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SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C.
20549

______________________FORM
10-K

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

For the fiscal year ended: December
31, 2008

|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(Name of registrant as specified in its charter)

|**Oregon**                                    | **93-1034484**                 
|--------------------------------------------- | -------------------------------
|(State of Incorporation)                      | (IRS Employer Identification #)
|                                             
|**1100 N.W. Wall Street, Bend,
      Oregon** | **97701**                      
|(Address of principal executive
    offices)  | (Zip Code)                     

(541) 385-6205(Registrants telephone number)

Securities registered pursuant to
Section 12(b) of the Act:

|**Common Stock, no par
    value** | **The NASDAQ Stock Market,
    LLC**
|---------------------------------- | ------------------------------------
|(Title of Class)                   | (Name of Exchange on Which
  Listed)

Securities registered pursuant to
Section 12(g) of the Act: N/A

Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No x

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes o No x

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 if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. o

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 definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (check one):

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

The aggregate market
value of the voting stock held by non-affiliates of the Registrant at June 30,
2008 (the last business day of the most recent second quarter) was $210,072,255
(based on the closing price as quoted on the NASDAQ Capital Market on that
date).

Indicate
the number of shares outstanding of each of the registrants classes of common
stock, as of the latest practicable date. 28,088,110shares of no par value
Common Stock on February 28, 2009.

DOCUMENTS INCORPORATED BY
REFERENCE

Portions
of the registrants definitive Proxy Statement for its 2009 Annual Meeting of
Shareholders of Cascade Bancorp to be held on April 27, 2009 are incorporated by
reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and
14.

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CASCADE
BANCORPFORM
10-KANNUAL REPORTTABLE OF
CONTENTS

|PART
      I
|------------
|            
|Item 1.     
|Item
1A.    
|Item 1B.    
|Item 2.     
|Item 3.     
|Item 4.     
|            
|PART II     
|Item 5.     
|            
|Item 6.     
|Item 7.     
|Item 7A.    
|Item 8.     
|Item 9.     
|Item
9A.    
|Item 9B.    
|            
|PART III    
|Item
10.    
|Item 11.    
|Item
12.    
|            
|Item 13.    
|Item
14.    
|            
|PART IV     
|Item
15.    
|Signatures  

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PART I

ITEM 1. BUSINESS

The
disclosures in this Item are qualified by the Risk Factors set forth in Item 1A
and the Section entitled Contingency Information Concerning Forward-Looking
Statements included in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations in this report and any other
cautionary statements contained herein.

Cascade Bancorp

**The
Company**

Cascade
Bancorp (Bancorp), is an Oregon chartered bank holding company formed in 1990,
headquartered in Bend, Oregon. Bancorp conducts its business activities through
its wholly-owned subsidiary, Bank of the Cascades (the Bank) which provides a
broad range of commercial and retail banking services (collectively, Bancorp and
the Bank are referred to as the Company or Cascade). At December 31, 2008,
the Company had total consolidated assets of approximately $2.3 billion, net
loans of approximately $1.9 billion and deposits of approximately $1.8
billion.

**Overview & Business
Strategy**

Management and directors of Cascade have developed and implemented
long-term goals and strategies with the objective of achieving sustainable,
above peer diluted earnings per share (EPS) growth for its shareholders while
progressively serving the banking and financial needs of its customers and
communities. The Companys business strategies include: 1) operate in and expand
into growth markets; 2) strive to recruit and retain the best relationship
bankers in such markets; 3) consistently deliver the highest levels of customer
service; and 4) apply state-of-the-art technology for the convenience of
customers. Cascades mission statement is to deliver the best in community
banking for the financial well-being of customers and shareholders. As is
detailed elsewhere in this document, the current downturn in the economy and
related declines in real estate values have had a direct and adverse affect on
the financial condition and results of operations for the Company, making near
term execution of its growth related strategies problematic until such time as
economic conditions stabilize and/or improve. In the interim, the Company plans
to conserve its capital and liquidity resources in light of the uncertain
duration and severity of the present cycle.

The
Company is managed by legal entity and not lines of business and therefore it
presents one principal operating segment for financial reporting purposes. For
more information regarding the Companys operating segment, see Note 1 to the
Companys consolidated financial statements included under Basis of
Presentation and Summary of Significant Accounting Policies.

The Companys original market was
Central Oregon, where in the past years population has grown in the 96th
percentile nationally due largely to in-migration of those seeking the quality
of life offered by the region. The Company has grown with the community to a
point of holding a 26% deposit market share of this market. The combination of a
historically fast growing economy and powerful market share contributed to
sustained high performance until the 2007 economic downturn. In past years,
management has sought to augment its banking footprint by expanding into other
attractive Oregon markets, including Northwest and Southern Oregon. Loans and
deposits in these markets total a combined 35% and 28%, respectively of total
Company balances. In April of 2006, Cascade acquired Farmers and Merchants Bank
(F&M) in Boise, Idaho. F&M held the top community bank deposit market
share of 6.9% in Ada County at that time. At December 31, 2008, this newest
market held loans and deposits of approximately 30% and 21%, respectively of
total Company balances. This expansion furthered the diversification of the
Companys banking business into multiple states and markets.

**Key Performance
Indicators**

Historically the Company has established the following performance goals:
1) consistently achieve growth in EPS that is above the norm of a group of peer
banks; 2) consistently exceed peer bank return on tangible equity; 3) identify
and prudently manage credit and business risk; 4) strive to profitably diversify
revenue sources and markets, and; 5) deliver advanced technology for the benefit
of its customers. In order to achieve these goals, the Company has established
key measures that specify annual and multi-year growth targets for loans and
deposits, set benchmarks for its credit quality and the net interest margin. In
addition, non-financial measurements are set with respect to sales

3

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and customer relationship and retention
goals to assist management in directing and monitoring results. Because of the
deteriorating economic trends and losses incurred in 2008, the Company did not
achieve its key goals as to loan, deposit growth, credit quality or
profitability. As such, executives did not receive bonuses or raises in 2008.
Neither did executives receive bonuses in 2007.

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. Since December 2007,
the United States has been in a recession. Business activity across a wide range
of industries and regions is greatly reduced and local governments and many
businesses are struggling due to the lack of consumer spending and the lack of
liquidity in the credit markets. Unemployment has increased significantly in
Idaho and Oregon, and is predicted to increase further. In 2008, as a
consequence of the continued downturn in real estate markets, the Company
incurred elevated credit losses and was subject to the general slowing of
economic growth within its footprint, causing results to fall short of many key
performance targets.

Subsidiaries

**Bank of the
Cascades**

The Bank
is an Oregon State chartered bank, opened for business in 1977 and now operates
33 branches serving communities in Central, Southwest and Northwest Oregon, as
well as in the greater Boise, Idaho area. The Bank offers a broad range of
commercial and retail banking services to its customers. Lending activities
serve small to medium-sized businesses, municipalities and public organizations,
professional and consumer relationships. The Bank provides commercial real
estate loans, real estate construction and development loans, commercial and
industrial loans as well as consumer installment, line-of-credit, credit card,
and home equity loans. It originates and services residential mortgage loans
that are typically sold on the secondary market. The Bank provides consumer and
business deposit services including checking, money market, and time deposit
accounts and related payment services, internet banking, electronic bill payment
and remote deposits. In addition, the Bank serves business customer deposit
needs with a suite of cash management services. The Bank also provides
investment and trust related services to its clientele.

With the
sustained increase in population and economy within its Oregon markets, the
Company has enjoyed rapid growth in assets and profitability over the past
decade. More recently, the Company has diversified its geographic footprint by
expanding into growth markets in the greater Boise, Idaho area with its April
2006 acquisition of F&M (see Completed Acquisition of F&M Holding
Company below.)

The principal office of the Bank is
at 1100 NW Wall Street, Bend, Oregon 97701, 541-385-6205.

**Cascade Bancorp Statutory
Trusts I, II, III and IV**

Cascade
Bancorp Statutory Trusts I, II, III and IV are wholly-owned subsidiary trusts of
Bancorp formed to facilitate the issuance of pooled trust preferred securities
(trust preferred securities). The trusts were organized in December 2004,
March 2006, and June 2006, respectively, in connection with four offerings of
trust preferred securities. For more information regarding Bancorps issuance of
trust preferred securities, see Note 12 Junior Subordinated Debentures to the
Companys audited consolidated financial statements included in Item 8 of this
report.

Employees

The
Company views its employees as an integral resource in achieving its strategies
and long term goals, and considers its relationship with its employees to be
strong. Bancorp has no employees other than its executive officers, who are also
employees of the Bank. The Company had 545 full-time equivalent employees as of
December 31, 2008, down from 559 at the prior year-end. This modest decrease
primarily resulted from attrition of non-essential staff positions and
realignment of positions to respond to current market conditions.

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Executive Officers of the
Registrant

The
names, ages as of December 31, 2008, and positions of the current executive
officers of Bancorp are listed below.

Officers Name
    
    Age
    
    PositionPatricia Moss
    
    55
    
    President and CEO of Cascade Bancorp since 1998.CEO of Bank of the Cascades since 1998.Gregory
      Newton
    
    57
    
    Executive Vice
      President, Chief Financial Officer andSecretary of
      Cascade Bancorp and Bank of the Cascadessince
      2002.Michael Delvin
    
    60
    
    Executive Vice President and Chief Operating Officerof Cascade Bancorp since 1998 and President and ChiefOperating Officer of Bank of the Cascades since 2004.Peggy
    Biss
    
    51
    
    Executive Vice
      President, Chief Human Resources Officer ofCascade Bancorp
      and Bank of the Cascades since 2002.


Risk Management

The
Company has risk management policies with respect to identification, assessment,
and management of important business risks. Such risks include, but are not
limited to, credit quality and loan concentration risks, liquidity risk,
interest rate risk, economic and market risk, as well as operating risks such as
compliance, disclosure, internal control, legal and reputation risks.

Credit
risk management objectives include loan policies and underwriting practices
designed to prudently manage credit risk, and monitoring processes to identify
and manage loan portfolio concentrations. Funding policies are designed to
maintain an appropriate volume and mix of core relationship deposits and time
deposit balances to minimize liquidity risk while efficiently funding its loan
and investment activities. In addition, the Company also utilizes borrowings
from reliable counterparties such as the Federal Home Loan Bank (FHLB) and the
Federal Reserve Bank (FRB) to augment its liquidity. The Company also utilizes
brokered deposits as part of its wholesale funding strategies. In February 2009,
the FDIC informed the Bank that it was placing a temporary restriction on the
Banks ability to increase brokered deposits. While this restriction is only in
place until the completion of the Banks regulatory exam, the results of the
exam may require a continued restriction on brokered deposits. Under banking
regulation, regulators may further restrict or place additional limits on
lending or funding activities of the Company.

The
Company monitors and manages its sensitivity to changing interest rates by
utilizing simulation analysis and scenario modeling and by adopting asset and
liability strategies and tactics to control the volatility of its net interest
income in the event of changes in interest rates. Operating related risks are
managed through implementation of and adherence to a system of internal
controls. Key control processes and procedures are subject to internal and
external testing in the course of internal audit and regulatory compliance
activities and the Company is subject to the requirements of Sarbanes Oxley Act
of 2002. The present adverse economic climate has caused elevated risk levels in
all banks, including the Company, thereby stressing risk management
capabilities. The Company strives to augment and enhance its risk management
strategies and processes as prudent and appropriate in managing the wide range
of risks inherent in its business. However there can be no assurance that such
strategies and processes will detect, contain, eliminate or prevent risks that
could result in adverse financial results in the future.

Competition

Commercial and consumer banking in Oregon and Idaho are highly
competitive businesses. The Bank competes principally with other commercial
banks, savings and loan associations, credit unions, mortgage companies, brokers
and other non-bank financial service providers. In addition to price competition
for deposits and loans, competition exists with respect to the scope and type of
services offered, customer service levels, convenience, as well as competition
in fees and service charges. Improvements in technology, communications and the
internet have intensified delivery channel competition. Competitor behavior may
result in heightened competition for banking and financial services and thus
affect future profitability.

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The Bank
competes for customers principally through the effectiveness and professionalism
of its bankers and its commitment to customer service. In addition, it competes
by offering attractive financial products and services, and by the convenient
and flexible delivery of those products and services. The Company believes its
community banking philosophy, technology investments and focus on small and
medium-sized business, professional and consumer accounts, enables it to compete
effectively with other financial service providers. In addition, the Companys
lending and deposit officers have significant experience in their respective
marketplaces. This enables them to maintain close working relationships with
their customers. To compete for larger loans, the Bank may participate loans to
other financial institutions for customers whose borrowing requirements exceed
the Companys internal lending limits.

Government Policies

The
operations of Bancorps subsidiary are affected by state and federal legislative
changes and by policies of various regulatory authorities. These policies
include, for example, statutory maximum legal lending rates, domestic monetary
policies of the Board of Governors of the Federal Reserve System and U.S.
Department of Treasury fiscal policy, and capital adequacy and liquidity
constraints imposed by federal and state regulatory agencies.

Supervision and Regulation

Bancorp
and the Bank are extensively regulated under Federal and Oregon law. These laws
and regulations are primarily intended to protect depositors and the deposit
insurance fund, not shareholders. To the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory or regulatory provisions. The operations
of the Company may be affected by legislative changes and by the policies of
various regulatory authorities. Management is unable to predict the nature or
the extent of the effects on its business and earnings that fiscal or monetary
policies, economic control or new Federal or State legislation may have in the
future. The description set forth below of the significant elements of the laws
and regulations that apply to the Company is qualified in its entirety by
reference to the full statutes, regulations and policies that are
described.

**Bank Holding Company
Regulation**

Bancorp
is a one-bank financial holding company within the meaning of the Bank Holding
Company Act (Act), and as such, is subject to regulation, supervision and
examination by the Federal Reserve Bank (FRB). Bancorp has been designated a
Financial Holding Company as defined in the 1999 Gramm-Leach-Bliley Act (see
description below), and does not expect such designation to have a material
effect on its financial condition or results of operations. Bancorp is required
to file annual reports with the FRB and to provide the FRB such additional
information as the FRB may require.

The Act
requires every bank holding company to obtain the prior approval of the FRB
before (1) acquiring, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such acquisition, it
would own or control more than 5% of such shares (unless it already owns or
controls the majority of such shares); (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. The FRB will not approve any
acquisition, merger or consolidation that would have a substantial
anticompetitive result, unless the anticompetitive effects of the proposed
transaction are clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served. The FRB also considers
capital adequacy and other financial and managerial factors in reviewing
acquisitions or mergers.

With
certain exceptions, the Act also prohibits a bank holding company from acquiring
or retaining direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities,
which by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or of managing or
controlling banks. In making this determination, the FRB considers whether the
performance of such activities by a bank holding company can be expected to
produce benefits to the public such as greater convenience, increased
competition or gains in efficiency in resources, which can be expected to
outweigh the risks of possible adverse effects such as decreased or unfair
competition, conflicts of interest or unsound banking practices.

6

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**State Regulations Concerning
Cash Dividends**

The
principal source of Bancorps cash revenues have been provided from dividends
received from the Bank. The Oregon banking laws impose certain limitations on
the payment of dividends by Oregon state chartered banks. The amount of the
dividend may not be greater than the Banks unreserved retained earnings,
deducting from that, to the extent not already charged against earnings or
reflected in a reserve, the following: (1) all bad debts, which are debts on
which interest is past due and unpaid for at least six months, unless the debt
is fully secured and in the process of collection; (2) all other assets charged
off as required by the Director of the Department of Consumer and Business
Services or a state or federal examiner; (3) all accrued expenses, interest and
taxes of the institution.

In
addition, the appropriate regulatory authorities are authorized to prohibit
banks and bank holding companies from paying dividends, which would constitute
an unsafe or unsound banking practice. Because of the elevated credit risk and
associated loss incurred in 2008, the Company cut its dividend to zero in the
fourth quarter of 2008. Meanwhile regulators have required the Company to seek
permission prior to payment of dividends on common stock or on Trust Preferred
Securities. In addition, the Bank is required to seek permission prior to
payment of cash dividends to Bancorp.

**Federal and State Bank
Regulation**

The Bank
is a Federal Deposit Insurance Corporation (FDIC) insured bank which is not a
member of the Federal Reserve System, is subject to the supervision and
regulation of the State of Oregon Department of Consumer and Business Services
and Division of Finance and Corporate Securities, respectively, and to the
supervision and regulation of the FDIC. These agencies may prohibit the Bank
from engaging in what they believe constitute unsafe or unsound banking
practices.

The
Community Reinvestment Act (CRA) requires that, in connection with
examinations of financial institutions within their jurisdiction, the FRB or the
FDIC evaluate the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility. The current CRA rating of the Bank is
satisfactory.

The Bank is subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders or any related interest of
such persons. Extensions of credit: (1) must be made on substantially the same
terms, collateral and following credit underwriting procedures that are not less
stringent than those prevailing at the time for comparable transactions with
persons not described above; and (2) must not involve more than the normal risk
of repayment or present other unfavorable features. The Bank is also subject to
certain lending limits and restrictions on overdrafts to such persons. A
violation of these restrictions may result in the assessment of substantial
civil monetary penalties on the bank or any officer, director, employee, agent
or other person participating in the conduct of the affairs of the bank, the
imposition of a cease and desist order, and other regulatory
sanctions.

Under the
Federal Deposit Insurance Corporation Improvement Act (FDICIA), each Federal
banking agency is required to prescribe by regulation, non-capital safety and
soundness standards for institutions under its authority. These standards are to
cover internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, such other operational and managerial standards
as the agency determines to be appropriate, and standards for asset quality,
earnings and stock valuation. An institution, which fails to meet these
standards, must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions. The
Company believes that the Bank meets substantially all the standards that have
been adopted.

**Capital Adequacy and Prompt
Corrective Action**

Banks and
bank holding companies are subject to various regulatory capital requirements
administered by state and federal banking agencies. Capital adequacy guidelines
and, additionally for banks, prompt corrective action regulations, involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weighting and other factors.

7

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The
Federal Reserve Board, the Office of the Comptroller of the Currency (OCC) and
the FDIC have substantially similar risk-based capital ratio and leverage ratio
guidelines for banking organizations. The guidelines are intended to ensure that
banking organizations have adequate capital given the risk levels of assets and
off-balance sheet financial instruments. Under the guidelines, banking
organizations are required to maintain minimum ratios for Tier 1 capital and
total capital to risk-weighted assets (including certain off-balance sheet
items, such as letters of credit). For purposes of calculating the ratios, a
banking organizations assets and some of its specified off-balance sheet
commitments and obligations are assigned to various risk categories. A
depository institutions or holding companys capital, in turn, is classified in
one of three tiers, depending on type:

- Core Capital (Tier 1).Tier 1 capital includes common equity, retained earnings,
  qualifying non-cumulative perpetual preferred
  stock, a limited amount of qualifying cumulative perpetual stock at the
  holding company level, minority interests in equity
  accounts of consolidated subsidiaries, qualifying trust preferred securities, less goodwill, most intangible assets and
  certain other assets.
- Supplementary Capital (Tier 2).Tier 2 capital includes, among other
  things, perpetual preferred stock and trust
  preferred securities not meeting the Tier 1 definition, qualifying mandatory
  convertible debt securities, qualifying
  subordinated debt, and allowances for possible loan and lease losses, subject
  to limitations.
- Market Risk Capital (Tier 3).Tier 3 capital includes qualifying unsecured subordinated
  debt.

Bancorp,
like other bank holding companies, currently is required to maintain Tier 1
capital and total capital (the sum of Tier 1, Tier 2 and Tier 3 capital) equal
to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets
(including various off-balance-sheet items, such as letters of credit). The
Bank, like other depository institutions, is required to maintain similar
capital levels under capital adequacy guidelines. For a depository institution
to be considered well-capitalized under the regulatory framework for prompt
corrective action, its Tier 1 and total capital ratios must be at least 6.0% and
10.0% on a risk-adjusted basis, respectively.

Bank holding companies and banks
subject to the market risk capital guidelines are required to incorporate market
and interest rate risk components into their risk-based capital standards. Under
the market risk capital guidelines, capital is allocated to support the amount
of market risk related to a financial institutions ongoing trading activities.

Bank
holding companies and banks are also required to comply with minimum leverage
ratio requirements. The leverage ratio is the ratio of a banking organizations
Tier 1 capital to its total adjusted quarterly average assets (as defined for
regulatory purposes). The requirements necessitate a minimum leverage ratio of
3.0% for financial holding companies and national banks that either have the
highest supervisory rating or have implemented the appropriate federal
regulatory authoritys risk-adjusted measure for market risk. All other
financial holding companies and national banks are required to maintain a
minimum leverage ratio of 4.0%, unless a different minimum is specified by an
appropriate regulatory authority. For a depository institution to be considered
well-capitalized under the regulatory framework for prompt corrective action,
its leverage ratio must be at least 5.0%.

The Federal Deposit Insurance Act,
as amended (FDIA), requires among other things, the federal banking agencies
to take prompt corrective action in respect of depository institutions that do
not meet minimum capital requirements. The FDIA sets forth the following five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. A depository
institutions capital tier will depend upon how its capital levels compare with
various relevant capital measures and certain other factors, as established by
regulation. The relevant capital measures are the total capital ratio, the Tier
1 capital ratio and the leverage ratio.

Under the
regulations adopted by the federal regulatory authorities, a bank will be: (i)
well-capitalized if the institution has a total risk-based capital ratio of
10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a
leverage ratio of 5.0% or greater, and is not subject to any order or written
directive by any such regulatory authority to meet and maintain a specific
capital level for any capital measure; (ii) adequately capitalized if the
institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1
risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or
greater and is not well-capitalized; (iii) undercapitalized if the
institution has a total risk-based capital ratio that is less than 8.0%, a Tier
1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than
4.0%; (iv) significantly undercapitalized if the institution has a total
risk-based capital ratio of less

8

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than 6.0%, a Tier 1 risk-based capital
ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v)
critically undercapitalized if the institutions tangible equity is equal or
less than 2.0% of average quarterly tangible assets. An institution may be
downgraded to, or deemed to be in, a capital category that is lower than
indicated by its capital ratios if it is determined to be in an unsafe or
unsound condition or if it receives an unsatisfactory examination rating with
respect to certain matters.

Banks
that are downgraded from well-capitalized to adequately capitalize face
significant additional restrictions. For example, an adequately capitalized
status affects a banks ability to accept brokered deposits and enter into
reciprocal CDARs contracts without the prior approval of the FDIC, and may cause
greater difficulty obtaining retail deposit and such bank may have to pay higher
interest rates to continue to attract those deposits. This status also affects a
banks eligibility for a streamlined review process for acquisition proposals.
In addition, banks that are adequately capitalized may not be eligible to
participate in the TARP or CPP Programs.

The FDIA
generally prohibits a depository institution from making any capital
distributions (including payment of a dividend) or paying any management fee to
its parent holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized institutions are subject to growth
limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the
plan is based on realistic assumptions and is likely to succeed in restoring the
depository institutions capital. In addition, for a capital restoration plan to
be acceptable, the depository institutions parent holding company must
guarantee that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company is limited to the lesser
of (i) an amount equal to 5.0% of the depository institutions total assets at
the time it became undercapitalized and (ii) the amount which is necessary (or
would have been necessary) to bring the institution into compliance with all
capital standards applicable with respect to such institution as of the time it
fails to comply with the plan. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly
undercapitalized.

Significantly undercapitalized
depository institutions may be subject to a number of requirements and
restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets, and cessation of
receipt of deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator.
Neither significantly undercapitalized nor critically undercapitalized
institutions are eligible to participate in the TARP or CPP Programs.

At
December 31, 2008, the Companys leverage, tier 1 capital and total risked-based
capital ratios were 8.19%, 8.94% and 10.22%, respectively, and therefore is
well capitalized. However, the Bank is currently undergoing its annual
regulatory examination and there can be no assurance that the regulators will
not downgrade the Banks capital rating. Additional future loan loss reserves,
or a downgrade in the Banks capital rating could cause the Bank to be less than
well-capitalized for regulatory purposes. The risk based capital category
below well-capitalized is deemed adequately capitalized. A failure to remain
well-capitalized could result in additional regulatory restrictions (as
described above), potentially including the issuance of a regulatory order by
the FDIC, and may cause the Company to be ineligible to receive funds through
the TARP Program.

For
information regarding the capital ratios and leverage ratio of Bancorp and the
Bank see the discussion under the section captioned Liquidity and Sources of
Funds included in Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operation and Note 21  Regulatory Matters in the notes
to consolidated financial statements included in Item 8 Financial Statements and
Supplementary Data, elsewhere in this report.

The
federal regulatory authorities risk-based capital guidelines are based upon the
1988 capital accord of the Basel Committee on Banking Supervision (the BIS).
The BIS is a committee of central banks and bank supervisors/regulators from the
major industrialized countries that develops broad policy guidelines for use by
each countrys supervisors in determining the supervisory policies they apply.
In 2004, the BIS published a new capital accord to replace its 1988 capital
accord (BIS II). BIS II provides two approaches for setting capital standards
for credit risk  an internal ratings-based approach tailored to individual
institutions circumstances and a standardized approach that bases risk
weightings on external credit assessments to a much greater extent than
permitted in existing risk-based capital guidelines. BIS II also would set
capital requirements for operational risk and refine the existing capital
requirements for market risk exposures.

9

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The U.S.
banking and thrift agencies are developing proposed revisions to their existing
capital adequacy regulations and standards based on BIS II. In November 2007,
the agencies adopted a definitive final rule for implementing BIS II in the
United States that would apply only to internationally active banking
organizations, or core banks  defined as those with consolidated total assets
of $250 billion or more or consolidated on-balance sheet foreign exposures of
$10 billion or more. The rule became effective as of April 1, 2008. Other U.S.
banking organizations may elect to adopt the requirements of this rule (if they
meet applicable qualification requirements), but they will not be required to
apply them. The rule also allows a banking organizations primary federal
supervisor to determine that the application of the rule would not be
appropriate in light of the banks asset size, level of complexity, risk
profile, or scope of operations. This new proposal, which is intended to be
finalized before the core banks may start their first transition period year
under BIS II, will replace the agencies earlier proposed amendments to existing
risk-based capital guidelines to make them more risk sensitive (formerly
referred to as the BIS I-A approach).

The Company has not elected to adopt
the requirements of this rule.

**Deposit
Insurance**

The
deposits of the Bank are insured up to applicable limits by the Deposit
Insurance Fund, or the DIF, of the FDIC and are subject to deposit insurance
assessments to maintain the DIF. The FDIC utilizes a risk-based assessment
system that imposes insurance premiums based upon a risk matrix that takes into
account a banks capital level and supervisory rating.

Effective
January 1, 2007, the FDIC imposed deposit assessment rates based on the risk
category of the bank. Risk Category I is the lowest risk category while Risk
Category IV is the highest risk category. Because of favorable loss experience
and a healthy reserve ratio in the Bank Insurance Fund, or the BIF, of the FDIC,
well-capitalized and well-managed banks, have in recent years paid minimal
premiums for FDIC insurance. With the additional deposit insurance, a deposit
premium refund, in the form of credit offsets, was granted to banks that were in
existence on December 31, 1996 and paid deposit insurance premiums prior to that
date. This credit was utilized to partially offset $1.1 million of assessments
during 2007. In February 2009, the FDIC proposed to further increase insurance
premiums and finalize a proposal to reflect risk factors into the
premiums.

On
October 16, 2008, the FDIC published a restoration plan designed to replenish
the Deposit Insurance Fund over a period of five years and to increase the
deposit insurance reserve ratio, which decreased to 1.01% of insured deposits on
June 30, 2008, to the statutory minimum of 1.15% of insured deposits by December
31, 2013. In order to implement the restoration plan, the FDIC proposes to
change both its risk-based assessment system and its base assessment rates. For
the first quarter of 2009 only, the FDIC increased all FDIC deposit assessment
rates by 7 basis points. These new rates range from 12-14 basis points for Risk
Category I institutions to 50 basis points for Risk Category IV institutions.
Under the FDICs restoration plan, the FDIC proposes to establish new initial
base assessment rates that will be subject to adjustment as described below.
Beginning April 1, 2009, the base assessment rates would range from 10-14 basis
points for Risk Category I institutions to 45 basis points for Risk Category IV
institutions. Changes to the risk-based assessment system would include
increasing premiums for institutions that rely on excessive amounts of brokered
deposits, including CDARS, increasing premiums for excessive use of secured
liabilities, including Federal Home Loan Bank advances, lowering premiums for
smaller institutions with very high capital levels, and adding financial ratios
and debt issuer ratings to the premium calculations for banks with over $10
billion in assets, while providing a reduction for their unsecured debt. Either
an increase in the Risk Category of the Bank or adjustments to the base
assessment rates could have a material adverse effect on our earnings.

In
addition, all institutions with deposits insured by the FDIC are required to pay
assessments to fund interest payments on bonds issued by the Financing
Corporation (FICO), a mixed-ownership government corporation established to
recapitalize a predecessor to the Deposit Insurance Fund. The current annualized
assessment rate is 1.14 basis points, or approximately .285 basis points per
quarter. These assessments will continue until the Financing Corporation bonds
mature in 2019.

The
enactment of EESA temporarily raised the basic limit on federal deposit
insurance coverage from $100,000 to $250,000 per depositor. The temporary
increase in deposit insurance coverage became effective on October 3, 2008.
Deposits maintained at the Bank are insured by the FDIC up to $250,000 per
account owner through December 31, 2009. On January 1, 2010, the standard
coverage limits are scheduled to return to $100,000 for all deposit categories
except Individual Retirement Accounts and certain other retirement accounts,
which will continue to be insured up to $250,000 per account owner. The Bank is
required to pay quarterly deposit insurance premiums to the FDIC.

10

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**Transaction Account
Guarantee Program**

The Bank
participates in the FDICs Transaction Account Guarantee Program, which is one
of the two primary components of the FDICs Temporary Liquidity Guarantee
Program (the TLGP) which was adopted on November 21, 2008. Under the TLGP,
effective October 14, 2008, through December 31, 2009, all noninterest-bearing
transaction accounts, IOLTA accounts, and certain NOW accounts are fully
guaranteed by the FDIC for the entire amount in the account. Coverage under the
Transaction Account Guarantee Program is in addition to and separate from the
coverage available under the FDICs general deposit insurance rules.

**Temporary Liquidity
Guarantee Program**

The FDIC
has stated that the purpose of the TLGP is to strengthen confidence and
encourage liquidity in the banking system by guaranteeing newly issued senior
unsecured debt of banks of 31 days or greater, thrifts, and certain holding
companies, and by providing full coverage of all transaction accounts,
regardless of dollar amount. Inclusion in the program was voluntary.
Participating institutions are assessed fees based on a sliding scale, depending
on length of maturity. Shorter-term debt has a lower fee structure and
longer-term debt has a higher fee. The range is from 50 basis points on debt of
180 days or less, and a maximum of 100 basis points for debt with maturities of
one year or longer, on an annualized basis. A 10-basis point surcharge is added
to a participating institutions current insurance assessment in order to fully
cover all transaction accounts. The Bank elected to participate in both parts of
the TLGP, and Bancorp elected to participate in the senior unsecured debt
portion of the program. The amount of greater than 30 day unsecured senior debt
that is eligible for the program is limited to 125% of the amount of such debt
outstanding as of September 30, 2008. If there was no unsecured senior debt
outstanding at September 30, 2008, the amount available under the program is
limited to two percent of total liabilities as of September 30, 2008. As the
Company did not have any unsecured senior debt outstanding as of September 30,
2008, the maximum amount of unsecured senior debt that can be issued under the
program is limited to two percent of its total liabilities as of September 30,
2008. On February 12, 2009 the Bank issued $41 million of TLGP under this
program comprised of $16 million floating rate and $27 million fixed rate notes
maturing February 12, 2012.

**Emergency Economic
Stabilization Act of 2008**

In
response to recent unprecedented market turmoil, the Emergency Economic
Stabilization Act of 2008 (EESA) was enacted on October 3, 2008. EESA
authorizes the U.S. Treasury Department to provide up to $700 billion in funding
for the financial services industry. Pursuant to the EESA, the Treasury was
initially authorized to use $350 billion for the Troubled Asset Relief Program
(TARP). Of this amount, Treasury allocated $250 billion to the TARP Capital
Purchase Program (see description below). On January 15, 2009, the second $350
billion of TARP monies was released to the Treasury. The Secretarys authority
under TARP expires on December 31, 2009 unless the Secretary certifies to
Congress that extension is necessary provided that his authority may not be
extended beyond October 3, 2010. The Company has applied for up to three percent
of its risk-weighted assets under the TARP Program and its application is
currently designated as pending. Management believes that any investment by
the Treasury through the TARP Program may be conditioned on the Companys
receipt of private equity capital.

On
February 25, 2009 the Treasury announced the terms and conditions for the
Capital Assistance Program (CAP). The purpose of the CAP is to restore
confidence throughout the financial system that the nations largest banking
institutions have a sufficient capital cushion against larger than expected
future losses, should they occur due to a more severe economic environment, and
to support lending to creditworthy borrowers. Under CAP, federal banking
supervisors will conduct forward-looking assessments to evaluate the capital
needs of the major U.S. banking institutions under a more challenging economic
environment. Should that assessment indicate that an additional capital buffer
is warranted, banks will have an opportunity to turn first to private sources of
capital. In light of the current challenging market environment, the Treasury is
making government capital available immediately through the CAP to eligible
banking institutions to provide this buffer. Eligible U.S. banking institutions
with assets in excess of $100 billion on a consolidated basis are required to
participate in the coordinated supervisory assessments, and may access the CAP
immediately as a means to establish any necessary additional buffer. Eligible
U.S. banking institutions with consolidated assets below $100 billion are also
eligible to obtain capital from CAP if they qualify.

Capital
provided under the CAP will be in the form of a preferred security that is
convertible into common equity at a 10 percent discount to the 20 day volume
weighed average price prevailing prior to February 9th. CAP securities will
carry a 9 percent dividend yield and would be convertible at the issuers option
(subject to the approval

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of their regulator). After 7 years, the
security would automatically convert into common equity if not redeemed or
converted before that date. Companies who participate in the CAP will be subject
to similar conditions as are imposed under the TARP Program.

**Community Reinvestment Act**

The
Community Reinvestment Act of 1977 (CRA) requires depository institutions to
assist in meeting the credit needs of their market areas consistent with safe
and sound banking practice. Under the CRA, each depository institution is
required to help meet the credit needs of its market areas by, among other
things, providing credit to low- and moderate-income individuals and
communities. Depository institutions are periodically examined for compliance
with the CRA and are assigned ratings. In order for a financial holding company
to commence any new activity permitted by the BHC Act, or to acquire any company
engaged in any new activity permitted by the BHC Act, each insured depository
institution subsidiary of the financial holding company must have received a
rating of at least satisfactory in its most recent examination under the CRA.
Furthermore, banking regulators take into account CRA ratings when considering
approval of a proposed transaction.

**Financial Privacy**

The
federal banking regulators adopted rules that limit the ability of banks and
other financial institutions to disclose non-public information about consumers
to nonaffiliated third parties. These limitations require disclosure of privacy
policies to consumers and, in some circumstances, allow consumers to prevent
disclosure of certain personal information to a nonaffiliated third party. These
regulations affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors.

**Anti-Money Laundering and
the USA Patriot Act**

A major
focus of governmental policy on financial institutions in recent years has been
aimed at combating money laundering and terrorist financing. The USA PATRIOT Act
of 2001 (the USA Patriot Act) substantially broadened the scope of United
States anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States. The United
States Treasury Department has issued and, in some cases, proposed a number of
regulations that apply various requirements of the USA Patriot Act to financial
institutions. These regulations impose obligations on financial institutions to
maintain appropriate policies, procedures and controls to detect, prevent and
report money laundering and terrorist financing and to verify the identity of
their customers. Certain of those regulations impose specific due diligence
requirements on financial institutions that maintain correspondent or private
banking relationships with non-U.S. financial institutions or persons. Failure
of a financial institution to maintain and implement adequate programs to combat
money laundering and terrorist financing, or to comply with all of the relevant
laws or regulations, could have serious legal and reputational consequences for
the institution.

