Cascade Bancorp Reports Second Quarter 2016 Earnings Per Share Of $0.07 Driven By Double-Digit Revenue And Loan Growth

BEND, Ore., July 27, 2016 /PRNewswire/ -- Cascade Bancorp (NASDAQ: CACB) ("Company" or "Cascade"), the holding company for Bank of the Cascades ("Bank"), today announced its financial results for the three and six months ended June 30, 2016.

Second Quarter 2016 Financial Highlights

• Net income for the second quarter of 2016 was $4.8 million, or $0.07 per share, compared to $1.9 million, or $0.03 per share, for the first quarter of 2016 ("linked quarter") which included non-recurring net expense items of $3.1 million (pretax), or $0.03 per share (after tax).
• Net interest income was $22.2 million for the current and linked quarter, up 7.6% from the linked quarter after adjusting for $1.5 million in non-recurring interest on called securities from the prior quarter¹. Stronger interest income is a result of growth in earning assets funded by the deposits of the 15 branches recently acquired from Bank of America (the "branch acquisition").
• Non-interest income was $7.8 million, up $2.3 million, or 42.4%, compared to the linked quarter, mainly due to increased service fees and card related revenues from the recently acquired branches.
• Non-interest expense was $22.3 million, down $2.2 million from the linked quarter which included $2.3 million of one-time costs related to the branch acquisition and $1.3 million related to branch consolidations.
• The cost of funds remained stable at 0.08% for the quarter, which includes $469.9 million in deposits assumed in the branch acquisition.
• At June 30, 2016, gross loans were $1.9 billion compared to $1.8 billion as of March 31, 2016. Second quarter organic loan growth² was $75.0 million, or 20.6% annualized.
• At June 30, 2016, total deposits were $2.6 billion, consistent with the linked quarter, with 97.8% retention of the deposits assumed in the Bank of America branch acquisition.
• The net interest margin ("NIM") was 3.40% for the second quarter of 2016, with approximately 75% deployment of the deposits assumed in the branch acquisition into securities and wholesale loans at a targeted yield of 2.25%.
• Net loan recoveries for the second quarter were $0.2 million. The allowance for loan losses ("ALLL") at quarter end was 1.30% of gross loans. No provision or credit for loan losses was recorded in the current quarter. Credit metrics improved with lower classified loans.
• At June 30, 2016, stockholders' equity was $345.3 million, with book value per share of $4.71 and tangible book value per share³ of $3.41.
• Return on average assets and return on average tangible assets⁴ in the current quarter was 0.65% and 0.68%, respectively, compared to 0.30% and 0.31% in the linked quarter, respectively.
• Return on average stockholders' equity and return on average tangible stockholders' equity⁵ in the current quarter was 5.65% and 7.85%, respectively, compared to 2.30% and 3.07% in the linked quarter, respectively.

"I am very pleased with the quarter's progress towards our goal of building a valuable banking franchise in the attractive growth markets of the Pacific Northwest," commented Terry Zink, President and CEO of Cascade Bancorp.  "We retained 97.8% of the deposits we assumed in the purchase of the former Bank of America branches in March, demonstrating the strength of Cascade's high touch community banking model.  We are now focused on driving fee income as well as deploying the acquired deposits into higher yielding loans through the balance of the year.  The early results are positive with strong increases in both non-interest income and loan growth."

Mr. Zink continued, "Also during the quarter, we announced the acquisition of Prime Pacific Bank, N.A., located in the Greater Seattle market.  We believe that Prime Pacific will complement our newly opened downtown Seattle commercial banking center, as well as expand our venture into a larger Small Business Administration strategy.  Prime Pacific's growth was constrained by capital and core deposits, so it represents an attractive area for further deployment of Cascade's low cost deposit base.  Subject to the satisfaction of customary closing conditions, we expect to close the acquisition in August with modest accretion to tangible book value and earnings through the second half of the year.  Importantly, we see the opportunity to build a $1 billion bank in the Seattle MSA over time."

Bank of the Cascades President, Chip Reeves added, "We continue to experience strong momentum as our bankers delivered double digit revenue and loan growth through the second quarter.  We believe investments in talented bankers combined with the recent opening of our Seattle commercial banking center are contributing to these robust results.  Additionally, I am extremely pleased with the progress that our new Idaho region president, Rob Perez, and his team have made in a very short period of time. Looking forward, Cascade's new business pipeline appears strong across our footprint, supporting our ambition to sustain organic loan growth above the level of our peers."

