Edgar Filing: CASCADE BANCORP

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended: September 30, 2007

o	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 or organization)		(I.R.S. Employer Identification No.)

1100 NW 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer x Non-accelerated file o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 28,138,988 shares of no par value Common Stock as of October 31, 2007.

CASCADE BANCORP & SUBSIDIARY
FORM 10-Q
QUARTERLY REPORT
SEPTEMBER 30, 2007

INDEX

PART I: FINANCIAL INFORMATION		Page

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets:
	September 30, 2007 and December 31, 2006	3

	Condensed Consolidated Statements of Income:
	Nine months and three months ended September 30, 2007 and 2006	4

	Condensed Consolidated Statements of Changes in Stockholders’ Equity:
	Nine months and three months ended September 30, 2007 and 2006	5

	Condensed Consolidated Statements of Cash Flows:
	Nine months ended September 30, 2007 and 2006	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25

Item 4.	Controls and Procedures	25

PART II: OTHER INFORMATION

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 6.	Exhibits	26

SIGNATURES		27

PART I

Item 1. Financial Statements

Cascade Bancorp & Subsidiary
Condensed Consolidated Balance Sheets
September 30, 2007 and December 31, 2006
(Dollars in thousands)
(unaudited)

	September 30, 2007		December 31, 2006

ASSETS
Cash and cash equivalents:
Cash and due from banks	$	60,363	$	54,962
Interest bearing deposits with Federal Home Loan Bank		72		47
Federal funds sold		807		650

Total cash and cash equivalents		61,242		55,659
Investment securities available-for-sale		94,675		103,228
Investment securities held-to-maturity		3,182		3,695
Federal Home Loan Bank stock		6,991		6,991
Loans, net		2,016,781		1,863,677
Premises and equipment, net		38,878		40,553
Goodwill		105,047		105,047
Core deposit intangibles		9,897		11,082
Bank-owned life insurance		32,713		31,730
Accrued interest and other assets		34,311		27,652

Total assets	$	2,403,717	$	2,249,314


LIABILITIES & STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	471,140	$	509,920
Interest bearing demand		949,162		791,768
Savings		41,142		46,522
Time		330,857		313,406

Total deposits		1,792,301		1,661,616
Junior subordinated debentures		68,558		68,558
Federal funds purchased		15,035		15,177
Other borrowings		200,799		171,290
Customer repurchase agreements		16,581		44,018
Accrued interest and other liabilities		25,706		27,579

Total liabilities		2,118,980		1,988,238

Stockholders’ equity:
Common stock, no par value;
35,000,000 shares authorized;
28,298,301 issued and outstanding (28,330,259 in 2006)		164,200		162,199
Retained earnings		120,150		98,112
Accumulated other comprehensive income		387		765

Total stockholders’ equity		284,737		261,076

Total liabilities and stockholders’ equity	$	2,403,717	$	2,249,314

See accompanying notes.

Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Income
Nine Months and Three Months ended September 30, 2007 and 2006
(Dollars in thousands, except per share amounts)
(unaudited)

	Nine months ended September 30,				Three months ended September 30,

	2007		2006		2007		2006


Interest income:
Interest and fees on loans	$	124,115	$	92,178	$	42,547	$	38,600
Taxable interest on investments		3,945		3,512		1,290		1,577
Nontaxable interest on investments		222		210		66		84
Interest on federal funds sold		149		431		41		62
Interest on interest bearing deposits with Federal Home Loan Bank		193		219		1		6
Dividends on Federal Home Loan Bank stock		28		—		11		—

Total interest income		128,652		96,550		43,956		40,329

Interest expense:
Deposits:
Interest bearing demand		22,602		13,293		8,388		5,486
Savings		157		151		49		66
Time		12,340		4,798		4,369		2,619
Junior subordinated debentures and other borrowings		11,739		8,106		3,426		4,176

Total interest expense		46,838		26,348		16,232		12,347

Net interest income		81,814		70,202		27,724		27,982
Loan loss provision		3,800		3,680		1,750		2,200

Net interest income after loan loss provision		78,014		66,522		25,974		25,782

Non-interest income:
Service charges on deposit accounts		7,295		5,844		2,597		2,366
Mortgage loan origination and processing fees		1,363		1,471		423		556
Gains on sales of mortgage loans, net		681		761		183		339
Gains on sales of investment securities available-for-sale		260		590		260		594
Card issuer and merchant services fees, net		2,988		2,484		1,038		1,077
Earnings on bank-owned life insurance		983		565		140		202
Other income		2,448		1,658		557		655

Total noninterest income		16,018		13,373		5,198		5,789

Non-interest expense:
Salaries and employee benefits		27,261		23,027		8,925		8,680
Occupancy and equipment, net		4,952		4,017		1,725		1,551
Communications		1,512		1,169		491		500
Advertising		960		723		330		235
Other expenses		11,984		9,636		3,848		3,692

Total noninterest expense		46,669		38,572		15,319		14,658


Income before income taxes		47,363		41,323		15,853		16,913
Provision for income taxes		17,643		15,869		5,835		6,393

Net income	$	29,720	$	25,454	$	10,018	$	10,520


Basic earnings per common share	$	1.05	$	1.00	$	0.35	$	0.37

Diluted earnings per common share	$	1.04	$	0.98	$	0.35	$	0.37

See accompanying notes.

Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Nine Months Ended September 30, 2007 and 2006
(Dollars in thousands)
(unaudited)

	Comprehensive income			Common stock			Retained earnings			Unearned compensation on restricted stock			Accumulated other comprehensive income (loss)			Total stockholders’ equity

Balance at December 31, 2005				$	33,706		$	70,571		$	(442	)	$	541		$	104,376
Comprehensive income:
Net income	$	25,454			—			25,454			—			—			25,454
Other comprehensive loss, net of tax:
Unrealized losses on securities available-for-sale		(153	)		—			—			—			(153	)		(153	)

Comprehensive income	$	25,301


Transfer to common stock due to implementation of SFAS 123R					(442	)		—			442			—			—
Issuance of stock to acquire F&M Holding Company					124,552			—			—			—			124,552
Cash dividends paid					—			(5,590	)		—			—			(5,590	)
Stock-based compensation expense					893			—			—			—			893
Stock options exercised (384,440)					2,327			—			—			—			2,327
Tax benefit from non-qualified stock options exercised					549			—			—			—			549

Balance at September 30, 2006				$	161,585		$	90,435		$	—		$	388		$	252,408


Balance at December 31, 2006				$	162,199		$	98,112		$	—		$	765		$	261,076
Comprehensive income:
Net income	$	29,720			—			29,720			—			—			29,720
Other comprehensive loss, net of tax:
Unrealized losses on securities available-for-sale		(378	)		—			—			—			(378	)		(378	)

Comprehensive income	$	29,342


Cash dividends paid					—			(7,682	)		—			—			(7,682	)
Stock repurchased					(1,208	)											(1,208	)
Stock-based compensation expense					1,258			—			—			—			1,258
Stock options exercised (121,210)					1,787			—			—			—			1,787
Tax benefit from non-qualified stock options exercised					164			—			—			—			164

Balance at September 30, 2007				$	164,200		$	120,150		$	—		$	387		$	284,737

See accompanying notes.

Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 30, 2007 and 2006
(Dollars in thousands)
(unaudited)

	Nine months ended September 30,

	2007			2006


Net cash provided by operating activities	$	26,952		$	23,326

Investing activities:
Proceeds from sales of investment securities available-for-sale		—			33,843
Proceeds from sales of equity securities available-for-sale		526			594
Proceeds from maturities, calls and prepayments of investment securities available-for-sale		21,456			21,799
Proceeds from maturities and calls of investment securities held-to-maturity		505			130
Purchases of investment securities available-for-sale		(14,850	)		(18,005	)
Purchase of Federal Home Loan Bank stock		—			(2,298	)
Net increase in loans		(154,839	)		(320,958	)
Cash acquired in acquisition of F&M Holding Compay		—			(30,850	)
Purchases of premises and equipment		(4,936	)		(2,477	)
Proceeds from sales of premises and equipment		5,093			—

Net cash used in investing activities		(147,045	)		(318,222	)

Financing activities:
Net increase in deposits		130,685			81,494
Cash dividends paid		(7,682	)		(5,590	)
Stock repurchased		(1,208	)		—
Stock options exercised		1,787			2,327
Tax benefit from non-qualified stock options exercised		164			549
Proceeds from issuance of junior subordinated debentures		—			47,939
Net decrease in federal funds purchased		(142	)		—
Net increase in other borrowings		2,072			125,496

Net cash provided by financing activities		125,676			252,215

Net increase (decrease) in cash and cash equivalents		5,583			(42,681	)
Cash and cash equivalents at beginning of period		55,659			107,709

Cash and cash equivalents at end of period	$	61,242		$	65,028

See accompanying notes.

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
September 30, 2007
(unaudited)

1. Basis of Presentation

The accompanying interim condensed consolidated financial statements include the accounts of Cascade Bancorp (Bancorp), an Oregon chartered financial holding company, and its wholly-owned subsidiary, Bank of the Cascades (the Bank) (collectively, “the Company” or “Cascades”).

Note that on July 6, 2007, the Company announced its branches in Idaho previously operating as Farmers & Merchants a Bank of the Cascades Company, changed its name to Bank of the Cascades. All significant intercompany 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 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 necessary adjustments (which are of a normal and recurring nature) 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.

The condensed consolidated balance sheet data as of December 31, 2006 was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2006 Annual Report to Shareholders. The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2006 consolidated financial statements, including the notes thereto, included in the Company’s 2006 Annual Report to Shareholders.

All issued and outstanding shares, weighted average shares and per share amounts in the accompanying condensed consolidated financial statements have been retroactively adjusted to reflect a 5-for-4 stock split that was declared in October 2006.

Certain amounts for 2006 have been reclassified to conform with the 2007 presentation.

2. Investment Securities

Investment securities at September 30, 2007 and December 31, 2006 consisted of the following (dollars in thousands):

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value

9/30/2007
Available-for-sale
U.S. Agency mortgage-backed securities	$	69,747	$	343	$	317	$	69,773
U.S. Government and agency securities		16,316		234		—		16,550
Obligations of state and political subdivisions		3,716		18		6		3,728
U.S. Agency asset-backed securities		3,562		18		2		3,578
Equity securities		310		334		—		644
Mutual fund		401		1		—		402

	$	94,052	$	948	$	325	$	94,675

Held-to-maturity
Obligations of state and political subdivisions	$	3,182	$	19	$	20	$	3,181

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value

12/31/2006
Available-for-sale
U.S. Agency mortgage-backed securities	$	72,420	$	387	$	197	$	72,610
U.S. Government and agency securities		19,128		195		5		19,318
Obligations of state and political subdivisions		5,481		21		17		5,485
U.S. Agency asset-backed securities		4,002		18		1		4,019
Equity securities		576		830		—		1,406
Mutual fund		388		2		—		390

	$	101,995	$	1,453	$	220	$	103,228

Held-to-maturity
Obligations of state and political subdivisions	$	3,695	$	22	$	30	$	3,687

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 September 30, 2007:

	Less than 12 months				12 months or more				Total

	Estimated fair value		Unrealized losses		Estimated fair value		Unrealized losses		Estimated fair value		Unrealized losses

U.S. Agency mortgage-
backed securities	$	22,067	$	189	$	9,903	$	128	$	31,970	$	317
U.S. Agency asset-
backed securities		522		2		—		—		522		2
Obligations of state and
political subdivisions		239		—		2,540		26		2,779		26

	$	22,828	$	191	$	12,443	$	154	$	35,271	$	345

The unrealized losses on the above investment securities are primarily due to increases in market interest rates over the yields available at the time the specific investment securities were purchased by the Company. Management of the Company expects the fair value of these investment securities to recover as the investment securities approach their maturity dates or repricing dates, or if market yields for such investment securities decline. Management of the Company does not believe that any of the investment securities are impaired due to reasons of credit quality. Accordingly, management of the Company does not believe that any of the above gross unrealized losses on investment securities are other-than-temporary and, accordingly, no impairment adjustments have been recorded.

3. Loans and Reserve for Loan Losses

The composition of the loan portfolio at September 30, 2007 and December 31, 2006 was as follows (dollars in thousands):

Loan portfolio	September 30, 2007		% of gross loans			December 31, 2006		% of gross loans

Commercial	$	614,509		30	%	$	560,728		30	%
Real Estate:
Construction/lot		689,500		34	%		588,251		31	%
Mortgage		86,490		4	%		80,860		4	%
Commercial		601,474		30	%		606,340		32	%
Consumer		49,600		2	%		51,083		3	%

Total loans		2,041,573		100	%		1,887,262		100	%

Less reserve for loan losses		24,792					23,585

Total loans, net	$	2,016,781				$	1,863,677

Mortgage real estate loans include mortgage loans held for sale of approximately $1.7 million at September 30, 2007 and approximately $3.0 million at December 31, 2006. In addition, the above loans are net of deferred loan fees of approximately $6.2 million at September 30, 2007 and $5.7 million at December 31, 2006.

At September 30, 2007 the Bank had approximately $772.2 million in outstanding commitments to extend credit, compared to approximately $713.9 million at year-end 2006. Reserves for unfunded commitments (which are classified as other liabilities) totaled approximately $3.2 million at September 30, 2007 and December 31, 2006, respectively.

