the accompanying
consolidated balance sheets. Management believes that at December 31, 2009, the
TPS meet applicable regulatory guidelines to qualify as Tier I capital in the
amount of $14.5 million and Tier 2 capital in the amount of $32.5
million. At December 31, 2008, the TPS met applicable regulatory
guidelines to qualify as Tier I capital and Tier 2 capital in the amounts of
$43.5 million and $23.0 million, respectively (see Note 21).
13.
|
Other
borrowings
|
The Bank
is a member of the FHLB. As a member, the Bank has a committed 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, 2009, the Bank had outstanding borrowings under the committed lines of
credit totaling $195,000 ($128,457 at December 31, 2008) of which $90,000 was at
fixed interest at rates ranging from 2.29% to 3.71% and of which $105,000 was at
variable interest rates ranging from 0.56% to 1.16%. In addition, at
December 31, 2009, the Bank has a total of $138,000 in letters of credit issued
by FHLB which are pledged to collateralize Oregon public deposits held by the
Bank. 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
loans. At December 31, 2009, the Bank had remaining available
maximum borrowings from the FHLB of approximately $418,578, given availability
and sufficiency of eligible collateral. At December 31, 2009, the Bank had
$8,868 in available borrowings from the FHLB based on existing collateral that
had been pledged to the FHLB, and had additional collateral with which to pledge
for borrowings totaling approximately $341,868. There can be no assurance that
future advances will be allowed by the FHLB based upon the condition of the Bank
(see Notes 2 and 21).
|
At
December 31, 2009, the contractual maturities of the Bank’s FHLB
borrowings outstanding were approximately as
follows:
|
2011
|
$ | 50,000 | ||
2012
|
85,000 | |||
2013
|
- | |||
2014
|
10,000 | |||
2015
|
25,000 | |||
Thereafter
|
25,000 | |||
$ | 195,000 |
94
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
In
December 2009, the Company elected to repay FHLB advances totaling approximately
$48,500 (with maturities ranging from September 2010 to May 2025, and rates
ranging from 1.87% to 6.62%) and receive two advances from the FHLB totaling
$20,000 each. These advances mature in December 2011 and June 2012 at
interest rates of one-month LIBOR plus a margin of 0.33% and prime minus a
margin of 2.45%, respectively. In connection with the early repayment of the
advances, the Company incurred prepayment penalties totaling
$2,081.
|
At
December 31, 2009, the Bank had approximately $83,383 in available
short-term borrowings from the FRB, collateralized by certain of the
Bank’s loans and securities. Such available borrowings include
participation in the Treasury Tax and Loan (TT&L) program of the
federal government, with access to this funding source limited to $300 and
fully at the discretion of the U.S. Treasury. Of the total
available FRB borrowings, at December 31, 2009, the Bank had approximately
$207 ($120,518 at December 31, 2008) in total borrowings outstanding from
the FRB. FRB borrowings at December 31, 2009 consisted of
TT&L overnight borrowings at an interest rate of
0.25%.
|
At
December 31, 2009, the Bank had $41,000 of senior unsecured debt issued in
connection with the FDIC’s Temporary Liquidity Guarantee Program (TLGP) maturing
February 12, 2012 bearing a weighted-average rate of 2.00%, exclusive of net
issuance costs and 1% per annum FDIC insurance assessment applicable to TLGP
debt which are being amortized on a straight line basis over the term of the
debt.
14.
|
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, 2009 and 2008, the Bank had no material commitments to extend
credit at below-market interest rates and held no significant derivative
financial instruments.
|
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 Company 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 at December 31, 2009 and
2008 is approximately as follows:
2009
|
2008
|
|||||||
Commitments
to extend credit
|
$ | 253,362 | $ | 465,500 | ||||
Commitments
under credit card lines of credit
|
28,455 | 30,522 | ||||||
Standby
letters of credit
|
6,932 | 18,583 | ||||||
Total
off-balance sheet financial instruments
|
$ | 288,749 | $ | 514,605 |
95
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
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,
2009 and 2008, 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. The Bank also has certain lending commitments
for conforming residential mortgage loans to be sold into the secondary market
which are considered derivative instruments under GAAP. However, in
the opinion of management, such derivative amounts are not significant, and,
therefore, no derivative assets or liabilities are recorded in 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, 2009, 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:
2010
|
$ | 1,813 | ||
2011
|
1,684 | |||
2012
|
1,617 | |||
2013
|
1,443 | |||
2014
|
1,091 | |||
Thereafter
|
6,086 | |||
$ | 13,734 |
Total
rental expense was approximately $2,395, $2,528 and $2,309 in 2009, 2008 and
2007, respectively.
96
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
|
Litigation
|
In the
ordinary course of business, the Bank becomes involved in various litigation
arising from normal banking activities, including numerous matters related to
loan collections and foreclosures. In the opinion of management, the
ultimate disposition of these legal actions will not have a material adverse
effect on the Company’s consolidated financial statements as of and for the year
ended December 31, 2009.
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, the assessment attributable to all public depositories is allocated
on a pro rata basis in proportion to the maximum liability of each public
depository as it existed on the date of loss. The Bank has pledged a letter of
credit issued by FHLB which collateralizes public deposits not otherwise insured
by FDIC. At December 31, 2009 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.
15.
|
Income
taxes
|
The
provision (credit) for income taxes for the years ended December 31, 2009, 2008
and 2007 was approximately as follows:
2009
|
2008
|
2007
|
||||||||||
Current:
|
||||||||||||
Federal
|
$ | (42,113 | ) | $ | (11,915 | ) | $ | 20,682 | ||||
State
|
360 | 479 | 3,915 | |||||||||
(41,753 | ) | (11,436 | ) | 24,597 | ||||||||
Deferred
|
22,168 | (11,870 | ) | (6,841 | ) | |||||||
Provision
(credit) for income taxes
|
$ | (19,585 | ) | $ | (23,306 | ) | $ | 17,756 |
The
provision (credit) for income taxes results in effective tax rates which are
different than the federal income tax statutory rate. The nature of
the differences for the years ended December 31, 2009, 2008, and 2007 were
approximately as follows:
97
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
2009
|
2008
|
2007
|
||||||||||
(Restated)
|
||||||||||||
Expected
federal income tax provision
|
||||||||||||
(credit)
at statutory rates
|
$ | (47,045 | ) | $ | (55,255 | ) | $ | 16,707 | ||||
State
income taxes, net of federal effect
|
(7,090 | ) | (2,860 | ) | 2,070 | |||||||
Effect
of nontaxable income, net
|
(441 | ) | (509 | ) | (928 | ) | ||||||
Valuation
allowance for deferred tax assets
|
35,517 | - | - | |||||||||
Goodwill
impairment
|
- | 35,830 | - | |||||||||
Other,
net
|
(526 | ) | (512 | ) | (93 | ) | ||||||
Provision
(credit) for income taxes
|
$ | (19,585 | ) | $ | (23,306 | ) | $ | 17,756 |
The
components of the net deferred tax assets and liabilities at December 31, 2009
and 2008 were approximately as follows:
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Deferred
tax assets:
|
||||||||
Reserve
for loan losses and unfunded loan commitments
|
$ | 24,195 | $ | 19,171 | ||||
Deferred
benefit plan expenses, net
|
6,252 | 5,742 | ||||||
State
net operating loss carryforwards
|
7,878 | 1,457 | ||||||
Tax
credit carryforwards
|
1,493 | - | ||||||
Net
unrealized losses on investment securities
|
- | 78 | ||||||
Allowance
for losses on OREO
|
3,305 | 2,124 | ||||||
Accrued
interest on non-accrual loans
|
685 | 1,970 | ||||||
Other
|
641 | 797 | ||||||
Deferred
tax assets
|
44,449 | 31,339 | ||||||
Valuation
allowance for deferred tax assets
|
(35,517 | ) | - | |||||
Deferred
tax assets, net of valuation allowance
|
8,932 | 31,339 | ||||||
Deferred
tax liabilities:
|
||||||||
Accumulated
depreciation and amortization
|
1,973 | 1,977 | ||||||
Deferred
loan income
|
1,646 | 1,674 | ||||||
MSRs
|
1,590 | 1,434 | ||||||
Purchased
intangibles related to F&M and CBGP
|
2,298 | 2,809 | ||||||
FHLB
stock dividends
|
580 | 573 | ||||||
Net
unrealized gains on investment securities
|
1,015 | - | ||||||
Other
|
845 | 626 | ||||||
Deferred
tax liabilities
|
9,947 | 9,093 | ||||||
Net
deferred tax assets (liabilities)
|
$ | (1,015 | ) | $ | 22,246 |
Due to
recent tax law changes enacted in 2009, the Company can carry back its federal
net operating losses from 2009 to offset federal taxes paid in the previous five
years as opposed to the two-year carry back permitted under the prior tax
laws. At December 31, 2009 and 2008, the Company has recorded income taxes
receivable of approximately $43,256 and $21,230, respectively, which are
recorded in other assets in the accompanying consolidated balance
sheets.