**Office of Foreign Assets
Control Regulation**

The
United States has imposed economic sanctions that affect transactions with
designated foreign countries, nationals and others. These are typically known as
the OFAC rules based on their administration by the U.S. Treasury Department
Office of Foreign Assets Control (OFAC). The OFAC-administered sanctions
targeting countries take many different forms. Generally, however, they contain
one or more of the following elements: (i) restrictions on trade with or
investment in a sanctioned country, including prohibitions against direct or
indirect imports from and exports to a sanctioned country and prohibitions on
U.S. persons engaging in financial transactions relating to making investments
in, or providing investment-related advice or assistance to, a sanctioned
country; and (ii) blocking of assets in which the government or specially
designated nationals of the sanctioned country have an interest, by prohibiting
transfers of property subject to U.S. jurisdiction (including property in the
possession or control of U.S. persons). Blocked assets (e.g., property and bank
deposits) cannot be paid out, withdrawn, set off or transferred in any manner
without a license from OFAC. Failure to comply with these sanctions could have
serious legal and reputational consequences.

12

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**Interstate Banking
Legislation**

Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Riegle-Neal Act), as amended, a bank holding company may acquire banks in
states other than its home state, subject to certain limitations. The
Riegle-Neal Act also authorizes banks to merge across state lines, thereby
creating interstate branches. Banks are also permitted to acquire and to
establish de novo branches in other states where authorized under the laws of
those states.

Available Information

Bancorps
filings with the Securities and Exchange Commission (SEC), including its
annual report on Form 10-K, quarterly reports on Form 10-Q, periodic reports on
Form 8-K and amendments to these reports, are accessible free of charge at our
website at http://www.botc.com as soon as reasonably practicable after filing
with the SEC. By making this reference to our website, Bancorp does not intend
to incorporate into this report any information contained in the website. The
website should not be considered part of this report.

The SEC
maintains a website at http://www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers including
Bancorp that file electronically with the SEC.

ITEM 1A. RISK FACTORS

There are
a number of risks and uncertainties, many of which are beyond the Companys
control that could have a material adverse impact on the Companys financial
condition or results of operations. The Company describes below the most
significant of these risks and uncertainties. These should not be viewed as an
all inclusive list or in any particular order. Additional risks that are not
currently considered material may also have an adverse effect on the Company.
This report is qualified in its entirety by these risk factors.

Before
making an investment decision you should carefully consider the specific risks
detailed in this section and other risks facing the Company including, among
others, those certain risks, uncertainties and assumptions identified herein by
management that are difficult to predict and that could materially affect the
Companys financial condition and results of operations and other risks
described in this Form 10-K, the information in Part I, Item 1 Business, Part
II, Item 7 Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Companys cautionary statements as to
Forward-Looking Statements contained therein.

**The Company May Continue to
be Adversely Affected by Current Economic and Market 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. Since mid-2007 the
country has experienced a significant economic downturn. Business activity
across a wide range of industries and regions has been negatively impacted and
local governments and many businesses are in serious difficulty due to the lack
of consumer spending and the lack of liquidity in the credit markets.
Unemployment has increased significantly in Idaho and Oregon, and is predicted
to increase further.

Beginning
in mid-2007 and particularly during the second half of 2008, the financial
services industry and the securities markets generally were materially and
adversely affected by significant declines in the values of nearly all asset
classes and by a serious lack of liquidity. This was initially triggered by
declines in home prices and the values of subprime mortgages, but spread to all
mortgage and real estate asset classes, to leveraged bank loans and to nearly
all asset classes, including equities. The global markets have been
characterized by substantially increased volatility and short-selling and an
overall loss of investor confidence, initially in financial institutions, but
more recently in companies in a number of other industries and in the broader
markets.

The
Companys financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
value of collateral securing those loans, is highly dependent upon on the
business environment in the markets where the Company operates. The current
downturn in the economy and declining real estate values has had a direct and
adverse affect on the financial condition and results of operations for the
Company. This is particularly evident in the residential land development and
residential construction segments of the Companys loan portfolio. Developers or
home builders whose cash flows are dependent on sale of lots or completed
residences have experienced reduced ability to service their loan obligations
and the market value of

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underlying collateral has decreased
dramatically. The impact on the Company has been an elevated level of impaired
loans, an associated increase in provisioning expense and charge-offs for the
Company, leading to a net loss for 2008. In addition, the Company experienced
declining deposit resources because business and retail customers saw a
reduction in overall level of assets and cash available to deposit in the bank.
As a consequence, the Company increased its use of more volatile wholesale
funds. There can be no assurance that these conditions will improve in the near
term. Such conditions could continue to adversely affect the credit quality of
the Companys loans, liquidity profile and results of operations and financial
condition. These conditions may also increase the Companys need for additional
capital which may not be available on terms acceptable to the Company, if at
all.

The
banking industry and Company operates under certain regulatory restrictions that
may further impair our revenues, operating income and financial
condition.

We
operate in a highly regulated industry and are subject to examination,
supervision, and comprehensive regulation by the Oregon Division of Finance and
Corporate Securities (DFCS), the FDIC, and the Federal Reserve Board. Our
compliance with these regulations is costly and restricts certain of our
activities, including payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, interest rates paid on deposits,
access to capital and brokered deposits and locations of banking offices. If we
are unable to meet these regulatory requirements, our financial condition,
liquidity and results of operations would be materially and adversely affected.

We must
also meet regulatory capital requirements imposed by our regulators. An
inability to meet these capital requirements would result in numerous mandatory
supervisory actions and additional regulatory restrictions, and could have a
negative impact on our financial condition, liquidity and results of operations.
At December 31, 2008, we exceeded regulatory benchmarks for well-capitalized
institutions. The Companys annual examination by its primary banking regulators
is currently in process. Upon conclusion of the examination, regulators could
implement certain restrictions due to the high level of non-performing loans and
adverse economic environment. The Company has not yet received its formal
examination report from the regulators, but generally, they could, among other
things, require management to reduce nonperforming assets, raise and/or improve
capital levels, restrict dividend payments, improve liquidity, limit deposit
pricing and restrict access to brokered or other volatile wholesale funds.

Failure to meet capital requirements imposed by certain regulatory
restrictions will have a negative impact on our financial condition, liquidity
and results of operations.

We are
subject to regulatory capital guidelines, which are used to evaluate our capital
adequacy based primarily on the regulatory weighting for credit risk associated
with certain balance sheet assets and certain off-balance sheet exposures such
as unfunded loan commitments and letters of credit. To be well-capitalized we
must have a Tier 1 capital ratio of at least 6%, a combined Tier 1 and Tier 2
risk-based capital ratio of at least 10%, and a leverage ratio of at least 5%,
and not be subject to a directive, order, or written agreement to meet and
maintain specific capital levels. If we are unable to meet these capital and
other regulatory requirements, our financial condition, liquidity, and results
of operations would be materially and adversely affected.

Federal
banking regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage 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. At December
31, 2008, the bank exceeded regulatory benchmarks for well-capitalized
institutions. However, the Bank is currently undergoing its annual examination
and there can be no assurances that upon completion of the exam the regulators
will continue to categorize us as well-capitalized. Our inability to remain
well-capitalized in the future would result in numerous mandatory supervisory
actions and regulatory restrictions, including restrictions on our ability to
make capital distributions, our ability to grow, our ability to raise deposits
(particularly in the wholesale market) and could negatively impact the manner in
which we are regulated by state and federal banking regulators. In addition, a
failure to remain well-capitalized may result in the Company being ineligible
to participate in the TARP or CAP Program, which in turn may have a significant
negative impact on the Companys ability to raise outside private capital. As of
December 31, 2008 our primary sources for liquidity are from retail deposits and
available borrowings at the Federal Home Loan Bank (FHLB) and the Federal
Reserve Board (FRB) and any failure to remain well-capitalized may have a
negative impact on our ability to access these sources of borrowings.

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The
Company has a significant concentration in real estate lending. A sustained
downturn in real estate within the Companys markets could negatively impact the
Company.

Many of
the Companys loans are to real estate developers and are secured by real estate
located in Oregon and Idaho. Declining real estate values and a severe
constriction in the availability of mortgage financing has negatively impacted
real estate sales, which has resulted in customers inability to repay loans. In
addition, the value of collateral underlying such loans has decreased
materially. During 2008, we experienced significant increases in non-performing
assets relating to our real estate lending, primarily in our residential real
estate portfolio. We could see an increase in non-performing assets if more
borrowers fail to perform according to loan terms and if we take possession of
real estate properties. If these effects continue or become more pronounced,
loan losses may increase more than we expect and our financial condition and
results of operations may be adversely impacted.

In
addition, the Companys loans in other real estate portfolios including
commercial construction and commercial real estate could also suffer reduced
cash flow and reduced collateral value. Nationally, delinquencies in these types
of portfolios are increasing significantly. While our portfolios of these types
of loans have not been as adversely impacted as residential loans, there can be
no assurance that the credit quality in these portfolios will not decrease
significantly. These trends may continue and may result in losses that exceed
the estimates that are currently included in the reserve for credit losses,
which could adversely affect the Companys financial conditions and results of
operations. See also Loans  Real Estate Loan Concentration In Item 7
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

The
Company may be required to make further increases to its reserve for credit
losses and to charge off additional loans in the future, which could adversely
affect our results of operations.

The
Company maintains a reserve for credit losses, which is a reserve established
through a provision for loan losses charged to expense, that represents
managements best estimate of probable incurred losses within the existing
portfolio of loans. The allowance, in the judgment of management, is necessary
to reserve for estimated loan losses and risks inherent in the loan portfolio.
The level of the allowance reflects managements continuing evaluation of
specific credit risks; loan loss experience; current loan portfolio quality;
present economic, political and regulatory conditions; industry concentrations
and other unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the reserve for credit losses
inherently involves a high degree of subjectivity and judgment and requires us
to make significant estimates of current credit risks and future trends, all of
which may undergo material changes. Changes in economic conditions affecting
borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of our
control, may require an increase in the allowance for loan losses. Increases in
nonperforming loans have a significant impact on our allowance for loan losses.
Generally, our non-performing loans and assets reflect operating difficulties of
individual borrowers resulting from weakness in the economy of the markets we
serve. If current trends in the real estate markets continue, we expect that we
may continue to experience increased delinquencies and credit losses,
particularly with respect to The Banks residential development loans. Moreover,
with the country currently in a recession, we expect that economic conditions in
our market areas will worsen and that we could experience significantly higher
delinquencies and credit losses.

Representatives of the Federal Reserve Board, the FDIC, and the DFCS, our
principal regulators, have publicly expressed concerns about the banking
industrys lending practices and have particularly noted concerns about real
estate-secured lending. Further, state and federal regulatory agencies, as an
integral part of their examination process, review our loans and our allowance
for loan losses. Additional provision for loan losses or charge-off of loans
could adversely impact our results of operations and financial condition. See
section Loans  Loan Portfolio Composition in Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operations for detailed
description of loan portfolio to which the reserve for credit losses
applies.

**Liquidity risk could impair
our ability to fund operations and jeopardize our financial condition.**

Liquidity
is essential to our business. An inability to raise funds through traditional
deposits, brokered deposits, borrowings, the sale of securities or loans and
other sources could have a substantial negative effect on our liquidity. Our
access to funding sources in amounts adequate to finance our activities or the
terms of which are acceptable to us could be impaired by factors that affect us
specifically or the financial services industry or economy in general. Our
primary funding source is customer deposits. During 2008, our core demand
deposits declined by approximately $95 million because customers in general have
experienced reduced funds available for core deposits. As a result, the

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amount of our wholesale funding has
increased. Our ability to borrow could also be impaired by factors that are not
specific to us, such as a disruption in the financial markets or negative views
and expectations about the prospects for the financial services industry in
light of the recent turmoil faced by banking organizations and the continued
deterioration in credit markets.

We rely
on commercial and retail deposits, brokered deposits, advances from the Federal
Home Loan Bank (FHLB) of Seattle, FRB discount window and other borrowings to
fund our operations. Although we have historically been able to replace maturing
deposits and advances as necessary, we might not be able to replace such funds
in the future if, among other things, our results of operations, financial
condition or capital ratings were to change. Our access to brokered deposits may
be significantly limited if our capital rating decreases.

In
February 2009, the FDIC informed the Bank that it was placing a temporary
restriction on the Banks ability to accept additional Brokered Deposits. While
this restriction is only in place until the completion of the Banks regulatory
exam, the results of the exam may require a continued restriction on brokered
deposits. If we fall below the FDICs thresholds to be considered
well-capitalized, regulators could further restrict access to brokered
deposits and the FRB or FHLB could restrict or limit our access to secured
borrowings. Such actions could have the effect of reducing secured borrowing
capacity. In addition, the State of Oregon Treasurer may, under certain
circumstances, exercise authority to increase required level of collateral to
pledge against public deposits held at the bank from 10% to 110%. The Company
has taken certain steps to plan for this possibility but such action would have
the net effect of reducing total secured borrowing capacity. As with many
community banks, correspondent banks have withdrawn unsecured lines of credit or
now require collateralization for the purchase of fed funds on a short-term
basis due to present adverse economic environment.

Although
we consider our sources of funds adequate for our liquidity needs, there can be
no assurance in this regard and we may be compelled to seek additional sources
of financing in the future. There can be no assurance additional borrowings, if
sought, would be available to us or, if available, would be on favorable terms.
The Companys stock price has been negatively affected by the recent adverse
economic trend, as has the ability of banks and holding companies to raise
capital or borrow in the debt markets compared to recent years. If additional
financing sources are unavailable or not available on reasonable terms, our
financial condition, results of operations and future prospects could be
materially adversely affected.

The
Company may elect or be compelled to seek additional capital in the future to
augment capital ratios or levels or improve liquidity, but capital may not be
available when it is needed.

The
Company is required by federal and state regulatory authorities to maintain
adequate levels of capital to support our operations. In addition, we may elect
to raise additional capital to offset elevated risks arising from adverse
economic conditions, support our business, finance acquisitions, if any, or we
may otherwise elect to raise additional capital. Our ability to raise additional
capital, if needed, will depend on conditions in the capital markets, economic
conditions and a number of other factors, many of which are outside our control,
and on our financial performance. In addition, private investors may condition
their investment on receipt of funds from the Treasury under EESA or other
available programs. Accordingly, we cannot be assured of our ability to raise
additional capital if needed or on terms acceptable to us. If we cannot raise
additional capital when needed, it may have a material adverse effect on our
financial condition, results of operations and prospects. In that regard,
current market conditions and investor uncertainty have made it very challenging
for financial institutions in general to raise capital. There can be no
assurance that the Company could successfully raise additional capital nor that
if such capital was available its price would not be significantly dilutive to
shareholders.

In light
of diverse and uncertain economic conditions, the Company is currently seeking
additional equity capital to bolster the Companys capital and liquidity
positions. The Company may not be able to obtain such financing or it may be
only available on terms that are unfavorable to the Company and its
shareholders. In the case of equity financings, dilution to Bancorps
shareholders could result and securities issued in such financings may have
rights, preferences and privileges that are senior to those of Bancorps current
shareholders. Under the Companys articles of incorporation, the Company may
issue preferred equity without first obtaining shareholder approval. Debt
financing may include covenants that restrict Bancorps operations and interest
charges would detract from future earnings. In the event additional capital is
not available on acceptable terms through available financing sources, the
Company may instead take additional steps to preserve capital, including slowing
or reduced lending, selling certain assets, increasing loan participations. The
Company reduced its dividend to $.01 in the third quarter of 2008, and

16

---

we eliminated our cash dividend at year
end as part of its effort to preserve capital under current adverse economic
conditions. There can be no assurance that the Companys current shareholders
will not be diluted or that possible future dividends will not be adversely
affected.

On
October 3, 2008, Congress approved the $700 billion EESA of 2008. The first
phase of implementation of EESA included a $250 billion Treasury Capital
Purchase Program. The Company applied for up to three-percent of its total
risk-weighted assets in capital, which would be in the form of non-cumulative
perpetual preferred stock of the institution with a dividend rate of 5% until
the fifth anniversary of the investment, and 9% thereafter. The Companys
application for TARP funds is currently designated as pending. There can be no
assurance or guarantee that the Treasury will select the Company to participate
in its Capital Purchase Program, or that upon completion of its annual
examination the Bank will remain eligible to participate in the TARP Program.
The Company believes that an investment by the Treasury through the TARP Program
may be conditioned on the Companys receipt of private equity capital which may
not be available on terms acceptable to the Company, or may not be available at
all.

Home
values may continue to decrease leading to additional and greater than
anticipated loan charge-offs and valuation write downs on our other real estate
owned (OREO) properties.

Real
estate owned by the Bank and not used in the ordinary course of its operations
is referred to as other real estate owned or OREO property. We foreclose on
and take title to the real estate serving as collateral for many of our loans as
part of our business. During 2008, we acquired a significant amount of OREO
relating to loans originated in the raw land and land development portfolio and
to a lesser extent, other loan portfolios. Increased OREO balances lead to
greater expenses as we incur costs to manage and dispose of the properties. We
expect that our earnings in 2009 will be negatively affected by various expenses
associated with OREO, including personnel costs, insurance and taxes, completion
and repair costs, and other costs associated with property ownership, as well as
by the funding costs associated with assets that are tied up in OREO. Moreover,
our ability to sell OREO properties is affected by public perception that banks
are inclined to accept large discounts from market value in order to quickly
liquidate properties. Any decrease in market prices may lead to OREO write
downs, with a corresponding expense in our income statement. We evaluate OREO
property values periodically and write down the carrying value of the properties
if the results of our evaluations require it. Further write-downs on OREO or an
inability to sell OREO properties will have a material adverse effect on our
results of operations and financial conditions.

**Concern of customers over
deposit insurance may cause a decrease in deposits.**

With
recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by the FDIC.
Customers may withdraw deposits in an effort to ensure that the amount they have
on deposit with their bank is fully insured. Decreases in deposits may adversely
affect our liquidity, funding costs and net income.

Our
deposit insurance premium could be substantially higher in the future, which
could have a material adverse effect on our future earnings.

The FDIC
insures deposits at FDIC insured financial institutions, including the Bank. The
FDIC charges the insured financial institutions premiums to maintain the Deposit
Insurance Fund at a certain level. Current economic conditions have increased
bank failures and expectations for further failures, in which case the FDIC
ensures payments of deposits up to insured limits from the Deposit Insurance
Fund.

On
October 16, 2008, the FDIC published a restoration plan designed to replenish
the Deposit Insurance Fund over a period of five years and to increase the
deposit insurance reserve ratio, which decreased to 1.01% of insured deposits on
June 30, 2008, to the statutory minimum of 1.15% of insured deposits by December
31, 2013. In order to implement the restoration plan, the FDIC proposes to
change both its risk-based assessment system and its base assessment rates. For
the first quarter of 2009 only, the FDIC increased all FDIC deposit assessment
rates by 7 basis points. These new rates range from 12-14 basis points for Risk
Category I institutions to 50 basis points for Risk Category IV institutions.
Under the FDICs restoration plan, the FDIC proposes to establish new initial
base assessment rates that will be subject to adjustment as described below.
Beginning April 1, 2009, the base assessment rates would range from 10-14 basis
points for Risk Category I institutions to 45 basis points for Risk Category IV
institutions. Changes to the risk-based assessment system would include
increasing premiums for institutions that rely on excessive amounts of brokered
deposits, including CDARS, increasing premiums for excessive use of secured
liabilities, including Federal Home Loan Bank advances, lowering premiums for
smaller institutions with very high

17

---

capital levels, and adding financial
ratios and debt issuer ratings to the premium calculations for banks with over
$10 billion in assets, while providing a reduction for their unsecured debt. In
addition, on March 2, 2009 the FDIC proposed a special insurance assessment
applicable to all banks to maintain its insurance fund at targeted ratios.
Either an increase in the Risk Category of the Bank or adjustments to the base
assessment rates, and/or a significant special assessment could have a material
adverse effect on our earnings.

**Changes in interest rates
could adversely impact the Company.**

The
Companys earnings are highly dependent on the difference between the interest
earned on loans and investments and the interest paid on deposits and
borrowings. Changes in market interest rates impact the rates earned on loans
and investment securities and the rates paid on deposits and borrowings. In
addition, changes to the market interest rates may impact the level of loans,
deposits and investments, and the credit quality of existing loans. These rates
may be affected by many factors beyond the Companys control, including general
and economic conditions and the monetary and fiscal policies of various
governmental and regulatory authorities. Changes in interest rates may
negatively impact the Companys ability to attract deposits, make loans and
achieve satisfactory interest rate spreads, which could adversely affect the
Companys financial condition or results of operations.

The
Company is subject to extensive regulation which undergoes frequent and often
significant changes.

The
Companys operations are subject to extensive regulation by federal and state
banking authorities which impose requirements and restrictions on the Companys
operations. The regulations affect the Companys investment practices, lending
activities, and dividend policy, among other things. Moreover, federal and state
banking laws and regulations undergo frequent and often significant changes and
have been subject to significant change in recent years, sometimes retroactively
applied, and may change significantly in the future. Changes to these laws and
regulations or other actions by regulatory agencies could, among other things,
make regulatory compliance more difficult or expensive for the Company, could
limit the products the Company can offer or increase the ability of non banks to
compete and could adversely affect the Company in significant but unpredictable
ways which in turn could have a material adverse effect on the Companys
financial condition or results of operations. Failure to comply with the laws or
regulations could result in fines, penalties, sanctions and damage to the
Companys reputation which could have an adverse effect on the Companys
business and financial results.

The
financial services business is intensely competitive and our success will depend
on our ability to compete effectively.

The
Company faces competition for its services from a variety of competitors. The
Companys future growth and success depends on its ability to compete
effectively. The Company competes for deposits, loans and other financial
services with numerous financial service providers including banks, thrifts,
credit unions, mortgage companies, broker dealers, and insurance companies. To
the extent these competitors have less regulatory constraints, lower cost
structures, or increased economies of scales they may be able to offer a greater
variety of products and services or more favorable pricing for such products and
services. As a result, the Companys competitive position could be weakened,
which could adversely affect the Companys financial condition and results of
operations.

**Our information systems may
experience an interruption or breach in security.**

The
Company relies on its computer information systems in the conduct of its
business. The Company has policies and procedures in place to protect against
and reduce the occurrences of failures, interruptions, or breaches of security
of these systems, however, there can be no assurance that these policies and
procedures will eliminate the occurrence of failures, interruptions or breaches
of security or that they will adequately restore or minimize any such events.
The occurrence of a failure, interruption or breach of security of the Companys
computer information systems could result in a loss of information, business or
regulatory scrutiny, or other events, any of which could have a material adverse
effect on the Companys financial condition or results of operations.

**We continually encounter
technological change.**

Frequent
introductions of new technology-driven products and services in the financial
services industry result in the need for rapid technological change. In
addition, the effective use of technology may result in improved customer
service and reduced costs. The Companys future success depends, to a certain
extent, on its ability to identify the needs of our customers and address those
needs by using technology to provide the desired products and services

18

---

and to create additional efficiencies
in its operations. Certain competitors may have substantially greater resources
to invest in technological improvements. We may not be able to successfully
implement new technology-driven products and services or to effectively market
these products and services to our customers. Failure to implement the necessary
technological changes could have a material adverse impact on our business and,
in turn, our financial condition and results of operations.

**The Companys controls and
procedures may fail or be circumvented.**

Management regularly reviews and updates the Companys internal controls,
disclosure controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and operated, is based
in part on certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure or
circumvention of the Corporations controls and procedures or failure to comply
with regulations related to controls and procedures could have a material
adverse effect on the Companys business, results of operations and financial
condition. See Item 9A Controls and Procedures.

**Bancorp relies on dividends
from the Bank.**

Bancorp
is a separate legal entity from the Bank and substantially all of Bancorps
revenues are derived from Bank dividends. These dividends may be limited by
certain federal and state laws and regulations. In addition, any distribution of
assets of the Bank upon a liquidation or reorganization would be subject to the
prior liens of the Banks creditor. Because of the elevated credit risk and
associated loss incurred in 2008, regulators have required the Company to seek
permission prior to payment of dividends on common stock (if any) or on Trust
Preferred Securities. In addition, the Bank is required to seek permission prior
to payment of cash dividends to Bancorp. If the Bank is unable to pay dividends
to Bancorp, Bancorp may not be able to pay dividends on its stock or pay
interest on its debt, which would have a material adverse effect on the
Companys financial condition and results of operations.

**The Company may not be able
to attract or retain key banking employees.**

We expect
our future success to be driven in large part by the relationships maintained
with our clients by our executives and senior lending officers. We have entered
into employment agreements with several members of senior management. The
existence of such agreements, however, does not necessarily ensure that we will
be able to continue to retain their services. The unexpected loss of key
employees could have a material adverse effect on our business and possibly
result in reduced revenues and earnings.

The
Company strives to attract and retain key banking professionals, management and
staff. Competition to attract the best professionals in the industry can be
intense which will limit the Companys ability to hire new professionals.
Banking related revenues and net income could be adversely affected in the event
of the unexpected loss of key personnel.

The
value of certain securities in our investment securities portfolio may be
negatively affected by disruptions in the market for these
securities.

While the
Companys securities are mainly guaranteed by government sponsored enterprises
such as FNMA, GNMA, FHLMC and FHLB, the present volatility and relative
illiquidity in financial markets may cause certain investment securities held
within our investment portfolio to become less liquid. This coupled with the
uncertainty surrounding the credit risk associated with the underlying
collateral may cause material discrepancies in valuation estimates obtained from
third parties. Volatile market may affect the value of securities through
reduced valuations due to the perception of heightened credit and liquidity
risks, in addition to interest rate risk typically associated with these
securities. There can be no assurance that the declines in market value
associated with these disruptions will not result in impairments of these
assets, which would lead to accounting charges that could have a material
adverse effect on our net income, equity, and capital ratios.

**Risks Associated With The
Companys Common Stock**

Stock
price volatility may make it more difficult for you to resell your common stock
when you want and at prices you find attractive. The Companys stock price can
fluctuate significantly in response to a variety of factors including, among
other things:

| | o | Actual or anticipated
      variations in quarterly results of operations.
| | - | --------------------------------------------------------------------------
| |   |                                                                           
| | o | Recommendations by
      securities analysts.                             

19

---

| | o | Operating and stock
      price performance of other companies that investors deem comparable to
      the Company.                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                   
| | o | News reports relating
      to trends, concerns and other issues in the financial services
      industry.                                                                        
| |   |                                                                                                                                                                                   
| | o | Perceptions in the
      marketplace regarding the Company and/or its competitors.                                                                                                
| |   |                                                                                                                                                                                   
| | o | New technology used, or
      services offered, by competitors.                                                                                                                   
| |   |                                                                                                                                                                                   
| | o | Significant
      acquisitions or business combinations, strategic partnerships, joint
      ventures or capital commitments by or involving the Company or its
      competitors.
| |   |                                                                                                                                                                                   
| | o | Failure to integrate
      acquisitions or realize anticipated benefits from
  acquisitions.                                                                                      
| |   |                                                                                                                                                                                   
| | o | Changes in government
      regulations.                                                                                                                                          
| |   |                                                                                                                                                                                   
| | o | Geopolitical conditions such as acts or threats
      of terrorism or military conflicts.                                                                                         

General
market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause the Companys stock price to
change regardless of operating results.

**An Investment In The
Companys Common Stock is not an insured deposit.**

The
Companys common stock is not a bank deposit and, therefore, is not insured
against loss by the Federal Deposit Insurance Corporation (FDIC), any other
deposit insurance fund or by any other public or private entity. Investment in
the Companys common stock is inherently risky for the reasons described in this
Risk Factors section and elsewhere in this report and is subject to the same
market forces that affect the price of common stock in any company. As a result,
if you acquire the Companys common stock, you could lose some or all of your
investment.

ITEM 1B. UNRESOLVED STAFF
COMMENTS

None

ITEM 2. PROPERTIES

At
December 31, 2008, the Company conducted full-service community banking through
33 branches, including eleven in Central Oregon, three in the Salem/Keizer area,
six in Southern Oregon, one office in Portland, and 12 branches serving the
greater Boise area.

In
Oregon, three branch buildings are owned and are situated on leased land. The
Bank owns the land and buildings at seven branch locations. The Bank leases the
land and buildings at eleven branch locations. In addition, the Bank leases
space for the Operations and Information Systems departments located in Bend.
All leases include multiple renewal options.

In Idaho,
Cascade owns the land and buildings at nine branch locations and leases the land
and building at three branch locations.

Cascades
main office is located at 1100 NW Wall Street, Bend, Oregon, and consists of
approximately 15,000 square feet (sq. ft.). The building is owned by the Bank
and is situated on leased land. The ground lease term is for 30 years and
commenced June 1, 1989. There are ten renewal options of five years each. The
current rent is $6,084 per month with adjustments every five years by mutual
agreement of landlord and tenant. The main bank branch occupies the ground
floor. A separate drive-up facility is also located on this site.

In 2004,
the Bank purchased the Boyd Building with 26,035 square feet in downtown Bend.
This building is now occupied by Credit Services, Mortgage Division, Deposit
Services and Administrative/Executive offices.

The Bank
sold the Cascade Building in the Old Mill district of Bend in early 2007, to the
partners in the construction at a cost-plus price basis that was agreed upon
earlier. The Bank leased back 2,000 sq. ft. for its Old Mill banking
branch.

In
December 2008, the Bank opened a new Salem regional office, which houses branch
banking services, a mortgage center, commercial lending, professional banking
and a trust department. In addition, during 2008 the Bank closed its West Salem
branch.

20

---

In the
opinion of management, all of the Banks properties are adequately insured, its
facilities are in good condition and together with any anticipated improvements
and additions, are adequate to meet it operating needs for the foreseeable
future.

ITEM 3. LEGAL
PROCEEDINGS

The
Company is from time to time a party to various legal actions arising in the
normal course of business. Management does not expect the ultimate disposition
of these matters to have a material adverse effect on the business or financial
position of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS

(a), (b),
(c): The Company held a special meeting of shareholders on December 19, 2008.
The record date for the meeting was October 27, 2008, at which time there were
28,088,110 shares of common stock outstanding. Holders of 25,283,641 shares
(90.1%) were present at the meeting in person or by proxy. At the meeting,
shareholders were asked to act upon, and ultimately voted to approve, the
following two proposals:

| | Proposal 1. |  | To approve an amendment to our
      Articles of Incorporation to authorize 5,000,000 shares of preferred stock
      with limited voting rights:
| | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Votes
    
    Votes
    
    VotesFOR
    
    AGAINST
    
    ABSTAIN16,780,664
    
    1,472,405
    
    53,518


| | Proposal 2. |  | To approve an amendment to our
      Articles of Incorporation to increase the number of authorized shares of
      the Companys common stock from 35,000,000 to
  45,000,000:
| | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Votes
    
    Votes
    
    VotesFOR
    
    AGAINST
    
    ABSTAIN24,353,839
    
    818,559
    
    57,284


21

---

PART II

|ITEM
      5. | MARKET FOR REGISTRANTS COMMON
      EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES
|------------- | ---------------------------------------------------------------------------------------------------------------------------

Cascade
Bancorp common stock trades on the NASDAQ Capital Market under the symbol
CACB. The high and low sales prices and cash dividends shown below are
retroactively adjusted for stock dividends and splits and are based on actual
trade statistical information provided by the Nasdaq Capital Market for the
periods indicated. Prices do not include retail mark-ups, mark-downs or
commissions:

First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2008High
    
    $
    14.11
    
    
    $
    10.12
    
    
    $
    11.24
    
    
    $
    9.80Low
    
    $
    9.25
    
    
    $
    7.70
    
    
    $
    6.56
    
    
    $
    5.29First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2007High
    
    $
    31.00
    
    
    $
    25.50
    
    
    $
    24.85
    
    
    $
    23.90Low
    
    $
    24.68
    
    
    $
    21.43
    
    
    $
    21.41
    
    
    $
    13.92


The
Company declared a 25% (5:4) stock split in October 2006. The Company announced
a policy of declaring regular quarterly cash dividends in 1997. However, in view
of the present adverse and uncertain economic conditions and consistent with the
Companys dividend policy wherein quarterly cash dividends are to be paid from
current earnings, the Board of Directors accordingly decided to omit the
quarterly cash dividend for the first quarter of 2009. Future dividends will be
dependent on the Companys future earnings, capital requirements and financial
condition. The dividends declared and paid listed below have been retroactively
adjusted for past stock dividends and stock splits.

First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter**Per Share**
    
    
    
    **Per Share**
    
    
    
    **Per Share**
    
    
    
    **Per Share**2009
    
    N/A
    
    N/A
    
    N/A
    
    N/A2008
    
    $0.10
    
    $0.10
    
    $0.01
    
    $0.012007
    
    $0.09
    
    $0.09
    
    $0.09
    
    $0.10


At
February 28, 2009, the Company had 45,000,000 shares of common stock authorized
with 28,088,110 shares issued and outstanding, held by approximately 8,400
shareholders of record.

The
following table sets forth Information regarding securities authorized for
issuance under the Companys equity plans as of December 31, 2008. Additional
information regarding the Companys equity plans is presented in Note 19 of theNotes to Consolidated Financial
Statementsincluded in Item 8 of this
report.

#
      of securities remainingavailable for future#
      of securities to be
    
    Weighted average
    
    issuance under planissued on exercise of
    
    exercise price of
    
    (excluding securities inoutstanding options
    
    outstanding options
    
    column (a)Plan Category
    
    (a)
    
    (b)
    
    (c)Equity
      compensation plans approved by security holders
    
    
    1,089,091
    
    
    
    $
    12.05
    
    
    
    1,344,068Equity
      compensations plans not approved by security holders
    
    
    None
    
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    1,089,091
    
    
    
    $
    12.05
    
    
    
    1,344,068


On August
13, 2007, the Company announced that the Board 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 and repurchased a total of 400,700 shares
at an average price of $19.57 at year-end 2007. 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, capital levels, risk factors, general
economic conditions, established and special trading blackout periods, and other
investment opportunities. The Company has not repurchased shares since the
fourth quarter of 2007 and does not presently contemplate additional activity
due to the elevated risk and uncertainty arising from the economic downturn. The
Company had no repurchase activity in 2008.

22

---

Five-Year Stock Performance Graph

The graph
below compares the yearly percentage change in the cumulative shareholder
return on the Companys common stock during the five years ended December 31,
2008 with: (i) the Total Return Index for the NASDAQ Stock Market (U.S.
Companies) as reported by the Center for Research in Securities Prices; (ii) the
Total Return Index for NASDAQ Bank Stocks as reported by the Center for Research
in Securities Prices; and (iii) a peer-group of publicly traded commercial
banks. This comparison assumes $100.00 was invested on December 31, 2003, in the
Companys common stock and the comparison groups and assumes the reinvestment of
all cash dividends prior to any tax effect and adjusted to give retroactive
effect to material changes resulting from stock dividends and splits.



|                                       |  | Period
Ending
|-------------------------------------- |  | -------------
|Index                                  |  | 12/31/03     
|Cascade
      Bancorp                  |  | 100.00       
|NASDAQ
    Composite                   |  | 100.00       
|SNL
      Bank NASDAQ                  |  | 100.00       
|Cascade Bancorp 2008
      Peer Group* |  | 100.00       

*Cascade Bancorp 2008 Peer Group
consists of publicly traded commercial banks, excluding Cascade Bancorp,
headquartered in Oregon and Washington with total assets between $700 million
and $3 billion in 2008.