Transactions in the reserve for loan losses and unfunded commitments for the nine months ended September 30, 2007 and 2006 were as follows (dollars in thousands):

	Nine months ended September 30,

Reserve for loan losses	2007			2006

Balance at beginning of period	$	23,585		$	11,935
Loan loss provision		3,800			3,680
Recoveries		1,012			494
Loans charged off		(3,605	)		(985	)
Reserves acquired from F&M		—			7,392

Balance at end of period	$	24,792		$	22,516


Reserve for unfunded commitments
Balance at beginning of period	$	3,213		$	2,753
Provision (credit) for unfunded commitments		(50	)		820

Balance at end of period	$	3,163		$	3,573


Reserve for credit losses
Reserve for loan losses	$	24,792		$	22,516
Reserve for unfunded commitments		3,163			3,573

Total reserve for credit losses	$	27,955		$	26,089

4. Non-Performing Assets

Risk of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing. The following table presents information with respect to non-performing assets at September 30, 2007 and December 31, 2006 (dollars in thousands):

		September 30, 2007			December 31, 2006

Loans on non-accrual status	$	21,046		$	2,679
Loans past due 90 days or more
but not on non-accrual status		52			—
Other real estate owned		376			326

Total non-performing assets	$	21,474		$	3,005


Percentage of non-performing assets to total assets		0.89	%		0.13	%

The composition of loans on non-accrual status at September 30, 2007 and December 31, 2006 was as follows (dollars in thousands):

	September 30, 2007		% of total			December 31, 2006		% of total

Commercial	$	1,110		5	%	$	319		12	%
Real Estate:
Construction/lot		16,940		81	%		1,958		73	%
Mortgage		198		1	%		—		0	%
Commercial		2,736		13	%		389		15	%
Consumer		61		0	%		13		0	%

Total non-accrual loans	$	21,046		100	%	$	2,679		100	%

The accrual of interest on a loan is discontinued when, in management’s judgment, the future collectibility of principal or interest is in doubt. Loans placed on non-accrual status may or may not be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on non-accrual status, it is the Bank’s policy to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such loans is credited to loan principal if, in the opinion of management, full collectibility of principal is doubtful. Interest income that was reversed and charged against income in 2007 and 2006 was $.4 million and $.2 million, respectively.

During our normal loan review procedures, a loan is considered to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair market value of the collateral if the loan is collateral dependent. Impaired loans are currently measured at lower of cost or fair value. Certain large groups of smaller balance homogeneous loans, collectively measured for impairment, are excluded. Impaired loans are charged to the allowance when management believes, after considering economic and business conditions, collection efforts and collateral position that the borrower’s financial condition is such that collection of principal is not probable. In addition, net overdraft losses are included in the calculation of the allowance for loan losses per the guidance provided by regulatory authorities early in 2005, “Joint Guidance on Overdraft Protection Programs.”

At September 30, 2007, impaired loans were approximately $21.0 million and related specific valuation allowances were $.8 million. At December 31, 2006, impaired loans were approximately $2.7 million and related specific valuation allowances were $.4 million. Interest income recognized for cash payments received on impaired loans for the periods presented was insignificant.

5. Mortgage Servicing Rights

At September 30, 2007 and December 31, 2006, the Bank retained servicing rights to mortgage loans with principal balances of approximately $493.6 million and $494.9 million, respectively. Generally, loans sold servicing-retained are sold to Fannie Mae, a U.S. government sponsored enterprise. The Company also sells mortgage originations servicing-released in the normal course of business to other mortgage companies. Sold loans are not included in loan balances in the accompanying condensed consolidated balance sheets. The sales of these mortgage loans are subject to specific underwriting documentation standards and requirements, which may result in repurchase risk. However, as of September 30, 2007, management is not aware of any material mortgage loans that will be subject to repurchase.

Mortgage servicing rights (MSRs) included in other assets in the accompanying condensed consolidated balance sheets are accounted for at the lower of origination value less accumulated amortization, or current fair value. The carrying value of MSRs was $3.8 and $4.1 million at September 30, 2007 and December 31, 2006, respectively. The fair value of MSRs was approximately $5.3 million at September 30, 2007 and $5.6 million at December 31, 2006. Activity in MSRs for the nine months ended September 30, 2007 and 2006 was as follows (dollars in thousands): (See MD&A – Non-Interest income).

	Nine months ended September 30,

	2007			2006

Balance at beginning of period	$	4,096		$	4,439
Additions		665			733
Amortization		(920	)		(976	)

Balance at end of period	$	3,841		$	4,196

6. Time Deposits (dollars in thousands)

Time deposits in excess of $100,000 aggregated approximately $172.2 million and $199.5 million at September 30, 2007 and December 31, 2006, respectively.

At September 30, 2007, the scheduled annual maturities of all time deposits were approximately as follows:

2007	$	172,000
2008		116,000
2009		18,000
2010		16,000
2011		8,000
2012		1,000

	$	331,000

7. Junior Subordinated Debentures

At September 30, 2007, the Company had established 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 condensed consolidated balance sheets.

The TPS are subordinated to any other borrowings of the Company, and no principal payments are required until the related maturity dates (unless conditions are met as described below). The significant terms of each individual trust are as follows (dollars in thousands):

Issuance Trust			Junior subordinated debentures (A)			Effective rate at 9/30/07


Cascade Bancorp Trust I (D)	12/31/04	3/15/2035	$	20,619	3-month LIBOR + 1.80% (C)	7.49	%

Cascade Bancorp Statutory Trust II (E)	3/31/2006	6/15/2036		13,660	6.619% (B)	6.62	%

Cascade Bancorp Statutory Trust III (E)	3/31/2006	6/15/2036		13,660	3-month LIBOR + 1.33% (C)	7.02	%

Cascade Bancorp Statutory Trust IV (F)	6/29/2006	9/15/2036		20,619	3-month LIBOR + 1.54% (C)	7.23	%

Totals			$	68,558

See notes on following page

	(A)	The Junior Subordinated Debentures (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, constitute a full and irrevocable guarantee by the Company of the obligations of the trusts.

	(B)	The Debentures bear a fixed quarterly interest rate for 20 quarters, at which time the rate begins to float on a quarterly basis based on the three-month London Inter-Bank Offered Rate (LIBOR) plus 1.33% thereafter until maturity.

	(C)	The three-month LIBOR in effect as of September 30, 2007 was 5.69%.

	(D)	The TPS may be called by the Company at par at any time subsequent to March 15, 2010 and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS.

	(E)	The TPS may be called by the Company at par at any time subsequent to June 15, 2011 and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS.

	(F)	The TPS may be called by the Company at par at any time subsequent to September 15, 2011 and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS.

In accordance with industry practice, the Company’s liability for the common securities has been included with the Debentures in the accompanying consolidated balance sheets. Management believes that at September 30, 2007 and December 31, 2006, the TPS meet applicable regulatory guidelines to qualify as Tier I capital.

Interest payments on all TPS are made on a quarterly basis on March 15, June 15, September 15 and December 15.