State net
operating losses may only be carried forward to future years. At
December 31, 2009, the Company had state net operating loss carryforwards of
approximately $171,070, which expire at various dates from 2014 to
2030.
98
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
The
valuation allowance for deferred tax assets as of December 31, 2009 was
$35,517. There was no valuation allowance as of December 31,
2008. Management determined that a valuation allowance was required
at December 31, 2009 by evaluating 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.
The
Company has evaluated its income tax positions as of December 31, 2009 and
2008. 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
penalties related to income tax matters as interest expense and other
noninterest expense, respectively, in the consolidated statements of
operations. The Company had no significant interest or penalties
related to income tax matters during the years ended December 31, 2009, 2008 or
2007.
16.
|
Basic and diluted
earnings (loss) per common
share
|
The
Company’s basic earnings (loss) per common share is computed by dividing net
income (loss) by the weighted-average number of common shares outstanding during
the period. The Company’s diluted earnings per common share is
computed by dividing net income by the weighted-average number of common shares
outstanding plus dilutive common shares related to stock options and nonvested
restricted stock. The Company’s diluted loss per common share is the same as the
basic loss per common share due to the anti-dilutive effect of common stock
equivalents.
The
numerators and denominators used in computing basic and diluted earnings (loss)
per common share for the years ended December 31, 2009, 2008 and 2007 can
be reconciled as follows:
99
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Weighted-
|
||||||||||||
Net
|
average
|
|||||||||||
income (loss)
|
shares
|
Per-share
|
||||||||||
(numerator)
|
(denominator)
|
amount
|
||||||||||
(Restated)
|
(Restated)
|
|||||||||||
2009
|
||||||||||||
Basic
loss per common share —
|
||||||||||||
Net
loss
|
$ | (114,829 | ) | 28,001,110 | $ | (4.10 | ) | |||||
Effect
of stock options and nonvested restricted stock
|
- | - | ||||||||||
Diluted
loss per common share
|
$ | (114,829 | ) | 28,001,110 | $ | (4.10 | ) | |||||
Common
stock equivalent shares excluded due to antidilutive
effect
|
123,194 | |||||||||||
2008
|
||||||||||||
Basic
loss per common share —
|
||||||||||||
Net
loss
|
$ | (134,566 | ) | 27,935,736 | $ | (4.82 | ) | |||||
Effect
of stock options and nonvested restricted stock
|
- | - | ||||||||||
Diluted
loss per common share
|
$ | (134,566 | ) | 27,935,736 | $ | (4.82 | ) | |||||
Common
stock equivalent shares excluded due to antidilutive
effect
|
236,129 | |||||||||||
2007
|
||||||||||||
Basic
earnings per common share —
|
||||||||||||
Net
income
|
$ | 29,979 | 28,242,684 | $ | 1.06 | |||||||
Effect
of stock options and nonvested restricted stock
|
- | 334,720 | ||||||||||
Diluted
earnings per common share
|
$ | 29,979 | 28,577,404 | $ | 1.05 |
17.
|
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 collectibility 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, 2009 and 2008 was approximately as
follows:
2009
|
2008
|
|||||||
Balance
at beginning of year
|
$ | 1,161 | $ | 1,007 | ||||
Additions
|
443 | 2,139 | ||||||
Repayments
|
(526 | ) | (1,985 | ) | ||||
Balance
at end of year
|
$ | 1,078 | $ | 1,161 |
|
In
addition, during the years ended December 31, 2009, 2008 and 2007, the
Company incurred legal fees of approximately $446, $47 and $243 to firms
in which certain directors were
partners.
|
100
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
18.
|
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 related 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 five
years. The total amounts charged to operations under the Plan were
approximately $197, $1,078 and $1,977 for the years ended December 31, 2009,
2008 and 2007, respectively. In 2009 and 2008 the Company’s
contributions to the Plan consisted solely of employer matching
contributions. The Company’s contributions to the Plan for the year ended
December 31, 2007 consisted of employer matching contributions of $1,120 and
profit sharing contributions of $857.
|
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 amounts
generally vest as deferred. 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, 2009 and 2008 was approximately $7,530 and
$7,253, respectively. The cash surrender value of the separate account policies,
including the value of the stable value wraps, was approximately $26,105 and
$26,315 at December 31, 2009 and 2008, respectively. At
December 31, 2009 and 2008, the liabilities related to the deferred
compensation plans included in accrued interest and other liabilities in the
accompanying consolidated balance sheets totaled approximately $4,481 and
$4,744, respectively. During 2009, two Board members received
withdrawals from their deferred compensation accounts aggregating a total of
approximately $400. In addition, during January 2010, the same two
Board members withdrew an aggregate of approximately $386 from their deferred
compensation accounts. All such withdrawals were pre-approved by the
FDIC. The amount of expense charged to operations in 2009, 2008 and
2007 related to the deferred compensation plans was approximately $1,385, $1,495
and $1,744, respectively. As of December 31, 2009 and 2008, the
liabilities related to the salary continuation and SERP plans included in
accrued interest and other liabilities in the accompanying consolidated balance
sheets totaled approximately $8,827 and $7,760, respectively. The
amount of expense charged to operations in 2009, 2008 and 2007 for the salary
continuation, SERP and fee continuation plans was approximately $1,257, $1,356
and $1,560, respectively. For financial reporting purposes, such
expense amounts have not been adjusted for income earned on the BOLI
policies.
101
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
19.
|
Stock-based
compensation plans
|
The
Company has historically maintained certain stock-based compensation plans,
approved by the Company’s shareholders that are administered by the Board or the
Compensation Committee of the Board (the Compensation Committee). In
addition, on April 28, 2008, the shareholders 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 one million 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. 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 Internal Revenue Code 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, 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, 2009, 1,353,217 shares reserved under the stock-based compensation
plans were available for future grants.
During
2009, the Company did not grant any stock options. During 2008 and 2007, the
Company granted 400,130 and 139,962 stock options with a weighted-average fair
value of $2.36 and $9.14 per option, respectively. The Company used
the Black-Scholes option-pricing model with the following weighted-average
assumptions to value options granted in 2008 and 2007:
2008
|
2007
|
|||||||
Dividend
yield
|
3.9 | % | 1.3 | % | ||||
Expected
volatility
|
32.0 | % | 29.9 | % | ||||
Risk-free
interest rate
|
3.0 | % | 4.8 | % | ||||
Expected
option lives
|
7
years
|
6
years
|
The
dividend yield was based on historical dividend information. The expected
volatility was based on historical volatility of the Company’s common stock
price. The risk-free interest rate was based on the U.S. Treasury yield curve in
effect at the date of grant for periods corresponding with the expected lives of
the options granted. The expected option lives represent the period of time that
options are expected to be outstanding giving consideration to vesting schedules
and historical exercise and forfeiture patterns.
102
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of publicly-traded options that have no vesting restrictions and are fully
transferable. Additionally, the model requires the input of highly
subjective assumptions. Because the Company’s stock options have
characteristics significantly different from those of publicly-traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimates, in the opinion of the Company’s management, the
Black-Scholes option-pricing model does not necessarily provide a reliable
single measure of the fair value of the Company’s stock options.