23

---

ITEM 6. SELECTED FINANCIAL
DATA

The
following consolidated selected financial data is derived from the Companys
audited consolidated financial statements as of and for the five years ended
December 31, 2008. The following consolidated financial data should be read in
conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and related
notes included elsewhere in this report. All of the Companys acquisitions
during the five years ended December 31, 2008 were accounted for using the
purchase method. Accordingly, the operating results of the acquired companies
are included with the Companys results of operations since their respective
dates of acquisition.

|(In
      thousands, except per share data and ratios; unaudited)
|-----------------------------------------------------------------
|                                                                 
|                                                                 
|Balance Sheet Data (at period end)                               
|Investment
securities                                            
|Loans, gross                                                     
|Total assets                                                     
|Total deposits                                                   
|Non-interest bearing deposits                                    
|Customer relationship deposits (1)                               
|Total common shareholders
      equity (book) (2)               
|Tangible common shareholders
      equity (tangible) (3)        
|Income Statement
      Data                                      
|Interest income                                                  
|Interest expense                                                 
|Net interest income                                              
|Loan loss provision                                              
|Net interest income (loss)
      after loan loss provision       
|Noninterest income                                               
|Noninterest expense                                              
|Income (loss) before income
      taxes                          
|Provision (credit) for income
      taxes                        
|Net income (loss)                                                
|Share Data (2)                                                   
|Basic earnings (loss) per
      common share                     
|Diluted earnings (loss) per
      common share                   
|Book value per common
      share                                
|Tangible value per common
      share                            
|Cash dividends paid per common
      share                       
|Ratio of dividends declared to
      net income                  
|Basic Average shares
      outstanding                           
|Fully Diluted average shares
      outstanding                   

|Notes:
|------
|      
|(1)   
|      
|(2)   
|      
|(3)   

24

---

|(In
      thousands, except per share data and ratios; unaudited)
|-----------------------------------------------------------------
|                                                                 
|                                                                 
|Key
      Ratios                                                 
|Return on average total
      shareholders equity (book)        
|Return on average total
      shareholders equity (tangible)    
|Return on average total
      assets                             
|Pre-tax pre provision return
      on average assets (1)         
|Net interest spread                                              
|Net interest margin                                              
|Total revenue (net int inc +
      non int inc)                  
|Efficiency ratio (2)                                             
|Credit Quality
      Ratios                                      
|Reserve for credit
      losses                                  
|Reserve to ending total
      loans                              
|Non-performing assets
      (3)                                  
|Non-performing assets to total
      loans                       
|Delinquent >30 days to
      total loans                         
|Net Charge offs
    (NCOs)                                      
|Net loan charge-offs
      (annualized)                          
|Provision for loan losses to
      NCOs                          
|Mortgage Activity                                                
|Mortgage
Originations                                            
|Total Servicing Portfolio
      (sold loans)                     
|Capitalized Mortgage Servicing
      Rights (MSRs)              
|Capital Ratios                                                   
|Average common shareholders
      equity to average assets      
|Leverage ratio (4)                                               
|Total risk-based capital ratio
      (4)                         

|Notes:
|------
|      
|(1)   
|      
|(2)   
|      
|(3)   
|      
|(4)   

|Total Shares
      Outstanding as of 12/31/08 | 28,088,110 | 
|--------------------------------------------- | ---------- | 

ITEM 7. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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
audited consolidated financial statements and the notes thereto as of December
31, 2008 and 2007 and for each of the years in the three-year period ended
December 31, 2008 included elsewhere in this report.

Cautionary Information Concerning
Forward-Looking Statements

This
annual report on Form 10-K 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, 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

25

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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
may cause actual results to differ materially from those projected, including
among others, the risk factors described in this report as well as general
business and economic conditions, including conditions in residential and
commercial real estate markets; volatility and disruption in financial markets;
changes in regulatory conditions or requirements or new legislation; including
government intervention in the U.S. financial system; - changes in interest
rates including timing or relative degree of change and the interest rate
policies of the FRB; competition in the industry, including our ability to
attract deposits, changes in the demand for loans and changes in consumer
spending, borrowing and savings habits; changes in credit quality and in
estimates of future reserve requirements; changes in the level of nonperforming
assets and charge-offs; and changes in accounting policies. 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 greater Boise area, 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.
Readers should carefully review all disclosures filed by the Company from time
to time with the SEC.

Recent Developments

**Financial Overview: Goodwill
Impairment and Other Adjustments as of December 31, 2008**

Subsequent to year end 2008 and after the issuance of its earnings
release on January 29, 2009, the Company made adjustments which are reflected in
the financial results for the fourth quarter and for the year ended December 31,
2008. The Company maintains risk based capital above regulatory benchmarks for
well-capitalized banks at 10.22% after taking into account the effect of these
items. The adjustments include:

- A noncash after-tax goodwill impairment charge of
  $105.0 million, resulting in the elimination of all previously recorded
  goodwill. Goodwill impairment is a noncash accounting adjustment that does not
  affect cash flow, capital or liquidity. Tier 1 and total regulatory capital
  ratios are unaffected by this adjustment;
- An increase in provision for loan losses totaling
  $14.8 million resulting from the following factors; (i) a $5.1 million
  increase mainly to increase the unallocated portion of the reserve for loan
  losses to 15%; (ii) an increase in specific reserves of approximately $9.7
  million for certain real estate secured credits;
- A $22.9 million charge against the balance sheet
  item reserve for credit losses mainly resulting from valuation write-downs
  of nonperforming collateral dependent land development loans, with a
  corresponding reduction in nonperforming asset balances;
- A valuation adjustment of approximately $0.8
  million to an OREO property based on receipt of an appraisal.

Including
the noncash goodwill charge of ($3.76) per share and other adjustments, the net
loss for the full year 2008 totals ($4.82) per share or ($134.6 million) as
compared to a net loss of ($0.76) per share or ($21.2 million) disclosed in our
preliminary unaudited earnings release dated January 29, 2009. The above
adjustments arose subsequent to the release date. The Company applied extensive
procedures in its preliminary earnings report, including analysis from
independent 3rd party experts and thorough examination of all significant
estimates. However, subsequent to that date additional evidence arose as to the
depth and duration of the current economic conditions, including evidence of the
unprecedented weakness in banking stocks in general and a significant decline in
the Companys stock price in particular, which most directly resulted in the
noncash goodwill impairment as discussed below. Certain of these adjustments
were also a result of the subsequent information as to the condition and
capacity of various obligors and appraisal valuation updates.

26

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2008
return on equity and tangible equity decreased to (47.90%) and (80.51%)
respectively, from the previously reported (7.02%) and (11.79%). Following these
adjustments, the Company maintained risk based capital above regulatory
benchmarks for well-capitalized banks at 10.22% total risk based capital
ratio. At December 31, 2008, the Companys reserve for credit losses was $48.2
million or 2.46% of total loans and nonperforming assets (NPAs) are reduced to
$159.4 million or 7.0% of total assets.

Goodwill is an intangible (noncash)
asset that was booked mainly in connection with the accounting for the
acquisition of F&M bank in Idaho in 2006. Goodwill impairment is a noncash
accounting adjustment that writes-down this intangible asset. It does not affect
cash flow, capital or liquidity, but reduces existing book value to a level very
near tangible book value. Underscoring the intangible aspect of goodwill is
that Tier 1 and Total regulatory capital ratios are unaffected by this
adjustment, and accordingly, the Companys risk based capital continues to
exceed regulatory benchmarks as a well-capitalized. The goodwill impairment
reflected the 3rd party accounting firms recently updated interim impairment
testing indicating the estimated fair value of the Companys reporting unit as
less than its book value resulting in a noncash after-tax impairment charge of
$105.0 million, eliminating all previously recorded goodwill.

On
October 3, 2008, Congress approved the $700 billion Emergency Economic
Stabilization Act of 2008 (EESA). The first phase of implementation of EESA
included a $250 billion Treasury Capital Purchase Program. The Company applied
for up to three-percent of its total risk-weighted assets in capital, which
would be in the form of non-cumulative perpetual preferred stock of the
institution with a dividend rate of 5% until the fifth anniversary of the
investment, and 9% thereafter. The Companys application is currently designated
as pending. In addition, the Company is currently seeking private equity
capital to bolster the Companys capital and liquidity positions in this time of
uncertainty and economic challenge. The Company may not be able to obtain either
TARP or private equity financing or it may be only available on terms that are
unfavorable to the Company and its shareholders. The Company believes that an
investment by the Treasury through the TARP Program may be conditioned on the
Companys receipt of private equity capital. In addition, the Bank is currently
undergoing its annual regulatory exam. If as a result of that exam the Bank is
downgraded to adequately capitalized by regulatory standards, the Bank may no
longer be eligible to receive funds through the TARP Program. In the event
additional capital is not available from the TARP Program or on acceptable terms
through available financing sources, the Company may instead take additional
steps to preserve capital, including slowing or reducing lending, selling
certain assets, and/or increasing loan participations. The Company reduced its
cash dividend to $.01 in the third quarter of 2008, and we eliminated our cash
dividend at year end as part of its effort to preserve capital under current
adverse economic conditions.

On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(TLGP). The final rule was adopted on November 21, 2008. The FDIC stated that
its purpose is to strengthen confidence and encourage liquidity in the banking
system by guaranteeing newly issued senior unsecured debt of banks of 31 days or
greater, thrifts, and certain holding companies, and by providing full coverage
of all transaction accounts, regardless of dollar amount. Inclusion in the
program was voluntary. Participating institutions are assessed fees based on a
sliding scale, depending on length of maturity. Shorter-term debt has a lower
fee structure and longer-term debt has a higher fee. The range is from 50 basis
points on debt of 180 days or less, and a maximum of 100 basis points for debt
with maturities of one year or longer, on an annualized basis. A 10-basis point
surcharge is added to a participating institutions current insurance assessment
in order to fully cover all transaction accounts. The Bank elected to
participate in both parts of the TLGP, and Bancorp elected to participate in the
senior unsecured debt portion of the program. The amount of greater than 30 day
unsecured senior debt that is eligible for the program is limited to 125% of the
amount of such debt outstanding as of September 30, 2008. If there was no
unsecured senior debt outstanding at September 30, 2008, the amount available
under the program is limited to two percent of total liabilities as of September
30, 2008. As the Company did not have any unsecured senior debt outstanding as
of September 30, 2008, the maximum amount of unsecured senior debt that can be
issued under the program is limited to two percent of its total liabilities as
of September 30, 2008. On February 12, 2009 the Bank issued $41 million of TLGP
under this program comprised of $16 million floating rate and $27 million fixed
rate notes maturing February 12, 2012.

On
February 25, 2009 the Treasury announced the terms and conditions for the
Capital Assistance Program (CAP). The purpose of the CAP is to restore
confidence throughout the financial system that the nations largest banking
institutions have a sufficient capital cushion against larger than expected
future losses, should they occur due to a more severe economic environment, and
to support lending to creditworthy borrowers. Under CAP, federal banking
supervisors will conduct forward-looking assessments to evaluate the capital
needs of the major U.S. banking institutions under a more challenging economic
environment. Should that assessment indicate that an additional

27

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capital buffer is warranted, banks will
have an opportunity to turn first to private sources of capital. In light of the
current challenging market environment, the Treasury is making government
capital available immediately through the CAP to eligible banking institutions
to provide this buffer. Eligible U.S. banking institutions with assets in excess
of $100 billion on a consolidated basis are required to participate in the
coordinated supervisory assessments, and may access the CAP immediately as a
means to establish any necessary additional buffer. Eligible U.S. banking
institutions with consolidated assets below $100 billion may also obtain capital
from the CAP.

Capital
provided under the CAP will be in the form of a preferred security that is
convertible into common equity at a 10 percent discount to the price prevailing
prior to February 9th. CAP securities will carry a 9 percent dividend yield and
would be convertible at the issuers option (subject to the approval of their
regulator). After 7 years, the security would automatically convert into common
equity if not redeemed or converted before that date. Companies who participate
in the CAP will be subject to similar conditions as are imposed under the TARP
Program.

Critical Accounting Policies and
Accounting Estimates

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 Credit
Losses:*The Companys reserve for credit
losses provides for probable losses based upon evaluations of known and inherent
risks in the loan portfolio and related loan commitments. Arriving at an
estimate of the appropriate level of reserve for credit losses (reserve for loan
losses and loan commitments) involves a high degree of judgment and assessment
of multiple variables that result in a methodology with relatively complex
calculations and analysis. Management uses historical information to assess the
adequacy of the reserve for loan losses as well as consideration of the
prevailing business environment. On an ongoing basis the Company seeks to refine
its methodology such that the reserve is responsive to the effect that
qualitative and environmental factors have upon the loan portfolio. However,
external factors and changing economic conditions may impact the portfolio and
the level of reserves in ways currently unforeseen. The reserve for loan losses
is increased by provisions for loan losses and by recoveries of loans previously
charged-off and reduced by loans charged-off. The reserve for loan commitments
is increased and decreased through non interest expense. For a full discussion
of the Companys methodology of assessing the adequacy of the reserve for credit
losses, see Reserve for Credit Losses later in this report.

Other
Real Estate Owned and Foreclosed Assets:Other real estate owned or other foreclosed assets acquired through loan
foreclosure are initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. The adjustment at the time of
foreclosure is recorded through the reserve for loans losses. Due to the
subjective nature of establishing the fair value when the asset is acquired, the
actual fair value of the other real estate owned or foreclosed asset could
differ from the original estimate. If it is determined that fair value declines
subsequent to foreclosure, a valuation allowance is recorded through noninterest
expense. Operating costs associated with the assets after acquisition are also
recorded as noninterest expense. Gains and losses on the disposition of other
real estate owned and foreclosed assets are netted and posted to other
noninterest expenses.

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
Non-Interest Income later in this item and footnote 7 of the Companys
Consolidated Financial Statements.

Goodwill and other intangibles:Net
assets of entities acquired in purchase transactions are recorded at fair value
at the date of acquisition. Identified intangibles are amortized on a
straight-line basis over the period benefited. Goodwill is not amortized,
although it is reviewed for impairment on an annual basis or if events or
circumstances indicate a potential impairment. The impairment test is performed
in two phases. The first step is to estimate the fair value of the reporting

28

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unit assuming it is sold in an orderly
transaction between knowledgeable market participants. If the estimated fair
value of the reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired; however, if the carrying amount of
the reporting unit exceeds its estimated fair value, an additional procedure
must be performed. That additional procedure compares the implied fair value of
the reporting units goodwill (as defined in SFAS No. 142,Goodwill and Other Intangible Assets) with the carrying amount of that goodwill. An impairment
loss is recorded to the extent that the carrying amount of goodwill exceeds its
implied fair value. The Company uses an independent third party accounting firm
to perform its impairment testing which concluded no goodwill impairment at its
annual test as of September 30, 2008. The third party performed an interim test
as of December 31, 2008, and recently updated its analysis. This report
concluded the estimated fair value of the Companys reporting unit was less than
its book value resulting in a noncash after-tax impairment charge of $105.0
million, eliminating all previously recorded goodwill.

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
deterioration of these local economies, resulting in an adverse affect on the
Companys financial condition or results of operations. Unemployment rates have
increased significantly and are expected to increase further. Business activity
across a wide range of industries and regions is greatly reduced and local
governments and many businesses are facing serious challenges due to the lack of
consumer spending driven by elevated unemployment and uncertainty.

The
Companys financial performance generally, and in particular the ability of
borrowers to pay interest on and repay principal of outstanding loans and the
value of collateral securing those loans, is highly dependent upon on the
business environment in the markets where the Company operates. The present
significant downturn in economic activity and declining real estate values has
had a direct and adverse affect on the condition and results of operations for
the Company. This is particularly evident in the residential land development
and residential construction segments of the Companys loan portfolio.
Developers or home builders whose cash flows are dependent on sale of lots or
completed residences experienced reduced ability to service their loan
obligations and the market value of underlying collateral was adversely
effected, The impact on the Company has been an elevated level of impaired
loans, an associated increase in provisioning expense and charge-offs for the
Company leading to a net loss for 2008. In addition, the Company experience
declining deposit resources because business and retail customers saw a
reduction in overall level of assets and cash available to deposit in the bank.
As a consequence the Company increased its use of higher priced and more
volatile wholesale funds.

Highlights and Summary of
Performance Q4 and Full Year 2008
Financial Performance

- Full Year 2008 Net Loss Per Share: at
  ($4.82) per share or ($134.6) million compared to earnings of $1.05
  per share and $30.0 million net income in
  2007.
- Fourth Quarter 2008 Net Loss Per Share: at
  ($4.92) per share or ($137.6) million compared to earnings of $0.01 per share and $0.3 million net income, respectively
  for the year ago quarter.
- Capital Ratio: exceeds regulatory
  benchmarks for well-capitalized designation at 10.22% total risk
  based capital.
- Fourth Quarter Provision for Loan Losses:
  at $61.3 million with net charge-offs of $64.0 million; year-end reserve for credit losses at $48.2 million or 2.46% of total
  loans.
- Total Loans: down 4.2% year-over-year and
  down 4.6% on a linked-quarter basis.
- Total Deposits: up 7.6% year-over-year, and
  up 2.1% on a linked-quarter basis.
- Net Interest Margin: at 4.09% for Q4-08
  (4.42% as adjusted for interest reversals) compared to 4.42% linked quarter.
- Non-Cash after-tax Goodwill Impairment of
  $105.0 million: Results in the elimination of all previously recorded goodwill. Goodwill impairment is a noncash
  accounting adjustment that does not affect cash flow, capital or liquidity. Tier 1 and Total regulatory capital ratios
  are unaffected by this adjustment.
- Cash Dividend: Board of Directors omit
  dividend for current quarter; was $.01 in prior quarter.

29

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**Net Interest
Income**

Total
interest income decreased approximately $33.5 million (or 19.5%) for 2008
primarily because of lower average yields, including interest reversed, and
interest foregone on non-performing loans. Total interest expense for 2008 also
declined by approximately $20.4 million (or 32.4%) for 2008 as compared to 2007
as a result of lower rates and reduced volumes of interest bearing deposits and
borrowings. Accordingly, net interest income decreased to $95.4 million or 12.1%
in 2008 over 2007. Yields earned on assets decreased to 6.40% for 2008, as
compared to 8.21% in 2007. Meanwhile, the average rates paid on interest bearing
liabilities for 2008 decreased to 2.49% compared to 4.01% in 2007.

**Loan portfolio and credit
quality**

At
December 31, 2008, Cascades loan portfolio was $1.96 billion, down 4.2% as
compared to a year-ago and down 4.6% on a linked-quarter basis. Management
believes that overall loan balances and growth will likely remain muted until
such time as the economic downturn runs its course. The Banks residential
development loans continue to be the most negatively effected by the downturn
including several relatively large credits in both Idaho and Central Oregon
being classified as non performing during the fourth quarter, necessitating
write-downs to estimated fair value and prompting the significant provision and
charge-offs discussed above. See Loans  Loan Portfolio Comparison
below.

At
December 31, 2008, loans delinquent >30 days were at 0.33% of total loans
compared to 0.21% for the linked-quarter and 0.47% at year-end 2007. This
compares favorably to peer banks whose average delinquency rates were 0.89% at
prior quarter end. At December 31, 2008 the delinquency rate in our commercial
real estate (CRE) portfolio was just 0.40%. CRE loans represent the largest
portion of Cascades portfolio at 36% of total loans. Delinquencies in our
commercial loan portfolio were just 0.36%; this portfolio represents 30% of
total loans. These statistics are one indication that as of year-end 2008 most
of the Companys total loans are performing well despite the economic
conditions.

Non-performing loans (NPLs) increased to $120.5 million in the fourth
quarter of 2008 mainly due to several large residential development project
loans where the Bank determined that, more likely than not, certain borrowers
would be unable to repay principal and interest according to the contractual
terms of their loans. Upon such determination the Bank promptly charges down the
balance of such loans to estimated fair value. NPLs represented 5.3% of total
assets at December 31, 2008 and compares with 4.5% for prior quarter and 1.9% a
year ago. Net loan charge-offs for the quarter were $64.0 million arising mainly
from deteriorating market prices for collateral dependent non-performing loans.
This compares with $8.2 million in net charge-offs in the prior quarter and $6.5
million for the year ago quarter.

Other
Real Estate Owned (OREO) represents real estate loan collateral now owned by the
Bank which is carried at approximate estimated fair value of $52.7 million at
December 31, 2008 as compared to $37.2 million in the prior quarter. The OREO
balance is net of a fourth quarter 2008 OREO valuation charge of $5.3 million
that is accounted for as non-interest expense (see below). OREO is largely
residential development or construction related properties. Note that this
amount excludes a $13.8 million performing OREO commercial building because
tenant revenues exceed the interest income previously received on the underlying
loan.

Non-performing assets (NPAs) include NPLs plus non-performing OREO
properties as discussed above. NPAs total $159.4 million or 7.0% of total
assets compared to $109.1 million or 4.5% of total assets for the
linked-quarter. The Company carries NPAs at the estimated fair value; however,
because of the uncertain real estate market, forward assurances cannot be given
as to the timing of ultimate disposition of such assets or that selling price
will be at or above carrying fair value. The orderly resolution of
non-performing loans and OREO properties is a priority for management.

At
December 31, 2008 the total reserve for credit losses was $48.2 million or 2.46%
of total loans. Management believes the reserve for credit losses is at an
appropriate level based on evaluation and analysis of portfolio credit quality
in conjunction with prevailing economic conditions and estimated fair values of
collateral supporting non performing loans. With uncertainty as to the depth and
duration of the real estate slowdown and its economic effect on the communities
within Cascades banking markets, forward assurances cannot be given that the
reserve will be adequate in future periods or that the level of NPAs will
subside. Further provisioning and charge-offs may be required before values
stabilize. See Loans  Real Estate Loan Concentration Below.

30

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**Deposits**

Customer
relationship deposits increased slightly during the fourth quarter to $1.4
billion or 1.4% at December 31, 2008, as compared to the linked-quarter and is
down 8.7% when compared to a year-ago. The year-over-year decline is
predominately a result of the economic downturns direct negative effect on
retail and business customer cash available to deposit in their bank. Consistent
efforts to retain and serve customers have proven successful with total customer
numbers remaining constant. To provide additional customer assurances, the
Company has chosen to participate in the FDICs temporary 100% guarantee of
non-interest bearing checking accounts, including NOW accounts paying less than
0.50%. Additionally, under recent changes from the FDIC, all interest bearing
deposit accounts are insured up to $250,000 through 12/31/2009. Total deposits
were $1.8 billion at December 30, 2008, up 7.6% compared to a year-ago and up
2.1% on a linked-quarter basis as the Bank accessed the brokered time deposit
market to augment aggregate deposits. Note that Cascades proportion of more
expensive time deposits to total deposits continues to remain well below its
peer banks because of its focus on relationship deposits. See Deposit
Liabilities and Time Deposit Maturities.

In addition to traditional deposits,
the Company may utilize brokered deposits as a source of liquidity. At December
31, 2008, our brokered deposits were $147.9 million, compared to $9.9 million at
December 31, 2007. In February 2009, the FDIC informed the Bank that it was
placing a temporary restriction on the Banks ability to increase brokered
deposits and limited pricing on deposits. While this restriction is only in
place until the completion of the Banks regulatory exam, the results of the
examination may require a continued restriction on brokered deposits.

**Non-interest income and
expense**

Non-interest Income for the fourth quarter of 2008 was $4.0 million
compared to the year-ago quarter of $5.1 million and $5.5 million for the
linked-quarter. The linked-quarter non-interest income benefited from a non-recurring gain on sale of securities which accounts for about half of the
period-to-period decline. In addition, the fourth quarter includes a $0.7
million fair value adjustment of investments underlying bank owned life
insurance policies whose prices have been adversely impacted by the uncertain
state of national credit markets. Bank service and other fee income categories
were generally flat.

Cascades
residential mortgage origination volume was down 45.3% from the year-ago period
at $20.1 million for the quarter, and compares to the linked quarter volume of
$21.3 million. Lower originations caused net mortgage related revenues to
decline to $0.3 million in the last two quarters, or about half the $0.6 million
recorded for the year-ago period. Note that the Company has focused on
originating appropriately underwritten conventional mortgage products throughout
its history while purposefully avoiding sub-prime / option-ARM type products. As
a result, the delinquency rate within Cascades $512 million portfolio of
serviced residential mortgage loans is only 1.10% at December 31, 2008,
significantly below the national mortgage delinquency rate of 6.99% at September
30, 2008. The fair value of servicing portfolio is estimated to exceed book
value by amounts ranging from $0.5 million to $1.4 million. Mortgage refinance
activity at Bank of the Cascades is up meaningfully in early 2009 in response to
lower mortgage rates in concert with FRB and Treasury efforts to unfreeze
mortgage markets.

Total
non-interest expense for 2008 increased 177.5% to $173.7 million as compared to
2007. This increase was primarily due to the noncash after-tax goodwill
impairment charge of $105.0 million. Excluding this noncash charge, noninterest
expenses increased approximately $5.9 million or 9.4% mainly due to $5.3 million
in valuation reserves for OREO properties incurred in the fourth quarter. This
expense resulted from the continuing decline in real estate values and reduced
the Companys OREO carrying value to current appraisals. Collection costs were
also higher for the year. Human resource costs were down year-over-year as
staffing was trimmed in response to slowing economy, and executive bonuses were
foregone in both 2007 and 2008. Total non-interest expenses for 2007 were 18.0%
higher compared to 2006, primarily due higher human resources costs in support
of Cascades ongoing growth and infrastructure investments. Excluding OREO
valuation and non recurring goodwill impairment charges the adjusted run rate
for normalized non-interest expense during the fourth quarter 2008 was up
modestly from the linked-quarter at approximately $16.1 million. Note that in
context of the reported annual loss, the Company has made the decision to pay no
2008 bonuses. In addition, the Company has announced that there will be no
executive salary increases effective in 2009.

**Cash
dividend**

In view
of the present adverse and uncertain economic conditions and consistent with the
Companys dividend policy wherein quarterly cash dividends are to be paid from
current earnings, the Board of Directors has decided to omit the quarterly cash
dividend at this time.

31

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RESULTS OF OPERATIONS -Years ended December 31, 2008, 2007 and
2006

Income Statement
Overview

**Net Income**

The
Company reported a net loss for 2008 of ($134.6) million compared to net income
of $30.0 million in 2007. The decrease was primarily due to the noncash
after-tax goodwill impairment charge of $105.0 million which eliminated all
previously recorded goodwill, and to a loan loss provision of $99.6 million, for
a year-over-year provision increase of $80.2 million due to the deteriorating
economic environment which adversely effected loan repayment capacity and
collateral values, particularly with respect to residential land development
loans. For the year, net interest income decreased $13.1 million or 12.1% due
mainly to lower average yields, including interest reversed, and interest
foregone on non-performing loans. Non-interest income was lower by $1.4 million
or 6.6%. Non-interest expense increased $110.9 million or 177.5% for the year
primarily due to the goodwill impairment charge of $105.0. In addition, OREO
expenses which were $8.4 million in 2008 as compared to only $0.1 million in
2007. Also, tax expense decreased 231.3% as a result of a decrease in net
income. Net income for 2007 decreased $5.7 million as compared to 2006. This
decrease was primarily due to an increase of $13.4 million in loan loss
provision over the prior year.

**Net Interest Income / Net
Interest Margin**

For most
financial institutions, including the Company, the primary component of earnings
is net interest income. Net interest income is the difference between interest
income earned, principally from loans and investment securities portfolio, and
interest paid, principally on customer deposits and borrowings. Changes in net
interest income typically result from changes in volume, spread and margin.
Volume refers to the dollar level of interest-earning assets and
interest-bearing liabilities. Spread refers to the difference between the yield
on interest-earning assets and the cost of interest-bearing liabilities. Margin
refers to net interest income divided by interest-earning assets and is
influenced by the level and relative mix of interest-earning assets and
interest-bearing liabilities.

Total
interest income decreased approximately $33.5 million (or 19.5%) for 2008
primarily because of lower average yields, including interest reversed, and
interest foregone on non-performing loans. Total interest expense for 2008 also
declined by approximately $20.4 million (or 32.4%) for 2008 as compared to 2007
as a result of lower rates and reduced volumes of interest bearing deposits and
borrowings. Accordingly, net interest income decreased to $95.4 million or 12.1%
in 2008 over 2007. Net interest income increased 10.4% in 2007 over 2006
primarily due an increase in average earning assets of 21.5% over 2006. Yields
earned on assets decreased to 6.40% for 2008, as compared to 8.21 in 2007 and
8.07% in 2006. Meanwhile, the average rates paid on interest bearing liabilities
for 2008 decreased to 2.49% compared to 4.01% in 2007 and 3.42% in
2006.

The Companys net interest margin
(NIM) decreased to 4.44% for 2008, as compared to 5.23% for 2007. Three factors
contributed to the lower NIM for the year ended December 31, 2008, including
interest forgone and reversed on NPAs, lower average balances in non-interest
bearing deposit accounts for the quarter, and the effect of lower market
interest rates on the Companys asset and liability mix. The margin can also be
affected by factors beyond market interest rates, including loan or deposit
volume shifts and/or aggressive rate offerings by competitor institutions. The
Companys financial model indicates a relatively stable interest rate risk
profile within a reasonable range of rate movements around the forward rates
currently predicted by financial markets. Because of its relatively high
proportion of non-interest bearing funds, the Companys NIM is most adversely
affected in the event the federal funds rate falls to a very low level.

Net
interest income would have been $100.4 million had the NPLs been paying in
accordance with the terms of the loans, and the amount of interest income that
would have been included in net interest income for that period for such loans.

32

---

**Components of Net Interest
Margin**

The
following table presents further analysis of the components of Cascades net
interest margin and sets forth for 2008, 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:

|                                            |  | Year ended        |           | Year ended        |  | Year ended        
|------------------------------------------- |  | ----------------- | --------- | ----------------- |  | ------------------
|                                            |  | December 31, 2008 |           | December 31, 2007 |  | December 31, 2006 
|                                            |  |                   |           |                   |  | **Interest**      
|                                            |  | **Average**       |           | **Income/**       |  | **Yield
      or**
|(dollars in
      thousands)                |  | **Balance**       |           | **Expense**       |  | **Rates**         
|Assets                                      |  |                   |           |                   |  |                   
|Taxable
      securities                    |  | $                 | 85,034    |                   |  | $                 
|Non-taxable securities (1)                  |  |                   | 5,211     |                   |  |                   
|Interest bearing
      balances due from    |  |                   |           |                   |  |                   
|Federal Home Loan
    Bank                  |  |                   | 13        |                   |  |                   
|Federal
      funds sold                    |  |                   | 2,026     |                   |  |                   
|Federal Home Loan Bank
      stock          |  |                   | 11,458    |                   |  |                   
|Loans
      (1)(2)(3)(4)                    |  |                   | 2,054,199 |                   |  |                   
|Total earning assets                        |  |                   | 2,157,941 |                   |  |                   
|Reserve
      for loan losses               |  |                   | (38,827   | )                 |  |                   
|Cash and due from
      banks               |  |                   | 48,341    |                   |  |                   
|Premises and equipment, net                 |  |                   | 37,273    |                   |  |                   
|Other Assets                                |  |                   | 207,094   |                   |  |                   
|Total assets                                |  | $                 | 2,411,822 |                   |  |                   
|                                           
|Liabilities and Stockholders Equity        |  |                   |           |                   |  |                   
|Int. bearing demand
      deposits          |  | $                 | 844,136   |                   |  |                   
|Savings
      deposits                      |  |                   | 36,761    |                   |  |                   
|Time deposits                               |  |                   | 386,990   |                   |  |                   
|Other
      borrowings                      |  |                   | 434,112   |                   |  |                   
|Total interest bearing
      liabilities    |  |                   | 1,701,999 |                   |  |                   
|Demand
      deposits                       |  |                   | 407,980   |                   |  |                   
|Other
    liabilities                       |  |                   | 20,904    |                   |  |                   
|Total
      liabilities                     |  |                   | 2,130,883 |                   |  |                   
|Stockholders
      equity                  |  |                   | 280,939   |                   |  |                   
|Total liabilities &
      equity            |  | $                 | 2,411,822 |                   |  |                   
|Net interest
      income                   |  |                   |           |                   |  | $                 
|Net
      interest spread                   |  |                   |           |                   |  |                   
|Net interest income to
      earning assets |  |                   |           |                   |  |                   

|(1) |  | Yields on tax-exempt loans and
      securities have been stated on a tax-equivalent basis.                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Average non-accrual loans
      included in the computation of average loans for 2008 was $86.3 million,
      $20.6 million for 2007 and insignificant for 2006. 
|   
|(3) |  | Loan related fees recognized
      during the period and included in the yield calculation were $4.6 million,
      $5.8 million in 2007 and $4.8 million in 2006.
|   
|(4) |  | Includes mortgage loans held for
      sale.                                                                                                                      

33

---

**Changes in Interest Income
and Expense**

The
following table shows the dollar amount of the increase (decrease) in the
Companys consolidated interest income and expense, and attributes such variance
to volume or rate changes. Variances that were immaterial have been
allocated equally between rate and volume categories:

|                              |  | Year ended December
  31,
|----------------------------- |  | -------------------------
|                              |  | 2008 over 2007           
|                              |  | Total                    
|                              |  | Increase                 
|(dollars in
      thousands)  |  | (Decrease)               
|Interest income:              |  |                          
|Interest and fees on loans    |  | $                        
|Taxable securities            |  |                          
|Non-taxable securities        |  |                          
|Interest bearing balances due |  |                          
|from FHLB                     |  |                          
|Federal Home Loan Bank stock  |  |                          
|Federal funds sold            |  |                          
|Total interest income         |  |                          
|Interest expense:             |  |                          
|Interest on deposits:         |  |                          
|Interest bearing demand       |  |                          
|Savings                       |  |                          
|Time                          |  |                          
|Other borrowings              |  |                          
|Total interest expense        |  |                          
|Net interest income           |  | $                        

**Loan Loss
Provision**

At
December 31, 2008, the reserve for credit losses (reserve for loan losses and
reserve for unfunded commitments) was 2.46% of outstanding loans, as compared to
1.81% for the year ago period. The loan loss provision was $99.6 million in
2008, $19.4 million in 2007 and $6.0 million in 2006. Provision expense is
determined by the Companys ongoing analytical and evaluative assessment of the
adequacy of the reserve for credit losses. At December 31, 2008, management
believes that its reserve for credit losses is at an appropriate level under
current circumstances and prevailing economic conditions. For further
discussion, see Reserve for Credit Losses below. There can be no assurance
that the reserve for credit losses will be sufficient to cover actual loan
related losses or that additional provision expense will not be required should
economic conditions remain adverse. See Item 1A Risk Factors and Highlights 
Loan Growth and Credit Quality earlier in this item.

**Non-interest
Income**

Total
non-interest income was $20.0 million, 5.8% below the prior year, primarily due
to a decrease of 83.2% in earnings on bank-owned life insurance due to lowered
investment returns in the volatile securities markets that persisted in 2008.
2007 non-interest income increased compared to 2006 due to increased volume of
banking accounts and related fee-based transaction activity in deposit account
services and overdraft transactions. Income related to residential mortgage
origination activity decreased approximately 23.1% in 2008 as compared to 2007
as a result of tightening credit conditions in national markets and related
home-buyer caution.

**Mortgage Banking Income -
Home Mortgage Originations and Mortgage Related Revenue**

The
Company provides residential mortgage services on a direct to customer basis and
does no business through third party (brokerage) channels. The Company has
focused its originations in conventional mortgage products while avoiding
sub-prime/option-ARM type products. The low delinquency rate within Cascades
loan servicing portfolio underscores this long-held discipline in mortgage
origination. At year end, the portfolio contained about

34

---

3,600 mortgage loans of which only 21
were past due more than 30 days. The delinquency rate on this $512 million
portfolio of serviced residential mortgage loans was at only 1.10%, notably
below the national mortgage delinquency rate of 11.18% at December 31,
2008.

Residential mortgage originations totaled $121.7 million in 2008, down
28.5% when compared to $170.1 million in 2007. Related net mortgage revenue was
$2.1 million, a decrease of 22.2% compared to $2.7 million for the previous
year. Non-Interest income arising from mortgage services totaled approximately
$3.0 million in 2006. The general level and direction of interest rates directly
influence the volume and profitability of mortgage banking. Rates continued to
decrease in 2008 and 2007, compared to stabilized rates in 2006. Despite the
lower interest rate climate in 2008, the tightening of credit conditions in
national markets and related home-buyer caution caused residential mortgage
originations to decline in 2008 to $121.7 million or 28.5% less than the $170.1
million in 2007. Net mortgage related revenue was down 22.2% at $2.1 million
compared to $2.7 million for 2007.

The Company sells a predominant
portion of its residential mortgage loans to Fannie Mae, a U.S. Government
sponsored enterprise and other secondary market investors. The Company services
such loans for Fannie Mae and is paid approximately .25% per annum on the
outstanding balances for providing this service. Such revenues are included in
the above mortgage banking results. Mortgages serviced for Fannie Mae totaled
$512.2 million at December 31, 2008, an increase over $494.0 million at December
31, 2007 and compared to $494.9 million at December 31, 2006. The related
Mortgage Servicing Rights (MSRs) were approximately $3.6 million in 2008 and
$3.8 million in 2007.

The fair value of mortgage servicing
rights portfolio (MSR) is estimated to exceed book value by amounts ranging from
$0.5 million to $2.4 million. The Company capitalizes the estimated market value
of MSRs into income upon the sale of each originated mortgage loan. The Company
amortizes MSRs in proportion to the servicing income it receives from Fannie Mae
over the estimated life of the underlying mortgages, considering prepayment
expectations and refinancing patterns. In addition, the Company amortizes, in
full, any remaining MSRs balance that is specifically associated with a serviced
loan that is refinanced or paid-off. At December 31, 2008, expressed as a
percentage of loans serviced, the book value of MSR was .70% of serviced
mortgage loans, while fair value was approximately .89% of serviced mortgages.
Fair value as a percentage of loans serviced was estimated at 1.07% a year
earlier.

Mortgage
loans not sold to the Federal National Mortgage Association (Fannie Mae or
FNMA), are generally sold servicing released to other secondary market
investors. Loans sold on this basis generate no future servicing fees for the
Company.

