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EX-21.1 - EXHIBIT 21.1 - CASCADE BANCORPcacb-20151231xexx211.htm
EX-31.2 - EXHIBIT 31.2 - CASCADE BANCORPcacb-2015x1231xexx312.htm
EX-32.1 - EXHIBIT 32.1 - CASCADE BANCORPcacb-2015x1231xexx321.htm
EX-31.1 - EXHIBIT 31.1 - CASCADE BANCORPcacb-2015x1231xexx311.htm
EX-23.1 - EXHIBIT 23.1 - CASCADE BANCORPcacb-2015x1231xexx231.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K 
(MARK ONE)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to_________
Commission file number: 000-23322
CASCADE BANCORP
(Exact name of registrant as specified in its charter)
Oregon
93-1034484
(State or other jurisdiction of incorporation)
(IRS Employer Identification No.)
 
1100 N.W. Wall Street
Bend, Oregon 97701
(Address of principal executive offices)
97701
(Zip Code)
(877) 617-3400
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
The NASDAQ Stock Market LLC
(Title of class)
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: N/A
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ]
Accelerated filer [X]
 
 
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):  Yes [ ]  No [X]
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter) was $147,693,331 (based on the closing price of registrant’s common stock as quoted on the NASDAQ Capital Market on that date).
There were 72,790,373 shares of no par value common stock outstanding as of March 2, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement on Schedule 14A for its Annual Meeting of Shareholders to be held in 2016 are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.




CASCADE BANCORP & SUBSIDIARY
FORM 10-K
ANNUAL REPORT


 
TABLE OF CONTENTS
 
 
Page
PART I
 
 
 
Item 1.
Business
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 1B.
Unresolved Staff Comments
 
 
 
Item 2.
Properties
 
 
 
Item 3.
Legal Proceedings
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
PART II
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
Item 6.
Selected Financial Data
 
 
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 8.
Financial Statements and Supplementary Data
 
 
 
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
 
 
Item 9A.
Controls and Procedures
 
 
 
Item 9B.
Other Information
 
 
 
PART III
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
 
 
Item 11.
Executive Compensation
 
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
 
 
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
 
 
Item 14.
Principal Accounting Fees and Services
 
 
 
PART IV
 
 
 
Item 15.
Exhibits, Financial Statement Schedules
 
 
 

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PART I
ITEM 1. BUSINESS.

Cautionary Information Concerning Forward-Looking Statements
This report contains forward-looking statements about the Company’s business and plans and anticipated results of operations and financial condition and liquidity. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the word “expects,” “believes,” “anticipates,” “could,” “may,” “will,” “should,” “plan,” “predicts,” “projections,” “continue” and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties and the Company’s success in managing such risks and uncertainties could cause actual results to differ materially from those projected, including among others, the risk factors described in Item 1A of this report.
These forward-looking statements speak only as of the date of this report. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof, except as required by applicable law. Readers should carefully review all disclosures filed or furnished by the Company from time to time with the SEC.
Cascade Bancorp and Bank of the Cascades
Cascade Bancorp (“Bancorp”) is an Oregon corporation and registered bank holding company that was formed in 1990 and is headquartered in Bend, Oregon. Bancorp's common stock trades on the NASDAQ Capital Market under the symbol “CACB.” Bancorp and its wholly-owned subsidiary, Bank of the Cascades (the “Bank,” and together with Bancorp, “Cascade,” the “Company,” “we,” “our” or “us”), operate in Central, Southern and Northwest Oregon, as well as in the greater Boise/Treasury Valley, Idaho and Seattle Metro areas. At December 31, 2015, the Company had total consolidated assets of approximately $2.5 billion, net loans of approximately $1.7 billion and deposits of approximately $2.1 billion. Bancorp has no significant assets or operations other than the Bank.
The Bank is an Oregon state chartered bank, which opened for business in 1977 and operates 37 branches serving communities in Central, Southern and Northwest Oregon, as well as in the greater Boise/Treasure Valley, Idaho and Seattle, Washington areas. The Bank offers a broad range of commercial and retail banking services to its customers. The Bank’s lending activities are focused on small- to medium-sized businesses, municipalities and public organizations, and professional and consumer relationships. The Bank provides commercial real estate loans, real estate construction and development loans, and commercial and industrial loans (“C&I”), as well as consumer installment, line-of-credit, credit card and home equity loans. The Bank also originates residential mortgage loans, including 30-year fixed rate loans that are mainly sold on the secondary market. The Bank provides consumer and business deposit services including checking, money market and time deposit accounts and related payment services, Internet banking, electronic bill payment and remote deposits. In addition, the Bank serves business customer deposit needs with a suite of cash management services. The Bank also provides trust and investment related services to its clientele.
The principal office of the Company is located at 1100 NW Wall Street, Bend, Oregon 97701. The Company's phone number is (877) 617-3400.
Acquisition of Bank of America Branches
On October 28, 2015, the Company entered into an agreement to purchase 15 branch locations in Oregon and southeast Washington from Bank of America, National Association. Pending the satisfaction of customary closing conditions, the transaction is on schedule to be completed in March 2016. All necessary regulatory approvals have been received. As of March 1, 2016, the approximate balance of the deposits to be assumed by Cascade is $480 million. After anticipated initial deposit attrition, the Company’s total deposits are expected to increase by nearly 23% to $2.56 billion with the transaction. The cost of these funds is expected to be similar to Cascade’s current 0.08% rate. The purchase price paid to the seller will be approximately 2% of the balance of deposits at closing. No loans are included in the transaction.
Management’s goal is for the transaction to be accretive to earnings by up to 10%. Achievement of this goal is targeted during the second half of 2016 under current assumptions including stable market interest rates. Net interest income is expected to increase over the next several quarters with investment of funds received in the transaction. Over time, these investments will be replaced with organic loan growth, funding the strong loan growth we are experiencing across our footprint, including loans generated by our new commercial banking center in Seattle. The transaction is also targeted to enhance the Company’s efficiency ratio by leveraging its existing infrastructure while increasing and diversifying non-interest revenue sources. It is estimated that the efficiency ratio will increase on an interim basis due to certain one-time integration costs but will improve by year end 2016. The Company expects the net interest margin (“NIM”) ratio to contract at closing and then begin to rebound in

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the second half of the year as we execute our earning-asset deployment plans. The Company expects to incur certain transitory integration, conversion, human resources, information technology and facilities costs in the course of integrating these new branches and customers.
Merger Completed with Home Federal Bancorp
On May 16, 2014, pursuant to the Agreement and Plan of Merger, dated as of October 23, 2013 (the “Merger Agreement”), between the Company and Home Federal Bancorp (“Home”), Home merged with and into Cascade with Cascade continuing as the surviving corporation (the “Merger”). Immediately after the Merger, Home Federal Bank, a wholly-owned subsidiary of Home, merged with and into the Bank, with the Bank continuing as the surviving bank. The results of Home’s operations are included in the Company’s financial results beginning on May 16, 2014.

Each share of Home’s common stock was converted into the right to receive $8.43 in cash and 1.6772 shares of Cascade common stock. The conversion of Home’s common stock resulted in Cascade paying $122.2 million in cash and issuing 24,309,131 shares of its common stock.
Business Overview
The Company’s banking business is closely tied to the economies of Idaho, Oregon and Washington, which in turn are influenced by regional and national economic trends and conditions. Idaho, Oregon and Washington have recently been experiencing improved economic trends, including gains in employment and increased real estate activity. National and regional economies and real estate prices have generally improved, as has business and consumer confidence. The Company’s markets, however, continue to be sensitive to general economic trends and conditions, including real estate values, and an unforeseen economic shock or a return of adverse economic conditions could cause deterioration of local economies and adversely affect the Company’s business, financial condition and results of operations.
Business Strategies
Cascade’s mission statement is “dedicated to delivering the best in banking for the financial well-being of our customers and stockholders.” The Company’s primary business objective is to continue to improve and diversify revenue resulting in sustainable profitability consistent with safe and sound business principals and its risk management appetite. Growth in franchise value, net income and earnings per share are considered primary metrics for which management goals are established. In addition, the Company seeks accretive merger and acquisition transactions to profitably leverage its existing infrastructure and enhance franchise value. To complement these priorities, the Company also focuses on (i) diversification of its earning assets to mitigate credit risk; (ii) expanding its relationship deposits to fund asset growth; (iii) diversification of revenue sources to reduce income volatility; (iv) improving its operating efficiency; (v) consistently delivering quality customer service and applying technology to enhance the delivery of banking services; and (vi) retaining a high-performing work force. Because of the uncertainties of the current economic climate, competitive factors and the risk factors described in Item 1A of this report, there can be no assurance that Cascade will be successful executing these strategies.
Highlights of the Company’s progress over recent years include a significant reduction in adversely risk rated loans and the improvement of credit quality metrics to levels that are generally consistent with those of peer banks, enabling the termination of the prior regulatory agreements in 2013. See “Supervision and Regulation - Regulatory Actions” for more information on the regulatory agreements. During recent years, the Company has returned to profitability with a renewed focus on commercial lending, and in May 2014 acquired the $1.0 billion Home in a transaction that rationalized the combined branch network and captured important economies of scale with the aim of improved profitability and the enhancement of franchise value.
Employees
Cascade views its employees as an integral resource in achieving its strategies and long-term goals, and considers its relationship with its employees to be strong. Bancorp has no employees other than its executive officers who are also employees of the Bank. The Bank had 513 full-time equivalent employees as of December 31, 2015.
Risk Management
The Company has risk management policies with respect to identification, assessment and management of important business risks. Such risks include, but are not limited to, credit quality and loan concentration risks, liquidity risk, interest rate risk, economic and market risk, as well as operating risks such as compliance, disclosure, internal control, legal and reputation risks. The Company’s board of directors and related committees review and oversee the implementation of policies that specify various controls and risk tolerances.
Credit risk management objectives include the implementation of loan policies and underwriting practices designed to prudently manage credit risk, and monitoring processes designed to identify and manage loan portfolio risk and concentrations.
Liquidity management policies are designed to maintain an appropriate volume and mix of core relationship deposits and time deposit balances to minimize liquidity risk while efficiently funding the Company’s loan and investment activities. Historically,

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the Company has utilized borrowings from reliable counterparties such as the Federal Home Loan Bank of Seattle and Des Moines (“FHLB”) and the Federal Reserve Bank of San Francisco (“FRB”), with wholesale funds augmenting liquidity from time to time.
The Company monitors and manages its sensitivity to changing interest rates by utilizing simulation analysis and scenario modeling and by adopting asset and liability strategies and tactics to control the volatility of its net interest income in the event of changes in interest rates.
Operating risks are managed through policies, procedures and implementation of and adherence to a system of internal controls. Internal controls are subject to testing in the course of internal audit and regulatory compliance activities, and the Company is subject to the requirements of the Sarbanes-Oxley Act of 2002. Policies, procedures and controls are enhanced over time in conjunction with the Company’s risk management strategies. However, there are a wide range of complex risks inherent in the Company's business, and there can be no assurance that internal controls will always detect, contain, eliminate or prevent risks that could result in adverse financial results in the future.
Competition
Commercial and consumer banking in Oregon, Idaho and Washington are highly competitive businesses. The Bank competes principally with other banks, thrifts, credit unions, mortgage companies, broker dealers and insurance companies and increasingly other non-bank financial services providers. All of its competitors may also use the Internet as a platform to originate loans and/or acquire deposits. In addition to price competition for deposits and loans, market participants compete with respect to the scope and type of services offered, customer service levels, convenience, fees and service charges. Improvements in technology, communications and the Internet have intensified delivery channel competition. Competitor behavior may result in heightened competition among banking and financial services market participants and thus may adversely affect the Company’s future profitability.
The Company believes its community banking philosophy, investments in technology, focus on small- and medium-sized businesses, and professional and consumer relationships enable it to compete effectively with other financial services providers in its primary markets. The Bank endeavors to offer attractive financial products and services delivered by effective bankers differentiated by their professionalism and customer service. The Bank’s products and services are designed to be convenient, with flexible delivery alternatives. In addition, the Bank’s lending and deposit officers have significant experience in their respective marketplaces. This enables them to maintain close working relationships with their customers. Also, the Bank may buy or sell loan participations with other financial institutions.
The Company serves the markets of Central, Southern and Northwest Oregon, as well in the greater Boise/Treasure Valley, Idaho and Seattle, Washington metro areas. Central Oregon was the original market area of the Bank. The Company has grown with the community and held a greater than 27% deposit market share in the Bend, Oregon Metropolitan Statistical Area as of June 30, 2015 (excluding broker and Internet CDs) according to the Federal Deposit Insurance Corporation’s (“FDIC”) “Deposits Market Share Report.” At December 31, 2015, loans and deposits in Oregon markets accounted for approximately 68.4% and 70.79%, respectively, of total balances, while Idaho loans and deposits were approximately 18.4% and 29.21%, respectively, of total balances. Balances in Washington are negligible as of December 31, 2015, due to the timing of our entry into the Seattle, Washington market in late 2015. Approximately 13.2% of loans are to borrowers located outside of the Company’s primary markets with the aim of diversifying earning assets and to meet asset and liability management strategies. Loan competition in Oregon, Idaho and Washington is substantial, and success is dependent on price and terms, as well as effectiveness of bankers in building relationships with customers.
Supervision and Regulation
The operations of the Company and the Bank may be affected by legislative changes and by the policies of various regulatory authorities. Management is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic control or new federal or state legislation may have in the future. The regulatory framework under which we operate is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund and not for the protection of our security holders and creditors. The significant laws and regulations that apply to the Company and the Bank are summarized below. The summaries are qualified in their entirety by reference to the full text of the statutes, regulations and policies that are described.
Regulatory Agencies
As a registered bank holding company, the Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and, acting under delegated authority, the FRB pursuant to the Bank Holding Company Act, as amended (the “BHC Act”).