8. Other Borrowings

At September 30, 2007 the Bank had a total of $79.7 million in long-term borrowings from FHLB with maturities from 2008 to 2025, bearing a weighted-average interest rate of 5.08%. In addition, at September 30, 2007, the Bank had short-term borrowings with FHLB and FRB of approximately $110.4 million and $10.7 million, respectively. At year-end 2006, the Bank had a total of $120.4 million in long-term borrowings from FHLB bearing a weighted-average interest rate of 4.77%. In addition, at December 31, 2006, the Bank had short-term borrowings with FHLB and FRB of approximately $48.8 million and 2.1 million, respectively. See “Liquidity and Sources of Funds” section on page 23 for further discussion.

9. Basic and Diluted Earnings per Common Share

The Company’s basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. The Company’s diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding plus the incremental shares arising from the dilutive effect of stock-based compensation. All share and per share amounts have been retroactively adjusted to reflect the 5-for-4 stock split declared in October, 2006.

The numerators and denominators used in computing basic and diluted earnings per common share for the nine months and three months ended September 30, 2007 and 2006 can be reconciled as follows (dollars and share data in thousands):

	Nine months ended September 30,				Three months ended September 30,

	2007		2006		2007		2006

Net income	$	29,720	$	25,454	$	10,018	$	10,520


Weighted-average shares outstanding - basic		28,315		25,350		28,340		28,125
Basic net income per common share	$	1.05	$	1.00	$	0.35	$	0.37


Incremental shares arising from stock-based compensation		370		623		335		595
Weighted-average shares outstanding - diluted		28,685		25,973		28,675		28,720
Diluted net income per common share	$	1.04	$	0.98	$	0.35	$	0.37

10. Stock-Based Compensation

Under the Company’s stock-based compensation plans approved by shareholders, the Company’s Board of Directors (the Board) - at their discretion - may grant Incentive Stock Options (ISOs), Non-qualified Stock Options (NSOs) and/or nonvested restricted stock to key employees and directors. These stock-based compensation programs were established to reward employees and directors who contribute to the success and profitability of the Company and to give such employees and directors a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s continued success. These programs also assist the Company in attracting and retaining key employees and qualified corporate directors.

In addition, within the stock-based compensation programs, the Board - at their discretion - may establish and prescribe grant guidelines including various terms and conditions for the granting of stock-based compensation and the total number of shares authorized for this purpose. For ISOs, the option strike price must be no less than 100% of the stock price at the grant date; and for NSOs, the option strike price can be no less than 85% of the stock price at the grant date, and all grants to date have been at 100%. Nonvested restricted stock grants must be at fair market value on the grant date. Generally, options become exercisable in varying amounts based on years of employee service and vesting schedules. All options expire after a period of ten years from the date of grant.

Stock-based compensation expense related to stock options for the nine months ended September 30, 2007 and 2006 was approximately $.6 million and $.5 million, respectively. As of September 30, 2007, there was approximately $1.5 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 Company has historically granted the majority of its annual stock-based compensation awards during the first quarter of each year. During the nine months ended September 30, 2007 and 2006, the Company granted 139,962 and 80,213 stock options respectively. The fair value of stock options granted during the nine months ended September 30, 2007 and 2006 was $9.16 and $7.35 per option, respectively.

The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions to value options granted for the nine months ended September 30, 2007 and 2006:

	Nine months ended September 30,				Three months ended September 30,

	2007		2006		2007		2006

Dividend yield		1.3%		1.4%		1.3%		1.2%
Expected volatility		29.9%		34.2%		29.9%		34.2%
Risk-free interest rate		4.8%		4.3%		4.8%		5.0%
Expected option lives		6 years		6 years		6 years		6 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 under all plans for the nine months ended September 30, 2007:

			Weighted Average Exercise Price			Aggregate Intrinsic Value (000)

Options outstanding at December 31, 2006	770,095		$	9.79	N/A		N/A
Granted	139,962			27.09	N/A		N/A
Exercised	(121,210	)		7.13	N/A		N/A
Cancelled	(8,277	)		20.18	N/A		N/A

Options outstanding at September 30, 2007	780,570		$	13.17	5.92	$	7,140

Options exercisable at September 30, 2007	518,033		$	8.21	8.30	$	7,277

In addition, during the nine months ended September 30, 2007, the Company granted a total of 32,488 shares of nonvested restricted stock at a weighted average grant date fair value of $27.32 per share (approximately $888,000). The restricted stock is scheduled to vest over periods of one to four years from the grant date. Restricted stock is reported as an increase to common stock in the accompanying condensed consolidated financial statements at September 30, 2007 and December 31, 2006. The unearned compensation on restricted stock is being amortized to expense on a straight-line basis over the applicable vesting periods.

As of September 30, 2007, unrecognized compensation cost related to nonvested restricted stock totaled approximately $1.6 million. Total expense recognized by the Company for nonvested restricted stock for the nine months ended September 30, 2007 and 2006 was approximately $.7 million and $.4 million, respectively. The following table presents the activity for nonvested restricted stock for the nine months ended September 30, 2007.

			Weighted- Average Grant Date Fair Value Per Share

Nonvested as of December 31, 2006	104,724		$	18.58	N/A
Granted	32,488			27.32	N/A
Vested	(6,564	)		21.56	N/A
Cancelled	(482	)		22.71	N/A

Nonvested as of September 30, 2007	130,166		$	20.10	1.95

11. Mergers and Acquisitions

F&M Holding Company

On April 20, 2006, the Company completed its acquisition of F&M to facilitate its expansion into the Idaho market. F&M’s banking subsidiary, Farmers & Merchants State Bank (FMSB), in Boise, Idaho and surrounding markets. The Company now operates 12 branches in this market and on July 6, 2007 announced a name change to Bank of the Cascades. In exchange for 100% of the outstanding common stock of F&M, the stockholders of F&M received 6,656,249 shares of the Company’s common stock (valued at $124,552) and $22,500 in cash (less a holdback of $3,902 related to the uncertain collectibility of specific F&M loans). The common stock issued was valued at $18.71 per share, representing an average of the closing market prices for two days before and after the date the acquisition terms were agreed to and announced.

Upon completion of this acquisition, F&M was merged into the Company. Accordingly, the assets and liabilities of F&M were recorded in the Company’s consolidated balance sheet at their estimated fair market values as of the acquisition date. The acquisition was accounted for using the purchase method of accounting.

