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,
2005


|[  ] |  | 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 NW Wall
Street, Bend, Oregon        |  |  |  | 97701                          
|(Address of
principal executive offices) |  |  |  | (Zip Code)                     
|(541) 385-6205                          
|(Registrants telephone number)         



Securities registered under Section 12(b) of the Exchange
Act:  None




Securities registered under Section 12(g) of the Exchange
Act:




Common Stock, no par value (Title of
Class)




Indicate by check mark whether
the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X]  No [  ]




Indicate by check mark 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.  [  ]




Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act (check one):




Large Accelerated Filer  [  ]        Accelerated
Filer [X]        Non-accelerated Filer [  ]




The aggregate market value of the
voting stock held by non-affiliates of the Registrant at June 30, 2005 (the last business day of the most recent second quarter) was $342,318,128
(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. 17,107,513 shares of no par value Common Stock
on March 10, 2006.




DOCUMENTS INCORPORATED BY REFERENCE




Portions of the registrants
definitive Proxy Statement for its 2006 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.







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CASCADE BANCORP FORM 10-K ANNUAL REPORT TABLE
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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FORWARD LOOKING STATEMENTS




This annual report on Form 10-K
contains forward-looking statements that are not facts and that are subject to risks and uncertainties. These include but are not limited to: the
effects of the proposed merger of Cascade Bancorp (Cascade) and F&M Holding Company (F&M) of Boise, Idaho, including projected future financial
and operating results and accretion to Cascades projected earnings that may be realized from the merger; the plans, objectives and expectations
of Cascade; and projected growth in particular markets. Cascades ability to predict results or the actual effect of future plans and strategies
is uncertain, and actual results may differ.




Factors that could cause actual
results to differ include but are not necessarily limited to difficulties or delays in completing the acquisition, difficulties in integrating the
assets, liabilities, systems, customers and personnel of the two operations, higher than expected costs related to the acquisition, a materially
adverse change in the financial condition of either Cascade or F&M, fluctuations in interest rates, changes in deposit flows and in the demand for
loans, changes in real estate values which could affect the quality of the assets securing the loans of either bank, inflation, changes in government
regulations, deterioration in economic conditions generally or within the markets in which Cascade and F&M conduct their operations, and changes or
increases in competition within those markets. For a discussion of additional factors, which could cause results to differ, please see Cascades
reports filed with the Securities and Exchange Commission.




These risks and uncertainties
should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. When used in this
release, the words or phrases such as will likely result in, management expects that, will continue, is
anticipated, estimate, projected, or similar expressions, are intended to identify forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). Readers should not place undue reliance on the
forward-looking statements, which reflect managements view only as of the date hereof. Cascade undertakes no obligation to publicly revise these
forward-looking statements to reflect subsequent events or circumstances. This statement is included for the express purpose of protecting Cascade and
PSLRAs safe harbor provisions.




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PART I


|ITEM
1. |  | BUSINESS
|------- |  | --------



Cascade Bancorp




Cascade Bancorp
(Cascade) is an Oregon chartered Financial Holding Company with headquarters in Bend, Oregon. Its principal subsidiary is Bank of the
Cascades. Together these entities are referred to as the Company. At December 31, 2005, the Company had total consolidated assets of
approximately $1.3 billion, net loans of approximately $1.04 billion and deposits of approximately $1.07 billion.




Bank of the Cascades




Bank of the Cascades was
chartered as an Oregon State bank and opened for business in 1977, with headquarters in Bend, Oregon. Bank of the Cascades is a community bank offering
a full range of financial services to its business and consumer clients, including residential mortgage, trust and investments. With the sustained
increase in population and economy of its Central Oregon market, 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 of Portland and Southern Oregon. By year-end 2005,
loans and deposits in those markets had risen to 34% and 17%, respectively, of Company-wide totals. With each of its markets expanding at a healthy
pace in 2005, total loans and total deposits were up 22.1% and 25.2%, respectively, for the year. At the end of 2005, Bank of the Cascades had a total
of 21 branches serving the communities in Central Oregon, Salem/Keizer, Southern Oregon and Portland.




During 2005, the Company opened
an additional office in Medford, expanding its branches in the fast growing Southern Oregon market to five. In Central Oregon, the Company consolidated
its East Bend-Safeway in-store facility into its neighboring East Bend Forum branch, which had opened in 2004.




A significant portion of the
assets of Bank of the Cascades continue to be in fast growing Deschutes County, Oregon, where the Company is the market share leader in deposits,
holding a 33% market share. Bank of the Cascades also is among the top originators of construction, commercial real estate, and residential loans in
the county. Over the past decade, the population of Deschutes County has grown at a rate among the fastest of all counties in the United
States.




With a personal-touch
relationship banking strategy, Bank of the Cascades 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. Bank of the Cascades 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. Bank of the Cascades originates and services residential mortgage loans that are typically sold on
the secondary market. Bank of the Cascades provides consumer and business deposit services including checking, money market, and time deposit accounts
and related payment services, internet banking and electronic bill payment. In addition, Bank of the Cascades serves business customer deposit needs
with cash management services.




Pending Acquisition of F&M Holding Company of Boise,
Idaho




On December 27, 2005, the Company
announced the signing of a definitive agreement under which F&M will merge into Cascade and the shareholders of F&M will exchange all of the
outstanding shares of F&M common stock for cash and common shares of Cascade. F&M is the holding company for Farmers & Merchants State Bank
(FMSB), which is headquartered in Boise, Idaho. If the merger closes, David Bolger, the sole shareholder of F&M will own approximately 24% of the
Companys outstanding shares of common stock. With a 38 year history and 11 branches serving the greater Boise area, FMSB is the top deposit
market share community bank in Ada (Boise) County as of June 30, 2005, with a 5.9% market share. F&M had total assets of $612.4 million, gross
loans of $452.6 million, deposits of $497.0 million and net income of $6.6 million for the year ended December 31, 2005. F&M is a privately-held
company.




The Company believes the merger
provides an outstanding strategic expansion opportunity for Cascade, adding another fast growing market to its community banking franchise. A proxy
statement prepared in connection with




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the proposed merger has been
filed with the U.S. Securities and Exchange Commission. The proxy statement describes the risks and considerations of the merger and the reader is
encouraged to carefully review this document in its entirety. Any commentary and descriptions contained in this Form 10-K with respect to the merger
are considered forward looking statements, and subject to the risks and limitations thereof.




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 very strong. Cascade
has no employees other than its executive officers, who are also employees of Bank of the Cascades. The Company had 336 full-time equivalent employees
as of December 31, 2005, up from 320 at the prior year-end. This increase is primarily to meet growing business volumes and to support new markets.
None of the employees of the Company are subject to a collective bargaining agreement.




The Company targets strong growth
markets and deploys a distinctive community banking strategy within such markets. The business strategy is focused on personal-touch relationship
banking, featuring premier customer service and competitive financial products. The Company is strategically committed to utilizing advanced technology
for the convenience of customers, including customer choice access through branches, ATMs, Internet, and telephone.




The Companys expansion into
Southern Oregon is based upon a community banking strategy, similar to the Companys strategy in its Central Oregon and Salem regions. The Medford
branch was opened in mid-2003, after hiring a well-known banking executive from the area. The Company acquired the former Community Bank of Grants Pass
on January 1, 2004, and during the year opened additional branches in Grants Pass and Ashland, Oregon. The Company added a second Medford location with
the opening of its Crater Lake Highway branch in June 2005. A third Medford location is targeted for 2006.




The Companys Portland
strategy is focused on attracting high value business and professional banking customers in greater metropolitan area. Key to the deployment of this
strategy was the hiring of an experienced Portland banking team from another financial institution in September 2003. Since that time, additional
in-market bankers have joined the Company, adding customer loan and deposit relationships, as well as strong new business development
skills.




While integrating Farmers &
Merchants into Bank of the Cascades, the Company will continue to focus on organic growth and increased market share in its existing locations. It may
also consider future expansion when it identifies market opportunities, as occurred in Southern Oregon and Portland in 2003. The Company may also
consider strategic partnerships or business acquisitions to expand its market opportunities in the future.




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 may utilize borrowings or
other wholesale funding from reliable counterparties such as the Federal Home Loan Bank and the Federal Reserve Bank to augment its liquidity. 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. While the Company believes its risk management
strategies and processes are




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prudent and appropriate to
manage the wide range of risks inherent in its business, 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 is highly competitive. The Company 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. In
addition, 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.




The Company 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 officers and senior managers have significant
experience in their respective marketplaces. This enables them to maintain close working relationships with their customers. In able to compete for
larger loans, the Bank may participate loans to other financial institutions for customers whose borrowing requirements exceed its lending
limits.




Government Policies




The operations of our
subsidiaries 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, United States
fiscal policy, and capital adequacy and liquidity constraints imposed by federal and state regulatory agencies.




Supervision and Regulation




Cascade, F&M, Bank of the
Cascades and Farmers & Merchants State Bank are extensively regulated under Federal, Oregon and Idaho law. These laws and regulations are primarily
intended to protect depositors and the deposit insurance fund, not shareholders of Cascade or F&M. 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. Any
change in applicable laws or regulations may have a material effect on the business and prospects of Cascade following the Merger. The operations of
Cascade 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.




Federal Bank Holding Company
Regulation




Cascade and F&M each are a
one-bank financial holding company within the meaning of the Bank Holding Company Act (Act), and as such, they are subject to regulation,
supervision and examination by the Federal Reserve Bank (FRB). Cascade 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. Both Cascade and F&M are 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;




6


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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.




