CASCADE BANCORP - FORM 10-Q - November 6, 2015

Attached files

file	filename
EX-32 - EXHIBIT 32 - CASCADE BANCORP	cacb-2015x0930xexx32.htm
EX-31.2 - EXHIBIT 31.2 - CASCADE BANCORP	cacb-2015x0930xexx312.htm
EX-31.1 - EXHIBIT 31.1 - CASCADE BANCORP	cacb-2015x0930xexx311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)



X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2015



	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to_________

Commission file number: 000-23322

CASCADE BANCORP

(Exact name of registrant as specified in its charter)



Oregon	93-1034484
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)

1100 N.W. Wall Street

Bend, Oregon 97701

(Address of principal executive offices)

(Zip Code)

(877) 617-3400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

¨ Large accelerated filer x Accelerated filer ¨ 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 72,779,005 shares of no par value Common Stock as of November 4, 2015.

CASCADE BANCORP & SUBSIDIARY

FORM 10-Q

QUARTERLY REPORT

September 30, 2015



	INDEX
		Page
PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets:	3
	September 30, 2015 and December 31, 2014

	Condensed Consolidated Statements of Operations:	4
	Three and nine months ended September 30, 2015 and 2014

	Condensed Consolidated Statements of Comprehensive Income:	5
	Three and nine months ended September 30, 2015 and 2014

	Condensed Consolidated Statements of Cash Flows:	6
	Nine months ended September 30, 2015 and 2014

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52

Item 4.	Controls and Procedures	52

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 3.	Defaults Upon Senior Securities	53

Item 4.	Mine Safety Disclosures	53

Item 5	Other Information	53

Item 6.	Exhibits	53

SIGNATURES		55

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Cascade Bancorp & Subsidiary

Condensed Consolidated Balance Sheets

September 30, 2015 and December 31, 2014

(Dollars in thousands)

(unaudited)



	September 30, 2015			December 31, 2014
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	47,007		$	39,115
Interest bearing deposits	77,823			43,701
Federal funds sold	273			273
Total cash and cash equivalents	125,103			83,089
Investment securities available-for-sale	296,139			319,882
Investment securities held-to-maturity, estimated fair value of $148,043 at September 30, 2015; $155,555 at December 31, 2014	143,793			152,579
Federal Home Loan Bank (FHLB) stock	3,012			25,646
Loans held for sale	2,824			6,690
Loans, net	1,619,238			1,468,784
Premises and equipment, net	42,106			43,649
Bank-owned life insurance (BOLI)	54,185			53,449
Other real estate owned (OREO), net	3,871			3,309
Deferred tax asset (DTA), net	53,823			66,126
Core deposit intangible (CDI)	7,068			7,683
Goodwill	78,610			80,082
Other assets	38,501			30,169
Total assets	$	2,468,273		$	2,341,137
LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	749,927		$	619,377
Interest bearing demand	1,010,489			995,497
Savings	135,610			129,610
Time	186,969			237,138
Total deposits	2,082,995			1,981,622
Other liabilities	53,689			44,032
Total liabilities	2,136,684			2,025,654
Stockholders’ equity:
Preferred stock, no par value; 5,000,000 shares authorized; none issued or outstanding	—			—
Common stock, no par value; 100,000,000 shares authorized; 72,789,412 issued and outstanding as of September 30, 2015; 72,491,850 issued and outstanding as of December 31, 2014	452,350			450,999
Accumulated deficit	(123,339		)	(138,351		)
Accumulated other comprehensive income	2,578			2,835
Total stockholders’ equity	331,589			315,483
Total liabilities and stockholders’ equity	$	2,468,273		$	2,341,137

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2015 and 2014

(Dollars in thousands, except per share amounts)

(unaudited)



	Three months ended September 30,						Nine months ended September 30, 2015
	2015			2014			2015			2014
Interest income:
Interest and fees on loans	$	17,788		$	16,571		$	51,269		$	41,467
Interest on investments	2,995			2,655			8,783			6,003
Other interest income	58			87			118			159
Total interest income	20,841			19,313			60,170			47,629

Interest expense:
Deposits:
Interest bearing demand	337			284			965			676
Savings	10			10			30			21
Time	83			427			442			929
Other borrowings	—			—			6			6
Total interest expense	430			721			1,443			1,632

Net interest income	20,411			18,592			58,727			45,997
Loan loss provision (recovery)	—			—			(2,000		)	—
Net interest income after loan loss provision (recovery)	20,411			18,592			60,727			45,997

Non-interest income:
Service charges on deposit accounts	1,326			1,457			3,836			3,324
Card issuer and merchant services fees, net	1,837			1,884			5,336			4,480
Earnings on BOLI	252			280			736			712
Mortgage banking income, net	624			734			2,089			1,790
Swap fee income	595			476			1,895			1,419
SBA gain on sales and fee income	554			272			1,060			529
Gain on sales of investments	503			—			503			—
Other income	693			430			3,746			1,445
Total non-interest income	6,384			5,533			19,201			13,699

Non-interest expense:
Salaries and employee benefits	11,315			10,199			33,033			31,588
Occupancy	1,123			1,553			3,906			7,544
Information technology	745			1,032			2,729			3,634
Equipment	390			497			1,142			1,463
Communications	560			695			1,585			1,640
Federal Deposit Insurance Corporation (FDIC) insurance	342			371			1,046			1,057
OREO (income) expense	122			314			11			1,016
Professional services	1,548			1,461			3,931			6,887
Card issuer	693			1,140			2,199			2,028
Insurance	183			254			583			1,029
Other expenses	2,049			2,212			6,116			5,917
Total non-interest expense	19,070			19,728			56,281			63,803

Income (loss) before income taxes	7,725			4,397			23,647			(4,107		)
Income tax (provision) / benefit	(2,626		)	(1,965		)	(8,635		)	2,804
Net income (loss)	$	5,099		$	2,432		$	15,012		$	(1,303	)

Basic and diluted income (loss) per share:
Net income (loss) per common share	$	0.07		$	0.03		$	0.21		$	(0.02	)
Net income (loss) per common share (diluted)	$	0.07		$	0.03		$	0.21		$	(0.02	)

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2015 and 2014

(Dollars in thousands)

(unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net income (loss)	$	5,099		$	2,432		$	15,012		$	(1,303	)

Other comprehensive income (loss):
Change in unrealized gain on investment securities available-for-sale	427			(1,595		)	(300		)	1,855
Tax effect of the unrealized gain on investment securities available-for-sale	(162		)	606			43			(705		)
Total other comprehensive income (loss)	$	265		$	(989	)	$	(257	)	$	1,150
Comprehensive income (loss)	$	5,364		$	1,443		$	14,755		$	(153	)

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2015 and 2014

(Dollars in thousands)

(unaudited)



	Nine Months Ended September 30,
	2015			2014
Net cash provided by operating activities	$	33,341		5,363

Investing activities:
Purchases of investment securities available-for-sale	(65,584		)	(36,246		)
Purchases of investment securities held to maturity	—			(1,112		)
Proceeds from sales, maturities, calls, and prepayments of investment securities available-for-sale	88,325			75,969
Proceeds from maturities and calls of investment securities held-to-maturity	8,349			15,337
Proceeds from redemption of FHLB stock	22,634			612
Loan originations, net	(150,012		)	(77,552		)
Purchases of premises and equipment, net	(334		)	(1,589		)
Proceeds from sales of premises and equipment	26			289
Proceeds from sales of other assets	1,855			2,669
Proceeds from sales of OREO	964			1,946
Net cash received from acquisition of Home	—			38,620
Net cash used in investing activities	(93,777		)	18,943

Financing activities:
Net increase in deposits	102,845			58,466
Tax effect of non-vested restricted stock	(395		)	(339		)
FHLB advance borrowings	95,000			60,000
Repayment of FHLB advances	(95,000		)	(87,000		)
Net cash provided by (used in) financing activities	102,450			31,127
Net decrease in cash and cash equivalents	42,014			55,433
Cash and cash equivalents at beginning of period	83,089			81,849
Cash and cash equivalents at end of period	$	125,103		$	137,282

Supplemental disclosures of cash flow information:
Interest paid	$	7,981		$	5,099
Taxes paid	$	891		$	33
Transfers of PP&E to Other Assets	$	394		$	—
Loans transferred to OREO	$	1,558		$	129

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

1. Basis of Presentation

The accompanying interim condensed consolidated financial statements include the accounts of Cascade Bancorp (“Bancorp”), an Oregon-chartered single bank holding company, and its wholly-owned subsidiary, Bank of the Cascades (the “Bank”) (collectively, the “Company” or “Cascade”). All significant inter-company accounts and transactions have been eliminated in consolidation.

The interim condensed consolidated financial statements have been prepared by the Company without audit and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all adjustments (all of which are of a normal and recurring nature) necessary for the fair presentation of the results of the interim periods presented. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and income and expenses for the reporting periods. Actual results could differ from those estimates. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

The condensed consolidated financial statements as of and for the year ended December 31, 2014 were derived from audited consolidated financial statements, but do not include all disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Annual Report”). The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2014 consolidated financial statements, including the notes thereto, included in the 2014 Annual Report.

Certain amounts in 2014 have been reclassified to conform to the 2015 presentation; however, the reclassifications do not have a material impact on the condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

2. Investment Securities

Investment securities at September 30, 2015 and December 31, 2014 consisted of the following (dollars in thousands):



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
September 30, 2015
Available-for-sale
U.S. Agency mortgage-backed securities (MBS) *	$	164,457	$	3,564	$	(411	)	$	167,610
Non-agency MBS	111,889		510		(542		)	111,857
U.S. Agency asset-backed securities	7,672		874		(19		)	8,527
Corporate securities	7,441		169		—			7,610
Mutual fund	522		13		—			535
	$	291,981	$	5,130	$	(972	)	$	296,139
Held-to-maturity
U.S. Agency MBS	$	101,840	$	3,215	$	—		$	105,055
Obligations of state and political subdivisions	41,524		1,049		(14		)	42,559
Tax credit investments	429		—		—			429
	$	143,793	$	4,264	$	(14	)	$	148,043

December 31, 2014
Available-for-sale
U.S. Agency MBS *	$	232,514	$	4,562	$	(896	)	$	236,180
Non-agency MBS	66,872		232		(407		)	66,697
U.S. Agency asset-backed securities	8,192		858		(42		)	9,008
Corporate securities	7,333		137		—			7,470
Mutual fund	514		13		—			527
	$	315,425	$	5,802	$	(1,345	)	$	319,882
Held-to-maturity
U.S. Agency MBS	$	110,175	$	2,032	$	—		$	112,207
Obligations of state and political subdivisions	41,840		962		(18		)	42,784
Tax credit investments	564		—		—			564
	$	152,579	$	2,994	$	(18	)	$	155,555

* U.S. Agency MBS include private label MBS of approximately $8.1 million and $9.3 million at September 30, 2015 and December 31, 2014, respectively, which are supported by FHA/VA collateral.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

The following table presents the contractual maturities of investment securities at September 30, 2015 (dollars in thousands):



	Available-for-sale				Held-to-maturity
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Due in one year or less	$	161	$	161	$	195	$	196
Due after one year through five years	4,317		4,319		25,346		25,850
Due after five years through ten years	54,308		54,131		94,706		98,012
Due after ten years	232,673		236,993		23,117		23,556
Mutual fund	522		535		—		—
Tax credit investments	—		—		429		429
	$	291,981	$	296,139	$	143,793	$	148,043

The following table presents the fair value and gross unrealized losses of the Bank’s investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014 (dollars in thousands):



	Less than 12 months					12 months or more					Total
	Estimated fair value		Unrealized losses			Estimated fair value		Unrealized losses			Estimated fair value		Unrealized losses
September 30, 2015
Available-for-sale
U.S. Agency MBS	$	6,003	$	(30	)	$	40,161	$	(381	)	$	46,164	$	(411	)
Non-Agency MBS	60,711		(401		)	4,213		(141		)	64,924		(542		)
U.S. Agency asset-backed securities	—		—			1,543		(19		)	1,543		(19		)
	$	66,714	$	(431	)	$	45,917	$	(541	)	$	112,631	$	(972	)

Held-to-maturity
Obligations of state and political subdivisions	$	733	$	—		$	1,015	$	(14	)	$	1,748	(14		)
	$	733	$	—		$	1,015	$	(14	)	$	1,748	$	(14	)

December 31, 2014
Available-for-sale
U.S. Agency MBS	$	15,807	$	(17	)	$	41,479	$	(879	)	$	57,286	$	(896	)
Non-Agency MBS	23,953		(220		)	6,411		(187		)	30,364		(407		)
U.S. Agency asset-backed securities	718		(6		)	1,582		(36		)	2,300		(42		)
	$	40,478	$	(243	)	$	49,472	$	(1,102	)	$	89,950	$	(1,345	)

Held-to-maturity
Obligations of state and political subdivisions	$	3,806	$	(18	)	$	—	$	—		$	3,806	$	(18	)
	$	3,806	$	(18	)	$	—	$	—		$	3,806	$	(18	)

The unrealized losses on investments in U.S. Agency and non-agency MBS and U.S. Agency asset-backed securities are primarily due to changes in market yield/rate spreads at September 30, 2015 and December 31, 2014 as compared to yield/rate spread relationships prevailing at the time specific investment securities were purchased. Management expects the fair value of these

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

investment securities to recover as securities approach their maturity dates. Management does not believe that the above gross unrealized losses on investment securities are other-than-temporary. Accordingly, no impairment adjustments have been recorded.

Management intends to hold the investment securities classified as held-to-maturity until they mature, at which time the Company will receive full amortized cost value for such investment securities. Furthermore, as of September 30, 2015, management did not have the intent to sell any of the securities classified as held-to-maturity in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.