At September 30, 2007, the holdback amount has been reduced to $1.7 million as certain loans have either paid-off or been upgraded and therefore removed from the holdback.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition (dollars in thousands):

Cash and cash equivalents	$	(8,350	)
Investment securities		106,159
Loans, net		493,900
Premises and equipment, net		16,479
Core deposit intangibles (CDI)		11,800
Goodwill		98,695
Other assets		3,302

Total assets acquired		721,985

Deposits		482,707
Borrowings		82,589
Other liabilities		9,637

Total liabilities assumed		574,933



Total purchase price	$	147,052

The accompanying condensed consolidated financial statements include the results of operations of F&M only since April 20, 2006, the date of acquisition. The following unaudited summary information presents the condensed consolidated results of operations of the Company for the three months and nine months ended September 30, 2007 and 2006 on a pro forma basis, as if the F&M acquisition had occurred at January 1, 2006 (dollars and share data in thousands):

	Nine Months Ended September 30,				Three Months Ended September 30,

	2007		2006		2007		2006

Net interest income	$	81,814	$	79,213	$	27,724	$	27,982
Loan loss provision		3,800		4,430		1,750		2,200

Net interest income after loan loss provision		78,014		74,783		25,974		25,782
Non-interest income		16,018		15,113		5,198		5,789
Non-interest expense		46,669		44,906		15,319		14,658

Income before income taxes		47,363		44,990		15,853		16,913
Provision for income taxes		17,643		17,236		5,835		6,393

Net income	$	29,720	$	27,754	$	10,018	$	10,520

Net income per common share
Basic	$	1.05	$	0.99	$	0.35	$	0.37
Diluted	$	1.04	$	0.97	$	0.35	$	0.37
Average shares outstanding
Basic		28,315		28,056		28,340		28,125
Diluted		28,685		28,693		28,675		28,720

The pro forma results include the accretion of the fair value adjustments on loans and deposits, the additional depreciation on fair value adjustments of premises, and the amortization of the CDI. The pro forma number of average common shares outstanding includes adjustments for shares issued for the acquisition and the impact of additional dilutive securities. The pro forma results presented do not reflect potential cost savings or revenue enhancements anticipated from the acquisition, and are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.

12. Core Deposit Intangibles

Net unamortized CDI totaled $9.9 million at September 30, 2007 and $11.1 million at December 31, 2006. Amortization expense related to the CDI during the nine months ended September 30, 2007 and 2006 totaled $1.2 million and $.7 million, respectively.

The estimated annual amortization expense for CDI is as follows (in thousands):

Year ending December 31,

2007	$	1,581
2008		1,581
2009		1,533
2010		1,476
2011		1,476
After 2011		3,435

13. Subsequent Events

On October 26, 2007, the Company announced that the Board of Directors approved a $.10 per share quarterly cash dividend payment, an increase of 11% over the prior quarter’s dividend. This regular dividend is payable on November 16, 2007, to shareholders of record as of November 9, 2007.

On August 13, 2007, the Company announced that its Board of Directors authorized the Company to acquire, from time to time, up to 5% of the Company’s issued and outstanding common shares over a two-year period. Management’s discretion will determine the timing of the stock repurchase transactions and the number of shares repurchased. Consideration will be given to factors including market price of the stock, growth expectations, general economic conditions, established and special trading blackout periods, and other investment opportunities. As of November 6, 2007, the Company has repurchased a total of 400,700 shares at an average price of $19.57.

14. Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140”. SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to permit fair value re-measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 also amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 was effective for all financial instruments acquired or issued by the Company after January 1, 2007. The adoption of SFAS No. 155 did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140.” SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value. In addition, entities are permitted to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment. Beginning with the fiscal year in which an entity adopts SFAS No. 156, it may elect to subsequently measure a class of servicing assets and liabilities at fair value. Post adoption, an entity may make this election as of the beginning of any fiscal year. An entity that elects to subsequently measure a class of servicing assets and liabilities at fair value should apply that election to all new and existing recognized servicing assets and liabilities within that class. The effect of re-measuring an existing class of servicing assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The statement also requires additional disclosures. SFAS No. 156 was effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the Company’s condensed consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109” (FIN 48). FIN 48 establishes a recognition threshold and measurement for income tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 also prescribes a two-step evaluation process for tax positions. The first step is recognition and the second is measurement. For recognition, an

enterprise judgmentally determines whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the “more-likely-than-not” recognition threshold it is measured and recognized in the financial statements. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Tax positions that meet the “more-likely-than-not” recognition threshold at the effective date of FIN 48 may be recognized or, continue to be recognized, upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. FIN 48 was effective for fiscal years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 during the first quarter of 2007. The adoption of FIN 48 did not have a material impact on the Company’s condensed consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 does not require any new fair value measurements; rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. The Company is currently evaluating the impact that SFAS No. 157 may have on its future consolidated financial statements.

On September 20, 2006, the FASB ratified Emerging Issue Task Force (EITF) Issue 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (FTB 85-4), Accounting for Purchases of Life Insurance” (EITF 06-5). EITF 06-5 addresses the methods by which an entity should determine the amounts that could be realized under an insurance contract at the consolidated balance sheet date when applying FTB 85-4, and whether the determination should be on an individual or group policy basis. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The adoption of EITF 06-5 did not have a material impact on the Company’s condensed consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value. If elected, subsequent changes in fair value would be reported in earnings and the Company would be required to make additional disclosures related to the election to use fair value reporting. It also requires the Company to display the fair value of those assets and liabilities on the face of the balance sheet for which the Company has elected to use fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that SFAS No. 159 may have on its future consolidated financial statements.

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 September 30, 2007 and the operating results for the nine months and three months then ended, included elsewhere in this report.

Cautionary Information Concerning Forward-Looking Statements

The following section contains forward-looking statements, which are not historical facts and pertain to our future operating results. 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” and other similar expressions are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Specific risks and uncertainties include, but are not limited to, general business and economic conditions, changes in interest rates including timing or relative degree of change, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business conditions, strategies and decisions, and such assumptions are subject to change.

Results may differ materially from the results discussed due to changes in business and economic conditions that negatively affect credit quality, which may be exacerbated by our concentration of operations in the States of Oregon and Idaho generally, including the Oregon communities of Central Oregon, Northwest Oregon, Southern Oregon, and the Idaho communities in Ada, Canyon and Payette counties, specifically. Likewise, competition or changes in interest rates could negatively affect the net interest margin, as could other factors listed from time to time in the Company’s SEC reports. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:

Reserve for Loan Losses: Arriving at an appropriate level of reserve for loan losses involves a high degree of judgment. The Company’s reserve for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the reserve for loan losses as well as the prevailing business environment. The reserve may be affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The reserve is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, see Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Company’s Annual Report on Form 10K.

Mortgage Servicing Rights (MSRs): Determination of the fair value of MSRs requires the estimation of multiple interdependent variables, the most impactful of which is mortgage prepayment speeds. Prepayment speeds are estimates of the pace and magnitude of future mortgage payoff or refinance behavior of customers whose loans are serviced by the Company. Errors in estimation of prepayment speeds or other key servicing variables could subject MSRs to impairment risk. On a quarterly basis, the Company engages a qualified third party to provide an estimate of the fair value of MSRs using a discounted cash flow model with assumptions and estimates based upon observable market-based data and methodology common to the mortgage servicing market. Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs, and the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the avoidance of possible impairment charges in future periods. See also Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-Interest Income, and footnote 5 of the Condensed Consolidated Financial Statements.

