Cascade Bancorp (CACB) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended: June 30, 2011

¨ 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:    0-23322

CASCADE BANCORP

(Exact name of registrant as specified in its charter)

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

1100 N.W. Wall Street

Bend, Oregon 97701

(Address of principal executive offices)

(Zip Code)

(541) 385-6205

(Registrant’s telephone number, including area code)

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

Yes x No ¨

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

Yes x No ¨

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

¨ Large Accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated Filer x Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  47,232,476shares of no par value Common Stock as of July 26, 2011.

CASCADE BANCORP & SUBSIDIARY

FORM 10-Q

QUARTERLY REPORT

JUNE 30, 2011

INDEX

		Page
PART I:  FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets:
	June 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Operations:
	Six months and three months ended June 30, 2011 and 2010	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity:
	Six months ended June 30, 2011 and 2010	6
	Condensed Consolidated Statements of Cash Flows:
	Six months ended June 30, 2011 and 2010	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	40
Item 4.	Controls and Procedures.	40
PART II:  OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	41
SIGNATURES		42

2

PART I – FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

Cascade Bancorp & Subsidiary

Condensed Consolidated Balance Sheets

June 30, 2011 and December 31, 2010

(Dollars in thousands)

(unaudited)

	June 30,			December 31,
	2011			2010
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	28,518		$	23,825
Interest bearing deposits		188,378			244,513
Federal funds sold		2,166			2,926
Total cash and cash equivalents		219,062			271,264
Investment securities available-for-sale		124,122			115,010
Investment securities held-to-maturity		1,335			1,806
Federal Home Loan Bank (FHLB) stock		10,472			10,472
Loans, net		1,085,498			1,177,045
Premises and equipment, net		34,509			35,281
Core deposit intangibles		4,174			4,912
Bank-owned life insurance (BOLI)		34,055			33,470
Other real estate owned (OREO), net		37,112			39,536
Deferred tax asset, net		-			9,201
Accrued interest and other assets		12,220			18,461
Total assets	$	1,562,559		$	1,716,458
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand	$	401,018		$	310,164
Interest bearing demand		467,026			520,080
Savings		33,711			31,040
Time		253,421			515,615
Total deposits		1,155,176			1,376,899
Junior subordinated debentures		-			68,558
FHLB borrowings		125,000			195,000
Temporary Liquidity Guarantee Program (TLGP) senior unsecured debt		41,000			41,000
Accrued interest and other liabilities		28,769			24,945
Total liabilities		1,349,945			1,706,402
Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; none issued or outstanding		-			-
Common stock, no par value; 100,000,000 shares authorized; 47,235,751 issued and outstanding (2,853,670 in 2010)		328,904			160,316
Accumulated deficit		(118,553	)		(151,608	)
Accumulated other comprehensive income		2,263			1,348
Total stockholders' equity		212,614			10,056
Total liabilities and stockholders' equity	$	1,562,559		$	1,716,458

See accompanying notes to condensed consolidated financial statements.

3

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Operations

Six Months and Three Months ended June 30, 2011 and 2010

(Dollars in thousands, except per share amounts)

(unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Interest income:
Interest and fees on loans	$	16,362		$	20,554		$	33,268		$	41,674
Taxable interest on investments		1,197			1,427			2,441			2,998
Nontaxable interest on investments		15			19			33			45
Interest on interest bearing deposits		134			111			270			259
Total interest income		17,708			22,111			36,012			44,976
Interest expense:
Deposits:
Interest bearing demand		547			1,372			1,132			2,877
Savings		17			20			34			37
Time		1,365			2,971			3,390			6,480
Federal funds purchased and other borrowings		1,113			1,737			2,456			3,461
Total interest expense		3,042			6,100			7,012			12,855
Net interest income		14,666			16,011			29,000			32,121
Loan loss provision		2,000			2,500			7,500			16,000
Net interest income after loan loss provision		12,666			13,511			21,500			16,121
Noninterest income:
Service charges on deposit accounts		1,206			1,709			2,394			3,429
Mortgage loan origination and processing fees		38			110			96			218
Gains on sales of mortgage loans, net		7			18			12			61
Gains on sales of investment securities available-for-sale		-			573			-			644
Card issuer and merchant services fees, net		689			703			1,264			1,326
Earnings on bank-owned life insurance		314			1			585			1
Other income		558			624			1,129			1,309
Total noninterest income		2,812			3,738			5,480			6,988
Noninterest expense:
Salaries and employee benefits		7,031			7,267			14,370			14,951
Occupancy and equipment		1,610			1,629			3,179			3,264
Communications		411			477			838			950
FDIC insurance		623			1,946			1,752			4,632
OREO		1,302			3,496			2,890			3,980
Other expenses		4,532			3,380			8,123			7,554
Total noninterest expense		15,509			18,195			31,152			35,331
Loss before income taxes and extraordinary net gain		(31	)		(946	)		(4,172	)		(12,222	)
Credit for income taxes		2,042			609			4,388			609
Income (loss) before extraordinary net gain		2,011			(337	)		216			(11,613	)
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes		-			-			32,839			-
Net income (loss)	$	2,011		$	(337	)	$	33,055		$	(11,613	)

See accompanying notes to condensed consolidated financial statements.

4

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Operations (continued)

Six Months and Three Months ended June 30, 2011 and 2010

(Dollars in thousands, except per share amounts)

(unaudited)

Income (loss) per share	Three months ended					Six months ended
	June 30,					June 30,
	2011		2010			2011		2010
Basic and diluted:
Income (loss) before extraordinary net gain	$	0.04	$	(0.12	)	$	0.01	$	(4.14	)
Extraordinary net gain		-		-			0.81		-
Net income (loss) per common share	$	0.04	$	(0.12	)	$	0.82	$	(4.14	)

See accompanying notes to condensed consolidated financial statements.

5

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Six Months Ended June 30, 2011 and 2010

(Dollars in thousands)

(unaudited)

	Six months ended
	June 30,
	2011		2010
Total stockholders' equity at beginning of period	$	10,056	$	23,318
Comprehensive income (loss):
Net income (loss)		33,055		(11,613	)
Unrealized gains on investment securities available-for-sale, net		915		117
Comprehensive income (loss)		33,970		(11,496	)
Issuance of common stock, net		168,074		-
Stock-based compensation expense, net		514		277
Total stockholders' equity at end of period	$	212,614	$	12,099

See accompanying notes to condensed consolidated financial statements.

6

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Cash Flows

Six Months ended June 30, 2011 and 2010

(Dollars in thousands)

(unaudited)

	Six months ended
	June 30,
	2011			2010
Net cash provided by operating activities before extraordinary net gain	$	41,892		$	57,937
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes		(32,839	)		-
Net cash provided by operating activities		9,053			57,937
Investing activities:
Proceeds from sales of investment securities available-for-sale		-			12,215
Proceeds from maturities, calls, and prepayments of investment securities available-for-sale		7,557			18,146
Proceeds from maturities and calls of investment securities held-to-maturity		470			200
Purchases of investment securities available-for-sale		(14,814	)		(22,461	)
Net decrease in loans		77,209			149,515
Purchases of premises and equipment		(172	)		-
Proceeds from sales of OREO		5,769			3,340
Net cash provided by investing activities		76,019			160,955
Financing activities:
Net decrease in deposits		(221,723	)		(239,306	)
Net proceeds from issuance of common stock		168,074			-
Extinguishment of junior subordinated debentures, net		(13,625	)		-
Net decrease in FHLB and other borrowings		(70,000	)		(207	)
Net cash used by financing activities		(137,274	)		(239,513	)
Net decrease in cash and cash equivalents		(52,202	)		(20,621	)
Cash and cash equivalents at beginning of period		271,264			359,322
Cash and cash equivalents at end of period	$	219,062		$	338,701
Supplemental disclosures of cash flow information:
Interest paid	$	11,113		$	13,020
Income tax refund received	$	-		$	43,613
Loans transferred to OREO	$	6,850		$	32,433

See accompanying notes to condensed consolidated financial statements.

7

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

June 30, 2011

(unaudited)

1.  Basis of Presentation

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

The interim condensed consolidated financial statements have been prepared by the Company without audit and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed.  In the opinion of management, the condensed consolidated financial statements include all adjustments (all of which are of a normal and recurring nature) necessary for the fair presentation of the results of the interim periods presented. In addition, during the three months ended June 30, 2011, the Company recorded a non-recurring reduction in salaries and employee benefits expense of $0.3 million (net of applicable income taxes) arising from insurance stop-loss credits with respect to the Company’s employee healthcare program. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and income and expenses for the periods.  Actual results could differ from those estimates. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

The condensed consolidated financial statements as of and for the year ended December 31, 2010 were derived from audited consolidated financial statements, but do not include all disclosures contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2010 consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

All share and per share information in the accompanying condensed consolidated financial statements has been adjusted to give retroactive effect to a 1-for-10 reverse stock split effective in 2010.

Certain amounts for 2010 have been reclassified to conform to the 2011 presentation.

2.  Capital Raise

The Company completed a $177.0 million capital raise (the “Capital Raise”) in January 2011. Capital Raise proceeds in the amount of $167.9 million (net of offering costs) were received on January 28, 2011, of which approximately $150.4 million was contributed to the Bank. Approximately $15.0 million of the Capital Raise proceeds were used to extinguish $68.6 million of the Company’s junior subordinated debentures (the “Debentures”) and $3.9 million of accrued interest payable (see Note 9), resulting in a pre-tax extraordinary gain of approximately $54.9 million ($32.8 million after tax). The combined effect of these transactions increased each of Bancorp’s and the Bank’s regulatory capital ratios to an amount in excess of both “well-capitalized” regulatory levels and the capital levels required by the regulatory order (the “Order”) under which the Company has been operating (see Note 15). During the second quarter of 2011, the Company received an additional $0.2 million in proceeds from the issuance of an additional 50,000 shares of common stock in connection with the completion of the Capital Raise described above.

3. Investment Securities

Investment securities at June 30, 2011 and December 31, 2010 consisted of the following (dollars in thousands):

8

			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
6/30/2011
Available-for-sale
U.S. Agency mortgage-backed securities (MBS) *	$	104,521	$	3,502	$	293	$	107,730
Non-agency MBS		4,387		41		7		4,421
U.S. Agency asset-backed securities		11,099		617		229		11,487
Mutual fund		464		20		-		484
	$	120,471	$	4,180	$	529	$	124,122
Held-to-maturity
Obligations of state and political subdivisions	$	1,335	$	86	$	-	$	1,421
12/31/2010
Available-for-sale
U.S. Agency MBS *	$	95,622	$	2,300	$	621	$	97,301
Non-agency MBS		5,051		15		28		5,038
U.S. Agency asset-backed securities		11,707		643		151		12,199
Mutual fund		456		16		-		472
	$	112,836	$	2,974	$	800	$	115,010
Held-to-maturity
Obligations of state and political subdivisions	$	1,806	$	98	$	-	$	1,904

* U.S. Agency MBS include private label MBS of approximately $14.2 million and $14.9 million at June 30, 2011 and December 31, 2010, respectively, which are supported by FHA/VA collateral.