The
following table presents the activity related to options under all plans for the
years ended December 31, 2009, 2008, and 2007.
2009
|
2008
|
2007
|
||||||||||||||||||||||
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||||||||
Options
|
Average
|
Options
|
average
|
Options
|
average
|
|||||||||||||||||||
out-
|
Exercise
|
out-
|
exercise
|
out-
|
exercise
|
|||||||||||||||||||
standing
|
price
|
standing
|
price
|
standing
|
price
|
|||||||||||||||||||
Balance
at beginning of year
|
1,089,091 | $ | 12.05 | 751,088 | $ | 13.34 | 770,095 | $ | 9.79 | |||||||||||||||
Granted
|
- | - | 400,130 | 10.06 | 139,962 | 27.09 | ||||||||||||||||||
Exercised
|
- | - | (11,505 | ) | 5.67 | (146,109 | ) | 6.86 | ||||||||||||||||
Cancelled
|
(98,473 | ) | 11.54 | (50,622 | ) | 15.39 | (12,860 | ) | 21.06 | |||||||||||||||
Balance
at end of year
|
990,618 | $ | 12.18 | 1,089,091 | $ | 12.05 | 751,088 | $ | 13.34 | |||||||||||||||
Exercisable
at end of year
|
526,656 | 520,645 | 488,203 |
Stock-based
compensation expense related to stock options for the years ended December 31,
2009, 2008 and 2007 was approximately $593, $676 and $769,
respectively. As of December 31, 2009 and 2008, unrecognized
compensation cost related to nonvested stock options totaled $336 and
$1,159, respectively, which is expected to be recognized over a weighted-average
life of less than two years.
Information
regarding the number, weighted-average exercise price and weighted-average
remaining contractual life of options by range of exercise price at December 31,
2009 is as follows:
Options
outstanding
|
Exercisable
options
|
|||||||||||||||||||
Weighted-
|
||||||||||||||||||||
Weighted-
|
average
|
Weighted-
|
||||||||||||||||||
average
|
remaining
|
average
|
||||||||||||||||||
Exercise
|
Number
of
|
exercise
|
contractual
|
Number
of
|
exercise
|
|||||||||||||||
price
range
|
options
|
price
|
life
(years)
|
options
|
price
|
|||||||||||||||
Under
$5.00
|
115,672 | $ | 4.64 | 0.6 | 115,672 | $ | 4.64 | |||||||||||||
$5.01-$8.00
|
84,416 | 6.73 | 2.0 | 82,416 | 6.89 | |||||||||||||||
$8.01-$12.00
|
466,252 | 9.81 | 6.6 | 140,737 | 9.07 | |||||||||||||||
$12.01-$16.00
|
154,174 | 13.64 | 4.4 | 147,485 | 13.57 | |||||||||||||||
$16.01-$22.00
|
50,532 | 20.35 | 6.0 | 38,471 | 20.23 | |||||||||||||||
$22.01-$30.12
|
119,572 | 27.22 | 7.1 | 1,875 | 24.48 | |||||||||||||||
990,618 | $ | 12.18 | 4.4 | 526,656 | $ | 9.89 |
As of
December 31, 2009, unrecognized compensation cost related to nonvested
restricted stock totaled approximately $388, which is expected to be recognized
over a weighted-average life of two years. Total expense recognized
by the Company for nonvested restricted stock for the years ended December 31,
2009, 2008 and 2007 was $665, $890 and $904, respectively. The
following table presents the activity for nonvested restricted stock for the
year ended December 31, 2009:
103
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Weighted-
|
||||||||
average grant
|
||||||||
Number of
|
date fair value
|
|||||||
shares
|
per share
|
|||||||
Nonvested
as of December 31, 2008
|
131,593 | $ | 17.70 | |||||
Granted
|
86,880 | 2.13 | ||||||
Vested
|
(86,739 | ) | 2.72 | |||||
Nonvested
as of December 31, 2009
|
131,734 | $ | 14.68 |
Nonvested
restricted stock is scheduled to vest over periods ranging from one to five
years from the grant dates, with a weighted-average remaining vesting term of
1.9 years. The unearned compensation on restricted stock is being
amortized to expense on a straight-line basis over the applicable vesting
periods.
The
Company has also granted awards of restricted stock units (RSUs). A RSU
represents the unfunded, unsecured right to require the Company to deliver to
the participant one share of common stock for each RSU. Total expense recognized
by the Company related to RSUs was insignificant for the years ended December
31, 2009, 2008 and 2007. There was no unrecognized
compensation cost related to RSUs at December 31, 2009 and 2008, as all RSUs
were fully-vested. The following table presents the activity for RSUs
for the year ended December 31, 2009:
Weighted-
|
||||||||
average grant
|
||||||||
Number of
|
date fair value
|
|||||||
shares
|
per share
|
|||||||
Vested
as of December 31, 2008
|
2,971 | $ | 8.75 | |||||
Vested
shares granted
|
8,840 | 2.50 | ||||||
Vested
as of December 31, 2009
|
11,811 | $ | 4.07 |
20.
|
Fair value
measurements
|
ASC Topic
820 establishes a hierarchy for determining fair value measurements, includes
three levels and is based upon the valuation techniques used to measure assets
and liabilities. The three levels are as follow:
|
·
|
Quoted prices in
active markets for identical assets (Level 1): Inputs that are
quoted unadjusted prices in active markets for identical assets that the
Company has the ability to access at the measurement date. An active
market for the asset is a market in which transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis.
|
|
·
|
Significant other
observable inputs (Level 2): Inputs that reflect the assumptions
market participants would use in pricing the asset or liability developed
based on market data obtained from sources independent of the reporting
entity including quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
inactive markets, and inputs derived principally from, or corroborated by,
observable market data by correlation or other
means.
|
104
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
|
·
|
Significant
unobservable inputs (Level 3): Inputs that reflect the
reporting entity's own assumptions about the assumptions market
participants would use in pricing the asset or liability developed based
on the best information available in the circumstances.
|
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation methodologies were
applied to all of the Company’s financial assets and financial liabilities
carried at fair value. In general, fair value is based upon quoted
market prices, where available. If such quoted market prices are not available,
fair value is based upon internally-developed models that primarily use, as
inputs, observable market-based parameters. Valuation adjustments may be made to
ensure that financial instruments are recorded at fair value. These adjustments
may include amounts to reflect counterparty credit quality and the Company’s
creditworthiness, among other things, as well as unobservable parameters. Any
such valuation adjustments are applied consistently over time. The Company’s
valuation methodologies may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values. While
management believes that the Company’s valuation methodologies are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting
date. Furthermore, the reported fair value amounts have not been comprehensively
revalued since the presentation dates, and therefore, estimates of fair value
after the consolidated balance sheet date may differ significantly from the
amounts presented herein.
The
following is a description of the valuation methodologies used for instruments
measured at fair value, as well as the general classification of such
instruments pursuant to valuation hierarchy:
Investment
securities: Where quoted prices for identical assets are available in an
active market, investment securities available-for-sale are classified within
level 1 of the hierarchy. If quoted market prices for identical securities are
not available then fair values are estimated by independent sources using
pricing models and/or quoted prices of investment securities with similar
characteristics or discounted cash flows. The Company has categorized its
investment securities available-for-sale as level 2, since a majority of such
securities are MBS which are mainly priced in this latter manner.
Impaired loans: In
accordance with GAAP, loans measured for impairment are reported at estimated
fair value, including impaired
loans measured at an observable market price (if available) or at the fair value
of the loan’s collateral (if collateral dependent). Estimated fair value of the
loan’s collateral is determined by appraisals or independent valuation which is
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. During 2009, impaired
loans with a carrying value of $197,283 were reduced by specific valuation
allowance allocations totaling $49,701 to a total reported value of $147,582
based on collateral valuations utilizing level 3 valuation
inputs. During 2008, impaired loans with a carrying value of $169,729
were reduced by specific valuation allowance allocations totaling
$49,261 to a total reported value of $120,468 based on collateral
valuations utilizing level 3 inputs.