As an Oregon state-chartered bank, the Bank is subject to the supervision and regulation of the Division of Finance and Corporate Securities (“DFCS”) and, with respect to the Bank’s Idaho branching operations, the Idaho Department of Finance and, with

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respect to the Bank’s Washington operations, the Washington State Department of Financial Institutions. As a state-chartered bank that is not a member of the Federal Reserve Board, the Bank is also subject to the supervision and regulation of the FDIC.

Regulatory Actions
Bancorp
On October 26, 2009, Bancorp entered into a written agreement with the FRB and Oregon DFCS (the “Written Agreement”) that required Bancorp to take certain measures to improve its safety and soundness. Under the Written Agreement, Bancorp was required to develop and submit for approval a plan to maintain sufficient capital at Bancorp and the Bank within 60 days of the date of the Written Agreement. The Company submitted a strategic plan on October 28, 2009. As of December 31, 2012, Bancorp met the 10% Tier 1 leverage ratio requirement per the Written Agreement. On July 8, 2013, the Bancorp entered into a memorandum of understanding (“FRB-MOU”) with the FRB and the DFCS that terminated the Written Agreement. On October 23, 2013, the FRB-MOU was lifted by the FRB and DFCS.
Bank
On August 27, 2009, the Bank entered into an agreement with the FDIC, its principal federal banking regulator, and the DFCS, that required the Bank to take certain measures to improve its safety and soundness. In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the DFCS of a cease-and-desist order (the “Order”) against the Bank as a result of certain findings from an examination of the Bank concluded in February 2009 based upon financial and lending data measured as of December 31, 2008 (the Report of Examination, or “ROE”). In entering into the stipulation and consenting to entry of the Order, the Bank did not concede the findings or admit to any of the assertions therein. Under the Order, the Bank was required to take certain measures to improve its capital position, maintain liquidity ratios, reduce its level of non-performing assets, reduce its loan concentrations in certain portfolios, improve management practices and board supervision, and assure that its reserve for loan losses is maintained at an appropriate level.

On March 7, 2013, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and the DFCS that terminated the Order. The MOU restricted the Bank from paying dividends without the written consent of the FDIC and DFCS and required that the Bank maintain higher levels of capital than may be required by published capital adequacy requirements. In particular the MOU required the Bank to maintain the minimum capital requirements for a “well-capitalized” bank, including a Tier 1 leverage ratio of at least 10.00%. On September 5, 2013, the MOU was lifted by the FDIC and DFCS.
Bank Holding Company Regulation
Bancorp is a one-bank holding company within the meaning of the BHC Act and, as such, is subject to regulation, supervision and examination by the Federal Reserve Board. Bancorp is required to file annual reports with the Federal Reserve Board and to provide the Federal Reserve Board such additional information as the Federal Reserve Board may require.
Acquisitions by Bank Holding Companies
The BHC Act generally requires every bank holding company to obtain the prior approval of the Federal Reserve Board before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5.00% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The Federal Reserve Board will not approve any acquisition, merger or consolidation that would have a substantial anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers, as well as Community Reinvestment Act (“CRA”) performance.
The Change in Bank Control Act, as amended, and the related regulations of the Federal Reserve Board require any person or groups of persons acting in concert (except for companies required to make application under the BHC Act), to file a written notice with the Federal Reserve Board or, acting under delegated authority, the appropriate Federal Reserve Bank, before the person or group acquires control of the Company. The Change in Bank Control Act defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable presumption of control arises under the Change in Bank Control Act where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.
In addition, the Change in Bank Control Act prohibits any entity from acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the Federal Reserve Board. On September

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22, 2008, the Federal Reserve Board issued a policy statement on equity investments in bank holding companies and banks, which allows the Federal Reserve Board to generally be able to conclude that an entity’s investment is not “controlling” if the investment in the form of voting and nonvoting shares represents in the aggregate (i) less than one-third of the total equity of the banking organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15% of any class of voting securities of the banking organization.
Permissible Activities
With certain exceptions, the BHC Act also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5.00% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. In making this determination, the Federal Reserve Board considers whether the performance of such activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency in resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest or unsound banking practices.
Source of Strength
Regulations and historical practice of the Federal Reserve Board have required bank holding companies to serve as a source of financial strength for their subsidiary banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) codified this requirement, but added managerial strength to the requirement, and extended it to all companies that control an insured depository institution. Accordingly, Bancorp is now required to act as a source of financial and managerial strength for the Bank. The appropriate federal banking regulators are required by the Dodd-Frank Act to issue final rules to carry out this requirement.
Capital Adequacy
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
The Federal Reserve Board and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations, referred to as the “Basel III Rules.” The risk-based guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. The Basel III Rules include new risk-based and leverage capital ratio requirements and refine the definition of what constitutes “capital” for purposes of calculating those ratios. Under the Basel III Rules, which became effective for the Company and the Bank on January 1, 2015, banking organizations are required to maintain minimum ratios for common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in one of two tiers, depending on type:
 
 
Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, qualifying trust preferred securities, less goodwill, most intangible assets and certain other assets; and
 
 
Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for possible loan and lease losses, subject to limitations.
As of December 31, 2015, Bancorp, like other bank holding companies, was required to maintain the following risk-based capital ratios: (i) a new common equity Tier 1 (“CET1”) risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); and (iii) a total risk-based capital ratio of 8% (unchanged from previous rules). As of December 31, 2015, the Bank, like other depository institutions, was required to maintain similar capital levels under capital adequacy guidelines. Common equity Tier 1 capital consists of retained earnings and common stock instruments, subject to certain adjustments, as well as accumulated other comprehensive income (“AOCI”) except to the extent that Bancorp and the Bank exercise a one-time irrevocable option to exclude certain components of AOCI.

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Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements as of December 31, 2015 necessitate a minimum leverage ratio of 4.00% for bank holding companies and banks that have the highest supervisory rating. For a depository institution to be considered “well-capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.00%.
The Basel III Rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital requirements. The capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. The conservation buffer, when added to the capital requirements, will result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. An institution will be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio. Although these capital ratios do not become fully phased in until 2019, the banking regulators will expect bank holding companies and banks to meet these requirements well ahead of that date.
The Basel III Rules also revise the prompt corrective action framework (as discussed below), which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions became effective January 1, 2015. The prompt correction action rules include a common equity Tier 1 capital component and increase certain other capital requirements for the various thresholds. As of January 1, 2015, insured depository institutions are required to meet the following capital levels in order to qualify as “well-capitalized:” (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from current rules).
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements to meet well-capitalized standards and future regulatory change could impose higher capital standards as a routine matter. As of December 31, 2015, the Company’s regulatory capital ratios and those of the Bank are in excess of the levels established for “well-capitalized” institutions under the new rules.
The Basel III Rules set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn will affect the calculation of risk based ratios. Under the Basel III Rules, higher or more sensitive risk weights would be assigned to various categories of assets, including certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, these rules include greater recognition of collateral and guarantees, and revised capital treatment for derivatives and repo-style transactions.
Regulations Concerning Cash Dividends
The principal source of Bancorp’s cash revenues historically has been dividends received from the Bank. In addition, the appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends, the payment of which would constitute an unsafe or unsound banking practice.
Under the Oregon Business Corporation Act (“OBCA”), the Company may declare a dividend to its stockholders only if, after giving it effect, in the judgment of the Cascade Board of Directors, the Company would be able to pay its debts as they become due in the usual course of business and the Company’s total assets would at least equal the sum of its total liabilities (plus the amount that would be needed if the Company were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution). The Federal Reserve Board also has further authority to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that, (1) the company’s net income for the past year is sufficient to cover the cash dividends, (2) the rate of earnings retention is consistent with the company’s capital needs, asset quality, and overall financial condition, and (3) the minimum regulatory capital adequacy ratios are met. It is also the Federal Reserve Board’s policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries.
The Company has no plans to pay dividends to its stockholders at this time.

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Bank Regulation
The Bank is a FDIC-insured bank that is not a member of the Federal Reserve Board, and is subject to the supervision and regulation of the DFCS and the FDIC. These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices.
The Dodd-Frank Act
The Dodd-Frank Act is resulting in a major overhaul of the current financial institution regulatory system. Among other things, the Dodd-Frank Act created the Financial Stability Oversight Council, which focuses on identifying, monitoring and addressing systemic risks in the financial system. In addition, branching restrictions were relaxed and national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. In connection with the Dodd-Frank Act, the regulators also approved the final Volcker Rule in December 2013 amending the BHC Act to generally prohibit banking entities from engaging in the short-term proprietary trading of securities and derivatives for their own account and bar them from having certain relationships with hedge funds or private equity funds. Included within the range of funds covered by the regulations are certain trust-preferred securities that back collateralized debt obligations. As the Company does not currently hold any of the prohibited investments, this aspect of the Volcker Rule is not expected to have any impact on the Company’s financial statements. In addition, the Dodd-Frank Act repealed the prohibition on paying interest on demand deposits, so that financial institutions are now allowed, but not required, to pay interest on demand deposits. The Dodd-Frank Act also includes provisions that, among other things, reorganize bank supervision and strengthen the authority of the Federal Reserve Board.
The Dodd-Frank Act requires fees charged for debit card transactions to be both “reasonable and proportional” to the cost incurred by the card issuer. The Federal Reserve Board published its final rule regarding debit card interchange fees on July 20, 2011, and the rule became effective on October 1, 2011. Under the Federal Reserve Board’s final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is $0.21 per transaction and 5 basis points multiplied by the value of the transaction. Any debit card issuer that has, along with its affiliates (i.e., any company that controls, is controlled by or is under common control with another company), fewer than $10 billion of assets will be exempt from the limit on interchange fees. The bank is starting to see some erosion of its debit card revenue on a per customer basis now that merchants can select more than one network for transaction routing.
Although the majority of the Dodd-Frank Act’s rulemaking requirements have been met with finalized rules, approximately one-third of the rulemaking requirements are either still in the proposal stage or have not yet been proposed. Accordingly, it is difficult to anticipate the continued impact this expansive legislation will have on the Company, its customers and the financial industry generally.
Consumer Financial Protection Bureau
The Dodd-Frank Act also created a new, independent federal agency called the Consumer Financial Protection Bureau, or CFPB, which is granted broad rule-making, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with more than $10 billion in assets as well as their affiliates. Depository institutions with $10 billion or less in assets, such as the Bank, are subject to rules promulgated by the CFPB, which may increase their compliance risk and the costs associated with their compliance efforts, but the banks will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products.
The CFPB has already finalized rules relating to remittance transfers under the Electronic Fund Transfer Act, which requires companies to provide consumers with certain disclosures before the consumer pays for a remittance transfer. In addition, on January 10, 2013, the CFPB released its final “Ability-to-Repay/Qualified Mortgage” rules, which amend TILA’s implementing regulation, Regulation Z. Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer’s ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd-Frank Act, which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The final rule also implements section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule became effective January 10, 2014. The CFPB allowed for a small creditor exemption for banks with assets under $2 billion and that originate less than 500 mortgage loans in 2015. Beginning January 1, 2016, the small creditor exemption will be allowed for banks with assets under $2 billion and that originate less than 2,000 mortgage loans.

