CASCADE BANCORP - FORM 10-Q

Attached files

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EX-32 - CASCADE BANCORP	v220807_ex32.htm
EX-3.1 - CASCADE BANCORP	v220807_ex3-1.htm
EX-31.2 - CASCADE BANCORP	v220807_ex31-2.htm
EX-31.1 - CASCADE BANCORP	v220807_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended: March 31, 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 ¨ 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. 47,206,276 shares of no par value Common Stock as of May 4, 2011.

CASCADE BANCORP & SUBSIDIARY

FORM 10-Q

QUARTERLY REPORT

MARCH 31, 2011

INDEX

		Page
PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets: March 31, 2011 and December 31, 2010	3

	Condensed Consolidated Statements of Operations: Three months ended March 31, 2011 and 2010	4

	Condensed Consolidated Statements of Changes in Stockholders’ Equity: Three months ended March 31, 2011 and 2010	6

	Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 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	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	38

Item 4.	Controls and Procedures.	38

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6.	Exhibits	39

SIGNATURES		40

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Cascade Bancorp & Subsidiary

Condensed Consolidated Balance Sheets

March 31, 2011 and December 31, 2010

(Dollars in thousands)

(unaudited)

	2011			2010
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	27,541		$	23,825
Interest bearing deposits		181,286			244,513
Federal funds sold		415			2,926
Total cash and cash equivalents		209,242			271,264
Investment securities available-for-sale		126,602			115,010
Investment securities held-to-maturity		1,806			1,806
Federal Home Loan Bank (FHLB) stock		10,472			10,472
Loans, net		1,131,126			1,177,045
Premises and equipment, net		34,825			35,281
Core deposit intangibles		4,543			4,912
Bank-owned life insurance (BOLI)		33,741			33,470
Other real estate owned (OREO), net		35,456			39,536
Deferred tax asset, net		-			9,201
Accrued interest and other assets		13,070			18,461
Total assets	$	1,600,883		$	1,716,458

LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand	$	374,153		$	310,164
Interest bearing demand		477,736			520,080
Savings		32,482			31,040
Time		290,813			515,615
Total deposits		1,175,184			1,376,899
Junior subordinated debentures		-			68,558
FHLB borrowings		145,000			195,000
Temporary Liquidity Guarantee Program (TLGP) senior unsecured debt		41,000			41,000
Accrued interest and other liabilities		30,156			24,945
Total liabilities		1,391,340			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; 47,061,141 issued and outstanding (2,853,670 in 2010)		328,399			160,316
Accumulated deficit		(120,564	)		(151,608	)
Accumulated other comprehensive income		1,708			1,348
Total stockholders' equity		209,543			10,056
Total liabilities and stockholders' equity	$	1,600,883		$	1,716,458

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Operations

Three Months ended March 31, 2011 and 2010

(Dollars in thousands, except per share amounts)

(unaudited)

	Three months ended
	March 31,
	2011			2010
Interest income:
Interest and fees on loans	$	16,906		$	21,120
Taxable interest on investments		1,244			1,571
Nontaxable interest on investments		18			26
Interest on interest bearing deposits		136			148
Total interest income		18,304			22,865

Interest expense:
Deposits:
Interest bearing demand		585			1,505
Savings		17			17
Time		2,025			3,509
Federal funds purchased and other borrowings		1,343			1,724
Total interest expense		3,970			6,755

Net interest income		14,334			16,110
Loan loss provision		5,500			13,500
Net interest income after loan loss provision		8,834			2,610

Noninterest income:
Service charges on deposit accounts		1,188			1,720
Mortgage loan origination and processing fees		58			108
Gains on sales of mortgage loans, net		5			43
Gains on sales of investment securities available-for-sale		-			71
Card issuer and merchant services fees, net		575			623
Earnings on bank-owned life insurance		271			-
Other income		571			685
Total noninterest income		2,668			3,250

Noninterest expense:
Salaries and employee benefits		7,339			7,684
Occupancy and equipment		1,569			1,635
Communications		427			473
FDIC insurance		1,129			2,686
OREO		1,588			484
Other expenses		3,591			4,174
Total noninterest expense		15,643			17,136

Loss before income taxes and extraordinary net gain		(4,141	)		(11,276	)
Credit for income taxes		(2,346	)		-
Loss before extraordinary net gain		(1,795	)		(11,276	)

Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes		32,839			-
Net income (loss)	$	31,044		$	(11,276	)

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Operations (continued)

Three Months ended March 31, 2011 and 2010

(Dollars in thousands, except per share amounts)

(unaudited)

Earnings (loss) per share	Three months ended
	March 31,
	2011			2010
Basic:
Loss before extraordinary net gain	$	(0.06	)	$	(4.02	)
Extraordinary net gain		0.99			-
Net income (loss) per common share	$	0.93		$	(4.02	)

Diluted:
Loss before extraordinary net gain	$	(0.06	)	$	(4.02	)
Extraordinary net gain		0.99			-
Net income (loss) per common share	$	0.93		$	(4.02	)

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended March 31, 2011 and 2010

(Dollars in thousands)

(unaudited)

	Three months ended
	March 31,
	2011		2010

Total stockholders' equity at beginning of period	$	10,056	$	23,318

Comprehensive income (loss):
Net income (loss)		31,044		(11,276	)
Unrealized gains on investment securities available-for-sale, net		360		369
Comprehensive income (loss)		31,404		(10,907	)

Issuance of common stock, net		167,874		-

Stock based compensation expense, net		209		194

Total stockholders' equity at end of period	$	209,543	$	12,605

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Condensed Consolidated Statements of Cash Flows

Three Months ended March 31, 2011 and 2010

(Dollars in thousands)

(unaudited)

	Three months ended
	March 31,
	2011			2010

Net cash provided by operating activities before extraordinary net gain	$	36,774		$	522
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes		(32,839	)		-
Net cash provided by operating activities		3,935			522

Investing activities:
Proceeds from sales of investment securities available-for-sale		-			1,440
Proceeds from maturities, calls and prepayments of investment securities available-for-sale		4,177			13,093
Purchases of investment securities available-for-sale		(14,810	)		(22,457	)
Net decrease in loans		37,815			54,137
Purchases of premises and equipment		(14	)		-
Proceeds from sales of OREO		4,341			2,786
Net cash provided by investing activities		31,509			48,999

Financing activities:
Net decrease in deposits		(201,715	)		(82,247	)
Net proceeds from issuance of common stock		167,874			-
Extinguishment of junior subordinated debentures, net		(13,625	)		-
Net increase (decrease) in FHLB borrowings		(50,000	)		12
Net cash used by financing activities		(97,466	)		(82,235	)
Net decrease in cash and cash equivalents		(62,022	)		(32,714	)
Cash and cash equivalents at beginning of period		271,264			359,322
Cash and cash equivalents at end of period	$	209,242		$	326,608

Supplemental disclosures of cash flow information:
Interest paid	$	8,132		$	7,458
Loans transferred to OREO	$	2,609		$	3,765

See accompanying notes to condensed consolidated financial statements.