105
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
OREO: The Company’s
OREO is measured at estimated fair value less estimated costs to sell. Fair
value was 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”, since a
preponderance have been short-sale or foreclosure related, this has directly
impacted appraisal valuation estimates. Estimated costs to sell OREO
were 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. During 2009, OREO with a carrying value of $35,090 was reduced by
specific valuation allowance allocations totaling $6,230 to a total reported
value of $28,860 based on collateral valuations utilizing level 3 valuation
inputs. During 2008, OREO with a carrying value of $58,067 was
reduced by specific valuation allowance allocations totaling $5,340 to a total
reported value of $52,727 based on collateral valuations utilizing level 3
inputs.
At
December 31, 2009 and 2008, the Company had no financial liabilities measured at
fair value on a recurring basis. The Company’s financial assets
measured at fair value on a recurring basis at December 31, 2009 and 2008 are as
follows:
Quoted Prices in
|
Significant
|
|||||||||||
Active Markets
|
Other
|
Significant
|
||||||||||
for Identical
|
Observable
|
Unobservable
|
||||||||||
Assets
|
Inputs
|
Inputs
|
||||||||||
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||
2009
|
||||||||||||
Investment
securities available - for - sale
|
$ | - | $ | 133,755 | $ | - | ||||||
Total
recurring assets measured at fair value
|
$ | - | $ | 133,755 | $ | - | ||||||
2008
|
||||||||||||
Investment
securities available - for - sale
|
$ | - | $ | 107,480 | $ | - | ||||||
Total
recurring assets measured at fair value
|
$ | - | $ | 107,480 | $ | - |
Certain
non-financial assets are also measured at fair value on a non-recurring
basis. These assets primarily consist of intangible assets and other
non-financial long-lived assets which are measured at fair value for periodic
impairment assessments. The Company has no non-financial liabilities
measured at fair value on a non-recurring basis.
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, 2009 and 2008:
106
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Quoted Prices in
|
Significant
|
|||||||||||
Active Markets
|
Other
|
Significant
|
||||||||||
for Identical
|
Observable
|
Unobservable
|
||||||||||
Assets
|
Inputs
|
Inputs
|
||||||||||
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||
(Restated)
|
||||||||||||
2009
|
||||||||||||
Impaired
loans with specific valuation allowances
|
$ | - | $ | - | $ | 114,039 | ||||||
Other
real estate owned
|
- | 28,860 | ||||||||||
$ | - | $ | - | $ | 142,899 | |||||||
2008
|
||||||||||||
Impaired
loans with specific valuation allowances
|
$ | - | $ | - | $ | 120,468 | ||||||
Other
real estate owned
|
- | 52,727 | ||||||||||
$ | - | $ | - | $ | 173,195 |
The
Company did not change the methodology used to determine fair value for any
financial instruments during the years ended December 31, 2009 and
2008. Accordingly, for any given class of financial instruments, the
Company did not have any transfers between level 1, level 2, or level 3 during
these periods.
The
following disclosures are made in accordance with the provisions of FASB ASC
Topic 825, “Financial Instruments,” 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, 2009 and 2008.
Because
ASC Topic 825 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.
107
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
FHLB
stock: The carrying amount approximates the estimated fair
value.
|
Loans: The
estimated fair value of loans is calculated by discounting the contractual
cash flows of the loans using December 31, 2009 and 2008 origination
rates. The resulting amounts are adjusted to estimate the effect of
changes in the credit quality of borrowers since the loans were
originated. Fair values for impaired loans are estimated using a
discounted cash flow analysis or the underlying collateral
values.
|
|
BOLI: The
carrying amount approximates the estimated fair value of these
instruments.
|
|
OREO: See
above description.
|
|
Deposits: The
estimated fair value of demand deposits, consisting of checking, interest
bearing demand and savings deposit accounts, is represented by the amounts
payable on demand. At the reporting date, the estimated fair
value of time deposits is calculated by discounting the scheduled cash
flows using the December 31, 2009 and 2008 rates offered on those
instruments.
|
|
Junior subordinated
debentures, other borrowings and TLGP senior unsecured
debt: The fair value of the Bank’s junior subordinated
debentures, other borrowings (including federal funds purchased) and TLGP
senior unsecured debt are estimated using discounted cash flow analyses
based on the Bank’s December 31, 2009 and 2008 incremental borrowing rates
for similar types of borrowing arrangements. However, as of
December 31, 2009, the estimated fair value of the Bank’s junior
subordinated debentures has been adjusted to reflect the possible
negotiated exchange of such debentures for
cash.
|
|
Customer repurchase
agreements: The carrying value approximates the estimated fair
value.
|
|
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, 2009 and 2008 were approximately as
follows:
108
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
December 31, 2009
|
December 31, 2008
|
||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||||||||
value
|
fair value
|
value
|
fair value
|
||||||||||
Financial
assets:
|
(Restated)
|
(Restated)
|
|||||||||||
Cash
and cash equivalents
|
$ | 359,322 | $ | 359,322 | $ | 48,946 | $ | 48,946 | |||||
Investment
securities:
|
|||||||||||||
Available-for-sale
|
133,755 | 133,755 | 107,480 | 107,480 | |||||||||
Held-to-maturity
|
2,008 | 2,143 | 2,211 | 2,247 | |||||||||
FHLB
stock
|
10,472 | 10,472 | 10,472 | 10,472 | |||||||||
Loans,
net
|
1,489,090 | 1,483,232 | 1,909,018 | 1,950,602 | |||||||||
BOLI
|
33,635 | 33,635 | 33,568 | 33,568 | |||||||||
OREO
|
28,860 | 28,860 | 52,727 | 52,727 | |||||||||
Financial
liabilities:
|
|||||||||||||
Deposits
|
1,815,348 | 1,819,103 | 1,794,611 | 1,795,004 | |||||||||
Junior
subordinated debentures, other borrowings, and TLGP senior unsecured
debt
|
304,765 | 256,814 | 317,533 | 320,796 | |||||||||
Customer
repurchase agreements
|
- | - | 9,871 | 9,867 |
21.
|
Regulatory
matters
|
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory – and possibly
additional discretionary – actions by regulators that, if undertaken, could have
a direct material effect on the Company’s consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company’s and the Bank’s capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
tables below) of Tier 1 capital to average assets and Tier 1 and total
capital to risk-weighted assets (all as defined in the
regulations).
Federal
banking regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
Such actions could potentially include a leverage limit, a risk-based capital
requirement, and any other measure of capital deemed appropriate by the federal
banking regulator for measuring the capital adequacy of an insured depository
institution. In addition, payment of dividends by the Company and the Bank are
subject to restriction by state and federal regulators and availability of
retained earnings. At December 31, 2009, the Company and the Bank do not meet
the regulatory benchmarks to be “adequately capitalized” under the applicable
regulations.
On August
27, 2009, the Bank entered into an agreement with the FDIC, its principal
federal banking regulator, and the DFCS which requires the Bank to take certain
measures to improve its safety and soundness.
In
connection with this agreement, the Bank stipulated to the issuance by the FDIC
and the DFCS of the Order based on certain findings from an
examination of the Bank conducted in February 2009 based upon financial and
lending data measured as of December 31, 2008 (the “ROE”). In entering into the
stipulation and consenting to entry of the Order, the Bank did not concede the
findings or admit to any of the assertions therein.
109
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
Under the
Order, the Bank is required to take certain measures to improve its capital
position, maintain liquidity ratios, reduce its level of non-performing assets,
reduce its loan concentrations in certain portfolios, improve management
practices and board supervision and to assure that its reserve for loan losses
is maintained at an appropriate level. Management generally believes
that at December 31, 2009 the Company is in substantial compliance with the
requirements of the Order with the exception of requirements tied to or
dependent upon execution of a capital raise as described below.
