Five years ago, Bend-based Cascades Bancorp, parent company of Bank of the Cascades, posted a $24.2 million quarterly loss, its first loss since the 1980s. The same year, 2009, state and federal regulators ordered the bank, bruised by poorly performing loans to real estate developers, to trim its loan portfolio and increase its capital assets. One year ago, Bank of the Cascades emerged from beneath that order, intact and profitable, but only half the bank it had been in 2007.

Ahead lay a choice: remain a smaller bank or grow, Cascades President and CEO Terry Zink said recently.

In October, Cascades announced a $265.7 million merger with Idaho’s largest bank, Nampa-based Home Federal Bank. If consummated, the merger returns Cascades to its prerecession heft and creates the fourth-largest community bank in the Northwest.

“Home (Federal) actually fit exactly what we were looking to do. Because it doubles the size of the bank, it right-sizes our infrastructure, brings us back to being a $2.5 billion bank and makes us look pretty good on a go-forward basis,” Zink said March 13.

“So, when I look at the risk/reward, there wasn’t a whole lot of risk; there was a tremendous amount of reward.”

Talks begin

The bank combination started brewing in 2012, according to a 589-page document that details the proposed merger filed with the U.S. Securities and Exchange Commission.

Home Federal was still a relative newcomer to Central Oregon. It appeared only in 2009 with the purchase of Community First Bank, based in Prineville, and, in 2010, LibertyBank, of Eugene. Three years later, in order to meet rising regulatory costs, Home Federal’s directors sent President and CEO Len Williams, on a hunt for “potential strategic transactions,” that would reduce costs, expand bank services and increase stockholder value, according to the filing.

Early in 2012, Zink first met with Williams “to explore the possibility of a potential transaction between Cascade and Home,” according to the filing. A year later, Cascades floated a nonbinding offer for Home Federal, which Home’s directors valued at $159.4 million and rejected.

While the two sides continued to talk, regulators in March 2013 lifted the 2009 cease-and-desist order on Cascades. But the bank remained bound until September by state and federal agencies, which prohibited Cascades from paying dividends without their written consent, according to the filing. The regulators lifted the requirements in September.

Meanwhile, a third bank, Washington-based Banner Bank, intervened in June with a formal bid for Home Federal: $192.4 million. The offer included a “go-shop” period, allowing Home Federal to consider other bids, and Cascades responded with an offer Home found acceptable.

“This is a deal, I think, for both companies (that) is transformational,” Zink said. “Home was finding it difficult to actually lend out money; they were struggling to grow. We were able to grow, but we were still too small to fit our infrastructure. This was a marriage that really made a lot of sense.”

The merger, still under review by the SEC, would provide the bank more capital for loans across a broad sweep of Oregon and Idaho just as economic indicators show a recovery gaining strength. Once the SEC signs off, shareholders of both banks must approve the merger in separate votes, which have yet to be scheduled.

The timing of the merger is fortuitous, said Ralph Cole, executive vice president of research at Ferguson Wellman Capital Management, a Portland financial consulting firm.

“Most banks are having trouble finding enough loans to give out, especially outside the real estate area,” he said. Banks “have a lot of deposits and are looking for places to loan, but they’re just not there. Their margins are squeezed by (low) interest rates, and growth is struggling. The next step for a lot of companies is to consolidate.”

But, Cole said, banks are ready to lend money again, and businesses, burned in the recession, are finding the confidence to borrow. “Their animal spirits are kicking in,” he said.

Economies of scale

If it materializes, the new Bank of the Cascades would expand into new territory in the southern Willamette Valley and increase its presence in Home Federal’s base, Idaho’s Treasure Valley. Among the total 26 Home Federal branches in Oregon and Idaho, four are in Eugene, which, for its size, is one of the most competitive banking and credit union markets in the state, said Jon Moulton, adjunct professor of finance at the University of Oregon.

“I think what you see is Bank of the Cascades moving out of the Bend market,” Moulton said. “Bend is not a huge manufacturing center. The South Willamette Valley, the Boise area, where Home is, those are manufacturing centers. … (Bank of the Cascades) has bought the ability to diversify away from the housing sector.”