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On November 20, 2013, pursuant to section 1032(f) of the Dodd-Frank Act, the CFPB issued the Know Before You Owe TILA/RESPA Integrated Disclosure Rule (“TRID”), which combined the disclosures required under TILA and sections 4 and 5 of RESPA, into a single, integrated disclosure for mortgage loan transactions covered by those laws. TRID, which requires the use of a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation, became effective for applications received on or after October 3, 2015 for applicable closed-end consumer credit transactions secured by real property. Creditors must only use the Loan Estimate and Closing Disclosure forms for mortgage loan transactions subject to TRID. All other mortgage loan transactions continue to use the Good Faith Estimate and the Initial Truth-in-Lending Disclosure at application and the HUD-1 Settlement Statement and the Final Truth-in-Lending Disclosure at closing. TRID also has new tolerance requirements and record retention requirements. Of note, the creditor must retain evidence of compliance with the Loan Estimate requirements, including providing the Loan Estimate, and the Closing Disclosure requirements for three years after the later of the date of consummation, the date disclosures are required to be made or the date the action is required to be taken. Additionally, the creditor must retain copies of the Closing Disclosure, including all documents related to the Closing Disclosure, for five years after consummation.
Although it is difficult to predict at this time the extent to which the CFPB’s final rules impact the operations and financial condition of the Bank, such rules may have a material impact on the Bank’s compliance costs, compliance risk and fee income.
Community Reinvestment Act
The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a bank holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of a bank holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed transaction. The most recent CRA rating of the Bank is “satisfactory.”
Safety and Soundness Standards
Under the Federal Deposit Insurance Corporation Improvement Act each federal banking agency is required to prescribe, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards are to cover internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution which fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. The Company believes that the Bank meets substantially all the required standards that have been adopted.
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (the “FDIA”), requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.
As of December 31, 2015, a bank will be: (i) “well-capitalized” if the institution has a total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a CET1 risk-based capital ratio of 6.50% and a leverage ratio of 5.00% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater, CET1 risk-based capital ratio of 4.50% and a leverage ratio of 4.00% or greater and is not “well-capitalized;” (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.00%, a Tier 1 risk-based capital ratio of less than 6.00%, a CET1 risk-based capital ratio of less than 4.50%, or a leverage ratio of less than 4.00%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.00%, a Tier 1 risk-based capital ratio of less than 4.00%, a CET1 risk-based capital ratio of less than 3.00%, or a leverage ratio of less than 3.00%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.00% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose

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of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its bank holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s bank holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the bank holding company is limited to the lesser of: (i) an amount equal to 5.00% of the depository institution’s total assets at the time it became undercapitalized; and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions that would be applicable if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
At December 31, 2015, Bancorp’s Tier 1 leverage, Common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratios were 9.40%, 11.53%, 11.53%, and 12.79%, respectively, and the Bank’s Tier 1 leverage, Common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratios were 9.25%, 11.35%, 11.35%, and 12.60%, respectively, which met regulatory benchmarks for a “well-capitalized” designation.
Dividends
Oregon banking laws impose certain limitations on the payment of dividends by Oregon state chartered banks. The amount of the dividend may not be greater than the Bank’s unreserved retained earnings, less, to the extent not already charged against earnings or reflected in a reserve, the following: (i) all bad debts, which are debts on which interest is past due and unpaid for at least six months, unless the debt is fully secured and in the process of collection; (ii) all other assets charged off as required by the Director of the Department of Consumer and Business Services or a state or federal examiner; and (iii) all accrued expenses, interest and taxes of the institution. During the fourth quarter of 2012, the Bank received regulatory approval to adjust retained earnings to zero at September 30, 2012. Since that date the retained earnings account has been replenished through positive earnings from the Bank.
Deposit Insurance
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund, referred to as the DIF, of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The maximum amount of deposit insurance for banks and savings institutions is $250,000 per depositor.
The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors and is calculated based on an insured institution’s average consolidated assets less tangible equity capital, instead of being based on deposits.
For the purpose of determining an institution’s assessment rate, each institution is provided an assessment risk assignment, which is generally based on the risk that the institution presents to the DIF. Insured institutions with assets of less than $10.0 billion are placed in one of four risk categories. These risk categories are generally determined based on an institution’s capital levels and its supervisory evaluation. These institutions will generally have an assessment rate that can range from 2.5 to 45 basis points. However, the FDIC does have flexibility to adopt higher or lower assessment rates without additional rule-making provided that (i) no one such quarterly adjustment is in excess of 2 basis points; and (ii) the net cumulative adjustment cannot exceed 2 basis points. In the future, if the reserve ratio reaches certain levels, these assessment rates will generally be lowered.

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The minimum ratio of assets in the DIF to the total of estimated insured deposits is now 1.35%, and the FDIC has until September 30, 2020 to meet the reserve ratio.
All FDIC-insured institutions are also required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, or FICO, an agency of the federal government established to recapitalize a predecessor to the DIF. These assessments, which are adjusted quarterly, will continue until the FICO bonds mature in 2017 through 2019. The annual FICO assessment rate for the first quarter of 2016 is 0.58 basis points.
Incentive Compensation
In June 2010, the Federal Reserve Board, Office of Comptroller of the Currency, and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
In addition, Section 956 of the Dodd-Frank Act required certain regulators (including the FDIC, Securities and Exchange Commission (the “SEC”) and Federal Reserve Board) to adopt requirements or guidelines prohibiting excessive compensation. On April 14, 2011, these regulators published a joint proposed rulemaking to implement Section 956 of the Dodd-Frank Act for depository institutions, their holding companies and various other financial institutions with $1 billion or more in assets. The proposed rule would (i) prohibit incentive-based compensation arrangements for covered persons that would encourage inappropriate risks by providing excess compensation; (ii) prohibit incentive-based compensation arrangements for covered persons that would expose the institution to inappropriate risks by providing compensation that could lead to a material financial loss; (iii) require policies and procedures for incentive-based compensation arrangements that are commensurate with the size and complexity of the institutions; and (iv) require annual reports on incentive compensation structures to the institution’s appropriate federal regulator. The comment period to the proposed rule ended on March 31, 2011. As of the date of this document, the final rule has not yet been published by these regulators.
The Dodd-Frank Act contains a number of provisions relating to compensation applying to public companies such as the Company. The Dodd-Frank Act added Section 14A(a) to the Exchange Act that requires companies to include a separate non-binding resolution subject to stockholder vote in their proxy materials approving the executive compensation disclosed in the materials. In addition, Section 14A(b) to the Exchange Act requires any proxy or consent solicitation materials for a meeting seeking stockholder approval of an acquisition, merger, consolidation or disposition of all or substantially all of a company’s assets to include a separate non-binding stockholder resolution approving certain “golden parachute” payments made in connection with the transaction. Finally, Section 10D to the Exchange Act requires the SEC to direct the national securities exchanges to require companies to implement a policy to “claw back” certain executive payments that were made based on improper financial statements.
UDAP and UDAAP
Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act (the “FTC Act”), which is the primary federal law that prohibits unfair or deceptive acts or practices (“UDAP”), and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” (“UDAAP”), which have been delegated to the CFPB for supervision. The CFPB has published a Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.
Financial Privacy and Technology Risk Management
The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, subject to certain exceptions, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

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Bank Secrecy Act, Anti-Money Laundering and the USA Patriot Act
The USA PATRIOT Act (the “USA Patriot Act”), substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued and, in some cases, proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and programs to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. These programs must, at a minimum, provide for a system of internal controls to assure ongoing compliance, provide for independent testing of such systems and compliance, designate individuals responsible for such compliance and provide appropriate personnel training. Moreover, certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Specifically, the Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences.
Restrictions on Transactions with Affiliates
The Bank and any subsidiaries it may have are subject to certain restrictions under federal law on extensions of credit by, and certain other transactions with, Bancorp and any non-banking affiliates it may have. Section 23A of the Federal Reserve Act generally imposes limitations on, and requires collateral for, extensions of credit by an insured depository institution, such as the Bank, and its non-bank affiliates, such as Bancorp. The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of its capital and surplus. In addition, Section 23B of the Federal Reserve Act requires that transactions between an insured depository institution and a non-bank affiliate must generally be on terms at least as favorable to the depository institution as transactions with a non-affiliate. Finally, the Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal stockholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (2) must not involve more than the normal risk of repayment or present other unfavorable features. The Dodd-Frank Act expanded coverage of transactions with insiders by including credit exposure arising from derivative transactions (which are also covered by the expansion of Section 23A). The Dodd-Frank Act prohibits an insured depository institution from purchasing or selling an asset to an executive officer, director, or principal shareholder (or any related interest of such a person) unless the transaction is on market terms, and, if the transaction exceeds 10% of the institution’s capital, it is approved in advance by a majority of the disinterested directors. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the Bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of the Bank, the imposition of a regulatory order and other regulatory sanctions.
Reserve Requirements
The Bank is subject to Federal Reserve Board regulations under which depository institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW accounts and checking accounts). The regulations generally require that for 2016 reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts over $15.2 million up to $110.2 million. Net transaction accounts up to $15.2 million are exempt from reserve requirements. The amount of aggregate transaction accounts in excess of $110.2 million is subject to a reserve ratio of 10.0%. The amounts of transaction accounts subject to the various reserve ratios are generally adjusted by the Federal Reserve Board annually. During 2015 and 2014, the Bank was in compliance with the requirements described above.
Risk Retention
The Dodd-Frank Act requires that, subject to certain exemptions, sponsors of mortgage- and other asset-backed securities retain not less than 5% of the credit risk of the related mortgage loans or other assets. On November 19, 2014, the federal banking regulators, together with the SEC, the Federal Housing Finance Agency and the Department of Housing and Urban Development, issued a final rule implementing this requirement. Generally, the final rule provides various ways in which the retention of risk requirement can be satisfied and also describe exemptions from the retention requirements for various types of assets, including mortgage loans.
Consumer Protection Laws and Regulations
The Bank and its affiliates are subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of their business relationships with consumers. These include the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair

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Housing Act, the SAFE Act, the Real Estate Settlement Procedures Act, the FHA, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service Members’ Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair, deceptive and abusive business practices, foreclosure laws and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including, but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages and the loss of certain contractual rights. The Bank is currently operating with real estate loan portfolios within the parameters of such guidance.
Concentrated Commercial Real Estate Lending Regulations
The federal banking regulatory agencies have promulgated guidance governing financial institutions with concentrations in commercial real estate lending, such guidance being recently supplemented as of December 18, 2015. The guidance provides that a bank has a concentration in commercial real estate lending if (1) total reported loans for acquisition, construction, land development, and other land represent 100.0% or more of total capital or (2) total reported loans secured by multifamily and nonfarm residential properties and loans for acquisition, construction, land development, and other land represent 300.0% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management practices that address, among other things, Board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. The Bank is currently operating with real estate loan portfolios within such percentage levels.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. The sanctions, which are administered by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”), targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Other Legislative and Regulatory Initiatives
In addition to the specific proposals described above, from time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to Bancorp or the Bank could have a material effect on the business of the Company.
Available Information
The Company files annual, quarterly and current reports, proxy statements and other business and financial information with the SEC. You may read and copy any materials that Bancorp files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 or 1-800-732-0330 for further information on the operation of the Public Reference Room. In addition, the SEC maintains an Internet site that contains the Company’s SEC filings, as well as reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, located at http://www.sec.gov. These filings are also accessible free of charge at the Company’s website at www.botc.com as soon as reasonably practicable after filing with the SEC. The information on or that is accessible through our website is not incorporated by reference into this report or any other document that the Company files with or furnishes to the SEC.

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ITEM 1A. RISK FACTORS.
There are a number of risks and uncertainties, many of which are beyond the Company’s control, that could have a material adverse impact on the Company’s business, financial condition, results of operations, liquidity, regulatory capital levels or prospects. The Company describes below the most significant of these risks and uncertainties in connection with both the Company’s business and operations. These should not be viewed as an all-inclusive list or in any particular order. Additional risks that are not currently considered material may also have an adverse effect on the Company. This report is qualified in its entirety by these risk factors.
Before making an investment decision, investors should carefully consider the specific risks detailed in Item 1A; other risks facing the Company identified in this report, including, risks, uncertainties and assumptions identified in this report that are difficult to predict and that could materially and adversely affect the Company’s business financial condition, results of operations, liquidity, regulatory capital levels and prospects; the information in Item 1; and the information in Item 7, including the Company’s cautionary statements as to forward-looking statements.
Risks related to our business
Our business is closely tied to the local economies of Oregon, Idaho and Washington.
The Company’s business is closely tied to the economies of Oregon, Idaho and Washington in general and is particularly affected by the economies of Central, Southern and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho and Seattle, Washington metro areas. In addition, the Company has a significant concentration in real estate lending that is directly affected by local and regional economic conditions. Approximately 72% of the Bank’s loan portfolio at December 31, 2015 consisted of loans secured by real estate, including construction and development loans, residential mortgage loans and commercial loans secured by commercial real estate, a strong majority of which are located in Oregon and Idaho. Since the end of the great recession of 2008, the economies of Oregon, Idaho and Washington have generally stabilized or are recovering, the housing market has improved and prices have increased, and vacancy rates for commercial properties have stabilized. 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, and cash flows.
Adverse changes in economic conditions could affect the Company’s business, financial condition and results of operations.
Although economic conditions have improved in recent years, financial institutions are affected by changing conditions in the real estate and financial markets.  Between 2008 and 2011, significant declines in the housing market, with falling home prices and increasing foreclosures and unemployment, resulted in significant write-downs of asset values by financial institutions, including the Company.  While conditions have improved and continue to indicate a stable recovery, there can be no assurance that these conditions will persist.  A return to a recessionary economy could result in financial stress on the Company’s borrowers and other customers that would adversely affect the Company’s business, financial condition and results of operations.  The Company may also face the following risks in connection with possible adverse economic events:
Ineffective monetary policy could cause rapid changes in interest rates and asset values that would have a materially adverse impact on the Company’s profitability and overall financial condition.
Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities.
Regulatory scrutiny of the industry could increase, leading to increased regulation of our industry that could lead to a higher cost of compliance, limit the Company’s ability to pursue business opportunities and increase the Company’s exposure to the judicial system and the plaintiff’s bar.
The Company may not be able to attract or retain key banking employees, which could adversely impact the Company’s business and operations.
The Company expects future success to be driven in large part by the relationships maintained with its customers by its executives and senior lending officers. The Company has entered into employment agreements with several members of senior management. The existence of such agreements, however, does not necessarily ensure that the Company will be able to continue to retain the services of these senior management members.
The Company’s future successes and profitability are substantially dependent upon the management and banking abilities of its senior executives. The Company strives to attract and retain key banking professionals, management and staff. Competition to attract the best professionals in the industry can be intense which will limit the Company’s ability to hire new professionals. Banking-related revenues and net income could be adversely affected in the event of the unexpected loss of key personnel.