Cascade Bancorp & Subsidiary

Notes to Condensed Consolidated Financial Statements

March 31, 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 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 date 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 with 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). Also, the related trusts are in the process of being terminated. 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).

3 . Investment Securities

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

			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
3/31/2011
Available-for-sale
U.S. Agency mortgage-backed securities (MBS) *	$	107,412	$	2,878	$	404	$	109,886
Non-agency MBS		4,610		14		26		4,598
U.S. Agency asset-backed securities		11,364		515		235		11,644
Mutual fund		460		14		-		474
	$	123,846	$	3,421	$	665	$	126,602
Held-to-maturity
Obligations of state and political subdivisions	$	1,806	$	85	$	-	$	1,891

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 of approximately $14.6 million and $14.9 million which are supported by FHA/VA collateral at March 31, 2011 and December 31, 2010, respectively

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 March 31, 2011 and December 31, 2010 (dollars in thousands):

	Less than 12 months				12 months or more				Total
	Estimated fair value		Unrealized losses		Estimated fair value		Unrealized losses		Estimated fair value		Unrealized losses
3/31/2011
U.S. Agency MBS	$	10,444	$	255	$	5,905	$	149	$	16,349	$	404
Non-agency MBS		3,106		26		-		-		3,106		26
U.S. Agency asset-backed securities		-		-		3,492		235		3,492		235
	$	13,550	$	281	$	9,397	$	384	$	22,947	$	665

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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 2011 and December 31, 2010 was as follows (dollars in thousands):

	March 31, 2011					December 31, 2010
	Amount		Percent			Amount		Percent
Commercial and industrial loans	$	260,046		22.2	%	$	281,275		23.0	%
Real estate:
Construction/lot		125,309		10.7			140,146		11.5
Mortgage		78,634		6.7			82,596		6.7
Commercial		668,029		56.9			675,371		55.2
Total real estate loans		871,972		74.3			898,113		73.4
Consumer loans		41,562		3.5			44,325		3.6
Total loans		1,173,580		100.0	%		1,223,713		100.0	%
Less:
Reserve for loan losses		42,454					46,668
Loans, net	$	1,131,126				$	1,177,045

Included in mortgage loans at both March 31, 2011 and December 31, 2010 were approximately $0.2 million in mortgage loans held for sale. In addition, the above loans are net of deferred loan fees of approximately $2.5 million and $2.6 million at March 31, 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), and, accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changes in the local economic conditions in such markets.

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 74% of the Bank’s loan portfolio at March 31, 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 March 31, 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 $35.5 million and $54.1 million, respectively.

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).

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.

With respect to loans to developers and builders that are secured by non-owner occupied properties (“construction/lot loans”), 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 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 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.

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.

Transactions in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the three months ended March 31, 2011 were as follows (dollars in thousands):

	Commercial
	and			Construction/
	industrial			lot			Mortgage			CRE			Consumer			Total

Balance at beginning of year	$	11,988		$	12,755		$	4,149		$	14,654		$	3,122		$	46,668
Loan loss provision		3,047			1,059			374			703			317			5,500
Recoveries		204			170			81			49			42			546
Loans charged off		(5,684	)		(1,976	)		(697	)		(1,312	)		(591	)		(10,260	)
Balance at end of period	$	9,555		$	12,008		$	3,907		$	14,094		$	2,890		$	42,454

Reserve for unfunded loan commitments
Balance at beginning of year	$	444		$	48		$	107		$	73		$	269		$	941
Provision for unfunded loan commitments		-			-			-			-			-			-
Balance at end of period	$	444		$	48		$	107		$	73		$	269		$	941

Reserve for credit losses
Reserve for loan losses	$	9,555		$	12,008		$	3,907		$	14,094		$	2,890		$	42,454
Reserve for unfunded loan commitments		444			48			107			73			269			941
Total reserve for credit losses	$	9,999		$	12,056		$	4,014		$	14,167		$	3,159		$	43,395

Transactions in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the three months ended March 31, 2010 were as follows (dollars in thousands):

	Commercial
	and			Construction/
	industrial			lot			Mortgage			CRE			Consumer			Total

Balance at beginning of year	$	9,572		$	22,217		$	5,326		$	16,640		$	4,831		$	58,586
Loan loss provision		3,697			7,417			623			1,183			580			13,500
Recoveries		1,054			334			3			89			28			1,508
Loans charged off		(3,696	)		(7,415	)		(623	)		(1,183	)		(579	)		(13,496	)
Balance at end of period	$	10,627		$	22,553		$	5,329		$	16,729		$	4,860		$	60,098

Reserve for unfunded loan commitments
Balance at beginning of year	$	332		$	36		$	80		$	55		$	201		$	704
Provision for unfunded loan commitments		112			12			27			18			68			237
Balance at end of period	$	444		$	48		$	107		$	73		$	269		$	941

Reserve for credit losses
Reserve for loan losses	$	10,627		$	22,553		$	5,329		$	16,729		$	4,860		$	60,098
Reserve for unfunded loan commitments		444			48			107			73			269			941
Total reserve for credit losses	$	11,071		$	22,601		$	5,436		$	16,802		$	5,129		$	61,039

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 March 31, 2011 and December 31, 2010 (dollars in thousands):