3. Loans and reserve for credit losses

The composition of the loan portfolio at September 30, 2015 and December 31, 2014 was as follows (dollars in thousands):



	September 30, 2015					December 31, 2014
	Amount			Percent		Amount			Percent
Originated loans (a):
Commercial real estate:
Owner occupied	$	263,621		18.9	%	$	198,845		16.8	%
Non-owner occupied	421,749			30.2	%	383,287			32.4	%
Total commercial real estate loans	685,370			49.1	%	582,132			49.2	%
Construction	121,737			8.7	%	100,437			8.5	%
Residential real estate	206,521			14.8	%	122,478			10.4	%
Commercial and industrial	344,410			24.7	%	342,746			29.0	%
Consumer	37,786			2.7	%	34,897			2.9	%
Total loans	1,395,824			100.0	%	1,182,690			100.0	%

Less:
Deferred loan fees	(1,608		)			(1,703		)
Reserve for loan losses	(26,623		)			(22,053		)
Loans, net	$	1,367,593				$	1,158,934

Acquired loans (b):
Commercial real estate:
Owner occupied	$	40,761		18.7	%	$	48,413		18.0	%
Non-owner occupied	88,046			40.3	%	102,890			38.2	%
Total commercial real estate loans	128,807			59.0	%	151,303			56.2	%
Construction	10,749			4.9	%	22,564			8.4	%
Residential real estate	58,246			26.7	%	71,385			26.5	%
Commercial and industrial	19,277			8.8	%	22,444			8.3	%
Consumer	1,365			0.6	%	1,963			0.6	%
Total loans	$	218,444		100.0	%	$	269,659		100.0	%


Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	10,610		32.0	%	$	11,851		29.5	%
Non-owner occupied	10,206			30.7	%	11,366			28.3	%
Total commercial real estate loans	20,816			62.7	%	23,217			57.8	%
Construction	2,121			6.4	%	2,427			6.0	%
Residential real estate	7,548			22.7	%	10,824			26.9	%
Commercial and industrial	2,423			7.3	%	3,285			8.2	%
Consumer	293			0.9	%	438			1.1	%
Total loans	$	33,201		100.0	%	$	40,191		100.0	%

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



Total loans:
Commercial real estate:
Owner occupied	$	314,992		19.1	%	$	259,109		17.4	%
Non-owner occupied	520,001			31.6	%	497,543			33.3	%
Total commercial real estate loans	834,993			50.7	%	756,652			50.7	%
Construction	134,607			8.2	%	125,428			8.4	%
Residential real estate	272,315			16.5	%	204,687			13.7	%
Commercial and industrial	366,110			22.2	%	368,475			24.7	%
Consumer	39,444			2.4	%	37,298			2.5	%
Total loans	1,647,469			100.0	%	1,492,540			100.0	%

Less:
Deferred loan fees	(1,608		)			(1,703		)
Reserve for loan losses	(26,623		)			(22,053		)
Loans, net	$	1,619,238				$	1,468,784

(a) Originated loans are loans organically made through the Company’s normal and customary origination process, including ARM purchases.
(b) Acquired loans are loans acquired in the acquisition of Home Federal Bancorp, Inc. (“Home”), discussed elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”), less acquired covered loans.
(c) Acquired covered loans are loans acquired in the acquisition of Home that are covered under FDIC loss share agreements.

The following describes the distinction between originated, acquired and acquired covered loan portfolios and certain significant accounting policies relevant to each of these portfolios.

Originated loans

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

Approximately 72.6% of the Bank’s originated loan portfolio at September 30, 2015 consisted of real estate-related loans, including construction and development loans, residential mortgage loans, and commercial loans secured by commercial real estate. At September 30, 2015, approximately 75.4% of the Bank’s total portfolio (inclusive of acquired and acquired covered loans) consisted of real estate-related loans as described above. The Bank’s results of operations and financial condition are affected by general economic trends and in particular, the strength of the local residential and commercial real estate markets in Central, Southern and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho and Seattle, Washington metro areas. Real estate values could be affected by, among other things, a worsening of national and local economic conditions, an increase in foreclosures, a decline in home sale volumes, and an increase in interest rates. Furthermore, the Bank may experience an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to the Bank in the event of a sustained downturn in business and economic conditions generally or specifically in the principal markets in which the Bank does business. An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of non-performing assets, net charge-offs, and loan loss provision. Management expects to diversify its commercial real estate (“CRE”) concentration over time, but real estate-related loans will remain a significant portfolio component due to the nature of the economies, businesses, and markets the Bank serves.

In the normal course of business, the Bank may participate portions of loans to third parties in order to extend the Bank’s lending capability or to mitigate risk. At September 30, 2015 and December 31, 2014, the portion of loans participated to third parties (which are not included in the accompanying condensed consolidated financial statements) totaled $50.2 million and $34.5 million, respectively.

Acquired and acquired covered loans

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

Acquired loans and acquired covered loans are those purchased in the Company’s acquisition of Home, which was completed on May 16, 2014 (the “Acquisition Date”). See the 2014 Annual Report for further information on the Home acquisition. These loans were recorded at estimated fair value at the Acquisition Date. The fair value estimates for acquired and acquired covered loans are based on expected prepayments, charge-offs and the amount and timing of undiscounted expected principal, interest and other cash flows. The net fair value adjustment to the acquired and acquired covered loans at acquisition was a reduction of $6.0 million, representing a valuation adjustment for interest rate and credit which will be accreted over the life of the loans (approximately 10 years).

Of the loans acquired on the Acquisition Date and still held at September 30, 2015, $10.2 million, or 4.0%, were graded substandard. Of that amount, $1.5 million, or 14.5%, of the substandard loans were covered under a loss sharing agreement with the FDIC. With the amount of classified loans acquired being nominal, all loans acquired are treated in a manner consistent with originated loans for credit risk management and accounting purposes.

As of September 30, 2015, $33.2 million, or 13.2%, of the $251.6 million in acquired and acquired covered loans were covered under loss sharing agreements with the FDIC (“covered loans”). The agreements were entered into in September 2009 and September 2010 between the FDIC and Home. The loss sharing agreements have limited terms (10 years for net losses on single-family residential real estate loans, as defined by the FDIC, five years for losses on non-residential real estate loans, as defined by the FDIC, and an additional three years with respect to recoveries on non-residential real estate loans). After the expiration of the loss sharing agreements, the Company will not be indemnified for losses and related expenses on covered loans. When the loss sharing agreements expire, the Company’s and the Bank’s risk-based capital ratios will be reduced. While the agreements are in place, the covered loans receive a 20% risk-weighting. When the agreements expire, the risk-weighting for previously covered loans will most likely increase to 100%, based on current regulatory capital definitions. Nearly all of the assets remaining in the covered loans portfolios are non-single family covered loans. Therefore, most of the covered loans were no longer indemnified after September 30, 2014 or were no longer indemnified after September 30, 2015. Only $1.5 million of the acquired covered loans were graded substandard. With the amount of classified loans covered under these agreements being nominal, amounts that may be due to or due from the FDIC under loss sharing agreements will be accounted for on a cash basis.

A net loss share payable was recorded at the Acquisition Date which represents the estimated value of reimbursement the Company expects to pay to the FDIC for recoveries net of incurred losses on covered loans. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. Upon the determination of an incurred loss or recovery, the loss share receivable/payable will be changed by the amount due to or due from the FDIC.

Changes in the loss share payable (receivable) associated with acquired covered loans for the three and nine months ended September 30, 2015 were as follows (dollars in thousands):



	Three months ended			Nine months ended
	September 30, 2015
Balance at beginning of period	$	(268	)	$	(449	)
Paid to FDIC	268			1,049
Increase due to impairment	—			73
FDIC reimbursement	(300		)	(1,100		)
Shared loss expenses	66			171
Adjustments from prior periods	(124		)	(140		)
OREO loss carryforward	—			38
Balance at end of period	$	(358	)	$	(358	)

Reserve for loan losses

The reserve for loan losses represents management’s estimate of known and inherent losses in the loan portfolio as of the condensed consolidated balance sheet date and is recorded as a reduction to loans. The reserve for loan losses is increased by charges to operating expense through the loan loss provision, and decreased by loans charged-off, net of recoveries. The reserve for loan losses requires complex subjective judgments as a result of the need to make estimates about matters that are uncertain. The reserve for loan losses is maintained at a level currently considered adequate to provide for potential loan losses based on management’s assessment of various factors affecting the loan portfolio.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

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

For purposes of assessing the appropriate level of the reserve for loan losses, the Company analyzes loans and commitments to loan, and the amount of reserves allocated to loans and commitments to loan in each of the following reserve categories: pooled reserves, specifically identified reserves for impaired loans, and the unallocated reserve. Also, for purposes of analyzing loan portfolio credit quality and determining the appropriate level of reserve for loan losses, the Company identifies loan portfolio segments and classes based on the nature of the underlying loan collateral.

As of March 31, 2015, the reserve for loan loss methodology was enhanced within the Company’s commercial and industrial (“C&I”) loan portfolio with respect to its holdings of shared national credits (“SNCs”). Risk ratings for individual SNCs are estimated using analysis of both public debt ratings and internal ratings. Expected loss rates are determined based upon historical published specific loss data for similar loans based on average losses and losses stratified by public debt ratings. Public ratings combined with internal risk rates are used to determine a minimum historical loss factor for each SNC loan. This amount may be increased for qualitative conditions including macroeconomic environment and observations by the Company’s SNC management group. The SNC lending strategy is intended to diversify the Company’s credit risk profile geographically and by industry. Additionally, such loans enhance the Company’s interest rate risk profile as they float with LIBOR rates.

The increase in the reserve for loan losses from December 31, 2014 to September 30, 2015 was related to net recoveries during the period. The unallocated reserve for loan losses at September 30, 2015 has increased $0.1 million from the balance at December 31, 2014. Management believes that the amount of unallocated reserve for loan losses is appropriate and will continue to evaluate the amount going forward.

Acquired reserve for loan losses

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

Covered reserve for loan losses

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

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

Transactions and allocations in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the three and nine months ended September 30, 2015 and 2014 were as follows (dollars in thousands):



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
For the three months ended September 30, 2015
Allowance for Loan Losses
Balance at June 30, 2015	$	5,032		$	1,356		$	2,463		$	11,355		$	1,001		$	2,294	$	23,501
Loan loss provision (credit)	(490		)	(293		)	(162		)	(2,245		)	99			3,091		—
Recoveries	408			155			162			2,885			179			—		3,789
Loans charged off	—			—			(50		)	(293		)	(324		)	—		(667		)
Balance at end of period	$	4,950		$	1,218		$	2,413		$	11,702		$	955		$	5,385	$	26,623

Reserve for unfunded lending commitments
Balance at June 30, 2015	$	48		$	268		$	25		$	75		$	24		$	—	$	440
Provision for unfunded loan commitments	—			—			—			—			—			—		—
Balance at end of period	$	48		$	268		$	25		$	75		$	24		$	—	$	440

Reserve for credit losses
Reserve for loan losses	$	4,950		$	1,218		$	2,413		$	11,702		$	955		$	5,385	$	26,623
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	4,998		$	1,486		$	2,438		$	11,777		$	979		$	5,385	$	27,063

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
For the nine months ended September 30, 2015
Allowance for Loan Losses
Balance at December 31, 2014	$	5,614		$	1,133		$	2,121		$	6,844		$	1,047		$	5,294	$	22,053
Loan loss provision (credit)	(4,397		)	(193		)	(60		)	2,024			535			91		(2,000		)
Recoveries	4,011			278			746			3,440			457					8,932
Loans charged off	(278		)	—			(394		)	(606		)	(1,084		)			(2,362		)
Balance at end of period	$	4,950		$	1,218		$	2,413		$	11,702		$	955		$	5,385	$	26,623

Reserve for unfunded lending commitments
Balance at December 31, 2014	$	48		$	268		$	25		$	75		$	24		$	—	$	440
Provision for unfunded loan commitments	—			—			—			—			—			—		—
Balance at end of period	$	48		$	268		$	25		$	75		$	24		$	—	$	440

Reserve for credit losses
Reserve for loan losses	$	4,950		$	1,218		$	2,413		$	11,702		$	955		$	5,385	$	26,623
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	4,998		$	1,486		$	2,438		$	11,777		$	979		$	5,385	$	27,063

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
For the three months ended September 30, 2014
Allowance for Loan Losses
Balance at June 30, 2014	$	7,960		$	728		$	2,068		$	6,615		$	1,181		$	1,919	$	20,471
Loan loss provision (credit)	(1,203		)	(597		)	6			469			211			1,114		—
Recoveries	317			869			349			512			76			—		2,123
Loans charged off	(91		)	—			(539		)	(244		)	(369		)	—		(1,243		)
Balance at end of period	$	6,983		$	1,000		$	1,884		$	7,352		$	1,099		$	3,033	$	21,351

Reserve for unfunded lending commitments
Balance at June 30, 2014	$	48		$	268		$	25		$	75		$	24		$	—	$	440
Provision for unfunded loan commitments	—			—			—			—			—			—		—
Balance at end of period	$	48		$	268		$	25		$	75		$	24		$	—	$	440

Reserve for credit losses
Reserve for loan losses	$	6,983		$	1,000		$	1,884		$	7,352		$	1,099		$	3,033	$	21,351
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	7,031		$	1,268		$	1,909		$	7,427		$	1,123		$	3,033	$	21,791