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The Company may be required to increase its reserve for credit losses and to charge off additional loans in the future, which could adversely affect the Company’s financial condition and results of operations.
The Company maintains a reserve for credit losses in an amount that the Company believes is adequate to provide for losses inherent in the loan portfolio. The level of the reserve reflects management’s continuing evaluation of specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; industry concentrations; and other unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the reserve for credit losses inherently involves a high degree of subjectivity and judgment and requires the Company to make significant estimates of current credit risks and future trends. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company’s control, may require an increase in the reserve for credit losses. Increases in non-performing loans have a significant impact on the Company’s reserve for credit losses. Generally, the Company’s non-performing loans reflect difficulties of individual borrowers resulting from financial stress on the borrowers’ asset values and cash flow abilities often related to the weakness in general economic conditions and/or adversity in sector specific situations.
If real estate markets or the economy in general deteriorate, the Company may experience increased delinquencies and credit losses. The reserve for credit losses may not be sufficient to cover actual loan-related losses. Additionally, banking regulators may require the Company to increase its reserve for credit losses in the future, which could have a negative effect on the Company’s financial condition and results of operations.
The Company’s reserve for credit losses is a significant accounting estimate and may not be adequate to cover future loan losses, which could adversely affect its business, financial condition and results of operations.
The Company maintains a reserve for credit losses in an amount that the Company believes is adequate to provide for losses inherent in the loan portfolio. While the Company strives to monitor credit quality and to identify adversely risk rated loans on a consistent and timely basis, including those that may become non-performing, at any time there are loans in the portfolio that could result in losses that have not been identified as problem or non-performing loans. Estimation of the reserve requires the Company to make various assumptions and judgments about the collectability of loans in the Company’s loan portfolio. These assumptions and judgments include historical loan loss experience, current credit profiles of the Bank’s borrowers, adverse situations that have occurred that may affect a borrower’s ability to meet its financial obligations, the estimated value of underlying collateral and general economic conditions. Determining the appropriateness of the reserve is complex and requires judgment by management about the effect of matters that are inherently uncertain. The Company cannot be certain that it will be able to identify deteriorating loans before they become non-performing assets or that it will be able to limit losses on those loans that have been identified. As a result, future increases to the reserve for credit losses may be necessary. Additionally, future increases to the reserve for credit losses may be required based on changes in the composition of the loans comprising the loan portfolio, deteriorating values in underlying collateral (most of which consists of real estate in the markets served) and changes in the financial condition of borrowers, such as those that may result from changes in economic conditions or as a result of incorrect assumptions by management in determining the reserve for credit loss. Finally, the Financial Accounting Standards Board has issued a proposed Accounting Standards Update that presents a new credit impairment model, the Current Expected Credit Loss (“CECL”) model, which would require financial institutions to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for incurred or probable losses up to the balance sheet date. Under the CECL model, credit deterioration would be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes. Accordingly, the CECL model could require financial institutions like the Bank to increase their allowances for loan losses. Moreover, the CECL model likely would create more volatility in our level of allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
The Company’s profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe it money.
The Company is exposed to the risk that third parties that owe it money will not perform their obligations. These parties may default on their obligations to the Company due to bankruptcy, lack of liquidity, operational failure or other reasons. The Company’s rights against third parties may not be enforceable in all circumstances. In addition, deterioration in the credit quality of third parties whose securities or obligations the Company holds could result in losses and/or adversely affect the Company’s ability to use those securities or obligations for liquidity purposes. The Company relies on representations of potential borrowers and/or guarantors as to the accuracy and completeness of certain financial information. The Company’s financial condition and results of operations could be negatively impacted if the financial statements or other information that the Company relies upon is materially misleading.

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Real estate values could decline leading to additional and greater-than-anticipated loan charge-offs and valuation write downs on OREO and OREO-related management and disposition expenses.
Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as other real estate owned (“OREO”). In its normal lending process, the Bank may take a security interest in real estate as collateral for loans. In the event of obligor default, the Bank may have the right to foreclose on such collateral and take title to it. At December 31, 2015, the Bank had OREO with a carrying value of approximately $3.3 million. Generally, higher levels of OREO lead to greater expenses as the Bank incurs costs to manage and dispose of the properties, including personnel costs, insurance, taxes, completion costs, repair costs and other costs associated with property ownership. There are also funding costs associated with OREO. The Bank evaluates property values periodically and establishes valuation reserves, as appropriate, to adjust the carrying value of the properties to the lesser of book or appraised value, net of selling costs and any additional liquidation reserves to expedite the sale of such properties. Decreases in market prices may lead to additional OREO valuation reserves, with a corresponding expense in the Company’s consolidated statement of income. Further valuation reserves of OREO or an inability to sell OREO properties could have a material adverse effect on the Company’s results of operations and financial condition.
The Company could be subject to environmental liabilities with respect to properties to which it takes title.
In the course of business, the Company may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or remediate hazardous or toxic substances at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the contaminated site. If the Company becomes subject to significant environmental liabilities, its business, financial condition and results of operations could be adversely affected.
The Company’s financial condition and ability to fund operations could be impaired by liquidity risk.
Liquidity is essential to the Company’s business. The Company’s primary funding source is customer deposits. In addition, the Bank has historically had access to advances from the FHLB, the FRB discount window and other wholesale sources such as Internet-sourced deposits to fund operations. Although the Company has historically been able to replace maturing deposits and advances as necessary, it might not be able to replace such funds in the future. An inability to raise funds through traditional deposits, brokered deposits, borrowings, or the sale of securities or loans would have a material adverse effect on the Company’s liquidity. The Company’s access to funding sources on terms which are acceptable to the Company could be impaired by factors that affect the Company specifically or the financial services industry or economy in general. The Company has ample liquidity as of December 31, 2015; however, the Company’s ability to borrow or attract and retain deposits in the future could be adversely affected by the Company’s financial condition or regulatory restrictions, or impaired by factors that are not specific to the Company, such as FDIC insurance changes, disruption in the financial markets or negative views and expectations about the prospects for the banking industry. The Bank’s primary counterparty for borrowing purposes is the FHLB and liquid assets are mainly held at correspondent banks or the FRB. Borrowing capacity from the FHLB or FRB may fluctuate based upon the condition of the Bank or the acceptability and risk rating of securities or loan collateral and counterparties could adjust discount rates applied to such collateral at their discretion. The FRB or FHLB could restrict or limit the Company’s access to secured borrowings. Correspondent banks can withdraw unsecured lines of credit or require collateralization for the purchase of federal funds. Liquidity also may be affected by the Bank’s routine commitments to extend credit.
Sources of funds may not remain adequate for liquidity needs and the Company may be compelled to seek additional sources of financing in the future. Additional borrowings, if sought, may not be available or, if available, may not be on favorable terms. If additional financing sources are unavailable or not available on reasonable terms to provide necessary liquidity, the Company’s business, financial condition, results of operations and future prospects could be materially and adversely affected.
Historically low interest rates and changes in interest rates may adversely affect the Company’s net interest income and profitability.
In recent years, it has been the policy of the FRB to maintain interest rates at historically low levels through its targeted federal funds rate. As a result, market rates on the loans the Company has originated and the yields on securities the Company has purchased have been at lower levels than available prior to 2008. As a general matter, the Company’s interest-bearing assets reprice or mature slightly more quickly than the Company’s interest-earning liabilities, which have resulted in decreases in net interest income as interest rates decreased. However, the Company’s ability to lower its interest expense is limited at these interest rate levels while the average yield on the Company’s interest-earning assets may continue to decrease. The FRB has indicated its intention to be patient in its determination whether to increase interest rates in the future.

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In addition, the Company’s results of operations are highly dependent on the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in market interest rates impact the rates earned on loans and investment securities and the rates paid on deposits and borrowings. In addition, changes to the market interest rates may impact the level of loans, deposits and investments and the credit quality of existing loans. These rates may be affected by many factors beyond the Company’s control, including general economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. Accordingly, the Company’s net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may be affected, which could have an adverse effect on the Company's profitability. Also, changes in interest rates may negatively impact the Company’s ability to attract deposits, make loans and achieve satisfactory interest rate spreads, as well as the Company's market values of its financial instruments, which could adversely affect the Company’s business, financial condition and results of operations.
The financial services business is intensely competitive and the Company may not be able to compete effectively.
The Company faces competition for its services from a variety of competitors. The Company’s future growth and success depend on its ability to compete effectively. The Company competes for deposits, loans and other financial services with numerous financial service providers including banks, thrifts, credit unions, mortgage companies, broker dealers and insurance companies and increasingly other non-bank financial services providers who use the Internet as a platform to originate loans and/or acquire deposits. To the extent these competitors have less regulatory constraints, lower cost structures or increased economies of scale, they may be able to offer a greater variety of products and services or more favorable pricing for such products and services. In addition, improvements in technology, communications and the Internet have intensified competition. As a result, the Company’s competitive position could be weakened, which could adversely affect the Company’s business, financial condition and results of operations.
New lines of business or new products and services may subject us to additional risks.
From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There may be substantial risks or uncertainties associated with these types of efforts, particularly in instances where the markets may not be fully developed. Significant time and resources may be invested in developing and marketing new lines of business and/or new products and services and successful implementation may not be achieved or price and profitability targets may not be obtained. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Additionally, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.
Risks associated with the Company’s Internet-based systems and online commerce security, including “hacking” and “identify theft,” could adversely affect the Company’s business.
The Company delivers its services both through its branch network and the Internet. The Company relies heavily upon data processing, including loan servicing and deposit processing software, communications systems and information systems from a number of third parties to conduct its business. Third party or internal systems and networks may fail to operate properly or become disabled due to deliberate attacks or unintentional events. The Company’s operations are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks, denial of service attacks, unauthorized access and other unforeseen events. Undiscovered data corruption could render the Company’s customer information inaccurate. These events may obstruct the Company’s ability to provide services and process transactions. While the Company believes that it is in compliance with all applicable privacy and data security laws, an incident could put its customer confidential information at risk.
While the Company believes that it has appropriate protective measures in place, the Company can never be certain that all of its systems are entirely free from vulnerability to breaches of security or other technological difficulties or failures. The Company monitors and modifies, as necessary, its protective measures in response to the perpetual evolution of cyber threats.
A breach in the security of any of the Company’s information systems, or other cyber incident, could have a material adverse effect on, among other things, its revenue, ability to attract and maintain customers and business reputation. In addition, as a result of any breach, the Company could incur higher costs to conduct its business, to increase protection, or related to remediation.
Furthermore, the Company’s customers could incorrectly blame the Company and terminate their accounts with the Bank for a cyber-incident which occurred on their own system or with that of an unrelated third party. In addition, a security breach could also subject the Company to additional regulatory scrutiny and expose the Company to civil litigation and possible financial liability.
In response to the Executive Order released by the Obama Administration, Improving Critical Ingrastructure Cybersecurity, referred to as the Executive Order, the Federal Financial Institutions Examination Council developed a cybersecurity

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assessment tool to help institutions identify their risks and determine their cybersecurity preparedness. The FFIEC has also published cybersecurity guidance on its website, along with observations from recent cybersecurity assessments. The federal banking agencies have indicated that they will use the assessment tool as guidance during a financial institution’s safety and soundness examination. Although we have used the assessment tool to develop policies and procedures related to our cybersecurity, no assurance can be given that the regulators will believe that our information security systems are adequate or that these policies and procedures will be effective in preventing cyber threats and attacks. Furthermore, the implementation of any recommended guidance could require us to incur additional costs.
The Company continually encounters technological changes and may not have the resources to invest in technological improvements.
Frequent introductions of new technology-driven products and services in the financial services industry result in the need for rapid technological change. In addition, the effective use of technology may result in improved customer service and reduced costs. The Company’s future success depends, to a certain extent, on its ability to identify the needs of customers and address those needs by using technology to provide the desired products and services and to create additional efficiencies in its operations. Certain competitors may have substantially greater resources to invest in technological improvements. The Company may not be able to successfully implement new technology-driven products and services or to effectively market these products and services to the Company’s customers. Failure to implement the necessary technological changes could have a material adverse impact on the Company’s business, financial condition and results of operations.
The Company relies heavily on technology and computer systems, and computer failure could result in loss of business and adversely affect the Company’s financial condition and results of operations.
Advances and changes in technology could significantly affect the Company’s business, financial condition, results of operations and prospects. The Company faces many challenges, including the increased demand for providing customers access to their accounts and the systems to perform banking transactions electronically. The Company’s ability to compete depends on its ability to continue to adapt technology on a timely and cost-effective basis to meet these demands. In addition, the Company’s business and operations are susceptible to negative effects from computer system failures, communication and energy disruption and unethical individuals with the technological ability to cause disruptions or failures of its data processing systems.
The Company could incur losses due to operating disruptions.
Operating disruptions could occur without warning, and the results may be predictable or unknown. Disruptions could be either internal or external, and could include natural disasters, technological failures, pandemic events, human error, or terrorism. In alignment with regulatory guidance, the Company has developed detailed Business Continuity Plans and Disaster Recovery Plans to mitigate the impact of a disaster, provide for operations at backup facilities, and minimize risk to the organization, its customers, stockholders, and reputation. These plans may or may not be sufficient to mitigate or prevent material loss to the Company in an event that disrupts operations. External events could also affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses.
Changes or disruptions in the market for certain securities in the Company’s investment portfolio could negatively affect the value of those securities.
The Company’s investment portfolio includes a variety of securities that are subject to interest rate risk and credit risk. The portfolio includes obligations of, and mortgage-backed securities guaranteed by, government sponsored enterprises (“GSEs”) such as the Federal National Mortgage Association (“Fannie Mae”), the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the FHLB or otherwise backed by Federal Housing Administration or Veteran’s Administration guaranteed loans. In addition, the porfolio contains non-GSE securities, including debt issued by public entities that are secured by expected future cash flows of the issuer. Adverse general economic conditions, credit risk associated with the collateral or guarantors of securities, and volatility or illiquidity in markets may cause investment securities held within the Company’s investment portfolio to fall in value and/or become less liquid. Should securities become impaired, they may be subject to material write-downs thereby impacting results of operations or financial condition of the Company. In addition, market conditions may reduce valuations due to the perception of heightened credit and liquidity risks in addition to interest rate risk typically associated with these securities. Possible FRB actions to increase interest rates in the future may cause a decline in the value of securities held by the Company. Declines in market value associated with these disruptions would result in impairments of these assets, which would lead to accounting charges that could have a material adverse effect on the Company’s results of operations, equity and capital ratios.