Highlights for the Third Quarter of 2007

	•	Earnings Per Share (Diluted): at $0.35 compared to $0.37 a year ago and $0.36 for the immediately preceding (linked) quarter

	•	Net Income: $10.0 million compared to $10.5 million year ago and $10.2 million for the linked-quarter

	•	Loan Growth: up 9.0% year-over-year and 4.2% on linked-quarter basis

	•	Customer Relationship Deposits: up 9.2% year over year and 4.5% on a linked-quarter basis

	•	Net Interest Margin: eased to 5.24% from 5.34% linked quarter

	•	Credit Quality Metrics: Non performing assets and net-charge offs trend higher

Financial Performance for the Third Quarter:

The Company reported third quarter 2007 diluted earnings per share (EPS) at $0.35 per share compared to $0.37 reported for the same quarter in 2006 and $0.36 per share in the immediately preceding (linked) quarter. Net Income for the period was $10.0 million versus $10.5 million for the year ago quarter and $10.2 million for the linked quarter. The net interest margin for the current quarter was 5.24% compared to 5.34% in the prior (linked) quarter and 5.71% a year earlier. Loan growth was up $169 million or 9.0% compared to the year ago period, and increased $83 million or 4.2% on a linked-quarter basis. Similarly, Customer Relationship Deposits were up $136 million or 9.2% year-over-year and increased $70 million or

4.5% on a linked-quarter basis. The Company defines customer relationship deposits to include core banking accounts such as checking, money market, and savings but excluding all wholesale or brokered deposits and CD’s greater than $100,000. Return on Equity was 13.54% and Return on Tangible Equity was 23.06% for the third quarter of 2007 and Return on Assets was 1.69%.

Stock Repurchase Program:

On August 13, 2007, the Company announced that the Board of Directors approved a stock repurchase program of up to 5% of the Company’s issued and outstanding common shares. Purchases will occur at management’s discretion over a two-year period. At September 30, 2007, the Company has acquired 53,900 shares at an average price per share of $22.37 totaling $1.2 million.

Loan Growth and Credit Quality:

At September 30, 2007, Cascade’s loan portfolio was $2.0 billion, up 9.0% compared to the year ago period and up $82.5 million or 4.2% on a linked-quarter basis. Loan portfolio growth was primarily in construction related credits along with higher commercial and industrial loans outstanding.

As expected for the quarter ended September 30, 2007, credit metrics trended higher from their historic lows of 2006. Net loan charge-offs were $1.6 million or 0.32% (annualized) of total loans for the quarter compared to 0.10% (annualized) for the linked-quarter. There was no concentration of charge-offs as to amount, loan type, or geographic location. Also, the quarter saw a modest uptick in consumer related loan charge-offs. Meanwhile, delinquent loans greater than 30 days past due were stable at 0.09% of total loans, compared to 0.11% for the linked-quarter. Non-performing assets (NPA’s) were also higher at $21.0 million as of September 30, 2007, or 0.89% of assets compared to $9.4 million or 0.41% of assets for the linked-quarter. The increase in NPA’s was mainly residential construction credits in the Boise, Idaho market which has experienced some slowing in new home sales ¹.

The Reserve for Credit Losses (reserve for loan losses and unfunded commitments) was a sturdy 1.37% of total loans at September 30, 2007, compared to 1.43% for the prior quarter and 1.39% a year ago. Cascade’s loan loss provision was $1.75 million for the third quarter of 2007, up from $1.0 million for the linked-quarter but below the $2.2 million provision in the year ago period. Cascade’s credit reserves remain strong compared to the average of its peer banks and management believes such reserves are at an appropriate level based upon its analysis and assessment of portfolio credit quality and prevailing economic conditions.

Deposit Growth:

At September 30, 2007, customer relationship deposits were up 9.2% compared to a year ago and increased 4.5% on a linked-quarter basis. The majority of the linked-quarter growth was from the Idaho and Portland markets, including strong deposit inflows to our new corporate money market sweep product for select business customers. For the third quarter of 2007, average non-interest bearing deposits were stable at $476.7 million compared to the linked quarter. However, current quarter average non-interest bearing deposits were $89.1 million or 15.7% below the average of the same quarter a year ago mainly due to the contraction of real estate related activity in Cascade markets. Total Deposits were $1.8 billion, up 10.0% compared to a year ago and flat on a linked-quarter basis.

Net Interest Margin and Interest Rate Risk:

Cascade’s net interest margin (NIM) eased modestly to 5.24% for the third quarter of 2007, down 10 basis points from the linked-quarter, primarily due to a decrease in yields on earning assets.

Yields on earning assets during the third quarter of 2007 were lower at 8.29% compared to 8.39% in the linked-quarter quarter and up from 8.22% in the year ago quarter. Lower yields were in part a result of the Federal Reserve’s action to reduce short term fed funds rate by 50 basis points late in the quarter as well as a result of interest adjustments with respect to non performing loans.

¹ For public information as to real estate metrics in Cascade’s markets, see the Company’s Investor Presentation dated Sept 1, 2007 at www.botc.com/investor relations.

The average cost of funds paid on interest bearing liabilities was stable during the third quarter of 2007 at 4.11% as compared to 4.09% in the linked-quarter but up from 3.64% for the year ago quarter. This year over year increase was primarily due to an increase in both volume and rates paid on interest bearing deposits, partially offset by a decrease in borrowings.

Looking forward, management expects the NIM will likely decline approximately 20 basis points in the coming quarter as a consequence of the cumulative 75 basis point reduction in market interest rates enacted by the Federal Reserve at its September and October 2007 meetings. This decline in NIM may be further exacerbated by competitive pricing pressures on deposits which have not moderated in response to the reduction in market rates. While management expects these pressures to gradually abate, it may take time for markets to adjust in the current operating environment. In addition, NIM may be affected by increased spreads on borrowings and carrying cost of non-performing assets.. See cautionary “Forward Looking Statements” below and in Cascade’s Form 10-K report for further information on risk factors including interest rate risk.

Non-Interest Income and Expense:

Non-interest income was $5.2 million, essentially flat compared to the linked-quarter and down 10.2% from the third quarter of 2006. The year over year decline is partially the result of reduced mortgage origination volume and related revenue owing to the slowing pace of real estate activity as well as a reduced level of gain on sale of investment securities compared to the year ago period. For the third quarter of 2007, residential mortgage originations totaled $38.8 million, down 23.0% from the year ago period and down 24.6% from the linked-quarter. Related net mortgage revenue was $.6 million, down from $.9 million in the year ago period and compared to $.8 million for the prior quarter.

Non-interest expense for the third quarter of 2007 was at a level comparable to the immediately preceding quarter, but up 4.5% compared to the third quarter of 2006. The year over year increase was primarily due to higher human resources costs in support of Cascade’s ongoing growth and infrastructure investments.

RESULTS OF OPERATIONS – Nine Months and Three Months ended September 30, 2007 and 2006

Net Interest Income

Net interest income increased 16.5% for the nine months but decreased 0.9% for the quarter ended September 30, 2007, as compared to the same periods in 2006. The nine month increase was due to higher average earning asset volumes related to the acquisition of F&M of Idaho on April 20, 2006 augmented by earning asset growth in its Oregon markets. Thus higher interest income was earned because of a larger base of earning assets. This higher level of interest income exceeded the incremental cost of funds on larger liability balances resulting in improved net interest income for the year to date period.