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
For the nine months ended September 30, 2014
Allowance for Loan Losses
Balance at December 31, 2013	$	9,565		$	535		$	2,381		$	6,261		$	1,401		$	714	$	20,857
Loan loss provision	(2,681		)	(482		)	(264		)	706			402			2,319		—
Recoveries	1,318			1,243			630			1,969			230			—		5,390
Loans charged off	(1,219		)	(296		)	(863		)	(1,584		)	(934		)	—		(4,896		)
Balance at end of period	$	6,983		$	1,000		$	1,884		$	7,352		$	1,099		$	3,033	$	21,351

Reserve for unfunded lending commitments
Balance at December 31, 2013	$	48		$	268		$	25		$	75		$	24		$	—	$	440
Provision for unfunded loan commitments	—			—			—			—			—			—		—
Balance at end of period	$	48		$	268		$	25		$	75		$	24		$	—	$	440

Reserve for credit losses
Reserve for loan losses	$	6,983		$	1,000		$	1,884		$	7,352		$	1,099		$	3,033	$	21,351
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	7,031		$	1,268		$	1,909		$	7,427		$	1,123		$	3,033	$	21,791

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

An individual loan is impaired when, based on current information and events, management believes that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The following table presents the reserve for loan losses and the recorded investment in loans by portfolio segment and impairment evaluation method at September 30, 2015 and December 31, 2014 (dollars in thousands):



	Reserve for loan losses						Recorded investment in loans
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
September 30, 2015
Commercial real estate	$	78	$	4,872	$	4,950	$	3,679	$	831,314	$	834,993
Construction	—		1,218		1,218		365		134,242		134,607
Residential real estate	—		2,413		2,413		—		272,315		272,315
Commercial and industrial	123		11,579		11,702		2,561		363,549		366,110
Consumer	—		955		955		—		39,444		39,444
	$	201	$	21,037	21,238		$	6,605	$	1,640,864	$	1,647,469
Unallocated					5,385
					$	26,623

December 31, 2014
Commercial real estate	$	60	$	5,554	$	5,614	$	28,947	$	727,705	$	756,652
Construction	—		1,133		1,133		963		124,465		125,428
Residential real estate	—		2,121		2,121		317		204,370		204,687
Commercial and industrial	25		6,819		6,844		3,495		364,980		368,475
Consumer	—		1,047		1,047		—		37,298		37,298
	$	85	$	16,674	16,759		$	33,722	$	1,458,818	$	1,492,540
Unallocated					5,294
					$	22,053

The above reserve for loan losses includes an unallocated allowance of $5.4 million at September 30, 2015 and $5.3 million at December 31, 2014. The change in the unallocated allowance is mainly a result of an enhanced reserve methodology for the C&I loans, specifically related to SNC loans as described above.

The Company uses credit risk ratings, which reflect the Bank’s assessment of a loan’s risk or loss potential, for purposes of assessing the appropriate level of reserve for loan losses. The Bank’s credit risk rating definitions along with applicable borrower characteristics for each credit risk rating are as follows:

Acceptable

The borrower is a reasonable credit risk and demonstrates the ability to repay the loan from normal business operations. Loans are generally made to companies operating in an economy and/or industry that is generally sound. The borrower tends to operate in regional or local markets and has achieved sufficient revenues for the business to be financially viable. The borrowers financial performance has been consistent in normal economic times and has been average or better than average for its industry.

A loan can also be considered Acceptable even though the borrower may have some vulnerability to downturns in the economy due to marginally satisfactory working capital and debt service cushion. Availability of alternate financing sources may be limited or nonexistent. In some cases, the borrower’s management may have limited depth or continuity but is still considered capable. An adequate primary source of repayment is identified while secondary sources may be illiquid, more speculative, less readily identified, or reliant upon collateral liquidation. Loan agreements will be well defined, including several financial performance covenants and detailed operating covenants. This category also includes commercial loans to individuals with average or better than average capacity to repay.

Pass-Watch

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

Loans are graded Pass-Watch when temporary situations increase the level of the Bank’s risk associated with the loan, and remain graded Pass-Watch until the situation has been corrected. These situations may involve one or more weaknesses in cash flow, collateral value or indebtedness that could, if not corrected within a reasonable period of time, jeopardize the full repayment of the debt. In general, loans in this category remain adequately protected by the borrower’s net worth and paying capacity, or pledged collateral.

Special Mention

A Special Mention credit has potential weaknesses that may, if not checked or corrected, weaken the loan or leave the Bank inadequately protected at some future date. Loans in this category are deemed by management of the Bank to be currently protected but reflect potential problems that warrant more than the usual management attention but do not justify a Substandard classification.

Substandard

Substandard loans are those inadequately protected by the net worth and paying capacity of the obligor and/or by the value of the pledged collateral, if any. Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision and borrowers are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants.

CRE and construction loans are classified Substandard when well-defined weaknesses are present which jeopardize the orderly liquidation of the loan. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, and/or the project’s failure to fulfill economic expectations. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Substandard loans also include impaired loans. Impaired loans bear the characteristics of Substandard loans as described above, and the Company has determined it does not expect timely payment of all contractually due interest and principal. Impaired loans may be adequately secured by collateral.

During the nine months ended September 30, 2015, the Bank saw improved credit quality, as demonstrated by a reduction in the aggregate balance of all loans adversely classified. The improvement was mainly in Special Mention loans, resulting from improving economic conditions as well as payoffs and paydowns in the Special Mention portfolio. Substandard loan balances have increased modestly, with improvements in certain credits offset by an increase related to a SNC, included in C&I loans, that was downgraded during the period.

The following table presents, by portfolio class, the recorded investment in loans by internally assigned grades at September 30, 2015 and December 31, 2014 (dollars in thousands):



	Loan grades
	Acceptable		Pass-Watch		Special Mention		Substandard		Total
September 30, 2015
Originated loans (a):
Commercial real estate:
Owner occupied	$	241,110	$	8,556	$	3,283	$	10,672	$	263,621
Non-owner occupied	400,442		9,121		7,056		5,130		421,749
Total commercial real estate loans	641,552		17,677		10,339		15,802		685,370
Construction	119,700		813		1,208		16		121,737
Residential real estate	204,711		714		596		500		206,521
Commercial and industrial	311,794		10,118		9,926		12,572		344,410
Consumer	37,786		—		—		—		37,786
	$	1,315,543	$	29,322	$	22,069	$	28,890	$	1,395,824

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



Acquired loans (b):
Commercial real estate:
Owner occupied	$	29,198	$	3,513	$	7,795	$	255		$	40,761
Non-owner occupied	65,798		5,699		8,930		7,619			88,046
Total commercial real estate loans	94,996		9,212		16,725		7,874			128,807
Construction	10,749		—		—		—			10,749
Residential real estate	57,408		—		—		838			58,246
Commercial and industrial	15,678		121		3,493		(15		)	19,277
Consumer	1,362		—		—		3			1,365
	$	180,193	$	9,333	$	20,218	$	8,700		$	218,444

Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	10,518	$	—	$	—	$	92		$	10,610
Non-owner occupied	5,134		—		4,572		500			10,206
Total commercial real estate loans	15,652		—		4,572		592			20,816
Construction	44		2,041		—		36			2,121
Residential real estate	7,207		—		—		341			7,548
Commercial and industrial	1,921		—		—		502			2,423
Consumer	293		—		—		—			293
	$	25,117	$	2,041	$	4,572	$	1,471		$	33,201

Total loans:
Commercial real estate:
Owner occupied	$	280,826	$	12,069	$	11,078	$	11,019		$	314,992
Non-owner occupied	471,374		14,820		20,558		13,249			520,001
Total commercial real estate loans	752,200		26,889		31,636		24,268			834,993
Construction	130,493		2,854		1,208		52			134,607
Residential real estate	269,326		714		596		1,679			272,315
Commercial and industrial	329,393		10,239		13,419		13,059			366,110
Consumer	39,441		—		—		3			39,444
	$	1,520,853	$	40,696	$	46,859	$	39,061		$	1,647,469

(a) Originated loans are loans organically made through the Company’s normal and customary origination process, including ARM purchases.
(b) Acquired loans are loans acquired in the acquisition of Home less acquired covered loans.
(c) Acquired covered loans are loans acquired in the acquisition of Home that are covered under FDIC loss share agreements.

Loan grades

Acceptable

Pass-Watch

Special
Mention

Substandard

Total

December 31, 2014

Originated loans (a):

Commercial real estate:

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



Owner occupied	$	167,509	$	8,749	$	4,035	$	18,552	$	198,845
Non-owner occupied	350,420		10,383		16,145		6,339		383,287
Total commercial real estate loans	517,929		19,132		20,180		24,891		582,132
Construction	95,440		3,086		1,850		61		100,437
Residential real estate	119,280		1,380		552		1,266		122,478
Commercial and industrial	306,030		18,721		14,676		3,319		342,746
Consumer	34,852		—		—		45		34,897
	$	1,073,531	$	42,319	$	37,258	$	29,582	$	1,182,690

Acquired loans (b):
Commercial real estate:
Owner occupied	$	42,673	$	1,125	$	4,352	$	263	$	48,413
Non-owner occupied	75,340		11,019		12,265		4,266		102,890
Total commercial real estate loans	118,013		12,144		16,617		4,529		151,303
Construction	22,448		—		—		116		22,564
Residential real estate	70,002		—		—		1,383		71,385
Commercial and industrial	22,236		151		—		57		22,444
Consumer	1,907		—		—		56		1,963
	$	234,606	$	12,295	$	16,617	$	6,141	$	269,659

Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	10,363	$	—	$	1,048	$	440	$	11,851
Non-owner occupied	5,668		361		4,641		696		11,366
Total commercial real estate loans	16,031		361		5,689		1,136		23,217
Construction	48		2,332		—		47		2,427
Residential real estate	9,601		—		—		1,223		10,824
Commercial and industrial	2,779		—		—		506		3,285
Consumer	438		—		—		—		438
	$	28,897	$	2,693	$	5,689	$	2,912	$	40,191

Total loans:
Commercial real estate:
Owner occupied	$	220,545	$	9,874	$	9,435	$	19,255	$	259,109
Non-owner occupied	431,428		21,763		33,051		11,301		497,543
Total commercial real estate loans	651,973		31,637		42,486		30,556		756,652
Construction	117,936		5,418		1,850		224		125,428
Residential real estate	198,883		1,380		552		3,872		204,687
Commercial and industrial	331,045		18,872		14,676		3,882		368,475
Consumer	37,197		—		—		101		37,298
	$	1,337,034	$	57,307	$	59,564	$	38,635	$	1,492,540

(a) Originated loans are loans organically made through the Company’s normal and customary origination process, including ARM purchases.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

(b) Acquired loans are loans acquired in the acquisition of Home less acquired covered loans.

(c) Acquired covered loans are loans acquired in the acquisition of Home that are covered under FDIC loss share agreements.

The following table presents, by portfolio class, an age analysis of past due loans, including loans placed on non-accrual at September 30, 2015 and December 31, 2014 (dollars in thousands):



	30-89 days past due		90 days or more past due		Total past due		Current		Total loans
September 30, 2015
Originated loans (a):
Commercial real estate:
Owner occupied	$	46	$	1,215	$	1,261	$	262,360	$	263,621
Non-owner occupied	604		—		604		421,145		421,749
Total commercial real estate loans	650		1,215		1,865		683,505		685,370
Construction	172		—		172		121,565		121,737
Residential real estate	238		—		238		206,283		206,521
Commercial and industrial	593		350		943		343,467		344,410
Consumer	95		—		95		37,691		37,786
	$	1,748	$	1,565	$	3,313	$	1,392,511	$	1,395,824

Acquired loans (b):
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	40,761	$	40,761
Non-owner occupied	—		—		—		88,046		88,046
Total commercial real estate loans	—		—		—		128,807		128,807
Construction	48		—		48		10,701		10,749
Residential real estate	1,266		370		1,636		56,610		58,246
Commercial and industrial	39		—		39		19,238		19,277
Consumer	8		—		8		1,357		1,365
	$	1,361	$	370	$	1,731	$	216,713	$	218,444

Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	10,610	$	10,610
Non-owner occupied	—		—		—		10,206		10,206
Total commercial real estate loans	—		—		—		20,816		20,816
Construction	2,041		—		2,041		80		2,121
Residential real estate	100		248		348		7,200		7,548
Commercial and industrial	3		11		14		2,409		2,423
Consumer	7		—		7		286		293
	$	2,151	$	259	$	2,410	$	30,791	$	33,201

Total loans:
Commercial real estate:
Owner occupied	$	46	$	1,215	$	1,261	$	313,731	$	314,992
Non-owner occupied	604		—		604		519,397		520,001
Total commercial real estate loans	650		1,215		1,865		833,128		834,993
Construction	2,261		—		2,261		132,346		134,607

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



Residential real estate	1,604		618		2,222		270,093		272,315
Commercial and industrial	635		361		996		365,114		366,110
Consumer	110		—		110		39,334		39,444
	$	5,260	$	2,194	$	7,454	$	1,640,015	$	1,647,469

December 31, 2014
Originated loans (a):
Commercial real estate:
Owner occupied	$	732	$	3,716	$	4,448	$	194,397	$	198,845
Non-owner occupied	1,718		971		2,689		380,598		383,287
Total commercial real estate loans	2,450		4,687		7,137		574,995		582,132
Construction	—		100		100		100,337		100,437
Residential real estate	662		110		772		121,706		122,478
Commercial and industrial	288		334		622		342,124		342,746
Consumer	139		45		184		34,713		34,897
	$	3,539	$	5,276	$	8,815	$	1,173,875	$	1,182,690

Acquired loans (b):
Commercial real estate:
Owner occupied	$	24	$	—	$	24	$	48,389	$	48,413
Non-owner occupied	—		120		120		102,770		102,890
Total commercial real estate loans	24		120		144		151,159		151,303
Construction	—		—		—		22,564		22,564
Residential real estate	1,361		288		1,649		69,736		71,385
Commercial and industrial	—		—		—		22,444		22,444
Consumer	55		—		55		1,908		1,963
	$	1,440	$	408	$	1,848	$	267,811	$	269,659

Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	11,851	$	11,851
Non-owner occupied	—		27		27		11,339		11,366
Total commercial real estate loans	—		27		27		23,190		23,217
Construction	—		—		—		2,427		2,427
Residential real estate	375		—		375		10,449		10,824
Commercial and industrial	—		—		—		3,285		3,285
Consumer	11		—		11		427		438
	$	386	$	27	$	413	$	39,778	$	40,191

Total loans:
Commercial real estate:
Owner occupied	$	756	$	3,716	$	4,472	$	254,637	$	259,109
Non-owner occupied	1,718		1,118		2,836		494,707		497,543
Total commercial real estate loans	2,474		4,834		7,308		749,344		756,652
Construction	—		100		100		125,328		125,428
Residential real estate	2,398		398		2,796		201,891		204,687
Commercial and industrial	288		334		622		367,853		368,475
Consumer	205		45		250		37,048		37,298

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



	$	5,365	$	5,711	$	11,076	$	1,481,464	$	1,492,540

(a) Originated loans are loans organically made through the Company's normal and customary origination process, including ARM purchases.
(b) Acquired loans are loans acquired in the acquisition of Home less acquired covered loans.
(c) Acquired covered loans are loans acquired in the acquisition of Home that are covered under FDIC loss share agreements.