**Non-interest
Expenses**

Total
non-interest expense for 2008 increased 177.5% to $173.7 million as compared to
2007. This increase was primarily due to the noncash after-tax goodwill
impairment charge and expenses related to the Companys OREO properties. Human
resource costs were down year-over-year as staffing was trimmed in response to
slowing economy, and executive bonuses were foregone in both 2007 and 2008.
Total non-interest expenses for 2007 were 18.0% higher compared to 2006,
primarily due higher human resources costs in support of Cascades ongoing growth
and infrastructure investments. One of these investments was the conversion to a
more robust core information technology system during the fourth quarter of
2007, providing an enhanced platform to support growth in the years ahead. The
Companys efficiency ratio was 150.6% in 2008 compared to 48.2% in 2007.
Management anticipates that controllable expenses will continue to decline in
2009, however, collection and OREO related costs could increase depending on the
direction of the economy. In addition, on March 2, 2009 the FDIC proposed a
special insurance assessment in addition to prior increases in assessment rates
which directly affect noninterest expense. Management is presently analyzing the
FDIC announcement and its impact on the Company.

**Income
Taxes**

The
provision for income taxes decreased in 2008 primarily as a result of lower
pre-tax income and increased in 2007 over 2006 due to higher pre-tax income. The
Companys effective tax rate remains lower than the statutory tax rate due to
nontaxable income generated from investments in bank owned life insurance,
tax-exempt municipal bonds, business energy tax credits and low income housing
credits.

35

---

Financial Condition

**Balance Sheet
Overview**

Total
assets decreased 4.9% to $2.278 billion at December 31, 2008, compared to $2.394
billion at December 31, 2007. This was mainly the result of the noncash
after-tax Goodwill Impairment of $105.0 million which resulted in the
elimination of all previously recorded goodwill. Also, loans decreased $85.3
million or 4.2% to $1.956 billion at year-end 2008 as the downturn in economy
reduced loan demand, and certain non performing loans were charged off. Deposits
grew 7.6% to $1.795 billion over the prior year-end, mainly due to an increase
in brokered time deposits of $123.0 million. Customer relationship deposits were
lower as the effects of the slowing economy on retail and business customers
resulting in generally lower deposit resources. Taking brokered time deposits
into consideration, deposits decreased approximately 0.6%
year-over-year.

The following sections provide
detailed analysis of the Companys financial condition, describing its
investment securities, loan portfolio composition and credit risk management
practices (including those related to the loan loss reserve), as well as its
deposits, and capital position.

**Investment
Securities**

The
following table shows the carrying value of the Companys portfolio of
investments at December 31, 2008, 2007, and 2006.

December 31,(dollars in
      thousands)
    
    2008
    
    2007
    
    2006U.S. Agency mortgage-backed securities
    
    $
    93,534
    
    $
    65,202
    
    $
    72,610U.S. Government
      and agency securities
    
    
    8,726
    
    
    10,497
    
    
    19,319Obligations of state and political subdivisions
    
    
    3,741
    
    
    6,917
    
    
    9,180Other
      asset-backed securities
    
    
    3,260
    
    
    3,538
    
    
    4,019Total debt securities
    
    
    109,261
    
    
    86,154
    
    
    105,127Mutual
      fund
    
    
    430
    
    
    412
    
    
    390Equity securities
    
    
    
    
    
    449
    
    
    1,406Total investment securities
    
    $
    109,691
    
    $
    87,015
    
    $
    106,923


Mortgage-backed securities (MBS) are mainly adjustable rate (ARM) MBS.
Prepayment speeds on mortgages underlying MBS may cause the average life of such
securities to be shorter (or longer) than expected.

36

---

The
Companys investment portfolio increased by $22.7 million, or 26.1% from
December 31, 2007 to December 31, 2008 as a result of increased purchase
activity during the year. The following is a summary of the contractual
maturities and weighted average yields of investment securities at December 31,
2008:

|(dollars in thousands)                       |  |          |         | Weighted
|-------------------------------------------- |  | -------- | ------- | --------
|                                             |  | Carrying |         | Average 
|Type and maturity                            |  |          | Value   |         
|U.S. Agency mortgage-backed securities       |  |          |         |         
|Due after 5 but within 10 years              |  | $        | 6,352   |         
|Due after 10 years                           |  |          | 87,198  |         
|Total U.S. Agency mortgage-backed securities |  |          | 93,550  |         
|                                            
|U.S. Government and Agency Securities        |  |          |         |         
|Due within 1 year                            |  |          | 2,026   |         
|Due after 1 but within 5
    years           |  |          | 6,684   |         
|Total U.S. Government and Agency Securities  |  |          | 8,710   |         
|                                            
|State and Political Subdivisions (1)         |  |          |         |         
|Due within 1 year                            |  |          | 200     |         
|Due after 1 but within 5
    years           |  |          | 1,805   |         
|Due after 5 but within 10 years              |  |          | 1,736   |         
|Total State and Political Subdivisions       |  |          | 3,741   |         
|                                            
|U.S. Agency asset-backed securities          |  |          |         |         
|Due within 1 year                            |  |          | 688     |         
|Due after 1 but within 5
    years           |  |          | 2,572   |         
|Total U.S. Agency asset-backed securities    |  |          | 3,260   |         
|                                            
|Total
      debt securities                  |  |          | 109,261 |         
|                                            
|Mutual fund                                  |  |          | 430     |         
|Total
      Securities                       |  | $        | 109,691 |         

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

The
average years to maturity of the Companys investment portfolio was 6.5 years at
December 31, 2008 compared to 4.8 years at December 31, 2007. Duration of the
portfolio is lower than average life since many of the securities are adjustable
rate mortgage securities (ARMs) with annual interest rate
adjustments.

Investments are mainly classified as available for sale and consist
mainly of MBS and Agency notes backed by government sponsored enterprises, such
as the Government National Mortgage Association (Ginnie Mae), FNMA and FHLB.
The Company regularly reviews its investment portfolio to determine whether any
securities are other than temporarily impaired. The Company did not invest in
securities backed by sub-prime mortgages and believes its investment portfolio
has negligible exposure to such risk at this date. At December 31, 2008, the
portfolio had an unrealized losses on available for sale securities of
approximately $1.4 million and no other than temporary impaired
securities.

Loans

**Loan Portfolio
Composition**

Net loans
represent 84% of total assets as of December 31, 2008. The Company makes
substantially all of its loans to customers located within the Companys service
areas. As a result of the economic conditions and characteristics of the
Companys primary markets, including among others, the rapid growth in
population and the nature of the tourism and service industry found in much of
its market areas, Cascades loan portfolio has historically been concentrated in
real estate related loans. At the time of the 2006 acquisition of F&M in
Boise, Idaho,

37

---

F&Ms loan portfolio was similar in
composition to that of Cascade. The Company is presently working to reduce its
construction/lot portfolio in response to the challenging real estate economy.
However achieving significant reduction could prove problematic without some
improvement in economic conditions and market liquidity as well as in pricing of
related real estate assets. Because of the nature of its markets, real estate
lending is expected to continue as a major concentration within the loan
portfolio. The Company has no significant agricultural loans.

The following table presents the
composition of the Companys loan portfolio, at the dates indicated:

|                             |  |      |           |       | %
      of |      |  |       |           | %
      of |     |       |  |      | %
      of |       |     |      |  | %
      of |           |  |     |   | %
      of
|---------------------------- |  | ---- | --------- | ----- | ---------- | ---- |  | ----- | --------- | ---------- | --- | ----- |  | ---- | ---------- | ----- | --- | ---- |  | ---------- | --------- |  | --- | - | ----------
|                             |  |      |           |       | gross      |      |  |       |           | gross      |     |       |  |      | gross      |       |     |      |  | gross      |           |  |     |   | gross     
|(dollars in
      thousands) |  | 2008 |           | loans |            | 2007 |  | loans |           | 2006       |     | loans |  | 2005 |            | loans |     | 2004 |  | loans     
|Commercial                   |  | $    | 582,831   |       | 30         | %    |  | $     | 606,408   |            | 30  | %     |  | $    | 560,728    |       | 30  | %    |  | $          | 320,619   |  | 31  | % |           
|Real
      Estate:           |  |      |           |       |            |      |  |       |           |            |     |       |  |      |            |       |     |      |  |            |           |  |     |   |           
|Construction/lot:            |  |      | 517,721   |       | 26         | %    |  |       | 686,829   |            | 34  | %     |  |      | 588,251    |       | 31  | %    |  |            | 220,230   |  | 21  | % |           
|Mortgage                     |  |      | 96,248    |       | 5          | %    |  |       | 88,509    |            | 4   | %     |  |      | 80,860     |       | 4   | %    |  |            | 56,724    |  | 5   | % |           
|Commercial                   |  |      | 703,149   |       | 36         | %    |  |       | 612,694   |            | 30  | %     |  |      | 606,340    |       | 32  | %    |  |            | 417,580   |  | 40  | % |           
|Consumer                     |  |      | 56,235    |       | 3          | %    |  |       | 47,038    |            | 2   | %     |  |      | 51,083     |       | 3   | %    |  |            | 34,551    |  | 3   | % |           
|Total loans                  |  |      | 1,956,184 |       | 100        | %    |  |       | 2,041,478 |            | 100 | %     |  |      | 1,887,262  |       | 100 | %    |  |            | 1,049,704 |  | 100 | % |           
|Less:                        |  |      |           |       |            |      |  |       |           |            |     |       |  |      |            |       |     |      |  |            |           |  |     |   |           
|Reserve for loan losses      |  |      | 47,166    |       |            |      |  |       | 33,875    |            |     |       |  |      | 23,585     |       |     |      |  |            | 14,688    |  |     |   |           
|Total loans,
      net       |  | $    | 1,909,018 |       |            |      |  | $     | 2,007,603 |            |     |       |  | $    | 1,863,677  |       |     |      |  | $          | 1,035,016 |  |     |   |           

The
following table provides the geographic distribution of the Companys loan
portfolio by region as a percent of total company-wide loans at December 31,
2008:

|                             |  |         |         |       | %
      of |               |  |       |         | %
      of   |    |       |  |       | %
      of |       |       |       |  | %
      of |         |       |    |   | %
      of
|---------------------------- |  | ------- | ------- | ----- | ---------- | ------------- |  | ----- | ------- | ------------ | -- | ----- |  | ----- | ---------- | ----- | ----- | ----- |  | ---------- | ------- | ----- | -- | - | ----------
|                             |  | Central |         | gross |            | **Northwest** |  | gross |         | **Southern** |    | gross |  |       |            |       | gross |       |  |            |         | gross
|(dollars in
      thousands) |  | Oregon  |         | loans |            | Oregon        |  | loans |         | Oregon       |    | loans |  | Idaho |            | loans |       | Total |  | loans     
|Commercial                   |  | $       | 190,409 |       | 10         | %             |  | $     | 176,210 |              | 9  | %     |  | $     | 54,266     |       | 3     | %     |  | $          | 161,946 |       | 8  | % |           
|Real
      Estate:           |  |         |         |       |            |               |  |       |         |              |    |       |  |       |            |       |       |       |  |            |         |       |    |   |           
|Construction/lot             |  |         | 167,218 |       | 9          | %             |  |       | 118,363 |              | 6  | %     |  |       | 52,244     |       | 3     | %     |  |            | 179,896 |       | 9  | % |           
|Mortgage                     |  |         | 39,852  |       | 2          | %             |  |       | 9,641   |              | 0  | %     |  |       | 8,863      |       | 0     | %     |  |            | 37,892  |       | 2  | % |           
|Commercial                   |  |         | 275,133 |       | 14         | %             |  |       | 131,122 |              | 7  | %     |  |       | 119,196    |       | 6     | %     |  |            | 177,698 |       | 9  | % |           
|Consumer                     |  |         | 26,236  |       | 1          | %             |  |       | 6,461   |              | 0  | %     |  |       | 4,088      |       | 0     | %     |  |            | 19,450  |       | 1  | % |           
|Total loans                  |  | $       | 698,848 |       | 36         | %             |  | $     | 441,797 |              | 23 | %     |  | $     | 238,657    |       | 11    | %     |  | $          | 576,882 |       | 29 | % |           

At December 31, 2008, the
contractual maturities of all loans by category were as follows:

(dollars in thousands)
    
    
    
    
    Due afterone year,Due within
    
    but within
    
    Due afterLoan Category
    
    
    one year
    
    five years
    
    five years
    
    TotalCommercial
    
    $
    282,412
    
    $
    203,213
    
    $
    97,207
    
    $
    582,831Real
      Estate:Construction/Lot
    
    
    382,987
    
    
    103,561
    
    
    31,174
    
    
    517,721Mortgage
    
    
    7,821
    
    
    16,665
    
    
    71,762
    
    
    96,248Commercial
    
    
    21,781
    
    
    80,000
    
    
    601,368
    
    
    703,149Consumer
    
    
    6,165
    
    
    21,987
    
    
    28,083
    
    
    56,235$
    701,166
    
    $
    425,425
    
    $
    829,593
    
    $
    1,956,184


At
December 31, 2008, variable and adjustable rate loans contractually due after
one year totaled $935.2 million and loans with predetermined or fixed rates due
after one year totaled $319.8 million.

**Real Estate Loan
Concentration Risk**

Real
estate loans have historically represented a significant portion of the
Companys overall loan portfolio and real estate is frequently a material
component of collateral for the Companys loans. Approximately two-thirds of
total loans have exposure to real estate, including construction and lot loans
(comprised of land development plus residential and commercial construction loan
types), commercial real estate loans, residential mortgage loans, and consumer
real estate. Risks associated with real estate loans include fluctuating land
values, demand and prices for

38

---

housing or commercial properties,
national, regional and local economic conditions, changes in tax policies, and
concentration within the Banks market area. Management believes that, because
of the strong historic and projected population in-migration and related
economic growth expected in the Banks markets, its real estate concentration
risk is mitigated to an acceptable level over the long term. However because of
the unprecedented economic deterioration and its effects on real estate no
assurance can be given that the Companys assessment of its real estate risks
will be accurate in either the short or long term.

The
following paragraphs provide information on portions of the Companys real
estate loan portfolio, specifically Construction/lot and Commercial Real Estate.
All such lending activities are subject to the varied risks of real estate
lending. The Companys loan origination process requires specialized
underwriting, collateral and approval procedures, which mitigates, but does not
eliminate the risk that loans may not be repaid. Note that the minor balance
differences between the preceding and following tables are a result of the
inclusion of net deferred loan fees in the above tables.

(a)
Residential land development category. This
category is included in the construction/lot portfolio balances above, and
represents loans made to developers for the purpose of acquiring raw land and/or
for the subsequent development and sale of residential lots. Such loans
typically finance land purchase and infrastructure development of properties
(i.e. roads, utilities, etc.) with the aim of making improved lots ready for
subsequent sale to consumers or builders for ultimate construction of
residential units. The primary source of repayment of such loans is generally
the cash flow from developer sale of lots or improved parcels of land while real
estate collateral, secondary sources and personal guarantees may provide an
additional measure of security for such loans. Recent nationwide downturn in
real estate has slowed lot and home sales within the Companys markets and the
credit crisis of the third quarter 2008 exacerbated the trend. This has
adversely impacted certain developers by lengthening the marketing period of
their projects and negatively affecting borrower liquidity and collateral
values. Weakness in this category of loans contributed significantly to the
elevated level of provision for loan losses in the fourth quarter of 2008. The
situation continues to be closely monitored and an elevated level of
provisioning may be required should deterioration continue.

%
      ofConstr /
    
    %
      of%
      of
    
    lot
    
    gross(dollars in
      thousands)
    
    12/31/2008
    
    category
    
    portfolio
    
    loans
    
    12/31/2007Residential Land Development:Raw Land
    
    $
    72,329
    
    
    36
    %
    
    
    14
    %
    
    4
    %
    
    $
    107,160Land Development
    
    
    112,234
    
    
    56
    %
    
    
    22
    %
    
    6
    %
    
    
    183,809Speculative Lots
    
    
    14,855
    
    
    7
    %
    
    
    3
    %
    
    1
    %
    
    
    20,916$
    199,418
    
    
    100
    %
    
    
    39
    %
    
    10
    %
    
    $
    311,885Geographic distribution by region:Central Oregon
    
    $
    74,209
    
    
    37
    %
    
    
    14
    %
    
    4
    %
    
    $
    107,150Northwest Oregon
    
    
    4,670
    
    
    2
    %
    
    
    1
    %
    
    0
    %
    
    
    5,328Southern Oregon
    
    
    12,722
    
    
    6
    %
    
    
    2
    %
    
    1
    %
    
    
    32,541Total Oregon
    
    
    91,601
    
    
    46
    %
    
    
    18
    %
    
    5
    %
    
    
    145,019Idaho
    
    
    107,816
    
    
    54
    %
    
    
    21
    %
    
    6
    %
    
    
    166,866Grand
      total
    
    $
    199,418
    
    
    100
    %
    
    
    39
    %
    
    10
    %
    
    $
    311,885


(b)
Residential construction category. This
category is included in the construction/lot portfolio balances above, and
represents financing of homeowner or builder construction of new residences and
condominiums where the obligor generally intends to own the home upon
construction (pre-sold), or builder construction of homes for resale
(speculative construction).

Pre-sold
construction loans are underwritten to facilitate permanent mortgage (take-out)
financing at the end of the construction phase. Especially with the turmoil in
mortgage markets of the last year, no assurance can be made that committed
take-out financing will be available at conclusion of construction.

Speculative construction lending finances builders/contractors who rely
on the sale of completed homes to repay loans. The Bank may finance construction
costs within residential subdivisions or on a custom site basis. Speculative
construction loans decreased in 2008 as a result of the nationwide downturn in
residential real estate. This may impact certain builders by lengthening the
marketing period for constructed homes and negatively affecting borrower
liquidity and collateral values.

39

---

%
      ofConsrtr. /
    
    %
      of%
      of
    
    lot
    
    gross(dollars in
      thousands)
    
    2008
    
    category
    
    portfolio
    
    loans
    
    2007Residential ConstructionPre sold
    
    $
    62,153
    
    
    58
    %
    
    
    12
    %
    
    3
    %
    
    $
    64,714Lots
    
    
    17,331
    
    
    16
    %
    
    
    3
    %
    
    1
    %
    
    
    20,575Speculative Construction
    
    
    28,461
    
    
    26
    %
    
    
    5
    %
    
    1
    %
    
    
    58,048$
    107,945
    
    
    100
    %
    
    
    21
    %
    
    6
    %
    
    $
    143,337Geographic
      distribution by region:Central Oregon
    
    $
    43,593
    
    
    40
    %
    
    
    8
    %
    
    2
    %
    
    $
    52,785Northwest Oregon
    
    
    30,445
    
    
    28
    %
    
    
    6
    %
    
    2
    %
    
    
    31,652Southern Oregon
    
    
    5,799
    
    
    5
    %
    
    
    1
    %
    
    0
    %
    
    
    14,252Total Oregon
    
    
    79,837
    
    
    74
    %
    
    
    15
    %
    
    4
    %
    
    
    98,689Idaho
    
    
    28,109
    
    
    26
    %
    
    
    5
    %
    
    1
    %
    
    
    44,648Grand
      total
    
    $
    107,945
    
    
    100
    %
    
    
    21
    %
    
    6
    %
    
    $
    143,337


(c)
Commercial construction category. This
category is included in the construction/lot portfolio balances above, and
represents lending to finance the construction or development of commercial
properties. Obligors may be the business owner/occupier of the building who
intends to operate its business from the property upon construction, or non
owner (speculative) developers. The expected source of repayment of these loans
is typically the sale or refinancing of the project upon completion of the
construction phase. In certain circumstances, the Company may provide or commit
to take-out financing upon construction. Take-out financing is subject to the
project meeting specific underwriting guidelines.

The
overall decline in 2008 in our commercial construction portfolio is mainly
related to project completions. While our portfolios of these types of loans
have not experienced the severe credit quality challenges experienced in
residential construction projects, there can be no assurance that the credit
quality in these portfolios will not be impacted should present challenging
economic conditions persist. No assurance can be given that losses will not
exceed the estimates that are currently included in the reserve for credit
losses, which could adversely affect the Companys financial conditions and
results of operations.

|                                   |  |      |         |          |            |           |     |       | %
      of |      |            |  |    |   | 
|---------------------------------- |  | ---- | ------- | -------- | ---------- | --------- | --- | ----- | ---------- | ---- | ---------- |  | -- | - | 
|                                   |  |      |         |          |            |           |     |       | Consrtr. / |      | %
      of |  |    |  
|                                   |  |      |         |          | %
      of |           | lot |       | gross      |      |            | 
|(dollars in
      thousands)       |  | 2008 |         | category |            | portfolio |     | loans |            | 2007
|Commercial Construction:           |  |      |         |          |            |           |     |       |            |      |            |  |    |   | 
|Pre sold                           |  | $    | 27,826  |          |            | 13        | %   |       |            | 5    | %          |  | 1  | % | 
|Lots                               |  |      | 16,404  |          |            | 8         | %   |       |            | 3    | %          |  | 1  | % | 
|Speculative                        |  |      | 143,719 |          |            | 68        | %   |       |            | 28   | %          |  | 7  | % | 
|Speculative Lots                   |  |      | 22,409  |          |            | 11        | %   |       |            | 4    | %          |  | 1  | % | 
|                                   |  | $    | 210,358 |          |            | 100       | %   |       |            | 41   | %          |  | 11 | % | 
|Geographic distribution by region: |  |      |         |          |            |           |     |       |            |      |            |  |    |   | 
|Central Oregon                     |  | $    | 49,817  |          |            | 24        | %   |       |            | 10   | %          |  | 3  | % | 
|Northwest Oregon                   |  |      | 83,720  |          |            | 40        | %   |       |            | 16   | %          |  | 4  | % | 
|Southern Oregon                    |  |      | 33,837  |          |            | 16        | %   |       |            | 7    | %          |  | 2  | % | 
|Total Oregon                       |  |      | 167,375 |          |            | 80        | %   |       |            | 32   | %          |  | 9  | % | 
|Idaho                              |  |      | 42,984  |          |            | 20        | %   |       |            | 8    | %          |  | 2  | % | 
|Grand
      total                  |  | $    | 210,358 |          |            | 100       | %   |       |            | 41   | %          |  | 11 | % | 

(d)
Commercial real estate (CRE) portfolio. This
$703.1 million portfolio generally represents loans to finance retail, office
and industrial commercial properties. The expected source of repayment of CRE
loans is generally the operations of the borrowers business, rents or the
obligors personal income. Management believes that commercial real estate
collateral may provide an additional measure of security for such loans. CRE
loans represent approximately 34% of total loans outstanding as of December 31,
2008. Approximately 51% of CRE loans are made to owner-occupied users of the
commercial property, while 49% of CRE loans are to obligors who do
not

40

---

directly occupy the property.
Management believes that lending to owner-occupied businesses mitigates, but
does not eliminate, commercial real estate risk. The average loan in the CRE
portfolio is only about $0.6 million and 88% of balances are represented in
loans under $5 million. This granular and well diversified portfolio has
maintained low delinquency and only modest deterioration in the present
downturn. However no assurance can be given that residential real estate or
other economic factors will not adversely impact the CRE portfolio.

%
      of
    
    %
      oftotal
    
    grossCommercial
      Real Estate:
    
    2008
    
    CRE
    
    loans
    
    2007Owner occupied
    
    $
    358,232
    
    51
    %
    
    18
    %
    
    $
    325,990Non-owner occupied
    
    
    344,917
    
    49
    %
    
    18
    %
    
    
    288,873$
    703,149
    
    100
    %
    
    34
    %
    
    $
    614,863


The
following table provides the geographic distribution of the Companys CRE loan
portfolio by region as a percent of total company-wide CRE loans at December 31,
2008:

|                              |  |         |         |       | %
      of |           |  |       |         | %
      of |    |       |  |       | %
      of |       |     |       |  | %
      of |         |  |   
|----------------------------- |  | ------- | ------- | ----- | ---------- | --------- |  | ----- | ------- | ---------- | -- | ----- |  | ----- | ---------- | ----- | --- | ----- |  | ---------- | ------- |  | --
|                              |  |         |         |       | total      |           |  |       |         | total      |    |       |  |       | total      |       |     |       |  | total      |         |  |   
|                              |  | Central |         | CRE   |            | Northwest |  | CRE   |         | Southern   |    | CRE   |  |       |            |       | CRE |       |  |           
|Commercial
      Real Estate: |  | Oregon  |         | loans |            | Oregon    |  | loans |         | Oregon     |    | loans |  | Idaho |            | loans |     | Total
|Owner occupied                |  | $       | 148,556 |       | 21         | %         |  | $     | 47,031  |            | 7  | %     |  | $     | 53,670     |       | 8   | %     |  | $          | 108,975 |  | 15
|Non-owner occupied            |  |         | 127,806 |       | 18         | %         |  |       | 84,624  |            | 12 | %     |  |       | 65,716     |       | 9   | %     |  |            | 66,771  |  | 9 
|Total loans                   |  | $       | 276,362 |       | 39         | %         |  | $     | 131,655 |            | 18 | %     |  | $     | 119,386    |       | 17  | %     |  | $          | 175,746 |  | 25

**Lending and Credit
Management**

The
Company has a comprehensive risk management process to control, underwrite,
monitor and manage credit risk in lending. The underwriting of loans relies
principally on an analysis of an obligors historical and prospective cash flow
augmented by collateral assessment, credit bureau information, as well as
business plan assessment. Ongoing loan portfolio monitoring is performed by a
centralized credit administration function including review and testing of
compliance to loan policies and procedures. Internal and external auditors and
bank regulatory examiners periodically sample and test certain credit files as
well. Risk of nonpayment exists with respect to all loans, which could result in
the classification of such loans as non-performing. Certain specific types of
risks are associated with different types of loans.

**Reserve for Credit
Losses**

The
reserve for credit losses (reserve for loan losses and reserve for unfunded
commitments) represents managements recognition of the assumed and present
risks of extending credit and the possible inability or failure of the obligors
to make repayment. The reserve is maintained at a level considered adequate to
provide for losses on loans and unfunded commitments based on managements
current assessment of a variety of current factors affecting the loan portfolio.
Such factors include loss experience, review of problem loans, current economic
conditions, and an overall evaluation of the quality, risk characteristics and
concentration of loans in the portfolio. The level of reserve for credit losses
is also subject to review by the bank regulatory authorities who may require
increases to the reserve based on their evaluation of the information available
to it at the time of its examination of the Bank. The reserve is based on
estimates, and ultimate losses may vary from the current estimates. These
estimates are reviewed periodically, and, as adjustments become necessary, they
are reported in earnings in the periods in which they become known. The reserve
is increased by provisions charged to operations and reduced by loans
charged-off, net of recoveries. See Income Statement Overview  Loan Loss
Provision above.

The
following describes the Companys methodology for assessing the appropriate
level of the reserve for loan losses. For this purpose, loans and related
commitments to loan are analyzed and reserves categorized into the allocated
reserve, specifically identified reserves for impaired loans, the unallocated
reserve, or the reserve for unfunded loan commitments.

The
allocated portion of the reserve and the reserve for unfunded loan commitments
is calculated by applying loss factors to outstanding loan balances and
commitments to loan, segregated by differing risk categories. Loss factors are
based on historical loss experience, adjusted for current economic trends,
portfolio concentrations and

41

---

other conditions affecting the
portfolio. In certain circumstances with respect to adversely risk rated loans,
loss factors may utilize information as to estimated collateral values,
secondary sources of repayment, guarantees and other relevant factors. The
allocated portion of the consumer loan reserve is estimated based mainly upon a
quarterly credit scoring analysis.

Impaired
loans are either specifically allocated for in the reserve for loan losses or
reflected as a partial charge-off of the loan balance. The Bank considers loans
to be impaired when management believes that it is probable that either
principal and/or interest amounts due will not be collected according to the
contractual terms. Impairment is measured on a loan-by-loan basis by either the
present value of expected future cash flows discounted at the loans effective
interest rate, the loans observable market price or the estimated fair value of
the loans underlying collateral or related guaranty. Since a significant
portion of the Banks loans are collateralized by real estate, the Bank
primarily measures impairment based on the estimated fair value of the
underlying collateral or related guaranty. In certain other cases, impairment is
measured based on the present value of expected future cash flows discounted at
the loans effective interest rate. Smaller balance homogeneous loans (typically
installment loans) are collectively evaluated for impairment. Accordingly, the
Bank does not separately identify individual installment loans for impairment
disclosures. Generally, the Bank evaluates a loan for impairment when a loan is
determined to be adversely risk rated.

The
unallocated portion of the reserve is based upon managements evaluation of
various factors that are not directly measured in the determination of the
allocated and specific reserves. Such factors include uncertainties in economic
conditions, uncertainties in identifying triggering events that directly
correlate to subsequent loss rates, risk factors that have not yet manifested
themselves in loss allocation factors , regulatory examinations, and historical
loss experience data that may not precisely correspond to the current portfolio.
In addition, the unallocated reserve may be further adjusted based upon the
direction of various risk indicators. Examples of such factors include the risk
as to current and prospective economic conditions, the level and trend of charge
offs or recoveries, levels and trends in delinquencies or non accrual loans,
risks in originating loans in new or unfamiliar markets, risk of heightened
imprecision of appraisals used in estimating real estate values, or initiating
specialty lending to industry sectors that may be new to the Company. Although
this allocation process may not accurately predict credit losses by loan type or
in aggregate, the total reserve for credit losses is available to absorb losses
that may arise from any loan type or category. Due to the subjectivity involved
in the determination of the unallocated portion of the reserve for loan losses,
the relationship of the unallocated component to the total reserve for loan
losses may fluctuate from period to period. As of year end 2008 the Companys
unallocated reserve balance was approximately 15% of its calculated reserve
based upon the managements assessment of elevated risk factors mainly relating
to uncertain and adverse economic conditions and the level and trend of
delinquencies, nonaccrual loans and charge-offs.

The
Banks ratio of reserve for credit losses to total loans has been relatively
stable for the last several years but increased especially in the fourth quarter
of 2008 reflecting higher risk resulting from the real estate downturn
especially with respect to deterioration in the land development loan portfolio
discussed above. The reserve was 2.46% at December 31, 2008 compared to 1.81% at
December 31, 2007, and 1.42% at December 31, 2006. At this date, management
believes that the Companys reserve is at an appropriate level under current
circumstances and prevailing economic conditions. The total amount of actual
loan losses may vary significantly from the estimated amount. No assurance can
be given that in any particular period, the reserve for credit losses will be
sufficient, or that loan losses will not be sustained that are sizable in
relation to the amount reserved, or that changing economic factors or other
environmental conditions could cause increases in the loan loss
provision.

Effective
in the fourth quarter of 2006, the Company began classifying reserves for
unfunded commitments as a liability on the consolidated balance sheet. Such
reserves are included as part of the overall reserve for credit losses. Prior to
2006, unfunded commitments were classified in accordance with industry practice
of other banks in our peer group. Reserves for unfunded commitments totaled
approximately $1,039 and $3,163 at December 31, 2008 and 2007,
respectively.

Allocation of Reserve for Credit
Losses

The
increase in unallocated portion of the reserve as well as the higher reserve
allocated to the construction/lot portfolio reflects the elevated level of
uncertainty as to the severity of the real estate downturn and its related
effects on loan credit quality in general and most specifically as to the land
development portfolio. Typical factors leading to

42

---

changes in reserve allocation include
changes in debt service coverage ratios, guarantor and/or collateral valuation
as well as economic conditions that may have a specific or generalized impact on
the relative risks inherent in various loan portfolios. Although this allocation
process may not accurately predict credit losses by loan type or in aggregate,
the total reserve for loan losses is available to absorb losses that may arise
from any loan type or category.

The following
table allocates the reserve for credit losses among major loan types.

|                                |  | 2008        |   | 2007             
|------------------------------- |  | ----------- | - | -----------------
|                                |  | Reserve for |   | **Allocated**    
|                                |  | loan and    |   | reserve as       
|                                |  | commitment  |   | a
      % of loan
|(dollars in
      thousands)    |  | losses      |   | category         
|Commercial                      |  |             | $ | 11,614           
|Real
      Estate:              |  |             |   |                  
|Construction/lot                |  |             |   | 18,722           
|Mortgage                        |  |             |   | 1,696            
|Commercial                      |  |             |   | 7,064            
|Consumer                        |  |             |   | 1,893            
|Committed/unfunded              |  |             |   | 735              
|Unallocated                     |  |             |   | 6,481            
|Total reserve for credit losses |  |             | $ | 48,205           
|                               
|                                |  | 2006        |   | 2005             
|                                |  | Reserve for |   | **Allocated**    
|                                |  | loan and    |   | reserve as       
|                                |  | commitment  |   | a
      % of loan
|                                |  | losses      |   | category         
|Commercial                      |  |             | $ | 7,818            
|Real
      Estate:              |  |             |   |                  
|Construction/lot                |  |             |   | 6,328            
|Mortgage                        |  |             |   | 1,112            
|Commercial                      |  |             |   | 3,986            
|Consumer                        |  |             |   | 2,050            
|Committed/unfunded              |  |             |   | 3,213            
|Unallocated                     |  |             |   | 2,291            
|Total reserve for credit losses |  |             | $ | 26,798           
|                               
|                                |  | 2008        |   |                  
|                                |  | Reserve for |   | **Allocated**    
|                                |  | loan and    |   | reserve as       
|                                |  | commitment  |   | a
      % of loan
|                                |  | losses      |   | category         
|Commercial                      |  |             | $ | 3,740            
|Real
      Estate:              |  |             |   |                  
|Construction/lot                |  |             |   | 1,643            
|Mortgage                        |  |             |   | 572              
|Commercial                      |  |             |   | 2,268            
|Consumer                        |  |             |   | 1,518            
|Committed/unfunded              |  |             |   | 2,077            
|Unallocated                     |  |             |   | 603              
|Total reserve for credit losses |  |             | $ | 12,421           

43

---

The
following table summarizes the Companys reserve for credit losses and
charge-off and recovery activity for each of the last five years:

|                                          |  | Year ended December
  31,
|----------------------------------------- |  | -------------------------
|(dollars in
      thousands)              |  | 2008                     
|Loans outstanding at                      |  |                          
|end of period                             |  | $                        
|Average loans
      outstanding           |  |                          
|during the period                         |  | $                        
|Reserve for loan losses, balance          |  |                          
|beginning of period                       |  | $                        
|Recoveries:                               |  |                          
|Commercial                                |  |                          
|Real Estate:                              |  |                          
|Construction                              |  |                          
|Mortgage                                  |  |                          
|Commercial                                |  |                          
|Consumer                                  |  |                          
|                                          |  |                          
|Loans charged
      off:                  |  |                          
|Commercial                                |  |                          
|Real Estate:                              |  |                          
|Construction                              |  |                          
|Mortgage                                  |  |                          
|Commercial                                |  |                          
|Consumer                                  |  |                          
|                                          |  |                          
|Net loans
      charged-off               |  |                          
|Provision charged to operations           |  |                          
|Reserves
      acquired from CBGP         |  |                          
|Reserve for unfunded commitments          |  |                          
|reclassified to other liabilities         |  |                          
|Reserves
      acquired from F&M          |  |                          
|Reserve balance, end of period            |  | $                        
|                                         
|Ratio of net loans charged-off to         |  |                          
|average loans outstanding                 |  |                          
|Ratio of reserve
      for loan losses to |  |                          
|loans at end of period                    |  |                          

44

---

The
following table presents information with respect to non-performing assets
(NPAs): As of December 31, 2008 residential land development and construction
represented about 62% of NPAs; Commercial construction 13%; commercial real
estate 14% and Commercial and Industrial loans 9%.

|                                      |  | December 31,
|------------------------------------- |  | ------------
|                                      |  | 2008        
|Loans on nonaccrual status            |  | $           
|Loans past due
      90 days or more  |  |             
|but not on nonaccrual
      status    |  |             
|OREO  non-performing                 |  |             
|Total
      non-performing assets     |  | $           
|                                     
|Operating commercial real estate OREO |  | $           
|OREO 
      non-performing           |  |             
|Total OREO                            |  | $           
|                                     
|Selected ratios:                      |  |             
|NPLs to total
      gross loans       |  |             
|NPAs to total gross loans and OREO    |  |             
|NPAs to total
      assets            |  |             

The
increase in non-performing assets at year-end 2008 is mainly due to difficulties
in residential land development and construction related credits in the Boise,
Idaho, as well as the Southern and Central Oregon markets. The increase is a
result of the nationwide downturn in real estate which has slowed lot and home
sales within the Companys markets. This has impacted certain developers by
lengthening the marketing period of their projects and negatively affecting
borrower liquidity and collateral values (for further discussion, see Real
Estate Loan Concentration Risk above).