The Sarbanes-Oxley Act of
2002




In July 2002, the Sarbanes-Oxley
Act of 2002 (the SOX) was enacted with the intent of protecting investors by improving the accuracy and reliability of corporate
disclosures. The SOX, among other things: sets standards for director independence; requires enhanced financial disclosures; requires certifications by
chief executive officer and chief financial officer as to the accuracy of financial statements; requires completeness of disclosure and effectiveness
of internal controls; provides for greater independence of audit functions; and provides for increased penalties for accounting and auditing
improprieties at publicly traded companies. The SOX directs the Securities and Exchange Commission (SEC) and securities exchanges to adopt
rules that implement these and other requirements. A number of rules have been adopted and continue to be proposed and implemented pursuant to the SOX.
Beginning for the year 2004, under section 404 of the Act, Cascade was required to document, assess, test and certify as to the effectiveness of its
system of internal controls. In addition, its independent auditor was required to audit and attest to such controls, and these reports are included in
this filing.




USA Patriot
Act




Under the USA Patriot Act of
2001, adopted by the U.S. Congress on October 26, 2001 to combat terrorism, FDIC insured banks and commercial banks were required to increase their due
diligence efforts for correspondent accounts and private banking customers. The USA Patriot Act requires Bank of the Cascades and Farmers &
Merchants State Bank to engage in additional record keeping or reporting, requiring identification of owners of accounts, or of the customers of
foreign banks with accounts, and restricts or prohibits certain correspondent accounts.




Financial Modernization
Act




On November 12, 1999 the
Gramm-Leach-Bliley Act became law, repealing the 1933 Glass-Steagall Acts separation of the commercial and investment banking industries. The
Gramm-Leach-Bliley Act expands the range of nonbanking activities a bank holding company may engage in, while reserving existing authority for bank
holding companies to engage in activities that are closely related to banking. This legislation creates a new category of holding company called a
Financial Holding Company, a subset of bank holding companies that satisfy the following criteria:


| |  | all of the depository institution subsidiaries must be well
capitalized and well managed;
|- |  | -----------------------------------------------------------------------------------------

| |  | the holding company must file a declaration with the Federal
Reserve Board that it elects to be a financial holding company to engage in activities that would not have been permissible before the
Gramm-Leach-Bliley Act; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | all of the depository institution subsidiaries must have a
Community Reinvestment Act rating of satisfactory or better.
|- |  | -------------------------------------------------------------------------------------------------------------------------



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Financial holding companies may
engage in any activity that: (1) is financial in nature or incidental to such financial activity; (2) is complementary to a financial activity and does
not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act
specifies certain activities that are financial in nature. These activities include:


| |  | acting as a principal, agent or broker for
insurance;
|- |  | -----------------------------------------------------

| |  | underwriting, dealing in or making a market in securities;
and
|- |  | --------------------------------------------------------------

| |  | providing financial and investment advice.
|- |  | ------------------------------------------



The Federal Reserve Board and the
Secretary of the Treasury have authority to decide whether other activities are also financial in nature or incidental to financial activity, taking
into account changes in technology, changes in the banking marketplace and competition for banking services.




Federal and State Bank
Regulation




Bank of the Cascades and Farmers
& Merchants State Bank, each as 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, Division of Finance
and Corporate Securities, and the Idaho Department of Finance, respectively, and to the supervision and regulation of the FDIC. These agencies may
prohibit Bank of the Cascades and Farmers & Merchants 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 Bank of the Cascades is Satisfactory and for Farmers & Merchants State Bank is
Satisfactory.




Bank of the Cascades and Farmers
& Merchants State Bank each also are 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.
Each of Bank of the Cascades and Farmers & Merchants State 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 of Cascade meets
substantially all the standards that have been adopted. To date, Farmers & Merchants State Bank has not been required to comply with FDICIA
reporting.




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.




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Deposit
Insurance




As a member institution of the
FDIC, the deposits of each of Bank of the Cascades and Farmers & Merchants State Bank are currently insured to a maximum of $100,000 per depositor
through the Bank Insurance Fund (BIF), and each bank is required to pay semiannual deposit insurance premium assessments to the
FDIC.




The Deposit Insurance Funds Act
of 1996 (Funds Act) eliminated the statutorily imposed minimum assessment amount, effective January 1, 1997. The Funds Act also authorizes
assessments on Bank Insurance Fund-assessable deposits and stipulates that the rate of assessment must equal one-fifth the Financing Corporation
assessment rate that is applied to deposits assessable by the Savings Association Insurance Fund. The Financing Corporation assessment rate for Bank
Insurance Fund-assessable deposits is 1.296 cents per $100 of deposits per year. The FDIC insurance expense for 2005 was approximately $238,000 for
Bank of the Cascades and $56,000 for Farmers & Merchants State Bank.




Regulatory
Capital




The Federal bank regulatory
agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the
minimum levels established by these guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or
non-bank businesses or to open facilities. At December 31, 2005, Cascade is considered well capitalized and F&M is considered
well capitalized according to these regulatory capital guidelines.




The FRB and FDIC promulgate
risk-based capital guidelines for banks and bank holding companies. Risk-based capital guidelines are designed to make capital requirements sensitive
to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the FRB has noted
that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should
maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and banks to maintain a minimum risk-based
total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital.




Tier 1 capital for bank holding
companies includes common stockholders equity, qualifying perpetual preferred stock (up to 25% of total Tier 1 capital, if cumulative; under a
FRB rule, redeemable perpetual preferred stock may not be counted as Tier 1 capital unless the redemption is subject to the prior approval of the FRB)
and minority interests in equity accounts of consolidated subsidiaries, less intangibles. Tier 2 capital includes: (1) the allowance for loan losses of
up to 1.25% of risk-weighted assets; (2) any qualifying perpetual preferred stock which exceeds the amount which may be included in Tier 1 capital; (3)
hybrid capital instrument; (4) perpetual debt; (5) mandatory convertible securities, and; (6) subordinated debt and intermediate term preferred stock
of up to 50% of Tier 1 capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal holdings of other banking organizations, capital
instruments and investments in unconsolidated subsidiaries.




Banks and bank holding
companies assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given credit conversion
factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total
risk-weighted assets.




Loans are generally assigned to
the 100% risk category, except for first mortgage loans fully secured by residential property, which carry a 50% rating. Cascades investment
securities, mainly U.S. Government sponsored agency obligations, are assigned to the 20% category, except for municipal or state revenue bonds, which
have a 50% risk-weight, and direct obligations of or obligations fully guaranteed by the United States Treasury or United States Government, which have
0% risk-weight. F&Ms investment securities, mainly U.S. Government sponsored agency obligations, are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of or obligations fully guaranteed by the United States Treasury
or United States Government, which have 0% risk-weight. Off-balance sheet items, direct credit substitutes, including general guarantees and standby
letters of credit backing financial obligations, are given a 100% conversion factor. Transaction related contingencies such as bid bonds, other standby
letters of credit and undrawn




9


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commitments, including
commercial credit lines with an initial maturity of more than one year, have a 50% conversion factor. Short-term, self-liquidating trade contingencies
are converted at 20%, and short-term commitments have a 0% factor.




The FRB also has implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to risk-based guidelines.
The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity
capital base. The FRB requires a minimum leverage ratio of 3%. However, for all but the most highly rated bank holding companies and for bank holding
companies seeking to expand, the FRB expects an additional cushion of at least 1% to 2%.




At December 31, 2005,
Cascades leverage, Tier 1 capital and Total risked-based capital ratios were 9.30%, 9.83% and 11.12%, respectively and F&Ms leverage,
Tier 1 capital and Total risked-based capital ratios were 7.48%, 7.59% and 10.66%, respectively.




The FDICIA also created a new
statutory framework of supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, an
institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions that are deemed undercapitalized, depending on the category to which
they are assigned, are subject to certain mandatory supervisory corrective actions. At December 31, 2005, Cascade and F&M each are considered
well-capitalized.




State Regulations Concerning
Cash Dividends




Cascade.  The
principal source of Cascades cash revenues have been provided from dividends received from Bank of the Cascades. The Oregon banking laws impose
the following limitations on the payment of dividends by Oregon state chartered banks. The amount of the dividend shall not be greater than its
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. Bank of the Cascades and Cascade are not currently subject to any regulatory restrictions on their dividends other than those noted
above.




Check 21




The Check Clearing for the 21st
Century Act, or Check 21 as it is commonly known, became effective October 28, 2004. Check 21 facilitates check collection by creating a
new negotiable instrument called a substitute check, which permits, but does not require, banks to replace original checks with substitute
checks and process check information electronically. Banks that do use substitute checks must comply with certain notice and recredit rights. Check 21
is expected to cut the time and cost involved in physically transporting paper items and reduce float, i.e. the time between the deposit of a check in
a bank and the banks receipt of payment for that check. Bank of the Cascades utilizes the Check 21 authority and currently possesses technology
necessary to process and exchange check information electronically. Farmers & Merchants State Bank uses a remote service provider for its check
clearing operations; accordingly, Check 21 has not had a material effect on its operations.




Available Information




The Companys filings with
the 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, we do not intend to incorporate into this report any information contained in the website. The website should not be considered part of
this report.