Loans contractually past due 90 days or more on which the Company continued to accrue interest were $0.21 million and $0.05 million at September 30, 2015 and December 31, 2014, respectively.

The following table presents information related to impaired loans, by portfolio class, at September 30, 2015 and December 31, 2014 (dollars in thousands):



	Impaired loans
	With a related allowance		Without a related allowance		Total recorded balance		Unpaid principal balance		Related allowance
September 30, 2015
Commercial real estate:
Owner occupied	$	1,055	$	1,974	$	3,029	$	4,207	$	73
Non-owner occupied	650		—		650		650		5
Total commercial real estate loans	1,705		1,974		3,679		4,857		78
Construction	—		365		365		365		—
Residential real estate	—		—		—		—		—
Commercial and industrial	2,399		162		2,561		2,954		123
Consumer	—		—		—		—		—
	$	4,104	$	2,501	$	6,605	$	8,176	$	201

December 31, 2014
Commercial real estate:
Owner occupied	$	436	$	5,624	$	6,060	$	8,699	$	41
Non-owner occupied	1,087		21,800		22,887		22,943		19
Total commercial real estate loans	1,523		27,424		28,947		31,642		60
Construction	—		963		963		963		—
Residential real estate	—		317		317		353		—
Commercial and industrial	2,702		793		3,495		3,962		25
Consumer	—		—		—		—		—
	$	4,225	$	29,497	$	33,722	$	36,920	$	85

At September 30, 2015 and December 31, 2014, the total recorded balance of impaired loans in the above table included $0.8 million and $22.8 million, respectively, of troubled debt restructuring (“TDR”) loans which were not on non-accrual status.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

The following table presents, by portfolio class, the average recorded investment in impaired loans for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30, 2015
	2015		2014		2015		2014
Commercial real estate:
Owner occupied	$	3,063	$	6,010	$	3,225	$	6,134
Non-owner occupied	1,072		22,586		8,297		22,637
Total commercial real estate loans	4,135		28,596		11,522		28,771
Construction	443		963		543		1,221
Residential real estate	28		391		66		403
Commercial and industrial	2,712		3,663		2,815		4,188
Consumer	—		—		—		—
	$	7,318	$	33,613	$	14,946	$	34,583

Interest income recognized for cash payments received on impaired loans for the three and nine months ended September 30, 2015 was insignificant.

Information with respect to the Company’s non-performing loans, by portfolio class, at September 30, 2015 and December 31, 2014 is as follows (dollars in thousands):



	September 30, 2015		December 31, 2014
Commercial real estate:
Owner occupied	$	2,570	$	5,564
Non-owner occupied	479		1,940
Total commercial real estate loans	3,049		7,504
Construction	16		216
Residential real estate	1,455		3,165
Commercial and industrial	401		744
Consumer	3		56
Total non-accrual loans	$	4,924	$	11,685

Accruing loans which are contractually past due 90 days or more:
Commercial real estate:
Owner occupied	$	—	$	—
Non-owner occupied	—		—
Total commercial real estate loans	—		—
Construction	—		—
Residential real estate	—		—
Commercial and industrial	209		9
Consumer	—		45
Total accruing loans which are contractually past due 90 days or more	$	209	$	54

TDRs

The Company allocated $0.2 million and $0.1 million of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2015 and December 31, 2014, respectively. TDRs involve the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. As indicated

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

above, TDRs may also include loans to borrowers experiencing financial distress that renewed at existing contractual rates, but below market rates for comparable credit quality. The Company has been actively utilizing these programs and working with its customers to improve obligor cash flow and related prospect for repayment. Concessions may include, but are not limited to, interest rate reductions, principal forgiveness, deferral of interest payments, extension of the maturity date, and other actions intended to minimize potential losses to the Company. For each commercial loan restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the new structure can be successful and whether cash flows will be sufficient to support the restructured debt. Generally, if the loan is on accrual status at the time of restructuring, it will remain on accrual status after the restructuring. After six consecutive payments under the restructured terms, a non-accrual restructured loan is reviewed for possible upgrade to accrual status.

Typically, once a loan is identified as a TDR it will retain that designation until it is paid off, because restructured loans generally are not at market rates following restructuring. Under certain circumstances, a TDR may be removed from TDR status if it is determined to no longer be impaired and the loan is at a competitive interest rate. Under such circumstances, allowance allocations for loans removed from TDR status would be based on the historical allocation for the applicable loan grade and loan class.

There were no loans modified and recorded as TDRs during the three and nine months ended September 30, 2015 or 2014. At both September 30, 2015 and 2014, the Company had no remaining commitments to lend on loans accounted for as TDRs.

There were no TDRs which had payment defaults during the nine months ended September 30, 2015 or 2014 that had been previously restructured within the twelve months prior to September 30, 2015 or 2014.

4. Other Real Estate Owned (“OREO”), net

The following table presents activity related to OREO for the periods shown (dollars in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Balance at beginning of period	$	4,040		$	5,724		$	3,309		$	3,144
Additions	—			129			1,558			3,643
Dispositions	(162		)	(1,756		)	(2,541		)	(2,070		)
Change in valuation allowance	(7		)	(65		)	1,545			(685		)
Balances at end of period	$	3,871		$	4,032		$	3,871		$	4,032

The following table summarizes activity in the OREO valuation allowance for the periods shown (dollars in thousands):



	Three months ended September 30,					Nine months ended September 30,
	2015		2014			2015			2014
Balance at beginning of period	$	771	$	3,014		$	2,323		$	2,394
Additions to the valuation allowance	7		219			12			925
Reductions due to sales	—		(154		)	(1,557		)	(240		)
Balance at end of period	$	778	$	3,079		$	778		$	3,079

The following table summarizes OREO expenses (income) for the periods shown (dollars in thousands):

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



	Three months ended September 30,					Nine months ended September 30,
	2015		2014			2015			2014
Operating costs	$	53	$	151		$	159		$	210
Net gains on dispositions	62		(56		)	(160		)	(119		)
Increases in valuation allowance	7		219			12			925
Total	$	122	$	314		$	11		$	1,016

5. Mortgage Servicing Rights (“MSRs”)

The Bank sells a predominant share of the fixed rate mortgage loans it originates into the secondary market while retaining servicing of such loans. MSRs included in other assets in the condensed consolidated financial statements as of September 30, 2015 and December 31, 2014 are accounted for at the lower of origination value less accumulated amortization or current fair value. The net carrying value of MSRs at September 30, 2015 and December 31, 2014 was $2.2 million. There was no valuation allowance at September 30, 2015 or December 31, 2014.

The following table presents activity in MSRs for the periods shown (dollars in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015		2014
Balance at beginning of period	$	2,276		$	2,239		2,248		2,232
Additions	130			256			506		542
Amortization	(195		)	(207		)	(543	)	(486	)
Change in valuation allowance	—			—			—		—
Balances at end of period	$	2,211		$	2,288		2,211		2,288

Mortgage banking income, net, consisted of the following for the periods shown (dollars in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015		2014
Origination and processing fees	$	94		$	264		538		562
Gain on sales of mortgage loans, net	551			502			1,582		1,218
MSR valuation allowance	—			—			—		—
Servicing fees	174			175			512		496
Amortization	(195		)	(207		)	(543	)	(486	)
Mortgage banking income, net	$	624		$	734		2,089		1,790

6. Goodwill and other intangibles assets

The Company recorded $78.6 million of goodwill in connection with the acquisition of Home in 2014. In accordance with the Intangibles - Goodwill and Other topic of the Financial Accounting Standards Board (“FASB”) ASC, goodwill is not amortized but is reviewed for potential impairment at the reporting unit level. Management analyzes its goodwill for impairment on an annual basis and between annual tests in certain circumstances, such as upon material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company performed an impairment assessment as of December 31, 2014 and concluded that there was no impairment.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

Core deposit intangibles (“CDI”) are evaluated for impairment if events and circumstances indicate a possible impairment. The CDI are amortized on a straight-line basis over an estimated life of 10 years. The following table sets forth activity for CDI for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands).



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Gross core deposit intangibles balance, beginning of period	$	8,196		$	8,196		$	8,196		$	529
Accumulated amortization, beginning of period	(923		)	(103		)	(513		)	—
Core deposit intangible, net, beginning of period	7,273			8,093			7,683			529
Established through acquisitions	—			—			—			7,667
CDI current period amortization	(205		)	(205		)	(615		)	(308		)
Total core deposit intangible, end of period	$	7,068		$	7,888		$	7,068		$	7,888

The following table provides the estimated future amortization expense of core deposit intangibles for the remaining three months ending December 31, 2015 and the succeeding four years (dollars in thousands):



Years Ending December 31,
2015	$	205
2016	820
2017	820
2018	820
2019	820

7. Basic and Diluted Net Income per Share

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

The numerators and denominators used in computing basic and diluted net income per common share for the three and nine months ended September 30, 2015 and 2014 can be reconciled as follows (dollars in thousands, except per share data):



	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Net income (loss)	$	5,099	$	2,432	$	15,012	$	(1,303	)

Weighted-average shares outstanding - basic	71,868,045		71,653,141		71,743,576		59,128,342
Dilutive securities	101,323		79,255		105,835		47,543
Weighted-average shares outstanding - diluted	71,969,368		71,732,396		71,849,411		59,175,885
Common stock equivalent shares excluded due to antidilutive effect	3,361,774		—		3,361,774		589,198

Basic and diluted:
Net income (loss) per common share	$	0.07	$	0.03	$	0.21	$	(0.02	)
Net income (loss) per common share (diluted)	$	0.07	$	0.03	$	0.21	$	(0.02	)

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

8. Stock-Based Compensation

At September 30, 2015, 275,413 shares reserved under the Company’s stock-based compensation plans were available for future grants.

During the nine months ended September 30, 2015, the Company granted 397,472 shares of restricted stock with a weighted-average grant date fair value of $4.98 per share, which vest between 2016 and 2020. During the same period, the Company granted 3,300,000 stock options with a weighted-average exercise price of $4.79 per share, of which 50% vest in 2018, 25% vest in 2019 and 25% vest in 2020 on the grant date anniversary. During the nine months ended September 30, 2014, the Company granted 641,879 shares of restricted stock with a weighted-average grant date fair value of $4.80 per share, which vest between 2015 and 2019. During the same period, no stock options were granted. The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions to value options granted in 2015:



	2015
Dividend yield	0.0	%
Expected volatility	36.6	%
Risk-free interest rate	1.3	%
Expected option lives	5.0 years

The dividend yield was based on historical dividend information. The Company has not paid dividends since the third quarter of 2008 resulting in the dividend yield of 0.0%. The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods of extraordinary volatility in order to provide a basis for a reasonable estimate of fair value. Periods that were determined to be extraordinary were replaced with the mean volatility of like publicly-traded community banks in the western U.S. Over time, identified periods of extraordinary volatility will recede and will be replaced with the Company’s actual historical volatility. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the date of grant for periods corresponding with the expected lives of the options granted. The expected option lives represent the period of time that options are expected to be outstanding, giving consideration to vesting schedules and historical exercise and forfeiture patterns.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of publicly-traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model is affected by subjective assumptions, including historical volatility of the Company’s common stock price.

The following table presents the activity related to stock options for the nine months ended September 30, 2015:



	Options		Weighted- average exercise price		Weighted- average remaining contractual term (years)	Aggregate intrinsic value (000)
Options outstanding at January 1, 2015	85,901		$	34.86	5.7	$	—
Granted	3,300,000		4.79		9.3	2.0
Canceled / forfeited	(8,011	)	19.52		N/A	N/A
Expired	(1,691	)	151.20		N/A	N/A
Options outstanding at September 30, 2015	3,376,199		$	5.45	9.2	$	2.0
Options exercisable at September 30, 2015	63,212		$	39.72	4.5	$	—

Stock-based compensation expense related to stock options for the nine months ended September 30, 2015 and 2014 was approximately $0.70 million and $0.02 million, respectively. As of September 30, 2015, there was approximately $4.7 million of unrecognized compensation cost related to non-vested stock options that will be recognized over the remaining vesting periods of the stock options.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

The following table presents the activity related to non-vested restricted stock for the nine months ended September 30, 2015:



	Number of shares		Weighted- average grant date fair value per share
Non-vested as of January 1, 2015	794,473		$	6.62
Granted	397,472		4.98
Vested	(213,840	)	5.18
Canceled / forfeited	(66,119	)	5.00
Non-vested as of September 30, 2015	911,986		$	6.36

Restricted stock is generally scheduled to vest over a three to five year period, with the unearned compensation related to restricted stock amortized to expense on a straight-line basis. As of September 30, 2015, unrecognized compensation cost related to non-vested restricted stock totaled approximately $3.9 million. Total expense recognized by the Company for non-vested restricted stock for the nine months ended September 30, 2015 and 2014 was $1.0 million and $0.9 million, respectively. There was no unrecognized compensation cost related to restricted stock units (“RSUs”) at September 30, 2015 and December 31, 2014, as all RSUs were fully-vested at the date of the grant.