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If the goodwill that the Company has recorded or may record in connection with a business acquisition becomes impaired, it could require charges to earnings, which would adversely affect the Company’s business, financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets the Company acquired in connection with the purchase of another financial institution. The Company reviews goodwill for impairment at least annually, or more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2015, the Company’s goodwill totaled $78.6 million. While the Company has not recorded any impairment charges since it initially recorded the goodwill, there can be no assurance that future evaluations of the Company’s existing goodwill or goodwill it may acquire in the future will not result in findings of impairment and related write-downs, which could adversely affect the Company’s business, financial condition and results of operations.
The Company has made acquisitions, and may do so in the future, which could dilute current stockholders’ stock ownership and expose it to additional risks.
In accordance with the Company’s strategic plan, it regularly evaluates opportunities to acquire other banks and branch locations to expand the Company. As a result, the Company may engage in acquisitions and other transactions that could have a material effect on its operating results, financial condition and liquidity.
The Company’s acquisition activities could require it to use a substantial amount of cash, other liquid assets, issue shares of common stock and/or incur debt. In addition, if goodwill recorded in connection with potential future acquisitions were determined to be impaired, then the Company would be required to recognize a charge against earnings, which could materially and adversely affect its results of operations during the period in which the impairment was recognized.
The Company’s acquisition activities could involve a number of additional risks, including the risks of:
the possibility that expected benefits may not materialize in the timeframe expected or at all, or may be more costly to achieve;
incurring the time and expense associated with identifying and evaluating potential acquisitions and merger partners and negotiating potential transactions, resulting in management’s attention being diverted from the operation of the Company’s existing business;
using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets;
incurring the time and expense required to integrate the operations and personnel of the combined businesses;
the possibility that the Company will be unable to successfully implement integration strategies, due to challenges associated with integrating complex systems, technology, banking centers, and other assets of the acquired bank in a manner that minimizes any adverse effect on customers, suppliers, employees, and other constituencies;
the possibility that the acquisition may not be timely completed, if at all; and
losing key employees and customers as a result of an acquisition that is poorly received.
If the Company does not successfully manage these risks, its acquisition activities could have a material adverse effect on its operating results, financial condition and liquidity.
New or acquired banking office facilities and other facilities may not be profitable.
The Company may not be able to identify profitable locations for new banking offices. The costs to start up new banking offices or to acquire existing branches, and the additional costs to operate these facilities, may increase the Company’s non-interest expense and decrease our earnings in the short term. If branches of other banks become available for sale, the Company may acquire those offices. It may be difficult to adequately and profitably manage our growth through the establishment or purchase of additional banking offices and the Company can provide no assurance that any such banking offices will successfully attract enough deposits to offset the expenses of their operation. In addition, any new or acquired banking offices will be subject to regulatory approval, and there can be no assurance that the Company will succeed in securing such approval.

The Company’s operations rely on certain external vendors, which presents certain risks to our business, including the risk that they may not perform in accordance with the contracted arrangements under service level agreements. 

The Company relies on certain external vendors to provide products and services necessary to maintain day-to-day operations of the Company.  Accordingly, external vendors are a course of operational and information security risk to us.  The Company’s

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operations are exposed to risk that these external vendors will not perform in accordance with the contracted arrangements under service level agreements.  Moreover, external vendors’ market power significantly limits our ability to be indemnified for a vendor’s negligence and insurance does not adequately cover all such exposure.  The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to the Company’s operations, which could have a material adverse impact on the Company’s business, financial condition and results of operations.   In addition, such a failure may force the Company to replace or renegotiate contracts with external vendors which could entail significant operational expense and delays for the Company.

We may be subject to potential liability and business risk from actions by our regulators related to supervision of third parties.
Oversight management by us of third parties by which we acquire deposit accounts and offer products and services, may be required to be expanded by our auditors or regulators. Although we have added significant compliance staff and have used outside consultants, our internal and external compliance examiners must be satisfied with the results of such augmentation and enhancement. We cannot assure you that we will satisfy all related requirements. Not achieving a compliance management system which is deemed adequate could result a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact the Bank’s reputation, business, financial condition and results of operations. Our ongoing review and analysis of our compliance management systems and implementation of any changes resulting from that review and analysis will likely result in increased noninterest expense.
The Bank is a community bank and its ability to maintain its reputation is critical to the success of its business and the failure to do so may materially adversely affect the Company’s performance.
The Bank is a community bank, and its reputation is one of the most valuable components of its business. A key component of the Bank’s business strategy is to rely on its reputation for customer service and knowledge of local markets to expand its presence by capturing new business opportunities from existing and prospective customers in its market area and contiguous areas. As such, the Bank strives to conduct its business in a manner that enhances its reputation. This is done, in part, by recruiting, hiring and retaining employees who share the Bank’s core values of being an integral part of the communities the Bank serves, delivering superior service to its customers and caring about its customers and associates. If Bancorp’s or the Bank’s reputation is negatively affected, by the actions of their employees, by their inability to conduct their operations in a manner that is appealing to current or prospective customers, or otherwise, the Company’s business and results of operations may be materially adversely affected.
Changes in accounting standards could affect reported earnings.
The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the SEC and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of the Company’s consolidated financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply new or revised guidance retroactively.
The Company’s controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could adversely affect our business, financial condition and results of operations.
The soundness of other financial institutions could adversely affect the Company.
The Bank is a public depository and, accordingly, accepts deposit funds that belong to, or are held for the benefit of, the State of Oregon, political subdivisions thereof, municipal corporations and other public funds. In accordance with applicable state law, in the event of default of one bank, all participating banks in the state collectively assure that no loss of funds is suffered by any public depositor. Generally, in the event of default by a depository of public funds in excess of collateral pledged, an assessment applicable to all public depositories is allocated on a pro rata basis in proportion to the maximum liability of each public depository as it existed on the date of loss. The maximum liability is dependent upon potential changes in regulations, the occurrence of Oregon bank failures and the level of public fund deposits held by the failing bank and cannot be presently determined.
In 2015, the amount of collateral the Bank was required to pledge against Oregon public deposits was 50% of the uninsured portion of these Oregon public deposits, but the percentage of collateral required to be pledged could be increased in the future.

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The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions or the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of the Company’s counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. Such losses may materially and adversely affect the Company’s results of operations.

Risks related to an investment in Cascade’s common stock
The Company may be restricted from paying or may determine not to pay dividends.
Bancorp is a separate legal entity from the Bank and substantially all of its revenues are derived from the Bank dividends. Oregon law prohibits the Bank from paying dividends to Bancorp unless the Bank has positive retained earnings. The Bank received regulatory approval to adjust retained earnings to zero at September 30, 2012, but the Bank’s payment of dividends will remain constrained under Oregon law by the amount of increases in its retained earnings from that date. In addition, regulators previously have required Bancorp to obtain permission prior to payment of dividends on Cascade common stock and prior to taking a dividend from the Bank. Although such requirements have been terminated, it is possible that regulators may impose the same or similar requirements or limitations on the dividends. If the Bank is unable to pay dividends to Bancorp in the future, Bancorp may not be able to pay dividends on Cascade common stock, which could have a material adverse effect on the Company’s financial condition, results of operations or price of Cascade common stock. In addition, if the Bank is unable to pay dividends to Bancorp in the future, Bancorp may not be able to pay its creditors, which could result in a default or acceleration of Bancorp’s debt obligations or have a material adverse effect on Bancorp’s reputation.
Cascade’s stock price may be volatile, which could result in losses to its investors and litigation against Cascade.
Cascade’s stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, Cascade’s announcement of developments related to its businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, concerns, irrational exuberance on the part of investors, and other issues related to the financial services industry. Cascade’s stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to its performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of the Company’s common stock, and the current market price may not be indicative of future market prices.
Stock price volatility may make it more difficult for our investors to sell their common stock when they desire and at prices they find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. The Company could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from Cascade’s normal business.
The existence of outstanding stock options issued to the Company’s current or former executive officers, directors, and employees may result in dilution of your ownership.
As of December 31, 2015, the Company had outstanding options to purchase 3,375,909 shares of its common stock at a weighted average exercise price of $5.44 per share. All of these options are held by the Company’s current or former executive officers, directors, and employees. As of December 31, 2015, the Company had the ability to issue options and restricted stock to purchase an additional 269,270 shares of our common stock. The issuance of shares subject to options under the equity compensation plans will result in dilution of the Company’s stockholders’ ownership of our common stock.

Regulatory Risks
The banking industry and the Company operate under certain regulatory requirements that may change significantly and in a manner that further impairs revenues, operating income and financial condition.
The Company operates in a highly regulated industry and is subject to examination, supervision and comprehensive regulation by the DFCS, the FDIC and the Federal Reserve Board. The regulations affect the Company’s investment practices, lending activities and dividend policy, among other things. Moreover, federal and state banking laws and regulations undergo frequent and often significant changes and have been subject to significant change in recent years, sometimes retroactively applied, and may change significantly in the future. Changes to these laws and regulations or other actions by regulatory agencies could,

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among other things, make regulatory compliance more difficult or expensive for the Company, limit the products the Company can offer or increase the ability of non-banks to compete and could adversely affect the Company’s business in significant but unpredictable ways, which in turn could have a material adverse effect on the Company’s financial condition or results of operations.
The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes in light of the performance of and government intervention in the financial services sector. Included in the Dodd-Frank Act are, for example, changes related to deposit insurance assessments, executive compensation and corporate governance requirements, payment of interest on demand deposits, interchange fees and overdraft services. The Dodd-Frank Act also resulted in the “Volcker Rule” for banks and bank holding companies, which prohibits proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and otherwise limit the relationships with such funds. Many aspects of the Dodd-Frank Act are subject to rulemaking by various regulatory agencies and will take effect over several years, making it difficult at this time to anticipate the overall financial impact of this expansive legislation on the Company, its customers or the financial industry generally. Likewise, any new consumer financial protection laws enacted by the Consumer Financial Protection Bureau, which was established pursuant to the Dodd-Frank Act, that would apply to all banks and thrifts may increase the Company’s compliance and operational costs in the future.
In addition, the banking regulatory agencies adopted a final rule effective January 1, 2015 that implements the Basel III changes to the international regulatory capital framework and revises the U.S. risk-based and leverage capital requirements for U.S. banking organizations to strengthen identified areas of weakness in the capital rules and to address relevant provisions of the Dodd-Frank Act. The final rule establishes a stricter regulatory capital framework that requires banking organizations to hold more and higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress.
The Company cannot predict the substance or impact of pending or future legislation or regulation. The Company’s compliance with these laws and regulations is costly and may restrict certain activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, access to capital and brokered deposits and locations of banking offices. Failure to comply with these laws or regulations could result in fines, penalties, sanctions and damage to the Company’s reputation, which could have an adverse effect on the Company’s business, financial condition or results of operations.
If the Company fails to maintain sufficient capital under regulatory requirements, whether due to losses, an inability to raise additional capital or otherwise, that failure would adversely affect the Company’s financial condition, liquidity and results of operations, as well as the Company’s ability to maintain regulatory compliance.
Bancorp and the Bank must meet regulatory capital requirements and maintain sufficient liquidity. The Company’s ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor preferences regarding the banking industry and market condition and governmental activities, many of which are outside the Company’s control, and on the Company’s financial condition and performance. Accordingly, the Company may not be able to raise additional capital if needed or on terms acceptable to the Company. If the Company fails to meet these capital and other regulatory requirements or is unable to raise additional capital when needed, the Company’s financial condition, liquidity and results of operations would be materially and adversely affected.
The Company may be subject to more stringent capital and liquidity requirements, which would adversely affect the Company’s net income and future growth.
In July 2013, the Federal Reserve Board and the FDIC, issued rules that implemented the Basel III changes to the international regulatory capital framework and revised the U.S. risk-based and leverage capital requirements for U.S. banking organizations in order to strengthen identified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act. The rules apply to both Bancorp and the Bank.
As a result of the enactment of the Basel III Rules, the Company recently became subject to increased required capital levels. The Basel III Rules became effective as applied to us on January 1, 2015, with a phase-in period that generally extends from January 1, 2015 through January 1, 2019. See “Supervision and Regulation - Bank Holding Company Regulation - New Capital Rules.”
Although the Company currently cannot predict the specific impact and long-term effects that Basel III will have on the Company and the banking industry more generally, the Company will be required to maintain higher regulatory capital levels which could impact the Company’s operations, net income and ability to grow. Furthermore, the Company’s failure to comply with the minimum capital requirements could result in regulators taking formal or informal actions against the Company, which could restrict future growth or operations.