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
nonaccrual 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
nonaccrual 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 for 2008 was $2.7 million,
$1.2 in 2007 and was insignificant for 2006.

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, in Joint Guidance on Overdraft Protection
Programs.

At December 31, 2008, the Companys
recorded investment in certain loans that were considered to be impaired was
$120.5 million and specific valuation allowances were $2.7 million. Impaired
loans were $45.9 million with specific valuation allowances of $3.9 at year-end
2007.

Bank-Owned Life Insurance
(BOLI)

The
Company has purchased BOLI to protect itself against the loss of certain key
employees and directors due to death and to offset the Banks future obligations
to its employees under its retirement and benefit plans. See footnote 1 of the
Companys notes to consolidated financial statements located under item 8 of
this report. During 2008 and 2007 the Bank did not purchase any new BOLI,
however for 2006 the Bank purchased $13.6 million. The

45

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cash surrender value of the Banks
total life insurance policies was $33.6 and $33.3 million at December 31, 2008
and 2007, respectively. The Bank recorded income from the BOLI policies of $.3
million in 2008, $1.6 million in 2007 and $.8 million in 2006.

The
Company owns both general account and separate account BOLI. The separate
account BOLI was purchased in the fourth quarter of 2006 as an investment
expected to provide a long-term source of earnings to support existing employee
benefit plans. The fair value of the general account BOLI is based on the
insurance contract cash surrender value. The cash surrender value of the
separate account BOLI is the quoted market price of the underlying securities,
further supported by a stable value wrap, which mitigates, but may not fully
insulate investment against changes in the fair market value depending on
severity and duration of possible market price disruption.

Liabilities

Deposit
Liabilities and Time Deposit Maturities. At December 31, 2008, total deposits
were $1.8 billion, up 7.6% from year-end 2007. Average deposits totaled $1.7
billion for the full year 2008, down 2.1% or $37.1 million on average from the
prior year. 2008 average non-interest-bearing demand was down $50.8 million or
11.4% and average interest bearing demand (including money market deposits) was
down $44.9 million or 5.1%. The year-over-year decline is predominately a result
of the economic downturns direct negative effect on retail and business
customer cash available to deposit in their bank. Consistent efforts to retain
and serve customers have proven successful with the number of total customer
relationships has remained consistent. In order to augment aggregate deposits
the Company utilized brokered and Certificate of Deposit Registry Program
(CDARS) deposits. At December 31, 2008, such brokered deposits totaled $147.9
million and CDARS deposits totaled approximately $168.2 million. The FDIC has
informed the Bank that pending the completion of its current examination it may
restrict increases in brokered deposits. To provide additional customer
assurances, the Company has chosen to participate in the FDICs temporary 100%
guarantee of non-interest bearing checking accounts, including NOW accounts
paying less than 0.50%. Additionally, under recent changes from the FDIC in
October 2008, all interest bearing deposit accounts are insured up to $250,000
through 12/31/2009.

Rates
paid on all interest bearing deposit categories decreased in 2008 primarily as a
result of lower average market interest rates. The increase in the average cost
of interest-bearing deposits during 2007 was primarily the result of increases
in interest rates offered on deposit products due to higher average market
interest rates.

Historically Cascade has had a relatively high proportion of its deposits
in non-interest bearing accounts. However, during 2008 non interest bearing
balances continued to ease to approximately 20.1% of total deposits as of
year-end, compared to 26.1% at year end 2007. This decline is directly related
to the downturn in economic activity with consumer and business customers having
reduced cash available to deposit.

Average
time deposits during 2008 increased $46.7 million to $387.0 million as compared
to 2007 averages. The increase in time deposits primarily resulted from the use
of national market brokered CDs that were part of the Companys wholesale
funding strategies in 2008. In addition, the Bank began using the CDARS program
in 2006. CDARS deposits are utilized to meet the needs of certain customers
whose investment policies may necessitate or require FDIC insurance (see
Deposits, Liabilities and Time Deposit Maturities and Liquidity and Sources
of Funds in this item). Of the increase in average time deposits during 2008,
brokered CDs and CDARS accounted for approximately $55.4 million and $138.4
million, respectively. The Company has not historically marketed high priced
time deposits within local markets as they are not believed to be key to its
relationship banking strategy.

The
following table summarizes the average amount of, and the average rate paid on,
each of the deposit categories for the periods shown:

|(dollars in thousands)  |  | Years ended December
    31,
|----------------------- |  | ----------------------------
|                        |  | 2008                        
|Deposit Liabilities     |  |                             
|                        |  |                             
|                        |  | Amount                      
|Demand                  |  | $407,980                    
|Interest-bearing demand |  | 844,136                     
|Savings                 |  | 36,761                      
|Time                    |  | 386,990                     
|Total Deposits          |  | $1,675,867                  

46

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As of December 31, 2008, the
Companys time deposit liabilities had the following times remaining to
maturity:

|(dollars in thousands)           |  | Time deposits of     |         | All other        
|-------------------------------- |  | -------------------- | ------- | -----------------
|                                 |  | $100,000 or more (1) |         | Time deposits (2)
|Remaining time to
      maturity |  |                      | Amount  |                  
|3 months or less                 |  | $                    | 136,028 |                  
|Due
      after 3 months through |  |                      |         |                  
|6 months                         |  |                      | 8,761   |                  
|Due after 6 months through       |  |                      |         |                  
|12 months                        |  |                      | 97,480  |                  
|Due
      after 12 months        |  |                      | 106,248 |                  
|Total                            |  | $                    | 348,516 |                  

|(1) |  | Time deposits of
      $100,000 or more represents 15.0% of total deposits as of December 31,
      2008.
|--- |  | ---------------------------------------------------------------------------------------------------------
|   
|(2) |  | All other time
      deposits represent 17.4% of total deposits as of December 31,
    2008.             

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 Junior Subordinated Debentures (the Debentures) and
related agreements, taken together, constitute a full and irrevocable guarantee
by the Company of the obligations of the trusts. The trust preferred securities
are subject to mandatory redemption upon the maturity of the Debentures, or upon
earlier redemption as provided in the Indenture related to the Debentures. The
trust preferred securities 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 trust preferred securities. See Note 12 of the
consolidated financial statements included in Item 8 of this report for
additional details.

*Other Borrowings.*
At December 31, 2008 the Bank had a total of $128.5
million in long-term borrowings from Federal Home Loan Bank (FHLB) with
maturities from 2009 to 2025, bearing a weighted-average interest rate of 3.54%.
In addition, at December 31, 2008, the Bank had short-term borrowings with the
Federal Reserve Bank (FRB) of approximately $120.5. At year-end 2007, the Bank
had a total of $117.4 million in long-term borrowings from FHLB with maturities
from 2008 to 2025. Approximately $77.3 million of this amount bears a fixed or
adjustable weighted average rate of 3.94% while the remaining $40.0 million
float with LIBOR. In addition, at December 31, 2007, the Bank had short-term
borrowings with FHLB and FRB of approximately $175.8 million and $34.7 million,
respectively. (See MD&A Liquidity and Sources of Funds for further
discussion).

*Contractual
Obligations.* As of December 31, 2008, the
Company has entered into the contractual obligations to make future payments as
listed below:

|                                      |  | Payments Due by
  Period
|------------------------------------- |  | ------------------------
|                                      |  |                         
|(dollars in
      thousands)          |  | Total                   
|Time deposits of $100,000 and over    |  | $                       
|Federal Home
      Loan Bank advances |  |                         
|Junior subordinated debentures        |  |                         
|Operating
      leases                |  |                         
|Total contractual
      obligations   |  | $                       

Off-Balance Sheet Arrangements. A
schedule of significant off-balance sheet commitments at December 31, 2008 is
included in the following table (dollars in thousands):

Commitments to extend credit
    $
    465,500Commitments
      under credit card lines of credit
    
    30,522Standby letters of credit
    
    18,583Total off-balance sheet
      commitments
    $
    514,605


See Note
14 of the Notes to Consolidated Financial
Statements included in Item 8 hereof for a
discussion of the nature, business purpose, and importance of off-balance sheet
arrangements.

47

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Stockholders Equity

The
Companys total stockholders equity at December 31, 2008 was $135.2 million, a
decrease of $140.0 million from December 31, 2007. The decrease primarily
resulted from the net loss for the year ended December 31, 2008 of $134.6
million plus cash dividends paid to shareholders of $6.2 million during 2008. In
addition, at December 31, 2008 the Company had accumulated other comprehensive
loss of approximately $.1 million.

CAPITAL RESOURCES

At
December 31, 2008, the Company and Bank continued to meet the regulatory
benchmarks for well-capitalized institutions. At December 31, 2008, the
Companys Tier 1 and total risked-based capital ratios were 8.92% and 10.19%,
respectively. The FRBs minimum risk-based capital ratio guidelines for Tier 1
and total capital are 4% and 8%, respectively. Additional information regarding
capital resources is located in Note 21 of the Notes to the Consolidated
Financial Statements included in item 8 this report.

Federal
banking regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage 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. At December
31, 2008, the Company exceeded regulatory benchmarks for well-capitalized
institutions. However, the Bank is currently undergoing a regulatory examination
and there can be no assurance that upon completion of the exam the regulators
will continue to categorize the Bank well-capitalized.

The Company is currently seeking
additional equity capital to bolster the Companys capital and liquidity
positions. The Company may not be able to obtain such financing or it may be
only available on terms that are unfavorable to the Company and its
shareholders. In addition, the Company has applied for up to three-percent of
its total risk-weighted assets in capital under the TARP Program, which would be
in the form of non-cumulative perpetual preferred stock of the institution with
a dividend rate of 5% until the fifth anniversary of the investment, and 9%
thereafter. The Companys application is currently designated as pending.
There can be no assurance or guarantee that the Treasury will select the Company
to participate in its Capital Purchase Program. The Company believes that an
investment by the Treasury through the TARP Program may be conditioned upon the
receipt of private equity financing.

From time
to time the Company makes commitments to acquire banking properties or to make
equipment or technology related investments of capital. At December 31, 2008,
the Company had no material capital expenditure commitments apart from those
incurred in the ordinary course of business.

LIQUIDITY AND SOURCES OF FUNDS

Liquidity
is essential to our business. Our primary funding source is customer deposits
which may be directly affected by the economy. With the significant downturn in
economic conditions our customers in general have experienced reduced funds
available to deposit in their bank. Our customer relationship deposit balances
fell approximately $136 million over the course of 2008, including a decline in
noninterest bearing demand deposits of approximately $71 million. As a result,
the Company has increased its use of wholesale funding including brokered
deposits and secured borrowings from FHLB and FRB. In response to the adverse
economic conditions, The Company has been, and will continue to work toward,
reducing the amount of nonperforming assets, adjusting the balance sheet by
reducing loan totals and other assets as possible, reducing controllable
operating costs, and augmenting deposits while striving to maximize secured
borrowing facilities to improve liquidity and preserve capital over the course
of 2009. However, the Companys inability to successfully implement its plans or
further deterioration in economic conditions and real estate prices could still
have a material adverse effect on the Companys liquidity.

Bancorp
is a single bank holding company and its primary ongoing source of liquidity is
from 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 the dividend that the Bank may pay to
Bancorp. In addition, Bancorp receives cash from the exercise of incentive stock
options and the issuance of trust preferred securities. If the Company desires
to raise funds in the future the Company may consider engaging in further
offerings of preferred securities, debentures or other borrowings as well as
issuance of capital stock.

48

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The
objective of the Banks 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. 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. Over the past several quarters customer
relationship deposits have declined in tandem with the slowing economy.
Accordingly the Bank has increased its overall use of wholesale funding sources
and anticipates that such will be the case until the economy rebounds.

Diversified and reliable sources of wholesale funds are utilized to
augment core deposit funding. Borrowings may be used on a long or short-term
basis to compensate for reduction in other sources of funds or on a long term
basis to support lending activities. 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 such sources 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
or other unforeseen circumstances, which could have liquidity implications that
may require different strategic or operational actions. One source of wholesale
funding is brokered deposits. Consistent with its risk management policy and in
response to the general tightening of credit and liquidity conditions in the
financial markets at large, the Bank recently increased its use of brokered
deposits. At December 31, 2008, such deposits totaled approximately $147.9
million compared to $9.9 million at December 31, 2007, exclusive of CDARS
deposits. In February 2009, the FDIC informed the Bank that it was placing a
temporary restriction on the Banks ability to increase wholesale brokered
deposits and limited pricing on deposits. While this restriction is only in
place until the completion of the Banks regulatory exam, the results of the
examination may require a continued restriction on brokered deposits.

The
Banks primary counterparty for borrowing purposes is the FHLB. At December 31,
2008, the FHLB had extended the Bank a secured line of credit of $829.6 million
that may be accessed for short or long-term borrowings given sufficient
qualifying collateral. As of December 31, 2008, the Bank had qualifying
collateral pledged for FHLB borrowings totaling $360.2 million. The Bank also
had $195.0 million in borrowing availability from the FRB that requires specific
qualifying collateral. 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. At
December 31, 2008, the Bank had remaining available borrowing capacity on its
aggregate lines of credit totaling $577.3 million however present collateral
limitations reduce available secured borrowings to approximately $326.4 million.
Subsequent to year-end the Bank has increased its secured borrowings to
approximately $338.2 million and has utilized FHLB letter of credit facility to
increase its collateralization level of public deposits held by the bank.
Accordingly the bank has approximately $239.1 million available from FHLB/FRB.
Additional loans available for pledging to FRB are expected to add approximately
$232 million to such capacity in the near term. As with many community banks,
correspondent banks have withdrawn unsecured lines of credit or now require
collateralization for the purchase of fed funds on a short-term basis due to
present adverse economic environment.

Recently
the U.S. Treasury announced a program under which the FDIC would temporarily
provide a guarantee of the senior debt of all FDIC-insured institutions and
their holding companies. Coverage under the Temporary Liquidity Guarantee
Program is available for 30 days without charge and thereafter at a cost of 75
basis points per annum for senior unsecured debt and 10 basis points per annum
for non-interest bearing transaction deposits. The Bank elected to participate
in both parts of the TLGP, and Bancorp elected to participate in the senior
unsecured debt portion of the program. The amount of greater than 30 day
unsecured senior debt that is eligible for the program is limited to 125% of the
amount of such debt outstanding as of September 30, 2008. If there was no
unsecured senior debt outstanding at September 30, 2008, the amount available
under the program is limited to two percent of total liabilities as of September
30, 2008. As the Company did not have any unsecured senior debt outstanding as
of September 30, 2008, the maximum amount of unsecured senior debt that can be
issued under the program is limited

49

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to two percent of its total liabilities
as of September 30, 2008. On February 12, 2009 the Bank issued $41 million of
TLGP under this program comprised of $16 million floating rate and $27 million
fixed rate notes maturing February 12, 2012.

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 December 31, 2008, the Bank had
approximately $514.6 million in outstanding commitments to extend credit,
compared to approximately $727.4 million at year-end 2007. At this time,
management believes that the Banks available resources will be sufficient to
fund its commitments in the normal course of business.

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 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The
disclosures in this item are qualified by the Risk Factors set forth in Item 1A
and the Section entitled Cautionary Information Concerning Forward-Looking
Statements included in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations in this report and any other
cautionary statements contained herein.

Interest Rate Risk and Asset and
Liability Management

The goal
of the Companys asset and liability management policy is to maximize long-term
profitability under the range of likely interest rate scenarios. Interest rate
risk management requires estimating the probability and impact of changes in
interest rates on assets and liabilities. The Board of Directors oversees
implementation of strategies to control interest rate risk. Management hires and
engages a qualified independent service provider to assist in modeling, monthly
reporting and assessing interest rate risk. The Companys methodology for
analyzing interest rate risk includes simulation modeling as well as traditional
interest rate gap analysis. While both methods provide an indication of risk for
a given change in interest rates, it is managements opinion that simulation is
the more effective tool for asset and liability management. The Bank has
historically adjusted its sensitivity to changing interest rates by
strategically managing its loan and deposit portfolios with respect to pricing,
maturity or contractual characteristics. The Bank may also target the expansion
or contraction of specific investment portfolio or borrowing structures to
further affect its risk profile. In addition, the Bank is authorized to enter
into interest rate swap or other hedging contracts with re-pricing
characteristics that tend to moderate interest rate risk. However, there are no
material structured hedging instruments in use at this time. Because of the
volatility of market rates, event risk and other uncertainties described below,
there can be no assurance of the effectiveness of management programs to achieve
its interest rate risk objectives.

To assess
and estimate the degree of interest rate risk, the Company utilizes a
sophisticated simulation model that estimates the possible volatility of Company
earnings resulting from changes in interest rates. Management first establishes
a wide range of possible interest rate scenarios over a two-year forecast
period. Such scenarios routinely include a stable or unchanged scenario and an
estimated or most likely scenario given current and forecast economic
conditions. In addition, scenarios titled rising rates, declining rates, and
alternate rising rates are established to stress-test the impact of more
dramatic rate movements that are perceived as less likely, but may still
possibly occur. Next, net interest income and net income are simulated in each
scenario. Note that earnings projections include the effect of estimated loan
and deposit growth that management deems reasonable; however, such volume
projections are not varied by rate scenario. Note also that the downturn in real
estate has caused elevated levels of non performing loans which lower reported
NIM depending on the absolute volume of such assets. Simulated earnings are
compared over a two-year time horizon. The following table defines the market
interest rates projected in various interest rate scenarios. Generally,
projected market rates are reached gradually over the 2-year simulation horizon.

50

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|                   |  | Actual
      Market |  | Estimated      |  | Declining      |  | Alt.
      Rising |  | Rising        
|------------------ |  | ------------------- |  | -------------- |  | -------------- |  | ----------------- |  | --------------
|                   |  | Rates
      at      |  | Rates
      at |  | Rates
      at |  | Rates
      at    |  | Rates
      at
|                   |  | December 2008       |  | December 2010  |  | December 2010  |  | December 2010     |  | December 2010 
|Federal Funds Rate |  | 0.25%               |  | 1.50%          |  | .063%          |  | 3.25%             |  | 6.25%         
|Prime
    Rate     |  | 3.25%               |  | 4.50%          |  | 3.063%         |  | 6.25%             |  | 9.25%         
|Yield Curve Spread |  |                     |  |                |  |                |  |                   |  |               
|Fed Funds to       |  |                     |  |                |  |                |  |                   |  |               
|10-year Treas.     |  | 1.96%               |  | 1.95%          |  | 1.90%          |  | 1.21%             |  | 0.45%         

The
following table presents percentage changes in simulated future earnings under
the above-described scenarios as compared to earnings under the Estimated rate
scenario calculated as of this year end. The effect on earnings assumes no
changes in non-interest income or expense between scenarios.

|                                           |  | First Twelve Month  |                           | Second Twelve Month |                           | 24th Month            
|------------------------------------------ |  | ------------------- | ------------------------- | ------------------- | ------------------------- | ----------------------
|                                           |  | Average % Change in |                           | Average % Change in |                           | annualized % Change in
|                                           |  | Pro-forma           |                           | Pro-forma           |                           | Pro-forma             
|Estimated Rate Scenario compared
      to: |  |                     | Net Interest
      Income |                     | Net Interest
      Income |                       
|Declining Rate Scenario                    |  |                     | (2.2%                     | )                   |                           |                       
|Alternate Rising Rate Scenario             |  |                     | 0.0%                      |                     |                           |                       
|Rising Rate Scenario                       |  |                     | 1.2%                      |                     |                           |                       

Managements assessment of interest rate risk and scenario analysis must
be considered in the context of market interest rates and overall economic
conditions. Beginning in mid 2004, the Federal Reserve engineered a gradual
rising in short term market interest rates. Meanwhile, long term rates remained
relatively stable resulting in a flattening of yield curve between short and
long term rates. However, with the much publicized subprime, real estate and
credit market disruptions of 2007, market participants are currently
anticipating a rapid decline in rates in 2008.

In
managements judgment and at this date, the interest rate risk profile of the
Bank is reasonably balanced within the most likely range of possible outcomes.
The model indicates that should future interest rates actually follow the path
indicated in the estimated rate scenario, the net interest margin would range
between 3.95% and 4.01% all else being equal. However, with the more dramatic
changes reflected in the rising or declining scenarios, the model suggests
the margin would likely fall outside of this range should such interest rates
actually occur. This is mainly because the Bank has a large portion of
non-interest bearing funds (approximately 21% of total deposits) that are
assumed to be relatively insensitive to changes in interest rates. Thus in the
event of rising rates, yields on earning assets would tend to increase at a
faster pace than overall cost of funds, leading to an improving margin.
Conversely, should rates fall to the low levels assumed in the declining
scenario, yields on loans and securities would compress against an already low
cost of funds. Also in this declining rate scenario, the model assumes an
annualized 35% prepayment rate on loans currently outstanding that would
refinance to lower rates, contributing to margin compression. Thus in the
declining rate scenario where the federal fund rates fall to just 0.06%, the
model indicates that the net interest margin could be nominally impacted during
the first 12 months of the forecast horizon, and only 3.3% below during the
second twelve months. Management has concluded that the degree of margin and
earnings volatility under the above scenarios is acceptable because of the cost
of mitigating such risk and because the model suggests that the Bank would still
generate satisfactory returns under such circumstances.

Please
carefully review and consider the following information regarding the risk of
placing undue reliance on simulation models, interest rate projections and
scenario results. In all scenarios discussed above, results are modeled using
managements estimates as to growth in loans, deposits and other balance sheet
items, as well as the expected mix and pricing thereof. These volume estimates
are static in the various scenarios. Such estimates may be inaccurate as to
future periods. Model results are only indicative of interest rate risk exposure
under various scenarios. The results do not encompass all possible paths of
future market rates, in terms of absolute change or rate of change, or changes
in the shape of the yield curve. Nor does the simulation anticipate changes in
credit conditions that could affect results. Likewise, scenarios do not include
possible changes in volumes, pricing or portfolio management tactics that may
enable management to moderate the effect of such interest rate changes.

51

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Simulations are dependent on assumptions and estimations that management
believes are reasonable, although the actual results may vary substantially, and
there can be no assurance that simulation results are reliable indicators of
future earnings under such conditions. This is, in part, because of the nature
and uncertainties inherent in simulating future events including: (1) no
presumption of changes in asset and liability strategies in response to changing
circumstances; (2) model assumptions may differ from actual outcomes; (3)
uncertainties as to customer behavior in response to changing circumstances; (4)
unexpected absolute and relative loan and deposit volume changes; (5) unexpected
absolute and relative loan and deposit pricing levels; (6) unexpected behavior
by competitors; and (7) other unanticipated credit conditions or other events
impacting volatility in market conditions and interest rates.

Interest Rate Gap Table

In the
opinion of management, the use of interest rate gap analysis is less valuable
than the simulation method discussed above as a means to measure and manage
interest rate risk. This is because it is a static measure of rate sensitivity
and does not capture the possible magnitude or pace of rate changes. At year-end
2008, the Companys one-year cumulative interest rate gap analysis indicates
that rate sensitive liabilities maturing or available for repricing within
one-year exceeded rate sensitive assets by approximately $381.6
million.

The
Company considers its rate-sensitive assets to be those that either contains a
provision to adjust the interest rate periodically or matures within one year.
These assets include certain loans and leases and investment securities and
interest bearing balances with FHLB. Rate-sensitive liabilities are those
liabilities that are considered sensitive to periodic interest rate changes
within one year, including maturing time certificates, savings deposits,
interest-bearing demand deposits and junior subordinated debentures.

Set forth
below is a table showing the interest rate sensitivity gap of the Companys
assets and liabilities over various re-pricing periods and maturities, as of
December 31, 2008:

|                                               |  |                |           | After 90    |  | After one   |          |            |  |      
|---------------------------------------------- |  | -------------- | --------- | ----------- |  | ----------- | -------- | ---------- |  | -----
|                                               |  |                |           | days within |  | year within |          | After five |  |      
|(dollars in
      thousands)                   |  | Within 90 Days |           | one year    |  | five years  |          | years      |  | Total
|INTEREST EARNING ASSETS:                       |  |                |           |             |  |             |          |            |  |      
|Investments & fed funds
      sold             |  | $              | 2,230     |             |  | $           | 2,914    |            |  | $    
|Interest
      bearing balances with FHLB      |  |                | 162       |             |  |             |         |            |  |      
|Loans                                          |  |                | 940,526   |             |  |             | 234,045  |            |  |      
|Total interest earning assets                  |  | $              | 942,918   |             |  | $           | 236,959  |            |  | $    
|                                               |  |                |           |             |  |             |          |            |  |      
|INTEREST BEARING LIABILITIES:                  |  |                |           |             |  |             |          |            |  |      
|Interest-bearing demand deposits               |  | $              | 702,099   |             |  | $           | 114,594  |            |  | $    
|Savings
      deposits                         |  |                | 16,602    |             |  |             | 16,601   |            |  |      
|Time deposits                                  |  |                | 236,904   |             |  |             | 219,367  |            |  |      
|Total interest bearing deposits                |  |                | 955,605   |             |  |             | 350,562  |            |  |      
|Junior
      subordinated debentures           |  |                | 54,898    |             |  |             |         |            |  |      
|Other
      borrowings                         |  |                | 189,762   |             |  |             | 777      |            |  |      
|Customer
      repurchase agreements           |  |                | 9,871     |             |  |             |         |            |  |      
|Total interest bearing liabilities             |  | $              | 1,210,136 |             |  | $           | 351,339  |            |  | $    
|Interest rate sensitivity gap                  |  | $              | (267,218  | )           |  | $           | (114,380 | )          |  | $    
|Cumulative interest rate
      sensitivity gap |  | $              | (267,218  | )           |  | $           | (381,598 | )          |  | $    
|Interest rate gap as a percentage of total     |  |                |           |             |  |             |          |            |  |      
|interest
      earning assets                  |  |                | -12.92    | %           |  |             | -5.53    | %          |  |      
|Cumulative interest rate gap as a              |  |                |           |             |  |             |          |            |  |      
|percentage of
      total earning assets       |  |                | -12.92    | %           |  |             | -18.45   | %          |  |      

52

---

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

The
following reports, audited consolidated financial statements and the notes
thereto are set forth in this Annual Report on Form 10-K on the pages
indicated:

|                                                                 |  | **Page**
|---------------------------------------------------------------- |  | --------
|Report of Independent Registered Public Accounting
      Firm    |  | 54      
|Consolidated
      Balance Sheets at December 31, 2008 and 2007  |  | 55      
|For the Years Ended December 31, 2008, 2007 and 2006:            |  |         
|Consolidated Statements of
      Operations                      |  | 56      
|Consolidated Statements of Changes in
      Stockholders Equity |  | 57      
|Consolidated Statements of Cash
      Flows                      |  | 59      
|Notes to Consolidated Financial Statements                       |  | 60      

53

---

REPORT OF SYMONDS, EVANS &
COMPANY, P.C.,INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
andStockholders of Cascade Bancorp

We have audited the accompanying
consolidated balance sheets of Cascade Bancorp and its subsidiary, Bank of the
Cascades (collectively, the Company), as of December 31, 2008 and 2007, and
the related consolidated statements of operations, changes in stockholders
equity, and cash flows for each of the years in the three-year period ended
December 31, 2008. The Companys management is responsible for these
consolidated financial statements. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Cascade Bancorp and its subsidiary as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States of America.

The Company experienced a significant
net loss for the year ended December 31, 2008. The primary reasons that caused
such net loss, the effect of the current environment on the Companys financial
condition and managements plans to address such matters, are described in Note
14 to the accompanying consolidated financial statements.

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Companys internal control over financial reporting as of December
31, 2008, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 10, 2009 expressed an unqualified opinion.



Portland, OregonMarch 10, 2009

54

---

CASCADE BANCORP AND
SUBSIDIARY

CONSOLIDATED BALANCE
SHEETS

DECEMBER 31, 2008 AND
2007

(Dollars in thousands)

|                                                                                           |  | 2008 |           | 2007
|------------------------------------------------------------------------------------------ |  | ---- | --------- | ----
|ASSETS                                                                                    
|Cash and cash equivalents:                                                                 |  |      |           |     
|Cash and due from
    banks                                                                |  | $    | 46,554    |     
|Interest
      bearing deposits with Federal Home Loan Bank                                |  |      | 162       |     
|Federal funds
      sold                                                                   |  |      | 2,230     |     
|Total cash and cash equivalents                                                            |  |      | 48,946    |     
|Investment securities available-for-sale                                                   |  |      | 107,480   |     
|Investment securities held-to-maturity, estimated fair                                     |  |      |           |     
|value of
      $2,247 ($3,193 in 2007)                                                     |  |      | 2,211     |     
|Federal Home Loan Bank stock                                                               |  |      | 10,472    |     
|Loans, net                                                                                 |  |      | 1,909,018 |     
|Premises and equipment, net                                                                |  |      | 39,763    |     
|Goodwill                                                                                   |  |      |          |     
|Core deposit intangibles                                                                   |  |      | 7,921     |     
|Bank-owned life insurance                                                                  |  |      | 33,568    |     
|Other real estate owned (OREO), net                                                        |  |      | 52,727    |     
|Accrued interest and other assets                                                          |  |      | 66,201    |     
|Total assets                                                                               |  | $    | 2,278,307 |     
|                                                                                          
|LIABILITIES AND STOCKHOLDERS EQUITY                                                      
|Liabilities:                                                                               |  |      |           |     
|Deposits:                                                                                  |  |      |           |     
|Demand                                                                                     |  | $    | 364,146   |     
|Interest bearing demand                                                                    |  |      | 816,693   |     
|Savings                                                                                    |  |      | 33,203    |     
|Time                                                                                       |  |      | 580,569   |     
|Total deposits                                                                             |  |      | 1,794,611 |     
|Junior
      subordinated debentures                                                       |  |      | 68,558    |     
|Federal funds
      purchased                                                              |  |      |          |     
|Other
      borrowings                                                                     |  |      | 248,975   |     
|Customer
      repurchase agreements                                                       |  |      | 9,871     |     
|Accrued
      interest and other liabilities                                               |  |      | 21,053    |     
|Total liabilities                                                                          |  |      | 2,143,068 |     
|Stockholders equity:                                                                      |  |      |           |     
|Preferred
      stock, no par value; 5,000,000 shares authorized (none in
      2007);     |  |      |           |     
|none issued or outstanding                                                                 |  |      |          |     
|Common stock,
      no par value; 45,000,000 shares authorized (35,000,000 in
      2007); |  |      |           |     
|28,088,110 shares issued and outstanding (28,034,172 in
      2007)                        |  |      | 158,489   |     
|Retained
      earnings (accumulated deficit)                                              |  |      | (23,124   | )   
|Accumulated
      other comprehensive income (loss)                                        |  |      | (126      | )   
|Total stockholders equity                                                                 |  |      | 135,239   |     
|Total liabilities and stockholders
    equity                                             |  | $    | 2,278,307 |     

See accompanying notes.

55

---

CASCADE BANCORP AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF
OPERATIONS

YEARS ENDED DECEMBER 31, 2008, 2007
AND 2006

(Dollars in thousands, except per
share amounts)

|                                                                 |  | 2008 |          | 2007 |  | 2006
|---------------------------------------------------------------- |  | ---- | -------- | ---- |  | ----
|Interest and
      dividend income:                              |  |      |          |      |  |     
|Interest and fees on
      loans                                 |  | $    | 132,979  |      |  | $   
|Taxable
      interest on investment securities                  |  |      | 4,451    |      |  |     
|Nontaxable interest on investment securities                     |  |      | 189      |      |  |     
|Interest on
      interest bearing deposits with                 |  |      |          |      |  |     
|Federal Home Loan Bank and Federal Reserve
      Bank            |  |      | 11       |      |  |     
|Interest on
      federal funds sold                             |  |      | 31       |      |  |     
|Dividends on
      Federal Home Loan Bank stock                  |  |      | 111      |      |  |     
|Total interest and dividend income                               |  |      | 137,772  |      |  |     
|Interest
      expense:                                          |  |      |          |      |  |     
|Deposits:                                                        |  |      |          |      |  |     
|Interest bearing demand                                          |  |      | 15,541   |      |  |     
|Savings                                                          |  |      | 135      |      |  |     
|Time                                                             |  |      | 12,850   |      |  |     
|Junior
      subordinated debentures and other borrowings        |  |      | 13,845   |      |  |     
|Total interest expense                                           |  |      | 42,371   |      |  |     
|Net interest
      income                                        |  |      | 95,401   |      |  |     
|Loan loss
      provision                                        |  |      | 99,593   |      |  |     
|Net interest
      income (loss) after loan loss provision       |  |      | (4,192   | )    |  |     
|Noninterest
      income:                                        |  |      |          |      |  |     
|Service
      charges on deposit accounts, net                   |  |      | 9,894    |      |  |     
|Mortgage
      banking income, net                               |  |      | 2,100    |      |  |     
|Card issuer
      and merchant service fees, net                 |  |      | 3,705    |      |  |     
|Earnings on
      bank-owned life insurance                      |  |      | 264      |      |  |     
|Gains on
      sales of investment securities available-for-sale |  |      | 436      |      |  |     
|Other                                                            |  |      | 3,592    |      |  |     
|Total noninterest income                                         |  |      | 19,991   |      |  |     
|Noninterest
      expenses:                                      |  |      |          |      |  |     
|Salaries and
      employee benefits                             |  |      | 33,708   |      |  |     
|Equipment                                                        |  |      | 2,156    |      |  |     
|Occupancy                                                        |  |      | 4,767    |      |  |     
|Communications                                                   |  |      | 2,038    |      |  |     
|FDIC
      insurance                                             |  |      | 1,709    |      |  |     
|OREO                                                             |  |      | 8,442    |      |  |     
|Reduction in reserve for
      unfunded loan commitments         |  |      | (2,124   | )    |  |     
|Goodwill
      impairment                                        |  |      | 105,047  |      |  |     
|Other                                                            |  |      | 17,928   |      |  |     
|Total noninterest expenses                                       |  |      | 173,671  |      |  |     
|Income (loss)
      before income taxes                          |  |      | (157,872 | )    |  |     
|Provision
      (credit) for income taxes                        |  |      | (23,306  | )    |  |     
|Net income (loss)                                                |  | $    | (134,566 | )    |  | $   
|Basic earnings (loss) per common share                           |  | $    | (4.82    | )    |  | $   
|Diluted earnings (loss) per common share                         |  | $    | (4.82    | )    |  | $   

See accompanying notes.

56

---

CASCADEBANCORPANDSUBSIDIARY

CONSOLIDATEDSTATEMENTSOFCHANGESINSTOCKHOLDERSEQUITY

YEARSENDEDDECEMBER31, 2008, 2007 AND
2006

(Dollarsinthousands,except per shareamounts)

|                                                                   |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  | Unearned           |   |                 |   |       |  |  |   |    
|------------------------------------------------------------------ |  | --------------- |  | ------------- | - | ------ |  | -------- |  | ---------- | ------- | ------------- |  | ----------------- |  | - | ------ | - |  |  | ------------------ | - | --------------- | - | ----- |  |  | - | ---
|                                                                   |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  | compensation       |   | **Accumulated** |   |       |  |  |   |    
|                                                                   |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  | on
      nonvested |   | other           |   | Total
|                                                                   |  | Number
      of |  | Comprehensive |   | Common |  | Retained |  | restricted |         | comprehensive |  | **stockholders'**
|                                                                   |  | shares          |  | income (loss) |   | stock  |  | earnings |  | stock      |         | income (loss) |  | equity           
|Balances at December 31, 2005                                      |  | 21,191,894      |  |               |   |        |  |          |  | $          | 33,706  |               |  |                   |  | $ | 70,571 |   |  |  |                    | $ | (442            | ) |       |  |  | $ | 541
|Comprehensive
      income:                                        |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  |                    |   |                 |   |       |  |  |   |    
|Net income                                                         |  |                |  |               | $ | 35,677 |  |          |  |            |        |               |  |                   |  |   | 35,677 |   |  |  |                    |   |                |   |       |  |  |   |   
|Other
      comprehensive income - unrealized gains on investment  |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  |                    |   |                 |   |       |  |  |   |    
|securities available-for-sale of approximately $590 (net
      of  |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  |                    |   |                 |   |       |  |  |   |    
|income taxes of approximately $361), net of
      reclassification |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  |                    |   |                 |   |       |  |  |   |    
|adjustment for net gains on sales of investment
      securities   |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  |                    |   |                 |   |       |  |  |   |    
|available-for-sale included in net income of
      approximately   |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  |                    |   |                 |   |       |  |  |   |    
|$366 (net of income taxes of approximately
      $224)             |  |                |  |               |   | 224    |  |          |  |            |        |               |  |                   |  |   |       |   |  |  |                    |   |                |   |       |  |  |   | 224
|Total comprehensive income                                         |  |                |  |               | $ | 35,901 |  |          |  |            |        |               |  |                   |  |   |       |   |  |  |                    |   |                |   |       |  |  |   |   
|Transfer to
      common stock due to implementation of SFAS 123R  |  |                |  |               |   |        |  |          |  |            | (442    | )             |  |                   |  |   |       |   |  |  |                    |   | 442             |   |       |  |  |   |   
|Common stock issued in conjunction with acquisition                |  |                 |  |               |   |        |  |          |  |            |         |               |  |                   |  |   |        |   |  |  |                    |   |                 |   |       |  |  |   |    
|of F&M
      Holding Company (Note 2)                              |  | 6,656,249       |  |               |   |        |  |          |  |            | 124,552 |               |  |                   |  |   |       |   |  |  |                    |   |                |   |       |  |  |   |   
|Nonvested
      restricted stock grants, net                       |  | 42,241          |  |               |   |        |  |          |  |            |        |               |  |                   |  |   |       |   |  |  |                    |   |                |   |       |  |  |   |   
|Stock-based compensation expense                                   |  |                |  |               |   |        |  |          |  |            | 1,149   |               |  |                   |  |   |       |   |  |  |                    |   |                |   |       |  |  |   |   
|Cash dividends
      paid (aggregating $.31 per share)             |  |                |  |               |   |        |  |          |  |            |        |               |  |                   |  |   | (8,136 | ) |  |  |                    |   |                |   |       |  |  |   |   
|Stock options exercised                                            |  | 439,875         |  |               |   |        |  |          |  |            | 2,609   |               |  |                   |  |   |       |   |  |  |                    |   |                |   |       |  |  |   |   
|Tax benefit from
      non-qualified stock options exercised       |  |                |  |               |   |        |  |          |  |            | 625     |               |  |                   |  |   |       |   |  |  |                    |   |                |   |       |  |  |   |   
|Balances at December 31, 2006                                      |  | 28,330,259      |  |               |   |        |  |          |  |            | 162,199 |               |  |                   |  |   | 98,112 |   |  |  |                    |   |                |   |       |  |  |   | 765

Seeaccompanyingnotes.