The following table presents the contractual maturities of investment securities at June 30, 2011 (dollars in thousands):

	Available-for-sale				Held-to-maturity
	Amortized		Estimated		Amortized		Estimated
	cost		fair value		cost		fair value
3 months to one year	$	-	$	-	$	310	$	316
One to three years		388		409		642		689
Three to five years		19		20		383		416
Five to ten years		11,651		11,958		-		-
Over ten years		107,949		111,251		-		-
Other		464		484		-		-
	$	120,471	$	124,122	$	1,335	$	1,421

The following table presents the fair value and gross unrealized losses of the Bank’s investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010 (dollars in thousands):

9

	Less than 12 months				12 months or more				Total
	Estimated  fair value		Unrealized losses		Estimated  fair value		Unrealized losses		Estimated  fair value		Unrealized losses
6/30/2011
U.S. Agency MBS	$	10,835	$	265	$	5,153	$	28	$	15,988	$	293
Non-agency MBS		716		7		-		-		716		7
U.S. Agency asset-backed securities		-		-		3,351		229		3,351		229
	$	11,551	$	272	$	8,504	$	257	$	20,055	$	529
12/31/2010
U.S. Agency MBS	$	17,639	$	472	$	6,531	$	149	$	24,170	$	621
Non-agency MBS		3,646		27		996		1		4,642		28
U.S. Agency asset-backed securities		-		-		3,788		151		3,788		151
	$	21,285	$	499	$	11,315	$	301	$	32,600	$	800

The unrealized losses on investments in U.S. Agency and non-agency MBS and U.S Agency asset-backed securities are primarily due to elevated yield/rate spreads at June 30, 2011 and December 31, 2010 as compared to yield/spread relationships prevailing at the time specific investment securities were purchased.  Management expects the fair value of these investment securities to recover as market volatility lessens, and/or as securities approach their maturity dates.  Accordingly, management does not believe that the above gross unrealized losses on investment securities are other-than-temporary.  Accordingly, no impairment adjustments have been recorded.

Management intends to hold the investment securities classified as held-to-maturity until they mature, at which time the Company will receive full amortized cost value for such investment securities.  Furthermore, as of June 30, 2011, management did not have the intent to sell any of the securities classified as available-for-sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.

4.  Federal Home Loan Bank of Seattle (“FHLB”) Stock

As of June 30, 2011 the FHLB met all of its regulatory capital requirements, but remained classified as “undercapitalized” by its primary regulator, the Federal Housing Finance Agency (FHFA), due to several factors including the possibility that further declines in the value of its private-label mortgage-backed securities could cause it to fall below its risk-based capital requirements. On October 25, 2010, the FHLB entered into a Consent Agreement with the FHFA, which requires the FHLB to take certain specified actions related to its business and operations. The FHFA continues to deem the FHLB “undercapitalized” under the FHFA’s Prompt Corrective Action rule. The FHLB will not pay a dividend or repurchase capital stock while it is classified as “undercapitalized”. While the FHLB was “undercapitalized” as of June 30, 2011, the Company does not believe that its investment in FHLB stock is impaired and management has not recorded an impairment of the carrying value of FHLB stock as of June 30, 2011. However, this analysis could change in the near-term if: 1) significant other-than-temporary losses are incurred on the FHLB’s mortgage-backed securities causing a significant decline in its regulatory capital status; 2) the economic losses resulting from credit deterioration on the FHLB’s mortgage-backed securities increases significantly; or 3) capital preservation strategies being utilized by the FHLB become ineffective.

5.  Loans

The composition of the loan portfolio at June 30, 2011 and December 31, 2010 was as follows (dollars in thousands):

10

	June 30, 2011					December 30, 2010
	Amount		Percent			Amount		Percent			% Change
Commercial real estate:
Owner occupied	$	298,620		26.5	%	$	315,723		25.8	%		5.4	%
Non-owner occupied and other		367,385		32.5	%		396,309		32.3	%		7.3	%
Total commercial real estate loans		666,005		59.0	%		712,032		58.1	%		6.5	%
Construction:
1-4 Family		5,342		0.5	%		7,523		0.6	%		29.0	%
Other		124,320		11.0	%		150,940		12.3	%		17.6	%
Total construction loans		129,662		11.5	%		158,463		12.9	%		18.2	%
Residential real estate:
Term		44,515		3.9	%		45,205		3.7	%		1.5	%
Line of credit and other		53,858		4.8	%		57,281		4.7	%		6.0	%
Total residential real estate loans		98,373		8.7	%		102,486		8.4	%		4.0	%
Commerical and industrial		190,786		16.9	%		205,692		16.8	%		7.2	%
Consumer		43,906		3.9	%		47,687		3.8	%		7.9	%
Total loans		1,128,732		100.0	%		1,226,360		100.0	%		8.0	%
Less:				��
Deferred loan fees		2,444					2,647					7.7	%
Reserve for loan losses		40,790					46,668					12.6	%
Loans, net	$	1,085,498				$	1,177,045					7.8	%

Included in mortgage loans was approximately $0.7 million and $0.2 million in mortgage loans held for sale at June 30, 2011 and December 31, 2010, respectively.

A substantial portion of the Bank’s loans are collateralized by real estate in four major markets (Central, Southern and Northwest Oregon, as well as the Boise, Idaho area). As such, the Bank’s results of operations and financial condition are dependent upon the general trends in the economy and, in particular, the local residential and commercial real estate markets it serves.  Economic trends can significantly affect the strength of the local real estate market. Approximately 79% of the Bank’s loan portfolio at June 30, 2011 consisted of real estate-related loans, including construction and development loans, commercial real estate mortgage loans, and commercial loans secured by commercial real estate.  While broader economic conditions appear to be stabilizing, real estate prices are at markedly lower levels due to the severe recession of the past few years. Should the period of lower real estate prices persist for an extended duration or should real estate markets further decline, the Bank could be materially and adversely affected.  Specifically, collateral for the Bank’s loans would provide less security and the Bank’s ability to recover on defaulted loans by selling real estate collateral would be diminished. Real estate values could be affected by, among other things, a worsening of economic conditions, an increase in foreclosures, a decline in home sale volumes, and an increase in interest rates.  Furthermore, the Bank may experience an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to the Bank given a sustained weakness or a weakening in business and economic conditions generally or specifically in the principal markets in which the Bank does business.  An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of nonperforming assets, net charge-offs, and loan loss provision.

In the normal course of business, the Bank participates portions of loans to third parties in order to extend the Bank’s lending capability or to mitigate risk.  At June 30, 2011 and December 31, 2010, the portion of these loans participated to third-parties (which are not included in the accompanying condensed consolidated financial statements) totaled approximately $32.9 million and $54.1 million, respectively.

6.  Reserve for loan losses

The Company has processes in place which require periodic reviews of individual loans within the loan portfolio. These processes assess, among other criteria, adherence to certain lending policies and procedures designed to maintain an acceptable level of risk in the portfolio. A portfolio reporting system supplements individual loan reviews by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.  Management reviews and approves all loan related policies and procedures on a regular basis (generally, at least annually).

11

At June 30, 2011, the reserve for credit losses (reserve for loan losses and reserve for unfunded commitments) was approximately $41.7 million or 3.7% of outstanding loans compared to $43.4 million or 3.7% at March 31, 2011. The unallocated reserve at June 30, 2011 was $2.7 million compared to $0.9 million at March 31, 2011.  The primary reason for the increase in the unallocated reserve was uncertainty related to the potential effects of planned enhancements to the Company’s model for calculating the reserve for loan losses with respect to creating historical loss rates to be applied against loan risk-ratings.

Commercial real estate (“CRE”) loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operations of the real property securing the loan or the business conducted on the property securing the loan. CRE loans may be more adversely affected by conditions in the real estate markets or in the general economy than other loan types.

With respect to loans to developers and builders that are secured by CRE, the Company generally requires the borrower to have an existing relationship with the Company and a historical record of successful projects. Construction loans are underwritten considering the feasibility of the project, independent “as-completed” appraisals, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and final property values associated with the completed project, and actual results may differ from these estimates.  Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved third-party long-term lenders, sales of the developed property, or else may be dependent on an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.

Residential real estate loans are generally secured by first mortgages, and are exposed to the risk that the collateral securing these loans may fluctuate in value due to economic or individual performance factors.

Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as forecasted and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Consumer loans are loans made to purchase personal property such as automobiles, boats, and recreational vehicles. The terms and rates are established periodically by management. Consumer loans tend to be relatively small and the amounts are spread across many individual borrowers, thereby minimizing the risk of loss.

For purposes of analyzing loan portfolio credit quality and determining the reserve for loan losses, the Company determines loan portfolio segments and classes based on the nature of the underlying loan collateral.

12

Transactions in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the six months ended June 30, 2011 were as follows (dollars in thousands):

	Commerical real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
Balance at beginning of year	$	14,338		$	12,652		$	4,115		$	12,220		$	2,966		$	377	$	46,668
Loan loss provision		508			2,087			387			1,763			552			2,203		7,500
Recoveries		96			261			102			1,002			180			-		1,641
Loans charged off		(2,060	)		(4,064	)		(908	)		(6,937	)		(1,050	)		-		(15,019	)
Balance at end of period	$	12,882		$	10,936		$	3,696		$	8,048		$	2,648		$	2,580	$	40,790
Reserve for unfunded loan commitments
Balance at beginning of year	$	40		$	-		$	101		$	523		$	241		$	36	$	941
Provision for unfunded loan commitments		-			-			-			-			-			-		-
Balance at end of period	$	40		$	-		$	101		$	523		$	241		$	36	$	941
Reserve for credit losses
Reserve for loan losses	$	12,882		$	10,936		$	3,696		$	8,048		$	2,648		$	2,580	$	40,790
Reserve for unfunded loan commitments		40			-			101			523			241			36		941
Total reserve for credit losses	$	12,922		$	10,936		$	3,797		$	8,571		$	2,889		$	2,616	$	41,731

Summary transactions in the reserve for loan losses and unfunded loan commitments for the six months ended June 30, 2010 were as follows (dollars in thousands):

	Total
Balance at beginning of year	$	58,586
Loan loss provision		16,000
Recoveries		7,259
Loans charged off		(24,115	)
Balance at end of period	$	57,730
Reserve for unfunded loan commitments
Balance at beginning of year	$	704
Provision for unfunded loan commitments		237
Balance at end of period	$	941
Reserve for credit losses
Reserve for loan losses	$	57,730
Reserve for unfunded loan commitments		941
Total reserve for credit losses	$	58,671

13

An individual loan is impaired when, based on current information and events, management believes that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The following table presents information, by portfolio segment, on the loans evaluated individually for impairment and collectively evaluated for impairment in the reserve for loan losses at June 30, 2011 and December 31, 2010 (dollars in thousands):

	Reserve for loan losses						Recorded investment in loans
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
June 30, 2011
Commercial real estate:
Owner occupied	$	1,670	$	2,312	$	3,982	$	28,533	$	270,087	$	298,620
Non-owner occupied		1,158		7,742		8,900		35,957		331,428		367,385
Total commercial real estate loans		2,828		10,054		12,882		64,490		601,515		666,005
Construction:
1-4 Family		-		187		187		1,640		3,702		5,342
Other		2,561		8,188		10,749		60,064		64,256		124,320
Total construction loans		2,561		8,375		10,936		61,704		67,958		129,662
Residential real estate:
Term		200		1,260		1,460		8,278		36,237		44,515
Line of credit and other		416		1,820		2,236		1,475		52,383		53,858
Total residential real estate loans		616		3,080		3,696		9,753		88,620		98,373
Commerical and industrial		1,006		7,042		8,048		22,451		168,335		190,786
Consumer		-		2,648		2,648		732		43,174		43,906
	$	7,011	$	31,199		38,210	$	159,130	$	969,602	$	1,128,732
Unallocated						2,580
					$	40,790
December 31, 2010
Commercial real estate:
Owner occupied	$	1,422	$	2,275	$	3,697	$	24,684	$	291,039	$	315,723
Non-owner occupied		1,242		9,399		10,641		33,184		363,125		396,309
Total commercial real estate loans		2,664		11,674		14,338		57,868		654,164		712,032
Construction:
1-4 Family		-		339		339		1,337		6,186		7,523
Other		10		12,303		12,313		43,913		107,027		150,940
Total construction loans		10		12,642		12,652		45,250		113,213		158,463
Residential real estate:
Term		110		1,728		1,838		2,164		43,041		45,205
Line of credit and other		-		2,278		2,278		544		56,737		57,281
Total residential real estate loans		110		4,006		4,116		2,708		99,778		102,486
Commerical and industrial		4,091		8,129		12,220		24,998		180,694		205,692
Consumer		-		2,966		2,966		-		47,687		47,687
	$	6,875	$	39,417		46,292	$	130,824	$	1,095,536	$	1,226,360
Unallocated						376
					$	46,668

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

Acceptable

The borrower is a reasonable credit risk and demonstrates the ability to repay the loan from normal business operations.  Loans are generally made to companies operating in sound industries and markets with a normal competitive environment.  The borrower tends to be involved in regional or local markets with adequate market share.  Financial performance has been consistent in normal economic times and has been average or better than average for its industry.