Among the
corrective actions required are for the Bank to develop and adopt a plan to
maintain the minimum capital requirements for a “well-capitalized” bank,
including a Tier 1 leverage ratio of at least 10% at the Bank level beginning
150 days from the issuance of the Order. As of December 31, 2009 and through the
date of this report the requirement relating to increasing the Bank’s Tier
1 leverage ratio has not been met.
In
addition, pursuant to the Order, the Bank must retain qualified management and
must notify the FDIC and the DFCS in writing when it proposes to add any
individual to its Board or to employ any new senior executive officer. Under the
Order the Bank’s Board must also increase its participation in the affairs of
the Bank, assuming full responsibility for the approval of sound policies and
objectives and for the supervision of all the Bank’s activities.
The Order
further requires the Bank to ensure the level of the reserve for loan losses is
maintained at appropriate levels to safeguard the book value of the Bank’s loans
and leases, and to reduce the amount of classified loans as of the date of the
Order to no more than 75% of capital. As of December 31, 2009 and through the
date of this report, the requirement that the amount of classified loans as of
the date of the Order be reduced to no more than 75% of capital has not been
met. However, as required by the Order, all assets classified as
“Loss” in the ROE have been charged-off. The Bank has also developed and
implemented a process for the review and approval of all applicable asset
disposition plans.
The Order
restricts the Bank from taking certain actions without the consent of the FDIC
and the DFCS, including paying cash dividends, and from extending additional
credit to certain types of borrowers.
The Order
further requires the Bank to maintain a primary liquidity ratio (net cash, net
short-term and marketable assets divided by net deposits and short-term
liabilities) of at least 15%.
The Bank
was required to implement these measures under various time frames, all of which
have expired. While the Bank successfully completed several of the measures, it
was unable to implement certain measures in the time frame provided,
particularly those related to raising capital levels. In order for the Bank to
meet the capital requirements of the Order, as of December 31, 2009, the Bank is
targeting a minimum of approximately $150 million of additional equity
capital. The economic environment in our market areas and the
duration of the downturn in the real estate market will continue to have a
significant impact on the implementation of the Bank’s business plans. While the
Company plans to continue its efforts to aggressively pursue and evaluate
opportunities to raise capital, there can be no assurance that such efforts will
be successful or that the Bank’s plans to achieve the objectives set forth in
the Order will successfully improve the Bank’s results of operations or
financial condition or result in the termination of the Order from the FDIC and
the DFCS. In addition, failure to increase capital levels consistent with the
requirements of the Order could result in further enforcement actions by the
FDIC and/or DFCS or the placing of the Bank into conservatorship or
receivership.
110
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
On
October 26, 2009, the Company entered into a written agreement with the FRB and
DFCS (the “Written Agreement”), which requires the Company to take certain
measures to improve its safety and soundness. Under the Written Agreement, the
Company is required to develop and submit for approval, a plan to maintain
sufficient capital at the Company and the Bank within 60 days of the date of the
Written Agreement. The Company submitted a strategic plan on October
28, 2009 and as of December 31, 2009 and through the date of this report,
management believes that the Company is in compliance with the terms of the
Written Agreement with the exception of requirements tied to or
dependent upon execution of a capital raise.
As
outlined in the table below, as of December 31, 2009 the Company and the Bank
had not complied with terms of the Order and Agreement to bring its capital
ratios to the targeted levels.
The
Company’s and Bank’s actual and required capital amounts and ratios are
presented in the following tables. Note that the Company’s
ratios are substantially below those of the Bank because regulatory calculations
disallow portions of TPS from inclusion of capital at the Company level, but it
is included as Tier 1 capital at the Bank level:
The
Company’s actual and required capital amounts and ratios are presented in the
following table:
Regulatory minimum
|
||||||||||||||||||||||||
Regulatory minimum to
|
to be "well capitalized"
|
|||||||||||||||||||||||
be "adequately
|
under prompt corrective
|
|||||||||||||||||||||||
Actual
|
capitalized"
|
action provisions
|
||||||||||||||||||||||
Capital
|
Capital
|
Capital
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(Restated)
|
(Restated)
|
(Restated)
|
(Restated)
|
|||||||||||||||||||||
December
31, 2009:
|
||||||||||||||||||||||||
Tier
1 leverage
|
||||||||||||||||||||||||
(to
average assets)
|
$ | 24,637 | 1.1 | % | $ | 88,563 | 4.0 | % | $ | 110,704 | 5.0 | % | ||||||||||||
Tier
1 risked
|
||||||||||||||||||||||||
(to
risk-weighted assets)
|
24,637 | 1.5 | 66,754 | 4.0 | 100,132 | 6.0 | ||||||||||||||||||
Total
capital
|
||||||||||||||||||||||||
(to
risk-weighted assets)
|
49,274 | 3.0 | 133,509 | 8.0 | 166,886 | 10.0 | ||||||||||||||||||
December
31, 2008:
|
||||||||||||||||||||||||
Tier
1 leverage
|
||||||||||||||||||||||||
(to
average assets)
|
$ | 196,707 | 8.2 | % | $ | 96,127 | 4.0 | % | $ | 120,159 | 5.0 | % | ||||||||||||
Tier
1 capital
|
||||||||||||||||||||||||
(to
risk-weighted assets)
|
196,707 | 8.9 | 87,968 | 4.0 | 131,951 | 6.0 | ||||||||||||||||||
Total
capital
|
||||||||||||||||||||||||
(to
risk-weighted assets)
|
224,701 | 10.2 | 175,935 | 8.0 | 219,919 | 10.0 |
111
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
The
Bank’s actual and required capital amounts and ratios (exclusive of the 10% Tier
1 leverage ratio required under the Order) are presented in the following
table:
Regulatory
minimum
|
||||||||||||||||||||||||
Regulatory
minimum to
|
to
be "well capitalized"
|
|||||||||||||||||||||||
be
"adequately
|
under
prompt
|
|||||||||||||||||||||||
Actual
|
capitalized"
|
corrective
action
provisions
|
||||||||||||||||||||||
Capital
|
Capital
|
Capital
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(Restated)
|
(Restated)
|
(Restated)
|
(Restated)
|
|||||||||||||||||||||
December
31, 2009:
|
||||||||||||||||||||||||
Tier
1 leverage
|
||||||||||||||||||||||||
(to
average assets)
|
$ | 82,847 | 3.8 | % | $ | 88,629 | 4.0 | % | $ | 110,787 | 5.0 | % | ||||||||||||
Tier
1 capital
|
||||||||||||||||||||||||
(to
risk-weighted assets)
|
82,847 | 5.0 | 66,664 | 4.0 | 99,996 | 6.0 | ||||||||||||||||||
Total
capital
|
||||||||||||||||||||||||
(to
risk-weighted assets)
|
104,159 | 6.3 | 133,328 | 8.0 | 166,660 | 10.0 | ||||||||||||||||||
December
31, 2008:
|
||||||||||||||||||||||||
Tier
1 leverage
|
||||||||||||||||||||||||
(to
average assets)
|
$ | 194,051 | 8.1 | % | $ | 95,998 | 4.0 | % | $ | 119,997 | 5.0 | % | ||||||||||||
Tier
1 capital
|
||||||||||||||||||||||||
(to
risk-weighted assets)
|
194,051 | 8.8 | 87,878 | 4.0 | 131,816 | 6.0 | ||||||||||||||||||
Total
capital
|
||||||||||||||||||||||||
(to
risk-weighted assets)
|
221,772 | 10.1 | 175,755 | 8.0 | 219,694 | 10.0 |
22.