9. Interest Rate Swap Derivatives

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

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

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

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

As of September 30, 2015 and December 31, 2014, the notional values or contractual amounts and fair values of the Company’s derivatives not designated in hedge relationships were as follows (dollars in thousands):

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)



	Asset Derivatives								Liability Derivatives
	September 30, 2015				December 31, 2014				September 30, 2015				December 31, 2014
	Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (1)		Notional/ Contract Amount		Fair Value (2)		Notional/ Contract Amount		Fair Value (2)
Interest rate swaps	$	147,058	$	9,753	$	82,935	$	4,828	$	147,058	$	9,753	$	82,935	$	4,828

(1) Included in Other Assets on the condensed consolidated balance sheet.
(2) Included in Other Liabilities on the condensed consolidated balance sheet.

Swap fee income, as included in non-interest income, was $0.6 million and $1.9 million for the three and nine months ended September 30, 2015, respectively, and $0.5 million and $1.4 million for the three and nine months ended September 30, 2014, respectively.

The Company generally posts collateral against derivative liabilities in the form of cash. Collateral posted against derivative liabilities was $9.6 million and $4.6 million as of September 30, 2015 and December 31, 2014, respectively.

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

The following table illustrates the potential effect of the Company’s derivative master netting arrangements, by type of financial instrument, on the Company’s condensed consolidated balance sheet as of September 30, 2015 and December 31, 2014 (dollars in thousands):



	September 30, 2015
							Gross Amounts of Financial Instruments Not Offset in the Balance Sheet
	Gross Amounts Recognized		Amounts offset in the Balance Sheet		Net Amounts in the Balance Sheet		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Balance Sheet		Net Amount
Asset Derivatives
Interest rate swaps	$	9,753	$	—	$	9,753	$	—	$	—	$	9,753

Liability Derivatives
Interest rate swaps	$	9,753	$	—	$	9,753	$	—	$	9,600	$	153

	December 31, 2014
							Gross Amounts of Financial Instruments Not Offset in the Balance Sheet
	Gross Amounts Recognized		Amounts offset in the Balance Sheet		Net Amounts in the Balance Sheet		Netting Adjustment Per Applicable Master Netting Agreements		Fair Value of Financial Collateral in the Balance Sheet		Net Amount
Derivative assets
Interest rate swaps	$	4,828	$	—	$	4,828	$	—	$	—	$	4,828

Derivative liabilities
Interest rate swaps	$	4,828	$	—	$	4,828	$	—	$	4,595	$	233

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

10. Income Taxes

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

During the three and nine months ended September 30, 2015, the Company recorded a $2.6 million and $8.6 million income tax provision, respectively. During the three and nine months ended September 30, 2014, the Company recorded a $2.0 million income tax provision and $2.8 million income tax benefit, respectively. As of September 30, 2015, the net DTA was $53.8 million compared with a net DTA of $66.1 million as of December 31, 2014. During the third quarter and year-to-date period of 2015, the Company’s current taxes include federal and state alternative minimum taxes and other state minimum taxes. During the nine months ended September 30, 2015, approximately $4.1 million was realized as a result of the carry back of the net operating loss generated from Home Federal's 2014 final tax return. Our estimated effective income tax rate differs from the statutory income tax rate primarily due to the exclusion of certain BOLI and municipal bond interest income from taxable income.

There are a number of tax issues that impact the deferred tax asset balance, including changes in temporary differences between the financial statement recognition of revenue and expenses, estimates as to the deductibility of prior losses and potential consequence of Section 382 of the Internal Revenue Code. See also “Critical Accounting Policies and Accounting Estimates - Deferred Income Taxes” included in Part II, Item 7 of the Company’s 2014 Annual Report.

11. Fair Value Measurements

GAAP establishes a hierarchy for determining fair value measurements which includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:


•	Level 1: Inputs that are quoted unadjusted prices in active markets - that the Company has the ability to access at the measurement date - for identical assets or liabilities.

•

Level 2: Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs derived principally from, or corroborated by, observable market data by correlation or other means.


•	Level 3: Inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s assets and liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internal or third-party models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that assets or liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes that the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain assets and liabilities could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and, therefore, estimates of fair value after the condensed consolidated balance sheet date may differ significantly from the amounts presented herein.

The following is a description of the valuation methodologies used for assets measured at fair value on a recurring or non-recurring basis, as well as the general classification of such assets pursuant to valuation hierarchy:

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

Investment securities available-for-sale: Where quoted prices for identical assets are available in an active market, investment securities available-for-sale are classified within level 1 of the hierarchy. If quoted market prices for identical securities are not available, then fair values are estimated by independent sources using pricing models and/or quoted prices of investment securities with similar characteristics or discounted cash flows. The Company has categorized its investment securities available-for-sale as level 2, since a majority of such securities are MBS which are mainly priced in this latter manner.

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

Impaired loans: In accordance with GAAP, loans are measured for impairment using one of three methods: an observable market price (if available), the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the fair value of the loan’s collateral (if collateral dependent). Estimated fair value of the loan’s collateral is determined by appraisals or independent valuations which are then adjusted for the estimated costs related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. A significant portion of the Bank’s impaired loans are measured using the estimated fair market value of the collateral less the estimated costs to sell. The Company has categorized all its loans impaired during the calendar year utilizing fair value metrics as level 3. Loans that were impaired during the calendar year based on the present value of expected future cash flows discounted at the loans’ effective interest rates are not included in the table below as the loans’ effective interest rates are not based on current market rates.

OREO: The Company’s OREO is measured at estimated fair value less estimated costs to sell. Fair value is generally determined based on third-party appraisals of fair value in an orderly sale. Historically, appraisals have considered comparable sales of like assets in reaching a conclusion as to fair value. Since many recent real estate sales could be termed “distressed sales”, and since a preponderance have been short-sale or foreclosure related, this has directly impacted appraisal valuation estimates. Estimated costs to sell OREO are based on standard market factors. The valuation of OREO is subject to significant external and internal judgment. Management periodically reviews OREO to determine whether the property continues to be carried at the lower of its recorded book value or estimated fair value, net of estimated costs to sell. The Company has categorized its OREO as level 3.

The Company’s financial assets measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014 were as follows (dollars in thousands):



	Level 1		Level 2		Level 3
September 30, 2015
Assets:
Investment securities available-for-sale	$	—	$	296,139	$	—
Interest rate swap derivatives	—		9,753		—
Total assets	$	—	$	305,892	$	—

Liabilities:
Interest rate swap derivatives	$	—	$	9,753	$	—

December 31, 2014
Assets:
Investment securities available-for-sale	$	—	$	319,882	$	—
Interest rate swap derivatives	—		4,828		—
Total assets	$	—	$	324,710	$	—

Liabilities:
Interest rate swap derivatives	—		4,828		—

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

Certain assets are measured at fair value on a non-recurring 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 non-recurring basis by the Company at September 30, 2015 and December 31, 2014 (dollars in thousands):



	Level 1		Level 2		Level 3
September 30, 2015
Impaired loans	$	—	$	—	$	50
Other real estate owned	—		—		3,871
	$	—	$	—	$	3,921

December 31, 2014
Impaired loans	$	—	$	—	$	1,423
Other real estate owned	—		—		3,309
	$	—	$	—	$	4,732

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2015 and December 31, 2014 (dollars in thousands):



	September 30, 2015
	Fair Value Estimate		Valuation Techniques	Unobservable Input
Impaired loans	$	50	Market approach	Appraised value less selling costs of 5% to 10% Additional discounts of 5% to 50% to appraised value to reflect liquidation value
Other real estate owned	$	3,871	Market approach	Appraised value less selling costs of 5% to 10%



	December 31, 2014
	Fair Value Estimate		Valuation Techniques	Unobservable Input
Impaired loans	$	1,423	Market approach	Appraised value less selling costs of 5% to 10% Additional discounts of 5% to 50% to appraised value to reflect liquidation value
Other real estate owned	$	3,309	Market approach	Appraised value less selling costs of 5% to 10%

The Company did not change the methodology used to determine fair value for any assets or liabilities during 2014, or during the nine months ended September 30, 2015. In addition, for any given class of assets, the Company did not have any transfers between level 1, level 2, or level 3 during 2014 or the nine months ended September 30, 2015.

The following disclosures are made in accordance with the provisions of GAAP, which requires the disclosure of fair value information about financial instruments where it is practicable to estimate that value.

In cases where quoted market values are not available, the Company primarily uses present value techniques to estimate the fair value of its financial instruments. Valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current market exchange.

In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items which are not defined as financial instruments but which may have significant value. The Company does not believe that it would be practicable to estimate a representational fair value for these types of items as of September 30, 2015 and December 31, 2014.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

Because GAAP excludes certain financial instruments and all non-financial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.

The Company uses the following methods and assumptions to estimate the fair value of its financial instruments:

Cash and cash equivalents: The carrying amount approximates the estimated fair value of these instruments.

Investment securities: See above description.

FHLB stock: The carrying amount approximates the estimated fair value of this investment.

Loans: The estimated fair value of non-impaired loans is calculated by discounting the contractual cash flows of the loans using September 30, 2015 and December 31, 2014 origination rates. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. Estimated fair values for impaired loans are determined using an observable market price (if available), the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the loan’s collateral (if collateral dependent) as described above. Observable market prices for community bank loans are not generally available given the non-homogenous characteristics of such loans.

BOLI: The carrying amount approximates the estimated fair value of these instruments.

MSRs: The estimated fair value of MSRs is calculated by discounting the expected future contractual cash flows. Factors considered in the estimated fair value calculation include prepayment speed forecasts, market discount rates, earning rates, servicing costs, acquisition costs, ancillary income, and borrower rates.

Interest rate swap derivatives: See above description.

Deposits: The estimated fair value of demand deposits, consisting of checking, interest bearing demand, and savings deposit accounts, is represented by the amounts payable on demand. At the reporting date, the estimated fair value of time deposits is calculated by discounting the scheduled cash flows using the September 30, 2015 and December 31, 2014 rates offered on those instruments.

Loan commitments and standby letters of credit: The majority of the Bank’s commitments to extend credit have variable interest rates and “escape” clauses that permit the Bank to terminate its commitment 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.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

The estimated fair values of the Company’s significant on-balance sheet financial instruments at September 30, 2015 and December 31, 2014 were approximately as follows (dollars in thousands):



		September 30, 2015				December 31, 2014
	Level in Fair Value Hierarchy	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	Level 1	$	125,103	$	125,103	$	83,089	$	83,089
Investment securities:
Available-for-sale	Level 2	296,139		296,139		319,882		319,882
Held-to-maturity	Level 2	143,793		148,043		152,579		155,555
FHLB stock	Level 2	3,012		3,012		25,646		25,646
Loans held-for-sale	Level 2	2,824		2,824		6,690		6,690
Loans, net	Level 3	1,619,238		1,622,911		1,468,784		1,471,327
BOLI	Level 3	54,185		54,185		53,449		53,449
MSRs	Level 3	2,211		2,954		2,248		2,773
Interest rate swap derivatives	Level 2	9,753		9,753		4,828		4,828

Financial liabilities:
Deposits	Level 2	2,082,995		2,082,991		1,981,622		1,981,994
Interest rate swap derivatives	Level 2	9,753		9,753		4,828		4,828

12. Regulatory Matters

Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Bancorp’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Bancorp and the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Tier 1 capital to average assets, common equity Tier 1 capital, and Tier 1 and total capital to risk-weighted assets (all as defined in the regulations).

Federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. Such actions could potentially include a leverage capital limit, a risk-based capital requirement, and any other measure of capital deemed appropriate by the federal banking regulator for measuring the capital adequacy of an insured depository institution. In addition, payment of dividends by Bancorp and the Bank are subject to restriction by state and federal regulators and availability of retained earnings.

In July 2013, the Board of Governors of the Federal Reserve System and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III”). Under the final rules, which became effective for the Bancorp and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements increased for both the quantity and quality of capital held by the Bancorp and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (“CET1” ratio) of 4.5% and a capital conservation buffer of 2.5% above the regulatory minimum risk-based capital requirements, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III also (i) raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

fully phased-in), (ii) effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and (iii) requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures.