23



The Bank’s deposit insurance premium could be higher in the future, which could have a material adverse effect on its results of operations.
The FDIC insures deposits at FDIC-insured financial institutions, including the Bank. The FDIC charges the insured financial institutions assessments to maintain the Deposit Insurance Fund at a certain level; if an FDIC-insured financial institution fails, payments of deposits up to insured limits are made from the Deposit Insurance Fund. An increase in the risk category of the Bank, adjustments to assessment rates and/or a special assessment could have an adverse effect on the Company’s results of operations.
Changes in the Federal Reserve Board’s monetary or fiscal policies could adversely affect the Company’s results of operations and financial condition.
The Company’s results of operations will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The Federal Reserve Board affects the levels of bank loans, investments and deposits through its purchases of government and other securities, its regulation of the discount rate applicable to member banks and its management of bank reserve requirements. The Company cannot predict the nature or impact of future changes in monetary and fiscal policies.
The Company could be subject to fines, sanctions or other adverse consequences if it fails to comply with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth in Lending Act, Home Mortgage Disclosure Act, Fair Lending Laws or other laws and regulations.
Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial Institutions are also obligated to file suspicious activity reports with the United States Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the Company is required to develop compliance management systems designed to detect and prevent violations of the Real Estate Settlement Procedures Act, Truth in Lending Act, Home Mortgage Disclosure Act, Fair Lending Laws and similar laws and regulations. The federal government has imposed and is expected to expand these and other laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks. The Company has developed policies and continues to augment procedures and systems designed to assist in compliance with these laws and regulations, however no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. Failure to comply with these regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact the Bank’s reputation, business, financial condition and results of operations.
Our financial condition, earnings and asset quality could be adversely affected if our consumer facing operations do not operate in compliance with applicable regulations.
While all aspects of our operations are subject to detailed and complex compliance regimes, bank regulators have increased their focus on risk management and consumer compliance, and we expect this focus to continue. As a result, those portions of our lending operations which most directly deal with consumers, in particular our mortgage operations, credit card and other consumer lending business, pose particular challenges. While we are not aware of any material issues with our compliance, mortgage and other consumer lending raises significant compliance risks resulting from the detailed and complex nature of mortgage and other consumer lending regulations imposed by federal regulatory agencies, and the relatively independent operating environment in which loan officers operate. As a result, despite the education, compliance training, supervision and oversight we exercise in these areas, failure to comply with these regulations could result in the Bank being strictly liable for restitution or damages to individual borrowers, and to a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact the Bank’s reputation, business, financial condition and results of operations.
The Company is subject to commercial real estate lending guidance issued by the federal banking regulators that impacts the Company’s operations and capital requirements.

24



The federal banking regulators have issued guidance regarding concentrations in commercial real estate lending directed at institutions that have particularly high concentrations of commercial real estate loans within their lending portfolios. This guidance suggests that institutions whose commercial real estate loans exceed certain percentages of capital should implement heightened risk management practices appropriate to their concentration risk and may be required to maintain higher capital ratios than institutions with lower concentrations in commercial real estate lending. Based on our commercial real estate concentration as of December 31, 2015, the Company believes that it is operating within the guidelines. However, increases in the Company’s commercial real estate lending, particularly as it expands into metropolitans markets and make more of these loans, could subject it to additional supervisory analysis. The Company cannot guarantee that any risk management practices it implements will be effective to prevent losses relating to its commercial real estate portfolio. Management has implemented controls to monitor the Company’s commercial real estate lending concentrations, but it cannot predict the extent to which this guidance will impact its operations or capital requirements.
The Company’s ability to continue to receive the benefits of its loss share arrangements with the FDIC is conditioned upon its compliance with certain requirements under the agreements.
The Company is the beneficiary of loss share agreements with the FDIC that call for the FDIC to fund a portion of our losses on a majority of the assets the Company acquired in the Home acquisition that came from Home’s FDIC-assisted transaction, entered into in September 2009 and September 2010. To recover a portion of the losses and retain the loss share protection, the Company must comply with certain requirements imposed by the agreements. The requirements of the agreements relate primarily to the administration of the assets covered by the agreements, as well as the Company obtaining the consent of the FDIC to engage in certain corporate transactions that may be deemed under the agreements to constitute a transfer of the loss share benefits.
When the consent of the FDIC is required under the loss share agreements, the FDIC may withhold its consent or may condition its consent on terms that we do not find acceptable. If the FDIC does not grant its consent to a transaction the Company would like to pursue, or conditions its consent on terms that the Company does not find acceptable, the Company may be unable to engage in a corporate transaction that might otherwise benefit its stockholders or the Company may elect to pursue such a transaction without obtaining the FDIC’s consent, which could result in termination of the loss share agreements with the FDIC.
Additionally, 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); therefore, any charge-off of related losses after the term of the loss sharing agreements will not be reimbursed by the FDIC and will negatively impact the Company’s net income. Further, when the loss sharing agreements expire, the Company’s and the Bank’s risk-based capital ratios may be reduced. While the agreements are in place, the covered assets receive a 20% risk-weighting. When the agreements expire, the risk-weighting for previously covered assets will most likely increase to 100%, based on current regulatory capital definitions. Nearly all of the assets remaining in the covered asset portfolios are non-single family covered assets. Therefore, most of the covered assets were no longer indemnified after September 2014 or September 2015.
The loss sharing arrangements with the FDIC will not cover all of the losses on loans the Company acquired through the acquisition of Home.
Although the Company has assumed loss share agreements with the FDIC that provide that the FDIC will bear a significant portion of losses related to specified loan portfolios that it acquired through the Home acquisition, the Company is not protected for all losses resulting from charge-offs with respect to those specified loan portfolios. Additionally, 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). Therefore, the FDIC will not reimburse the Company for any charge-off or related losses that it experiences after the term of the loss share agreements, and any such charge-offs would negatively impact its net income. Moreover, the loss share provisions in the loss share agreement may be administered improperly, or the FDIC may interpret those provisions in a way different than the Company does. In any of those events, the Company’s losses on loans could increase.
The FDIC requires that the Company make a “true-up” payment to the FDIC if its realized losses are less than expected.
The loss share agreements that the Company assumed in the acquisition of Home, related to Home’s FDIC-assisted acquisitions of Community First Bank and Liberty Bank, contain a provision that obligates the Company to make a “true-up” payment to the FDIC if the realized losses of that acquired bank are less than expected. The “true-up” calculation is scheduled to be made as of the 45th day following the last day of the calendar month of the tenth anniversary of the closing of the acquisitions of the acquired banks. Any such “true-up” payment that is materially higher than current estimates could have a negative effect on the Company’s business, financial condition and results of operations.


25



ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
Not applicable.

ITEM 2. PROPERTIES.

The Company’s headquarters is located in downtown Bend, Oregon and the building and land are owned by the Bank. The Company also owns or leases other facilities within the Company’s primary market areas as follows: 23 locations in Oregon located in the counties of Crook, Deschutes, Jackson, Jefferson, Josephine, Klamath, Lane, Marion and Multnomah, and 14 locations in Idaho located in the counties of Ada, Canyon, Elmore, Gem and Payette. The Company considers its properties to be suitable and adequate for its present needs. For information about the Company’s lease commitments, see Note 13 of the "Notes to Consolidated Financial Statements" included elsewhere in this annual report.

ITEM 3. LEGAL PROCEEDINGS.
 
The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business.  While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s condensed consolidated financial position, results of operations or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES.
 
Not applicable.


26



PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information
Cascade Bancorp common stock trades on the NASDAQ Capital Market under the symbol “CACB.” The following table sets forth, for the quarters shown, the range of high and low sales prices of our common stock on the NASDAQ Capital Market and the cash dividends declared on the common stock. The sales price and cash dividends shown below are retroactively adjusted for stock dividends, stock splits, and reverse stock splits and are based on actual trade statistical information provided by the NASDAQ Capital Market for the periods indicated.
Quarter Ended
 
High
 
Low
 
Dividend per share
2015
 
 
 
 
 
 
December 31
 
$
6.14

 
$
5.26

 
N/A
September 30
 
$
5.56

 
$
5.10

 
N/A
June 30
 
$
5.25

 
$
4.74

 
N/A
March 31
 
$
5.14

 
$
4.25

 
N/A
2014
 
 
 
 
 
 
December 31
 
$
5.25

 
$
4.62

 
N/A
September 30
 
$
5.58

 
$
4.97

 
N/A
June 30
 
$
5.68

 
$
4.20

 
N/A
March 31
 
$
5.74

 
$
4.49

 
N/A

Holders
As of March 2, 2016 Cascade Bancorp had 72,790,373 shares of common stock outstanding, held of record by approximately 859 holders of record. The last reported sales price of our common stock on the NASDAQ Capital Market on March 2, 2016 was $5.49 per share.
Dividends
As noted in the table above, Bancorp has not paid dividends for the last two fiscal years. The amount of future dividends will depend upon our earnings, financial condition, capital requirements and other factors and will be determined by our board of directors. The appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. Bancorp has no plan to pay dividends at this time. See “Regulations Concerning Cash Dividends” in Item 1 of this report for additional discussion of limitations on the Bank’s and Bancorp’s respective abilities to pay cash dividends.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of December 31, 2015, regarding the number of shares that may be issued upon the exercise of options and other rights that have been granted under all of the Company’s existing equity compensation plans, as well as the number of securities remaining available for issuance under such equity plans.
 
# of securities to be issued on exercise of outstanding options
 
Weighted average exercise price of outstanding options
 
# of securities remaining available for future issuance under plan (excluding securities in column (a))
Plan Category
(a)
 
(b)
 
(c)(1)
Equity compensation plans approved by security holders
3,375,909

 
 
$
5.44

 
 
269,270

 
Equity compensation plans not approved by security holders
None
 
N/A
 
N/A
Total
3,375,909

 
 
$
5.44

 
 
269,270

 

27




Stock Performance Graph
The following chart, which is furnished not filed, compares the yearly percentage changes in the cumulative shareholder return on our common stock during the five fiscal years ended December 31, 2015, with (i) the NASDAQ composite index and (ii) the SNL Bank NASDAQ index. This comparison assumes $100.00 was invested on December 31, 2010, in our common stock and the comparison indices, and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. Price information from December 31, 2010 to December 31, 2015, was obtained by using the NASDAQ closing prices as of the last trading day of each year.
 
Period Ending
Index
12/31/2010

12/31/2011

12/31/2012

12/31/2013

12/31/2014

12/31/2015

Cascade Bancorp
100.00

51.83

74.08

61.89

61.42

71.83

NASDAQ Composite
100.00

99.21

116.82

163.75

188.03

201.40

SNL Bank NASDAQ
100.00

88.73

105.75

152.00

157.42

169.94




28



ITEM 6. SELECTED FINANCIAL DATA.

Cascade Bancorp
Annual Financial Trends
(in thousands, except per share data)
 
2015
 
2014
 
2013
 
2012
 
2011
Interest income
 
$
80,387

 
$
67,374

 
$
50,985

 
$
54,879

 
$
67,100

Interest expense
 
1,872

 
2,289

 
2,769

 
4,999

 
11,704

  Net interest income
 
78,515

 
65,085

 
48,216

 
49,880

 
55,396

Loan loss (recovery) provision
 
(4,000
)
 

 
1,000

 
1,100

 
75,000

Net interest income after loan loss provision
 
82,515

 
65,085

 
47,216

 
48,780

 
(19,604
)
Non-interest income
 
24,973

 
20,171

 
14,453

 
13,091

 
10,967

Non-interest expense
 
74,396

 
81,341

 
60,970

 
55,841

 
83,199

Income before income taxes
 
33,092

 
3,915

 
699

 
6,030

 
(91,836
)
Income tax (provision) benefit
 
(12,513
)
 
(178
)
 
50,146

 
(79
)
 
11,721

Net income (loss) before extraordinary net gain
 
20,579

 
3,737

 
50,845

 
5,951

 
(80,115
)
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes
 

 

 

 

 
32,839

Net income (loss)
 
$
20,579

 
$
3,737

 
$
50,845

 
$
5,951

 
$
(47,276
)
Share Data
 
 
 
 
 
 
 
 
 
 
Basic net income per common share
 
$
0.29

 
$
0.06

 
$
1.08

 
$
0.13

 
$
(1.08
)
Diluted net income per common share
 
$
0.29

 
$
0.06

 
$
1.07

 
$
0.13

 
$
(1.08
)
Book value per basic common share
 
$
4.63

 
$
4.35

 
$
3.97

 
$
2.97

 
$
2.81

Tangible book value per common share1
 
$
3.45

 
$
3.14

 
$
3.95

 
$
2.97

 
$
2.81

Basic average shares outstanding
 
71,789

 
62,265

 
47,187

 
47,128

 
43,628

Fully diluted average shares outstanding
 
71,969

 
62,340

 
47,484

 
47,278

 
43,628

Balance Sheet Detail
 
 
 
 
 
 
 
 
 
 
Gross loans
 
$
1,686,573

 
$
1,490,837

 
$
994,475

 
$
856,318

 
$
897,058

  Wholesale loans
 
$
268,417

 
$
222,383

 
$
128,297

 
$
26,939

 
$

  Total organic loans
 
$
1,418,156

 
$
1,268,454

 
$
866,178

 
$
829,379

 
$
897,058

Total deposits
 
$
2,083,088

 
$
1,981,622

 
$
1,167,320

 
$
1,076,234

 
$
1,086,827

  Non interest bearing
 
$
727,730

 
$
619,377

 
$
431,079

 
$
410,258

 
$
371,662

  Checking
 
$
1,183,274

 
$
1,056,284

 
$
584,002

 
$
539,003

 
$
472,796

  Money market
 
$
588,590

 
$
558,590

 
$
391,744

 
$
367,929

 
$
419,477

  Time
 
$
175,697

 
$
237,138

 
$
141,315

 
$
129,272

 
$
160,833

Key Ratios
 
 
 
 
 
 
 
 
 
 
Return on average stockholders' equity
 
6.30
%
 
1.41
%
 
28.89
%
 
4.34
%
 
(25.65
)%
Return on average tangible stockholders' equity2
 
8.56
%
 
1.77
%
 
30.59
%
 
4.34
%
 
(25.66
)%
Return on average assets
 
0.84
%
 
0.19
%
 
3.78
%
 
0.46
%
 
(3.04
)%
Return on average tangible assets3
 
0.87
%
 
0.19
%
 
3.75
%
 
0.46
%
 
(3.04
)%
Common stockholders’ equity ratio
 
13.65
%
 
13.48
%
 
13.42
%
 
10.82
%
 
10.19
 %
Tangible common stockholders’ equity ratio4
 
10.18
%
 
9.73
%
 
13.38
%
 
10.82
%
 
10.19
 %
Net interest spread
 
3.62
%
 
3.69
%
 
3.75
%
 
3.85
%
 
3.42
 %
Net interest margin
 
3.67
%
 
3.76
%
 
3.90
%
 
4.11
%
 
3.85
 %
Total revenue (net int. inc. + non int. inc.)
 