	Reserve for loan losses						Recorded investment in loans
March 31, 2011	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Commercial and industrial	$	1,051	$	8,504	$	9,555	$	20,333	$	163,137	$	183,470
Real estate secured:
Construction/lot		2,871		9,137		12,008		65,856		75,608		141,464
Mortgage		127		3,780		3,907		3,562		97,223		100,785
Commercial		2,566		11,528		14,094		59,980		638,896		698,876
Total real estate loans		5,564		24,445		30,009		129,398		811,727		941,125
Consumer loans		-		2,890		2,890		633		48,352		48,985
	$	6,615	$	35,839	$	42,454	$	150,364	$	1,023,216	$	1,173,580

December 31, 2010
Commercial and industrial	$	4,091	$	7,897	$	11,988	$	24,067	$	176,596	$	200,663
Real estate secured:
Construction/lot		10		12,745		12,755		45,250		112,990		158,240
Mortgage		110		4,039		4,149		2,708		99,669		102,377
Commercial		2,664		11,990		14,654		58,799		655,947		714,746
Total real estate loans		2,784		28,774		31,302		106,757		868,606		975,363
Consumer loans		-		3,122		3,122		-		47,687		47,687
	$	6,875	$	39,793	$	46,668	$	130,824	$	1,092,889	$	1,223,713

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.

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 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 the project’s failure to fulfill economic expectations. They 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 March 31, 2011 and December 31, 2010 (dollars in thousands):

	Loan Grades
March 31, 2011	Acceptable		Watch		Special Mention		Substandard		Total
Commercial and industrial	$	127,487	$	7,384	$	11,636	$	36,962	$	183,469
Real estate secured:
Construction/lot		39,793		21,109		6,351		74,211		141,464
Mortgage		87,633		2,042		4,962		6,148		100,785
Commercial		539,427		31,232		46,863		81,354		698,876
Total real estate loans		666,853		54,383		58,176		161,713		941,125
Consumer loans		47,926		2		641		417		48,986
	$	842,266	$	61,769	$	70,453	$	199,092	$	1,173,580

December 31, 2010
Commercial and industrial	$	140,186	$	7,350	$	12,158	$	40,969	$	200,663
Real estate secured:
Construction/lot		69,768		21,409		6,862		60,201		158,240
Mortgage		89,491		2,169		4,291		6,426		102,377
Commercial		536,999		53,846		43,531		80,370		714,746
Total real estate loans		696,258		77,424		54,684		146,997		975,363
Consumer loans		46,465		116		637		469		47,687
	$	882,909	$	84,890	$	67,479	$	188,435	$	1,223,713

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

March 31, 2011	30-89 days past due		90 days or more past due		Total past due		Current		Total loans
Commercial and industrial	$	2,714	$	9,515	$	12,229	$	171,240	$	183,469
Real estate secured:
Construction/lot		4,523		26,515		31,038		110,426		141,464
Mortgage		1,978		1,370		3,348		97,437		100,785
Commercial		1,545		13,981		15,526		683,350		698,876
Total real estate loans		8,046		41,866		49,912		891,213		941,125
Consumer loans		194		3		197		48,789		48,986
	$	10,954	$	51,384	$	62,338	$	1,111,242	$	1,173,580

December 31, 2010
Commercial and industrial	$	2,129	$	13,194	$	15,323	$	185,340	$	200,663
Real estate secured:
Construction/lot		2,611		29,671		32,282		125,958		158,240
Mortgage		1,070		1,495		2,565		99,812		102,377
Commercial		22,020		16,599		38,619		676,127		714,746
Total real estate loans		25,701		47,765		73,466		901,897		975,363
Consumer loans		157		-		157		47,530		47,687
	$	27,987	$	60,959	$	88,946	$	1,134,767	$	1,223,713

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

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

	March 31, 2011		December 31, 2010
Impaired loans with an associated allowance	$	76,458	$	52,004
Impaired loans without an associated allowance		73,906		78,820
Total recorded investment in impaired loans	$	150,364	$	130,824
Amount of the reserve for loan losses allocated to impaired loans	$	6,615	$	6,875

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

	Impaired loans
March 31, 2011	With a related allowance		Without a related allowance		Total recorded balance		Unpaid principal balance		Related allowance
Commercial and industrial loans	$	8,491	$	11,842	$	20,333	$	21,656	$	1,051
Real estate secured:
Construction/lot		22,296		43,560		65,856		86,642		2,871
Mortgage		1,244		2,318		3,562		6,070		127
Commercial		44,427		15,553		59,980		67,587		2,566
Total real estate loans		67,967		61,431		129,398		160,299		5,564
Consumer loans		-		633		633		32,855		-
	$	76,458	$	73,906	$	150,364	$	214,810	$	6,615

December 31, 2010
Commercial and industrial loans	$	10,757	$	13,310	$	24,067	$	24,898	$	4,091
Real estate secured:
Construction/lot		273		44,977		45,250		66,563		10
Mortgage		756		1,952		2,708		5,047		110
Commercial		40,218		18,581		58,799		65,818		2,664
Total real estate loans		41,247		65,510		106,757		137,428		2,784
	$	52,004	$	78,820	$	130,824	$	162,326	$	6,875

The average recorded investment in impaired loans was approximately $133.4 million and $173.2 million for the three months ended March 31, 2011 and 2010, respectively. Interest income recognized for cash payments received on impaired loans for the three months ended March 31, 2011 and 2010 was insignificant.

At March 31, 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 March 31, 2011 and December 31, 2010 (dollars in thousands):

	March 31, 2011		December 31, 2010
Loans on nonaccrual status	$	69,974	$	80,997
Loans past due 90 days or more but not on nonaccrual status		23		7
OREO		35,456		39,536
Total non-performing assets	$	105,453	$	120,540

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

	March 31, 2011			December 31, 2010
Loans accounted for on a nonaccrual basis:
Commercial and industrial loans	$	10,778		$	15,892
Real estate:
Construction/lot		42,914			44,830
Mortgage		1,707			1,952
Commercial		14,572			18,323
Total real estate loans		59,193			65,105
Consumer		3			-
Total non-accrual loans		69,974			80,997

Accruing loans which are contractually past due 90 days or more		23			7
Total of nonaccrual and 90 days past due loans		69,997			81,004

OREO		35,456			39,536
Total non-performing assets (1)	$	105,453		$	120,540
TDR loans on accrual status (2)	$	73,489		$	43,283

Nonaccrual and 90 days or more past due on loans as a percentage of loans		5.96	%		6.62	%

Nonaccrual and 90 days or more past due loans as a percentage of total assets		4.37	%		4.72	%

Non-performing assets as a percentage of total assets		6.59	%		7.02	%
Total loans (3)	$	1,173,580		$	1,223,713
Total assets	$	1,600,883		$	1,716,458

(1)

Does not include TDR loans on accrual status.