Net interest income was slightly lower for the third quarter of 2007 compared to the year ago quarter primarily because of higher cost of interest bearing liabilities compared to the year ago quarter. Yield on earning asset during the third quarter of 2007 was 8.29%, as compared to 8.22% for the year ago quarter, but average rates paid on interest bearing liabilities increased from 3.64% for the year ago quarter to 4.11% in 2007. This increase was largely a result of a change in mix of liabilities, as the slowing real estate economy reduced the amount of non interest bearing account balances held at Cascade. These funds were replaced with more expensive interest bearing deposits and borrowings.

Primarily because of higher loan volumes and yields, total interest income increased approximately $32.1 million (or 33.2%) for the nine months and increased $3.6 million (or 9.0%) for the three months ended September 30, 2007 as compared to the same periods in 2006. Increased volumes of interest bearing deposits and borrowings in conjunction with higher interest rates paid caused total interest expense to increase approximately $20.5 million (or 77.8%) for the nine months and increase $3.9 million (or 31.5%) for the three months ended September 30, 2007, as compared to the same periods in 2006.

Average Balances and Average Rates Earned and Paid

The following table sets forth for the quarter ended September 30, 2007 and 2006 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, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company (dollars in thousands):

	Quarter ended September 30, 2007							Quarter ended September 30, 2006

	Average Balance			Interest Income/ Expense		Average Yield or Rates		Average Balance			Interest Income/ Expense		Average Yield or Rates

Assets
Taxable securities	$	93,995		$	1,313	5.54	%	$	119,764		$	1,608	5.33	%
Non-taxable securities (1)		7,249			66	3.61	%		9,772			84	3.41	%
Interest bearing balances due from FHLB		93			1	4.27	%		382			6	6.23	%
Federal funds sold		3,423			41	4.75	%		4,578			61	5.29	%
Federal Home Loan Bank stock		6,991			11	0.62	%		6,785			—	0.00	%
Loans (1)(2)(3)(4)		1,997,010			42,631	8.47	%		1,809,905			38,672	8.48	%

Total earning assets/interest income		2,108,761			44,063	8.29	%		1,951,186			40,431	8.22	%
Reserve for loan losses		(24,665	)						(24,802	)
Cash and due from banks		51,306							59,837
Premises and equipment, net		38,141							40,579
Bank-ow ned life insurance		32,711							17,894
Accrued interest and other assets		148,002							141,915

Total assets	$	2,354,256						$	2,186,609


Liabilities and Stockholders’ Equity
Interest bearing demand deposits	$	918,875			8,389	3.62	%		735,303			5,487	2.96	%
Savings deposits		40,406			49	0.48	%		53,317			66	0.49	%
Time deposits		366,111			4,368	4.73	%		245,664			2,619	4.23	%
Other borrow ings and F&M Holdback		242,082			3,426	5.61	%		311,102			4,175	5.32	%

Total interest bearing liabilities/interest expense		1,567,474			16,232	4.11	%		1,345,386			12,347	3.64	%
Demand deposits		476,707							565,757
Other liabilities		31,080							30,394

Total liabilities		2,075,261							1,941,537
Stockholders’ equity		278,995							245,072

Total liabilities and stockholders’ equity	$	2,354,256						$	2,186,609



Net interest income				$	27,831						$	28,084


Net interest spread						4.18	%						4.58	%


Net interest income to earning assets (5)						5.24	%						5.71	%



(1)	Yields on tax-exempt municipal loans and securities have been stated on a tax-equivalent basis.

(2)	Average non-accrual loans included in average loans above w as approximately $14.6 million for 2007 and insignificant for 2006.

(3)	Loan related fees recognized during the period and included in the yield calculation totalled approximately $1.5 million in 2007 and $1.4 million in 2006.

(4)	Includes mortgage loans held for sale.

(5)	NIM has been adjusted to reflect municipal loans and securities on a tax-equivalent basis.

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 September 30, 2007, 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):

	2007 compared to 2006

	Total Increase (Decrease)			Amount of Change Attributed to

				Volume			Rate

Interest income:
Interest and fees on loans	$	3,959		$	3,998		$	(39	)
Investments and other		(327	)		(388	)		61

Total interest income		3,632			3,610			22

Interest expense:
Interest on deposits:
Interest bearing demand		2,902			1,370			1,532
Savings		(17	)		(16	)		(1	)
Time deposits		1,749			1,284			465
Other borrowings		(749	)		(926	)		177

Total interest expense		3,885			1,712			2,173


Net interest income	$	(253	)	$	1,898		$	(2,151	)

Provision for Credit Losses

At September 30, 2007, the reserve for credit losses (reserve for loan losses and loan commitments) was 1.37% of outstanding loans, as compared to 1.39% for the year ago period. The loan loss provision was $1.75 million in the third quarter of 2007 compared to $2.2 million for the year earlier period. Provision expense is determined by the Company’s ongoing analytical and evaluative assessment of the adequacy of the reserve for loan losses. At this date, management believes that its reserve for credit losses is at an appropriate level under current circumstances and prevailing economic conditions.

Non-Interest Income

Non-interest income increased 19.8% for the nine months but decreased 10.2% for the quarter ended September 30, 2007 compared to the year ago periods. The increase for the nine month period is largely due to the acquisition of F&M on April 20, 2006. Meanwhile, service charges on deposit accounts and income related to card issuer and merchant services increased for the nine-month period due to higher transaction volume including F&M. Service charge revenue increased primarily due to increased customer base in connection with the F&M acquisition and the utilization of overdraft protection products. The decline in non interest income compared to year ago quarter was partially the result of reduced mortgage origination volume and related revenue owing to the slowing pace of real estate activity as well as a reduced level of gain on sale of investment securities compared to the year ago period.

Mortgage revenue eased in the current quarter compared to the year ago quarter due to a decline in mortgage originations, as the Company originated $38.8 million in residential mortgages during the third quarter ended September 30, 2007, compared to $50.4 million for the year ago quarter and $51.5 million for the immediately preceding quarter.

Generally accepted accounting principles allow for MSRs to be carried at the lower of origination value less accumulated amortization (book value) or fair value. At September 30, 2007, the Company serviced $493.6 million in mortgage loans on behalf of its customers, representing approximately 3,600 mortgage loans. The Company’s MSRs had a book value of $3.8 million compared to a fair value of approximately $5.3 million. Thus, there was no MSR valuation adjustment for the current quarter. At September 30, 2007, expressed as a percentage of loans serviced, the book value of MSR was .78% of serviced mortgage loans, while fair value was approximately 1.08% of serviced mortgages. Fair value as a percentage of loans serviced was estimated at 1.12% a year ago.