Bancorp’s and Bank’s actual capital amounts and ratios and the required capital ratios under the prompt corrective action framework as of September 30, 2015 and December 31, 2014 are presented in the following table (dollars in thousands):



	Actual				Regulatory minimum to be “adequately capitalized”				Regulatory minimum to be “well capitalized”
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
September 30, 2015
Tier 1 leverage (to average assets)
Bancorp	$	215,509	9.1	%	$	94,428	4.0	%	$	118,035	5.0	%
Bank	211,528		9.0	%	94,285		4.0	%	117,856		5.0	%
CET1 capital (to risk weighted assets)
Bancorp	215,509		11.3		85,700		4.5		123,790		6.5
Bank	211,528		11.1		85,747		4.5		123,856		6.5
Tier 1 capital (to risk-weighted assets)
Bancorp	215,509		11.3		114,267		6.0		152,356		8.0
Bank	211,528		11.1		114,329		6.0		152,439		8.0
Total capital (to risk-weighted assets)
Bancorp	239,596		12.6		152,356		8.0		190,446		10.0
Bank	235,599		12.4		152,439		8.0		190,548		10.0

December 31, 2014
Tier 1 leverage (to average assets)
Bancorp	$	170,615	7.7	%	$	89,076	4.0	%	$	111,345	5.0	%
Bank	167,056		7.5	%	88,946		4.0	%	111,183		5.0	%
Tier 1 capital (to risk-weighted assets)
Bancorp	170,615		9.9		68,892		4.0		103,338		6.0
Bank	167,056		9.7		68,700		4.0		103,050		6.0
Total capital (to risk-weighted assets)
Bancorp	192,162		11.2		137,784		8.0		172,230		10.0
Bank	188,543		11.0		137,400		8.0		171,750		10.0

13. Commitments and Contingencies

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

14. Subsequent Event

On October 28, 2015, the Company announced that the Bank had entered into an agreement to purchase 12 Oregon branch locations and three Washington branch locations from Bank of America. This acquisition allows Cascade the opportunity to enhance and strengthen its footprint in Oregon, while providing entry into the Washington market.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(unaudited)

Cascade will assume approximately $707 million of branch deposits in the transaction. Pending regulatory approval, the closing of the acquisition and conversion of these branches to Bank of the Cascade offices is expected to occur in the first quarter of 2016. Cascade plans on retaining current employees working at the branches and is committed to a smooth transition for customers.

15. New Authoritative Accounting Guidance

In April 2015, the FASB issued ASU 2015-03, “Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs and requires that the debt issuance costs related to a recognized debt liability be presented in the balance sheet as direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance of debt issuance costs are not affected by the amendments in this update. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. Adoption of ASU 2015-03 is not expected to have a material impact on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, “Receivables- Troubled Debt Structurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure” (“ASU 2014-14”). ASU 2014-14 clarifies accounting and reporting for foreclosed mortgage loans when the loan is subject to a government guarantee. The provisions require that a mortgage loan be derecognized and that a separate other receivable recognized upon foreclosure if 1) the loan has a government guarantee that is not separable from the loan before foreclosure; 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make claim on the guarantee, and the creditor has the ability to recover under that claim; and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU 2014-14 is effective for annual and interim reporting periods beginning after December 15, 2014. Adoption of ASU 2014-14 did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 establishes a comprehensive revenue recognition standard for virtually all industries under GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: 1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2017 with three transition methods available - full retrospective, retrospective and cumulative effect approach. Adoption of ASU 2014-09 is not expected to have a material effect on our consolidated financial statements.

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

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

The following discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto, included elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”). This discussion highlights key information as determined by management but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 9, 2015 (the “2014 Annual Report”), including its audited 2014 consolidated financial statements and the notes thereto as of December 31, 2014 and 2013 and for each of the years in the three-year period ended December 31, 2014.

In this Form 10-Q, please note that “we,” “our,” “us,” “Cascade” or the “Company” refer collectively to Cascade Bancorp (“Bancorp”), an Oregon chartered single bank holding company, and its wholly-owned subsidiary, Bank of the Cascades (the “Bank”).

Cautionary Information Concerning Forward-Looking Statements

This Form 10-Q contains forward-looking statements about the Company’s plans and anticipated results of operations and financial condition. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the words “expects,” “believes,” “anticipates,” “could,” “may,” “will,” “should,” “plan,” “predicts,” “projections,” “continue” and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the economy of the States of Oregon and Idaho generally, and Central, Southern and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho and greater Seattle, Washington areas; our ability to maintain asset quality and expand our market share or net interest margin; our ability to integrate future branch acquisitions; and expected cost savings, synergies and other related benefits of our acquisition of Home Federal Bancorp, Inc. (“Home”) might not be realized within the expected timeframe and costs or difficulties relating to the integration might be greater than expected. Further, actual results may be affected by competition with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Certain risks and uncertainties, and the Company’s success in managing such risks and uncertainties, could cause actual results to differ materially from those projected, including, among others, the risk factors disclosed in Part I - Item 1A of the 2014 Annual Report. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations

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

Critical Accounting Policies and Accounting Estimates

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2014 included in our 2014 Annual Report. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows.

Reserve for Credit Losses

The Company’s reserve for credit losses provides for estimated losses based upon evaluations of known and inherent risks in the loan portfolio and related loan commitments. Arriving at an estimate of the appropriate level of reserve for credit losses (which consists of the Company’s reserve for loan losses and reserve for loan commitments) involves a high degree of judgment and assessment of multiple variables that result in a methodology with relatively complex calculations and analysis. Management uses historical information to assess the adequacy of the reserve for loan losses and considers qualitative factors, including national and local macroeconomic conditions, real estate market behavior and a range of other factors, in its determination of the reserve.

On an ongoing basis, the Company seeks to enhance and refine its methodology such that the reserve is at an appropriate level and responsive to changing conditions. The Company is currently working to refine a subset of its methodology with respect to certain components within its qualitative factor analysis.

In this regard, as of March 31, 2015, the reserve for loan loss methodology was enhanced within the Company's commercial and industrial (“C&I”) loan portfolio with respect to shared national credits (“SNCs”). Risk rating for individual SNCs are estimated using analysis of both public debt ratings and internal ratings. Expected loss rates are determined based upon historical published specific loss data for similar loans based on average losses and losses stratified by public debt ratings. Public ratings combined with internal risk rates are used to determine a minimum historical loss factor for each SNC loan. This amount may be increased for qualitative conditions including macroeconomic environment and observations by the Company’s SNC management group. The SNCs lending strategy is intended to diversify the Company’s credit risk profile geographically and by industry. Additionally, such loans enhance the Company’s interest rate risk profile as they float with LIBOR rates.

Also, as of June 30, 2013, management implemented a homogeneous pool approach to estimate reserves for consumer and small business loans. This change has not had a material effect on the level of the reserve for loan losses. However, the Company’s methodology may not accurately estimate inherent loss or external factors and changing economic conditions may impact the loan portfolio and the level of reserves in ways currently unforeseen.

The reserve for loan losses is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. The reserve for loan commitments is increased and decreased through non-interest expense. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for credit losses, see “Loan Portfolio and Credit Quality” in Item 7 of our 2014 Annual Report.

Deferred Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision (credit) for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized.

Deferred tax assets are recognized subject to management’s judgment that realization is “more likely than not.” Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement. Tax benefits not meeting our realization criteria represent unrecognized tax benefits. We account for interest and penalties as a component of income tax expense.

The Company reversed its deferred tax asset (“DTA”) valuation allowance as of June 30, 2013 due to management’s determination that it was more likely than not that a significant portion of the Company’s DTA would be realized. Management’s determination resulted from consideration of both the positive and negative evidence available that can be objectively verified. For a full discussion of the Company’s considerations, see “Deferred Income Taxes” in Part II, Item 7 of our 2014 Annual Report.

As of September 30, 2015 and December 31, 2014, the Company had a net DTA of $53.8 million and $66.1 million, respectively, with the decrease from the prior period due in part to a $4.1 million carry back of Home's net operation losses generated from Home's 2014 final tax return. There are a number of tax issues that impact the DTA balance, including changes in temporary differences between the financial statement and tax recognition of revenue and expenses and estimates as to the deductibility of prior losses.

Other Real Estate Owned (“OREO”) and Foreclosed Assets

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

Goodwill

Goodwill from an acquisition is the value attributable to unidentifiable intangible elements acquired. At a minimum, annual evaluation of the value of goodwill is required.

An entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Factors assessed include all relevant events and circumstances including macroeconomic conditions, industry and market conditions, cost factors that have a negative effect on earnings and cash flows, overall financial performance, other relevant entity or reporting unit specific events and, if applicable, a sustained decrease in share price. If after assessing the totality of events or circumstances, such as those described above, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity shall perform a two-step impairment test.

The first step of the impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test shall be performed to measure the amount of impairment loss, if any, when it is more likely than not that goodwill impairment exists.

The second step of the impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

Management concluded as of December 31, 2014 that there have been no material events or circumstances that have changed since the initial recognition of goodwill on the Acquisition Date (as defined below) that lead management to believe it is more likely than not that the fair value of the Bank is less than its carrying amount. Therefore, no further testing is deemed necessary.

Economic Conditions

The Company’s banking business is closely tied to the economies of Idaho, Oregon and Washington, which in turn are influenced by regional and national economic trends and conditions. Idaho, Oregon and Washington have recently been experiencing improved economic trends, including gains in employment and increased real estate activity. National and regional economies and real estate prices have generally improved, as has business and consumer confidence. The Company’s markets, however, continue to be sensitive to general economic trends and conditions, including real estate values, and an unforeseen economic shock or a return of adverse economic conditions could cause deterioration of local economies and adversely affect the Company’s business, financial condition and results of operations.

Financial Highlights

On May 16, 2014 (the “Acquisition Date”), the Company completed its acquisition of Home in a stock and cash transaction valued at $241.4 million. The transaction value includes $122.2 million in cash and 24,309,131 shares of the Company’s common stock. The completion of the acquisition provided an expanded geographic footprint for the Company and increased the size of the balance sheet wherein the combined companies expect to realize economies of scale and other operating efficiencies. Assets and liabilities acquired in the Home acquisition were recorded at fair value.

As a result of the Home acquisition, goodwill of $78.6 million was recorded. Goodwill represents the excess of the purchase price of $241.4 million less the fair value of the net identifiable assets acquired of $162.8 million.

The financial statements as of September 30, 2015 and 2014 are inclusive of the effects of the combined results of operations with Home. However, due to the timing of the acquisition in 2014, year over year comparisons are significantly affected by this transaction.


•	Net income for the third quarter of 2015 was $5.1 million, or $0.07 per share, compared to $4.8 million, or $0.07 per share, for the second quarter of 2015 (“linked quarter”), and $2.4 million, or $0.03 per share, for the third quarter of 2014.


•	Third quarter organic loan growth¹was approximately $26.3 million, or 7.7% annualized, and is net of a large construction payoff. Year-to-date (“YTD”) annualized organic growth was 11.9%. At September 30, 2015, gross loans were $1.6 billion.


•	Total deposits were $2.1 billion at September 30, 2015, up $36.5 million compared to the linked quarter with non-interest bearing accounts up $44.7 million, or 6.3%, from the linked quarter. At quarter-end, total checking balances represented over 57.5% of total deposits with an overall cost of funds of 0.08%.


•	Third quarter net interest income was $20.4 million, up $1.1 million, or 5.4%, from the linked quarter.


•	Net interest margin (“NIM”) was 3.72% for the third quarter of 2015, compared to 3.70% in the linked quarter and 3.63% for the quarter ended September 30, 2014.


•	Third quarter net loan recoveries totaled $3.1 million, bringing the allowance for loan losses (“ALLL”) to 1.62% of gross loans.


•	At September 30, 2015, stockholders’ equity was $331.6 million, with book value per share of $4.56 and tangible book value² per share of $3.38.


•	Return on average tangible assets³ was 0.85% compared to 0.83% in the linked quarter.


•	Return on average tangible stockholders' equity⁴ was 8.33% compared to 8.06% in the linked quarter.


•	On October 9, 2015, the Bank announced the hiring of a commercial banking team in the Seattle, Washington market.

¹ Organic loan growth is a non-GAAP measure defined as total loan growth less acquired loans during the period. Total loan growth was $21.4 million during the quarter, with acquired loans declining $4.9 million, resulting in organic net loan growth of $26.3 million for the quarter.

²Tangible book value per common share is a non-GAAP measure defined as total stockholders’ equity, less the sum of core deposit intangible (“CDI”) and goodwill, divided by total number of shares outstanding.

³ Return on average tangible assets is a non-GAAP measure defined as average total assets, less the sum of average CDI and goodwill, divided by net income.

⁴Return on average tangible stockholders' equity is a non-GAAP measure defined as average total stockholders' equity, less the sum of average CDI and goodwill, divided by net income.

RESULTS OF OPERATIONS –Three and Nine Months Ended September 30, 2015 and 2014

Income Statement

Net Income

Net income for the quarter ended September 30, 2015 was $0.07 per share, or $5.1 million, compared to $0.07 per share, or $4.8 million, in the linked quarter and $0.03 per share, or $2.4 million, for the third quarter of 2014. The increase in net income in the third quarter of 2015 compared to the third quarter of 2014 was the result of a $1.8 million increase in net interest income, a $0.9 million increase in non-interest income and a $0.7 million decrease in non-interest expense, offset by a $0.7 million increase in the provision for income taxes. Net income for the nine months ended September 30, 2015 was $0.21 per share, or $15.0 million, compared to a net loss of $0.02 per share, or $1.3 million, for the nine months ended September 30, 2014. The loss in the 2014 period was mainly due to the effect of the Home acquisition and one-time acquisition related costs. Improvements in 2015 earnings are attributable to a $12.7 million increase in net interest income arising from increased earning assets from the Home acquisition, as well as a $5.5 million increase in non-interest income.

Net Interest Income

Net interest income was $20.4 million for the third quarter of 2015, as compared to $18.6 million in the third quarter of 2014.

Total interest income increased $1.5 million from $19.3 million in the third quarter of 2014 to $20.8 million in the third quarter of 2015. This increase was due primarily to originated loan growth over the past year. Accretion of the fair value discount on loans acquired as part the acquisition of Home is accreted over the remaining term to maturity of the acquired loans into interest income on loans. Accretion will vary in the event of payoffs or paydowns of specific loans. For the nine months ended September 30, 2015, accretion was approximately $1.1 million.