Financial Review

Prime Pacific Financial ("PPF") Acquisition Update:

Subject to the satisfaction of customary closing conditions, the purchase of the $123 million asset PPF is expected to be completed in August 2016, with customer system conversion in the fourth quarter.  PPF is headquartered in Lynnwood, Washington at the convenient intersection of the I-5 and I-405 traffic corridors.  This location complements Cascade Bancorp's existing downtown Seattle commercial banking location.  During the third quarter, Cascade expects to record one time transaction costs of approximately $3.5 million in connection with the transaction. The transaction is expected to be accretive to tangible book value and earnings.  

Bank of America Branch Acquisition:

The financial statements as of June 30, 2016 are inclusive of deposit liabilities assumed in connection with the acquisition of 15 Bank of America branches.  The transaction closed on March 4, 2016, with the assumption of approximately $469.9 million in Oregon and Washington deposits. The following comparative balance sheet and income statement information is notably affected by the branch acquisition, including certain one-time charges recorded in connection with the transaction.

Balance Sheet:

At June 30, 2016 as compared to December 31, 2015 and June 30, 2015

Total assets at June 30, 2016 were $3.0 billion compared to $2.5 billion as of December 31, 2015 and $2.4 billion a year ago, with the increase over prior periods due primarily to assets assumed with the closing of the branch acquisition during the first quarter and loan growth.

Cash equivalents at June 30, 2016 were $178.8 million due to increased deposits assumed in the branch acquisition, compared to $77.8 million and $79.8 million as of December 31, 2015 and June 30, 2015, respectively.

Investment securities classified as available-for-sale and held-to-maturity increased to $604.2 million at June 30, 2016 as compared to $449.7 million at December 31, 2015 and $458.6 million a year ago.  The increase is due to the deployment of cash assumed in the branch acquisition into investment securities and adjustable rate mortgages ("ARMs").  The deployment of remaining cash from the branch acquisition is expected to continue into the third quarter.  Management continues to anticipate the yield on these new earning assets will average 2.25% in aggregate, including certain fixed and floating rate securities as well as whole loan ARM purchases.

Gross loans at June 30, 2016, were $1.9 billion, up $214.3 million, or 25.6% (annualized), from the year end with significant growth across commercial real estate, consumer residential, commercial and industrial ("C&I") and construction loans.  The increase over the linked quarter includes both organic loan growth and purchased loans related to deployment of funds received in the branch acquisition. Organic loan growth was 20.6% (annualized) for the quarter ended June 30, 2016 and was largely centered in our C&I and commercial portfolios.  Organic loan growth was achieved across all regions of the bank's footprint.

Wholesale loan portfolios are designed to diversify the Company's overall loan portfolio by geography industry and loan type.  To that end, the purchased ARM portfolio totaled $211.4 million at June 30, 2016 compared to $100.1 million at December 31, 2015 and $68.1 million a year ago.  Meanwhile, the shared national credit portfolio balances, which declined due to runoff, were $146.6 million at June 30, 2016 compared to $160.6 million for the linked quarter and $194.2 million a year earlier.

The ALLL at June 30, 2016 was steady at $24.7 million as compared to December 31, 2015 with net recoveries of $0.2 million during the second quarter.  See additional discussion in "Asset Quality" below.

Total deposits as of June 30, 2016 increased 22.9% to $2.6 billion compared to $2.1 billion as of December 31, 2015, and $2.0 billion as of June 30, 2015.  These increases were mainly attributable to the $469.9 million of deposits assumed in the branch acquisition. Non-interest bearing deposits were $876.9 million, or 34.3% of total deposits.  Combined with interest checking balances, total checking balances were 56.3% of total deposits.  Money market and saving accounts were 35.7% while CDs were 8.0% of total deposits. 

The overall cost of funds for the quarter was 0.08%, including the cost of deposits from the branch acquisition.

Total stockholders' equity at June 30, 2016 was $345.3 million compared to $336.8 million at December 31, 2015. This increase is primarily a result of the year-to-date 2016 net income of $6.8 million. Tangible common stockholders' equity⁶ was $249.9 million, or $3.41 per share, at June 30, 2016, as compared to $251.3 million, or $3.45 per share, at December 31, 2015. The ratios of common stockholders' equity to total assets and tangible common stockholders' equity to total assets⁷ were 11.64% and 8.43% at June 30, 2016, respectively, and 13.65% and 10.18% at December 31, 2015, respectively.

Income Statement:

Quarter Comparison:  Quarter ended June 30, 2016 as compared to the quarter ended March 31, 2016 and June 30, 2015

Net income for the second quarter of 2016 was $4.8 million, or $0.07 per share, compared to $1.9 million, or $0.03 per share, for the linked quarter and $4.8 million, or $0.07 per share, for the second quarter 2015.  The linked quarter included approximately $3.1 million in net pretax non-recurring items, mainly related to costs incurred in connection with the branch acquisition, such as customer integration and IT conversion expenses, as well as certain branch consolidation costs. These costs were partially offset by $1.5 million in earnings on investment securities called during that period.