14

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

Watch

Loans are graded Watch when they have temporary situations which cause the level of risk to be increased until the situation has been corrected.  These situations may involve one or more weaknesses that could, if not corrected within a short period of time, jeopardize the full repayment of the debt.  In general, loans in this category remain adequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral.

Special Mention

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

Substandard

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

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

In addition, Substandard loans also include impaired loans.  Such loans bear all of the characteristics of Substandard loans as described above, but with the added characteristic that the likelihood of full collection of interest and principal may be uncertain.  Impaired loans include loans that may be adequately secured by collateral but the borrower is unable to maintain regularly scheduled interest payments.

The following table presents, by portfolio class, credit risk profile by internally assigned grades at June 30, 2011 and December 31, 2010 (dollars in thousands):

15

	Loan Grades
	Acceptable		Watch		Special Mention		Substandard		Total
June 30, 2011
Commercial real estate:
Owner occupied	$	222,092	$	11,637	$	27,086	$	37,805	$	298,620
Non-owner occupied		268,570		20,078		35,977		42,760		367,385
Total commercial real estate loans		490,662		31,715		63,063		80,565		666,005
Construction:
1-4 Family		681		-		437		4,224		5,342
Other		36,134		19,641		3,389		65,156		124,320
Total construction loans		36,815		19,641		3,826		69,380		129,662
Residential real estate:
Term		33,048		1,610		3,180		6,677		44,515
Line of credit and other		49,289		408		980		3,181		53,858
Total residential real estate loans		82,337		2,018		4,160		9,858		98,373
Commerical and industrial		136,937		5,536		11,575		36,738		190,786
Consumer		42,824		1		620		461		43,906
	$	789,575	$	58,911	$	83,244	$	197,002	$	1,128,732
December 31, 2010
Commercial real estate:
Owner occupied	$	245,775	$	12,741	$	22,213	$	34,994	$	315,723
Non-owner occupied		289,670		41,105		21,318		44,216		396,309
Total commercial real estate loans		535,445		53,846		43,531		79,210		712,032
Construction:
1-4 Family		4,826		467		500		1,730		7,523
Other		65,165		20,942		6,362		58,471		150,940
Total construction loans		69,991		21,409		6,862		60,201		158,463
Residential real estate:
Term		36,752		1,761		3,218		3,474		45,205
Line of credit and other		52,848		408		1,073		2,952		57,281
Total residential real estate loans		89,600		2,169		4,291		6,426		102,486
Commerical and industrial		144,055		7,350		12,158		42,129		205,692
Consumer		46,465		116		637		469		47,687
	$	885,556	$	84,890	$	67,479	$	188,435	$	1,226,360

16

The following table presents, by portfolio class, an age analysis of past due loans, including loans placed on non-accrual at June 30, 2011 and December 31, 2010 (dollars in thousands):

	30-89 days     past due		90 days or more past due		Total past due		Current		Total loans
June 30, 2011
Commercial real estate:
Owner occupied	$	2,097	$	4,958	$	7,055	$	291,565	$	298,620
Non-owner occupied		2,042		3,887		5,929		361,456		367,385
Total commercial real estate loans		4,139		8,845		12,984		653,021		666,005
Construction:
1-4 Family		244		1,397		1,641		3,701		5,342
Other		7,042		21,780		28,822		95,498		124,320
Total construction loans		7,286		23,177		30,463		99,199		129,662
Residential real estate:
Term		3,452		1,270		4,722		39,793		44,515
Line of credit and other		101		247		348		53,510		53,858
Total residential real estate loans		3,553		1,517		5,070		93,303		98,373
Commerical and industrial		2,316		9,211		11,527		179,259		190,786
Consumer		95		43		138		43,768		43,906
	$	17,389	$	42,793	$	60,182	$	1,068,550	$	1,128,732
December 31, 2010
Commercial real estate:
Owner occupied	$	5,313	$	5,405	$	10,718	$	305,005	$	315,723
Non-owner occupied		16,706		10,263		26,969		369,340		396,309
Total commercial real estate loans		22,019		15,668		37,687		674,345		712,032
Construction:
1-4 Family		754		976		1,730		5,793		7,523
Other		1,857		28,695		30,552		120,388		150,940
Total construction loans		2,611		29,671		32,282		126,181		158,463
Residential real estate:
Term		617		1,092		1,709		43,496		45,205
Line of credit and other		453		404		857		56,424		57,281
Total residential real estate loans		1,070		1,496		2,566		99,920		102,486
Commerical and industrial		2,129		14,126		16,255		189,437		205,692
Consumer		157		7		164		47,523		47,687
	$	27,986	$	60,968	$	88,954	$	1,137,406	$	1,226,360

Loans contractually past due 90 days or more on which the Company continued to accrue interest were insignificant at June 30, 2011 and December 31, 2010.

Total impaired loans at June 30, 2011 and December 31, 2010 were as follows (dollars in thousands):

	June 30,     2011		December 31, 2010
Impaired loans with an associated allowance	$	86,222	$	52,004
Impaired loans without an associated allowance		72,908		78,820
Total recorded investment in impaired loans	$	159,130	$	130,824
Amount of the reserve for loan losses allocated to impaired loans	$	7,011	$	6,875

17

The following table presents information related to impaired loans, by portfolio class, at June 30, 2011 and December 31, 2010 (dollars in thousands):

	Impaired loans
	With a  related allowance		Without a  related  allowance		Total recorded balance		Unpaid principal balance		Related allowance
June 30, 2011
Commercial real estate:
Owner occupied	$	21,110	$	7,423	$	28,533	$	28,560	$	1,670
Non-owner occupied		31,035		4,922		35,957		42,039		1,158
Total commercial real estate loans		52,145		12,345		64,490		70,599		2,828
Construction:
1-4 Family		-		1,640		1,640		1,702		-
Other		20,174		39,890		60,064		82,079		2,561
Total construction loans		20,174		41,530		61,704		83,781		2,561
Residential:
Term		3,295		4,983		8,278		10,766		200
Line of credit and other		949		526		1,475		1,475		416
Total residential loans		4,244		5,509		9,753		12,241		616
Commerical and industrial loans		9,659		12,792		22,451		23,709		1,006
Consumer loans		-		732		732		732		-
	$	86,222	$	72,908	$	159,130	$	191,062	$	7,011
December 31, 2010
Commercial real estate:
Owner occupied	$	18,051	$	6,633	$	24,684	$	25,493	$	1,422
Non-owner occupied		22,167		11,017		33,184		39,105		1,242
Total commercial real estate loans		40,218		17,650		57,868		64,598		2,664
Construction:
1-4 Family		-		1,337		1,337		1,541		-
Other		273		43,640		43,913		66,324		10
Total construction loans		273		44,977		45,250		67,865		10
Residential:
Term		756		1,408		2,164		4,600		110
Line of credit and other		-		544		544		544		-
Total residential loans		756		1,952		2,708		5,144		110
Commerical and industrial loans		10,757		14,241		24,998		26,529		4,091
	$	52,004	$	78,820	$	130,824	$	164,136	$	6,875

The average recorded investment in impaired loans was approximately $133.7 million and $140.2 million for the six months ended June 30, 2011 and 2010, respectively. Interest income recognized for cash payments received on impaired loans for the six and three months ended June 30, 2011 and 2010 was insignificant.

At June 30, 2011 and December 31, 2010, the remaining commitments to lend on loans accounted for as troubled debt restructurings (“TDRs”) were insignificant.

The following table presents information with respect to non-performing assets at June 30, 2011 and December 31, 2010 (dollars in thousands):

	June 30,     2011		December 31, 2010
Loans on nonaccrual status	$	60,827	$	80,997
Loans past due 90 days or more but not on nonaccrual status		274		7
OREO, net		37,112		39,536
Total non-performing assets	$	98,213	$	120,540

18

The following table presents information with respect to the Company’s non-performing assets, by portfolio class, at June 30, 2011 and December 31, 2010 (dollars in thousands):

	June 30, 2011			December 31, 2010
Loans on nonaccrual status:
Commercial real estate:
Owner occupied	$	5,779		$	6,510
Non-owner occupied		3,928			10,883
Total commercial real estate loans		9,707			17,393
Construction:
1-4 Family		1,640			1,337
Other		36,347			43,493
Total construction loans		37,987			44,830
Residential real estate:
Term		1,497			1,408
Line of credit and other		1,458			544
Total residential real estate loans		2,955			1,952
Commerical and industrial		10,158			16,822
Consumer		20			-
Total non-accrual loans		60,827			80,997
Accruing loans which are contractually past due 90 days or more		274			7
Total of nonaccrual and 90 days past due loans		61,101			81,004
OREO, net		37,112			39,536
Total non-performing assets (1)	$	98,213		$	120,540
TDR loans on accrual status (2)	$	92,491		$	43,283
Nonaccrual and 90 days or more past due on loans as a percentage of loans		5.41	%		6.61	%
Nonaccrual and 90 days or more past due loans as a percentage of total assets		3.91	%		4.72	%
Non-performing assets as a percentage of total assets		6.29	%		7.02	%
Total loans (3)	$	1,128,732		$	1,226,360
Total assets	$	1,562,559		$	1,716,458

(1) Does not include TDR loans on accrual status.

(2) Does not include TDR loans reported as nonaccrual totaling $17,917 and $19,539, respectively, as of June 30, 2011 and December 2010.

(3) Includes loans held for sale and is before deferred loan fees and the reserve for loan losses.

At June 30, 2011, the Bank had approximately $186.1 million in outstanding commitments to extend credit, compared to approximately $191.2 million at December 31, 2010.

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

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

	Six months ended June 30,
	2011			2010
Balance at beginning of year	$	39,536		$	28,860
Additions		6,850			32,433
Dispositions		(8,062	)		(3,340	)
Change in valuation allowance		(1,212	)		(2,377	)
Balances at end of period	$	37,112		$	55,576

19

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

	Six months ended June 30,
	2011			2010
Balance at beginning of year	$	16,849		$	6,230
Additions to the valuation allowance		2,269			3,661
Reductions due to sales of OREO		(1,057	)		(1,284	)
Balance at end of period	$	18,061		$	8,607

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

	Three months ended June 30,					Six months ended June 30,
	2011			2010		2011		2010
Operating costs	$	243		$	1,025	$	442	$	222
Net (gains) losses on dispositions		(23	)		45		179		97
Increases in valuation allowance		1,082			2,426		2,269		3,661
Total	$	1,302		$	3,496	$	2,890	$	3,980

8. Mortgage Servicing Rights (“MSRs”)

The Bank sells a predominant share of the mortgage loans it originates into the secondary market. In April 2010, the Federal National Mortgage Association (FNMA) terminated its mortgage servicing agreement with the Bank due to the Bank’s capital condition. Accordingly, in April 2010, the Bank sold its MSRs and discontinued directly servicing mortgage loans that it originates, and now sells originations “servicing released”.  “Servicing released” means that whoever the Bank sells the loan to will service or arrange for servicing of the loan.  In connection with the sale of the Bank’s MSRs, the Bank entered into an agreement with the FNMA under which management believes that the Bank will have no further recourse liability or obligation to FNMA in connection with the Bank’s original mortgage sales and servicing agreement with FNMA or any other recourse obligations to FNMA.