$
103,488

 
$
85,256

 
$
62,669

 
$
62,971

 
$
66,363

Efficiency ratio5
 
71.89
%
 
95.41
%
 
97.29
%
 
88.68
%
 
125.37
 %
Loan to deposit ratio
 
79.79
%
 
74.12
%
 
83.41
%
 
77.03
%
 
78.55
 %
Non-interest income to average assets
 
1.02
%
 
1.02
%
 
1.07
%
 
1.01
%
 
0.71
 %
Non-interest expense to average assets
 
3.05
%
 
4.11
%
 
4.49
%
 
4.30
%
 
5.36
 %


29



(in thousands, except per share data)
 
2015
 
2014
 
2013
 
2012
 
2011
Credit Quality Ratios
 
 
 
 
 
 
 
 
 
 
Reserve for loan losses
 
$
24,415

 
$
22,053

 
$
20,857

 
$
27,261

 
$
43,905

Reserve for loan losses to ending gross loans
 
1.45
 %
 
1.48
 %
 
2.10
%
 
3.18
%
 
4.89
%
Reserve for credit losses
 
$
24,855

 
$
22,493

 
$
21,297

 
$
27,701

 
$
45,455

Reserve for credit losses to ending gross loans
 
1.47
 %
 
1.51
 %
 
2.14
%
 
3.23
%
 
5.07
%
Non-performing assets (“NPAs”)
 
$
8,396

 
$
15,047

 
$
11,453

 
$
25,305

 
$
30,404

NPAs to total assets
 
0.34
 %
 
0.64
 %
 
0.81
%
 
1.94
%
 
2.33
%
Delinquent >30 days to total loans (excl. NPAs)
 
0.24
 %
 
0.27
 %
 
0.29
%
 
1.78
%
 
0.34
%
Net (recoveries) charge-offs
 
$
(6,362
)
 
$
(1,196
)
 
$
7,404

 
$
17,744

 
$
77,763

Net loan (recoveries) charge-offs to average total loans
 
(0.40
)%
 
(0.09
)%
 
0.81
%
 
2.06
%
 
7.20
%
1 Tangible book value per common share is a non-GAAP measure defined as total stockholders’ equity, less the sum of core deposit intangible (“CDI”) and goodwill, divided by total number of shares outstanding.
2 Return on average tangible stockholders' equity is a non-GAAP measure defined as average total stockholders' equity, less the sum of average CDI and goodwill, divided by net income.
3 Return on average tangible assets is a non-GAAP measure defined as average total assets, less the sum of average CDI and goodwill, divided by net income.
4 Tangible common stockholders’ equity ratio is a non-GAAP measure defined as total stockholders’ equity, less the sum of CDI and goodwill, divided by total assets.
5 The efficiency ratio is a non-GAAP ratio that is calculated by dividing non-interest expense by the sum of net interest income and non-interest income. Other companies may define and calculate this data differently.

Reconciliation of Non-GAAP measures:
Reconciliation of period end total stockholders' equity to period end tangible book value per common share:
 
2015
 
2014
 
2013
 
2012
 
2011
Total stockholders’ equity
 
$
336,774

 
$
315,483

 
$
188,715

 
$
140,775

 
$
132,881

Core deposit intangible
 
(6,863
)
 
(7,683
)
 
(529
)
 

 

Goodwill
 
(78,610
)
 
(80,082
)
 

 

 

Tangible stockholders equity
 
$
251,301

 
$
227,718

 
$
188,186

 
$
140,775

 
$
132,881

Common shares outstanding
 
72,792,570

 
72,491,850

 
47,592,061

 
47,326,306

 
47,236,725

Tangible book value per common share
 
$
3.45

 
$
3.14

 
$
3.95

 
$
2.97

 
$
2.81


Reconciliation of return on average tangible stockholders' equity:
 
2015
 
2014
 
2013
 
2012
 
2011
Average stockholders' equity
 
$
326,557

 
$
265,277

 
$
166,290

 
$
137,173

 
$
184,239

Average core deposit intangible
 
(7,240
)
 
(5,154
)
 
(99
)
 

 

Average goodwill
 
(78,940
)
 
(48,723
)
 

 

 

Average tangible stockholders' equity
 
$
240,377

 
$
211,400

 
$
166,191

 
$
137,173

 
$
184,239

Net income
 
20,579

 
3,737

 
50,845

 
5,951

 
(47,276
)
Return on average tangible stockholders' equity (annualized)
 
8.56
%
 
1.77
%
 
30.59
%
 
4.34
%
 
(25.66
)%


30



Reconciliation of return on average tangible assets:
 
2015
 
2014
 
2013
 
2012
 
2011
Average total assets
 
$
2,439,474

 
$
1,977,733

 
$
1,356,637

 
$
1,298,351

 
$
1,552,935

Average core deposit intangible
 
(7,240
)
 
(5,154
)
 
(99
)
 

 

Average goodwill
 
(78,940
)
 
(48,723
)
 

 

 

Average tangible assets
 
$
2,353,294

 
$
1,923,856

 
$
1,356,538

 
$
1,298,351

 
$
1,552,935

Net income
 
20,579

 
3,737

 
50,845

 
5,951

 
(47,276
)
Return on average tangible assets (annualized)
 
0.87
%
 
0.19
%
 
3.75
%
 
0.46
%
 
(3.04
)%

Reconciliation of period end common stockholders’ equity ratio to period end tangible common stockholders’ equity ratio:
 
2015
 
2014
 
2013
 
2012
 
2011
Total stockholders’ equity
 
$
336,774

 
$
315,483

 
$
188,715

 
$
140,775

 
$
132,881

Core deposit intangible
 
(6,863
)
 
(7,683
)
 
(529
)
 

 

Goodwill
 
(78,610
)
 
(80,082
)
 

 

 

Tangible stockholders equity
 
$
251,301

 
$
227,718

 
$
188,186

 
$
140,775

 
$
132,881

Total assets
 
2,468,029

 
2,341,137

 
1,406,219

 
1,301,417

 
1,303,450

Tangible common stockholders’ equity ratio
 
10.18
%
 
9.73
%
 
13.38
%
 
10.82
%
 
10.19
%

Reconciliation of efficiency ratio:
 
2015
 
2014
 
2013
 
2012
 
2011
Non-interest expense
 
$
74,396

 
$
81,341

 
$
60,970

 
$
55,841

 
$
83,199

 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
78,515

 
$
65,085

 
$
48,216

 
$
49,880

 
$
55,396

Non-interest income
 
24,973

 
20,171

 
14,453

 
13,091

 
10,967

Total net interest income and non-interest income
 
$
103,488

 
$
85,256

 
$
62,669

 
$
62,971

 
$
66,363

Efficiency ratio
 
71.89
%
 
95.41
%
 
97.29
%
 
88.68
%
 
125.37
%

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following is management’s discussion and analysis of the Company’s results of operation, financial condition, cash flows and liquidity. The following should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto as of December 31, 2015 and 2014 and for each of the years in the three-year period ended December 31, 2015 included in Item 8 of this report.

Cautionary Information Concerning Forward-Looking Statements
This report contains forward-looking statements about the Company’s business and plans and anticipated results of operations and financial condition and liquidity. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. See full discussion of cautionary information concerning forward-looking statements in Item 1 of this report.
Regulatory Orders Terminated in 2013
On September 5, 2013, the FDIC and the DFCS terminated the MOU, issued to the Bank in March 2013. Prior to March 2013, the Bank was under the Order issued by the FDIC and the DFCS in August 2009.
On October 23, 2013, the FRB and the DFCS terminated the FRB-MOU issued to Bancorp in July 2013. Between October 2009 and July 2013, the Company was under the Written Agreement entered into with the FRB and the DFCS in October 2009. See “Supervision and Regulation- Regulatory Actions.”


31



Critical Accounting Policies and Accounting Estimates
 
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company believes that its most critical accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments are set forth below.
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 December 31, 2015, the Company enhanced its methodology to better estimate reserves through the implementation of a separate qualitative risk assessment process that focuses on the commercial and industrial (“C&I”) portion of the portfolio. The C&I loans portfolio is stratified by industry classification using NAICS codes. At the stratified level, factors considered in the evaluation of the loans include current events, economic or market data, loan performance and concentration risks. This qualitative risk assessment is separate from other qualitative risk assessments included in the allowance methodology.
As of March 31, 2015, the reserve for loan loss methodology was enhanced within the Company’s C&I loan portfolio with respect to shared national credits (“SNCs”). Risk ratings for individual SNCs are estimated using analysis of both public debt ratings and internal ratings. Expected loss rates are determined based upon historical published specific loss data for similar loans based on average losses and losses stratified by public debt ratings. Public ratings combined with internal risk rates are used to determine a minimum historical loss factor for each SNC loan. This amount may be increased for qualitative conditions including macroeconomic environment and observations by the Company’s SNC management group. 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 more discussion of Cascade’s methodology of assessing the adequacy of the reserve for credit losses, see “Loan Portfolio and Credit Quality” below in this Item 7.
Deferred Income Taxes
Deferred tax assets (“DTA”) and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision (credit) for income taxes. The Company believes it is more likely than not that the DTA will be realized in a tax year that will be subject to a 35% federal effective tax rate and used that rate in providing deferred taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized.

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


32



Cascade reversed its DTA valuation allowance as of June 30, 2013 due to management’s determination that it was more likely than not that the Company’s DTA would be realized. The determination resulted from consideration of both the positive and negative evidence available that can be objectively verified. Considering the guidance in paragraphs 21-23 of Accounting Standards Codification (“ASC”) 740-10-30, forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Such a condition, which existed at June 30, 2013, is considered a significant piece of negative evidence that is difficult to overcome. Accordingly, in its determination of DTA, the Company analyzed and evaluated the nature and timing of relevant facts and circumstances with respect to its cumulative loss. Positive evidence considered by management as of June 30, 2013 included the following:
The Company revised and enhanced loan underwriting and credit risk management;
The credit risk management infrastructure has been reconstituted with people with a strong depth and breadth of industry experience who have developed sound credit processes and lending initiatives;
Since implementation of strengthened policies, historically high loan loss categories such as land acquisition and residential construction and development loans (within the CRE portfolio) have decreased dramatically;
Credit risk management developed various strategies for the remediation of criticized and classified assets;
Management evaluated the unique and non-recurring loss evidence;
Positive considerations also evaluated by management included reduction of the risk inherent in the loan portfolio as indicated by the reduction of classified loans, strengthening of the credit risk management process, elimination of substantially all of the OREO properties, termination of all existing regulatory agreements and orders, profitable performance during the past two years, development of new products and services that strengthen non-interest income, opportunities that exist to bring operating costs in line with peer groups, the Company’s strong capital and liquidity positions, substantial improvements resulting from new members of the Board of Directors and management, new leadership in the production units, strong loan production focused on commercial lending, implementation of a productive sales management culture, strengthening of the Company’s governance and oversight and the sustained improvement in the economic conditions at a national and local level.

The Company refreshed its analysis each year, focusing on the changes in positive and negative evidence. Primary amongst those changes was the elimination of the existence of a cumulative loss position in recent years, with the Company in a three-year cumulative net income position at year end 2015. The Company’s financial position and performance continued to improve substantially during 2014 and 2015. The acquisition and integration of Home during 2014 resulted in an improved earnings performance that is expected to be sustained in future periods. Management continues to believe positive evidence outweighs the negative evidence. As a result of this analysis, management concluded it was more likely than not that forecasted earnings performance would allow for the realization of the DTA in a timely manner.