(2)

Does not include TDR loans reported as nonaccrual totaling $17,111 and $19,539, respectively, as of March 31, 2011 and December 2010.

(3)

Includes loans held for sale and is before the reserve for loan losses.

At March 31, 2011, the Bank had approximately $188.5 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):

	Three months ended March 31,
	2011			2010
Balance at beginning of period	$	39,536		$	28,860
Additions		2,609			3,765
Dispositions		(6,461	)		(2,786	)
Change in valuation allowance		(228	)		37
Balances at end of period	$	35,456		$	29,876

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

	Three months ended March 31,
	2011			2010
Balance at beginning of year	$	16,849		$	6,230
Additions to the valuation allowance		1,187			1,235
Reductions due to sales of OREO		(959	)		(1,272	)
Balance at end of period	$	17,077		$	6,193

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

	Three months ended March 31,
	2011		2010
Operating costs (credits)	$	199	$	(54	)
Net losses on dispositions		202		52
Increases in valuation allowance		1,187		486
Total	$	1,588	$	484

8. Mortgage Servicing Rights (“MSRs”)

The Bank sells a predominant share of the mortgage loans it originates into the secondary market. In April 2010 FNMA terminated its mortgage servicing agreement with the Bank due to its capital condition. Accordingly0, 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 Federal National Mortgage Association (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 is 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 are 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 Company’s Capital Raise (see Note 2). In connection with such retirement, the related trusts are in the process of being terminated.

10.	Other Borrowings

At March 31, 2011 the Bank had a total of $145.0 million in long-term borrowings from FHLB with maturities ranging from 2012 to 2017, bearing a weighted-average rate of 2.19%. At December 31, 2010, the bank had a total of $195.0 million in long-term borrowings from FHLB. In February 2011, the Bank repaid approximately $50 million in FHLB advances with maturity dates during 2011. As of March 31, 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 December 31, 2010 and March 31, 2011, 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 bearing a weighted average rate of 2.01%. (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 Operation for further discussion.

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

The Company’s basic earnings (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 earnings (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 earnings (loss) per common share for the three months ended March 31, 2011 and 2010 can be reconciled as follows (dollars in thousands, except per share data):

	Three months ended
	March 31,
	2011			2010
Net loss before extraordinary net gain	$	(1,795	)	$	(11,276	)
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes		32,839			-
Net income (loss)	$	31,044		$	(11,276	)

Weighted-average shares outstanding - basic		33,257,981			2,804,401
Weighted-average shares outstanding - dilluted		33,300,736			2,804,401
Common stock equivalent shares excluded due to antidilutive effect		71,174			48,860

Basic:
Loss before extraordinary net gain per common share	$	(0.06	)	$	(4.02	)
Income from extraordinary net gain per common share		0.99			-
Net income (loss) per common share	$	0.93		$	(4.02	)

Dilluted:
Loss before extraordinary net gain per common share	$	(0.06	)	$	(4.02	)
Income from extraordinary net gain per common share		0.99
Net income (loss) per common share	$	0.93		$	(4.02	)

12.	Stock-Based Compensation

During the three months ended March 31, 2011, as part of their annual compensation, Company Directors were granted a total of 12,100 shares of restricted stock with an aggregate fair value of approximately $110,000 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 $637,000 that will vest over a three year period. This grant is contingent upon shareholder approval of proposed revisions to the Company’s incentive plan. Accordingly, no compensation expense has been recorded during the three months ended March 31, 2011 for these awards.

The Company did not grant any stock options during the three months ended March 31, 2011. During the three months ended March 31, 2010, the Company granted 76,625 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 three months ended March 31, 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.

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 three months ended March 31, 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		(12,128	)		-		N/A		N/A
Options outstanding at March 31, 2011		144,394		$	68.93		6.7	$	-
Options exercisable at March 31, 2011		73,169		$	130.29		4.4	$	-

As of March 31, 2011, there was approximately $0.3 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 three months ended March 31, 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		12,100			9.13		N/A
Vested		(17,031	)		9.06		N/A
Nonvested as of March 31, 2011		42,755		$	15.36		-

As of March 31, 2011, unrecognized compensation cost related to nonvested restricted stock totaled approximately $0.3 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 March 31, 2011 and December 31, 2010, as all RSUs were fully-vested. During the three months ended March 31, 2011, the Company granted 2,420 RSUs to a director of the Company at an approximate fair value of $22,100.

13.	Income Taxes

During the three months ended March 31, 2011, the Company recorded an income tax provision of approximately $19.7 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 $19.7 million also includes a credit for income taxes of approximately $2.4 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. During the three months ended March 31, 2010, there was no provision or credit for income taxes due to the full valuation allowance that was recorded.

Management determined the amount of the deferred tax valuation allowance at March 31, 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.

As of March 31, 2011, the Company maintained a full valuation allowance against the deferred tax asset balance of $35.3 million. There was a $10 million decrease from year-end 2010 due to the estimated utilization of certain deferred tax assets during the three months ended March 31, 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, 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.

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 March 31, 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 March 31, 2011 and December 31, 2010 were as follows (dollars in thousands):

	Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
March 31, 2011
Investment securities available - for - sale	$	-	$	126,602	$	-

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. At March 31, 2011 and December 31, 2010, the Company had no financial liabilities or non-financial liabilities measured at fair value on a nonrecurring basis.

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

	Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
March 31, 2011
Impaired loans with specific valuation allowances	$	-	$	-	$	69,844
Other real estate owned		-		-		35,456
	$	-	$	-	$	105,300

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 three months ended March 31, 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 three months ended March 31, 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.