|
Parent company
financial information
|
|
Condensed
financial information for Bancorp (Parent company only) is presented as
follows:
|
CONDENSED
BALANCE SHEETS
December
31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Assets:
|
|
|||||||
Cash
and cash equivalents
|
$ | 2,663 | $ | 2,697 | ||||
Investment
in subsidiary
|
88,750 | 199,080 | ||||||
Other
assets
|
2,223 | 2,216 | ||||||
Total
assets
|
$ | 93,636 | $ | 203,993 | ||||
Liabilities
and stockholders' equity:
|
||||||||
Junior
subordinated debentures
|
$ | 68,558 | $ | 68,558 | ||||
Other
liabilities
|
1,760 | 196 | ||||||
Stockholders'
equity
|
23,318 | 135,239 | ||||||
Total
liabilities and stockholders' equity
|
$ | 93,636 | $ | 203,993 |
112
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
CONDENSED
STATEMENTS OF OPERATIONS
Years
ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(Restated)
|
||||||||||||
Income:
|
|
|||||||||||
Interest
and dividend income
|
$ | 5 | $ | 18 | $ | 38 | ||||||
Gains
on sales of investment securities available-for-sale
|
- | 115 | 260 | |||||||||
Total
income
|
5 | 133 | 298 | |||||||||
Expenses:
|
||||||||||||
Administrative
|
1,569 | 1,945 | 2,001 | |||||||||
Interest
|
2,287 | 3,466 | 4,679 | |||||||||
Other
|
538 | 621 | 431 | |||||||||
Total
expenses
|
4,394 | 6,032 | 7,111 | |||||||||
Net
loss before credit for income taxes, dividends from the Bank and equity in
undistributed net earnings (losses) of subsidary
|
(4,389 | ) | (5,899 | ) | (6,813 | ) | ||||||
Credit
for income taxes
|
1,669 | 2,283 | 2,377 | |||||||||
Net
loss before dividends from the Bank and equity in undistributed net
earnings (losses) of subsidiary
|
(2,720 | ) | (3,616 | ) | (4,436 | ) | ||||||
Dividends
from the Bank
|
- | 6,900 | 20,200 | |||||||||
Equity
in undistributed net earnings (loss) of subsidiary
|
(112,109 | ) | (137,850 | ) | 14,215 | |||||||
Net
income (loss)
|
$ | (114,829 | ) | $ | (134,566 | ) | $ | 29,979 |
113
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
CONDENSED
STATEMENTS OF CASH FLOWS
2009
|
2008
|
2007
|
||||||||||
(Restated)
|
||||||||||||
Cash
flows from operating activities:
|
|
|||||||||||
Net
income (loss)
|
$ | (114,829 | ) | $ | (134,566 | ) | $ | 29,979 | ||||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
Dividends
from the Bank
|
- | 6,900 | 20,200 | |||||||||
Equity
in undistributed net (earnings) loss of subsidiary
|
112,109 | 130,950 | (34,415 | ) | ||||||||
Gains
on sales of investment securities available-for-sale
|
- | (115 | ) | (260 | ) | |||||||
Stock-based
compensation expense
|
1,258 | 1,566 | 1,632 | |||||||||
Increase
in other assets
|
(6 | ) | (4 | ) | (5 | ) | ||||||
(Decrease)
increase in other liabilities
|
1,564 | (49 | ) | 12 | ||||||||
Net
cash provided by operating activities
|
96 | 4,682 | 17,143 | |||||||||
Cash
flows provided by investing activities:
|
||||||||||||
Proceeds
from sales of investment securities available-for-sale
|
- | 425 | 525 | |||||||||
Cash
flows from financing activities:
|
||||||||||||
Cash
dividends paid
|
- | (6,158 | ) | (10,491 | ) | |||||||
Repurchases
of common stock
|
- | - | (9,205 | ) | ||||||||
Proceeds
from stock options exercised
|
- | 67 | 1,979 | |||||||||
Tax
benefit (cost) from non-qualified stock options exercised
|
- | (297 | ) | 548 | ||||||||
Income
taxes withheld on vested restricted stock
|
(130 | ) | - | - | ||||||||
Net
cash used by financing activities
|
(130 | ) | (6,388 | ) | (17,169 | ) | ||||||
Net
(decrease) increase in cash and cash equivalents
|
(34 | ) | (1,281 | ) | 499 | |||||||
Cash
and cash equivalents at beginning of year
|
2,697 | 3,978 | 3,479 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 2,663 | $ | 2,697 | $ | 3,978 |
23.
|
Restatement of
consolidated financial
statements
|
Subsequent
to the Company’s filing of its Annual Report on Form 10-K for the year ended
December 31, 2009, management made the decision to restate its previously
reported results of operations and financial condition. This
restatement is related to an examination by banking regulators of the Bank that
commenced on March 15, 2010 and is primarily related to the reserve for loan
losses and loan loss provision. In connection with the examination,
the regulators provided additional information to the Company on July 29, 2010
which resulted in management refining and enhancing its model for calculating
the reserve for loan losses by considering an expanded scope of information and
augmenting the qualitative and judgmental factors used to
estimate losses inherent in the loan portfolio. As a
result of the findings of the regulatory examination, the
regulators required the Bank to amend its Call Report of Condition as
of and for the year ended December 31, 2009. On August 3, 2010, the
Audit Committee of the Board concluded, based upon additional information
received from banking regulators and the recommendation of
management, that the Company’s previously issued audited consolidated financial
statements as of and for the year ended December 31, 2009 as reported
in the Company’s Annual Report on Form 10-K, could no longer be relied
upon.
114
CASCADE
BANCORP AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Dollars
in thousands, except per share amounts)
The effects of the restatement
on
the Company’s consolidated balance sheet, statement of operations, statement of
changes in stockholders’ equity and statement of cash flows are
summarized as follows:
As of and for the year ended December 31, 2009
|
||||||||||||
As Previously
|
||||||||||||
Reported
|
Adjustment
|
Restated
|
||||||||||
Consolidated
balance sheet
|
||||||||||||
Reserve
for loan losses
|
$ | 37,586 | $ | 21,000 | $ | 58,586 | ||||||
Net
loans
|
1,510,090 | (21,000 | ) | 1,489,090 | ||||||||
Other
real estate owned
|
29,609 | (749 | ) | 28,860 | ||||||||
Total
assets
|
2,193,877 | (21,749 | ) | 2,172,128 | ||||||||
Accumulated
deficit
|
(116,204 | ) | (21,749 | ) | (137,953 | ) | ||||||
Total
stockholders' equity
|
45,067 | (21,749 | ) | 23,318 | ||||||||
Total
liabilities and stockholders' equity
|
2,193,877 | (21,749 | ) | 2,172,128 | ||||||||
Consolidated
statement of operations
|
||||||||||||
Loan
loss provision
|
$ | 113,000 | $ | 21,000 | $ | 134,000 | ||||||
Net
interest loss after loan loss provision
|
(40,324 | ) | (21,000 | ) | (61,324 | ) | ||||||
OREO
expense
|
22,391 | 749 | 23,140 | |||||||||
Non-interest
expense
|
93,967 | 749 | 94,716 | |||||||||
Loss
before income taxes
|
(112,665 | ) | (21,749 | ) | (134,414 | ) | ||||||
Net
loss
|
(93,080 | ) | (21,749 | ) | (114,829 | ) | ||||||
Per
share data:
|
||||||||||||
Basic
loss per common share
|
$ | (3.32 | ) | $ | (0.78 | ) | $ | (4.10 | ) | |||
Diluted
loss per common share
|
(3.32 | ) | (0.78 | ) | (4.10 | ) | ||||||
Consolidated
statement of changes in stockholders' equity
|
||||||||||||
Net
loss
|
$ | (93,080 | ) | $ | (21,749 | ) | $ | (114,829 | ) | |||
Accumulated
deficit
|
(116,204 | ) | (21,749 | ) | (137,953 | ) | ||||||
Consolidated
statement of cash flows:
|
||||||||||||
Net
loss
|
$ | (93,080 | ) | $ | (21,749 | ) | $ | (114,829 | ) | |||
Loan
loss provision
|
113,000 | 21,000 | 134,000 | |||||||||
Writedown
of OREO
|
17,232 | 749 | 17,981 | |||||||||
Net
cash provided by operating activities
|
30,576 | 17,232 | 47,808 | |||||||||
Net
cash provided by investing activities
|
281,832 | (17,232 | ) | 264,600 |
The
consolidated financial statements have not been reviewed or confirmed for
accuracy
or
relevance by the Federal Deposit Insurance Corporation.