As of December 31, 2015 and 2014, Cascade had a net deferred tax asset of $50.7 million and $66.1 million, respectively.
OREO and Foreclosed Assets
OREO and other foreclosed assets acquired through loan foreclosure are initially recorded at estimated fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the reserve for loan losses. Due to the subjective nature of establishing the asset’s fair value when it is acquired, the actual fair value of the OREO or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets after 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.

33



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.
As of December 31, 2015, management has concluded that there have been no material events or circumstances that have changed since the May 16, 2014 Home acquisition date that lead management to believe it is more likely than not that the fair value of the Bank is less than its carrying amount. Therefore, no further testing is deemed necessary.

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

Consolidated Results of Operations — Years ended December 31, 2015, 2014, and 2013
Net Income/Loss
The Company’s consolidated results of operations are dependent to a large degree on net interest income. Interest income is earned based upon average earning asset yields of our loan portfolio and investment securities, including loan fees generated in connection with origination of such loans. The earnings from such sources are partially offset by the cost of funding such assets, including interest paid on customer deposits and the cost of borrowings, as needed. We generate other income primarily through banking-related service charges and fees, card issuer and merchant service fees, mortgage banking, Small Business Administration (“SBA”) lending and fees on interest rate derivative instruments for certain qualified customers. In addition, the Bank generates revenue from its investment in bank-owned life insurance (“BOLI”) as a means to defray employee benefit expenses.
Net income is also affected when loan loss provisions are made to ensure the reserve for loan losses is adequate.
The Company’s largest operating expenses relate to employee and human resource related costs, including compensation and benefits expense. In addition, to support the provision of banking services to its customers, the Bank incurs expenses related to its branch network and facilities, communications, equipment, information technology, card and mobile transaction related activity, insurance expenses, FDIC and other regulatory assessments, professional and outside services, and expenses related to collection and resolution of credit quality issues. Interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.
In 2015, the Company recorded net income of $20.6 million, compared to net income of $3.7 million in 2014 and $50.8 million in 2013. During these periods, net income per basic common share was $0.29, $0.06 and $1.08, respectively. Net income in 2015 was a result of growth in net interest income arising from strong loan and deposit growth, while non-interest income was up on higher transaction activity. 2015 net income also benefited from a $4.0 million credit to the provision for loan losses due to increased loan recoveries. The Company recorded no loan loss provision in 2014 and a $1.0 million loan loss provision in 2013. The 2015 year-over-year increase in net income from 2014 was also related to the full year impact of the Home acquisition, which closed on May 16, 2014. Non-interest expenses for 2015 were down $6.9 million as compared to 2014, in part because 2014 included significant Home related non-recurring costs. 2013 net income was above 2015 and 2014 levels because of the reversal of its valuation allowance against the Company’s DTA. The reversal was approximately $50.1 million.
Net Interest Income
For most financial institutions, including the Company, the primary component of earnings is net interest income. Net interest income is the difference between interest income earned, principally from loans and the investment securities portfolio, and interest paid, principally on customer deposits and borrowings. Changes in net interest income typically result from changes in volume, spread and margin. Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest income divided by interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

34



Net interest income was $78.5 million in 2015, a $13.4 million, or 20.6%, increase from 2014. This was mainly attributable to higher volume of average earning assets in 2015 due to increased loan growth as well as the full year effect of the 2014 Home acquisition. Similarly, net interest income in 2014 increased $16.9 million, or 35.0%, from 2013 levels due to higher average earning assets.
Yields on earning assets decreased to 3.75% for 2015 as compared to 3.89% in 2014 and 4.12% in 2013 mainly due to the ongoing period of historically low market interest rates combined with the full year impact of acquired Home assets. Specifically, Home earning assets yields were lower than yields achieved by the Company because Home had a greater portion of lower yielding securities and a lower portion of loans. Meanwhile, lower market interest rates also resulted in the average rates paid on interest bearing liabilities for 2015 declining to 0.14% compared to 0.21% in 2014 and 0.37% in 2013.
Total interest income for 2015 increased $13.0 million, or 19.3%, compared to total interest income in 2014 due mainly to higher average earning loans, for reasons described above. Similarly, total interest income for 2014 increased approximately $16.4 million, or 32.1%, compared to total interest income in 2013 due to increased average earning assets arising from the acquisition of Home in 2014. Total interest expense declined by $0.4 million, or 18.2%, in 2015 as compared to 2014 mainly due to the effect of lower time deposit costs, which were higher in 2014 with the acquisition of Home. Interest expense for 2014 declined $0.5 million, or 17.3%, as compared to 2013 mainly due to a reduction in borrowings which carry higher rates than core deposits. Borrowing rate costs were specifically benefited by the second quarter 2013 pay-off of $60.0 million of FHLB advances bearing a weighted average interest rate of 3.17%, thereby decreasing ongoing interest expense.
Net Interest Margin (NIM)
The Company’s net interest margin (“NIM”) decreased to 3.67% for 2015 compared to 3.76% for 2014 and 3.90% for 2013. The 2015 decrease was largely a result of the impact of lower market interest rates on loan and investment portfolio yields. In addition, certain fixed rate commercial loans originated in 2014 and 2015 with a fixed rate were subject to interest rate swaps. This resulted in the Company’s conversion of fixed rates to a LIBOR floating rate. This strategic increase in the Company’s portfolio of floating rate loans was designed to reduce its future interest rate risk. The NIM decrease in 2014 compared to 2013 was mainly due to the mix of earning assets acquired in the Home transaction in 2014, as described above.
The following table presents further analysis of the components of the Company’s NIM and sets forth for 2015, 2014, and 2013 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company:

35



 
Year ended December 31,
(dollars in thousands)
2015
 
2014
 
2013
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield or
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield or
Rates
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield or
Rates
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Investment securities
$
454,258

 
$
11,687

 
2.57
%
 
$
346,235

 
$
8,982

 
2.59
%
 
$
220,383

 
$
5,436

 
2.47
%
Interest bearing balances due from other banks
80,096

 
216

 
0.27
%
 
92,104

 
237

 
0.26
%
 
92,748

 
245

 
0.26
%
Federal funds sold
273

 

 
%
 
128

 

 
%
 
22

 

 
%
Federal Home Loan Bank stock
12,315

 

 
%
 
19,882

 

 
%
 
10,130

 

 
%
Loans (1)(2)(3)
1,594,082

 
68,484

 
4.30
%
 
1,272,426

 
58,155

 
4.57
%
 
914,493

 
45,304

 
4.95
%
Total earning assets/interest income
2,141,024

 
80,387

 
3.75
%
 
1,730,775

 
67,374

 
3.89
%
 
1,237,776

 
50,985

 
4.12
%
Reserve for loan losses
(24,640
)
 
 

 
 

 
(21,533
)
 
 

 
 

 
(23,782
)
 
 

 
 

Cash and due from banks
43,214

 
 

 
 

 
37,152

 
 

 
 

 
30,972

 
 

 
 

Premises and equipment, net
42,796

 
 

 
 

 
40,109

 
 

 
 

 
34,067

 
 

 
 

Bank-owned life insurance
53,920

 
 

 
 

 
46,834

 
 

 
 

 
36,115

 
 

 
 

Deferred tax asset
58,937

 
 
 
 
 
61,364

 
 
 
 
 
24,939

 
 
 
 
Goodwill
78,940

 
 
 
 
 
48,723

 
 
 
 
 

 
 
 
 
Core deposit intangibles
7,240

 
 
 
 
 
5,154

 
 
 
 
 
99

 
 
 
 
Accrued interest and other assets
38,043

 
 

 
 

 
29,155

 
 

 
 

 
16,451

 
 

 
 

Total assets
$
2,439,474

 
 

 
 

 
$
1,977,733

 
 

 
 

 
$
1,356,637

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest bearing demand deposits
$
1,027,228

 
$
1,333

 
0.13
%
 
$
803,271

 
$
982

 
0.12
%
 
$
536,129

 
$
732

 
0.14
%
Savings deposits
133,440

 
40

 
0.03
%
 
101,419

 
31

 
0.03
%
 
45,457

 
22

 
0.05
%
Time deposits
202,293

 
493

 
0.24
%
 
203,817

 
1,270

 
0.62
%
 
136,600

 
1,045

 
0.77
%
Other borrowings
1,685

 
6

 
0.36
%
 
2,214

 
6

 
0.27
%
 
37,441

 
970

 
2.59
%
Total interest bearing liabilities/interest expense
1,364,646

 
1,872

 
0.14
%
 
1,110,721

 
2,289

 
0.21
%
 
755,627

 
2,769

 
0.37
%
Demand deposits
700,838

 
 

 
 

 
566,577

 
 

 
 

 
412,396

 
 

 
 

Other liabilities
47,433

 
 

 
 

 
35,158

 
 

 
 

 
22,324

 
 

 
 

Total liabilities
2,112,917

 
 

 
 

 
1,712,456

 
 

 
 

 
1,190,347

 
 

 
 

Stockholders’ equity
326,557

 
 

 
 

 
265,277

 
 

 
 

 
166,290

 
 

 
 

Total liabilities and stockholders’ equity
$
2,439,474

 
 

 
 

 
$
1,977,733

 
 

 
 

 
$
1,356,637

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 

 
$
78,515

 
 

 
 

 
$
65,085

 
 

 
 

 
$
48,216

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread
 

 
 

 
3.62
%
 
 

 
 

 
3.69
%
 
 

 
 

 
3.75
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income to earning assets
 

 
 

 
3.67
%
 
 

 
 

 
3.76
%
 
 

 
 

 
3.90
%


36



(1) Average non-accrual loans included in the computation of average loans were $9.3 million for 2015, $13.1 million for 2014, and $15.8 million for 2013.
(2) Loan related fees, including prepayment penalties, recognized during the period and included in the yield calculation totaled $2.6 million in 2015, $2.2 million in 2014, and $1.6 million in 2013.
(3) Includes loans held for sale.
Changes in Interest Income and Expense
The following table shows the dollar amount of increase (decrease) in the Company’s consolidated interest income and expense, and attributes such variance to “volume” or “rate” changes. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.
 
Year ended December 31,
 
Year ended December 31,
 
2015 over 2014
 
2014 over 2013
 
Total
Increase
 
Amount of Change
Attributed to
 
Total
Increase
 
Amount of Change
Attributed to
 (dollars in thousands)
(Decrease)
 
Volume
 
Rate
 
(Decrease)
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Interest and fees on loans
$
10,329

 
$
14,701

 
$
(4,372
)
 
$
12,851

 
$
17,732

 
$
(4,881
)
Interest on investment securities
2,705

 
2,802

 
(97
)
 
3,546

 
3,104

 
442

Other investment income
(21
)
 
(31
)
 
10

 
(8
)
 
(2
)
 
(6
)
Total interest income
13,013

 
17,472

 
(4,459
)
 
16,389

 
20,834

 
(4,445
)
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
 

 
 

 
 

 
 

 
 

 
 

Interest on deposits:
 

 
 

 
 

 
 

 
 

 
 

Interest bearing demand
351

 
274

 
77

 
250

 
365

 
(115
)
Savings
9

 
10

 
(1
)
 
9

 
27

 
(18
)
Time deposits
(777
)
 
(9
)
 
(768
)
 
225

 
514

 
(289
)
Other borrowings

 
(1
)
 
1

 
(964
)
 
(913
)
 
(51
)
Total interest expense
(417
)
 
274

 
(691
)
 
(480
)
 
(7
)
 
(473
)
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
13,430

 
$
17,198

 
$
(3,768
)
 
$
16,869

 
$
20,841

 
$
(3,972
)

Loan Loss Provision
In 2015, the Company recorded a credit to the loan loss provision of $4.0 million, as compared to no provision in 2014 and a $1.0 million provision in 2013. The credit to the provision in 2015 was due primarily to a net recovery of prior loan losses of approximately $6.4 million as well as a generally improving credit risk profile within the loan portfolio. At December 31, 2015, the reserve for loan losses was approximately $24.4 million while the reserve for unfunded commitments was $0.4 million, as compared to a reserve for loan losses of $22.1 million and a reserve for unfunded commitments of $0.4 million at December 31, 2014.
The Bank maintains pooled and impaired loan reserves with additional consideration of qualitative factors and unallocated reserves in reaching its determination of the total reserve for loan losses. The level of reserves is subject to review by the Bank’s regulatory authorities who may require adjustments to the reserve based on their evaluation and opinion of economic and industry factors as well as specific loans in the portfolio. For further discussion, see “Critical Accounting Policies and Estimates” and “Loan Portfolio and Credit Quality” in Item 7 of this report. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan-related losses.
Non-interest Income
The following table details categories of non-interest income for the years ended December 31, 2015, 2014, and 2013, and the changes therein:

37



(dollars in thousands)
2015
 
2014
 
2013
 
2015 to 2014 change
 
2014 to 2013 change
Service charges on deposit accounts
$
5,121

 
$
4,621

 
$
3,031

 
$
500

 
$
1,590

Card issuer and merchant services fees, net
7,052

 
6,213

 
3,310

 
839

 
2,903

Earnings on BOLI
1,001

 
986

 
862

 
15

 
124

Mortgage banking income, net
2,617

 
2,296

 
4,261

 
321

 
(1,965
)
Swap fee income
2,533

 
1,847

 
430

 
686

 
1,417

SBA gain on sales and fee income
1,294

 
1,120

 
507

 
174

 
613

Gain (loss) on sales of investments
475

 

 

 
475