10


---



The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers including the Company 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 some of these risks and uncertainties. These should not be viewed as an all inclusive list or in
any particular order.




Detailed discussions of the
specific risks outlined in this section and other risks facing the Company are included within this Form 10-K in Part I, Item 1 Business,
and Part II, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations. Please see the
Companys cautionary statements as to Forward-Looking Statements for further description of certain risks, uncertainties and
assumptions identified by management that are difficult to predict and that could materially affect the Companys financial condition and results
of operations.




The Company may fail to
complete or fail to realize anticipated benefits from our proposed acquisition of F&M Holdings of Boise, Idaho.




On December 27, 2005 the Company
entered into a definitive agreement to acquire F&M of Boise Idaho, through a merger transaction in which all outstanding shares of F&M common
stock will be exchanged for cash and common shares of the Company. Completion of the merger is subject to satisfaction of various conditions set forth
in the merger agreement, including regulatory and Cascade shareholder approvals, and, therefore, may or may not be completed or delayed. The combined
bank may fail to realize some or all of the anticipated business opportunities envisioned in the acquisition, or may not realize the cost savings or
other benefits of the transaction. In addition, integration issues could cause higher than anticipated expenses and lower benefits from the merger than
currently anticipated. In this regard, Farmers & Merchants State Bank has had deficiencies in its bank regulatory compliance management system,
including weak oversight of its compliance function, insufficient internal monitoring procedures and an inadequate internal audit function. Although
Cascade has a strong bank regulatory compliance management system, and believes it will be able to remedy Farmers & Merchants State Banks
deficiencies following the merger, implementation of remedial measure may take significant time and expenses.




Adverse changes in economic
growth and vitality in the Companys banking markets may negatively impact the Company.




The Companys business is
closely tied to the economies of Central and Southern Oregon as well as to the cities of Portland and Salem metropolitan areas. A sustained economic
downturn could adversely affect the Companys financial condition or results of operations.




The Companys reserve for
loan losses may not be adequate to cover actual loan losses.




The risk of nonpayment of loans
is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on the Companys financial condition or results of
operation. The Company maintains a reserve for loan losses to absorb estimated probable loan losses inherent in the loan and commitment portfolios as
of the balance sheet date. In determining the level of the reserve, management makes various assumptions and judgments about the loan portfolio. If the
Companys assumptions are incorrect, the reserve for loan losses may not be sufficient to cover losses, which could adversely affect the
Companys financial condition or results of operations.




Many of the Companys loans
are secured by real estate located in Oregon. If these locations experience an economic downturn that impact real estate values and customers
ability to repay, loan losses may exceed the estimates that are currently included in the reserve for loan losses, which could adversely affect our
financial results and shareholder value.




The inability to attract or
retain key banking employees could adversely affect revenues and net income.




The Company strives to attract
and retain key banking professionals, management and staff is to achieve its growth goals. Banking related revenues could be adversely affected in the
event of a loss of key personnel.




11


---



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.




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 impact of changes to laws and regulations or other actions by regulatory agencies could make regulatory compliance more difficult or expensive for
the Company and could adversely affect the Companys financial condition or results of operations.




Competition may adversely
affect the Company.




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. Competition could adversely affect the Companys financial condition or results of
operations.




Operational risks including
communications system interruptions or breach in security systems may adversely affect the Company.




The Company relies on
communications and information systems to conduct its business. Some of these communications and information systems are provided or supported by third
party service providers. A significant disruption in key communications or information systems could adversely affect the Companys ability to
deliver products and services to its customers and otherwise to conduct its business. A material security breach of the Companys information
systems or data (whether managed by the Company or by third parties) could harm the Companys reputation, cause a decrease in the number of
customers, and adversely affect the Companys financial condition or results of operations.


|ITEM
1B. |  | Unresolved Staff Comments
|-------- |  | -------------------------



None


|ITEM
2. |  | PROPERTIES
|------- |  | ----------



At December 31, 2005, the Company
conducted banking services in 21 locations throughout Oregon. Twelve locations are in Central Oregon, four in Salem/Keizer, four in Southern Oregon and
one in Portland. All offices are free standing buildings with the exception of three branches, two which operate in leased space in supermarkets in
Bend and the third which operates on the 10th floor of the Pioneer Tower Building in
Portland.




The main office and three other
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.




The 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




12


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the ground floor. Human
Resources and Commercial Lending occupy approximately 8,400 square feet. A separate drive-up facility is also located on this site, which is also
occupied by Finance and Marketing.




The Bank currently owns the
Cascade Building in the Old Mill district of Bend, which contains approximately 21,800 sq. ft. of space of which the Bank occupies 2,000 sq. ft. The
remaining space is partially leased by non-bank commercial businesses and the Bank is seeking tenants for the remainder. Partners in the construction
of this building have an option to purchase the building from the Company at a cost-plus price through February of 2007.




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 and Private Financial
Services. Including Bank use, the space is near full occupancy.




In the opinion of management, all
of the Banks properties are adequately insured.


|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 believes that there are no threatened or pending proceedings
against the Company, which, if determined adversely, would have a material effect on the business or financial position of the
Company.


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



No matters were submitted to a
vote of shareholders during the fourth quarter of 2005.




13


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PART II


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



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 Quarter |       | Second Quarter |  | Third Quarter |       | Fourth Quarter
|--------------------------------- |  |  |  | ------------- | ----- | -------------- |  | ------------- | ----- | --------------
|2006
(January 1 through March 10) |  |  |  |               |       |                |  |               |       |               
|High                              |  |  |  | $             | 26.36 |                |  |               | N/A   |               
|Low                               |  |  |  | $             | 23.11 |                |  |               | N/A   |               
|2005                              |  |  |  |               |       |                |  |               |       |               
|High                              |  |  |  | $             | 20.17 |                |  | $             | 21.33 |               
|Low                               |  |  |  | $             | 18.35 |                |  | $             | 18.58 |               
|                                 
|2004                              |  |  |  |               |       |                |  |               |       |               
|High                              |  |  |  | $             | 18.78 |                |  | $             | 20.00 |               
|Low                               |  |  |  | $             | 15.42 |                |  | $             | 15.48 |               



The Company declared a 25% (5:4)
stock split in March 2004. The Company announced a policy of declaring regular quarterly cash dividends in 1997. 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
|---- |  |  |  | ------------- | --- | -------------- |  | ------------- | --- | --------------
|
|2006 |  |  |  | $             | .09 |                |  |               | N/A |               
|2005 |  |  |  | $             | .08 |                |  | $             | .08 |               
|2004 |  |  |  | $             | .06 |                |  | $             | .06 |               



At March 10, 2006, the Company
had 35,000,000 shares of common stock authorized with 17,107,513 shares issued and outstanding, held by approximately 5,800 shareholders of
record.




Information regarding securities
authorized for issuance under the Companys equity plans is located on page 62 (Note 17) of this annual report and is incorporated by
reference.


|ITEM
6. |  | SELECTED FINANCIAL DATA
|------- |  | -----------------------



The following tables present
certain financial and statistical information with respect to the Company for the periods indicated. Most of the information is required by Guide 3,
Statistical Disclosure by Bank Holding Companies, published by the SEC. At the beginning of each table, information is presented as to the
nature of data disclosed in the table.




Critical Accounting Policies




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




Reserve for Loan
Losses:  Arriving at an appropriate level of reserve for loan losses involves a high degree of judgment. The Companys reserve for
loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical
information to assess the adequacy of the reserve




14


---



for loan losses as well as
the prevailing business environment as it is affected by changing economic conditions and various external factors which may impact the portfolio in
ways currently unforeseen. The reserve is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by
loans charged-off. For a full discussion of the Companys methodology of assessing the adequacy of the reserve for loan losses, see
Managements Discussion and Analysis of Financial Condition and Results of Operation.




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. At least quarterly, 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 methodologies common to the mortgage servicing market.
Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs and
the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the
avoidance of possible impairment charges in future periods. See also Managements Discussion and Analysis of Financial Condition and Results of
Operation, and footnote 6 of the Financial Statements.