115
ITEM 9.
|
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None
ITEM
9A. CONTROLS AND
PROCEDURES
Evaluation of Disclosure
Controls and Procedure
As
required by Rule 13a-15 under the Exchange Act of 1934, the Company carried out
an evaluation of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of the end of the period covered by this
report. Any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. This evaluation was carried out under the supervision and
with the participation of the Company’s management, including the Company’s
Chief Executive Officer and the Company’s Chief Financial
Officer. Based upon that evaluation, the Chief Executive Officer and
the Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were not effective as of the end of the period covered by this
report.
Management’s Report on
Internal Control Over Financial Reporting
Management
of Cascade Bancorp and its subsidiary, Bank of the Cascades (collectively,
“Bancorp”), is responsible for preparing Bancorp’s annual consolidated financial
statements. Management is also responsible for establishing and maintaining
internal control over financial reporting presented in conformity with both
accounting principles generally accepted in the United States and regulatory
reporting in conformity with the Federal Financial Institutions Examination
Council Instructions for Consolidated Reports of Condition and Income (call
report instructions). Bancorp’s internal control contains monitoring
mechanisms, and actions are taken to correct deficiencies
identified.
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 financial statement
preparation. Further, because of changes in conditions, the
effectiveness of internal control may vary over time.
The
Company’s management assessed the effectiveness of Bancorp’s internal control
over financial reporting presented in conformity with generally accepted
accounting principles as of December 31, 2009. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework.
In
connection with the preparation of the Company’s previously filed Annual Report
on Form 10-K, as originally filed with the SEC on March 15, 2010, our Chief
Executive Officer and Chief Financial Officer previously concluded that our
disclosure controls and procedures were effective as of December 31, 2009
and reported that there was no change in our internal control over financial
reporting that occurred during that period that materially affected, or was
reasonably likely to materially affect, our internal control over financial
reporting.
As a
result of the restatement of the Company’s consolidated financial statements as
of and for the year ended December 31, 2009 in connection with our estimated
reserve for loan losses, as discussed in Note 23 to the accompanying audited
consolidated financial statements, a re-evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures was performed as
of June 30, 2010, under the supervision of the Audit Committee of the Board and
with the participation of the Company’s management, including its Chief
Executive Officer and Chief Financial Officer. Based upon this evaluation which
was performed using the COSO framework, the Company’s Chief Executive Officer
and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were not effective as of December 31, 2009 to ensure that information
required to be disclosed in the reports that the Company files and submits under
the Exchange Act are recorded, processed, summarized and reported as and when
required due to a material weakness in the Company’s internal control over
financial reporting specifically with respect to our estimate of the reserve for
loan losses.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009, has been audited by Delap LLP, the independent registered
public accounting firm who has also audited the Company’s consolidated financial
statements included in this Annual Report on Form 10-K/A. Delap LLP’s
report on the Company’s internal control over financial reporting appears on
page 118 of
this Annual Report on Form 10-K/A.
Remediation Steps to Address
Material Weakness
As of the
date of this Amendment, the management has refined and enhanced its model for
calculating the reserve for loan losses by considering an expanded scope of
information and augmenting the qualitative and judgmental factors used to
estimate potential losses inherent in the loan portfolio. Management
will continue to enhance its methodology to improve such estimates and will be
engaging the assistance of external independent consulting resources to assist
with these revisions and enhancements.
ITEM 9B. OTHER INFORMATION
Submission of Matters to a
Vote of Security Holders
The Company held a special meeting of
shareholders on December 7, 2009. The record date for the meeting was
October 26, 2009, at which time there were 28,156,483 shares of common stock
outstanding. Holders of 24,737,657 shares (87.9%) were present at the
meeting in person or by proxy. At the meeting, shareholders were asked to act
upon, and ultimately voted to approve, the following three
proposals:
Proposal
1.
|
To
approve an amendment to our Articles of Incorporation, as amended, to
increase the number of authorized shares of the Company’s Common Stock
from 45,000,000 to 300,000,000:
|
116
Votes
|
Votes
|
Votes
|
||||||
"FOR"
|
"AGAINST"
|
"ABSTAIN"
|
||||||
23,792,834
|
825,493 | 11,933 |
Proposal
2.
|
To
approve the issuance of up to $65 million of the Company’s Common Stock to
investors in Private Offerings, which will result in such investors owning
greater than 20% of the outstanding voting securities of the
Company:
|
Votes
|
Votes
|
Votes
|
||||||
"FOR"
|
"AGAINST"
|
"ABSTAIN"
|
||||||
16,449,360
|
590,248 | 121,871 |
Proposal
3.
|
To
approve an amendment to our Articles of Incorporation, as amended, to
effect a one for ten reverse stock split of our Common Stock and payment
of cash for resulting fractional
shares:
|
Votes
|
Votes
|
Votes
|
||||||
"FOR"
|
"AGAINST"
|
"ABSTAIN"
|
||||||
23,177,966
|
1,453,150
|
106,542
|
Although
all of the above proposals passed at the special shareholders meeting, as a
result of the Company’s unsuccessful efforts to raise capital and the previously
announced withdrawal of the registration statement due to market and other
conditions, none of the proposals have been implemented as of the date of this
report.
117
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Cascade Bancorp
We have
audited the internal control over financial reporting of Cascade Bancorp and its
subsidiary, Bank of the Cascades (the Bank) (collectively, “the Company”) as of
December 31, 2009, based on criteria established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Company’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 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 of internal control over financial
reporting 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 the 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
report on the Company’s internal control over financial reporting as of
December 31, 2009 dated March 12, 2010, we expressed an unqualified
opinion that the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
the COSO criteria. The Company subsequently identified material
misstatements in its 2009 consolidated financial statements, which caused the
2009 consolidated financial statements to be restated, and, therefore,
management of the Company subsequently revised its assessment of its internal
control over financial reporting and concluded that the Company’s internal
control over financial reporting was not effective as of December 31,
2009. Accordingly, our opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009,
expressed herein, is different from that expressed in our previous
report.
A material weakness is a
deficiency, or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim consolidated financial
statements will not be prevented or detected on a timely basis. The
following material weakness has been identified and included in management’s
assessment. In connection with an examination by banking
regulators of the Bank that commenced on March 15, 2010, management
received additional information from the regulators on July 29, 2010, which
resulted in management refining and enhancing its model for calculating the
reserve for loan losses by considering an expanded scope of information and
augmenting the qualitative and judgmental factors used to estimate losses
inherent in the loan portfolio. As a result of the findings of the
regulatory examination, the regulators required the Bank to amend its Call
Report of Condition as of and for the year ended December 31,
2009. Accordingly, management determined that a material weakness
existed, specifically related to a failure of the controls in place to properly
estimate the reserve for loan losses. The ineffective control
resulted in the restatement of the Company’s 2009 consolidated financial
statements.
This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the 2009 consolidated financial
statements, and this report does not affect our report dated March 12,
2010, except for Note 23, as to which the date is August 20, 2010, which
expressed an unqualified opinion on those 2009 consolidated financial
statements, and such report included an explanatory paragraph related to the
Company’s ability to continue as a going concern.
In our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of
December 31, 2009, based on the COSO criteria.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s consolidated balance sheet as of
December 31, 2009, and the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for the year then ended, and our
report dated March 12, 2010, except for Note 23, and the effects of
the restatement described therein, as to which the date is August 20, 2010,
expressed an unqualified opinion on those consolidated financial statements, and
such report included an explanatory paragraph related to the Company’s ability
to continue as a going concern.
/s/ Delap
LLP
Lake
Oswego, Oregon
the
material weakness described in the sixth
paragraph
above, as to which the date is
August
20, 2010
118
PART III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain
information regarding executive officers is included in the section captioned
"Executive Officers of the Registrant" in Part 1, Item 1, elsewhere in this
report. Information concerning directors of Bancorp required to be
included in this item is set forth under the headings "Election of Directors,"
and "Compliance with Section 16(a)," in the Company's Proxy Statement for its
2010 Annual Meeting of Shareholders to be filed within 120 days of the Company's
fiscal year end of December 31, 2009 (the "Proxy Statement"), and is
incorporated into this report by reference and under the heading
Business-Executive Officers of the Registry in this report.