9. Junior Subordinated Debentures

At December 31, 2010, the Company had four subsidiary grantor trusts for the purpose of issuing Trust Preferred Securities (“TPS”) and common securities. The common securities were purchased by the Company, and the Company’s investment in the common securities of $2.1 million was included in accrued interest and other assets in the accompanying December 31, 2010 condensed consolidated balance sheet.  The weighted average interest rate of all TPS was 2.83% at December 31, 2010.  The Debentures were issued with substantially the same terms as the TPS and were the sole assets of the related trusts.  The Company’s obligations under the Debentures and related agreements, taken together, constituted a full irrevocable guarantee by the Company of the obligations of the trusts.  As of December 31, 2010 the Company had $68.6 million of Debentures and approximately $3.9 million of related accrued interest payable.

In January 2011, the TPS, Debentures and all related accrued interest were retired in connection with the completion of the Capital Raise (see Note 2).

10. Other Borrowings

At June 30, 2011 the Bank had a total of $125.0 million in long-term borrowings from FHLB with maturities ranging from 2012 to 2017, bearing a weighted-average rate of 2.22%.  At December 31, 2010, the Bank had a total of $195.0 million in long-term borrowings from FHLB.  In February and May 2011, the Bank repaid an aggregate of approximately $70 million in FHLB advances with maturity dates during 2011 and early 2012. As a result of such early prepayments, the Company incurred prepayment costs of $0.3 million. As of June 30, 2011, the Bank had $60.0 million in off-balance sheet FHLB letters of credit used for collateralization of public deposits held by the Bank.  The Bank’s available line of credit with the FHLB is reduced by the amount of these letters of credit.  Also, as of both June 30, 2011 and December 31, 2010, the Bank had $41.0 million of senior unsecured debt issued in connection with the Federal Deposit Insurance Corporation’s (“FDIC”) Temporary Liquidity Guarantee Program (“TLGP”) maturing February 12, 2012 and bearing a weighted-average rate of 2.00% (exclusive of net issuance costs which are being amortized on a straight-line basis over the term of the debt, and a 1.00% per annum FDIC insurance assessment applicable to TLGP debt). See “Capital Resources” and “Liquidity” under Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

20

11. Basic and Diluted Net Income (Loss) per Common Share

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

The numerators and denominators used in computing basic and diluted net income (loss) per common share for the three months and six months ended June 30, 2011 and 2010 can be reconciled as follows (dollars in thousands, except per share data):

	Three months ended					Six months ended
	June 30,					June 30,
	2011		2010			2011		2010
Income (loss) before extraordinary net gain	$	2,011	$	(337	)	$	216	$	(11,613	)
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes		-		-			32,839		-
Net income (loss)	$	2,011	$	(337	)	$	33,055	$	(11,613	)
Weighted-average shares outstanding - basic		47,071,512		2,804,975			40,164,747		2,804,688
Weighted-average shares outstanding - diluted		47,209,402		N/A			40,255,069		N/A
Common stock equivalent shares excluded due to antidilutive effect		137,890		48,334			90,322		48,597
Basic and diluted:
Income (loss) before extraordinary net gain per common share	$	0.04	$	(0.12	)	$	0.01	$	(4.14	)
Extraordinary net gain per common share		-		-			0.81		-
Net income (loss) per common share	$	0.04	$	(0.12	)	$	0.82	$	(4.14	)

12. Stock-Based Compensation

During the six months ended June 30, 2011, as part of their annual compensation, Company Directors were granted a total of 38,300 shares of restricted stock with an aggregate fair value of approximately $319,000 that were immediately vested. In March 2011, the Board authorized the grant of additional restricted shares as part of its incentive program for certain officers and management with an aggregate fair value of approximately $547,000 that will vest over a three year period. A total of approximately $441,000 in compensation expense has been recorded during the six months ended June 30, 2011 for these awards.   

The Company did not grant any stock options during the six months ended June 30, 2011.  During the six months ended June 30, 2010, the Company granted 77,075 stock options with a calculated fair value of $4.30 per option.  The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions to value options granted during the six months ended June 30, 2010:

Dividend yield		0.0	%
Expected volatility		78.1	%
Risk-free interest rate		3.1	%
Expected option lives	7.9 years

The dividend yield is based on historical dividend information. The expected volatility is based on historical volatility of the Company’s common stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for periods corresponding with the expected lives of the options granted. The expected option lives represent the period of time that options are expected to be outstanding giving consideration to vesting schedules and historical exercise and forfeiture patterns.

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The Black-Scholes option-pricing model was developed for use in estimating the fair value of publicly-traded options that have no vesting restrictions and are fully transferable.  Additionally, the model requires the input of highly subjective assumptions.  Because the Company’s stock options have characteristics significantly different from those of publicly-traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in the opinion of the Company’s management, the Black-Scholes option-pricing model does not necessarily provide a reliable single measure of the fair value of the Company’s stock options.

The following table presents the activity related to stock options for the six months ended June 30, 2011:

	Options			Weighted- average exercise price		Weighted- average remaining contractual term (years)		Aggregate intrinsic value (000)
Options outstanding at January 1, 2011		156,522		$	68.26		4.9	$	-
Cancelled/expired		(12,152	)		-		N/A		N/A
Options outstanding at June 30, 2011		144,370		$	68.90		6.4	$	-
Options exercisable at June 30, 2011		73,145		$	130.25		4.2	$	-

As of June 30, 2011, there was approximately $0.2 million of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting periods of the underlying stock options.

The following table presents the activity for nonvested restricted stock for the six months ended June 30, 2011:

	Number of shares			Weighted- average grant date fair value per share		Weighted- average remaining vesting term (years)
Nonvested as of January 1, 2011		47,686		$	34.96		N/A
Granted		133,435			7.07		N/A
Vested		(43,231	)		9.94		N/A
Nonvested as of June 30, 2011		137,890		$	51.82		5.26

As of June 30, 2011, unrecognized compensation cost related to nonvested restricted stock totaled approximately $0.9 million.  The nonvested restricted stock is scheduled to vest over periods of three to four years from the grant date.  The unearned compensation on nonvested stock is being amortized to expense on a straight-line basis over the applicable vesting periods.

The Company has also granted awards of restricted stock units (RSUs). A RSU represents the unfunded, unsecured right to require the Company to deliver to the participant one share of common stock for each RSU.  There was no unrecognized compensation cost related to RSUs at June 30, 2011 and December 31, 2010, as all RSUs were fully-vested.  During the six months ended June 30, 2011, the Company granted 5,695 RSUs to a director of the Company at an approximate fair value of $48,000.

13. Income Taxes

During the six months ended June 30, 2011, the Company recorded an income tax provision of approximately $17.7 million.  Included in this amount was an income tax provision of approximately $22.1 million related to the extraordinary gain on the extinguishment of the Debentures (see Notes 2 and 9), which was calculated based on the Company’s estimated statutory income tax rates. The income tax provision of $17.7 million also includes a credit for income taxes of approximately $4.4 million related to the Company’s loss from operations excluding the extraordinary gain.  This credit for income taxes was calculated based on management’s current projections of estimated full-year pre-tax results of operations, estimated utilization of deferred tax assets on which a full valuation allowance was previously recorded, and other permanent book/tax differences. Accordingly, this calculation and the estimated income tax amounts are subject to adjustment as additional facts become available and management’s estimates are revised.

Management determined the amount of the deferred tax valuation allowance at June 30, 2011 and December 31, 2010 by evaluating the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies.   The ability to utilize deferred tax assets is a complex process requiring in-depth analysis of statutory, judicial, and regulatory guidance and estimates of future taxable income.  The amount of deferred taxes recognized could be impacted by changes to any of these variables.

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As of June 30, 2011, the Company maintained a full valuation allowance against the deferred tax asset balance of $35.1 million. There was an approximate $10 million decrease from the year-end 2010 valuation allowance due to the estimated utilization of certain deferred tax assets during the six months ended June 30, 2011. See also “Critical Accounting Policies – Deferred Income Taxes” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

14. Fair Value Measurements

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820 establishes a hierarchy for determining fair value measurements which includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follow:

· Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets - that the Company has the ability to access at the measurement date - for identical assets or liabilities. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

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

· Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

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

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

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

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Impaired loans: In accordance with GAAP, loans measured for impairment are reported at estimated fair value,including impaired loans measured at an observable market price (if available), the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the fair value of the loan’s collateral (if collateral dependent). Estimated fair value of the loan’s collateral is determined by appraisals or independent valuations which are then adjusted for the estimated costs related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale.  A significant portion of the Bank’s impaired loans are measured using the estimated fair market value of the collateral less the estimated costs to sell.

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

At June 30, 2011 and December 31, 2010, the Company had no financial liabilities - and no non-financial assets or non-financial liabilities - measured at fair value on a recurring basis.  The Company’s only financial assets measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010 were as follows (dollars in thousands):

	Level 1		Level 2		Level 3
June 30, 2011
Investment securities available - for - sale	$	-	$	124,122	$	-
December 31, 2010
Investment securities available - for - sale	$	-	$	115,010	$	-

Certain financial assets, such as impaired loans, are measured at fair value on a nonrecurring basis (e.g., the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments when there is evidence of impairment). Certain non-financial assets are also measured at fair value on a non-recurring basis.  These assets primarily consist of intangible assets and other non-financial long-lived assets which are measured at fair value for periodic impairment assessments, and OREO. The Company had no liabilities measured at fair value on a nonrecurring basis at June 30, 2011 and December 31, 2010.

The following table represents the assets measured at fair value on a nonrecurring basis by the Company at June 30, 2011 and December 31, 2010 (dollars in thousands):

	Level 1		Level 2		Level 3
June 30, 2011
Impaired loans with specific valuation allowances	$	-	$	-	$	79,211
Other real estate owned		-		-		37,112
	$	-	$	-	$	116,323
December 31, 2010
Impaired loans with specific valuation allowances	$	-	$	-	$	45,129
Other real estate owned		-		-		39,536
	$	-	$	-	$	84,665

The Company did not change the methodology used to determine fair value for any financial instruments during 2010 or the six months ended June 30, 2011.  In addition, for any given class of financial instruments, the Company did not have any transfers between level 1, level 2, or level 3 during 2010 or the six months ended June 30, 2011.

The following disclosures are made in accordance with the provisions of FASB ASC Topic 825, “Financial Instruments,” which requires the disclosure of fair value information about financial instruments where it is practicable to estimate that value.

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

In addition, as the Company normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed.  The disclosures also do not include estimated fair value amounts for items which are not defined as financial instruments but which may have significant value.  The Company does not believe that it would be practicable to estimate a representational fair value for these types of items as of June 30, 2011 and December 31, 2010.

Because ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements, any aggregation of the fair value amounts presented would not represent the underlying value of the Company.

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

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

Investment securities:  See above description.

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

Loans:  The estimated fair value of non-impaired loans is calculated by discounting the contractual cash flows of the loans using June 30, 2011 and December 31, 2010 origination rates. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. Estimated fair values for impaired loans are estimated using an observable market price (if available), the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the fair value of the loan’s collateral (if collateral dependent) as described above.

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

Deposits:  The estimated fair value of demand deposits, consisting of checking, interest bearing demand, and savings deposit accounts, is represented by the amounts payable on demand.  At the reporting date, the estimated fair value of time deposits is calculated by discounting the scheduled cash flows using the June 30, 2011 and December 31, 2010 rates offered on those instruments.