57

---

CASCADEBANCORPANDSUBSIDIARY

CONSOLIDATEDSTATEMENTSOFCHANGESINSTOCKHOLDERSEQUITY(continued)

YEARSENDEDDECEMBER31, 2008, 2007 AND
2006

(Dollarsinthousands,except per shareamounts)

|                                                                   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  | Unearned |   |   |  |  |  |   |      |   |  |  |  |  
|------------------------------------------------------------------ |  | ---------- | - | ------------- |  | ------ | -------- | ------------ |  | ---------- |  | ----------------- | ------- | ----------------- |  |  | -------- | - | ------------------ | - | --------------- |  | -------- | - | - |  |  |  | - | ---- | - |  |  |  | -
|                                                                   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  | Retained |   | compensation       |   | **Accumulated** |  |          |   |   |  | 
|                                                                   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  | earnings |   | on
      nonvested |   | other           |  | Total   
|                                                                   |  | Number of  |   | Comprehensive |  | Common |          | (accumulated |  | restricted |  | **comprehensive** |         | **stockholders'**
|                                                                   |  | shares     |   | income
(loss) |  | stock  |          | deficit)     |  | stock      |  | **income (loss)** |         | equity           
|Balances at December 31, 2006                                      |  | 28,330,259 |   |               |  | $      |         |              |  |            |  | $                 | 162,199 |                   |  |  |          | $ | 98,112             |   |                 |  |          | $ |  |  |  |  | $ | 765  |   |  |  |  | $
|Comprehensive
      income:                                        |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|Net income                                                         |  |           |   |               |  |        | 29,979   |              |  |            |  |                   |        |                   |  |  |          |   | 29,979             |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Other
      comprehensive loss - unrealized losses on investment   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|securities available-for-sale of approximately $70 (net
      of   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|income taxes of approximately $43), net of
      reclassification  |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|adjustment for net gains on sales of investment
      securities   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|available-for-sale included in net income of
      approximately   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|$162 (net of income taxes of approximately
      $98)              |  |           |   |               |  |        | (232     | )            |  |            |  |                   |        |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   | (232 | ) |  |  |  |  
|Total comprehensive income                                         |  |           |   |               |  | $      | 29,747   |              |  |            |  |                   |        |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Nonvested
      restricted stock grants, net                       |  | 40,904     |   |               |  |        |          |              |  |            |  |                   |        |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Stock-based compensation expense                                   |  |           |   |               |  |        |          |              |  |            |  |                   | 1,632   |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Cash dividends
      paid (aggregating $.37 per share)             |  |           |   |               |  |        |          |              |  |            |  |                   |        |                   |  |  |          |   | (10,491            | ) |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Stock options exercised                                            |  | 146,109    |   |               |  |        |          |              |  |            |  |                   | 1,979   |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Tax effect from
      non-qualified stock options exercised        |  |           |   |               |  |        |          |              |  |            |  |                   | 548     |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Repurchases of common stock                                        |  | (483,100   | ) |               |  |        |          |              |  |            |  |                   | (9,205  | )                 |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Balances at
      December 31, 2007                                |  | 28,034,172 |   |               |  |        |          |              |  |            |  |                   | 157,153 |                   |  |  |          |   | 117,600            |   |                 |  |          |   |  |  |  |  |   | 533  |   |  |  |  |  
|Comprehensive loss:                                                |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|Net
      loss                                                     |  |           |   |               |  |        | (134,566 | )            |  |            |  |                   |        |                   |  |  |          |   | (134,566           | ) |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Other
      comprehensive loss - unrealized losses on investment   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|securities available-for-sale of approximately $385 (net
      of  |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|income taxes of approximately $242), net of
      reclassification |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|adjustment for net gains on sales of investment
      securities   |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|available-for-sale included in net loss of
      approximately     |  |            |   |               |  |        |          |              |  |            |  |                   |         |                   |  |  |          |   |                    |   |                 |  |          |   |   |  |  |  |   |      |   |  |  |  |  
|$274 (net of income taxes of approximately
      $162)             |  |           |   |               |  |        | (659     | )            |  |            |  |                   |        |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   | (659 | ) |  |  |  |  
|Total comprehensive loss                                           |  |           |   |               |  | $      | (135,225 | )            |  |            |  |                   |        |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Nonvested restricted stock grants, net                             |  | 42,433     |   |               |  |        |          |              |  |            |  |                   |        |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Stock-based
      compensation expense                             |  |           |   |               |  |        |          |              |  |            |  |                   | 1,566   |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Cash dividends paid (aggregating $0.22 per share)                  |  |           |   |               |  |        |          |              |  |            |  |                   |        |                   |  |  |          |   | (6,158             | ) |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Stock options
      exercised                                      |  | 11,505     |   |               |  |        |          |              |  |            |  |                   | 67      |                   |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Tax effect from non-qualified stock options exercised              |  |           |   |               |  |        |          |              |  |            |  |                   | (297    | )                 |  |  |          |   |                   |   |                 |  |          |   |  |  |  |  |   |     |   |  |  |  |  
|Balances at December 31,
2008                                      |  | 28,088,110 |   |               |  |        |          |              |  |            |  | $                 | 158,489 |                   |  |  |          | $ | (23,124            | ) |                 |  |          | $ |  |  |  |  | $ | (126 | ) |  |  |  | $

Seeaccompanyingnotes.

58

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CASCADE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2008, 2007
AND 2006

(Dollars in thousands)

|                                                                      |  | 2008 |          | 2007 |  | 2006
|--------------------------------------------------------------------- |  | ---- | -------- | ---- |  | ----
|Cash flows from operating activities:                                 |  |      |          |      |  |     
|Net income (loss)                                                     |  | $    | (134,566 | )    |  | $   
|Adjustments
      to reconcile net income (loss) to net cash provided |  |      |          |      |  |     
|by operating activities:                                              |  |      |          |      |  |     
|Depreciation and amortization                                         |  |      | 5,443    |      |  |     
|Goodwill impairment                                                   |  |      | 105,047  |      |  |     
|Loan loss provision                                                   |  |      | 99,593   |      |  |     
|Credit for deferred income taxes                                      |  |      | (11,870  | )    |  |     
|Discounts (gains) on sales of mortgage loans,
      net               |  |      | 367      |      |  |     
|Gains on sales of investment securities
      available-for-sale      |  |      | (436     | )    |  |     
|Deferred benefit plan expenses                                        |  |      | 1,762    |      |  |     
|Stock-based compensation expense                                      |  |      | 1,566    |      |  |     
|Gains on sales of premises and equipment,
      net                   |  |      | (574     | )    |  |     
|Losses on sales of other real estate
    owned                        |  |      | 662      |      |  |     
|Increase in accrued interest and other
      assets                   |  |      | (21,625  | )    |  |     
|Increase (decrease) in accrued interest and other
      liabilities   |  |      | (2,796   | )    |  |     
|Originations of mortgage loans                                        |  |      | (121,663 | )    |  |     
|Proceeds from sales of mortgage loans                                 |  |      | 124,186  |      |  |     
|Net cash provided by operating
activities                             |  |      | 45,096   |      |  |     
|Cash flows from investing activities:                                 |  |      |          |      |  |     
|Purchases of
      investment securities available-for-sale           |  |      | (48,100  | )    |  |     
|Proceeds from
      maturities, calls and prepayments of              |  |      |          |      |  |     
|investment securities available-for-sale                              |  |      | 23,329   |      |  |     
|Proceeds from
      sales of investment securities available-for-sale |  |      | 425      |      |  |     
|Proceeds from
      maturities and calls of investment securities     |  |      |          |      |  |     
|held-to-maturity                                                      |  |      | 965      |      |  |     
|Purchases of
      Federal Home Loan Bank stock                       |  |      | (3,481   | )    |  |     
|Loan
      originations, net                                          |  |      | (59,658  | )    |  |     
|Cash
      exchanged in acquisition of F&M Holding Company, net       |  |      |         |      |  |     
|Purchases of
      premises and equipment, net                        |  |      | (3,555   | )    |  |     
|Purchases of
      bank-owned life insurance                          |  |      |         |      |  |     
|Proceeds from
      sales of OREO                                     |  |      | 6,676    |      |  |     
|Writedown of
      OREO                                               |  |      | 5,460    |      |  |     
|Net cash used in investing activities                                 |  |      | (77,939  | )    |  |     
|Cash flows from
      financing activities:                           |  |      |          |      |  |     
|Net increase
      in deposits                                        |  |      | 127,473  |      |  |     
|Net decrease
      in customer repurchase agreements                  |  |      | (8,743   | )    |  |     
|Proceeds from
      issuance of junior subordinated debentures        |  |      |         |      |  |     
|Net increase
      (decrease) in federal funds purchased              |  |      | (14,802  | )    |  |     
|Net increase (decrease) in other borrowings                           |  |      | (78,892  | )    |  |     
|Cash
      dividends paid                                             |  |      | (6,158   | )    |  |     
|Proceeds from
      stock options exercised                           |  |      | 67       |      |  |     
|Repurchases
      of common stock                                     |  |      |         |      |  |     
|Tax benefit
      (cost) from non-qualified stock options exercised   |  |      | (297     | )    |  |     
|Net cash provided by financing
activities                             |  |      | 18,648   |      |  |     
|Net increase (decrease) in cash and cash equivalents                  |  |      | (14,195  | )    |  |     
|Cash and cash
      equivalents at beginning of year                  |  |      | 63,141   |      |  |     
|Cash and cash equivalents at end of year                              |  | $    | 48,946   |      |  | $   

See accompanying notes.

59

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

1. Basis of presentation and summary
of significant accounting policies

Basis of presentation

The accompanying consolidated financial
statements include the accounts of Cascade Bancorp (Bancorp), an Oregon
chartered single bank holding company, and its wholly-owned subsidiary, Bank of
the Cascades (the Bank) (collectively, the Company). Prior to July 6, 2007,
the Bank operated branches in Idaho under the name of Farmers & Merchants, a
Bank of the Cascades Company (see Note 2). Effective July 6, 2007, the Company
announced that such branches in Idaho changed their name to Bank of the
Cascades. All significant intercompany accounts and transactions have been
eliminated in consolidation.

Bancorp has also established four
subsidiary grantor trusts in connection with the issuance of trust preferred
securities (see Note 12). In accordance with the requirements of Financial
Accounting Standards Board (FASB) Interpretation No. 46(R), Consolidation of
Variable Interest Entities (as amended), the accounts and transactions of these
trusts are not included in the accompanying consolidated financial
statements.

All share and per share information in
the accompanying consolidated financial statements have been adjusted to give
retroactive effect to a 5-for-4 stock split in 2006.

Certain amounts in 2007 and 2006 have
been reclassified to conform with the 2008 presentation.

Description of
business

The Bank conducts a general banking
business, operating branches in Central, Southern and Northwest Oregon, as well
as the Boise, Idaho area. Its activities include the usual lending and deposit
functions of a commercial bank: commercial, construction, real estate,
installment, credit card and mortgage loans; checking, money market, time
deposit and savings accounts; Internet banking and bill payment; automated
teller machines and safe deposit facilities. Additionally, the Bank originates
and sells mortgage loans into the secondary market and offers trust and
investment services.

Method of accounting

The Company prepares its consolidated
financial statements in conformity with accounting principles generally accepted
in the United States and prevailing practices within the banking industry. The
Company utilizes the accrual method of accounting which recognizes income and
gains when earned and expenses and losses when incurred. The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of income,
gains, expenses, and losses during the reporting periods. Actual results could
differ from those estimates.

Segment reporting

The Company is managed by legal entity
and not by lines of business. The Company has determined that its operations are
solely in the community banking industry and include traditional community
banking services, including lending activities; acceptance of demand, savings,
and time deposits; business services; and trust services. These products and
services have similar distribution methods, types of customers and regulatory
responsibilities. The performance of the Company and Bank is reviewed by the
executive management team and the Companys Board of Directors (the Board) on a
monthly basis. All of the executive officers of the Company are members of the
Banks executive management team, and operating decisions are made based on the
performance of the Company as a whole. Accordingly, disaggregated segment
information is not required to be presented in the accompanying consolidated
financial statements, and the Company will continue to present one segment for
financial reporting purposes.

60

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

Cash and cash
equivalents

For purposes of reporting cash flows,
cash and cash equivalents include cash on hand, amounts due from banks
(including cash items in process of collection), interest bearing deposits with
Federal Home Loan Bank (FHLB) and federal funds sold. Generally, any interest
bearing deposits are invested for a maximum of 90 days. Federal funds are
generally sold for one-day periods.

The Bank maintains balances in
correspondent bank accounts which, at times, may exceed federally insured
limits. Management believes that its risk of loss associated with such balances
is minimal due to the financial strength of the correspondent banks. The Bank
has not experienced any losses in such accounts.

Supplemental disclosures of cash
flow information

Noncash transactions resulted from
unrealized gains and losses on investment securities available-for-sale, net of
income taxes, reclassification of unearned compensation on nonvested restricted
stock to common stock, issuance of nonvested restricted stock, common stock
issued in conjunction with the acquisition of F&M Holding Company (F&M),
and stock-based compensation expense, all as disclosed in the accompanying
consolidated statements of changes in stockholders equity; the net
capitalization of originated mortgage-servicing rights, as disclosed in Note 7;
a 5-for-4 stock split in 2006; the transfer of approximately $55,760, $11,651
and $367 of loans to other real estate owned (OREO) in 2008, 2007 and 2006,
respectively; a $105,047 impairment of goodwill and a $11,400 transfer of
general account bank-owned life insurance (BOLI) policies to separate account
BOLI policies in 2006.

During 2008, 2007 and 2006, the Company
paid approximately $42,521, $62,902 and $37,941, respectively, in interest
expense.

During 2008, 2007 and 2006, the Company
made income tax payments of approximately $7,338, $24,940 and $24,270,
respectively.

Investment securities

Investment securities that management
has the positive intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity.

Investment securities that are
purchased and held principally for the purpose of selling them in the near term
are classified as trading securities and are reported at fair value, with
unrealized gains and losses included in noninterest income. The Company had no
trading securities during 2008, 2007 or 2006.

Investment securities that are not
classified as either held-to-maturity securities or trading securities are
classified as available-for-sale securities and are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as other
comprehensive income or loss, net of income taxes. Investment securities are
valued utilizing a number of methods including quoted prices in active markets,
quoted prices for similar assets, quoted prices for securities in inactive
markets and inputs derived principally from, or corroborated by, observable
market data by correlation or other means.

Management determines the appropriate
classification of securities at the time of purchase.

Gains and losses on the sales of
available-for-sale securities are determined using the specific-identification
method. Premiums and discounts on available-for-sale securities are recognized
in interest income using the interest method generally over the period to
maturity.

61

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

Declines in the fair value of
individual held-to-maturity and available-for-sale securities below their cost
that are other-than-temporary would result in write-downs of the individual
securities to their fair value. In estimating other-than-temporary impairment
losses, management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near term prospects of the issuer, and (iii) the intent and
ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery of fair value. The related
write-downs would be included in earnings as realized losses. Management
believes that all unrealized losses on investment securities at December 31,
2008 and 2007 are temporary (see Note 4).

Federal Home Loan Bank (FHLB)
stock

The Banks investment in FHLB stock is
carried at cost, which approximates fair value. The FHLB stock is accounted for
in accordance with the American Institute of Certified Public Accountants
Statement of Position (SOP) No. 01-6, Accounting by Certain Entities that Lend
to or Finance the Activities of Others. SOP 01-6 provides that, for impairment
testing purposes, the value of long-term investments such as FHLB stock is based
on the ultimate recoverability of the par value of the security without regard
to temporary declines in value. As a member of the FHLB system, the Bank is
required to maintain a minimum level of investment in FHLB stock based on
specific percentages of its outstanding mortgages, total assets or FHLB
advances. At December 31, 2008, the Bank met its minimum required investment.
The Bank may request redemption at par value of any FHLB stock in excess of the
minimum required investment; however, stock redemptions are at the discretion of
the FHLB. Management believes that there is no impairment of the value of FHLB
stock at December 31, 2008.

Loans

Loans are stated at the amount of
unpaid principal, reduced by the reserve for loan losses, the undisbursed
portion of loans in process and deferred loan fees.

Interest income on loans is accrued
daily based on the principal amounts outstanding. Allowances are established for
uncollected interest on loans for which the interest is determined to be
uncollectible. Generally, all loans past due (based on contractual terms) 90
days or more are placed on non-accrual status and internally classified as
substandard. Any interest income accrued at that time is reversed. Subsequent
collections are applied proportionately to past due principal and interest,
unless collectibility of principal is in doubt, in which case all payments are
applied to principal. Loans are removed from non-accrual status only when the
loan is deemed current, and the collectibility of principal and interest is no
longer doubtful, or, on one-to-four family loans, when the loan is less than 90
days delinquent.

The Bank charges fees for originating
loans. These fees, net of certain loan origination costs, are deferred and
amortized to interest income, on the level-yield basis, over the loan term. If
the loan is repaid prior to maturity, the remaining unamortized deferred loan
origination fee is recognized in interest income at the time of repayment.

Reserve for loan losses

The reserve for loan losses represents
managements recognition of the assumed risks of extending credit. The reserve
is established to absorb managements best estimate of known and inherent losses
in the loan portfolio as of the consolidated balance sheet date. The reserve
requires complex subjective judgments as a result of the need to make estimates
about matters that are uncertain. The reserve is maintained at a level currently
considered adequate to provide for potential loan losses based on managements
assessment of various factors affecting the portfolio.

The reserve is based on estimates, and
ultimate losses may vary from the current estimates. These estimates are
reviewed periodically, and, as adjustments become necessary, they are reported
in earnings in the periods in which they become known. Therefore, we cannot
provide assurance that, in any particular period, the Company will not have
significant losses in relation to the amount reserved. The level of reserve for
loan losses is also subject to

62

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

review by the bank regulatory
authorities who may require increases to the reserve based on their evaluation
of the information available to them at the time of their examination of the
Bank. The reserve is increased by provisions charged to operations and reduced
by loans charged-off, net of recoveries.

The following describes the Companys
methodology for assessing the appropriate level of the reserve for loan losses.
For this purpose, loans and related commitments to loan are analyzed and
reserves are categorized into the allocated reserve, specifically identified
reserves for impaired loans, the unallocated reserve, or the reserve for
unfunded loan commitments.

The allocated portion of the reserve
and the reserve for unfunded loan commitments is calculated by applying loss
factors to outstanding loan balances and commitments to loan, segregated by
differing risk categories. Loss factors are based on historical loss experience,
adjusted for current economic trends, portfolio concentrations and other
conditions affecting the portfolio. In certain circumstances with respect to
adversely risk rated loans, loss factors may utilize information as to estimated
collateral values, secondary sources of repayment, guarantees and other relevant
factors. The allocated portion of the consumer loan reserve is estimated based
mainly upon a quarterly credit scoring analysis.

Impaired loans are either specifically
allocated for in the reserve for loan losses or reflected as a partial
charge-off of the loan balance. The Bank considers loans to be impaired when
management believes that it is probable that either principal and/or interest
amounts due will not be collected according to the contractual terms. Impairment
is measured on a loan-by-loan basis by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans
observable market price or the estimated fair value of the loans underlying
collateral or related guaranty. Since a significant portion of the Banks loans
are collateralized by real estate, the Bank primarily measures impairment based
on the estimated fair value of the underlying collateral or related guaranty. In
certain other cases, impairment is measured based on the present value of
expected future cash flows discounted at the loans effective interest rate.
Smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Bank does not separately identify individual installment loans
for impairment disclosures. Generally, the Bank evaluates a loan for impairment
when a loan is determined to be adversely risk rated.

The unallocated portion of the reserve
is based upon managements evaluation of various factors that are not directly
measured in the determination of the allocated and specific reserves. Such
factors include uncertainties in economic conditions, uncertainties in
identifying triggering events that directly correlate to subsequent loss rates,
risk factors that have not yet manifested themselves in loss allocation factors
and historical loss experience data that may not precisely correspond to the
current portfolio. The unallocated reserve may also be affected by review by the
bank regulatory authorities who may require increases to the reserve based on
their evaluation of the information available to them at the time of their
examination. Also, loss data representing a complete economic cycle is not
available for all sections of the loan portfolio. Accordingly, the unallocated
reserve helps to minimize the risk related to the margin of imprecision inherent
in the estimation of allocated loan losses. Due to the subjectivity involved in
the determination of the unallocated portion of the reserve for loan losses, the
relationship of the unallocated component to the total reserve for loan losses
may fluctuate from period to period.

Reserve for unfunded loan
commitments

The Company maintains a separate
reserve for losses related to unfunded loan commitments. Management estimates
the amount of probable losses related to unfunded loan commitments by applying
the loss factors used in the reserve for loan loss methodology to an estimate of
the expected amount of funding and applies this adjusted factor to the unused
portion of unfunded loan commitments. The reserve for unfunded loan commitments
totaled $1,039 and $3,163 at December 31, 2008 and 2007, respectively, and these
amounts are included in accrued interest and other liabilities in the
accompanying consolidated balance sheets. Increases (decreases) in the reserve
for unfunded loan commitments are recorded in noninterest expenses in the
accompanying consolidated statements of operation.

63

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

Mortgage servicing
rights

Mortgage servicing rights (MSRs) are
measured by allocating the carrying value of loans between the assets sold and
interest retained, based upon the relative estimated fair value at date of sale.
MSRs are capitalized at their allocated carrying value and amortized in
proportion to, and over the period of, estimated future net servicing revenue.
Impairment of MSRs is assessed based on the estimated fair value of servicing
rights. Fair value is estimated using discounted cash flows of servicing revenue
less servicing costs taking into consideration market estimates of prepayments
as applied to underlying loan type, note rate and term. Impairment adjustments,
if any, are recorded through a valuation allowance.

Fees earned for servicing mortgage
loans are reported as income when the related mortgage loan payments are
received. The Company classifies MSRs as accrued interest and other assets in
the accompanying consolidated balance sheets.

Premises and
equipment

Premises and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization are computed on the straight-line method over the shorter of the
estimated useful lives of the assets or terms of the leases. Amortization of
leasehold improvements is included in depreciation and amortization expense in
the accompanying consolidated financial statements.

Goodwill and other intangible assets

Goodwill and other intangible assets
represent the excess of the purchase price and related costs over the fair value
of net assets acquired in business combinations under the purchase method of
accounting. As of December 31, 2007, the carrying value of goodwill was
$105,047, which arose from the acquisition of F&M during 2006 (see Note 2)
and from the acquisition of Community Bank of Grants Pass (CBGP) during 2004. As
of December 31, 2008, the Company had determined that all of its goodwill was
impaired, and, accordingly, wrote-off all of its goodwill.

In accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, goodwill cannot be amortized; however, it must be tested for impairment
at least annually. The impairment test for goodwill requires a two-step process.
First, the aggregate estimated fair value of a reporting unit is compared to its
carrying amount, including goodwill. If the estimated fair value exceeds the
carrying amount, no impairment exists. If the carrying amount of the reporting
unit exceeds the estimated fair value, then a second step of the impairment test
is required in order to determine the implied fair value of the reporting units
goodwill. If the carrying amount of the reporting units goodwill exceeds the
implied fair value, then goodwill impairment is recognized by writing goodwill
down to the implied fair value. The Company performs its annual impairment test
for goodwill as of September 30 of each year. Goodwill is tested for impairment
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. The goodwill impairment evaluation process requires the Company to make
estimates and assumptions with regard to the fair value of a reporting unit.
Differences in the identification of reporting units and the use of valuation
techniques can result in materially different evaluations of impairment. For
purposes of the goodwill impairment test, the Company identified a single
reporting unit.

During 2008, the Company engaged an
independent third-party to perform its annual impairment test. At September 30,
2008, the fair value of the Companys single reporting unit was determined by
applying the following valuation methods and weightings (all of which were
based, in part, on data from recent transactions involving similar financial
institutions): (i) a market approach which utilized an estimated control premium
(control premium method) (20%); (ii) a market approach using acquisition
multiples based on recent transactions involving similar financial institutions
(comparable transaction method) (60%); and (iii) an income approach based on the
Companys historical earnings data (20%). The results of this testing indicated
that there was no goodwill impairment at September 30, 2008.

64

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

However, based on deteriorating
economic conditions and the decline in the market price of the Companys common
stock, the Company engaged an independent third-party to perform an interim
goodwill impairment test at December 31, 2008, and recently updated its analysis
as of that date. The results of the interim test concluded that the estimated
fair value of the Companys reporting unit was less than its book value and the
carrying amount of the Companys reporting unit goodwill exceeded its implied
fair value, resulting in a noncash after-tax impairment charge of $105.0
million, eliminating all previously recorded goodwill. Goodwill impairment is a
noncash accounting adjustment that does not affect the Companys reported cash
flows and the Companys Tier 1 and total regulatory capital ratios are
unaffected by this adjustment.

The Company did not experience any
goodwill impairment during the years ended December 31, 2007 and 2006.

Other intangible assets include core
deposit intangibles (CDI) and other identifiable finite-life intangible assets
which are being amortized over their estimated useful lives primarily under the
straight-line method. The CDI arose from the acquisitions of F&M and CBGP,
and totaled approximately $7,921 and $9,502 at December 31, 2008 and 2007,
respectively. The CDI is included in accrued interest and other assets in the
accompanying consolidated balance sheets and is being amortized over an
eight-year period for F&M and over a seven-year period for CBGP. Other
intangible assets, exclusive of CDI, are not significant at December 31, 2008
and 2007.

Bank-owned life
insurance

The Company has purchased BOLI to
protect itself against the loss of certain key employees and directors due to
death. At December 31, 2008 and 2007, the Company had $26,315 and $26,271,
respectively, of separate account BOLI and $7,253 and $7,033, respectively, of
general account BOLI. During 2006, approximately $11,400 of existing general
account BOLI was transferred into the separate account.

The separate account BOLI was purchased
in the fourth quarter of 2006 as an investment expected to provide a long-term
source of earnings to support existing employee benefit plans. The cash
surrender value of the separate account BOLI is the quoted market price of the
underlying securities, further supported by a stable value wrap, which
mitigates, but does not fully protect the investment against changes in the fair
market value depending on the severity and duration of market price disruption.
The fair value of the general account BOLI is based on the insurance contract
cash surrender value.

During 2008, losses on the underlying
investments in the separate account BOLI exceeded the support of the stable
value wrap. As a result, the Company incurred losses of approximately $648 on
the separate account BOLI during 2008, and there is a possibility that
additional losses could be incurred on the separate account BOLI in the
future.

Other real estate
(OREO)

OREO, acquired through foreclosure or
deeds in lieu of foreclosure, is carried at the lower of cost or estimated net
realizable value. When the property is acquired, any excess of the loan balance
over the estimated net realizable value is charged to the reserve for loan
losses. Holding costs; subsequent write-downs to net realizable value, if any;
or any disposition gains or losses are included in noninterest expenses. The
valuation of OREO is subjective in nature and may be adjusted in the future
because of changes in economic conditions. Management considers third-party
appraisals, as well as independent fair market value assessments from realtors
or persons involved in selling OREO, in determining the fair value of particular
properties. Net OREO was approximately $52,727 and $9,765 at December 31, 2008
and 2007, respectively, which is net of an allowance for losses in OREO of
$5,340 as of December 31, 2008. No allowance was recorded as of December 31,
2007.

Federal funds
purchased

Federal funds purchased are short-term
borrowings that typically mature within one to ninety days.

65

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

Customer repurchase
agreements

The Bank enters into repurchase
agreements with customers who wish to deposit amounts in excess of the Federal
Deposit Insurance Corporation (FDIC) insured amount of $250,000 ($100,000 prior
to October 3, 2008). Each agreement is for a fixed length of time at a fixed
interest rate. These deposits are not insured by the FDIC but are collateralized
by an interest in pledged securities. The Bank has classified these borrowings
separately from deposits.

Advertising

Advertising costs are generally charged
to expense during the year in which they are incurred.

Income taxes

The provision (credit) for income taxes
is based on income and expenses as reported for financial statement purposes
using the asset and liability method for accounting for deferred taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision (credit) for income taxes. A valuation allowance, if needed, reduces
deferred tax assets to the expected amount to be realized.

Trust assets

Assets of the Banks trust department,
other than cash on deposit at the Bank, are not included in the accompanying
consolidated financial statements because they are not assets of the Bank.
Assets (unaudited) totaling approximately $130,000 and $163,000 were held in
trust as of December 31, 2008 and 2007, respectively.

Transfers of financial assets

Transfers of financial assets are
accounted for as sales when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (i) the assets
have been isolated from the Company, (ii) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets, and (iii) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.

Cash dividend
restriction

Payment of dividends by the Company and
the Bank is subject to restriction by state and federal regulators and
availability of retained earnings.

Preferred stock

Beginning in 2008, the Company may
issue preferred stock in one or more series, up to a maximum of 5,000,000
shares. Each series shall include the number of shares issued, preferences,
special rights and limitations as determined by the Board. Preferred stock may
be issued with or without voting rights, not to exceed one vote per share, and
the shares of preferred stock will not vote as a separate class or series except
as required by state law. At December 31, 2008, there were no shares of
preferred stock issued and outstanding.

Recently issued accounting
standards

In September 2006, the Financial
Accounting Standards Board (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

66

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

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 was effective for fiscal years beginning after November 15, 2007, with
earlier adoption permitted. The Companys adoption of SFAS No. 157 on January 1,
2008 did not have a material impact on the Companys consolidated financial
statements. Effective February 12, 2008, the FASB issued a staff position, FSP
FAS 157-2, which delayed the applicability of FAS 157 to non-financial
instruments until January 1, 2009. On October 10, 2008, the FASB issued FSP FAS
157-3, Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS
No. 157 in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP 157-3 was effective
immediately, and did not affect the Companys fair value measurements for the
year ended December 31, 2008.

In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities 
Including an amendment of FASB Statement No. 115. SFAS No. 159 provides
entities with an option to report certain financial assets and liabilities at
fair value  with changes in fair value reported in earnings  and requires
additional disclosures related to an entitys election to use fair value
reporting. It also requires entities to display the fair value of those assets
and liabilities for which the entity has elected to use fair value on the face
of the balance sheet. SFAS No. 159 was effective for fiscal years beginning
after November 15, 2007. The Companys adoption of SFAS No. 159 on January 1,
2008 did not have an impact on the Companys consolidated financial
statements.

In November 2007, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109 (SAB 109).
SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows
related to the associated servicing of a loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. SAB 109 was applied on a prospective basis to derivative loan
commitments issued or modified in fiscal quarters beginning after December 15,
2007. The adoption of SAB 109 on January 1, 2008 did not have a material impact
on the Companys consolidated financial statements.

In December 2007, the FASB issued SFAS
No. 141 (revised 2007) (SFAS No. 141R), Business Combinations. SFAS No. 141R
replaces SFAS No. 141, Business Combinations and applies to all transactions
and other events in which one entity obtains control over one or more other
businesses. SFAS No. 141R retains the fundamental requirements of SFAS No. 141
that the acquisition method of accounting be used for all business combinations
and for the acquirer to be identified for each business combination. SFAS No.
141R requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of the acquisition date. SFAS No. 141R
also requires an acquirer to recognize assets acquired and liabilities assumed
arising from contractual contingencies as of the acquisition date, measured at
their acquisition-date fair values. This changes the requirements of SFAS No.
141 which permitted deferred recognition of preacquisition contingencies, until
the recognition criteria for SFAS No. 5, Accounting for Contingencies were
met. SFAS No. 141R will also require acquirers to expense acquisition-related
costs as incurred rather than require allocation of such costs to the assets
acquired and liabilities assumed. SFAS No. 141R is effective for business
combination reporting for fiscal years beginning after December 15, 2008. The
Company expects SFAS No. 141R to have a material impact on the accounting for
any business combination occurring on or after January 1, 2009.

In December 2007, the FASB issued SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51. SFAS No. 160 amends Accounting Research Bulletin (ARB)
No. 51, Consolidated Financial Statements, to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 also clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest. Prior to SFAS No. 160, net income (loss)
attributable

67

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

to the noncontrolling interest
generally was reported as an expense or other deduction in arriving at
consolidated net income (loss). Additional disclosures are required as a result
of SFAS No. 160 to clearly identify and distinguish between the interests of the
parents owners and the interests of the noncontrolling owners of a subsidiary.
SFAS No. 160 is effective for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the impact that SFAS No. 160 may have on its
future consolidated financial statements.

In March 2008, the FASB issued SFAS No.
161, Disclosures About Derivative Instruments and Hedging Activities - an
Amendment of FASB Statement No. 133. SFAS No. 161 expands disclosure
requirements regarding an entitys derivative instruments and hedging
activities. Expanded qualitative disclosures that will be required under SFAS
No. 161 include: (1) how and why an entity uses derivative instruments; (2) how
derivative instruments and related hedged items are accounted for under SFAS No.
133, and its related interpretations; and (3) how derivative instruments and
related hedged items affect an entitys financial position, financial
performance, and cash flows. SFAS No. 161 also requires several added
quantitative disclosures in financial statements. SFAS No. 161 is effective for
the Company on January 1, 2009. The Company is currently evaluating the effect
that the provisions of SFAS No. 161 will have on its future consolidated
financial statements.

Stock-based
compensation

Prior to January 1, 2006, the Company
accounted for stock-based compensation arrangements under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
(collectively, APB No. 25). Under this method, no compensation expense was
recognized for the years prior to 2006, as the exercise price of each stock
option which the Company granted was equal to the market value of the underlying
common stock on the date of grant.

Effective January 1, 2006, the Company
adopted SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. SFAS
123R requires the measurement of compensation cost for all stock-based awards to
be based on the grant-date fair value and the recognition of compensation cost
over the service period of stock-based awards, which is generally the same as
the vesting period. The fair value of stock options is determined using the
Black-Scholes valuation model, which is consistent with the Companys valuation
methodology previously utilized for stock options in the footnote disclosures
required under SFAS No. 123, Accounting for Stock-Based Compensation.

The Company has adopted SFAS 123R using
a modified version of prospective application (modified prospective
application). Under modified prospective application, as it is applicable to the
Company, SFAS 123R applies to new awards and to awards modified, repurchased or
cancelled after January 1, 2006. Additionally, compensation cost for the portion
of awards for which the requisite service has not been rendered (generally
referring to non-vested awards) that are outstanding as of January 1, 2006, must
be recognized as the remaining requisite service is rendered during the period
of and/or the periods after the adoption of SFAS 123R. The attribution of
compensation cost for those earlier awards will be based on the same method and
on the same grant-date fair values previously determined for the pro forma
disclosures required for companies that did not adopt the fair value accounting
method for stock-based employee compensation. Modified prospective application
provides for no retroactive application to prior periods and no cumulative
adjustment to equity accounts. In accordance with SFAS 123R, unearned
compensation on nonvested restricted stock has been reclassified to common stock
effective January 1, 2006.