ITEM 11. EXECUTIVE
COMPENSATION
Information
concerning executive and director compensation and certain matters regarding
participation in the Company’s compensation committee required by this item is
set forth under the heading “Compensation Discussion & Analysis” in the
Proxy Statement and is incorporated into this report by reference.
ITEM
12.
|
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER
MATTERS
|
Information
concerning the security ownership of certain beneficial owners and management
required by this item is set forth under the heading “Security Ownership of
Management and Others” in the Proxy Statement and is incorporated into this
report by reference.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information
concerning certain relationships and related transactions required by this item
is set forth under the heading “Certain Relationships and Related Transactions”
and the information concerning director independence is set forth under the
heading of “Committees of the Board of Directors” each in the Proxy Statement
and incorporated into this report by reference.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Information
concerning fees paid to our independent auditors required by this item is
included under the heading “Audit and Non-Audit Fees” in the Proxy Statement and
is incorporated into this report by reference.
119
PART IV
ITEM
15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
|
(a)
|
The
following documents are filed as part of this Annual Report on Form
10-K:
|
|
(1)
|
The
consolidated financial statements required in this Annual Report are
listed in the accompanying Index to Consolidated Financial Statements on
page 64.
|
|
(2)
|
All
consolidated financial statement schedules are omitted because they are
not applicable or not required, or because the required information is
included in the consolidated financial statements or the notes
thereto
|
(3)
|
Exhibits. Exhibits
filed with this Annual Report on Form 10-K or incorporated by reference
from other filing are as follows:
|
3.1
|
Articles of Incorporation of
Cascade Bancorp, as amended. Filed as exhibit 3.1 to
registrant’s Quarterly Report on Form 10-Q, as filed with the Securities
and Exchange Commission filed June 30, 2997 and incorporated herein by
reference.
|
|
3.2
|
Bylaws of Cascade Bancorp, as
amended and restated. 10.1 Registrant’s 1994 Incentive
Stock Option Plan. Filed as an exhibit to registrant’s
Registration Statement on Form 10-SB, as filed with the Securities and
Exchange Commission in January 1994, and incorporated herein by
reference.
|
|
10.2
|
Incentive Stock Option Plan
Letter Agreement. Entered into between registrant and
certain employees pursuant to registrant’s 1994 Incentive Stock Option
Plan. Filed as an exhibit to registrant’s Registration Statement on Form
10-SB, as filed with the Securities and Exchange Commission in January
1994, and incorporated herein by reference.
|
|
10.3
|
Incentive Stock Option Plan
Letter Agreement. Entered into between registrant and
certain employees pursuant to registrant’s 1994 Incentive Stock Option
Plan. Filed as an exhibit to registrant’s Registration Statement on Form
10-SB, as filed with the Securities and Exchange Commission in January
1994, and incorporated herein by reference.
|
|
10.4
|
Deferred Compensation
Plans. Established for the Board, certain key executives
and managers during the fourth quarter ended December 31, 1995. Filed as
exhibit 10.5 to registrant’s Form 10-KSB, as filed with the Securities and
Exchange Commission on March 28, 1996 (File No. 000-23322), and
incorporated herein by reference.
|
|
10.5
|
Executive Employment Agreement
between Cascade Bancorp, Bank of the Cascades, and Patricia L. Moss,
entered into February 18, 2008. Filed as an exhibit to
the registrant’s filing on Form 8-K Current Report, as filed with the
Securities and Exchange Commission on February 19, 2008, and incorporated
herein by reference.
|
|
10.6
|
Executive Employment Agreement
between Cascade Bancorp, Bank of the Cascades, and Gregory D. Newton
entered into February 18, 2008. Filed as an exhibit to
the registrant’s filing on Form 8-K Current Report, as filed with the
Securities and Exchange Commission on February 19, 2008, and incorporated
herein by reference.
|
|
10.7
|
Executive Employment Agreement
between Cascade Bancorp, Bank of the Cascades, and Peggy L. Biss entered
into February 18, 2008. Filed as an exhibit to the
registrant’s filing on Form 8-K Current Report, as filed with the
Securities and Exchange Commission on February 19, 2008, and incorporated
herein by reference.
|
|
10.8
|
Executive Employment Agreement
between Cascade Bancorp, Bank of the Cascades, and Frank R. Weis entered
into February 18, 2008. Filed as an exhibit to the
registrant’s filing on Form 8-K Current Report, as filed with the
Securities and Exchange Commission on February 19, 2008, and incorporated
herein by reference.
|
|
10.9
|
Agreement, together with Order
to Cease and Desist dated August 27, 2009. The Order to
Cease and Desist was filed as exhibit 99.2 to the registrant’s filing on
Form 8-K Current Report, as filed with the Securities and Exchange
Commission on September 2, 2009, and incorporated herein by
reference.
|
120
10.10
|
Shareholders Agreement dated
December 27,2005, by and among Cascade Bancorp, David F. Bolger and
Two-forth Associates. Filed as exhibit 4 to Schedule 13D
filed by Mr. David Bolger and Two-Forty Associates on April 27, 2006 and
incorporated herein by reference.
|
|
10.6
|
First
Amendment to the Securities Purchase Agreement, dated February 16, 2010,
between the Company and David F. Bolger, Two-Forty Associates, and The
David F. Bolger 2008 Grantor Retained Annuity Trust. Filed as
an exhibit to the registrants Form 8-K filed with the Securities and
Exchange Commission on February 19, 2010).
|
|
10.7
|
First
Amendment to the Securities Purchase Agreement dated February16, 2010,
between the Company and BOTC Holdings LLC incorporated by reference to
exhibit 10.2 of the registrants filing on Form 8-K filed with the
Securities and Exchange Commission on February 19,
2010).
|
|
11.1
|
Earnings
per Share Computation. The information called for by this item is located
on page 92 of this Form 10-K/A Annual Report, and is incorporated herein
by reference.
|
|
21.1
|
Subsidiaries
of registrant.
|
|
23.1
|
Consent
of Symonds, Evans & Company, P.C., Independent
Accountants.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-4(a).
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule
15d-4(a).
|
|
32.0
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(b) or Rule 15d-14(b) and Section
906 of the Sarbanes-Oxley Act of
2002.
|
Exhibits
related to our Trust Preferred Securities have been intentionally
omitted. Upon written request, we will provide to you, without
charge, a copy of those exhibits. Written requests to obtain a list
of exhibits or any exhibit should be sent to Cascade Bancorp, 1100 NW Wall
Street, Bend, Oregon 97701, attention: Investor Relations.
121
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
|
CASCADE
BANCORP
|
|
/s/ Patricia L. Moss
|
/s/ Gregory D. Newton
|
|
Patricia
L. Moss
|
Gregory
D. Newton
|
|
President/Chief
Executive Officer
|
Executive
Vice President/Chief Financial Officer
|
|
Date: March 12,
2010
|
Date: March 12,
2010
|
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/ Jerol E. Andres
|
March 12, 2010
|
||
Jerol
E. Andres, Director/Vice Chairman
|
Date
|
||
/s/ Gary L. Hoffman
|
March 12, 2010
|
||
Gary
L. Hoffman, Director/Chairman
|
Date
|
||
/s/ Henry H. Hewitt
|
March 12, 2010
|
||
Henry
H. Hewitt, Director
|
Date
|
||
/s/ Judith A. Johansen
|
March 12, 2010
|
||
Judith
A. Johansen, Director
|
Date
|
||
/s/ Clarence Jones
|
March 12, 2010
|
||
Clarence
Jones, Director
|
Date
|
||
/s/ Patricia L. Moss
|
March 12, 2010
|
||
Patricia
L. Moss, Director/President & CEO
|
Date
|
||
/s/ Ryan R. Patrick
|
March 12, 2010
|
||
Ryan
R. Patrick, Director
|
Date
|
||
/s/ James E. Petersen
|
March 12, 2010
|
||
James
E. Petersen, Director
|
Date
|
122