The following selected financial
data should be read in conjunction with the Companys consolidated financial statements and the accompanying notes, which are included in this
Annual Report on Form 10-K, (in thousands, except per share data and ratios; unaudited):







|                                              |  |  |  | Years ended December 31, |          
|--------------------------------------------- |  |  |  | ------------------------ | ---------
|
|Balance Sheet
Data (at period end)            |  |  |  |                          |          
|Investment
securities                         |  |  |  | $                        | 59,286   
|Total
loans                                   |  |  |  |                          | 1,049,704
|Total
assets                                  |  |  |  |                          | 1,269,671
|Total
deposits                                |  |  |  |                          | 1,065,380
|Non-interest
bearing deposits                 |  |  |  |                          | 430,463  
|Core Deposits
(1)                             |  |  |  |                          | 1,030,444
|Total
shareholders equity (2)                |  |  |  |                          | 104,375  
|Income
Statement Data                         |  |  |  |                          |          
|Interest
income                               |  |  |  | $                        | 72,837   
|Interest
expense                              |  |  |  |                          | 13,285   
|Net interest
income                           |  |  |  |                          | 59,552   
|Loan loss
provision                           |  |  |  |                          | 3,050    
|Net interest
income after loan loss provision |  |  |  |                          | 56,502   
|Non-interest
income                           |  |  |  |                          | 13,069   
|Non-interest
expenses                         |  |  |  |                          | 34,201   
|Income before
income taxes                    |  |  |  |                          | 35,370   
|Provision for
income taxes                    |  |  |  |                          | 12,934   
|Net
income                                    |  |  |  | $                        | 22,436   
|Share Data
(2)                                |  |  |  |                          |          
|Basic
earnings per common share               |  |  |  | $                        | 1.33     
|Diluted
earnings per common share             |  |  |  | $                        | 1.29     
|Book value
per common share                   |  |  |  | $                        | 6.16     
|Tangible book
value per common share          |  |  |  | $                        | 5.76     
|Cash
dividends declared per common share      |  |  |  | $                        | 0.33     
|Ratio of
dividends declared to net income     |  |  |  |                          | 24.79    
|Basic Average
shares outstanding              |  |  |  |                          | 16,856   
|Fully Diluted
average shares outstanding      |  |  |  |                          | 17,420   



15


---

|                                                            |  |  |  | Years ended December 31, |        
|----------------------------------------------------------- |  |  |  | ------------------------ | -------
|
|Key
Ratios                                                  |  |  |  |                          |        
|Return on
average total shareholders equity (book)         |  |  |  |                          | 24.04  
|Return on
average total shareholders equity (tangible) (3) |  |  |  |                          | 25.93  
|Return on
average total assets                              |  |  |  |                          | 1.97   
|Net interest
spread                                         |  |  |  |                          | 4.85   
|Net interest
margin                                         |  |  |  |                          | 5.66   
|Total revenue
(net int inc + non int inc)                   |  |  |  | $                        | 72,621 
|Efficiency
ratio (4)                                        |  |  |  |                          | 47.10  
|Asset Quality
Ratios                                        |  |  |  |                          |        
|Loan loss
reserves on loans and loan commitments            |  |  |  | $                        | 14,688 
|Reserve to
endng total loans                                |  |  |  |                          | 1.40   
|Non-performing assets (5)                                   |  |  |  | $                        | 40     
|Non-performing assets to total assets                       |  |  |  |                          | 0.00   
|Delinquent
>30 days to total loans                          |  |  |  |                          | 0.02   
|Net Charge
offs                                            |  |  |  | $                        | 773    
|Net loan
charge-offs (annualized)                           |  |  |  |                          | 0.08   
|Mortgage
Activity                                           |  |  |  |                          |        
|Mortgage
Originations                                       |  |  |  | $                        | 158,775
|Total
Servicing Portfolio (sold loans)                      |  |  |  | $                        | 498,668
|Capitalized
Mortgage Servicing Rights (MSRs)               |  |  |  | $                        | 4,439  
|Capital
Ratios                                              |  |  |  |                          |        
|Average
shareholders equity to average assets              |  |  |  |                          | 8.19   
|Leverage
ratio (6)                                          |  |  |  |                          | 9.30   
|Total
risk-based capital ratio (6)                          |  |  |  |                          | 10.72  








Notes:


|(1) |  | Core deposits include all demand, interest bearing demand,
savings plus time deposits of amounts less than $100,000.
|--- |  | --------------------------------------------------------------------------------------------------------------------

|(2) |  | Adjusted to reflect a 20% (6:5) stock split declared in May
2001, a 50% (3:2) stock split declared in May 2002 and a 25% (5:4) stock split declared in March 2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Excludes goodwill, core deposit intangible and other
identifiable intangible assets, related to acquisition of Community Bank of Grants Pass.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Efficiency ratio is noninterest expense divided by (net interest
income + noninterest income).
|--- |  | ----------------------------------------------------------------------------------------------

|(5) |  | Nonperforming assets consist of loans contractually past due 90
days or more, nonaccrual loans and other real estate owned.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(6) |  | Computed in accordance with FRB and FDIC guidelines.
|--- |  | ----------------------------------------------------



16


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



As outlined in guidance from the
Securities and Exchange Commission, the objective of the following discussion is to help investors and other interested parties to see the Company
through the eyes of management; to assist in providing context within which financial information can be better analyzed; and to provide information as
to the quality and variability of the Companys earnings and cash flows such that the investor can more easily ascertain the likelihood whether
past performance is indicative of future performance.




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, 2005
and 2004 and for each of the three years in the period ended December 31, 2005 included elsewhere in this report.




In the following discussion, the
Company provides certain descriptions, information and commentary with respect to the pending acquisition of Farmers and Merchants State Bank of Idaho
that is expected to be completed in April of 2006. Such information is preliminary and should be read only in the context of the enclosed proxy
statement that more fully describes the risks and considerations of the acquisition. In addition, such commentary and descriptions are considered
forward looking statements, and subject to the risks and limitations thereof.




HIGHLIGHTS AND SUMMARY OF PERFORMANCE




Overview & Business Strategy




Management and directors of
Cascade Bancorp have developed and implemented long-term goals and strategies with the objective of achieving sustainable double-digit EPS growth for
its shareholders while progressively serving the banking and financial needs of its customers and communities. The Companys business strategy
includes: 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.




The Companys original
market is Central Oregon, whose population has grown in the 96th percentile of the nation due largely to in-migration of those seeking the quality of
life offered by the region. The region has natural high-desert beauty, bountiful recreational and cultural choices, good weather, and premier
healthcare services. The Company and Bank have grown with the community during the last 25 years, to a point of holding a 33% deposit share of this
fast growing market. The combination of a fast growing economy and powerful market share contributed to sustained high performance over the past
decade. In recent years, management has sought to augment this solid growth by prudently expanding into other attractive Oregon markets, now including
Salem, Portland, and Southern Oregon. The latter two markets were entered in mid-2003, and during 2004 attained breakeven after less than one year of
operation. At December 31, 2005, loans and deposits in these new markets total 34% and 18% respectively of total Company balances. This growth has had
the additional benefit of diversifying the Companys concentration of assets into several Oregon markets. Investing in the start-up phase of the
new markets slowed 2004 earnings growth from its historical levels; however, earnings momentum appears positive at December 31, 2005. The following
table reflects the strong and sustained growth and returns the Company has achieved:







|Compound Annual Growth    |  |  |  | 1 year |      | 3 year |  | 5 year
|------------------------- |  |  |  | ------ | ---- | ------ |  | ------
|Earnings Per
Share Growth |  |  |  |        | 39.2 | %      |  |       
|Net Income
Growth         |  |  |  |        | 40.2 | %      |  |       
|Loan
Growth               |  |  |  |        | 22.1 | %      |  |       
|Deposit
Growth            |  |  |  |        | 25.2 | %      |  |       



Pending Acquisition of F&M Holding Company and
Farmers and Merchants State Bank, Boise, Idaho




On December 27, 2005 the Company
announced the signing of a definitive agreement under which F&M will merge into Cascade and F&M shareholder will exchange all of the common
stock of F&M for cash and common shares of Cascade. F&M is the holding company for Farmers & Merchants State Bank (FMSB), which is
headquartered in Boise, Idaho. If the merger closes, Mr. David Bolger, the sole shareholder of F&M, will own approximately 24% of the outstanding
shares of the Companys common stock.




17


---



The terms of the agreement call
for Cascade to pay $22.5 million in cash and issue 5,325,000 shares of common stock. Based on Cascades March 10, 2006 average of the high and low
closing stock price of $25.98, the value of the stock consideration is approximately $138.3 million and the aggregate transaction value is
approximately $160.8 million. One time costs in connection with the transaction are estimated to be $6.4 million (pre-tax), primarily for costs to
terminate contracts, legal and professional fees and employee retention and/or severance costs.




Based on its audited financial
statements, at December 31, 2005, F&M had total assets of $612.4 million. At that date, gross loans were $452.6 million up 23.5% from $366.6
million at December 31, 2004. Total deposits at December 31, 2005 were $497.0 million compared to $400.1 million at December 31, 2004, an increase of
24.2%. Growth in both loans and deposits reflects the strong economic conditions in the greater Boise market, and is also the result of successful
expansion of existing customer relationships and the growth of new customers by F&M. Upon closing of the merger, F&M will represent
approximately 30% of loans and 32.0% of deposits of the combined company. F&M Shareholder Equity was $42.5 million at December 31, 2005 and net
income for the 2005 was $6.6 million, up 24.0% compared to $5.4 million in 2004. Earnings in 2005 increased due to higher net interest income resulting
from growing loan and deposit totals, as well as stronger non interest income for the year.




If the merger closes, it will
create a banking franchise serving northwest markets that are among the fastest growing in the nation. The Oregon and Idaho counties served by the
combined Company rank above the 90th percentile nationally in both rate of population and deposit growth. On a deposit weighted basis, the combined
bank will rank among the top 3 banks in the nation in terms of banking presence in fast growth markets.(1)




F&M has a 38 year history of
serving the banking needs of communities and customers of the greater Boise area. As of June 30, 2005, the latest date for which information is
available, FMSB was the top deposit market share community bank in Ada County ranking 5th overall, with 5.9% deposit market share. The Boise market is
dominated by large national banks, which occupy the top four deposit market share positions and collectively account for approximately 61% of
deposits.