Total interest expense for the third quarter of 2015 was $0.4 million compared to $0.7 million for the year ago period. The current period saw a reduction in time deposits expense owing to a strategic run-off of higher priced CDs acquired in the Home acquisition.

The NIM for the third quarter of 2015 was 3.72%, compared to NIM of 3.63% in the third quarter of 2014. The NIM for the nine months ended September 30, 2015 was 3.72%, compared to NIM of 3.79% in the nine months ended September 30, 2014.

Components of Net Interest Margin

The following tables set forth the components of the Company’s NIM for the three and nine months ended September 30, 2015 and 2014. The tables present average balance sheet information, interest income and yields on average interest-earning assets, interest expense and rates paid on average interest-bearing liabilities, net interest income, net interest spread and NIM for the Company (dollars in thousands):



	Three Months Ended September 30,
	2015							2014
	Average Balance			Interest Income/ Expense		Average Yield or Rates		Average Balance			Interest Income/ Expense		Average Yield or Rates
Assets
Investment securities	$	450,655		$	2,995	2.64	%	$	426,055		$	2,655	2.47	%
Interest bearing balances due from other banks	97,099			58		0.24	%	145,433			87		0.24	%
Federal funds sold	273			—		—	%	191			—		—	%
Federal Home Loan Bank stock	3,018			—		—	%	26,124			—		—	%
Loans (1)(2)(3)	1,626,066			17,788		4.34	%	1,433,394			16,571		4.59	%
Total earning assets/interest income	2,177,111			20,841		3.80	%	2,031,197			19,313		3.77	%
Reserve for loan losses	(25,113		)					(21,341		)
Cash and due from banks	45,781							42,400
Premises and equipment, net	42,362							44,458
Bank-owned life insurance	54,041							53,006
Deferred tax asset	55,389							70,056
Goodwill	78,610							76,032
Accrued interest and other assets	43,729							46,128
Total assets	$	2,471,910						$	2,341,936


Liabilities and Stockholders' Equity
Interest bearing demand deposits	$	1,040,493		337		0.13	%	$	964,803		284		0.12	%
Savings deposits	134,033			10		0.03	%	131,075			10		0.03	%
Time deposits	193,895			83		0.17	%	252,429			427		0.67	%
Total interest bearing liabilities/interest expense	1,368,421			430		0.12	%	1,348,307			721		0.21	%
Demand deposits	728,104							644,939
Other liabilities	46,907							39,923
Total liabilities	2,143,432							2,033,169
Stockholders' equity	328,478							308,767
Total liabilities and stockholders' equity	$	2,471,910						$	2,341,936
Net interest income				$	20,411						$	18,592

Net interest spread						3.68	%						3.56	%

Net interest income to earning assets						3.72	%						3.63	%


(1)	Average non-performing loans included in the computation of average loans for the three months ended September 30, 2015 and 2014 was approximately $4.1 million and $10.7 million, respectively.


(2)	Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled approximately $1.0 million in 2015 and $0.5 million in 2014.


(3)	Includes loans held for sale.



	Nine Months Ended September 30,
	2015							2014
	Average Balance			Interest Income/ Expense		Average Yield or Rates		Average Balance			Interest Income/ Expense		Average Yield or Rates
Assets
Investment securities	$	459,306		$	8,783	2.56	%	$	308,958		$	6,003	2.60	%
Interest bearing balances due from other banks	62,106			118		0.25	%	86,727			159		0.25	%
Federal funds sold	273			—		—	%	79			—		—	%
Federal Home Loan Bank stock	15,453			—		—	%	17,873			—		—	%
Loans (1)(2)(3)	1,573,712			51,269		4.36	%	1,207,022			41,467		4.59	%
Total earning assets/interest income	2,110,850			60,170		3.81	%	1,620,659			47,629		3.93	%
Reserve for loan losses	(24,038		)					(21,449		)
Cash and due from banks	43,004							35,468
Premises and equipment, net	43,024							38,685
Bank-owned life insurance	53,795							44,660
Deferred tax asset	60,962							58,708
Goodwill	79,052							38,119
Accrued interest and other assets	43,764							31,596
Total assets	$	2,410,413						$	1,846,446


Liabilities and Stockholders' Equity
Interest bearing demand deposits	$	1,012,221		$	965	0.13	%	$	740,260		676		0.12	%
Savings deposits	132,704			30		0.03	%	91,584			21		0.03	%
Time deposits	208,722			442		0.28	%	191,507			929		0.65	%
Other borrowings	2,253			6		0.36	%	2,960			6		0.27	%
Total interest bearing liabilities/interest expense	1,355,900			1,443		0.14	%	1,026,311			1,632		0.21	%
Demand deposits	684,859							539,197
Other liabilities	45,764							31,400
Total liabilities	2,086,523							1,596,908
Stockholders' equity	323,890							249,538
Total liabilities and stockholders' equity	$	2,410,413						$	1,846,446
Net interest income				$	58,727						$	45,997

Net interest spread
						3.67	%						3.72	%
Net interest income to earning assets
						3.72	%						3.79	%


(1)	Average non-performing loans included in the computation of average loans for the nine months ended September 30, 2015 and 2014 was approximately $5.8 million and $8.4 million, respectively.


(2)	Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled approximately $2.2 million in 2015 and $1.8 million in 2014.


(3)	Includes loans held for sale.

Analysis of Changes in Interest Income and Expense

The following table shows the dollar amount of increase (decrease) in the Company’s consolidated interest income and expense for the three and nine months ended September 30, 2015, and attributes such variance to “volume” or “rate” changes (dollars in thousands). The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.



	Three Months Ended September 30,
	2015 over 2014
	Total Increase			Amount of Change Attributed to
	(Decrease)			Volume			Rate
Interest income:
Interest and fees on loans	$	1,217		$	2,227		$	(1,010	)
Interest on investment securities	340			153			187
Other investment income	(29		)	(29		)	—
Total interest income	1,528			2,351			(823		)

Interest expense:
Interest on deposits:
Interest bearing demand	53			22			31
Savings	—			—			—
Time deposits	(344		)	(99		)	(245		)
Total interest expense	(291		)	(77		)	(214		)

Net interest income	$	1,819		$	2,428		$	(609	)



	Nine Months Ended September 30,
	2015 over 2014
	Total Increase			Amount of Change Attributed to
	(Decrease)			Volume			Rate
Interest income:
Interest and fees on loans	$	9,802		$	12,598		$	(2,796	)
Interest on investment securities	2,780			2,921			(141		)
Other investment income	(41		)	(45		)	4
Total interest income	12,541			15,474			(2,933		)

Interest expense:
Interest on deposits:
Interest bearing demand	289			248			41
Savings	9			9			—
Time deposits	(487		)	84			(571		)
Other borrowings	—			(1		)	1
Total interest expense	(189		)	340			(529		)

Net interest income	$	12,730		$	15,134		$	(2,404	)

Loan Loss Provision and Reserve for Loan Losses

The Company did not record a loan loss provision during the three months ended September 30, 2015. The nine months ended September 30, 2015 includes a $2.0 million reverse provision arising from the remediation of an outstanding credit in the first quarter of 2015 that had previously been written off.

The Bank maintains pooled and impaired loan reserves with additional consideration of qualitative factors and unallocated reserves in reaching its determination of the total reserve for loan losses. The level of reserves is subject to review by the Bank’s regulatory authorities who may require adjustments to the reserve based on their evaluation and opinion of economic and industry factors as well as specific loans in the portfolio. For further discussion, see “Critical Accounting Policies and Estimates” in this Form 10-Q and “Loan Portfolio and Credit Quality” in Item 7 of our 2014 Annual Report. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan-related losses.

As of September 30, 2015, the reserve for loan losses was $26.6 million, or 1.62% of outstanding loans, compared to $22.1 million, or 1.48% of outstanding loans, at December 31, 2014. The increase is a result of year-to-date net recoveries of $6.6 million, less a $2.0 million provision credit in the first quarter of 2015. Net recoveries for the current quarter were $3.1 million, primarily related to a recovery on a large project loan that was previously charged-off, resulting in an increase in the unallocated portion of the reserve. The increase in the unallocated portion of the reserve is subject to refinement as we continue to enhance our qualitative factors, including considerations such as the seasoning of the above described enhancement to our SNC methodology, uncertainties regarding our 2015 entry into niche aircraft lending, our announced commercial banking venture in the Seattle, Washington Metro market, and our recently announced branch acquisition in certain markets in Oregon and Washington. As the Company refines its methodology with respect to its qualitative factors, it expects the unallocated portion of the reserve will become a lower portion of the total reserve. In that regard, a future credit to provision expense is possible depending on the Company’s ongoing assessment of local and regional economic conditions, and other considerations.

The reserve for unfunded lending commitments was $0.4 million at September 30, 2015, which remained unchanged from December 31, 2014.

Non-Interest Income

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



	Three Months Ended September 30, 2015		Three Months Ended September 30, 2014		% Change		Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014		% Change
Service charges on deposit accounts	$	1,326	$	1,457	(9.0	)%	$	3,836	$	3,324	15.4	%
Card issuer and merchant services fees, net	1,837		1,884		(2.5	)%	5,336		4,480		19.1	%
Earnings on BOLI	252		280		(10.0	)%	736		712		3.4	%
Mortgage banking income, net	624		734		(15.0	)%	2,089		1,790		16.7	%
Swap fee income	595		476		25.0	%	1,895		1,419		33.5	%
SBA gain on sales and fee income	554		272		103.7	%	1,060		529		100.0	%
Gain (loss) on sales of investments)	503		—		100.0	%	503		—		100.0	%
Other income	693		430		61.2	%	3,746		1,445		159.2	%
Total non-interest income	$	6,384	$	5,533	15.4	%	$	19,201	$	13,699	40.2	%

Non-interest income for the three and nine months ended September 30, 2015 was $6.4 million and $19.2 million, respectively, up from $5.5 million and $13.7 million during the respective year ago periods. Much of the year-over-year improvement is related to the Company’s growth in activity levels and transaction volumes from an increasing customer base arising, in part, from the Home acquisition.

For the quarter ended September 30, 2015, service charges on deposit accounts were below year ago levels mainly due to a reduction in consumer usage of overdraft protection fees. Card issuer and merchant service fees were down modestly in the third quarter of 2015 as compared to 2014 because of our 2015 sale of Home’s merchant servicing portfolio. Growth in the nine months ended September 30, 2015 compared to 2014 in both service charges on deposit accounts and card issuer and merchant service fees related largely to the Home acquisition.

Increased earnings on BOLI for the nine months ended September 30, 2015 were primarily due to the addition of Home related plans in May 2014.

Net mortgage banking income for the third quarter of 2015 was down modestly from the year ago period mainly due to an increase in the retention of mortgage originations in the Company’s loan portfolio as opposed to sale of such originations. The increase for the nine month period of 2015 was due to higher volumes of residential mortgage originations and related gains on sales.

The Bank began to offer its customer interest rate swaps and SBA services in 2013 in order to increase its services to customers and diversify its revenue sources. Changes in customer swap fee income and SBA revenue for the quarter and year to date periods generally reflect the timing of transaction settlement for these services.

Gain on sales of investments during the three and nine months ended September 30, 2015 related to a gain on sale of certain short duration MBS investment securities in the sale available for sale portfolio.

Other income for the three and nine months ended September 30, 2015 was up 61.2% and 159.2% respectively. These increases were due to gains on disposition of branch properties during 2015, as well as a vendor production performance bonus and sale of merchant services portfolio during 2015.

Non-Interest Expense

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



	Three Months Ended September 30, 2015		Three Months Ended September 30, 2014		% Change		Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014		% Change
Salaries and employee benefits	$	11,315	$	10,199	10.9	%	$	33,033	$	31,588	4.6	%
Occupancy	1,123		1,553		(27.7	)%	3,906		7,544		(48.2	)%
Information technology	745		1,032		(27.8	)%	2,729		3,634		(24.9	)%
Equipment	390		497		(21.5	)%	1,142		1,463		(21.9	)%
Communications	560		695		(19.4	)%	1,585		1,640		(3.4	)%
FDIC insurance	342		371		(7.8	)%	1,046		1,057		(1.0	)%
OREO (income) expense	122		314		(61.1	)%	11		1,016		(98.9	)%
Professional services	1,548		1,461		6.0	%	3,931		6,887		(42.9	)%
Card issuer	693		1,140		(39.2	)%	2,199		2,028		8.4	%
Insurance	183		254		(28.0	)%	583		1,029		(43.3	)%
Other expenses	2,049		2,212		(7.4	)%	6,116		5,917		3.4	%
Total non-interest expense	$	19,070	$	19,728	(3.3	)%	$	56,281	$	63,803	(11.8	)%

Non-interest expense in the three and nine months ended September 30, 2015 was $19.1 million and $56.3 million, respectively, compared to $19.7 million and $63.8 million in the respective year ago periods. The changes between the three and nine months ended September 30, 2015 and the year ago periods relate primarily to the Home acquisition costs incurred in 2014.

Total salaries and benefits increased $1.1 million for the three months ended September 30, 2015 compared to the same period in 2014, primarily related to elevated incentives and commission expenses associated with loan production in the current period, as well as increased stock option expenses associated with grants issued in the first quarter of 2015.

Information technology for the three and nine months ended September 30, 2015 decreased from the same periods in 2014, due primarily to costs associated with the Home acquisition in 2014.

Occupancy, equipment and communications expenses for the three and nine months ended September 30, 2015 decreased an aggregate of $0.7 million and $4.0 million, respectively, compared to the three and nine months ended September 30, 2014 primarily related to the effect of a consolidation of number of branches following the Home acquisition and lesser expenses related to the Home acquisition in 2014.

OREO expense is lower for both the three month and nine month periods due to a reduction in net OREO assets.