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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 March 31, 2011 and December 31, 2010 were approximately as follows (dollars in thousands):

	March 31, 2011				December 31, 2010
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	209,242	$	209,242	$	271,264	$	271,264
Investment securities:
Available-for-sale		126,602		126,602		115,010		115,010
Held-to-maturity		1,806		1,891		1,806		1,904
FHLB stock		10,472		10,472		10,472		10,472
Loans, net		1,131,126		1,138,266		1,177,045		1,173,304
BOLI		33,741		33,741		33,470		33,470

Financial liabilities:
Deposits		1,175,184		1,178,603		1,376,899		1,380,965
Debentures, other borrowings,and TLGP senior unsecured debt		186,000		190,681		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 the Bancorp and the Bank are subject to restriction by state and federal regulators and availability of retained earnings. At March 31, 2011, the Bancorp and the Bank meet 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 March 31, 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 March 31, 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.

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 March 31, 2011, the Bank’s primary liquidity ratio was 19.3%.

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 March 31, 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, the Bancorp entered into a written agreement with the FRB and DFCS (the Written Agreement), which requires the Bancorp to take certain measures to improve its safety and soundness. Under the Written Agreement, the 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. The 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 the Bancorp is in compliance with regulatory capital-related terms of the Written Agreement.

As of March 31, 2011, the Bancorp and the Bank meet the minimum regulatory requirements for a “well-capitalized” institution. As of December 31, 2010, prior to the closing of the Capital Raise, Bank and Bancorp had not yet brought their capital ratios to the required levels and therefore had not complied with the terms of the Order and Written Agreement at that date with respect to minimum capital requirements.

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
March 31, 2011:
Tier 1 leverage (to average assets)	$	205,089		12.2	%	$	66,998		4.0	%	$	83,748		5.0	%
Tier 1 capital (to risk-weighted assets)		205,089		16.1			50,882		4.0			76,322		6.0
Total capital (to risk-weighted assets)		221,335		17.4			101,763		8.0			127,204		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

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
March 31, 2011:
Tier 1 leverage (to average assets)	$	226,599		13.5	%	$	66,946		4.0	%	$	167,365		10.0	%(1)
Tier 1 capital (to risk-weighted assets)		226,599		17.7			51,338		4.0			76,312		6.0
Total capital (to risk-weighted assets)		242,986		18.9			102,676		8.0			127,187		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.

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 adoption of ASU 2011-02 is not expected to have a material impact on the Company’s 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 (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 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. The bankruptcy court has scheduled a status conference in the adversary proceeding for May 2011.

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.

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 March 31, 2011 and the operating results for the three months then ended, included elsewhere in this 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.

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 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 have increased significantly 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.

CASCADE BANCORP

Selected Consolidated Financial Highlights

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

	Year over Year Quarter									Linked Quarter
	1st Qtr			1st Qtr			%			4th Qtr			%
	2011			2010			Change			2010			Change
Balance Sheet Data (at period end)
Investment securities	$	128,408		$	144,194			-10.9	%	$	116,816			9.9	%
Loans, gross		1,173,580			1,465,629			-19.9	%		1,223,713			-4.1	%
Total assets		1,600,883			2,077,977			-23.0	%		1,716,458			-6.7	%
Total deposits		1,175,184			1,733,101			-32.2	%		1,376,899			-14.6	%
Non-interest bearing deposits		374,153			258,710			44.6	%		310,164			20.6	%
Total common shareholders' equity (book)		209,543			12,604			1562.5	%		10,056			1983.8	%
Tangible common shareholders' equity (tangible) (1)		205,000			6,585			3013.1	%		5,144			3885.2	%
Income Statement Data
Interest income	$	18,304		$	22,865			-19.9	%	$	19,373			-5.5	%
Interest expense		3,970			6,755			-41.2	%		5,146			-22.9	%
Net interest income		14,334			16,110			-11.0	%		14,227			0.8	%
Loan loss provision		5,500			13,500			-59.3	%		5,000			10.0	%
Net interest income after loan loss provision		8,834			2,610			238.5	%		9,227			-4.3	%
Noninterest income		2,668			3,250			-17.9	%		3,430			-22.2	%
Noninterest expense		15,643			17,136			-8.7	%		21,226			-26.3	%
Loss before income taxes		(4,141	)		(11,276	)		-63.3	%		(8,569	)		-51.7	%
Credit for income taxes for operations		(2,346	)		-			100.0	%		(9,963	)		-76.5	%
Net income (loss) before extraordinary net gain		(1,795	)		(11,276	)		-84.1	%		1,394			-228.8	%
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes		32,839			-			100.0	%		-			100.0	%
Net income (loss)	$	31,044		$	(11,276	)		275.3	%	$	1,394			2127.0	%
Share Data (3)
Basic earnings (loss) per common share (incl. extraordinary net gain)	$	0.93		$	(4.02	)		-123.2	%	$	0.50			86.7	%
Diluted earnings (loss) per common share (incl. extraordinary net gain)	$	0.93		$	(4.02	)		-123.2	%	$	0.50			86.4	%
Book value per common share	$	4.45		$	4.42			0.7	%	$	3.52			26.5	%
Tangible book value per common share	$	4.36		$	2.31			88.6	%	$	1.80			142.0	%
Basic average shares outstanding		33,258			2,804			1086.1	%		2,805			1085.7	%
Fully diluted average shares outstanding		33,301			2,804			1087.6	%		2,805			1087.2	%
Key Ratios
Return on average total shareholders' equity (book)		82.16	%		-101.77	%		-180.7	%		54.87	%		49.7	%
Return on average total shareholders' equity (tangible)		84.79	%		-117.51	%		-172.2	%		111.55	%		-24.0	%
Return on average total assets		7.51	%		-2.23	%		-436.8	%		0.31	%		2322.6	%
Net interest spread		2.94	%		3.67	%		-19.9	%		2.94	%		0.0	%
Net interest margin		3.72	%		3.50	%		6.3	%		3.44	%		8.1	%
Total revenue (net int inc + non int inc)	$	17,002		$	19,360			-12.2	%	$	17,657			-3.7	%
Efficiency ratio (2)		92.01	%		88.51	%		3.9	%		120.21	%		-23.5	%
Credit Quality Ratios
Reserve for credit losses		43,395			61,039			-28.9	%		47,609			-8.9	%
Reserve to ending total loans		3.70	%		4.16	%		-11.1	%		3.89	%		-4.9	%
Non-performing assets (NPAs) (4)		105,453			160,710			-34.4	%		120,540			-12.5	%
Non-performing assets to total assets		6.59	%		7.73	%		-14.8	%		7.02	%		-6.2	%
Delinquent >30 days to total loans (Excl. NPAs)		0.55	%		0.58	%		-4.8	%		1.93	%		-71.4	%
Net Charge off's (NCOs)		9,713			11,988			-19.0	%		9,865			-1.5	%
Net loan charge-offs (annualized)		3.23	%		3.17	%		2.0	%		3.15	%		2.7	%
Provision for loan losses to NCOs		56.63	%		112.61	%		-49.7	%		50.68	%		11.7	%
Bank Capital Ratios (5)
Tier 1 capital leverage ratio		13.54	%		3.57	%		279.3	%		4.40	%		207.7	%
Tier 1 risk-based capital ratio		17.66	%		4.65	%		279.8	%		5.76	%		206.6	%
Total risk-based capital ratio		18.93	%		5.90	%		220.8	%		7.01	%		170.0	%
Bancorp Capital Ratios (5)
Tier 1 capital leverage ratio		12.24	%		0.60	%		1940.0	%		0.49	%		2398.0	%
Tier 1 risk-based capital ratio		16.12	%		0.78	%		1966.7	%		0.64	%		2418.8	%
Total risk-based capital ratio		17.40	%		1.57	%		1008.3	%		1.29	%		1248.8	%