The Companys stockbased compensation
plans are described more fully in Note 19.

Stock repurchases

On August 13, 2007, the Company
announced that the Board 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,
capital levels,

68

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

risk factors, general economic
conditions, established and special trading blackout periods, and other
investment opportunities. The Company has not repurchased shares since the
fourth quarter of 2007 and does not presently contemplate additional activity
due to the elevated risk and uncertainty arising from the current economic
downturn. As of December 31, 2008, the Company had repurchased a total of
483,100 shares at an average price of $19.05, all of which were repurchased in
2007.

2. Mergers and acquisitions

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),
operated 11 branches in Boise, Idaho and surrounding markets. 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 December 31, 2008, the holdback
amount has been reduced to zero from $1,702 at December 31, 2007, 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:

Cash
      and cash equivalents
    
    $
    (8,350
    )Investment
      securities
    
    
    106,159Loans,
      net
    
    
    493,900Premises and equipment,
      net
    
    
    16,479Core
      deposit intangibles
    
    
    11,800Goodwill (See Note
      1)
    
    
    98,695Other
      assets
    
    
    3,302Total assets
acquired
    
    
    721,985Deposits
    
    
    482,707Borrowings
    
    
    82,589Other
      liabilities
    
    
    9,637Total liabilities
      assumed
    
    
    574,933Total purchase price
    
    $
    147,052


3. Cash and due from banks

By regulation, the Bank must meet
reserve requirements as established by the Federal Reserve Bank (FRB)
(approximately $9,993 and $1,360 at December 31, 2008 and 2007, respectively).
Accordingly, the Bank complies with such requirements by holding cash and
maintaining average reserve balances with the FRB in accordance with such
regulations.

69

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

4. Investment securities

Investment securities at December 31,
2008 and 2007 consisted of the following:

|                                                      |  |           |         |            | Gross |            | Gross |            |  | 
|----------------------------------------------------- |  | --------- | ------- | ---------- | ----- | ---------- | ----- | ---------- |  | 
|                                                      |  | Amortized |         | unrealized |       | unrealized |       | Estimated 
|                                                      |  | cost      |         | gains      |       | losses     |       | fair value
|2008                                                  |  |           |         |            |       |            |       |            |  | 
|Available-for-sale                                    |  |           |         |            |       |            |       |            |  | 
|U.S. Agency mortgage-backed securities                |  | $         | 94,292  |            |       | $          | 607   |            |  | 
|U.S.
      Government and agency securities           |  |           | 8,273   |            |       |            | 453   |            |  | 
|Obligations of state and political subdivisions       |  |           | 1,503   |            |       |            | 32    |            |  | 
|U.S. Agency
      asset-backed securities             |  |           | 3,193   |            |       |            | 67    |            |  | 
|Mutual fund                                           |  |           | 423     |            |       |            | 7     |            |  | 
|                                                      |  | $         | 107,684 |            |       | $          | 1,166 |            |  | 
|Held-to-maturity                                      |  |           |         |            |       |            |       |            |  | 
|Obligations
      of state and political subdivisions |  | $         | 2,211   |            |       | $          | 36    |            |  | 
|                                                     
|2007                                                  |  |           |         |            |       |            |       |            |  | 
|Available-for-sale                                    |  |           |         |            |       |            |       |            |  | 
|U.S. Agency mortgage-backed securities                |  | $         | 64,874  |            |       | $          | 452   |            |  | 
|U.S.
      Government and agency securities           |  |           | 10,187  |            |       |            | 310   |            |  | 
|Obligations of state and political subdivisions       |  |           | 3,710   |            |       |            | 30    |            |  | 
|U.S. Agency
      asset-backed securities             |  |           | 3,490   |            |       |            | 48    |            |  | 
|Equity securities                                     |  |           | 310     |            |       |            | 139   |            |  | 
|Mutual
      fund                                     |  |           | 405     |            |       |            | 7     |            |  | 
|                                                      |  | $         | 82,976  |            |       | $          | 986   |            |  | 
|Held-to-maturity                                      |  |           |         |            |       |            |       |            |  | 
|Obligations of state and political subdivisions       |  | $         | 3,180   |            |       | $          | 24    |            |  | 

70

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

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 December 31, 2008 and
2007:

|                                                |  | Less than 12 months |   | 12 months or more |  | Total        
|----------------------------------------------- |  | ------------------- | - | ----------------- |  | -------------
|                                                |  | Estimated           |   | **Unrealized**    |  | **Estimated**
|                                                |  | fair value          |   | losses            |  | fair value   
|2008                                            |  |                     |   |                   |  |              
|U.S. Agency
      mortgage-backed securities    |  |                     | $ | 56,029            |  |              
|Obligations of state and political subdivisions |  |                     |   | 295               |  |              
|                                                |  |                     | $ | 56,324            |  |              
|                                                | 
|2007                                            |  |                     |   |                   |  |              
|U.S. Agency
      mortgage-backed securities    |  |                     | $ | 14,684            |  |              
|Obligations of state and political subdivisions |  |                     |   |                  |  |              
|                                                |  |                     | $ | 14,684            |  |              

The unrealized losses on U.S. Agency
mortgage-backed securities (MBS) are primarily due to widening of interest rate
spreads resulting from turbulent credit market conditions that existed at
December 31, 2008 as compared to yields/spread relationships prevailing at the
time specific investment securities were purchased. Management expects the fair
value of these investment securities to recover as market turbulence abates,
and/or as securities approach their maturity dates. Because the Companys MBS
portfolio is comprised of conventional agency MBS which carry U.S. government
guarantees as to principal and interest, management does not believe that any of
the securities are impaired due to issues of credit quality nor that any of the
above gross unrealized losses on investment securities are other-than-temporary.
Accordingly, no impairment adjustments have been recorded for the years ended
December 31, 2008 and 2007.

Management of the Company has the
intent and ability 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 December
31, 2008, management of the Company also had the intent and ability to hold the
investment securities classified as available-for-sale for a period of time
sufficient for a recovery of cost.

71

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

The amortized cost and estimated fair
value of investment securities at December 31, 2008, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities,
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.

|                                             |  |           |         |       | Estimated
|-------------------------------------------- |  | --------- | ------- | ----- | ---------
|                                             |  | Amortized |         | fair 
|Available-for-sale                           |  | cost      |         | value
|Due one
      year or less                   |  | $         | 2,673   |       | $        
|Due after one year
      through five years  |  |           | 9,273   |       |          
|Due
      after five years through ten years |  |           | 7,209   |       |          
|Due after ten
      years                    |  |           | 88,106  |       |          
|Mutual
      fund                            |  |           | 423     |       |          
|                                             |  | $         | 107,684 |       | $        
|                                            
|Held-to-maturity                             |  |           |         |       |          
|Due one year or
      less                   |  | $         | 200     |       | $        
|Due
      after one year through five years  |  |           | 1,299   |       |          
|Due after five years
      through ten years |  |           | 712     |       |          
|                                             |  | $         | 2,211   |       | $        

Investment securities with a carrying
value of approximately $109,293 and $86,139 at December 31, 2008 and 2007,
respectively, were pledged to secure public deposits, customer repurchase
agreements and for other purposes as required or permitted by law.

The Company had no gross realized
losses on sales of investment securities during the years ended December 31,
2008, 2007, and 2006. Gross realized gains on sales of investment securities
during the years ended December 31, 2008, 2007, and 2006, are as disclosed in
the accompanying consolidated statements of operations.

5. Loans

Loans at December 31, 2008 and 2007
consisted of the following:

|                                   |  | 2008 |           | 2007
|---------------------------------- |  | ---- | --------- | ----
|Commercial                         |  | $    | 582,831   |     
|Real Estate:                       |  |      |           |     
|Construction/lot                   |  |      | 517,721   |     
|Mortgage                           |  |      | 96,248    |     
|Commercial                         |  |      | 703,149   |     
|Consumer                           |  |      | 56,235    |     
|                                  
|Total
      loans                  |  |      | 1,956,184 |     
|Less reserve for loan
      losses |  |      | 47,166    |     
|                                   |  | $    | 1,909,018 |     

Included in mortgage loans at December
31, 2008 and 2007 were approximately $1,416 and $4,306, respectively, in
mortgage loans held for sale. In addition, the above loans are net of deferred
loan fees of approximately $4,697 and $5,659 at December 31, 2008 and 2007,
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.

72

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

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 December 31, 2008 and 2007,
the portion of these loans participated to third-parties (which are not included
in the accompanying consolidated financial statements) totaled approximately
$46,432 and $72,776, respectively.

6. Reserve for credit losses

Transactions in the reserve for loan
losses and unfunded loan commitments for the years ended December 31, 2008, 2007
and 2006 were as follows:

|Reserve for
      loan losses                             |  |   | 2008    |   | 2007 |   | 2006   
|--------------------------------------------------------- |  | - | ------- | - | ---- | - | -------
|Balance at beginning of year                              |  | $ | 33,875  |   |      | $ | 23,585 
|Loan loss
      provision                                 |  |   | 99,593  |   |      |   | 19,400 
|Recoveries                                                |  |   | 1,980   |   |      |   | 1,290  
|Loans charged
      off                                   |  |   | (88,282 | ) |      |   | (10,400
|Reclassification to reserve for unfunded loan commitments |  |   |        |   |      |   |       
|Reserves
      acquired from F&M                          |  |   |        |   |      |   |       
|Balance at end of year                                    |  | $ | 47,166  |   |      | $ | 33,875 
|                                                          |  |   |         |   |      |   |        
|Reserve for
      unfunded loan commitments               |  |   |         |   |      |   |        
|Balance at
      beginning of year                        |  | $ | 3,163   |   |      | $ | 3,213  
|Reclassification from reserve for loan losses             |  |   |        |   |      |   |       
|Credit for
      unfunded loan commitments                |  |   | (2,124  | ) |      |   | (50    
|Balance at end of year                                    |  | $ | 1,039   |   |      | $ | 3,163  
|                                                          |  |   |         |   |      |   |        
|Reserve for
      credit losses                           |  |   |         |   |      |   |        
|Reserve for
      loan losses                             |  | $ | 47,166  |   |      | $ | 33,875 
|Reserve for unfunded loan commitments                     |  |   | 1,039   |   |      |   | 3,163  
|Total reserve
      for credit losses                     |  | $ | 48,205  |   |      | $ | 37,038 

Starting in the fourth quarter of 2006,
the Bank began classifying its reserve for unfunded loan commitments as other
liabilities; prior to the fourth quarter of 2006, the reserve for unfunded loan
commitments was included as a component of the reserve for loan losses in
accordance with the industry practice of other banks in its peer group. During
the third quarter of 2008, the Company reduced its estimated reserves for
unfunded commitments by approximately $2,100 as a result of declining
outstanding commitments and lower estimated funding rates. At December 31, 2008
the Bank had approximately $514.6 million in outstanding commitments to extend
credit, compared to approximately $727.4 million at year-end 2007.

The Banks operations, like those of
other financial institutions operating in the Banks market, are significantly
influenced by various economic conditions including local economies, the
strength of the real estate market and the fiscal and regulatory policies of the
federal and state government and the regulatory authorities that govern
financial institutions. Approximately 67% of the Banks loan portfolio at
December 31, 2008 consisted of real estate-related loans, including construction
and development loans, commercial real estate mortgage loans and commercial
loans secured by commercial real estate. There has been a significant slow-down
in the real estate markets due to negative economic trends and credit market
disruption, the impacts of which are not yet completely known or quantified.
Recently, there has been tighter credit underwriting and higher premiums on
liquidity, both of which may continue to place downward pressure on real estate
values. Any further downturn in the real estate markets could materially and
adversely affect the Banks business because a significant portion of the Banks
loans are secured by real estate. The Banks ability to recover on defaulted
loans by selling the real estate collateral would then be diminished and

73

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

the Bank would be more likely to suffer
losses on defaulted loans. Consequently, the Banks results of operations and
financial condition are dependent upon the general trends in the economy, and in
particular, the residential and commercial real estate markets. If there is a
further decline in real estate values, the collateral for the Banks loans would
provide less security. 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. Further, 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.

Loans on nonaccrual status at December
31, 2008 and 2007 were approximately $119,765 and $45,865, respectively.
Interest income which would have been realized on such nonaccrual loans
outstanding at year-end, if they had remained current, was approximately $4,953,
$1,307, and $163 for the years ended December 31, 2008, 2007, and 2006
respectively.

Loans contractually past due 90 days or
more on which the Company continued to accrue interest were insignificant at
December 31, 2008 and 2007.

Total impaired loans as of December 31,
2008 and 2007 were as follows:

|                                                                        |  | 2008 |         | 2007
|----------------------------------------------------------------------- |  | ---- | ------- | ----
|Impaired loans with an associated allowance                             |  | $    | 120,468 |     
|Impaired loans without
      an associated allowance                    |  |      |        |     
|Total
      recorded investment in impaired loans                       |  | $    | 120,468 |     
|Amount of the reserve
      for loan losses allocated to impaired loans |  | $    | 2,699   |     

The average recorded investment in
impaired loans was approximately $86,332 and $24,272 for the years ended
December 31, 2008 and 2007, respectively. Interest income recognized for cash
payments received on impaired loans for the years ended December 31, 2008, 2007,
and 2006 was insignificant.

The following tables present
information with respect to non-performing assets at December 31, 2008 and
2007:

|                                                                  |  | 2008 |         | 2007
|----------------------------------------------------------------- |  | ---- | ------- | ----
|Loans
      on nonaccrual status                                  |  | $    | 120,468 |     
|Loans past due 90 days
      or more but not on nonaccrual status |  |      | 5       |     
|OREO -
      non-performing                                       |  |      | 38,952  |     
|Total non-performing
      assets                                 |  | $    | 159,425 |     
|                                                                 
|Operating commercial real estate OREO                             |  | $    | 13,775  |     
|OREO -
      non-performing                                       |  |      | 38,952  |     
|Total
      OREO                                                  |  | $    | 52,727  |     

7. Mortgage banking activities

The Bank sells a predominant share of
the mortgage loans it originates into the secondary market. However, it has
retained the right to service sold loans with principal balances totaling
approximately $512,000, $494,000 and $495,000 as of December 31, 2008, 2007 and
2006, respectively. These balances are not included in the accompanying
consolidated balance sheets. The sales of these mortgage loans are subject to
technical underwriting requirements and related repurchase risks. However, as of
December 31, 2008 and 2007, management is not aware of any mortgage loans which
will have to be repurchased.

74

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

Mortgage loans held for sale are
carried at the lower of cost or estimated market value. Market value is
determined on an aggregate loan basis. At December 31, 2008 and 2007, mortgage
loans held for sale were carried at cost, which was less than the estimated
market value.

Transactions in the Companys MSRs for
the years ended December 31, 2008, 2007 and 2006 were as follows:

|                                   |  | 2008 |        | 2007 |  | 2006
|---------------------------------- |  | ---- | ------ | ---- |  | ----
|Balance
      at beginning of year |  | $    | 3,756  |      |  | $   
|Additions                          |  |      | 989    |      |  |     
|Amortization                       |  |      | (1,140 | )    |  |     
|Balance at end of
      year       |  | $    | 3,605  |      |  | $   

At December 31, 2008 and 2007, the fair
value of the Companys MSRs was approximately $4,572 and $5,279, respectively.
The key assumptions used in estimating the fair value of MSRs at December 31,
2008 included weighted-average mortgage prepayment rates of approximately 318%
for the first year, 258% for the second year and 219% thereafter (194%, 184% and
175%, respectively, in 2007). Discount rates of 10% and 9% were applied in 2008
and 2007, respectively.

The Company analyzes its MSRs by
underlying loan type and interest rate (primarily fixed and adjustable). The
estimated fair values are obtained through an independent third-party valuation,
utilizing future cash flows which incorporate numerous assumptions including
servicing income, servicing costs, market discount rates, prepayment speeds,
default rates and other market-driven data. Accordingly, changes in such
assumptions could significantly affect the estimated fair values of the
Companys MSRs.

No valuation allowance for MSRs was
required for the years ended December 31, 2008, 2007 and 2006.

Mortgage banking income, net, consisted
of the following for the years ended December 31, 2008, 2007 and
2006:

|                                            |  | 2008 |        | 2007 |  | 2006
|------------------------------------------- |  | ---- | ------ | ---- |  | ----
|Origination and processing fees             |  | $    | 1,363  |      |  | $   
|Gains on sales of
      mortgage loans, net |  |      | 583    |      |  |     
|Servicing fees                              |  |      | 1,294  |      |  |     
|Amortization                                |  |      | (1,140 | )    |  |     
|Mortgage banking income, net                |  | $    | 2,100  |      |  | $   

8. Premises and equipment

Premises and equipment at December 31,
2008 and 2007 consisted of the following:

|                                                     |  | 2008 |        | 2007
|---------------------------------------------------- |  | ---- | ------ | ----
|Land                                                 |  | $    | 9,237  |     
|Buildings and leasehold
      improvements           |  |      | 30,796 |     
|Furniture and equipment                              |  |      | 14,684 |     
|                                                     |  |      | 54,717 |     
|Less
      accumulated depreciation and amortization |  |      | 15,212 |     
|                                                     |  |      | 39,505 |     
|Construction in progress                             |  |      | 258    |     
|Premises and equipment,
      net                    |  | $    | 39,763 |     

75

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

9. Core deposit intangibles
(CDI)

Net unamortized CDI totaled $7,921 and
$9,502 at December 31, 2008 and 2007, respectively. Amortization expense related
to the CDI during the years ended December 31, 2008, 2007 and 2006 totaled
$1,581, $1,580 and $1,089, respectively.

At December 31, 2008, the forecasted
CDI annual amortization expense for each of the next five years and thereafter
is as follows:

2009
    $
    1,5332010
    
    1,4762011
    
    1,4762012
    
    1,4762013
    
    1,476Thereafter
    
    484


10. Other real estate
owned

Transactions in the Companys OREO for
the years ended December 31, 2008 and 2007 are summarized in the following
table. OREO transactions for the year ended December 31, 2006 were
insignificant.

|                                   |  | 2008 |        | 2007
|---------------------------------- |  | ---- | ------ | ----
|Balance
      at beginning of year |  | $    | 9,765  |     
|Additions                          |  |      | 55,760 |     
|Dispositions                       |  |      | (7,458 | )   
|Valuation
      adjustments        |  |      | (5,340 | )   
|Balances at end of year            |  | $    | 52,727 |     

OREO valuation adjustments have been
recorded on certain OREO properties in 2008. This expense is included in OREO
expense in the accompanying 2008 consolidated statement of operations. There
were no valuation adjustments recorded in 2007 or 2006. The following table
summarizes activity in the OREO valuation allowance taken for the year ended
December 31, 2008:

|Balance
      at beginning of year         |  | $ |      |  
|------------------------------------------ |  | - | ----- | -
|Additions to the
      valuation allowance |  |   | 5,460 |  
|Reductions due to sales of OREO            |  |   | (120  | )
|Balance at end of
      year               |  | $ | 5,340 |  

OREO expenses for the year ended
December 31, 2008 primarily consisted of $2,742 of OREO operating costs and
$5,340 of valuation allowances. OREO expenses for the years ended December 31,
2007 and 2006 were insignificant.

11. Time deposits

Time deposits in amounts of $100,000 or
more aggregated approximately $349,000 and $117,000 at December 31, 2008 and
2007, respectively.

76

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

At December 31, 2008, the scheduled
annual maturities of all time deposits were approximately as follows:

2009
    $
    457,0002010
    
    91,0002011
    
    9,0002012
    
    23,0002013
    
    1,000$
    581,000


The increase in time deposits (from
approximately $257,000 at December 31, 2007 to approximately $581,000 at
December 31, 2008) primarily resulted from the use of national market brokered
CDs that were part of the Companys wholesale funding strategies in 2008. In
addition, the Bank uses the CDARS program to meet the needs of certain
customers whose investment policies may necessitate or require FDIC insurance.
The Company does not aggressively market time deposits within local markets as
they are not believed to be key to its relationship banking strategy. At
December 31, 2008, brokered deposits totaled $147,900 and CDARS deposits totaled
$168,246. At December 31, 2007, brokered deposits totaled $9,874 and CDARS
deposits totaled $79,627.

12. Junior subordinated debentures

The Company has 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 $2,058 at both
December 31, 2008 and 2007, is included in accrued interest and other assets in
the accompanying 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:

|                                              |  |            |  |           |  | Junior         |   |          |  | Effective        
|--------------------------------------------- |  | ---------- |  | --------- |  | -------------- | - | -------- |  | -----------------
|                                              |  | Issuance   |  | Maturity  |  | subordinated   |   | Interest |  | rate at          
|Issuance Trust                                |  | date       |  | date      |  | debentures (A) |   | rate     |  | December 31, 2008
|                                              |  |            |  |           |  |                |   |          |  |                  
|                                              |  |            |  |           |  |                |   |          |  |                  
|Cascade
      Bancorp Trust I (D)             |  | 12/31/2004 |  | 3/15/2035 |  |                | $ | 20,619   |  |                  
|                                              | 
|Cascade
      Bancorp Statutory Trust II (E)  |  | 3/31/2006  |  | 6/15/2036 |  |                |   | 13,660   |  |                  
|                                              | 
|                                              |  |            |  |           |  |                |   |          |  |                  
|                                              |  |            |  |           |  |                |   |          |  |                  
|Cascade
      Bancorp Statutory Trust III (E) |  | 3/31/2006  |  | 6/15/2036 |  |                |   | 13,660   |  |                  
|                                              | 
|                                              |  |            |  |           |  |                |   |          |  |                  
|                                              |  |            |  |           |  |                |   |          |  |                  
|Cascade
      Bancorp Statutory Trust IV (F)  |  | 6/29/2006  |  | 9/15/2036 |  |                |   | 20,619   |  |                  
|                                              | 
|                                              |  |            |  |           |  |                |   |          |  |                  
|Totals                                        |  |            |  |           |  |                | $ | 68,558   |  |                  

77

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|CASCADE BANCORP AND
      SUBSIDIARY
      NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS (Continued)
      DECEMBER 31,
2008
      (Dollars in thousands, except
      per share
amounts)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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 December 31, 2008 was 1.996%.                                                                                                                                                                                                                                                                                                
|   
|(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 December 31, 2008 and 2007, the TPS meet applicable regulatory
guidelines to qualify as Tier I capital (see Note 21).

Interest payments on all TPS are made
on a quarterly basis on March 15, June 15, September 15 and December 15. Because
of the elevated credit risk and associated net loss incurred by the Company in
2008, the Banks regulators have required the Bank to obtain regulatory approval
prior to the payment of interest on the TPS.

13. Other borrowings

The Bank participates in the FHLBs
Cash Management Advance Program (the Program). At December 31, 2008, the Bank
had $128,457 ($293,209 at December 31, 2007) in borrowings outstanding from the
FHLB under the Program with fixed interest at rates ranging from 2.50% to 6.62%.
All outstanding borrowings with the FHLB are collateralized by a blanket pledge
agreement on the Banks FHLB stock, any funds on deposit with the FHLB,
investment securities and loans. At December 31, 2008, the Bank had remaining
available borrowings from the FHLB of approximately $701,130, given availability
and sufficiency of eligible collateral. As of December 31, 2008, the Bank had
collateral with which to pledge for borrowings totaling approximately
$360,242.

At December 31, 2008, the contractual
maturities of the Banks FHLB borrowings outstanding were approximately as
follows:

2009
    
    $
    24,0002010
    
    
    5,0762011
    
    
    20,0002012
    
    
    20,0002013
    
    
    886Thereafter
    
    
    58,495$
    128,457


At December 31, 2008, the Bank had
approximately $194,988 in available short-term borrowings from the FRB,
collateralized by certain of the Banks loans. Such available borrowings include
participation in the Treasury Tax and Loan (TT&L) program of the federal
government, with access to this funding source limited to $5,000 and is fully at
the discretion of the U.S. Treasury. Of the total available FRB borrowings, at
December 31, 2008, the Bank had approximately $120,518 ($34,658 at December 31,
2007) in total borrowings outstanding from the FRB. FRB

78

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

borrowings at December 31, 2008
consisted of approximately $14,000 of overnight borrowings at a rate of 0.50%,
$105,000 in auction term funding maturing in the first quarter of 2009 that
bears a weighted average rate of 0.31% and TT&L overnight borrowings of
approximately $1,500.

As an additional source of liquidity,
the Bank had federal fund borrowing agreements with correspondent banks
aggregating approximately $20,100 and $105,000 at December 31, 2008 and 2007,
respectively. At December 31, 2008 the Company had no outstanding borrowings
under these federal fund borrowing agreements and the Company had $14,802
outstanding under these federal fund borrowing agreements at December 31, 2007.

On February 12, 2009, the Bank issued
$41 million of senior unsecured debt under the FDICs Temporary Liquidity
Guarantee Program (TLGP) comprised of $15 million floating rate and $26 million
fixed rate notes maturing on February 12, 2012.

14. Commitments, guarantees and
contingencies

Off-balance sheet financial
instruments

In the ordinary course of business, the
Bank is a party to financial instruments with off-balance sheet risk to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, commitments under credit card lines of credit and
standby letters of credit. These financial instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of amounts
recognized in the accompanying consolidated balance sheets. The contractual
amounts of these financial instruments reflect the extent of the Banks
involvement in these particular classes of financial instruments. As of December
31, 2008 and 2007, the Bank had no material commitments to extend credit at
below-market interest rates and held no significant derivative financial
instruments.

The Banks exposure to credit loss for
commitments to extend credit, commitments under credit card lines of credit and
standby letters of credit is represented by the contractual amount of these
instruments. The Company follows the same credit policies in underwriting and
offering commitments and conditional obligations as it does for on-balance sheet
financial instruments.

A summary of the Banks off-balance
sheet financial instruments at December 31, 2008 and 2007 is approximately as
follows:

2008
    
    2007Commitments to extend credit
    
    $
    465,500
    
    $
    669,336Commitments under
      credit card lines of credit
    
    
    30,522
    
    
    30,490Standby
      letters of credit
    
    
    18,583
    
    
    27,602Total off-balance sheet
      financial instruments
    
    $
    514,605
    
    $
    727,428


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.

79

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

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.

The Bank considers the fees collected
in connection with the issuance of standby letters of credit to be
representative of the fair value of its obligations undertaken in issuing the
guarantees. In accordance with GAAP related to guarantees, the Bank defers fees
collected in connection with the issuance of standby letters of credit. The fees
are then recognized in income proportionately over the life of the standby
letter of credit agreement. At December 31, 2008 and 2007, the Banks deferred
standby letter of credit fees, which represent the fair value of the Banks
potential obligations under the standby letter of credit guarantees, were
insignificant to the accompanying consolidated financial statements. The Bank
also has certain lending commitments for conforming residential mortgage loans
to be sold into the secondary market which are considered derivative instruments
under the guidelines of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 149. However, in the opinion of
management, such derivative amounts are not significant, and, therefore, no
derivative assets or liabilities are recorded in the accompanying consolidated
financial statements.

Lease commitments

The Bank leases certain land and
facilities under operating leases, some of which include renewal options and
escalation clauses. At December 31, 2008, the aggregate minimum rental
commitments under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year were approximately as follows:

2009
    $
    2,0702010
    
    1,7122011
    
    1,6282012
    
    1,5922013
    
    1,462Thereafter
    
    8,803$
    17,267


Total rental expense was approximately
$2,528, $2,309 and $1,801 in 2008, 2007 and 2006, respectively.

Operating environment and financial
condition

During the year ended December 31,
2008, the Company incurred a net loss of $135.6 million of which $105.0 million
was a result of a non-cash impairment of its goodwill. The balance of the loss
was primarily related to a $99.6 million pre-tax loan loss provision for the
year that was required as a result of the economic downturn, which negatively
affected a substantial portion of the Companys real estate related construction
and development loans. In response to the adverse economic conditions,
management has been, and will continue to work toward, reducing the amount of
the Companys nonperforming assets, adjusting the balance sheet by reducing loan
totals and other assets as possible, reducing controllable operating costs, and
augmenting deposits while striving to maximize secured borrowing facilities to
improve liquidity and preserve capital over the course of 2009. Accordingly, at
a minimum through December 31, 2009, management believes that the Company has
sufficient capital and liquidity to successfully meet its obligations in the
normal course of business. However, the Companys inability to successfully
implement its plans or further deterioration in economic conditions and real
estate prices could have a material adverse effect on the Companys financial
position and liquidity.

80

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

The Companys annual examination by its
primary banking regulators is currently in process. The Company has not yet
received its formal examination report from the regulators, but given current
economic conditions and the Companys elevated levels of nonperforming assets,
the regulators could, among other things, require management to reduce
nonperforming assets, raise and/or improve capital levels, restrict dividend
payments, improve liquidity, limit deposit pricing and restrict access to
brokered or other volatile wholesale funds.

Litigation

In the ordinary course of business, the
Bank becomes involved in various litigation arising from normal banking
activities. In the opinion of management, the ultimate disposition of these
actions will not have a material adverse effect on the Companys consolidated
financial statements as of and for the year ended December 31, 2008.

Other

The Bank is a public depository and,
accordingly, accepts deposit funds belonging to, or held for the benefit of, the
state of Oregon, political subdivisions thereof, municipal corporations, and
other public funds. In accordance with applicable state law, in the event of
default of one bank, all participating banks in the state collectively assure
that no loss of funds is suffered by any public depositor. Generally, in the
event of default by a public depository, the assessment attributable to all
public depositories is allocated on a pro rata basis in proportion to the
maximum liability of each public depository as it existed on the date of loss.
The Bank has taken out a letter of credit from the FHLB which collateralizes a
substantial portion of its public deposits. At December 31, 2008 there was no
liability associated with the Banks participation in this pool, as there were
no failed banks in Oregon. The maximum future contingent liability is dependent
upon potential changes in regulations, bank failures, and the level of public
fund deposits, all of which cannot presently be determined.

The Company has entered into employment
contracts and benefit plans with certain executive officers and members of the
Board that allow for payments (or accelerated payments) contingent upon a change
in control of the Company.

15. Income taxes

The provision (credit) for income taxes
for the years ended December 31, 2008, 2007 and 2006 was approximately as
follows:

|                                          |  | 2008 |         | 2007 |  | 2006
|----------------------------------------- |  | ---- | ------- | ---- |  | ----
|Current:                                  |  |      |         |      |  |     
|Federal                                   |  | $    | (11,915 | )    |  | $   
|State                                     |  |      | 479     |      |  |     
|                                          |  |      | (11,436 | )    |  |     
|Deferred                                  |  |      | (11,870 | )    |  |     
|Provision (credit) for
      income taxes |  | $    | (23,306 | )    |  | $   

The provision (credit) for income taxes
results in effective tax rates which are different than the federal income tax
statutory rate. The nature of the differences for the years ended December 31,
2008, 2007, and 2006 were approximately as follows:

|                                                |  | 2008 |         | 2007 |  | 2006
|----------------------------------------------- |  | ---- | ------- | ---- |  | ----
|Expected federal income tax provision           |  |      |         |      |  |     
|(credit) at statutory
      rates               |  | $    | (55,255 | )    |  | $   
|State income taxes, net
      of federal effect |  |      | (2,860  | )    |  |     
|Goodwill impairment                             |  |      | 35,830  |      |  |     
|Effect of nontaxable
      income, net          |  |      | (509    | )    |  |     
|Other,
      net                                |  |      | (512    | )    |  |     
|Provision (credit) for
      income taxes       |  | $    | (23,306 | )    |  | $   

81

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

The components of the net deferred tax
assets and liabilities at December 31, 2008 and 2007 were approximately as
follows:

|                                                            |  | 2008 |        | 2007
|----------------------------------------------------------- |  | ---- | ------ | ----
|Deferred tax assets:                                        |  |      |        |     
|Reserve for loan losses and
      unfunded loan commitments |  | $    | 19,171 |     
|Deferred benefit plan
      expenses, net                   |  |      | 5,742  |     
|State operating loss
      carryforwards                    |  |      | 1,457  |     
|Net unrealized losses on
      investment securities        |  |      | 78     |     
|Allowance for losses on
      OREO                          |  |      | 2,124  |     
|Accrued interest on
      non-accrual loans                 |  |      | 1,970  |     
|Other                                                       |  |      | 797    |     
|Total deferred tax assets                                   |  |      | 31,339 |     
|                                                           
|Deferred tax liabilities:                                   |  |      |        |     
|Accumulated depreciation and
      amortization             |  |      | 1,977  |     
|Deferred loan income                                        |  |      | 1,674  |     
|MSRs                                                        |  |      | 1,434  |     
|Purchased intangibles related
      to F&M and CBGP         |  |      | 2,809  |     
|FHLB stock dividends                                        |  |      | 573    |     
|Net unrealized gains on
      investment securities         |  |      |       |     
|Other                                                       |  |      | 626    |     
|Total deferred tax liabilities                              |  |      | 9,093  |     
|Net deferred tax assets                                     |  | $    | 22,246 |     

No valuation allowance for deferred tax
assets was recorded at December 31, 2008 and 2007, as management believes that
it is more likely than not that all of the deferred tax assets will be realized
based on managements expectation of future federal and state taxable income and
recoverable federal income taxes paid in prior years. In addition, due to the
net operating loss incurred in 2008, the Company has recorded income taxes
receivable of approximately $21,230, which is included in other assets on the
accompanying 2008 consolidated balance sheet. At December 31, 2007, the Company
had income taxes payable of approximately $4,229 which is recorded in other
liabilities in the accompanying 2007 consolidated balance sheet.

16. Basic and diluted earnings
(loss) per common share

The Companys basic earnings (loss) per
common share is computed by dividing net income (loss) 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 dilutive common shares
related to stock options and nonvested restricted stock. The Companys diluted
loss per common share is the same as the basic loss per common share due to the
anti-dilutive effect of common stock equivalents. All share and per share
amounts in 2007 have been retroactively adjusted to reflect a 5-for-4 stock
split declared in 2006.

82

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

The numerators and denominators used in
computing basic and diluted earnings (loss) per common share for the years ended
December 31, 2008, 2007 and 2006 can be reconciled as follows:

|                                                                         |  |               |          |               |  | Weighted-  |  |   |       |  
|------------------------------------------------------------------------ |  | ------------- | -------- | ------------- |  | ---------- |  | - | ----- | -
|                                                                         |  | Net           |          | average       |  |            |  |  
|                                                                         |  | income (loss) |          | shares        |  | Per-share 
|                                                                         |  | (numerator)   |          | (denominator) |  | amount    
|2008                                                                     |  |               |          |               |  |            |  |   |       |  
|Basic loss
      per common share                                       |  |               |          |               |  |            |  |   |       |  
|Net loss                                                                 |  | $             | (134,566 | )             |  | 27,935,736 |  | $ | (4.82 | )
|Effect of stock options and nonvested restricted stock                   |  |               |         |               |  |           |  |   |       |  
|Diluted loss per common share                                            |  | $             | (134,566 | )             |  | 27,935,736 |  | $ | (4.82 | )
|Common stock equivalent shares excluded due to antidilutive
      effect |  |               |          |               |  | 236,129    |  |   |       |  
|                                                                        
|2007                                                                     |  |               |          |               |  |            |  |   |       |  
|Basic earnings per common share                                         |  |               |          |               |  |            |  |   |       |  
|Net income                                                               |  | $             | 29,979   |               |  | 28,242,684 |  | $ | 1.06  |  
|Effect of stock options and nonvested restricted stock                   |  |               |         |               |  | 334,720    |  |   |       |  
|Diluted earnings per common share                                        |  | $             | 29,979   |               |  | 28,577,404 |  | $ | 1.05  |  
|                                                                        
|2006                                                                     |  |               |          |               |  |            |  |   |       |  
|Basic earnings per common share                                         |  |               |          |               |  |            |  |   |       |  
|Net income                                                               |  | $             | 35,677   |               |  | 26,062,018 |  | $ | 1.37  |  
|Effect of stock options and nonvested restricted stock                   |  |               |         |               |  | 601,498    |  |   |       |  
|Diluted earnings per common share                                        |  | $             | 35,677   |               |  | 26,663,516 |  | $ | 1.34  |  

17. Transactions with related
parties

Certain officers and directors (and the
companies with which they are associated) are customers of, and have had banking
transactions with, the Bank in the ordinary course of the Banks business. In
addition, the Bank expects to continue to have such banking transactions in the
future. All loans, and commitments to loan, to such parties are generally made
on the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons. In the opinion of
management, these transactions do not involve more than the normal risk of
collectibility or present any other unfavorable features.