Cascade has outlined the
following priorities in the planning the integration of F&M:


| |  | Attract and retain bankers
|- |  | --------------------------

| |  | Retain and grow profitable relationships
|- |  | ----------------------------------------

| |  | Maintain earnings momentum
|- |  | --------------------------

| |  | Complete conversion with minimal customer disruption
|- |  | ----------------------------------------------------

| |  | Realize synergies in the future
|- |  | -------------------------------



Because the primary strategic aim
of the merger is to grow by expanding the number of customers and increasing market share in the greater Boise market, the Company has targeted a 10%
cost savings in the transaction, and is devoting efforts at retaining key banking personnel. The Company believes that the merger will provide F&M
with additional banking products, capital, and increased lending limits to strengthen its growth potential and retention of customer banking
relationships, which are integral to maintaining earnings momentum. In addition, management is in process of planning a systems integration in the
second quarter of 2006 with the objective of minimizing customer disruption and maximizing retention of existing customers.




Management expects to identify
and pursue operational and financial synergies as a result of the merger. Examples may include increasing loan growth by capitalizing on larger
combined legal lending limits, and implementing cash management and other business deposit services to increase deposits and customer relationships.
Synergies may also arise from the replacement of certain low yielding investment securities with higher yielding loans, reduction of relatively higher
cost deposits as well as operational and systems enhancements in areas such as float reduction.




Despite its best efforts, the
combined bank may fail to realize some or all of the anticipated business opportunities or synergies envisioned in the acquisition, or may not realize
the cost savings or other benefits of the transaction. In addition, integration issues could cause higher than anticipated expenses and lower benefits
from the merger than currently anticipated.







|(1) |  | USA banks over $2 billion in assets
|--- |  | -----------------------------------



18


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Key Performance Indicators




The Company has established the
following performance goals: 1) consistently exceed 12% growth in EPS; 2) consistently exceed 18% return on 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 and
customer relationship and retention goals to assist management in directing and monitoring results.




Highlights  2005 Financial
Performance


| |  | Fourth Quarter 2005 Earnings Per Share up 49.0% at
$0.39
|- |  | --------------------------------------------------------

| |  | Full Year 2005 Earnings Per Share up 39.2% at
$1.29
|- |  | ---------------------------------------------------

| |  | Loan Growth at 22.1% Year-over-Year
|- |  | -----------------------------------

| |  | Deposit Growth at 25.2% Year-over-Year
|- |  | --------------------------------------

| |  | Outstanding Loan Portfolio Credit Quality
|- |  | -----------------------------------------



The Company reported Diluted
Earnings Per Share (EPS) for the fourth quarter of 2005 was $0.39, up 49.0% from the year ago quarter while 2005 full year EPS was $1.29, up 39.2% from
2004. Return on Equity was 27.06% for the fourth quarter of 2005 and 24.04% for the full year 2005. Return on Assets continued well above peer banks at
2.15% for the final quarter of 2005 and 1.97% for the full year 2005. Net Income for the fourth quarter of 2005 was $6.8 million, up 49.9% compared to
the year-ago quarter, while full year 2005 net income was $22.4 million, up 40.2% above 2004. There was no loan loss provision in the fourth quarter of
2005 compared to $.9 million ($.03 per share) in the year ago period because of improved credit metrics (see Loan Growth and Credit Quality section
below). Also, the Oregon corporate state tax reduction (2005 only) added to EPS by approximately $.01 for the fourth quarter and $.04 for the full
year.




Loan growth and credit
quality




At December 31, 2005,
Cascades loan portfolio had grown to $1.05 billion, up 22.1% compared to a year ago. With the seasonally slower pace of construction and real
estate activity during the fourth quarter, loans grew at an 11.0% (annualized) pace when compared to the immediately preceding
quarter.




Credit quality remains very
strong at Cascade, with improved metrics during the fourth quarter. Non-performing assets were reduced to only $40,000 at quarter end, while delinquent
loans greater than 30 days past due were reduced to just .02% of total loans. Fourth quarter net loan charge-offs were .02% (annualized) of total loans
as compared to .10% and .13% for the prior quarter and prior year, respectively. These strong quality metrics are a result of ongoing discipline in the
credit granting and monitoring process as well as the solid economic underpinnings of the Companys banking markets. Accordingly, and reflecting
these strong quality metrics as well as the seasonally slower loan growth during the fourth quarter, the provision for loan losses was zero for the
fourth quarter. This compares to an average quarterly provision of $1 million during recent periods of faster loan growth, resulting in an approximate
$.03 per share positive effect on the current quarter EPS.




Total Loan Loss Reserve on Loans
(and Loan Commitments) totaled 1.40% of loans at year-end, compared to 1.44% a year earlier. Management believes the reserve is at an appropriate level
based upon its evaluation and analysis of portfolio credit quality and prevailing economic conditions.




Deposit growth




At December 31, 2005 Deposits
were $1.1 billion, up 25.2% or $214.9 million from year-end 2004 driven by the strong economic growth evident in Cascades Oregon banking markets
as well as the Companys positive market-share progress within those markets. Total deposits at December 31, 2005 were approximately $87 million
lower than at September 30, 2005. This was mainly because of a short-term $100 million deposit that temporarily




19


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inflated balances at
September 30. Adjusting for this item, deposits were up $12.8 million or 4.9% (annualized) on a linked-quarter basis. The seasonal flattening in the
rate of deposit growth during the fourth quarter (and often extending through the winter) is a fairly typical pattern especially in the Companys
Central Oregon market resulting from diminished levels of tourism, construction and real estate activity.




The Companys overall cost
of funds for the quarter was 1.49% an increase from 1.36% in the preceding quarter and .70% for the year ago quarter as deposit rates continued to
increase in tandem with higher market rates.




Non-interest income and
expense




As expected, 2005 full year
Non-Interest Income was $13.1 million, just 1% above 2004. For the year, service fee income was at $6.2 million, down 7.8% reflecting a moderation in
the use of overdraft protection products. For the full year 2005, residential mortgage originations totaled $158.8 million, up 12.3% when compared to
$141.4 million in 2004. 2005 net mortgage revenue was $2.3 million, slightly below the $2.4 million for 2004, primarily due to a $325,000 Mortgage
Servicing Rights valuation credit adjustment recorded in 2004.




Non-Interest Expense for 2005
increased 15.6% compared to 2004, while fourth quarter expenses were 17.1% above the year ago quarter. Expense increases were primarily for human
resources, including staffing increases to meet growing business volumes and support for new markets, along with incentive-based bonuses that are
directly tied to the increasing profitability of the Company.




RESULTS OF OPERATIONS  Years ended December 31, 2005,
2004, and 2003




Net Interest Income/Net Interest Margin




2005 interest income increased a
strong 43.1% over the prior year primarily as a result of a 21.7% growth in outstanding loans. Average yields on earning assets increased to 6.92% in
2005 compared to 6.35% in 2004, primarily due to an increasing prime rate which rose from 5.25% at the beginning of the year to 7.25% by year-end. With
interest rates at very low levels for most of 2004, interest income advanced 24.7% due to growth in earning assets. Earning asset yields were 6.35% in
2004 compared to 6.68% in 2003.




While deposit volumes grew at
25.2% and 30.8% in 2005 and 2004, respectively, interest expense increased 171.0% in 2005 after an increase of 22.5% in 2004. In the latter half of
2005, market rates began increasing and rates paid on interest bearing liabilities was trending up at year-end. Following the trend in market interest
rates, the cost of interest bearing deposits and borrowings has increased since mid 2004 averaging 2.07% in 2005, compared to 1.00% in 2004 and 1.06%
in 2003.




Compared to peer banks, the
Company has historically maintained a relatively low cost of funds. An important factor in achieving and sustaining this advantage has been the
Companys high percentage of non-interest bearing deposits. Such deposits averaged about 38.9% and 38.9% of total deposits in 2005 and 2004,
respectively, and are a reflection of the Companys relationship and business banking strategy, high customer service standards, and 33% deposit
market share in Central Oregon. Because of this relatively high proportion of non-interest bearing deposits, the overall cost of funds was 1.27% in
2005 compared to .63% in 2004, and .68% for 2003. With broadly increasing competition for deposits as well as competitive new markets where the Company
does not enjoy a large market share, the proportion of non-interest bearing deposits may ease over time.




Interest expense on junior
subordinated debentures and other borrowings increased 426.8% to $3.2 million in 2005, up from $.7 million in 2004, while 2004 saw an increase of 35.1%
over 2003. The primary reason for this increase was the higher borrowing expense related to the full year effect of the trust preferred securities
issued in December 2004 and additional borrowing costs related to the $27.8 million increase in the volume of other borrowings.




The Companys net interest
margin (NIM) to fell to 5.66% in 2005 from 5.74% in 2004 and 6.03% in 2003. The Companys NIM has been in the high 90th percentile of all banks for a decade, and continues to be well above peer levels. The relatively flat yield curve
and low absolute interest rate climate caused a gradual decline in loan yields that compress against an already low cost of funds. Management forecasts
that the net interest margin will likely remain between 5.50% and 5.70% over the next 12 to 18 months assuming interest rates follow the financial
markets expected path to slightly higher rates (excluding any effect of the FMSB acquisition).




20


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Management has estimated that
upon the closing of the F&M transaction, the net interest margin of the combined company may be approximately 20 basis points lower than Cascade on
a stand-alone basis. This is mainly because FMSB has a lower portion of non-interest bearing deposits and a higher overall cost of funds than Cascade.
Management expects the combined company will generate substantially higher net interest income owing to higher loan and deposit balances. Management
believes the merger will not have a material affect on the interest rate risk profile of the Company. Please see Item 7A interest rate risk
for further information.