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.

Financial Highlights and Summary of the First Quarter of 2011

Capital Raise Completed: On January 28, 2011, new capital investment proceeds were received in the net amount of $167.9 million; resulting in capital levels in excess of “well-capitalized” designation.

Extinguishment of Trust Preferred Debentures (“Debentures”): On January 28, 2011, Debentures totaling $68.6 million were extinguished, resulting in an extraordinary after-tax gain of $32.8 million.

First Quarter Net Income Per Share: $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 was approximately ($0.06) per share or ($1.8) million, as compared to net income of $0.50 per share or $1.4 million for the linked-quarter and a net loss of ($4.02) per share or ($11.3) million for the year-ago quarter.

Core Customer Deposits: DDA, Savings, and MMA balances up $23.1 million on a linked-quarter basis.

Net Interest Margin (“NIM”) / Liquidity: The NIM improved to 3.72% compared to 3.44% for the linked-quarter owing to a strategic reduction of non-core excess liquidity. Primary liquidity ratio still remains a strong 19.3% after these actions.

Loans: Loan balances declined $50.1 million or 4.1% from year-end mainly due to loan payoffs.

Credit Quality: Non-performing assets (NPA’s) totaled $105.4 million at March 31, 2011 improving from $120.5 million at year-end 2010.

Credit Quality: Net charge-offs were $9.7 million compared to $9.9 million for the linked-quarter and $12.0 million for the year-ago period.

Credit Quality: Delinquent Loans: Loans > 30 days delinquent were at 0.55% of total loans compared to 1.93% for linked-quarter.

The Company recorded net income of $0.93 per share or $31.0 million in the first quarter of 2011 including a $32.8 million after-tax extraordinary gain on extinguishment of $68.6 million in Debentures. Excluding this gain, the net loss was approximately ($0.06) per share or ($1.8) million compared to net income of $0.50 per share or $1.4 million for the linked-quarter and a net loss of ($4.02) per share or ($11.3) million for the year-ago quarter. For the first quarter of 2011, net interest income was $14.3 million, comparable to the linked-quarter as lower interest income was offset by similar decline in interest expense. The decline in interest income is attributable to the reduction in loans, while lower interest expense is the result of actions related to the reduction of excess liquidity including extinguishment of $68.6 million in Debentures; call/maturity of $210 million of internet sourced time deposits; and repayment of $50 million of FHLB advances. Net interest income was down 11.0% when compared to the year-ago period primarily due to lower average earning loans.

At March 31, 2011, Cascade’s loan portfolio was approximately $1.17 billion, down $50.1 million and $292.0 million when compared to the linked-quarter and the year-ago period, respectively. Loans have declined primarily due to customers’ continued deleveraging of their debt in response to slow economic conditions, as well as loan charge-offs.

Total core customer deposits (DDA, Savings, MMA and local customer CDs < $250,000) have increased over the past quarter, up modestly between year-end and March 31, 2011. Total deposits at March 31, 2011, were $1.18 billion, down $201.7 million or 14.6% compared to the linked-quarter mainly due to the call on scheduled maturity of approximately $210 million in internet sourced time deposits. Deposits were down $557.9 million or 32.2% compared to the year-ago quarter in part as a result of the above described actions. In addition, the Company experienced a year-over-year decline in interest bearing demand and demand deposits related to the Bank’s uncertain outlook prior to the Capital Raise.

The NIM was 3.72% for the first quarter of 2011 compared to 3.44% for the linked-quarter and 3.50% for the year-ago period due to actions taken to reduce excess liquidity described elsewhere in this Quarterly Report, including call/maturities of internet sourced time deposits, extinguishment of Debentures and repayment of FHLB advances. Note that these actions were completed early in the quarter resulting in a NIM of approximately 4.09% during the month of March alone. The Bank’s primary liquidity ratio remains at a strong 19.3% with $209.2 million held in cash and cash equivalents at March 31, 2011 compared to $319.4 million at December 31, 2010.

At March 31, 2011, the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 13.54%, 17.66% and 18.93%, respectively, exceeding the regulatory benchmarks for “well-capitalized” designation. Regulatory minimums to be “well-capitalized” are 5%, 6%, and 10% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. Pursuant to the Order, the Bank is required to maintain a Tier 1 leverage ratio of at least 10% to be considered “well-capitalized”. Bancorp’s Tier 1 leverage, Tier risk-based and total risk-based capital ratios were 12.24%, 16.12% and 17.40%, respectively, as of March 31, 2011.

RESULTS OF OPERATIONS – Three Months ended March 31, 2011 and 2010

Income Statement

Net Income

The Company recorded net income of $0.93 per share or $31.0 million in the first quarter of 2011 including a $32.8 million extraordinary after-tax gain on extinguishment of $68.6 million in Debentures. Excluding this gain, the Company recorded a net loss of approximately ($0.06) per share or ($1.8) million compared to net income of $0.50 per share or $1.4 million for the linked-quarter and a net loss of ($4.02) per share or ($11.3) million for the year-ago quarter.