Debentures, other borrowings, and TLGP senior unsecured debt:

During the first quarter of 2011 the Debentures and related accrued interest were extinguished (see Notes 2 and 9).  As of December 31, 2010, the fair value of the Bank’s Debentures was adjusted to reflect the exchange of such Debentures for cash. The fair value of other borrowings (including federal funds purchased, if any) and TLGP senior unsecured debt are estimated using discounted cash flow analyses based on the Bank’s June 30, 2011 and December 31, 2010 incremental borrowing rates for similar types of borrowing arrangements.

Loan commitments and standby letters of credit:  The majority of the Bank’s commitments to extend credit have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.

The estimated fair values of the Company’s significant on-balance sheet financial instruments at June 30, 2011 and December 31, 2010 were approximately as follows (dollars in thousands):

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	June 30, 2011				December 31, 2010
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	219,062	$	219,062	$	271,264	$	271,264
Investment securities:
Available-for-sale		124,122		124,122		115,010		115,010
Held-to-maturity		1,335		1,421		1,806		1,904
FHLB stock		10,472		10,472		10,472		10,472
Loans, net		1,085,498		1,098,307		1,177,045		1,173,304
BOLI		34,055		34,055		33,470		33,470
Financial liabilities:
Deposits		1,155,176		1,158,381		1,376,899		1,380,965
Debentures, other borrowings, and TLGP senior unsecured debt		166,000		170,927		304,558		256,499

15. Regulatory Matters

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

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

Federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. Such actions could potentially include a leverage capital limit, a risk-based capital requirement, and any other measure of capital deemed appropriate by the federal banking regulator for measuring the capital adequacy of an insured depository institution. In addition, payment of dividends by Bancorp and the Bank are subject to restriction by state and federal regulators and availability of retained earnings. At June 30, 2011, Bancorp and the Bank met the regulatory benchmarks to be “well-capitalized” under the applicable regulations.

On August 27, 2009, the Bank entered into an agreement with the FDIC, its principal federal banking regulator, and the Oregon Division of Finance and Corporate Securities (“DFCS”) which requires the Bank to take certain measures to improve its safety and soundness (the “Order”).

In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the DFCS of the Order based on certain findings from an examination of the Bank conducted in February 2009 based upon financial and lending data measured as of December 31, 2008 (the “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 is 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 to assure that its reserve for loan losses is maintained at an appropriate level.

Among the corrective actions required are for the Bank to develop and adopt a plan to maintain the minimum capital requirements for a “well-capitalized” bank, including a Tier 1 leverage ratio of at least 10% at the Bank level beginning 150 days from the issuance of the Order. As of June 30, 2011, the requirement relating to increasing the Bank’s Tier 1 leverage ratio has been met.

The Order further requires the Bank to ensure the level of the reserve for loan losses is maintained at appropriate levels to safeguard the book value of the Bank’s loans and leases, and to reduce the amount of classified loans as of the ROE to no more than 75% of capital.  As of June 30, 2011, the requirement that the amount of classified loans as of the ROE be reduced to no more than 75% of capital has been met.  As required by the Order, all assets classified as “Loss” in the ROE have been charged-off. The Bank has also developed and implemented a process for the review and approval of all applicable asset disposition plans.

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The Order further requires the Bank to maintain a primary liquidity ratio (net cash, plus net short-term and marketable assets divided by net deposits and short-term liabilities) of at least 15%.  At June 30, 2011, the Bank’s primary liquidity ratio was 20.4%.

In addition, pursuant to the Order, the Bank must retain qualified management and must notify the FDIC and the DFCS in writing when it proposes to add any individual to its Board or to employ any new senior executive officer. Under the Order, the Bank’s Board must also increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the Bank’s activities. The Order also restricts the Bank from taking certain actions without the consent of the FDIC and the DFCS, including paying cash dividends, and from extending additional credit to certain types of borrowers.
 

As of June 30, 2011 the Order remains in place until lifted by the FDIC and DFCS, and, therefore, the Bank remains subject to the requirements and restrictions set forth therein.

On October 26, 2009, Bancorp entered into a written agreement with the FRB and DFCS (the Written Agreement), which requires Bancorp to take certain measures to improve its safety and soundness. Under the Written Agreement, Bancorp is required to develop and submit for approval, a plan to maintain sufficient capital at the Bancorp and the Bank within 60 days of the date of the Written Agreement.  Bancorp submitted a strategic plan on October 28, 2009, and, as of the completion of the Capital Raise on January 28, 2011, management believes that Bancorp is in compliance with regulatory capital-related terms of the Written Agreement.

As of June 30, 2011, Bancorp and the Bank met the minimum regulatory requirements for a “well-capitalized” institution under the terms of the Order and Written Agreement.

Bancorp’s actual and required capital amounts and ratios are presented in the following table:

	Actual					Regulatory minimum to be "adequately capitalized"					Regulatory minimum to be "well capitalized" under prompt corrective action provisions
	Capital amount		Ratio			Capital amount		Ratio			Capital amount		Ratio
June 30, 2011:
Tier 1 leverage
(to average assets)	$	207,827		13.1	%	$	63,629		4.0	%	$	79,536		5.0	%
Tier 1 capital
(to risk-weighted assets)		207,827		17.1			48,687		4.0			73,030		6.0
Total capital
(to risk-weighted assets)		223,378		18.4			97,374		8.0			121,717		10.0
December 31, 2010:
Tier 1 leverage
(to average assets)		7,158		0.4			70,257		4.0			87,821		5.0
Tier 1 capital
(to risk-weighted assets)		7,158		0.5			53,451		4.0			80,176		6.0
Total capital
(to risk-weighted assets)		14,316		1.1			106,902		8.0			133,627		10.0

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The Bank’s actual and required capital amounts and ratios are presented in the following table (dollars in thousands):

	Actual						Regulatory minimum to be "adequately capitalized"					Regulatory minimum to be "well capitalized" under prompt corrective action provisions
	Capital amount			ratio			Capital amount		ratio			Capital amount		ratio
June 30, 2011:
Tier 1 leverage
(to average assets)	$	229,445			14.4	%	$	63,603		4.0	%	$	159,008		10.0	% (1)
Tier 1 capital
(to risk-weighted assets)		229,445			18.6			49,219		4.0			73,829		6.0
Total capital
(to risk-weighted assets)		245,143	��		19.9			98,438		8.0			123,048		10.0
December 31, 2010:
Tier 1 leverage
(to average assets)		75,662			4.3			70,145		4.0			175,364		10.0	(1)
Tier 1 capital
(to risk-weighted assets)		75,662			5.7			53,497		4.0			80,245		6.0
Total capital
(to risk-weighted assets)		92,768			6.9			106,993		8.0			133,742		10.0

(1) Pursuant to the Order, in order to be deemed "well capitalized", the Bank must maintain a Tier 1 leverage ratio of at least 10.00%.

16. New Authoritative Accounting Guidance

In January 2010, the FASB issued FASB Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements” (ASU 2010-06).  ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized, and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements.  ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) entities should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy were required for the Company beginning January 1, 2011, and the adoption of this disclosure requirement did not have a significant effect on the Company’s condensed consolidated financial statements.  The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010 and did not have a significant effect on the Company’s condensed consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20 “Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (ASU 2010-20) which requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the reserve for loan losses, and (iii) the changes and reasons for those changes in the reserve for loan losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its reserve for loan losses, and class of financing receivable, which is generally a disaggregation of portfolio segments. The required disclosures include, among other things, a rollforward of the reserve for loan losses, as well as information about modified, impaired, non-accrual, and past due loans and credit quality indicators. ASU 2010-20 became effective for the Company’s condensed consolidated financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period are required for the Company’s condensed consolidated financial statements that include periods beginning on or after January 1, 2011. The adoption of ASU 2010-20 did not have a significant effect on the Company’s condensed consolidated financial statements. ASU No. 2011-01, “Receivables (Topic 310)—Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” temporarily deferred the effective date for disclosures related to TDRs to coincide with the effective date of a proposed ASU related to TDRs, which was issued in April 2011, as described below.

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In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” (ASU 2011-02). The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in ASU 2011-02 also ends the FASB’s deferral of the additional disclosures about TDRs as required by ASU 2010-20. The provisions of ASU 2011-02 are effective for the Company’s reporting period ending September 30, 2011. The Company is in the process of evaluating the impact of adoption of ASU 2011-02 and does not expect it to have a material impact on the Company’s future condensed consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). The provisions of ASU 2011-04 amend FASB ASC Topic 820, clarify the Board’s intent regarding application of existing fair value measurement guidance, and revise certain measurement and disclosure requirements to achieve convergence of U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments clarify the FASB’s intent about the application of the highest-and-best-use and valuation premise and with respect to the measurement of fair value of an instrument classified as equity. The amendment also expands the information required to be disclosed with respect to fair value measurements categorized in Level 3 fair value measurements and the items not measured at fair value but for which fair value must be disclosed. The provisions of ASU 2011-04 are effective for the Company’s first reporting period beginning on January 1, 2012, with early adoption not permitted. The Company is in the process of evaluating the impact of adoption of ASU 2011-04 and does not expect it to have a material impact on the Company’s future condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (ASU 2011-05). The provisions of ASU 2011-05 amend FASB ASC Topic 220 “Comprehensive Income” to eliminate the current option to present the components of other comprehensive income in the statement of changes in equity, and require the presentation of net income and other comprehensive income (and their respective components) either in a single continuous statement or in two separate but consecutive statements. The amendments do not alter any current recognition or measurement requirements with respect to items of other comprehensive income.  The provisions of ASU 2011-05 are effective for the Company’s first reporting period beginning on January 1, 2012, with early adoption permitted. The Company is in the process of evaluating the impact of adoption of ASU 2011-05 and does not expect it to have a material impact on the Company’s future condensed consolidated financial statements.

17. Commitments and Contingencies

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

On August 18, 2010, the Bank was sued in an asserted class action lawsuit.  The lawsuit alleges that, in 2004, F&M Holding Company (acquired by the Bank in 2006), acting as trustee, inappropriately disbursed the proceeds of three bond issuances, allegedly resulting years later in the bondholders’ loss of their collective investment of approximately $23.5 million.  Recovery is sought on claims of breach of the indentures, breach of fiduciary duty, and conversion.  In November 2010, the lawsuit was dismissed without prejudice for a lack of subject matter jurisdiction in federal court.

In addition, in November 2010 a bankruptcy trustee filed an adversary proceeding against the Bank.  The bankruptcy trustee claims that the Bank violated the automatic stay by taking control of approximately $250,000 in the bankrupt entity’s accounts shortly after the bankruptcy filing, and, as a result, the Bank owes sanctions and damages.  Under an order of the bankruptcy court, the adversary proceeding is stayed, and the Bank need not respond to the bankruptcy trustee’s claims and allegations pending a further court order.

While the outcome of these actions cannot be predicted with certainty, based on management's review, management believes that the lawsuit and the adversary proceedings are without merit and plans to vigorously pursue its defenses.  Management also believes that if any liability were to result, it would not have a material adverse effect on the Company's consolidated financial condition or results of operations.

29

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

The following discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto as of June 30, 2011 and the operating results for the six months then ended, included elsewhere in this quarterly report on Form 10-Q.  This discussion highlights key information as determined by management but may not contain all of the information that is important to you.  For a more complete understanding, the following should be read in conjunction with the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2011; including its audited 2010 consolidated financial statements and the notes thereto as of December 31, 2010 and 2009 and for each of the years in the three-year period ended December 31, 2010.

Cautionary Information Concerning Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements about the Company’s plans and anticipated results of operations and financial condition. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the 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 disclosed in Part 1 - Item 1A of the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2011 for the year ended December 31, 2010.