Average Balances and Average Rates Earned and
Paid




The following table sets forth
for 2005, 2004, and 2003 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from
interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest
spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company (dollars in
thousands):







|                                                              |  | Year
      ended
      December 31, 2005 |           | Year
      ended
      December 31, 2004 |  | Year
      ended
      December 31, 2003
|------------------------------------------------------------- |  | ---------------------------------------- | --------- | ---------------------------------------- |  | ----------------------------------------
|
|Assets                                                        |  |                                          |           |                                          |  |                                         
|Taxable
        securities                                    |  | $                                        | 46,115    |                                          |  | $                                       
|Non-taxable
        securities (1)                            |  |                                          | 5,593     |                                          |  |                                         
|Interest
        bearing balances from Federal Home Loan Bank |  |                                          | 22,357    |                                          |  |                                         
|Federal
        funds sold                                    |  |                                          | 12,516    |                                          |  |                                         
|Federal
        Home Loan Bank stock                          |  |                                          | 3,108     |                                          |  |                                         
|Loans
        (2)(3)(4)                                       |  |                                          | 962,514   |                                          |  |                                         
|Total
        earning assets                                  |  |                                          | 1,052,203 |                                          |  |                                         
|Reserve
        for loan losses                               |  |                                          | (13,909   | )                                        |  |                                         
|Cash
        and due from banks                               |  |                                          | 63,907    |                                          |  |                                         
|Premises
        and equipment, net                           |  |                                          | 22,254    |                                          |  |                                         
|Other
        Assets                                          |  |                                          | 15,174    |                                          |  |                                         
|Total
        assets                                          |  | $                                        | 1,139,629 |                                          |  |                                         
|Liabilities & Stockholders Equity                            |  |                                          |           |                                          |  |                                         
|Int.
        bearing demand deposits                          |  | $                                        | 458,767   |                                          |  |                                         
|Savings
        deposits                                      |  |                                          | 37,094    |                                          |  |                                         
|Time
        deposits                                         |  |                                          | 67,557    |                                          |  |                                         
|Other
        borrowings                                      |  |                                          | 76,828    |                                          |  |                                         
|Total
        interest bearing liabilities                    |  |                                          | 640,246   |                                          |  |                                         
|Demand
        deposits                                       |  |                                          | 392,273   |                                          |  |                                         
|Other
        liabilities                                     |  |                                          | 13,791    |                                          |  |                                         
|Total
        liabilities                                     |  |                                          | 1,046,310 |                                          |  |                                         
|Stockholders equity                                          |  |                                          | 93,319    |                                          |  |                                         
|Total
        liabilities & equity                            |  | $                                        | 1,139,629 |                                          |  |                                         
|                                                              |  |                                          |           |                                          |  |                                         
|Net
        interest income                                   |  |                                          |           |                                          |  | $                                       
|Net
        interest spread                                   |  |                                          |           |                                          |  |                                         
|Net
        interest income to earning assets                 |  |                                          |           |                                          |  |                                         






|(1) |  | Yields on tax-exempt securities have not been stated on a
tax-equivalent basis.
|--- |  | -------------------------------------------------------------------------------

|(2) |  | Average non-accrual loans included in the computation of average
loans was insignificant for 2005, 2004 and 2003.
|--- |  | -----------------------------------------------------------------------------------------------------------------

|(3) |  | Loan related fees included in the above yield calculations:
$2,649,000 in 2005, $2,218,000 in 2004, and $1,885,000 in 2003.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes mortgage loans held for sale.
|--- |  | --------------------------------------



21


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Analysis of Changes in Interest Income and
Expense




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 results 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.




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 (dollars
in thousands):







|                                        |  |  |  | Year ended December 31, |       
|--------------------------------------- |  |  |  | ----------------------- | ------
|
|
|
|Interest
income:                        |  |  |  |                         |       
|Interest and
fees on loans              |  |  |  | $                       | 20,331
|Taxable
securities                      |  |  |  |                         | 626   
|Non-taxable
securities                  |  |  |  |                         | 67    
|Interest
bearing balances due from FHLB |  |  |  |                         | 603   
|Federal Home
Loan Bank stock            |  |  |  |                         | (53   
|Federal funds
sold                      |  |  |  |                         | 352   
|Total
interest income                   |  |  |  |                         | 21,926
|Interest
expense:                       |  |  |  |                         |       
|Interest on
deposits:                   |  |  |  |                         |       
|Interest
bearing demand                 |  |  |  |                         | 5,110 
|Savings                                 |  |  |  |                         | 9     
|Time                                    |  |  |  |                         | 848   
|Other
borrowings                        |  |  |  |                         | 2,415 
|Total
interest expense                  |  |  |  |                         | 8,382 
|Net interest
income                     |  |  |  | $                       | 13,544



Non-interest Income




Total non-interest income was up
just 1.0% at $13.1 million from 2004, following a 3.4% decrease in 2004. 2005 service fee income was at $6.2 million, down 7.8% year over year,
reflecting a moderation in the use of overdraft protection products. This decrease was partially offset by increases in card issuer and merchant
services fee income and other income related to increased business volumes and transactions.




Management expects non-interest
income will be higher upon the merger with F&M. F&M generates most of its non-interest income from bank service fees and residential mortgage
origination related activities.




Home Mortgage Originations and Mortgage Related
Revenue




Residential mortgage originations
totaled $158.8 million, up 12.3% compared to $141.4 million in 2004 and decreased 15.0% percent in 2004 compared to $304.7 million in 2003. Mortgage
revenue was slightly lower in 2005 at $2.3 million, primarily due to a $325,000 Mortgage Servicing Rights valuation credit adjustment recorded in 2004.
Net mortgage revenues decreased 57.4% to $2.4 million in 2004 compared to 2003.




The general level and direction
of interest rates directly influence the volume and profitability of mortgage banking. As expected, interest rates modestly increased in 2005, after
interest rates in 2004 rose from their historical lows.




22


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The Company mainly sells the
residential mortgage loans it originates to Fannie Mae, a U.S. Government sponsored enterprise. 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 $498.7 million at December 31, 2005 and $502.4 million at December 31, 2004, upon which were
recorded related Mortgage Servicing Rights (MSRs) of approximately $4.4 million in 2005 and $4.7 million for 2004.




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.




The carrying value of the MSRs at
December 31, 2005 was .89% of serviced loans compared to 0.93% a year ago.




F&M gain on sale of mortgages
was $1.5 million compared to $1.0 million in 2004. F&M does not retain mortgage servicing rights.




Non-interest Expenses




Total non-interest expenses for
2005 were $34.2 million, an increase of 15.6% compared to 2004, modestly lower then the 19.0% increase in 2004. Expense increases in 2005 and 2004 were
primarily for human resources, including staffing increases to meet growing business volumes and support for new markets, along with incentive-based
bonuses that are directly tied to the increasing profitability of the Company. As a result of increases in income exceeding increases in expenses, the
Companys efficiency ratio improved to 47.1% in 2005 compared to 50.2 in 2004, notably better than peer banks for the report period. Total
non-interest expenses for 2004 were $29.6 million, an increase of 19.0% compared to 2003, primarily relating to new markets start-up costs, which
accounted for about two-thirds of the increase for the full year. 2004 expense increases occurred for human resources, including staffing increases to
meet growing business volumes and support for new markets, along with incentive-based bonuses that are directly tied to the increasing profitability of
the Company.




Upon the closing of the merger
with F&M, the larger size and staffing of the combined company will cause non-interest expense to increase. In 2005, F&Ms non-interest
expense was $19.3 million compared to $14.5 million for 2004. The increase was predominately in employee salaries and benefits due to staffing
increases and incentive payments. In its planning for the merger, Cascade has targeted cost savings of 10% of F&Ms annualized non-interest
expense. With an expected closing date for the transaction in April of 2006, expense reductions are expected to be realized for only a portion of 2006
and fully realized in 2007. The cost savings are expected mainly from reductions in back office positions and elimination of duplicate vendors and
related contract costs.




Income Taxes




The provision for income taxes
increased during the periods presented primarily as a result of higher pre-tax income. However, the provision was lower that it otherwise would have
been in 2005 due to a State of Oregon income tax credit of approximately $747,000. This credit is not expected to recur in 2006.




FINANCIAL CONDITION




Total assets increased 26.1% to
$1.270 billion at December 31, 2005 compared to $1.007 billion at December 31, 2004. The increase in total assets was driven by continued growth in
loans, which grew $190.1 million or 22.1% to $1,050 billion at year-end 2005, following a 46.4% increase in 2004. Growth in total assets was primarily
funded by a $214.9 million or 25.2% increase in deposits, and a modest increase in longer term borrowings during the year.




The Company had no significant
derivative financial instruments as of December 31, 2005 and 2004.