For the first quarter of 2011, the Company recorded a pre-tax loss of approximately $4.1 million mainly due to the $5.5 million provision for loan losses. The level of pretax loss in the first quarter of 2011 is improved from a $8.6 loss for the linked quarter mainly because of lower OREO valuation expense. However tax adjustments in the current quarter were $2.3 million (credit) compared to $10.0 million (credit) in the linked quarter due to lower utilization of deferred tax assets on which a full valuation allowance was previously recorded, As a result, the first quarter of 2011 reflects an after-tax loss of $1.8 million from operations as compared to net income of $1.4 million for the linked quarter.

Net Interest Income

Net interest income was $14.3 million for the current quarter, comparable to the linked-quarter. This outcome was a result of the decline in interest income attributable to the reduction in loans, offset by a significant improvement in overall funding costs. Lower funding costs resulted from actions related to the Company’s reduction of excess liquidity including extinguishment of $68.6 million in Debentures; call/maturity of $210 million in internet sourced time deposits; and repayment of $50 million of FHLB advances. Net interest income was down 11.0% when compared to the year-ago period due to lower average earning assets.

Total interest income decreased approximately $1.1 million compared to the linked-quarter and $4.6 million compared to the prior-year quarter. The decrease is mainly due to lower average earning loan balances and interest reversals and interest foregone on non-performing loans. For the three months ended March 31, 2011, total interest expense declined by approximately $1.2 million or 22.9% 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. This program had temporarily provided unlimited FDIC insurance coverage for interest bearing NOW checking accounts. The above actions resulted in an overall cost of funds of 1.08% for the first quarter of 2011 compared to 1.19% for the linked-quarter. Yields on earning assets were stable compared to the linked-quarter at 4.77% while year ago earning asset yields were 4.97%. Meanwhile, average rates paid on interest bearing liabilities for the three month period ended March 31, 2011 decreased to 1.45% compared to 1.66% in the year-ago period.

Components of Net Interest Margin

The following table sets forth for the quarters ended March 31, 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):

	Quarter ended								Quarter ended
	March 31, 2011								March 31, 2010
				Interest		Average						Interest		Average
	Average			Income/		Yield or			Average			Income/		Yield or
	Balance			Expense		Rates			Balance			Expense		Rates
Assets
Taxable securities	$	117,612		$	1,244		4.29	%	$	143,783		$	1,571		4.43	%
Non-taxable securities		1,806			18		4.04	%		2,792			35		5.08	%
Interest bearing balances due from other banks		229,251			136		0.24	%		204,232			145		0.29	%
Federal funds sold		2,900			1		0.14	%		3,255			3		0.37	%
Federal Home Loan Bank stock		10,472			-		0.00	%		10,472			-		0.00	%
Loans (1)(2)(3)		1,201,276			16,906		5.71	%		1,513,853			21,195		5.68	%
Total earning assets/interest income		1,563,317			18,304		4.75	%		1,878,387			22,949		4.95	%
Reserve for loan losses		(45,055	)							(41,920	)
Cash and due from banks		29,640								63,404
Premises and equipment, net		35,113								37,158
Bank-owned life insurance		33,556								33,635
Accrued interest and other assets		60,690								125,427
Total assets	$	1,677,261							$	2,096,091

Liabilities and Stockholders' Equity
Interest bearing demand deposits	$	463,782			585		0.51	%	$	752,935			1,505		0.81	%
Savings deposits		31,905			17		0.22	%		29,658			17		0.23	%
Time deposits		384,809			2,025		2.13	%		564,229			3,509		2.52	%
Other borrowings		228,283			1,343		2.39	%		304,805			1,724		2.29	%
Total interest bearing liabilities/interest expense		1,108,779			3,970		1.45	%		1,651,627			6,755		1.66	%
Demand deposits		384,968								374,549
Other liabilities		30,272								27,148
Total liabilities		1,524,019								2,053,324
Stockholders' equity		153,242								42,767
Total liabilities and stockholders' equity	$	1,677,261							$	2,096,091

Net interest income				$	14,334							$	16,194

Net interest spread							3.30	%							3.30	%

Net interest income to earning assets							3.72	%							3.50	%

(1)	Average non-accrual loans included in the computation of average loans was approximately $75.4 million for 2011 and $152.1 million for 2010.

(2)	Loan related fees recognized during the period and included in the yield calculation totalled approximately $0.5 million in 2011 and $0.6 million in 2010.

(3)	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 March 31, 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):

	Quarter ended
	March 31, 2011 vs. 2010
	Total			Volume			Rate
Interest income:
Interest and fees on loans	$	(4,289	)	$	(4,376	)	$	87
Investments and other		(356	)		(308	)		(48	)
Total interest income		(4,645	)		(4,684	)		39
Interest expense:
Interest bearing demand		(920	)		(578	)		(342	)
Savings		0			1			(1	)
Time deposits		(1,484	)		(1,116	)		(368	)
Other borrowings		(381	)		(433	)		52
Total interest expense		(2,785	)		(2,126	)		(659	)
Net interest income	$	(1,860	)	$	(2,558	)	$	698

Loan Loss Provision

The loan loss provision was $5.5 million in the first quarter of 2011 compared to $5.0 million in the linked-quarter and $13.5 million a year earlier. At March 31, 2011, the reserve for credit losses (reserve for loan losses and reserve for unfunded commitments) was approximately $43.4 million or 3.70% of outstanding loans compared to a linked-quarter reserve of 3.89% and 4.16% for the first quarter of 2010. The decline in the first quarter 2011 reserve was primarily the result of a charge-off of a single loan that previously carried a special reserve.

Non-Interest Income

Noninterest income in the first quarter of 2011 was $2.7 million as compared to $3.4 million in the linked-quarter and $3.3 million a year earlier. This trend is a function of slowing economic activity affecting service charge revenue, net mortgage revenue and a decrease in card issuer and merchant services fees. These decreases were partially offset by an increase in earnings on bank owned life insurance policies.

