Cascade Can't Quite Grasp a Lengthened Capital Lifeline

Cascade Bancorp Inc. in Bend, Ore., is looking for a lifeline after stumbling badly in recent months.

The $2.2 billion-asset company missed a regulatory deadline last month to improve capital levels — which have plummeted as a result of losses in its residential portfolio. The company tried to raise capital in a December public offering but failed. Also, a contract with its largest shareholder, David Bolger, to invest more capital expired at yearend.

That lifeline, though, may still be available. Cascade last week announced that Bolger and a fund with which he is affiliated, Lightyear Fund II LP, would extend and expand the contract to invest $65 million in Cascade if the company first raises other capital.

Yet an obvious question remains: If Cascade could not raise capital last year, how would it be able to do so now?

"There is a shortfall of capital here," said Jeff Rulis, an analyst at D.A. Davidson & Co. "I don't know if there is a rush to capitalize a bank of this quality. And it isn't certain that this is the last round of capital they will need.

"We have entered into that murky environment with this bank," Rulis added. "We have seen others enter this, and there haven't been a lot that have wiggled out of it."

During recent months, a string of bad news has emanated from Cascade; the company did not return phone calls seeking comment.

Late last year, it tried to go to the public markets for capital but withdrew the offering a few weeks later. Then the contract with Bolger and Lightyear expired, and weeks later, the company missed a deadline to satisfy a regulatory order requiring a 10% leverage ratio.

The new contract with Bolger, who did not return a phone call seeking comment, would give Cascade until May 31 to raise $85 million in capital through private placements, before Bolger would invest $65 million. The previous agreement with Bolger required a public capital-raising effort or investment through the Treasury Department's Troubled Asset Relief Program. Cascade applied for capital under Tarp but later withdrew its application.

Cascade's financial troubles worsened last year. In 2009 its subsidiary bank lost $90 million, significantly eroding capital ratios, according to Federal Deposit Insurance Corp. data. At Dec. 31, its leverage ratio was 4.69%; Tier 1 risk-based capital was 6.20%, and the total risk-based capital ratio was 7.46%. At the end of 2008, the bank had an 8.09% leverage ratio, 8.83% Tier 1 risk-based ratio and a 10.09% total risk-based ratio.

Information from Foresight Analytics showed that Cascade's subsidiary bank would need an additional $118.7 million in capital to comply with the regulatory requirement of a 10% leverage ratio.

Some of Cascade's woes stem from problems in the Pacific Northwest, where construction markets have felt the ripple effects from California's housing slump. Also, many banks in the region continue to grapple with asset-quality issues. Cascade operates in two of the region's markets — Bend and Boise, Idaho — hardest hit by construction problems.

Analysts have said that Bolger's decision to stick by the company, despite its recent woes, is a positive sign because he is familiar with Cascade and its challenges. Bolger is the former chairman of F&M Holding Co. in Boise, which Cascade bought about four years ago. Nearly all of the $147 million in cash and stock that Cascade paid for F&M went to him.

News of the contract's extension "could be viewed positively, that he is continuing to be in the discussion," Rulis said. "Or it could be viewed negatively — that as time passes they have yet to secure any additional funds."

Brett Rabatin, a research analyst at Sterne, Agee & Leach Equity Research, said that, among the troubled banks in the Pacific Northwest, he had picked Cascade to succeed in raising capital because of its valuable deposit franchise.

"When you look at the bank, it is core-funded and has a lot of relationships," he said. "Unfortunately, they happen to operate in two of the worst markets in the Pacific Northwest. If those two markets rebound, Cascade could get an equity offering completed, but I think it is tough right now."

Davidson's Rulis said he expects a resolution with Cascade this year — one way or another.

"If things progress as they have and it suffers more losses, I can't imagine that regulators would allow several more quarters of this trend," he said. "Credit has to stabilize, or they have to get a capital infusion, or they will have to take other measures. By the second half of this year, there will be an event that decides this."