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




23


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Loan Portfolio Composition




Net loans represent 82% of total
assets as of December 31, 2005. The Company makes substantially all of its loans to customers located within the Companys service areas. The
Company has historically had a loan concentration in real estate based lending including construction and commercial real estate loans. This is due to
the rapid growth in population and the nature of the tourism and service industry found in the Companys primary Central Oregon market. While the
Company has worked to increase the diversification of its loan portfolio by geography and loan type, it is expected that real estate lending will
continue to be 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 (dollars in thousands):







|                        |  |  |  | December 31, |          
|----------------------- |  |  |  | ------------ | ---------
|
|Commercial              |  |  |  | $            | 320,619  
|Real
Estate:            |  |  |  |              |          
|Construction/lot        |  |  |  |              | 220,230  
|Mortgage                |  |  |  |              | 56,724   
|Commercial              |  |  |  |              | 417,580  
|Consumer                |  |  |  |              | 34,551   
|Total
loans             |  |  |  |              | 1,049,705
|Less:                   |  |  |  |              |          
|Reserve for
loan losses |  |  |  |              | 14,688   
|Total loans,
net        |  |  |  | $            | 1,035,017



At December 31, 2005, the
contractual maturities of all loans by category were as follows (dollars in thousands):







|Loan Category    |  |  |  | Due within one year |         | Due after one, but within five years |  | Due after five years |         | Total
|---------------- |  |  |  | ------------------- | ------- | ------------------------------------ |  | -------------------- | ------- | -----
|Commercial       |  |  |  | $                   | 141,835 |                                      |  | $                    | 134,812 |      
|Real
Estate:     |  |  |  |                     |         |                                      |  |                      |         |      
|Construction/lot |  |  |  |                     | 112,009 |                                      |  |                      | 108,221 |      
|Mortgage         |  |  |  |                     | 11,931  |                                      |  |                      | 8,009   |      
|Commercial       |  |  |  |                     | 19,208  |                                      |  |                      | 73,068  |      
|Consumer         |  |  |  |                     | 6,912   |                                      |  |                      | 15,162  |      
|                 |  |  |  | $                   | 291,895 |                                      |  | $                    | 339,272 |      



Variable and adjustable rate
loans contractually due after one year totaled $620.7 million at December 31, 2005 and loans with predetermined or fixed rates due after one year
totaled $137.1 million at December 31, 2005.




While total loans will increase
significantly upon the merger with F&M, the loan portfolio distribution by type and maturity characteristic is not expected to be materially
different.




Real Estate Loan Concentration




Due to the rapid growth in
population and the nature of the tourism and service industry found in the Companys primary Central Oregon market, (and to an important but
lesser degree other banking markets), real estate is frequently a material component of collateral for the Companys loans. Risks associated with
real estate loans include fluctuating land values, national, regional and local economic conditions, changes in tax policies, and a concentration of
loans within the Banks market area.




Commercial Real Estate (CRE)
loans represent the largest category within the loan portfolio at approximately 40% of total loans outstanding as of December 31, 2005. Approximately
52% of such loans are made to owner-




24


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occupied users of the
commercial property, while 48% of CRE loans are to obligors who do not directly occupy the property. 2005 continued to be a strong year in commercial
real estate lending due to relatively low interest rates and continued economic growth in the Companys markets. 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 provides an additional measure of security for loans. Management believes lending to owner-occupied businesses
mitigates, but does not eliminate, commercial real estate risk. The following table shows the breakdown of the two categories (dollars in
thousands):







|Commercial Real Estate: |  |  |  | 2005 |         | % of total CRE |  | 2004 |     | % of total CRE |  | 2003 |         | % of total CRE
|----------------------- |  |  |  | ---- | ------- | -------------- |  | ---- | --- | -------------- |  | ---- | ------- | --------------
|Owner
occupied          |  |  |  | $    | 219,909 |                |  |      | 52  | %              |  | $    | 185,688 |               
|Non-owner
occupied      |  |  |  |      | 199,324 |                |  |      | 48  | %              |  |      | 154,100 |               
|                        |  |  |  | $    | 419,233 |                |  |      | 100 | %              |  | $    | 339,788 |               



Real estate construction loans
represent 21% of total loans and include residential/commercial development loans as well as lot loans. The steady growth in construction/lot lending
reflects the continued economic growth and in-migration into the Companys markets. This portfolio is diversified into three categories and are
listed in the table below (dollars in thousands):







|Real Estate Construction/lot
loans:                      |  |  |  | 2005 |         | % of total Const. |  | 2004 |     | % of total Const. |  | 2003 |         | % of total Const.
|-------------------------------------------------------- |  |  |  | ---- | ------- | ----------------- |  | ---- | --- | ----------------- |  | ---- | ------- | -----------------
|Residential
construction  to homeowner                  |  |  |  | $    | 41,223  |                   |  |      | 19  | %                 |  | $    | 48,247  |                  
|Commercial
construction                                  |  |  |  |      | 69,102  |                   |  |      | 31  | %                 |  |      | 75,065  |                  
|Residential
speculative construction  developer/builder |  |  |  |      | 110,951 |                   |  |      | 50  | %                 |  |      | 56,620  |                  
|                                                         |  |  |  | $    | 221,276 |                   |  |      | 100 | %                 |  | $    | 179,932 |                  



Residential construction loans
are generally made to customers who own the property and whose credit profile supports permanent mortgage (take-out) financing at the end of the
construction phase. The Company maintains a list of approved local contractors, and the experience and background of contractors may factor into its
lending decisions.




Commercial construction loans
finance the development and construction of commercial properties. The expected source of repayment of these loans is typically the operations of the
borrowers business or the obligors personal income.




Speculative construction loans
increased relative to residential and commercial construction in 2005. This reflects the increasing capacity of the Company to serve larger development
clientele and is a function of the overall growth in population within the communities served by the Bank. Residential speculative construction lending
finances builders/developers of residential properties. Such loans may include financing the development and/or construction of residential
subdivisions. This activity may involve financing land purchase, infrastructure development (i.e. roads, utilities, etc.), as well as construction of
residences or multi-family dwellings for subsequent sale by developer/builder. Because the sale of developed properties is integral to the success of
developer business, loan repayment may be especially subject to the volatility of real estate market values.




All of the above lending
activities are subject to the varied risks of real estate lending. Such activity is subject to specialized underwriting, collateral and approval
requirements, which mitigates, but does not eliminate the risk that loans may not be repaid.




F&M has a significant portion
of its loans collateralized by real estate. Management does not expect the merger to have a material affect on the combined Companys loan
portfolio mix; however, the addition of F&M loans collateralized by real estate in Idaho will improve the geographic diversification of the
portfolio.




25


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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 Loan Losses




The reserve for loan losses
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 loan losses based on managements 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 reserve is increased by provisions charged to
operations and reduced by loans charged-off, net of recoveries. No assurance can be given that, in any particular period, 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.




F&Ms reserve for loan
losses was $6.7 million at December 31, 2005. As part of the merger agreement, F&M shareholders will have the right to receive approximately
$3,902,000 in contingent consideration after the closing of the merger if certain conditions are met with respect to specific loans identified in due
diligence. During the two year period commencing on the closing date of the merger, if any identified loan is either graded acceptable by
Cascade, or is paid in any amount exceeding applicable reserves, a portion of the contingent consideration plus interest will be paid to the
shareholders of F&M. If an identified loan is subject to a charge-off during that period in excess of applicable reserves, Cascade will retain that
portion of the contingent consideration. This period extends indefinitely for one loan. In the context of the above agreement, Cascade believes that
F&Ms reserve for loan losses was adequate at December 31, 2005. Despite Cascade efforts in due diligence, there can be no assurance that
F&Ms reserve for loan losses is or will be sufficient to cover losses, which could adversely affect the Companys financial condition or
results of operations.




Loan Loss Provision




The Banks ratio of reserve
for loan losses to total loans was 1.40% at December 31, 2005, down from 1.44% at December 31, 2004, and 1.59% at December 31, 2003. The loan loss
provision for 2005 was $3.1 million, down from $3.7 million in 2004 and up from $2.7 million in 2003. The decline in 2005 provision was a result of
improved credit metrics and 2004 increased primarily as a result of loan growth. F&Ms reserve for loan losses was 1.47% of gross loans at
December 31, 2005.




Provision expense is determined
by the Companys ongoing analytical and evaluative assessment of the adequacy of the reserve for loan losses. This assessment reflects a continued
sound credit quality profile, with low delinquent loans, modest net loan charge-offs and stable non-performing assets. At this date, management
believes that its reserve for loan losses is at an appropriate level under current circumstances and prevailing economic conditions.




Allocation of Reserve for Loan Losses




The following table allocates the
reserve for loan losses among major loan types. The Company utilizes a systematic methodology to estimate and evaluate the inherent risk within the
loan portfolio in order to estimate the reserve. The Companys methodology segments the loan portfolio into various risk categories and pools.
Appropriate base reserve rates are established based on historical loss rates. Economic and concentration adjustments are also applied to selected
categories and pools to reflect current economic conditions and




26


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concentration risk. The
consumer reserve allocation is based mainly upon credit scoring methodology. Specific impairment evaluations are conducted on loans in accordance with
SFAS No. 114 as amended by SFAS No. 118. The unallocated portion of the reserve is based upon factors not measured in the allocated or specific
reserves, and/or relate to the margin of imprecision inherent in the estimation of such reserves. Factors include uncertainties in economic or
environmental conditions, uncertainty in identifying triggering events that directly correlate to subsequent loss rates and risk factors that have not
yet been manifested in historical loss experience. Examples of such factors could include originating loans in new or unfamiliar markets, initiating
new loan programs or products, or initiating specialty lending to industry sectors that may be new to the Company. Although this allocation process may
not accurately predict future 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.




27


---



In the table below and compared
to 2004, the lower allocation ascribed to commercial loans is a result of improved metrics and credit quality ratings of loans within this portfolio.
The increase in allocation to construction is consistent with the increase in larger credits and relative growth in speculative construction within the
overall construction portfolio.