Professional services increased for the three month period ended September 30, 2015 due mainly to the cost of consolidating imaging systems and elevated legal fees. Lower professional services for the nine months ended September 30, 2015 compared to the same period in 2014, were due primarily to expenses related to the Home acquisition incurred in the first and second quarters of 2014.

Lower card issuer expenses for the three month period ended September 30, 2015 related to timing of the issuance of new cards after the Home acquisition.

Insurance expenses decreased 28.0% and 43.3% in the three and nine months ended September 30, 2015, respectively, compared to the same periods in 2014, largely as a result of lower risk rate on renewal of insurance, with the year over year decline also related to 2014 tail of Home contracts.

Other expenses were stable for the three and nine months ended September 30, 2015 as compared to the three and nine months ended in the same periods in 2014.

Income Taxes

The Company recorded an income tax provision of $2.6 million during the three months ended September 30, 2015 as compared to $2.0 million for the three months ended September 30, 2014. The provision expense for the nine months ended September 30, 2015 was $8.6 million as compared to an income tax benefit of $2.8 million taken during the nine months ended September 30, 2014.

As of September 30, 2015, the DTA was $53.8 million. This is compared with a DTA as of December 31, 2014 of $66.1 million. Our estimated effective income tax rate differs from the statutory income tax rate primarily due to the exclusion of certain BOLI and municipal loan and bond interest income from taxable income.

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

The Company reversed its DTA valuation allowance as of June 30, 2013 due to management’s determination that it was more likely than not that a significant portion of the Company’s DTA would be realized. Management’s determination resulted from consideration of both the positive and negative evidence available that can be objectively verified. For a full discussion of the Company’s considerations, see “Deferred Income Taxes” in Part II, Item 7 of our 2014 Annual Report.

Financial Condition

Total Assets and Liabilities

Total assets at September 30, 2015 increased to $2.5 billion, compared to $2.3 billion at December 31, 2014, with higher cash and loans outstanding, partially offset by lower investment balances.

Cash and cash equivalents at September 30, 2015 were $125.1 million compared to $83.1 million at December 31, 2014. Investment securities classified as available-for-sale and held-to-maturity were down slightly at $439.9 million at September 30, 2015, from

$472.5 million at December 31, 2014 due to principal paydowns and sales, as discussed above. At September 30, 2015, goodwill was stable at $78.6 million.

Total loans at September 30, 2015 were $1.6 billion, compared to $1.5 billion at December 31, 2014. Year-to-date, gross loans increased 10.4%, with growth distributed among commercial real estate, construction, and consumer residential loans. The latter included both retained and acquired ARMs. Strategically, the Bank continued to expand its ARM portfolio to further diversify its overall loan portfolio by geography and loan type. Organic growth was partially offset by a modest decline in the shared national credits (“SNC”) portfolio.

Loans acquired in the Home acquisition were recorded at fair value with no allowance for loan losses brought forward in accordance with purchase accounting principles. The net fair value adjustment to acquired loans from the Home acquisition was $6.0 million at the Acquisition Date, representing a valuation adjustment for interest rate and credit quality which will be accreted over the life of the loans (approximately 10 years).

FHLB stock declined from $25.6 million at December 31, 2014 to $3.0 million at September 30, 2015 due to changes in FHLB membership stock requirements in connection with the Seattle FHLB merging with Des Moines FHLB in the second quarter 2015.

Total deposits were seasonally stable at $2.1 billion at September 30, 2015 as compared to $2.0 billion December 31, 2014. Non-interest bearing accounts increased by $130.6 million, or 21.1%, over December 31, 2014 but were partially offset by runoff in higher priced certificates of deposit acquired with the Home acquisition. This resulted in an overall cost of funds at 0.08% for the quarter as compared to 0.13% for the quarter ended December 31, 2014 and 0.14% for the quarter ended September 30, 2014.

From time to time the Company makes commitments to acquire banking properties or to make equipment or technology related investments of capital. At September 30, 2015, the Company had no material capital expenditure commitments apart from those incurred in the ordinary course of business.

Stockholders’ Equity and Capital Resources

Total stockholders’ equity at September 30, 2015 was $331.6 million, as compared to $315.5 million at December 31, 2014. The increase in total stockholders' equity was predominantly due to the year to date 2015 net income. At September 30, 2015, the total common equity to total assets ratio was 13.43% and the Company’s basic book value per share was $4.56 as compared to the total common equity to total assets ratio of 13.48% and basic book value per share of $4.35 at December 31, 2014.

At September 30, 2015, the Bancorp’s and Bank’s capital ratios exceeded the requirements to be designated as “well-capitalized” under the Basel III regulatory capital framework. Additional information regarding capital requirements can be found in Note 12 of the notes to the condensed consolidated financial statements included in this Form 10-Q.



	Actual				Regulatory minimum to be “well capitalized”
	Capital Amount		Ratio		Capital Amount		Ratio
September 30, 2015
Tier 1 leverage (to average assets)
Bancorp	$	215,509	9.1	%	$	118,035	5.0	%
Bank	211,528		9.0	%	117,856		5.0	%
CET1 capital (to risk weighted assets)
Bancorp	215,509		11.3		123,790		6.5
Bank	211,528		11.1		123,856		6.5
Tier 1 capital (to risk-weighted assets)
Bancorp	215,509		11.3		152,356		8.0
Bank	211,528		11.1		152,439		8.0
Total capital (to risk-weighted assets)
Bancorp	239,596		12.6		190,446		10.0
Bank	235,599		12.4		190,548		10.0

December 31, 2014
Tier 1 leverage (to average assets)
Bancorp	$	170,615	7.7	%	$	111,345	5.0	%
Bank	167,056		7.5	%	111,183		5.0	%
Tier 1 capital (to risk-weighted assets)
Bancorp	170,615		9.9		103,338		6.0
Bank	167,056		9.7		103,050		6.0
Total capital (to risk-weighted assets)
Bancorp	192,162		11.2		172,230		10.0
Bank	188,543		11.0		171,750		10.0

Asset Quality

Credit quality metrics were solid as of September 30, 2015, with a continuing trend toward lower loan delinquencies and non-performing asset ratios. The Bank has recorded net loan recoveries in each of the periods since the Acquisition Date. The ratio of loan loss reserve to total loans was stable at 1.62% as of September 30, 2015.

At September 30, 2015, delinquent loans were 0.31% of the loan portfolio. This compares to 0.27% as of December 31, 2014 and 0.34% as of September 30, 2014. Net loan recoveries totaled $6.6 million for the nine months ended September 30, 2015 compared to net recoveries of $0.5 million for the nine months ended September 30, 2014.

Non-performing assets as a percentage of total assets was 0.36% at September 30, 2015, as compared to 0.64% at December 31, 2014 and 0.74% at September 30, 2014.

At September 30, 2015, $33.2 million, or 13.2%, of the $251.6 million still held in acquired and acquired covered loans were covered under loss sharing agreements with the FDIC. These loss sharing agreements will expire five years after the date of the FDIC agreements for non-single family covered assets and 10 years after the acquisitions date for single-family covered assets. The Company has determined it will report on a cash basis any potential future benefits and/or costs incurred with respect to the remaining loss share receivables (or payables) under these agreements. The remaining benefit and/or cost of the FDIC loss sharing agreements are not expected to be material to the Company’s financial condition. Estimated future losses on acquired covered loans are included in the fair value purchase accounting mark.

Off-Balance Sheet Arrangements

The following table summarizes the Bank’s off-balance sheet commitments at September 30, 2015 and December 31, 2014 (dollars in thousands):



	September 30, 2015		December 31, 2014
Commitments to extend credit	$	440,598	$	371,871
Commitments under credit card lines of credit	60,744		28,822
Standby letters of credit	6,728		4,201

Total off-balance sheet financial instruments	$	508,070	$	404,894

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the customer contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Bank applies established credit standards and underwriting practices in evaluating the creditworthiness of such obligors and related collateral requirements, if any. Collateral held for commitments varies but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. The Bank typically does not obtain collateral related to credit card commitments.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Bank would be entitled to seek recovery from the customer. The Bank’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those involved in extending loans to customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers.

The increase in commitments to extend credit from the balance at December 31, 2014 to the balance at September 30, 2015 was primarily related to an increase in construction, commercial and real estate lending commitments.

Other than those commitments discussed above, there are no other obligations or liabilities of the Company arising from its off-balance sheet arrangements that are or are reasonably likely to become material. In addition, the Company knows of no event, demand, commitment, trend or uncertainty that will result in or is reasonably likely to result in the termination or material reduction in availability of the off-balance sheet arrangements. The Company had no material off-balance sheet derivative financial instruments as of September 30, 2015 and December 31, 2014.

Liquidity and Sources of Funds

The objective of the Bank’s liquidity management is to maintain sufficient cash flows to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. At September 30, 2015, liquid assets of the Bank were mainly interest bearing balances held at the Federal Reserve Bank of San Francisco (“FRB”) totaling $68.7 million compared to $34.2 million at December 31, 2014. The increase was primarily the result of seasonally higher deposit balances.

Core relationship deposits are the Bank’s primary source of funds. As such, the Bank focuses on deposit relationships with local business and consumer clients who maintain multiple accounts and services at the Bank. The Company views such deposits as the foundation of its long-term liquidity because it believes such core deposits are more stable and less sensitive to changing interest rates and other economic factors compared to large time deposits or wholesale purchased funds. The Bank’s customer relationship strategy has resulted in a relatively higher percentage of its deposits being held in checking and money market accounts, and a lesser percentage in time deposits.

The Bank augments core deposits with wholesale funds from time to time. The Bank may accept local relationship-based reciprocal Certificate of Deposit Account Registry Service (“CDARS”) and Demand Deposit Marketplace (“DDM”) deposits. Regulators

classify such as brokered deposits. At September 30, 2015 and December 31, 2014, the Company had $12.9 million and $11.5 million in reciprocal CDARS, respectively, and $61.0 million and $54.3 million in reciprocal DDM deposits, respectively.

The Bank accepts public fund deposits in Oregon and Idaho and follows rules imposed by state authorities. Current rules imposed by the Oregon State Treasury require that the Bank collateralize 50% of the uninsured public funds of Oregon entities held by the Bank. At September 30, 2015, the Bank was in compliance with this requirement. Currently, there are no collateral requirements set on Idaho public deposits.

The Bank also utilizes borrowings and lines of credit as sources of funds. At September 30, 2015, the Federal Home Loan Bank of Des Moines (“FHLB”) had extended the Bank a secured line of credit of $844.6 million (35.00% of total assets) accessible for short or long-term borrowings given sufficient qualifying collateral. As of September 30, 2015, the Bank had qualifying collateral pledged for FHLB borrowings totaling $491.1 million, of which the Bank had $5.0 million outstanding. At September 30, 2015, the Bank also had undrawn borrowing capacity at FRB of $17.4 million supported by specific qualifying collateral. Borrowing capacity from FHLB or FRB may fluctuate based upon the acceptability and risk rating of loan collateral, and counterparties could adjust discount rates applied to such collateral at their discretion. Also, FRB or FHLB could restrict or limit our access to secured borrowings. Correspondent banks have extended $110.0 million in unsecured or collateralized short-term lines of credit for the purchase of federal funds. At September 30, 2015, the Company had no outstanding borrowings under these federal fund borrowing agreements.

Liquidity may be affected by the Bank’s routine commitments to extend credit. At September 30, 2015, the Bank had $508.1 million in total outstanding commitments to extend credit, compared to $404.9 million at year-end 2014. At this time, management believes that the Bank’s available resources will be sufficient to fund its commitments in the normal course of business.

The investment portfolio also provides a secondary source of funds as investments may be pledged for borrowings or sold for cash. This liquidity is limited, however, by counterparties’ willingness to accept securities as collateral and the market value of securities at the time of sale could result in a loss to the Bank. As of September 30, 2015, the book value of unpledged investments totaled $269.1 million compared to $285.2 million at December 31, 2014.

Bancorp is a single bank holding company and its primary ongoing source of liquidity is dividends received from the Bank. Oregon banking laws impose certain limitations on the payment of dividends by Oregon state chartered banks. The amount of the dividend may not be greater than the Bank’s unreserved retained earnings, deducting from that, to the extent not already charged against earnings or reflected in a reserve, the following: (1) all bad debts, which are debts on which interest is past due and unpaid for at least six months, unless the debt is fully secured and in the process of collection; (2) all other assets charged off as required by the Director of the Department of Consumer and Business Services or a state or federal examiner; and (3) all accrued expenses, interest and taxes of the institution.

Inflation

The effect of changing prices on financial institutions is typically different than on non-banking companies since virtually all of a bank’s assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor magnitude of the changes are directly related to price level indices; therefore, the Company can best counter inflation over the long term by managing net interest income and controlling net increases in noninterest income and expenses.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedure

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer. Based upon that evaluation, the Chief Executive

Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s condensed consolidated financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors previously disclosed in Part I – Item 1A Risk Factors of our 2014 Annual Report. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this Form 10-Q. There have been no material changes to Cascade’s risk factors described in our 2014 Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)-(b) Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

(a) Not applicable.

(b) There have been no material changes to the procedures by which shareholders may nominate directors to the Company’s board of directors.

ITEM 6. EXHIBITS



Exhibit Number		Description
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-4(a)
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-4(a)
32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			CASCADE BANCORP (Registrant)
Date	November 6, 2015	By	/s/ Terry E. Zink
			Terry E. Zink, President & Chief Executive Officer (Principal Executive Officer)

Date	November 6, 2015	By	/s/ Gregory D. Newton
			Gregory D. Newton, EVP & Chief Financial Officer (Principal Financial and Chief Accounting Officer)

Attached files

Stock widget

Investing forum

CASCADE BANCORP Reports