The merger also allows Cascades to economize its costs to comply with banking regulations, which experts said grew heavier after the recession, particularly with the passage of the federal Dodd–Frank Wall Street Reform and Consumer Protection Act. Cascades expects to save $15 million annually in expenses other than interest after the merger.

For example, banks must report every deposit of $10,000 or greater as a means of combating money laundering, Moulton said. That may mean 10 reports for every 100 transactions, which would swamp the back office that files those reports. “But two organizations together can probably get rid of a third of this,” he said. “The paperwork is very familiar. There are synergies to be gained.”

Zink agreed.

“What I would say is the regulatory burden on small banks has gotten to the point that it really makes sense for people to look to get together and share that burden.”

Moulton said combining Cascades and Home Federal is a smart move. For one, Home Federal’s loan-to-asset ratio is lower than average, meaning it loaned less of its deposits than the average bank its size. It brings those deposits to the merger, like an old-fashioned dowry.

“From a stakeholder point of view, it goes from the customers, who might see no difference, to shareholders, who might like this, to regulators, who like this because it’s a more diversified portfolio,” Moulton said.

He credited Zink for managing the pending merger, which would allow the bank to double in size. “It’s quite impressive, that he was able to complete this the way that he did,” Moulton said. “Not … ‘I have the money,’ it’s … ‘I have the reputation and culture that you would like to be part of.’”

Unfinished business

The merger may be complete in a matter of weeks. The merger cost to Bank of the Cascades breaks down as $120.8 million in cash and 24.3 million shares of its common stock, payable to Home Federal shareholders. Home Federal stock closed Friday at $15.60, Cascades at $5.60.

Bank officials have yet to say how many, if any, of about 750 employees across both banks may lose jobs in the merger.

“We haven’t announced anything, and I don’t know that we’ve actually gotten to the point where we know,” Zink said. “We probably have more ideas on upper management than we do the rest of the banks. Again, it’s really going to be how the consolidation goes. The effort would be to try and maintain as many people as we can.”

Williams, the Home Federal CEO, will exit after the merger with approximately $2.8 million in compensation, according to the SEC filing. Chief Financial Officer Eric Nadeau will receive $1.53 million. Other Home Federal executives would receive lesser amounts.

Those sums are typical for departing executives, Moulton said.

“From a merger-and-acquisition standpoint, the idea of making payments to a former or involved executive is to get them to a present value of what they would have made had they stood in the way of this merger and continued on by themselves,” he said.

Consolidation

Cascades so far plans to consolidate three of its 32 offices — one each in Prineville, Nampa, Idaho, and Caldwell, Idaho — with three branches in the same cities, said Cascades Executive Vice President Debbie Amerongen.

“(It) is not our intention to exit any market currently served by Home,” Amerongen wrote in an email Tuesday. “And we look forward to working together to deliver financial services to our shared communities.”

Zink has said Home and Cascades branches in proximity would consolidate. He said, for example, the Home Federal branch on Northwest Bond Street, in downtown Bend, would close and consolidate with the Cascades branch on Northwest Wall Street.

Home Federal executives referred questions on branch closures to Bank of the Cascades, whose officials declined to address plans for specific Home Federal branches before the merger is complete.

Legal challenges

On the legal front, one of two separate challenges to Home Federal after it announced merger plans was dismissed in a state court in Maryland, where Home Federal is incorporated. Another Maryland suit, filed by the Sternheim Family Trust, also a shareholder, remains open, according to court records. The plaintiff’s lawyer in New York City did not return a call seeking comment.

Both complaints arose after Home Federal announced plans in September to merge with Banner Bank. The suits, which sought class-action status, allege Home Federal accepted too little compensation for shareholders as part of the merger with Banner.

“Every time there’s a merger out there, there’s a law firm that files a lawsuit. This one is a little preposterous,” Zink said.

He said Cascades urged Home Federal to “try and see what you can get done” with those lawsuits. Home Federal Senior Vice President David Eldred in an email declined comment.

— Reporter: 541-617-7815, jditzler@bendbulletin.com