Net interest income for the second quarter 2016 was $22.2 million, consistent with the linked quarter which included $1.5 million in non-recurring interest on called investment securities. The increase in run-rate is due to the deployment of cash received from the branch acquisition into securities and wholesale loans.

NIM was 3.40% for the second quarter of 2016, compared to 3.80% in the linked quarter.  As adjusted to exclude the aforementioned interest income on called securities, the NIM for the prior quarter would have been 3.54%⁸.  The NIM for the second quarter a year ago was 3.70%.  The NIM declined from prior periods because of the deployment of assumed funds into lower yielding securities and wholesale loans.  The Company's goal is to replace these wholesale assets with originated loans over time.

Non-interest income for the second quarter of 2016 was $7.8 million, compared to $5.5 million in the linked quarter and $6.7 million in the second quarter 2015. Service fees were higher on a linked quarter basis mainly owing to higher transaction volumes, including those from locations acquired in the branch acquisition.  Mortgage related revenues were up 81.6% compared to the linked quarter on seasonally stronger origination volumes.  SBA-related revenues were up $0.2 million over the linked quarter and other income rebounded with a $0.3 million gain on sale of a decommissioned branch.

Non-interest expense in the second quarter of 2016 was $22.3 million compared to $24.5 million in the linked quarter and $18.4 million in the second quarter 2015.  The decrease from the linked quarter was mainly due to the effects of the one-time acquisition and integration costs incurred with the branch acquisition that totaled approximately $2.3 million.  The linked quarter also included non-recurring costs of $1.3 million to consolidate four branch locations, including contract termination and severance.  Non-recurring expenses in the current quarter were approximately $0.5 million, including loss share true up and legal expenses for the PPF acquisition.  Management expects the third quarter results will include one-time costs related to the expected PPF closing, but revenue should accelerate with the addition of loans and service fee income from PPF.

There was no provision for loan loss in the current quarter, linked quarter or second quarter of 2015.

The income tax provision for the second quarter of 2016 was $2.8 million, representing a 36.9% effective tax rate for the period.  Management expects the full year effective rate to be approximately 38.1%.

Comparison with year ago period:  For the six months ended June 30, 2016 and 2015

Net income for the six months ended June 30, 2016 was $6.8 million, or $0.09 per share, compared to $9.9 million, or $0.14 per share, for the comparable 2015 period.  Lower net income is mainly due to the one-time costs incurred in connection with the branch acquisition as described above.

Net interest income for the six months ended June 30, 2016 was higher than six months ended June 30, 2015 (the "year ago period") primarily due to net revenues arising from higher earning assets, as well as $1.5 million in non-recurring interest on called securities in the current period.

Non-interest income for the six months ended June 30, 2016 was $13.2 million, up from $12.8 million during the year ago period. Year-over-year organic changes include higher revenues on transaction volumes related to services fees and card activity largely related to increase customer base with the acquired branches.  Mortgage, swap and other income were off slightly as compared to the year ago period. The year ago period included a gain on sale of decommissioned branches and a contractual arrangement for future revenue-sharing of merchant services, together totaling $1.3 million.

Non-interest expense in the six months ended June 30, 2016 was $46.9 million compared to $37.2 million in the year ago period. Higher expense during the six months ended June 30, 2016 compared to the year ago period relate primarily to one-time costs incurred in connection with the branch acquisition, as well as increased salaries and occupancy costs related to our expanded presence resulting from the branch acquisition.  

Income tax expense in the six months ended June 30, 2016 was $4.0 million as compared to $6.0 million in the year ago period.

Asset Quality

For the quarter ended June 30, 2016, net recoveries were approximately $0.2 million resulting in an increase to the balance in the reserve for loan losses to $24.7 million.  The ratio of loan loss reserve to total loans was 1.30% at June 30, 2016 compared to 1.37% at March 31, 2016 and 1.45% at June 30, 2015.  The decline in this ratio is related to continuing positive credit metrics as well as an increase in total loan balances.

Non-performing assets as a percentage of total assets was 0.51% at June 30, 2016, as compared to 0.49% at March 31, 2016 and 0.41% at June 30, 2015.  At June 30, 2016, delinquent loans were 0.19% of the loan portfolio. This compares to 0.30% at March 31, 2016 and 0.07% at June 30, 2015.