Non-Interest Expense

Non-interest expense increased 24.1% for the nine months and increased 4.5% for the third quarter of 2007 as compared to the third quarter of 2006. Expenses for the nine month period increased primarily due to the acquisition of F&M. The third quarter increase compared to a year earlier was primarily due to higher

human resources costs in support of Cascade’s ongoing growth and infrastructure investments. In addition, the Company incurred higher occupancy related costs and other expenses grew with business volumes.

Income Taxes

Income tax expense increased during the nine-month period ended September 30, 2007, primarily as a result of higher pre-tax income. Meanwhile, the third quarter resulted in a decrease due to lower pre-tax income.

FINANCIAL CONDITION

At September 30, 2007 total assets increased 6.9% to $2.4 billion compared to $2.2 billion at December 31, 2006. Increases in cash and cash equivalents and organic loan growth during the first nine months of 2007 contributed to the overall increase. Asset growth was funded primarily by increased interest-bearing deposits and time deposits as well as borrowings in 2007 to support loan growth.

The Company had no material off balance sheet derivative financial instruments as of September 30, 2007 and December 31, 2006.

LIQUIDITY AND SOURCES OF FUNDS

The objective of liquidity management is to maintain ample cash flows to meet obligations for depositor withdrawals, fund the borrowing needs of loan customers, and to fund ongoing operations. Core relationship deposits are the primary source of the Bank’s liquidity. As such, the Bank focuses on deposit relationships with local business and consumer clients who maintain multiple accounts and services at the Bank. Management 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. Time deposits increased in 2006 and 2007 in part due to the use of brokered CD’s where the Bank pays national market rates. The Bank’s present funding mix is diverse, with approximately 76% of its checking account balances arising from business and public accounts and 24% from consumers. The composition of money market and interest-bearing demand accounts was 59% business and 41% consumer. Management invests excess funds in short-term and overnight money market instruments.

To supplement its funding sources, the Bank utilizes brokered deposits. At September 30, 2007, wholesale deposits totaled approximately $92.8 million, down from $114.3 million at December 31, 2006. A further source of funds and liquidity is the Company’s capability to borrow from reliable counterparties. The Bank utilizes its investment securities, certain loans and FHLB Stock to provide collateral to support its borrowing needs.

Policy requires the analysis and testing of liquidity to ensure ample cash flow is available under a range of circumstances. Management believes that its focus on core relationship deposits coupled with access to borrowing through reliable counterparties provides reasonable and prudent assurance that ample liquidity is available. However, depositor or counterparty behavior could change in response to competition, economic or market situations including relative returns available in stock or bond markets or other unforeseen circumstances, which could have liquidity implications that may require different strategic or operational actions.

The Bank’s primary counterparty for borrowing purposes is the Federal Home Loan Bank (FHLB). At September 30, 2007, the FHLB had extended the Bank a secured line of credit of $811.2 million that may be accessed for short or long-term borrowings given sufficient qualifying collateral. As of September 30, 2007, the Bank had qualifying collateral pledged for FHLB borrowings totaling $336.1 million. The Bank also had $53.0 million in short-term borrowing availability from the Federal Reserve Bank that requires specific qualifying collateral. In addition, the Bank maintained unsecured lines of credit totaling $105.0 million for the purchase of funds on a short-term basis from several commercial bank counterparties. At September 30, 2007, the Bank had remaining available borrowing capacity on its aggregate lines of credit totaling $711.2 million given sufficient collateral. However at September 30, 2007, the Company’s collateral availability limited such borrowing capacity to approximately $278.3 million in aggregate.

Liquidity may be affected by the Bank’s routine commitments to extend credit. Historically a significant portion of such commitments (such as lines of credit) have expired or terminated without funding. In addition, more than one-third of total commitments pertain to various construction projects. Under the terms of such construction commitments, completion of specified project benchmarks must be certified before funds may be drawn. At September 30, 2007, the Bank had approximately $772.2 million in outstanding commitments to extend credit, compared to approximately $713.9 million at year-end 2006. Management believes that the Bank’s available resources will be sufficient to fund its commitments in the normal course of business.

JUNIOR SUBORDINATED DEBENTURES

The purpose of the Company’s $68.6 million of trust preferred securities was to fund the cash portion of the F&M acquisition, to support general corporate purposes and to augment regulatory capital. Management believes the securities qualify as Tier 1 regulatory capital and are priced at a competitive level. The Company’s obligations under the Debentures and related agreements, taken together, constitute a full and irrevocable guarantee by the Company of the obligations of the Trusts. The TPS are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the Indenture related to the Debentures. The TPS may be called by the Company at par at varying times subsequent to September 15, 2011, and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS. See footnote 7 of the accompanying condensed consolidated financial statements for additional details.

OTHER BORROWINGS

CAPITAL RESOURCES

The Company’s total stockholders’ equity at September 30, 2007 was $284.7 million, an increase of $23.7 million from December 31, 2006. The increase primarily resulted from net income for the nine months ended September 30, 2007 of $29.7 million, less cash dividends paid to shareholders of $7.7 million during the same period, less the cost to repurchase shares of $1.2 million. In addition, at September 30, 2007 the Company had accumulated other comprehensive income of approximately $.4 million.

At September 30, 2007, the Company’s Tier 1 and total risked-based capital ratios under the Federal Reserve Board’s (“FRB”) risk-based capital guidelines were 10.25% and 11.48%, respectively. The FRB’s minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8%, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

A summary of the Bank’s off-balance sheet commitments at September 30, 2007 and December 31, 2006 is included in the following table (dollars in thousands):

	September 30, 2007		December 31, 2006

Commitments to extend credit	$	708,337	$	660,786
Commitments under credit card lines of credit		30,789		29,284
Standby letters of credit		33,098		23,825

Total off-balance sheet financial instruments	$	772,224	$	713,895

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Management considers interest rate risk to be a significant market risk, which could have the largest material effect on the Company’s financial condition and results of operations.

There has not been any material change in the market risk disclosure contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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. 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 are effective as of the end of the period covered by this report.

Changes in Internal Controls

During the third quarter of 2007, the Company had no changes to identified internal controls that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1A. Risk Factors

There are no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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

The following table provides information with respect to purchases made by or on behalf of the Company during the quarter ended September 30, 2007:

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plan ⁽¹⁾	Maximum Number of Shares That May Yet Be Purchased Under the Plan at the End of the Period

7/1/07 - 7/31/07	—	—	—	—
8/1/07 - 8/31/07	—	—	—	1,423,526
9/1/07 - 9/30/07	53,900	22.37	53,900	1,369,626

Total	53,900		53,900


	⁽¹⁾	The Company announced on August 13, 2007, the Board of Directors approved a stock repurchase program of up to 5% of the Company’s issued and outstanding shares, at management’s discretion over a two-year period.

Item 6. Exhibits


	(a)	Exhibits

	31.1 Certification of Chief Executive Officer

	31.2 Certification of Chief Financial Officer

	32 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	11/7/07	By	/s/ Patricia L. Moss

			Patricia L. Moss, President & CEO

Date	11/7/07	By	/s/ Gregory D. Newton

			Gregory D. Newton, EVP/Chief Financial Officer