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

Recent Developments

The Company completed a $177.0 million capital raise (the “Capital Raise”) in January 2011. Capital Raise proceeds in the amount of $167.9 million (net of offering costs) were received on January 28, 2011, of which approximately $150.4 million was contributed to the Bank. Approximately $15.0 million of the Capital Raise proceeds were used to extinguish $68.6 million of the Company’s junior subordinated debentures (the “Debentures”) and related accrued interest of $3.9 million, resulting in  a pre-tax extraordinary gain of approximately $54.9 million ($32.8 million after tax).  The combined effect of these transactions increased each of Bancorp’s and the Bank’s regulatory capital position to an amount in excess of both “well-capitalized” regulatory levels and the capital levels required under the regulatory order (the “Order”) under which the Company has been operating (for additional information regarding the Order see Note 15 to the Company’s condensed consolidated financial statements).

Prior to the consummation of the Capital Raise, the Company maintained a large amount of liquidity to mitigate customer uncertainty. The effect of the proceeds of the Capital Raise on the Company’s capital position has reduced the Company’s need for excess liquidity and allowed the Company to repay a significant amount of its wholesale deposit liabilities and certain FHLB advances. The impact of the Capital Raise on the Company’s capital and liquidity are discussed in more detail under “Capital Resources” and “Liquidity” below.

Critical Accounting Policies and Accounting Estimates

The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Accounting policies related to the reserve for loan losses are considered to be critical, as these policies involve considerable subjective judgment and estimation by management.

30

For additional information regarding critical accounting policies, refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Accounting Estimates included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2010.

Economic Conditions

The Company’s business is closely tied to the economies of Idaho and Oregon in general and is particularly affected by the economies of Central, Southern and Northwest Oregon, as well as the Greater Boise, Idaho area. The uncertain depth and duration of the present economic downturn could continue to cause further deterioration of these local economies, resulting in an adverse effect on the Company’s financial condition and results of operations. Real estate values in these areas have declined and may continue to fall or remain depressed for an uncertain amount of time. Unemployment rates in these areas continue to be high and could increase further. Business activity across a wide range of industries and regions has been impacted and local governments and many businesses are facing serious challenges due to the lack of consumer spending driven by elevated unemployment and uncertainty. Recently, the national and regional economies and real estate price depreciation have appeared to show signs of stabilization. However, elevated unemployment and other indicators continue to suggest that the future direction of the economy remains uncertain.

31

CASCADE BANCORP

Selected Consolidated Financial Highlights

(In thousands, except per share data and ratios; unaudited)

	Year over Year Quarter									Linked Quarter
	2nd Qtr			2nd Qtr			%			1st Qtr			%
	2011			2010			Change			2011			Change
Balance Sheet Data (at period end)
Investment securities	$	125,457		$	127,713			-1.8	%	$	128,408			-2.3	%
Loans, gross		1,128,732			1,351,875			-16.5	%		1,176,074			-4.0	%
Total assets		1,562,559			1,918,775			-18.6	%		1,600,883			-2.4	%
Total deposits		1,155,176			1,576,042			-26.7	%		1,175,184			-1.7	%
Non-interest bearing deposits		401,018			323,686			23.9	%		374,153			7.2	%
Total common shareholders' equity (book)		212,614			12,099			1657.3	%		209,543			1.5	%
Tangible common shareholders' equity (tangible) (1)		208,440			6,449			3132.1	%		205,000			1.7	%
Income Statement Data
Interest income	$	17,708		$	22,111			-19.9	%	$	18,304			-3.3	%
Interest expense		3,042			6,101			-50.1	%		3,970			-23.4	%
Net interest income		14,666			16,010			-8.4	%		14,334			2.3	%
Loan loss provision		2,000			2,500			-20.0	%		5,500			-63.6	%
Net interest income after loan loss provision		12,666			13,510			-6.2	%		8,834			43.4	%
Noninterest income		2,812			3,737			-24.8	%		2,668			5.4	%
Noninterest expense		15,509			18,192			-14.7	%		15,643			-0.9	%
Loss before income taxes		(31	)		(945	)		-96.7	%		(4,141	)		-99.3	%
Credit for income taxes for operations		(2,042	)		(609	)		235.3	%		(2,346	)		-12.9	%
Net income (loss) before extraordinary net gain		2,011			(336	)		698.5	%		(1,795	)		-212.0	%
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes		-			-			-			32,839			100.0	%
Net income (loss)	$	2,011		$	(336	)		698.5	%	$	31,044			-93.5	%
Share Data (3)
Basic net income (loss) per common share (incl. extraordinary net gain)	$	0.04		$	(0.12	)		135.6	%	$	0.93			-95.4	%
Diluted net income (loss) per common share (incl. extraordinary net gain)	$	0.04		$	(0.12	)		135.5	%	$	0.93			-95.4	%
Book value per common share	$	4.50		$	4.24			6.2	%	$	4.45			1.1	%
Tangible book value per common share	$	4.41		$	2.26			95.3	%	$	4.36			1.3	%
Basic average shares outstanding		47,072			2,805			1578.1	%		33,258			41.5	%
Fully diluted average shares outstanding		47,209			2,805			1583.0	%		33,301			41.8	%
Key Ratios
Return on average total shareholders' equity (book)		3.18	%		-5.98	%		153.2	%		82.16	%		-96.1	%
Return on average total shareholders' equity (tangible)		3.24	%		-8.09	%		140.0	%		84.79	%		-96.2	%
Return on average total assets		0.42	%		-0.07	%		700.0	%		7.51	%		-94.4	%
Net interest spread		3.52	%		0.32	%		1000.0	%		2.94	%		19.7	%
Net interest margin		3.97	%		3.60	%		10.3	%		3.72	%		6.7	%
Total revenue (net int inc + non int inc)	$	17,478		$	19,747			-11.5	%	$	17,002			2.8	%
Efficiency ratio (2)		88.73	%		92.13	%		-3.7	%		92.01	%		-3.6	%
Credit Quality Ratios
Reserve for credit losses	$	41,731		$	58,671			-28.9	%	$	43,395			-3.8	%
Reserve to ending total loans		3.71	%		4.35	%		-14.8	%		3.70	%		0.2	%
Non-performing assets (NPAs) (4)	$	98,213		$	140,125			-29.9	%	$	105,453			-6.9	%
Non-performing assets to total assets		6.29	%		7.30	%		-13.9	%		6.59	%		-4.6	%
Delinquent >30 days to total loans (excl. NPAs)		1.81	%		0.75	%		140.7	%		0.55	%		226.9	%
Net Charge off's (NCOs)		3,664			4,868			-24.7	%		9,713			-62.3	%
Net loan charge-offs (annualized)		1.29	%		1.46	%		-11.6	%		3.23	%		-60.1	%
Provision for loan losses to NCOs		54.59	%		48.00	%		13.7	%		56.63	%		-3.6	%
Bank Capital Ratios (5)
Tier 1 capital leverage ratio		14.43	%		3.82	%		277.7	%		13.54	%		6.6	%
Tier 1 risk-based capital ratio		18.65	%		5.08	%		267.1	%		17.66	%		5.6	%
Total risk-based capital ratio		19.92	%		6.37	%		212.7	%		18.93	%		5.2	%
Bancorp Capital Ratios (5)
Tier 1 capital leverage ratio		13.06	%		0.53	%		2364.2	%		12.24	%		6.7	%
Tier 1 risk-based capital ratio		17.07	%		0.70	%		2338.6	%		16.12	%		5.9	%
Total risk-based capital ratio		18.35	%		1.40	%		1210.7	%		17.40	%		5.5	%

Notes:

(1) Excludes core deposit intangible and other identifiable intangible assets, related to the acquisition of F&M Holding Company.

(2) Efficiency ratio is noninterest expense (adj for one-time adjs) divided by (net interest income + noninterest income).

(3) Adjusted to reflect a 1:10 reverse stock split in November 2010.

(4) Nonperforming assets consist of loans contractually past due 90 days or more, nonaccrual loans and other real estate owned.

(5) Computed in accordance with FRB and FDIC guidelines.

32

Financial Highlights and Summary of the Second Quarter of 2011

· Second Quarter Net Income Per Share: $0.04 per share or $2.0 million (including an approximate $2.0 million tax credit for the period).  This compares to linked-quarter net income of $0.93 per share or $31.0 million including a $32.8 million after-tax extraordinary gain on extinguishment of $68.6 million in Debentures. Excluding this gain, the net loss from operations for the linked-quarter was approximately ($0.06) per share or ($1.8) million, and a net loss of ($0.12) per share or ($0.3) million for the year-ago quarter.

· Core Customer Deposits: DDA, Savings, and MMA balances up $17.4 million on a linked-quarter basis and up $40.5 million from year-end.

· Net Interest Margin (“NIM”) / Liquidity: The NIM improved to 3.97% compared to 3.72% for the linked-quarter owing to a continued strategic reduction of non-core excess liquidity.  Primary liquidity ratio remains a strong 20.38%.

· Loans:  Loan balances are down $47.3 million on a linked-quarter basis and down a total of $97.7 million or 8.0% from year-end, mostly due to loan payoffs as customers’ deleverage in a challenging economy.

· Credit Quality: Non-performing assets (“NPA’s”) reduced to $98.2 million at June 30, 2011 compared to $120.5 million at year-end 2010 and $105.5 million for the linked-quarter.

· Credit Quality: Net loan charge-offs were $3.7 million in the quarter compared to $9.7 million for the linked-quarter and $4.9 million for the year-ago period.

The Company recorded net income of $0.04 per share or $2.0 million, including an approximate $2.0 million tax credit for the period.  This compares to linked-quarter net income of $0.93 per share or $31.0 million including a $32.8 million after-tax extraordinary gain on extinguishment of $68.6 million in Debentures. Excluding this gain, the net loss from operations for the linked-quarter was approximately ($0.06) per share or ($1.8) million, and a net loss of ($0.12) per share or ($0.3) million for the year-ago quarter.

For the second quarter of 2011, net interest income was $14.7 million, which was comparable to the linked-quarter as modestly lower interest income was more than offset by declines in interest expense. Like many banks, interest income was lower as a consequence of continued loan payoffs in earnings loans resulting from customers acting to reduce their debt levels in a challenging economy. Interest expense declined 23.4% or $0.9 million on a linked-quarter basis and declined $3.1 million for the year-ago quarter. This improvement is attributable to customers shifting deposit preferences to non-interest bearing transaction accounts as well as actions taken to reduce excess liquidity.

Total core customer deposits (DDA, Savings, and MMA accounts) have increased over the past quarter, up $17.4 million on a linked-quarter basis and up $40.5 million for the year to date.  Total deposits at June 30, 2011, were $1.16 billion, down $20.0 million or 1.7% compared to the linked-quarter attributable to the $26.9 million decline of internet sourced time deposits. Deposits were down $420.9 million or 26.7% compared to the year-ago quarter due to actions taken to reduce excess liquidity including the call/maturity of $239.0 million of internet sourced time deposits. The NIM was 3.97% for the second quarter of 2011 compared to 3.72% for the linked-quarter and 3.60% for the year-ago a result of lower cost of funds which improved to 0.90% for the second quarter of 2011 as compared to 1.08% for the first quarter of 2011 and 1.27% for the linked-quarter due to actions taken to reduce excess liquidity described elsewhere in this Quarterly Report. The Bank’s primary liquidity ratio remains at a strong 20.38% with $219.1 million held in cash and cash equivalents at June 30, 2011 compared to $271.3 million at December 31, 2010.

At June 30, 2011, the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were a strong 14.43%, 18.65% and 19.92%, respectively, owing to the successful capital raise that closed January 28, 2011 and declining asset base year to date.  Regulatory minimums for a “well-capitalized” bank are 5%, 6%, and 10% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. Bancorp’s Tier 1 leverage, Tier risk-based and total risk-based capital ratios were 13.06%, 17.07% and 18.35%, respectively, as of June 30, 2011.