Non-Interest Expense

Non-interest expenses for the first quarter of 2011 were $15.6 million as compared to $21.2 million in the linked-quarter and $17.1 million in the comparable period of 2010. The year-over-year declines are largely attributable to lower FDIC deposit insurance and salary and benefit costs somewhat offset by higher OREO expenses. FDIC deposit insurance costs are down 58.0% in the first quarter of 2011 mainly because the Company’s return to “well-capitalized” category results in a lower insurance assessment rate on deposits. Meanwhile, salary costs have trended lower decreasing 4.0% year-over-year as a result of a decline in staffing in response to the slowing economy. OREO expenses for the first quarter of 2011 were $1.6 million compared to a linked-quarter of $0.5 million due to an increase in valuation allowances during the quarter.

Income Taxes

During the three months ended March 31, 2011, the Company recorded a net income tax provision of approximately $19.7 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 $19.7 million also includes a credit for income taxes of approximately $2.3 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 March 31, 2011, the Company maintained a valuation allowance of $36.1 million against the deferred tax asset balance of $35.3 million, for a net deferred tax credit of $0.8 million. This amount represented a $10.0 million decrease from year-end 2010 due to the estimated utilization of certain deferred tax assets during the three months ended March 31, 2011.

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 $209.5 million as of March 31, 2011. This compares to $12.6 million at March 31, 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 March 31, 2011, the Company’s tangible common equity to total assets ratio was 12.7%. The Company’s basic and tangible book value per share increased to $4.50 and $4.41, respectively, at March 31, 2011.

March 31, 2011 regulatory capital ratios are as follows: Bancorp’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 12.24%, 16.12% and 17.40%, respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 13.54%, 17.66% and 18.93%, 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.” 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 March 31, 2011, the Company had no material capital expenditure commitments apart from those incurred in the ordinary course of business.

Total Assets and Liabilities

Total assets were $1.60 billion at March 31, 2011 a decrease of $115.6 million from $1.72 billion at year-end 2010, mainly due to a $62.0 million decrease in cash and cash equivalents and a $50.1 million reduction in loans. Total liabilities declined $315.1 million as a result of actions taken to reduce excess liquidity described elsewhere in this Quarterly Report, including call/maturities of internet sourced time deposits, extinguishment of the Debentures and repayment of FHLB advances.

Cash and cash equivalents decreased approximately $62.0 million to $209.2 million or 13.1% of total assets at March 31, 2011 compared to year-end 2010. This decrease resulted mainly from a decrease in interest bearing balances of approximately $63.2 million, which was used to repay $50.0 million in FHLB advances and increase in the Bank’s investment securities available-for-sale of $11.6 million. At March 31, 2011, the Company’s loan portfolio was approximately $1.17 billion, down $50.1 million and $292.0 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 $9.7 million for the three months ended March 31, 2011, also contributed to the reduction in loan balances outstanding. Approximately $3.5 million of current charge-offs was related to one credit with previous reserves of a like amount.

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

Off-Balance Sheet Arrangements

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

	March 31, 2011		December 31, 2010

Commitments to extend credit	$	157,438	$	164,542
Commitments under credit card lines of credit		25,072		26,257
Standby letters of credit		5,953		3,013

Total off-balance sheet financial instruments	$	188,463	$	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.

Liquidity

Prior to the Capital Raise, 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 million in internet sourced deposits, let mature an additional $40 million in internet sourced deposits and repaid $50 million in FHLB advances. At March 31, 2011 and after this series of actions, cash and cash equivalents of the Company totaled $209 million as compared to $271 million at December 31, 2010. This amount includes interest bearing balances held at FRB totaling $173.4 million. The Company’s primary liquidity ratio remains a strong 19.3% at March 31, 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 March 31, 2011 the FHLB had extended the Bank a secured line of credit of $273.0 million (17% of total assets) accessible for short or long-term borrowings given sufficient qualifying collateral. As of March 31, 2011, the Bank had qualifying collateral pledged for FHLB borrowings totaling $269.6 million of which $205 million was utilized with $145.0 million in secured borrowings and $60.0 million FHLB letters of credit used for collateralization of Oregon public deposits held at the Bank. At March 31, 2011, the Bank also had undrawn borrowing capacity at FRB of approximately $55.7 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 $10 million in unsecured lines of credit from correspondent banks.

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 March 31, 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 $2.5 at March 31, 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 million of notes under the TLGP. The issuance included $16 million floating rate and $25 million fixed rate notes maturing February 12, 2012.

Liquidity may be affected by the Bank’s routine commitments to extend credit. At March 31, 2011, the Bank had approximately $188.5 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.

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 March 31, 2011, unpledged investments totaled approximately $19.7 million.

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.

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 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 March 31, 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. 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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. The bankruptcy court has scheduled a status conference in the adversary proceeding for May 26, 2011. 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 March 31, 2011 was previously reported in a Current Report on Form 8-K, filed with the SEC on January 31, 2011. During the quarter ended March 31, 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 March 31, 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 Bylaws of Cascade Bancorp, as amended

10.1

Form of Indemnification Agreement by and between Cascade Bancorp and certain of its directors filed as Exhibit 10.1 to the Company's filing on Form 8-K, as filed with the Securities and Exchange Commission on January 31, 2011 and incorporated herein by reference.

10.2

Form of Indemnification Agreement by and between Bank of the Cascades and certain of its directors filed as Exhibit 10.2 to the Company's filing on Form 8-K, as filed with the Securities and Exchange Commission on January 31, 2011 and incorporated herein by reference.

10.3

Registration Rights Agreement, dated as of January 28, 2011, by and among Cascade Bancorp and the Investors party thereto filed as Exhibit 10.3 to the Company's filing on Form 8-K, as filed with the Securities and Exchange Commission on January 31, 2011 and incorporated herein by reference.

31.1

Certification of Chief Executive Officer

31.2

Certification of Chief Financial Officer

Certification Pursuant to Section 906

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	May 4, 2011	By	/s/ Patricia L. Moss
			Patricia L. Moss, President & CEO
			(Principal Executive Officer)

Date	May 4, 2011	By	/s/ Gregory D. Newton
			Gregory D. Newton, EVP/Chief Financial Officer
			(Principal Financial and Chief Accounting Officer)

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