As previously reported, the linked quarter included a $3.3 million recovery on a previously charged off loan.  This was partially offset by a $2.7 million charge off related to downgrades in the shared national credit portfolio with exposure to the oil and mining sector. The Company's aggregate mining and energy exposure remains less than 1.0% of total loans and management believes it is adequately reserved for such risks.  Risk-rating downgrades were partially offset by several upgrades of previously adversely risk rated credits.

Conference Call

As previously announced, a conference call and webcast discussing the second quarter 2016 results will be held today, July 27, 2016 at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time). Stockholders, analysts and other interested parties are invited to join the webcast by registering at http://public.viavid.com/index.php?id=120240 or the live conference call by dialing (877) 407-4018 prior to 2:00 p.m. Pacific Time.

About Cascade Bancorp and Bank of the Cascades

Cascade Bancorp (NASDAQ: CACB), headquartered in Bend, Oregon, and its wholly owned subsidiary, Bank of the Cascades, operates in the Pacific Northwest. Founded in 1977, Bank of the Cascades offers full-service community banking through 48 branches in Oregon, Idaho and Washington. The Bank has a business strategy that focuses on delivering the best in community banking for the financial well-being of customers and shareholders. It executes its strategy through the consistent delivery of full relationship banking focused on attracting and retaining value-driven customers. For further information, please visit our website at www.botc.com.

NON-GAAP FINANCIAL MEASURES

This release contains certain non-GAAP financial measures.  The Company's management uses these non-GAAP financial measures, specifically efficiency ratio, adjusted net interest margin, return on average tangible assets, return on average stockholders' equity, organic loan growth, tangible book value per common share, tangible common equity ratio to total assets and tangible stockholders' equity, as important measures of the strength of its capital and its ability to generate earnings on its tangible capital invested by its shareholders.  Management believes presentation of these non-GAAP financial measures provides useful supplemental information to our investors and others that contributes to a proper understanding of the financial results and capital levels of the Company. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company's performance. These non-GAAP disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the table at the end of this release under the caption "Reconciliation of Non-GAAP Financial Measures."

FORWARD LOOKING STATEMENTS

This release contains forward-looking statements about Cascade Bancorp's plans and anticipated results of operations and financial condition. These statements include, but are not limited to, our plans, objectives, expectations, and intentions and are not statements of historical fact. When used in this report, the 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 Cascade Bancorp's success in managing such risks and uncertainties and could cause actual results to differ materially from those projected and/or adversely affect our results of operations and financial condition.  Such factors could include: local and national economic conditions; housing/real estate market prices, employment and wages rates, as well as historically low interest rates and/or the rate of change in such rates.   Such factors, depending on severity, could adversely affect credit quality, collateral values, including real estate collateral and OREO (other real estate owned) properties, investment values, liquidity, the pace of loan growth and /or originations, the adequacy of reserves for loan losses including the trend and amount of loan charge offs and delinquency rates. These factors may be exacerbated by our concentration of operations in the States of Oregon, Idaho and Washington generally, and Central, Southern and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho and greater Seattle, Washington areas, specifically; interest rate changes could significantly reduce net interest income and negatively affect funding sources; competition among financial institutions could increase significantly; competition or changes in interest rates could negatively affect net interest margin, as could other factors listed from time to time in Cascade Bancorp's reports filed with or furnished to the Securities and Exchange Commission (the "SEC"); the reputation of the financial services industry could further deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers; and existing regulatory requirements, changes in regulatory requirements and legislation (including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act) and our inability to meet those requirements, including capital requirements and increases in our deposit insurance premium, could adversely affect the businesses in which we are engaged, our results of operations and our financial condition. Such forward-looking statements also include, but are not limited to, statements about our strategy to expand our loan portfolio to markets outside our branch network, including Portland, Oregon and Seattle, Washington, and our ability to execute our business plan, both of which could be affected by our ability to obtain regulatory approval for any expansionary activities. Additional risks and uncertainties are identified and discussed in Cascade Bancorp's reports filed with or furnished to the SEC and available at the SEC's website at www.sec.gov.  However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ materially from our expectations. These forward-looking statements speak only as of the date of this release. Cascade Bancorp undertakes no obligation to update or publish revised forward-looking statements to reflect the impact of events or circumstances that may arise after the date hereof, except as required by applicable law. Readers should carefully review all disclosures filed or furnished by Cascade Bancorp from time to time with the SEC.

Information contained herein, other than information at December 31, 2015, and for the twelve months then ended, is unaudited. All financial data should be read in conjunction with the notes to the consolidated financial statements of Cascade Bancorp and subsidiary as of and for the fiscal year ended December 31, 2015, as contained in the Company's Annual Report on Form 10-K for such fiscal year.

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