33

RESULTS OF OPERATIONS – Six Months and Three Months ended June 30, 2011 and 2010

Income Statement

Net Income

For the six months ended June 30, 2011, the Company recorded net income of $0.82 per share or $33.1 million. This includes a $32.8 million after-tax extraordinary gain on extinguishment of $68.6 million in Debentures occurring in the first quarter of 2011. Excluding this gain, the net income year to date was approximately $0.01 per share or $0.2 million. For the year-ago period, the Company recorded a net loss of ($4.14) per share or ($11.6) million.

Pretax income for the Quarter ended June 30, 2011 was approximately break-even as compared to a pretax loss of ($4.1) million for the linked-quarter.  Tax adjustments in the current quarter was $2.0 million (credit) compared to $2.3 million (credit) in the linked-quarter resulting in after-tax net income of $2.0 million in the June 30, 2011 quarter as compared to a loss from operations of ($1.8) million in the quarter ended March 31, 2011.  These tax adjustments arise because the Company recognized a portion of its deferred tax assets on which a full valuation allowance was previously recorded. As a result, the second quarter of 2011 reflects an after-tax net income of $2.0 million as compared to net income of $31.0 million for the linked-quarter and a net loss of ($0.3) million year-ago quarter.

Net Interest Income

Net interest income was $14.7 million for the current quarter, compared to $14.3 million on a linked-quarter.  This outcome was a result of a slight decline in interest income attributable to the reduction in loans, offset by a significant improvement in overall funding costs and corresponding decrease in interest expense of $0.9 million quarter-over-quarter.  Lower funding costs due to actions taken in the first quarter of 2011 and early in the second quarter of 2011 resulted in the second quarter of 2011 benefiting from actions related to the Company’s reduction of excess liquidity. These actions included extinguishment of $68.6 million in Debentures; call/maturity of $239.0 million in internet sourced time deposits; and repayment of $70 million of FHLB advances in the first half of the year.  Net interest income was down 8.4% when compared to the year-ago period due to lower average earning assets.

Total interest income decreased approximately $0.6 million compared to the linked-quarter and $4.4 million compared to the prior-year quarter.  The decrease is mainly due to lower average earning loan balances and interest reversals on non-performing loans. Interest expense decreased approximately $0.9 million or 23.4% on a linked-quarter basis and $3.1 million or 50.1% compared to the prior-quarter. These significant declines are mainly due to actions related to the reduction of excess liquidity discussed elsewhere in this Quarterly Report.  Interest expense also benefited from depositor shift from NOW accounts to non interest bearing checking accounts with the expiration of the TAG program on December 31, 2010.  This program had temporarily provided unlimited FDIC insurance coverage for interest bearing NOW checking accounts.  The above actions resulted in a decreased overall cost of funds to 0.90% for the second quarter of 2011 compared to 1.08% for the first quarter of 2011 and compared to 1.27% for the linked-quarter. Net interest spread was improved in the current quarter to 3.52% compared to 3.42% a year-ago quarter. This was accomplished by slightly higher yields on earning assets in the second quarter of 2011, increasing to 4.79% compared to the linked-quarter at 4.75% while year-ago earning asset yields were 4.97%.  Meanwhile, average rates paid on interest bearing liabilities for three month period ended June 30, 2011 decreased to 1.27% compared to 1.45% on a linked-quarter basis and 1.55% in the year-ago period.

Components of Net Interest Margin

The following table sets forth for the quarters ended June 30, 2011 and 2010 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 and net interest margin for the Company (dollars in thousands):

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	YEAR OVER YEAR
(dollars in thousands)	Quarter ended June 30, 2011									Quarter ended June 30, 2010
				Interest			Average						Interest		Average
	Average			Income/			Yield or			Average			Income/		Yield or
	Balance			Expense			Rates			Balance			Expense		Rates
Assets
Taxable securities	$	124,949		$	1,197			3.84	%	$	135,010		$	1,427		4.24	%
Non-taxable securities		1,587			15			3.79	%		1,942			19		3.92	%
Interest bearing balances due from other banks		203,819			134			0.26	%		205,799			110		0.21	%
Federal funds sold		2,614			-			0.00	%		3,065			1		0.13	%
Federal Home Loan Bank stock		10,472			-			0.00	%		10,472			-		0.00	%
Loans (1)(2)(3)		1,138,800			16,362			5.76	%		1,428,070			20,554		5.77	%
Total earning assets/interest income		1,482,241			17,708			4.79	%		1,784,358			22,111		4.97	%
Reserve for loan losses		(41,982	)								(51,085	)
Cash and due from banks		31,784									107,623
Premises and equipment, net		34,712									36,616
Bank-owned life insurance		33,855									33,636
Accrued interest and other assets		53,012									64,651
Total assets	$	1,593,622								$	1,975,799
Liabilities and Stockholders' Equity
Interest bearing demand deposits	$	473,793		$	547			0.46	%	$	716,977		$	1,372		0.77	%
Savings deposits		33,657			17			0.20	%		30,843			20		0.26	%
Time deposits		275,134			1,365			1.99	%		530,779			2,971		2.25	%
Other borrowings		177,648			1,113			2.51	%		303,963			1,737		2.29	%
Total interest bearing liabilities/interest expense		960,232			3,042			1.27	%		1,582,562			6,100		1.55	%
Demand deposits		392,283									348,924
Other liabilities		30,155									21,781
Total liabilities		1,382,670									1,953,267
Stockholders' equity		210,952									22,532
Total liabilities and stockholders' equity	$	1,593,622								$	1,975,799
Net interest income				$	14,666								$	16,011
Net interest spread						��		3.52	%							3.42	%
Net interest income to earning assets								3.97	%							3.60	%

(1) Average non-accrual loans included in the computation of average loans was approximately $63.9 million for 2011 and $107.5 million for 2010.

(2) Loan related fees recognized during the period and included in the yield calculation totalled approximately $0.4 million in 2011 and $0.6 million in 2010.

(3) 2010 includes mortgage loans held for sale.

Analysis of Changes in Interest Income and Expense

The following table shows the dollar amount of increase (decrease) in the Company’s consolidated interest income and expense for the quarter ended June 30, 2011, and attributes such variance to “volume” or “rate” changes.  Variances that were immaterial have been allocated equally between rate and volume categories (dollars in thousands):

35

	Quarter ended June 30, 2011
	2011 over 2010
	Total			Amount of Change
	Increase			Attributed to
	(Decrease)			Volume			Rate
Interest income:
Interest and fees on loans	$	(4,192	)	$	(4,163	)	$	(29	)
Taxable securities		(230	)		(106	)		(124	)
Non-taxable securities		(4	)		(3	)		(1	)
Interest bearing balances due from other banks		24			(1	)		25
Federal funds sold		(1	)		(0	)		(1	)
Total interest income		(4,403	)		(4,274	)		(129	)
Interest expense:
Interest on deposits:
Interest bearing demand		(825	)		(465	)		(360	)
Savings		(3	)		2			(5	)
Time deposits		(1,606	)		(1,431	)		(175	)
Other borrowings		(624	)		(721	)		98
Total interest expense		(3,058	)		(2,615	)		(442	)
Net interest income	$	(1,345	)	$	(1,659	)	$	313

 

Loan Loss Provision

The loan loss provision was $2.0 million in the second quarter of 2011 compared to $5.5 million in the linked-quarter and $2.5 million a year earlier. At June 30, 2011, the reserve for credit losses (reserve for loan losses and reserve for unfunded commitments) was approximately $41.7 million or 3.71% of outstanding loans compared to a linked-quarter reserve of 3.70% and 4.35% for the second quarter of 2010. The unallocated reserve increased in second quarter to $2.7 million compared to $0.9 million at March 31, 2011.  The primary reason for the increase was uncertainty related to the potential effects of planned enhancements to reserve for loan losses model with respect to historical loss rates to be applied against loan risk-ratings.

Non-Interest Income

Non-interest income in the second quarter of 2011 was $2.8 million as compared to $2.7 million in the linked-quarter and $3.7 million a year earlier. This slight improvement from the first quarter of the year was due to seasonal increases in service charge revenue, net mortgage revenue and in card issuer and merchant services fees

Non-Interest Expense

Non-interest expenses for the second quarter of 2011 were $15.5 million as compared to $15.6 million in the linked-quarter and $18.2 million in the comparable period of 2010.  The year-over-year declines are largely attributable to lower FDIC deposit insurance.  FDIC deposit insurance costs are down 44.8% from the first quarter of 2011 and 68.0% from the same quarter in 2010 attributable to the Company’s return to “well-capitalized” category and consequent lower insurance assessment rate. Also contributing to lower FDIC insurance was that, effective April 1, 2011, the FDIC deposit insurance assessment base was changed from average quarterly deposits to average quarterly assets, generally benefiting most community banks including Cascade. Non-interest expense for the current quarter includes a $0.6 million one-time non-recurring reduction in salaries and employee benefits arising from insurance stop-loss credits with respect to the Company's employee healthcare program. Offsetting this item were higher other expenses including $0.3 million in costs related to the early repayment of $20 million in FHLB advances and a $0.5 increase in consulting and recruiting services.  OREO related expenses declined from the year-ago period as higher costs were incurred in 2010 arising from back-property taxes incurred in process of foreclosure of OREO properties during that period.

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Income Taxes

During the six and three months ended June 30, 2011, the Company recorded a net income tax provision of approximately $17.7 million.  Included in this amount was an income tax provision of approximately $22.1 million related to the extraordinary gain on the extinguishment of the Debentures, which was calculated based on the Company’s estimated statutory income tax rates. The net income tax provision of $17.7 million year to date also includes a credit for income taxes of approximately $4.4 million related to the Company’s loss from operations excluding the extraordinary gain.  This credit for income taxes was calculated based on management’s current projections of estimated full-year pre-tax results of operations, estimated utilization of deferred tax assets on which a full valuation allowance was previously recorded, and other permanent book/tax differences.  Accordingly, this calculation and the prospective income tax amounts are subject to adjustment as additional facts become available and management’s estimates are revised.

As of June 30, 2011, the Company maintained a valuation allowance of $35.1 million against the deferred tax asset. This amount represented a $10.0 million decrease from year-end 2010 due to the estimated utilization of certain deferred tax assets during the six and three months ended June 30, 2011.

Management determined the amount of the deferred tax valuation allowance at June 30, 2011 and December 31, 2010 by evaluating the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies.   The ability to utilize deferred tax assets is a complex process requiring in-depth analysis of statutory, judicial and regulatory guidance and estimates of future taxable income.  The amount of deferred taxes recognized could be impacted by changes to any of these variables.

The issuance of common stock in connection with the Company’s successful completion of its Capital Raise in the first quarter of 2011 resulted in an “ownership change” of the Company, as broadly defined in Section 382 of the Internal Revenue Code. As a result of the ownership change, utilization of the Company’s net operating loss carryforwards and certain built-in losses under federal income tax laws will be subject to annual limitation. The annual limitation placed on the Company’s ability to utilize these potential tax deductions will equal the product of an applicable interest rate mandated under federal income tax laws and the Company’s value immediately before the ownership change. The annual limitation imposed under Section 382 may limit the deduction for both the carryforward tax attributes and the built-in losses realized within five years of the date of the ownership change. Given the limited carryforward period assigned to these tax deductions in excess of this annual limit, some portion of these potential deductions will be lost and, consequently, the related tax benefits may not be recorded in the financial statements.

Financial Condition

Capital Resources

The Company’s successful Capital Raise and extraordinary gain on the extinguishment of the Debentures recorded in the first quarter of 2011 increased total stockholders’ equity to $212.6 million as of June 30, 2011.  This compares to $12.1 million at June 30, 2010. Gross capital proceeds were $177.0 million upon sale of 44,193,750 shares of common stock to private investors at a price of $4.00 per share. At June 30, 2011, the Company’s tangible common equity to total assets ratio was 13.3%. The Company’s basic and tangible book value per share increased to $4.50 and $4.41, respectively, at June 30, 2011.