An analysis of activity with respect to
loans to officers and directors of the Bank for the years ended December 31,
2008 and 2007 was approximately as follows:

|                                   |  | 2008 |        | 2007
|---------------------------------- |  | ---- | ------ | ----
|Balance
      at beginning of year |  | $    | 1,007  |     
|Additions                          |  |      | 2,139  |     
|Repayments                         |  |      | (1,985 | )   
|Balance at end of
      year       |  | $    | 1,161  |     

83

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

18. Benefit plans

401(k) profit sharing
plan

The Company maintains a 401(k) profit
sharing plan (the Plan) that covers substantially all full-time employees.
Employees may make voluntary tax-deferred contributions to the Plan, and the
Companys contributions related to the Plan are at the discretion of the Board,
not to exceed the amount deductible for federal income tax purposes.

Employees vest in the Companys
contributions to the Plan over a period of five years. The total amounts charged
to operations under the Plan were approximately $1,078, $1,977 and $1,899 for
the years ended December 31, 2008, 2007 and 2006, respectively. In 2008 the
Companys contributions to the Plan of $1,078 consisted solely of employer
matching contributions. The Companys contributions to the Plan for the year
ended December 31, 2007 consisted of employer matching contributions of $1,120
and profit sharing contributions of $857. The Companys contributions to the
Plan for the year ended December 31, 2006 consisted of employer matching
contributions of $923 and profit sharing contributions of $976.

Other benefit plans

The Bank has deferred compensation
plans for the Board and certain key executives and managers, a salary
continuation plan and a supplemental executive retirement (SERP) plan for
certain key executives. In accordance with the provisions of the deferred
compensation plans, participants can elect to defer portions of their annual
compensation or fees. The deferred amounts generally vest as deferred. The
deferred compensation plus interest is generally payable upon termination in
either a lump-sum or monthly installments.

The salary continuation and SERP plans
for certain key executives provide specified benefits to the participants upon
termination or change of control. The benefits are subject to certain vesting
requirements, and vested amounts are generally payable upon termination or
change of control in either a lump-sum or monthly installments. The Bank
annually expenses amounts sufficient to accrue for the present value of the
benefits payable to the participants under these plans. These plans also include
death benefit provisions for certain participants.

To assist in the funding of these
plans, the Bank has purchased BOLI policies on the majority of the participants.
The cash surrender value of the general account policies at December 31, 2008
and 2007 was approximately $7,253 and $7,033, respectively. The cash surrender
value of the separate account policies, including the value of the stable value
wraps, was approximately $26,315 and $26,271 at December 31, 2008 and 2007,
respectively. At December 31, 2008 and 2007, the liabilities related to the
deferred compensation plans included in accrued interest and other liabilities
in the accompanying consolidated balance sheets totaled approximately $4,744 and
$4,584, respectively. The amount of expense charged to operations in 2008, 2007
and 2006 related to the deferred compensation plans was approximately $1,495,
$1,744 and $1,035, respectively. As of December 31, 2008 and 2007, the
liabilities related to the salary continuation and SERP plans included in
accrued interest and other liabilities in the accompanying consolidated balance
sheets totaled approximately $7,760 and $6,606, respectively. The amount of
expense charged to operations in 2008, 2007 and 2006 for the salary
continuation, SERP and fee continuation plans was approximately $1,356, $1,560
and $934, respectively. For financial reporting purposes, such expense amounts
have not been adjusted for income earned on the BOLI policies.

19. Stock-based compensation plans

The Company has historically maintained
certain stock-based compensation plans, approved by the Companys shareholders
that are administered by the Board, or the Compensation Committee of the Board
(the Compensation Committee). In addition, on April 28, 2008, the shareholders
of the Company approved the 2008 Cascade Bancorp Performance Incentive Plan (the
2008 Plan). The 2008 Plan authorized the Board to issue up to an additional one
million shares of common stock related to the grant or settlement of stock-based
compensation awards, expanded

84

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

the types of stock-based compensation
awards that may be granted, and expanded the parties eligible to receive such
awards. Under the Companys stock-based compensation plans, the Board (or the
Compensation Committee) may grant stock options (including incentive stock
options (ISOs) as defined in Section 422 of the Internal Revenue Code and
non-qualified stock options (NSOs), restricted stock, restricted stock units,
stock appreciation rights and other similar types of equity awards intended to
qualify as performance-based compensation under applicable tax rules). The
stock-based compensation plans were established to allow for the granting of
compensation awards to attract, motivate and retain employees, executive
officers, non-employee directors and other service providers who contribute to
the success and profitability of the Company and to give such persons a
proprietary interest in the Company, thereby enhancing their personal interest
in the Companys success.

The Board or Compensation Committee 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. Under the 2008 Plan, for ISOs and NSOs, the option
strike price must be no less than 100% of the stock price at the grant date.
(Prior to the approval of the 2008 Plan, the option strike price for NSOs could
be no less than 85% of the stock price at 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.Other permissible stock awards include restricted stock grants,
restricted stock units, stock appreciation rights or other similar stock awards
(including awards that do not require the grantee to pay any amount in
connection with receiving the shares or that have a purchase price that is less
than the grant date fair market value of the Companys stock.)

At December 31, 2008, 1,344,068 shares
reserved under the stock-based compensation plans were available for future
grants.

The Company used the Black-Scholes
option-pricing model with the following weighted-average assumptions to value
options granted:

|                            |  | 2008 |         | 2007 |  | 2006
|--------------------------- |  | ---- | ------- | ---- |  | ----
|Dividend yield              |  |      | 3.9%    |      |  |     
|Expected
    volatility     |  |      | 32.0%   |      |  |     
|Risk-free interest rate     |  |      | 3.0%    |      |  |     
|Expected option
      lives |  |      | 7 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
weighted-average fair value of stock options granted was $2.36 for 2008, $9.14
for 2007 and $7.50 for 2006.

85

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

The following table presents the
activity related to options under all plans for the years ended December 31,
2008, 2007, and 2006.

|                                 |  | 2008        |   | 2007     |           | 2006       
|-------------------------------- |  | ----------- | - | -------- | --------- | -----------
|                                 |  |             |   |          | Weighted- |            
|                                 |  |             |   |          | average   |            
|                                 |  | Options     |   | exercise |           | Options    
|                                 |  | outstanding |   | price    |           | outstanding
|Balance at beginning of year     |  | 751,088     |   |          |           | $          
|Granted                          |  | 400,130     |   |          |           |            
|Exercised                        |  | (11,505     | ) |          |           |            
|Forfeited                        |  | (50,622     | ) |          |           |            
|Balance at end of year           |  | 1,089,091   |   |          |           | $          
|Exercisable at end of
      year |  | 520,645     |   |          |           |            

The total intrinsic value of both the
outstanding stock options and outstanding exercisable stock options was
approximately $271 at December 31, 2008. The total intrinsic value of stock
options exercised was $21 in 2008, $2,959 in 2007 and $8,400 in 2006. The total
fair value of stock options vested for the years ended 2008, 2007 and 2006 was
$773, $2,925 and $1,988, respectively. As of December 31, 2008 and 2007,
unrecognized compensation cost related to nonvested stock options totaled $1,159
and $1,322, respectively, which is expected to be recognized over a
weighted-average life of less than two years.

Information regarding the number,
weighted-average exercise price and weighted-average remaining contractual life
of options by range of exercise price at December 31, 2008 is as
follows:

|                         |  | Options outstanding |         | Exercisable options
|------------------------ |  | ------------------- | ------- | -------------------
|                         |  |                     |         |                    
|                         |  |                     |         | Weighted-          
|                         |  |                     |         | average            
|                         |  | Number of           |         | exercise           
|Exercise price
    range |  |                     | options |                    
|Under
      $5.00        |  | 115,672             |         | $                  
|$5.01-$8.00              |  | 119,718             |         |                    
|$8.01-$12.00             |  | 505,470             |         |                    
|$12.01-$16.00            |  | 162,168             |         |                    
|$16.01-$22.00            |  | 55,942              |         |                    
|$22.01-$30.12            |  | 130,121             |         |                    
|                         |  | 1,089,091           |         | $                  

86

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

As of December 31, 2008, unrecognized
compensation cost related to nonvested restricted stock totaled approximately
$1,078, which is expected to be recognized over a weighted-average life of two
years. Total expense recognized by the Company for nonvested restricted stock
for the years ended December 31, 2008, 2007 and 2006 was $890, $904 and $545,
respectively. The following table presents the activity for nonvested restricted
stock for the year ended December 31, 2008:

|                                  |  |                 |   |                 | Weighted-average
|--------------------------------- |  | --------------- | - | --------------- | ----------------
|                                  |  | Number
      of |   | grant date fair
|                                  |  | shares          |   | value per
share
|Nonvested as of December 31, 2007 |  | 114,939         |   |                 |                 
|Granted                           |  | 62,181          |   |                 |                 
|Vested                            |  | (45,486         | ) |                 |                 
|Cancelled                         |  | (41             | ) |                 |                 
|Nonvested as of December 31, 2008 |  | 131,593         |   |                 |                 

Nonvested restricted stock is scheduled
to vest over periods ranging from one to five years from the grant dates, with a
weighted average remaining vesting term of 2.4 years. The unearned compensation
on restricted stock is being amortized to expense on a straight-line basis over
the applicable vesting periods.

20. Fair value
measurements

SFAS No. 157s hierarchy for
determining fair value measurement, 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 for identical assets that the Company has the
  ability to access at the measurement date. An active market for the asset 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, quoted prices for securities 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 financial assets and financial liabilities carried at fair value
effective January 1, 2008. 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 financial instruments are recorded at fair value. These adjustments may
include amounts to reflect counterparty credit quality and the corporation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 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 financial instruments could
result in a different estimate of fair

87

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

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 consolidated balance sheet date may differ significantly from the
amounts presented herein.

The following is a description of the
valuation methodologies used for instruments measured at fair value, as well as
the general classification of such instruments pursuant to valuation
methodology:

Investment securities: Where quoted
prices are available in an active market, investment securities
available-for-sale are classified within level 1 of the hierarchy. Level 1
includes investment securities available-for-sale that have quoted prices in an
active market for identical assets. 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
most of its investment securities available-for-sale as level 2, since U.S
Agency MBS are mainly priced in this latter manner.

Impaired
loans: SFAS No. 157 applies to loans measured
for impairment using the practical expedients permitted by SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, including impaired loans
measured at an observable market price (if available) or at the fair value of
the loans collateral (if collateral dependent). Fair value of the loans
collateral is determined by appraisals or independent valuation which is 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. The Company has categorized its impaired loans as level
3.

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.
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. The Company has categorized its OREO as level 3.

The table below presents assets and
liabilitiesmeasured at fair value on a recurring basis at December 31, 2008 (dollars
in thousands):

|                                                    | Quoted Prices in |    | Significant |  |             
|--------------------------------------------------- | ---------------- | -- | ----------- |  | ------------
|                                                    | Active Markets   |    | Other       |  | Significant 
|                                                    | for Identical    |    | Observable  |  | Unobservable
|                                                    | Assets           |    | Inputs      |  | Inputs      
|                                                    | (Level 1)        |    | (Level 2)   |  | (Level 3)   
|Assets                                              |                  |    |             |  |             
|Investment securities available-for-sale            |                  | $ |             |  | $107,480    
|Total recurring assets measured at fair
      value |                  | $ |             |  | $107,480    

Other assets, including intangible
assets, are also subject to periodic impairment assessments under GAAP. These
assets are not considered financial instruments. Effective February 12, 2008,
the FASB issued a staff position, FSP FAS 157-2, which delayed the applicability
of FAS 157 to non-financial instruments until January 1, 2009. Accordingly,
these assets have been omitted from the above disclosures.

88

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

Certain assets 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). The following table represents the assets measured
at fair value on a nonrecurring basis by the Company (dollars in thousands):

|                                       | Quoted Prices in |    | Significant |  |              |    | 
|-------------------------------------- | ---------------- | -- | ----------- |  | ------------ | -- | 
|                                       | Active Markets   |    | Other       |  | Significant 
|                                       | for Identical    |    | Observable  |  | Unobservable
|                                       | Assets           |    | Inputs      |  | Inputs      
|                                       | (Level 1)        |    | (Level 2)   |  | (Level 3)   
|Assets                                 |                  |    |             |  |              |    | 
|Impaired loans with specific valuation |                  |    |             |  |              |    | 
|allowances under SFAS No. 114          |                  | $ |             |  |              | $ | 
|Other real estate owned                |                  |    |             |  |              |   | 
|                                       |                  | $ |             |  |              | $ | 

The Company did not change the
methodology used to determine fair value for any financial instruments during
2008. Accordingly, for any given class of financial instruments, the Company did
not have any transfers between level 1, level 2, or level 3 during
2008.

The following disclosures are made in
accordance with the provisions of SFAS No. 107, Disclosures about Fair Value of
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 December 31, 2008 and
2007.

Because SFAS No. 107 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.

Loans: The estimated fair value of loans is calculated by discounting the
contractual cash flows of the loans using December 31, 2008 and 2007 origination
rates. The resulting amounts are adjusted to estimate the effect of changes in
the credit quality of borrowers since the loans were originated. Fair values for
impaired loans are estimated using a discounted cash flow analysis or the
underlying collateral values.

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

OREO: See above
description.

89

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CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

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
December 31, 2008 and 2007 rates offered on those instruments.

Junior subordinated debentures and
other borrowings (including federal funds purchased): The fair value of the Banks junior subordinated debentures and other
borrowings (including federal funds purchased) are estimated using discounted
cash flow analyses based on the Banks December 31, 2008 and 2007 incremental
borrowing rates for similar types of borrowing arrangements.

Customer repurchase
agreements: The carrying value approximates
the estimated fair value.

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 December 31,
2008 and 2007 were approximately as follows:

|                                     |  | 2008     |           | 2007      
|------------------------------------ |  | -------- | --------- | ----------
|                                     |  | Carrying |           | Estimated 
|                                     |  | value    |           | fair value
|Financial assets:                    |  |          |           |           
|Cash and cash
      equivalents      |  | $        | 48,946    |           
|Investment
      securities:         |  |          |           |           
|Available-for-sale                   |  |          | 107,480   |           
|Held-to-maturity                     |  |          | 2,211     |           
|FHLB
      stock                     |  |          | 10,472    |           
|Loans,
      net                     |  |          | 1,909,018 |           
|BOLI                                 |  |          | 33,568    |           
|OREO                                 |  |          | 52,727    |           
|                                     |  |          |           |           
|Financial liabilities:               |  |          |           |           
|Deposits                             |  |          | 1,794,611 |           
|Junior
      subordinated debentures |  |          |           |           
|and other borrowings                 |  |          | 317,533   |           
|Customer
      repurchase agreements |  |          | 9,871     |           

21. Regulatory matters

The Company and the Bank are subject to
various regulatory capital requirements administered by the federal 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 effect on the Companys consolidated
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company 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 Company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 Company 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). Management believes that as of December 31,
2008 and 2007, the Company and the Bank met capitalization benchmarks for well
capitalized.

90

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

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 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 Company and the Bank is subject to
restriction by state and federal regulators and availability of retained
earnings. At December 31, 2008, the Company and the Bank were deemed to be
well-capitalized by regulatory definition.

As of December 31, 2008, the Companys
annual examination by its primary banking regulators was currently in process as
discussed in Note 14 operating environment and financial condition.

The Companys actual and required
capital amounts and ratios are presented in the following table:

|                                               |  |        |         |              |      |            |  |                             |         |                         |     |       |  | Regulatory
      minimum      
|---------------------------------------------- |  | ------ | ------- | ------------ | ---- | ---------- |  | --------------------------- | ------- | ----------------------- | --- | ----- |  | ------------------------------
|                                               |  |        |         |              |      |            |  |                             |         |                         |     |       |  | to be well
      capitalized
|                                               |  |        |         |              |      |            |  | Regulatory
      minimum to |         | under
      prompt     
|                                               |  |        |         |              |      |            |  | be
      adequately        |         | corrective
      action
|                                               |  | Actual |         | capitalized |      | provisions
|                                               |  | Amount |         | Ratio        |      | Amount     |  | Ratio                       |         | Amount                  |     | Ratio
|December 31, 2008:                             |  |        |         |              |      |            |  |                             |         |                         |     |       |  |                               
|Tier 1 capital (to average
      assets)       |  | $      | 196,707 |              | 8.2  | %          |  | $                           | 96,127  |                         | 4.0 | %     |  | $                             
|Tier
      1 capital (to risk-weighted assets) |  |        | 196,707 |              | 8.9  |            |  |                             | 87,968  |                         | 4.0 |       |  |                               
|Total capital (to
      risk-weighted assets)  |  |        | 224,701 |              | 10.2 |            |  |                             | 175,935 |                         | 8.0 |       |  |                               
|                                               |  |        |         |              |      |            |  |                             |         |                         |     |       |  |                               
|December 31, 2007:                             |  |        |         |              |      |            |  |                             |         |                         |     |       |  |                               
|Tier 1 capital (to average
      assets)       |  | $      | 226,328 |              | 9.9  | %          |  | $                           | 91,450  |                         | 4.0 | %     |  | $                             
|Tier
      1 capital (to risk-weighted assets) |  |        | 226,328 |              | 10.0 |            |  |                             | 90,383  |                         | 4.0 |       |  |                               
|Total capital (to
      risk-weighted assets)  |  |        | 254,638 |              | 11.3 |            |  |                             | 180,766 |                         | 8.0 |       |  |                               

The Banks actual and required capital
amounts and ratios are presented in the following table:

|                                               |  |        |         |              |      |            |  |                             |         |                         |     |       |  | Regulatory
      minimum      
|---------------------------------------------- |  | ------ | ------- | ------------ | ---- | ---------- |  | --------------------------- | ------- | ----------------------- | --- | ----- |  | ------------------------------
|                                               |  |        |         |              |      |            |  |                             |         |                         |     |       |  | to be well
      capitalized
|                                               |  |        |         |              |      |            |  | Regulatory
      minimum to |         | under
      prompt     
|                                               |  |        |         |              |      |            |  | be
      adequately        |         | corrective
      action
|                                               |  | Actual |         | capitalized |      | provisions
|                                               |  | Amount |         | Ratio        |      | Amount     |  | Ratio                       |         | Amount                  |     | Ratio
|December 31, 2008:                             |  |        |         |              |      |            |  |                             |         |                         |     |       |  |                               
|Tier 1 capital (to average
      assets)       |  | $      | 194,051 |              | 8.1  | %          |  | $                           | 95,998  |                         | 4.0 | %     |  | $                             
|Tier
      1 capital (to risk-weighted assets) |  |        | 194,051 |              | 8.8  |            |  |                             | 87,878  |                         | 4.0 |       |  |                               
|Total capital (to
      risk-weighted assets)  |  |        | 221,772 |              | 10.1 |            |  |                             | 175,755 |                         | 8.0 |       |  |                               
|                                               |  |        |         |              |      |            |  |                             |         |                         |     |       |  |                               
|December 31, 2007:                             |  |        |         |              |      |            |  |                             |         |                         |     |       |  |                               
|Tier 1 capital (to average
      assets)       |  | $      | 222,132 |              | 9.7  | %          |  | $                           | 90,278  |                         | 4.0 | %     |  | $                             
|Tier
      1 capital (to risk-weighted assets) |  |        | 222,132 |              | 9.8  |            |  |                             | 91,256  |                         | 4.0 |       |  |                               
|Total capital (to
      risk-weighted assets)  |  |        | 250,344 |              | 11.1 |            |  |                             | 182,512 |                         | 8.0 |       |  |                               

The Board of Governors of the Federal
Reserve System, which is Bancorps banking regulator, has promulgated a
modification of the capital regulations affecting trust preferred securities.
Under this modification, effective March 31, 2009, the Company will be required
to use a more restrictive formula to determine the amount of trust preferred
securities that can be included in regulatory Tier I capital. At that time, the
Company will be allowed to include in Tier I capital an amount of trust
preferred securities equal to no more than 25% of the sum of all core capital
elements, which is generally defined as stockholders equity, less goodwill net
of any related deferred income tax liability. The regulations that were

91

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

in effect through December 31, 2008
limit the amount of trust preferred securities that can be included in Tier I
capital to 25% of the sum of core capital elements without a deduction for
goodwill. All $66,500 of the Companys trust preferred securities were included
in Tier I capital at December 31, 2008. Had the proposed rule been in effect at
December 31, 2008, on a pro forma basis, $43,300 of the trust preferred
securities could have been included in the Companys Tier I capital at December
31, 2008. Accordingly, the Company expects that its Tier I capital ratios will
be at or above the existing well-capitalized levels on March 31, 2009, the first
date on which the modified capital regulations must be applied.

22. Parent company financial
information

Condensed financial information for
Bancorp (Parent company only) is presented as follows:

CONDENSED BALANCE
SHEETS

|                                               |  | December
  31,
|---------------------------------------------- |  | --------------
|                                               |  | 2008          
|Assets:                                        |  |               
|Cash and cash
      equivalents                |  | $             
|Investment securities
      available-for-sale |  |               
|Investment in
      subsidiary                 |  |               
|Other assets                                   |  |               
|Total assets                                   |  | $             
|Liabilities and stockholders equity:          |  |               
|Junior subordinated
      debentures           |  | $             
|Other
    liabilities                          |  |               
|Stockholders
      equity                     |  |               
|Total liabilities and stockholders equity     |  | $             

CONDENSED STATEMENTS OF
OPERATIONS

|                                                                              |  | Years ended December
      31,
|----------------------------------------------------------------------------- |  | ------------------------------
|                                                                              |  | 2008                          
|Income:                                                                       |  |                               
|Interest and dividend
      income                                            |  | $                             
|Gains on sales of
      investment securities available-for-sale              |  |                               
|Total income                                                                  |  |                               
|Expenses:                                                                     |  |                               
|Administrative                                                                |  |                               
|Interest                                                                      |  |                               
|Other                                                                         |  |                               
|Total expenses                                                                |  |                               
|Net loss before
      credit for income taxes, dividends from the Bank and    |  |                               
|equity in undistributed
      net earnings of subsidiary                      |  |                               
|Credit for income taxes                                                       |  |                               
|Net loss before
      dividends from the Bank and equity in undistributed net |  |                               
|earnings of
      subsidiary                                                  |  |                               
|Dividends from the Bank                                                       |  |                               
|Equity in
      undistributed net earnings (loss) of subsidiary               |  |                               
|Net income (loss)                                                             |  | $                             

92

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

CONDENSED STATEMENTS OF CASH
FLOWS

|                                                                      |  | Years ended December
      31,
|--------------------------------------------------------------------- |  | ------------------------------
|                                                                      |  | 2008                          
|Cash flows from operating activities:                                 |  |                               
|Net income
    (loss)                                                 |  | $                             
|Adjustments to reconcile
      net income (loss) to net cash provided |  |                               
|by operating activities:                                              |  |                               
|Dividends from the Bank                                               |  |                               
|Equity in undistributed
      net (earnings) loss of subsidiary       |  |                               
|Gains on sales of
      investment securities available-for-sale      |  |                               
|Stock-based compensation
      expense                                |  |                               
|Increase in other
      assets                                        |  |                               
|(Decrease) increase in
      other liabilities                        |  |                               
|Net cash provided by operating activities                             |  |                               
|Cash flows from investing activities:                                 |  |                               
|Investment in
      subsidiary                                        |  |                               
|Proceeds from sales of
      investment securities available-for-sale |  |                               
|Net cash provided (used) by investing activities                      |  |                               
|Cash flows from financing activities:                                 |  |                               
|Cash dividends
      paid                                             |  |                               
|Net proceeds from
      issuance of junior subordinated debentures    |  |                               
|Repurchases of common
      stock                                     |  |                               
|Proceeds from stock
      options exercised                           |  |                               
|Tax effect from
      non-qualified stock options exercised           |  |                               
|Net cash provided (used) by financing activities                      |  |                               
|Net (decrease)
      increase in cash and cash equivalents            |  |                               
|Cash and cash equivalents at beginning of year                        |  |                               
|Cash and cash equivalents at end of
      year                        |  | $                             

93

---

CASCADE BANCORP AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)

DECEMBER 31, 2008

(Dollars in thousands, except per
share amounts)

23. Selected quarterly financial
data (unaudited)

The following table sets forth the
Companys unaudited data regarding operations for each quarter of 2008 and 2007.
This information, in the opinion of management, includes all normal recurring
adjustments necessary to fairly state the information set forth:

|                                                     |  | 2008   
|---------------------------------------------------- |  | -------
|                                                     |  | Fourth 
|                                                     |  | Quarter
|Interest and dividend income                         |  | $      
|Interest
      expense                               |  |        
|Net interest income                                  |  |        
|Loan loss
      provision                            |  |        
|Net interest income (loss) after loan loss provision |  |        
|Noninterest
      income                             |  |        
|Noninterest expenses                                 |  |        
|Income (loss)
      before income taxes              |  |        
|Provision (credit) for income taxes                  |  |        
|Net
      income (loss)                              |  | $      
|Basic earnings (loss) per common share               |  | $      
|Diluted earnings (loss) per common share             |  | $      
|                                                    
|                                                     |  | 2007   
|                                                     |  | Fourth 
|                                                     |  | Quarter
|Interest and dividend income                         |  | $      
|Interest
      expense                               |  |        
|Net interest income                                  |  |        
|Loan loss
      provision                            |  |        
|Net interest income after loan loss provision        |  |        
|Noninterest
      income                             |  |        
|Noninterest expenses                                 |  |        
|Income before
      income taxes                     |  |        
|Provision for income taxes                           |  |        
|Net
    income                                       |  | $      
|Basic earnings per common share                      |  | $      
|Diluted earnings
      per common share              |  | $      

|(1) |  | Increase in fourth
      quarter provision to increase level of credit reserves primarily related
      to deterioration within the Companys residential land development loan
      portfolio.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Increase in fourth
      quarter noninterest expenses primarily due to $105,047 impairment of
      goodwill.                                                                                   



The consolidated financial
statements have not been reviewed or confirmed for accuracyor relevance by
the Federal Deposit Insurance Corporation.

94

---

|ITEM 9. | **** | CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
|------- | ---- | ------------------------------------------------------------------------------------------------

None

ITEM 9A. 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 are effective as
of the end of the period covered by this report.

Changes in Internal
Controls

During
the first quarter of 2008, in response to the current credit cycle, the Company
assigned additional staff and expanded key controls with respect to credit
monitoring and to expedite the process of risk rating loans and collateral
valuation.

During
2008 the Company restated the interim period financial statements in connection
with an increase in the balance for the reserve for loan losses, and a
corresponding increase in loan loss provision that were deemed to have existed
as of September 30, 2008 in the amount of approximately $6.1 million (pretax).
The restatement related to managements discovery of a material miscalculation
within its loan data extract software program specifically with respect to the
treatment of classified loans that have been partially participated to other
financial institutions.

In
connection with the restatement described above, on December 31, 2008 the Audit
Committee of the Board of Directors met to discuss the facts and circumstances
related to the identification and correction of the miscalculation. The
Committee reviewed an assessment and related information from management and
from the internal risk manager, and considered and discussed the information
with independent auditor. The Committee determined that the atypical nature of
the miscalculation within the software program indicated there was not a
material weakness in the system of controls. However, the Company did
re-evaluate the controls surrounding the software program and related processes
for calculating the allowance for loan losses. Upon re-evaluation, the Company
implemented additional software assurance tests and analytic procedures deemed
necessary to enhance internal control to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements.

Apart
from the changes to internal controls mentioned above, the Company had no other
changes to identified internal controls that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting.

Managements Report on Internal
Control Over Financial Reporting

Management of Cascade Bancorp and its subsidiary, Bank of the Cascades
(collectively, Bancorp), is responsible for preparing Bancorps annual
consolidated financial statements. Management is also responsible for
establishing and maintaining internal control over financial reporting presented
in the conformity with both accounting principles generally accepted in the
United States and regulatory reporting in conformity with the Federal Financial
Institutions Examination Council Instructions for Consolidated Reports of
Condition and Income (call report instructions). Bancorps internal control
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.

There are
inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over
time.

95

---

The
Companys management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2008. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated
Framework. Based on our assessment, we believe that, as of December 31, 2008,
the Companys internal control over financial reporting is effective.

The
Companys independent registered public accounting firm, Symonds, Evans &
Company, P.C., have issued an attestation report on managements assessment of
the effectiveness of the Companys internal control over financial
reporting.

The
Companys independent registered public accounting firm, Symonds, Evans &
Company, P.C., have issued an audit report on our assessment of the Companys
internal control over financial reporting. This report appears on page 97 of
this annual report.

96

---

REPORT OF SYMONDS, EVANS &
COMPANY, P.C.,INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Cascade Bancorp

We have audited the internal control
over financial reporting of Cascade Bancorp and its subsidiary, Bank of the
Cascades (collectively, the Company) as of December 31, 2008, based on
criteria established inInternal
ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control
over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A companys internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit the
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.

Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Companys consolidated balance sheets as of December 31, 2008 and
2007, and the related consolidated statements of operations, changes in
stockholders equity, and cash flows for each of the years in the three-year
period ended December 31, 2008, and our report dated March 10, 2009 expressed an
unqualified opinion on those consolidated financial
statements.

Portland, OregonMarch 10, 2009

ITEM 9B. OTHER
INFORMATION

None

97

---

PART III

ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE

Certain
information regarding executive officers is included in the section captioned
Executive Officers of the Registrant in Part 1, Item 1, elsewhere in this
report. Information concerning directors of Bancorp required to be included in
this item is set forth under the headings Election of Directors, and
Compliance with Section 16(a), in the Companys Proxy Statement for its 2009
Annual Meeting of Shareholders to be filed within 120 days of the Companys
fiscal year end of December 31, 2008 (the Proxy Statement), and is
incorporated into this report by reference and under the heading
Business-Executive Officers of the Registry in this report.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive and director compensation and certain
matters regarding participation in the Companys compensation committee required
by this item is set forth under the heading Compensation Discussion &
Analysis in the Proxy Statement and is incorporated into this report by
reference.

|ITEM 12. | **** | SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK
      HOLDER MATTERS
|-------- | ---- | -----------------------------------------------------------------------------------------------------------

Information concerning the security ownership of certain beneficial
owners and management required by this item is set forth under the heading
Security Ownership of Management and Others in the Proxy Statement and is
incorporated into this report by reference.

|ITEM 13. | **** | CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
|-------- | ---- | -------------------------------------------------------------------------------------

Information concerning certain relationships and related transactions
required by this item is set forth under the heading Certain Relationships and
Related Transactions and the information concerning director independence is
set forth under the heading of Committees of the Board of Directors each in
the Proxy Statement and incorporated into this report by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES

Information concerning fees paid to our independent auditors required by
this item is included under the heading Audit and Non-Audit Fees in the Proxy
Statement and is incorporated into this report by reference.

98

---

PART IV

ITEM 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES

| | (a) |  | The
      following documents are filed as part of this Annual Report on Form
      10-K:
| | --- |  | -----------------------------------------------------------------------------------------
| |     | 
| |     |  | (1)                                                                                      
| |    
| |     |  | (2)                                                                                      
| |    
| |     |  | (3)                                                                                      

| | 3.1  |  | Articles of
      Incorporation.As amended, filed as exhibit 3.1 to registrants Form
      10-Q report for the quarter ended June 30, 1997, and incorporated herein
      by reference.                                                                                                                                                                    
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      | 
| | 3.2  |  | Bylaws.As
      amended and restated, filed as exhibit 3.1 to registrants Form 8-K
      Current Report filed on February 25, 2008, and is incorporated herein by
      reference.                                                                                                                                                                         
| |     
| | 10.1 |  | Registrants 1994
      Incentive Stock Option Plan.Filed as an exhibit to registrants
      Registration Statement on Form 10-SB, filed in January 1994, and
      incorporated herein by reference.                                                                                                                                                      
| |      | 
| | 10.2 |  | Incentive Stock
      Option Plan Letter Agreement.Entered into between registrant and
      certain employees pursuant to registrants 1994 Incentive Stock Option
      Plan. Filed as an exhibit to registrants Registration Statement on Form
      10-SB, filed in January, 1994, and incorporated herein by reference.                               
| |     
| | 10.3 |  | Deferred
      Compensation Plans.Established for the Board, certain key executives
      and managers during the fourth quarter ended December 31, 1995. Filed as
      exhibit 10.5 to registrants Form 10-KSB filed December 31, 1995, and
      incorporated herein by reference.                                                                      
| |     
| | 10.4 |  | 2002 Equity
      Incentive Plan.Filed as an exhibit to the registrants filing on Form
      S-8/A, as filed with the Securities and Exchange Commission on April 23,
      2003, and incorporated herein by reference.                                                                                                                                    
| |     
| | 10.5 |  | Executive
      Employment Agreement between Cascade Bancorp, Bank of the Cascades, and
      Patricia L. Moss, entered into February 18, 2008.Filed as an exhibit
      to the registrants filing on Form 8-K Current Report, as filed with the
      Securities and Exchange Commission on February 19, 2008, and incorporated
      herein by reference.
| |     
| | 10.6 |  | Executive
      Employment Agreement between Cascade Bancorp, Bank of the Cascades, and
      Gregory D. Newton entered into February 18, 2008.Filed as an exhibit
      to the registrants filing on Form 8-K Current Report, as filed with the
      Securities and Exchange Commission on February 19, 2008, and incorporated
      herein by reference.
| |     
| | 10.7 |  | Executive
      Employment Agreement between Cascade Bancorp, Bank of the Cascades, and
      Peggy L. Biss entered into February 18, 2008.Filed as an exhibit to
      the registrants filing on Form 8-K Current Report, as filed with the
      Securities and Exchange Commission on February 19, 2008, and incorporated
      herein by reference.    
| |     
| | 10.8 |  | Executive
      Employment Agreement between Cascade Bancorp, Bank of the Cascades, and
      Frank R. Weis entered into February 18, 2008.Filed as an exhibit to
      the registrants filing on Form 8-K Current Report, as filed with the
      Securities and Exchange Commission on February 19, 2008, and incorporated
      herein by reference.    
| |     
| | 11.1 |  | Earnings per Share
      Computation.The information called for by this item is located on
      page 69 of this Form 10-K Annual Report, and is incorporated herein by
      reference.                                                                                                                                                                    
| |     
| | 21.1 |  | Subsidiaries of
      registrant.                                                                                                                                                                                                                                                                                                                           
| |     
| | 23.1 |  | Consent of Symonds,
      Evans & Company, P.C., Independent Accountants.                                                                                                                                                                                                                                                                                   
| |     

99

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| | 31.1 |  | Certification of
      Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.                            
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------
| |      | 
| | 31.2 |  | Certification of
      Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.                            
| |     
| | 32.0 |  | Certification of
      Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002.
| |     

Exhibits related to our Trust Preferred
Securities have been intentionally omitted. Upon written request, we will
provide to you, without charge, a copy of those exhibits. Written requests to
obtain a list of exhibits or any exhibit should be sent to Cascade Bancorp, 1100
NW Wall Street, Bend, Oregon 97701, attention: Investor Relations.

100

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SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) 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                   |                | CASCADE BANCORP                                 
|--------------------------------- | -------------- | ------------------------------------------------
|                                 
|/s/ Patricia L. Moss              |                | /s/ Gregory D. Newton                           
|Patricia L. Moss                  |                | Gregory D. Newton                               
|President/Chief Executive Officer |                | Executive Vice President/Chief Financial Officer
|                                 
|Date:                             | March 10, 2009 |                                                 

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|/s/ Jerol E. Andres                              |  | March 10, 2009
|------------------------------------------------ |  | --------------
|Jerol E.
      Andres, Director/Vice Chairman    |  | Date          
|                                                
|/s/ Gary L. Hoffman                              |  | March 10, 2009
|Gary L.
      Hoffman, Director/Chairman         |  | Date          
|                                                
|/s/ Henry H. Hewitt                              |  | March 10, 2009
|Henry H.
      Hewitt, Director                  |  | Date          
|                                                
|/s/ Judith A. Johansen                           |  | March 10, 2009
|Judith A.
      Johansen, Director               |  | Date          
|                                                
|/s/ Clarence Jones                               |  | March 10, 2009
|Clarence
      Jones, Director                   |  | Date          
|                                                
|/s/ Patricia L. Moss                             |  | March 10, 2009
|Patricia L.
      Moss, Director/President & CEO |  | Date          
|                                                
|/s/ Ryan R. Patrick                              |  | March 10, 2009
|Ryan R.
      Patrick, Director                  |  | Date          
|                                                
|/s/ James E. Petersen                            |  | March 10, 2009
|James E.
      Petersen, Director                |  | Date          

101

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