June 30, 2011 regulatory capital ratios are as follows: Bancorp’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 13.06%, 17.07% and 18.35%, respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 14.43%, 18.65% and 19.92%, respectively, which exceed regulatory benchmarks for “well-capitalized”. Regulatory benchmarks for a “well-capitalized” designation are 5.00%, 6.00%, and 10.00% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. However, as mentioned elsewhere in this Quarterly Report, pursuant to the Order, the Bank is required to maintain a Tier 1 leverage ratio of at least 10.00% to be considered “well-capitalized”, which the Bank met as of June 30, 2011. Additional information regarding capital resources are located in Note 15 of the Notes to the Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q.

From time to time the Company makes commitments to acquire banking properties or to make equipment or technology related investments of capital. At June 30, 2011, the Company had no material capital expenditure commitments apart from those incurred in the ordinary course of business.

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Total Assets and Liabilities

Total assets were $1.56 billion at June 30, 2011 a decrease of $153.9 million from $1.72 billion at year-end 2011, mainly due to a $97.7 million decrease in loans and a $52.2 million reduction in cash and cash equivalents.  Total liabilities declined $356.5 million as a result of actions taken to reduce excess liquidity described elsewhere in this Quarterly Report.

Cash and cash equivalents decreased approximately $52.2 million to $219.1 million or 19.2% of total assets at June 30, 2011 compared to year-end 2010.  This decrease was mainly a result of repayment of $70.0 million in FHLB advances during the period.  At June 30, 2011, the Company’s loan portfolio was approximately $1.13 billion, down $47.3 million and $222.9 million when compared to the linked-quarter and the year-ago period, respectively. Loans have declined primarily due to customers’ continued deleveraging of debt in response to slow economic conditions.  Net charge-offs of $13.4 million for the six and three months ended June 30, 2011, also contributed to the reduction in loan balances outstanding.

The Company had no material off balance sheet derivative financial instruments as of June 30, 2011 and December 31, 2010.

Off-Balance Sheet Arrangements

A summary of the Bank’s off-balance sheet commitments at June 30, 2011 and December 31, 2010 is included in the following table (dollars in thousands):

	June 30, 2011		December 31, 2010
Commitments to extend credit	$	158,628	$	164,542
Commitments under credit card lines of credit		24,684		26,257
Standby letters of credit		2,747		3,013
Total off-balance sheet financial instruments	$	186,059	$	193,812

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require the payment of fees.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Bank applies established credit-related standards and underwriting practices in evaluating the creditworthiness of such obligors. The amount of collateral obtained, if it is deemed necessary by the Bank upon the extension of credit, is based on management’s credit evaluation of the counterparty.

The Bank typically does not obtain collateral related to credit card commitments. Collateral held for other commitments varies but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

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

There are no other obligations or liabilities of the Company arising from its off-balance sheet arrangements that are or are reasonably likely to become material.  In addition, the Company knows of no event, demand, commitment, trend or uncertainty that will result in or is reasonably likely to result in the termination or material reduction in availability of the off-balance sheet arrangements.

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Liquidity

Prior to the Capital Raise occurring January 28, 2011, the Company had maintained excess liquidity to mitigate customer uncertainty. The effect of the $167.9 million net proceeds of the Capital Raise on the Company’s capital position has reduced the Company’s need for excess liquidity. Accordingly, during the first quarter, in addition to the extinguishment of $68.6 million in Debentures, the Company called $170.0 million in internet sourced deposits, let mature an additional $40.0 million in internet sourced deposits and repaid $50.0 million in FHLB advances. During the second quarter, liquidity remained elevated as the Company let mature an additional $26.8 million in internet sourced deposits and repaid $20.0 million in FHLB advances. At June 30, 2011 and after this series of actions, cash and cash equivalents of the Company totaled $219.1 million as compared to $271.3 million at December 31, 2010.  This amount includes interest bearing balances held at FRB totaling $181.8 million.  The Company’s primary liquidity ratio remains a strong 20.38% at June 30, 2011.

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

From time to time the Bank may augment core deposits with wholesale funds it deems reliable and stable under the circumstances such as internet sourced time deposits and borrowings and lines of credit from what it deems reliable counterparties. At June 30, 2011 the FHLB had extended the Bank a secured line of credit of $234.4 million (15% of total assets) accessible for short or long-term borrowings given sufficient qualifying collateral. As of June 30, 2011, the Bank had qualifying collateral pledged for FHLB borrowings totaling $195.4 million of which $185.0 million was utilized with $125.0 million in secured borrowings and $60.0 million FHLB letters of credit used for collateralization of Oregon public deposits held at the Bank. At June 30, 2011, the Bank also had undrawn borrowing capacity at FRB of approximately $46.0 million assuming pledged collateral continues to meet standards for qualifications. Borrowing capacity from FHLB or FRB may fluctuate based upon the acceptability and risk rating of loan collateral, and counterparties could adjust discount rates applied to such collateral at their discretion. Also, FRB or FHLB could restrict or limit access to secured borrowings. The Bank has approximately $30.0 million in unsecured lines of credit from correspondent banks.

The investment portfolio also provides a secondary source of funds as investments may be pledged for borrowings or sold for cash. This liquidity may be limited, however, by counterparties’ willingness to accept securities as collateral and the market value of securities at the time of sale which could result in a loss to the Bank. As of June 30, 2011, unpledged investments totaled approximately $35.0 million.

The Bank is currently restricted from accepting or renewing brokered deposits including reciprocal CDARS deposits until such time as the regulatory order is lifted.  At June 30, 2011 and December 31, 2010, the Company had negligible brokered deposits. Local relationship based reciprocal CDARS deposits which are also technically classified as brokered deposits totaled $1.0 million at June 30, 2011, down from $7.9 million at December 31, 2010.

In 2008, TLGP was established under which the FDIC would temporarily provide a guarantee of the senior debt of FDIC-insured institutions and their holding companies. On February 12, 2009 the Bank issued $41.0 million of notes under the TLGP. The issuance included $16.0 million floating rate and $25.0 million fixed rate notes maturing February 12, 2012.

Liquidity may be affected by the Bank’s routine commitments to extend credit. At June 30, 2011, the Bank had approximately $186.1 million in outstanding commitments to extend credit, compared to approximately $193.8 million at year-end 2010. At this time, management believes that the Bank’s available resources will be sufficient to fund its commitments in the normal course of business. This decrease was in direct connection to the decrease in loans described above.

Bancorp is a single bank holding company and its primary ongoing source of liquidity is dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and authorities may limit the amount or require certain approvals of dividends that the Bank may pay to Bancorp and payment of shareholder dividends is also restricted by state and federal regulators (see Note 15 of the Company’s condensed consolidated financial statements). Also, pursuant to the Order, the Bank is required to seek permission from its regulators prior to payment of any dividends on its common stock. The Company has no plans to resume payment of cash dividends to shareholders at this time.

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Inflation

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures in this item are qualified by the Risk Factors referred to in Part II, Item 1A and set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and the Section entitled “Cautionary Information Concerning Forward-Looking Statements” included in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this quarterly report and any other cautionary statements contained herein.

Refer to the disclosures of market risks included in Item 7A Quantitative and Qualitative Disclosures about Market Risks in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedure

As required by Rule 13a-15 under the Exchange Act of 1934, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this report.

Remediation Steps to Address Material Weakness

Management previously disclosed a material weakness in internal control over financial reporting in its Annual Report on Form 10-K for the year ended December 31, 2010, specifically with respect to the Company’s estimate of the reserve for loan losses. As background, during the third and fourth quarters of 2010, in connection with an examination by banking regulators of the Bank, management refined and enhanced its model for calculating the reserve for loan losses by considering an expanded scope of information, modifying its calculation of historical loss factors, and augmenting the qualitative and judgmental factors used to estimate losses inherent in the loan portfolio. As of December 31, 2010, the Company was utilizing the refined and enhanced model.

At the time of filing the Company’s Annual Report on Form 10-K, management concluded that a sufficient period of time subsequent to December 31, 2010 had not yet elapsed to provide the required remediation evidence that the revised controls were operating effectively.  As of June 30, 2011, management again concluded that a sufficient period of time subsequent to December 31, 2010 had not yet elapsed to provide the required remediation evidence that the revised controls were operating effectively.  In addition Management is working to further enhance the model with respect to the loan category loss factors by risk rating.  However, management believes that the reserve for loan losses is appropriately stated and that additional refinements and testing will occur in the future to fully remediate the material weakness.

Changes in Internal Control over Financial Reporting

There were no other changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

On August 18, 2010, the Bank was sued in an asserted class action lawsuit, Russell Firkins & Rena Firkins v. Bank of the Cascades, Case No. 1:10-cv-414-BLW in the United States District Court for the District of Idaho.  The lawsuit alleges that, in 2004, the Bank’s predecessor (Farmers and Merchants Bank), acting as trustee under three similar trust indentures, inappropriately disbursed the proceeds of three bond issuances, allegedly resulting years later in the bondholders’ loss of their collective investment of approximately $23.5 million.  Recovery is sought on claims of breach of the indentures, breach of fiduciary duty, and conversion.  On November 22, 2010, the lawsuit was dismissed without prejudice for a lack of subject matter jurisdiction in federal court. In addition, on November 10, 2010 the DBSI Funding Corporations' bankruptcy trustee filed an adversary proceeding against the Bank, in re: DBSI INC., et al, James R. Zazzali, as Trustee v. Bank of the Cascades, Adversary Proceeding No. 10-55325 (PJW) in the U.S. Bankruptcy Court, District of Delaware.  The trustee claims that the Bank violated the automatic stay by taking control of approximately $250,000 in the DBSI Funding Corporations' accounts shortly after the DBSI bankruptcy filing, and, as a result, the Bank owes sanctions and damages.  Under an order of the bankruptcy court, the adversary proceeding against the Bank is stayed, and the Bank need not respond to the bankruptcy trustee's claims and allegations pending a further court order.  While the outcome of these proceedings cannot be predicted with certainty, based on management's review, management believes that the lawsuit and the adversary proceedings are without merit and plans to vigorously pursue its defenses.  Management also believes that if any liability were to result, it would not have a material adverse effect on the Company's consolidated liquidity, financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to Cascade’s risk factors previously disclosed in Part I – Item 1A Risk Factors of Cascade’s Annual Report on Form 10-K filed with the SEC on March 15, 2011 for the year ended December 31, 2010.

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

Information with respect to the Company’s sale of unregistered equity securities during the quarter ended June 30, 2011 was previously reported in a Current Report on Form 8-K, filed with the SEC on January 31, 2011 with additional information filed with the SEC on April 26, 2011. During the quarter ended June 30, 2011, the Company did not repurchase any shares under its currently authorized repurchase plan and does not expect to repurchase shares in the foreseeable future.  As of June 30, 2011, the Company was authorized to repurchase up to an additional 94,042 shares under this repurchase plan.

ITEM 6. EXHIBITS

(a) Exhibits

3.1 Amended and Restated Articles of Incorporation. As amended, filed as exhibit 3.1 to registrant’s Annual Report on Form 10-K for the year ended December 31, 2010, filed March 15, 2010 (File No. 000-23322) and incorporated herein by reference.

3.2 Amended and Restated Bylaws. As amended, filed as exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed May 5, 2011 (File No. 000-23322) and incorporated herein by reference.

31.1 Certification of Chief Executive Officer

31.2  Certification of Chief Financial Officer

32  Certification Pursuant to Section 906

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SIGNATURES

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

	CASCADE BANCORP
	(Registrant)
Date       July 28, 2011	By	/s/ Patricia L. Moss
		Patricia L. Moss, President & CEO
		(Principal Executive Officer)
Date       July 28, 2011	By	/s/ Gregory D. Newton
		Gregory D. Newton, EVP/Chief Financial Officer
		(Principal Financial and Chief Accounting Officer)

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