The following table sets forth
the allocation of the reserve for loan losses (dollars in thousands):







|                              |  |  |  | 2005 |        | 2004 | 
|----------------------------- |  |  |  | ---- | ------ | ---- | 
|
|Commercial                    |  |  |  | $    | 3,526  |      | 
|Real
Estate:                  |  |  |  |      |        |      | 
|Construction/lot              |  |  |  |      | 2,445  |      | 
|Mortgage                      |  |  |  |      | 567    |      | 
|Commercial                    |  |  |  |      | 2,821  |      | 
|Consumer                      |  |  |  |      | 1,281  |      | 
|Committed/unfunded (1)        |  |  |  |      | 2,753  |      | 
|Unallocated                   |  |  |  |      | 1,295  |      | 
|Total reserve
for loan losses |  |  |  | $    | 14,688 |      | 






|                              |  |  |  | 2003 |       | 2002 | 
|----------------------------- |  |  |  | ---- | ----- | ---- | 
|
|Commercial                    |  |  |  | $    | 1,977 |      | 
|Real
Estate:                  |  |  |  |      |       |      | 
|Construction/lot              |  |  |  |      | 1,183 |      | 
|Mortgage                      |  |  |  |      | 581   |      | 
|Commercial                    |  |  |  |      | 2,133 |      | 
|Consumer                      |  |  |  |      | 1,144 |      | 
|Committed/unfunded (1)        |  |  |  |      | 1,372 |      | 
|Unallocated                   |  |  |  |      | 1,009 |      | 
|Total reserve
for loan losses |  |  |  | $    | 9,399 |      | 






|                              |  |  |  | 2001 |      
|----------------------------- |  |  |  | ---- | -----
|
|Commercial                    |  |  |  | $    | 978  
|Real
Estate:                  |  |  |  |      |      
|Construction/lot              |  |  |  |      | 766  
|Mortgage                      |  |  |  |      | 532  
|Commercial                    |  |  |  |      | 1,238
|Consumer                      |  |  |  |      | 2,129
|Committed/unfunded (1)        |  |  |  |      | 589  
|Unallocated                   |  |  |  |      | 323  
|Total reserve
for loan losses |  |  |  | $    | 6,555






|(1) |  | The Company currently classifies reserves for commitments in the
loan loss reserve in accordance with industry practice of other banks in its peer group. At some point in the future management anticipates that the
Company will reclassify such amounts as other liabilities.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28


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The following table summarizes
the Companys reserve for loan losses and charge-off and recovery activity for each of the last five years (dollars in
thousands):







|                                                            |  |  |  | Year ended December 31, |          
|----------------------------------------------------------- |  |  |  | ----------------------- | ---------
|
|Loans
outstanding at end of period                          |  |  |  | $                       | 1,049,704
|Average loans
outstanding during the period                 |  |  |  | $                       | 962,514  
|Reserve
balance, beginning of period                        |  |  |  | $                       | 12,412   
|                                                           
|Recoveries:                                                 |  |  |  |                         |          
|Commercial                                                  |  |  |  |                         | 241      
|Real
Estate:                                                |  |  |  |                         |          
|Construction                                                |  |  |  |                         |         
|Mortgage                                                    |  |  |  |                         | 25       
|Commercial                                                  |  |  |  |                         |         
|Consumer                                                    |  |  |  |                         | 227      
|                                                            |  |  |  |                         | 493      
|Loans charged
off:                                          |  |  |  |                         |          
|Commercial                                                  |  |  |  |                         | (405     
|Real
Estate:                                                |  |  |  |                         |          
|Construction                                                |  |  |  |                         |         
|Mortgage                                                    |  |  |  |                         |         
|Commercial                                                  |  |  |  |                         |         
|Consumer                                                    |  |  |  |                         | (861     
|                                                            |  |  |  |                         | (1,266   
|Net loans
charged-off                                       |  |  |  |                         | (773     
|Provision
charged to operations                             |  |  |  |                         | 3,050    
|Reserves
acquired from CBGP                                 |  |  |  |                         |         
|Reserve
balance, end of period                              |  |  |  | $                       | 14,688   
|Ratio of net
loans charged-off to average loans outstanding |  |  |  |                         | .08      
|Ratio of
reserve for loan losses to loans at end of period  |  |  |  |                         | 1.40     



The following table presents
information with respect to non-performing assets (dollars in thousands):







|                                                             |  |  |  | December 31, |    
|------------------------------------------------------------ |  |  |  | ------------ | ---
|
|Loans on
non-accrual status                                  |  |  |  | $            | 40 
|Loans past
due 90 days or more but not on non-accrual status |  |  |  |              |   
|Other real
estate owned                                      |  |  |  |              |   
|Total
non-performing assets                                  |  |  |  | $            | 40 
|Percentage of
non-performing assets To total assets          |  |  |  |              | .00



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.




29


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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 the years of 2005, 2004 and 2003 was insignificant.




At December 31, 2005, except as
may be discussed above, there were no potential material problem loans, where known information about possible credit problems of the borrower caused
management to have serious doubts as to the ability of such borrower to comply with the present loan repayment terms.




Investment Portfolio




The following table shows the
carrying value of the Companys portfolio of investments at December 31, 2005, 2004, and 2003 (dollars in thousands).







|                                                |  |  |  | December 31, |       
|----------------------------------------------- |  |  |  | ------------ | ------
|
|U.S. Agency
mortgage-backed securities          |  |  |  | $            | 38,408
|U.S.
Government and agency securities           |  |  |  |              | 11,925
|Obligations
of state and political subdivisions |  |  |  |              | 6,464 
|Total debt
securities                           |  |  |  |              | 56,797
|Mutual
fund                                     |  |  |  |              | 377   
|Equity
securities                               |  |  |  |              | 2,112 
|Total
investment securities                     |  |  |  | $            | 59,286



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. The following is a summary of the contractual maturities and weighted average yields of investment securities at December 31,
2005 (dollars in thousands):







|Type and maturity                            |  |  |  | Carrying Value |        | Weighted Average Yield (1)
|-------------------------------------------- |  |  |  | -------------- | ------ | --------------------------
|U.S. Agency
mortgage-backed securities       |  |  |  |                |        |                           
|Due after 1
but within 5 years               |  |  |  | $              | 1,513  |                           
|Due after 10
years                           |  |  |  |                | 36,895 |                           
|Total U.S.
Agency mortgage-backed securities |  |  |  |                | 38,408 |                           
|                                            
|U.S.
Government and Agency Securities        |  |  |  |                |        |                           
|Due within 1
year                            |  |  |  |                | 3,010  |                           
|Due after 1
but within 5 years               |  |  |  |                | 7,424  |                           
|Due after 10
years                           |  |  |  |                | 1,491  |                           
|Total U.S.
Government and Agency Securities  |  |  |  |                | 11,925 |                           
|                                            
|State and
Political Subdivisions (1)         |  |  |  |                |        |                           
|Due within 1
year                            |  |  |  |                | 989    |                           
|Due after 1
but within 5 years               |  |  |  |                | 3,472  |                           
|Due after 5
but within 10 years              |  |  |  |                | 2,003  |                           
|Total State
and Political Subdivisions       |  |  |  |                | 6,464  |                           
|Total debt
securities                        |  |  |  |                | 56,797 |                           
|Mutual
fund                                  |  |  |  |                | 377    |                           
|Equity
securities                            |  |  |  |                | 2,112  |                           
|Total
Securities                             |  |  |  | $              | 59,286 |                           






|(1) |  | Yields on tax-exempt securities have not been stated on a tax
equivalent basis.
|--- |  | -------------------------------------------------------------------------------



30


---



F&Ms investment
portfolio was carried at $111.8 million at December 31, 2005. Investments are mainly classified as available for sale and consist mainly of
MBS and Agency notes backed by Government Sponsored Enterprises, such as FNMA and FHLB, At December 31, 2005 the portfolio had an unrealized loss on
available for sale securities of approximately $1.5 million and no other than temporary impaired securities.




Bank-Owned Life Insurance




The Bank has purchased BOLI to
protect itself against the loss of key employees and certain directors due to death and to offset the Banks future obligations to its employees
under its retirement and benefit plans. During 2005, 2004 and 2003, the Bank purchased $1.4 million, $4.9, and $.3 million of BOLI, respectively. The
cash surrender value of these life insurance policies was $16.0 million and $14.1 million at December 31, 2005 and 2004, respectively. The Bank
recorded income from the BOLI policies of $.7 million in 2005 and 2004, and $.4 million in 2003.




Deposit Liabilities and Time Deposit
Maturities




Total deposits at year-end 2005
were $1,065 billion, an increase of $214.0 million or 25.1% compared to year-end 2004. Deposits averaged $955.7 million for the full year 2005, up
26.0% or $197.2 million from the prior year average. This growth has been achieved by expanding market share in existing markets augmented by
incremental deposit growth in new markets. In addition, deposit flows across the banking industry may have benefited from the recent low interest rate
climate and risk versus reward profile of other investment vehicles. These behaviors and bias could change and reduce deposit growth in the
future.




A key competitive advantage in
growing deposits has been the Companys ability to expand and retain relationships with its loyal customers. This advantage is evidenced in part
by the Companys relatively high proportion of non-interest bearing (checking account) deposits, which remained steady at approximately 40.0% of
total deposits at year end, and averaged 41.0% for the year. In 2005, non-interest-bearing demand was up $89.8 million or 26.4% and interest bearing
demand (including money market deposits) up $118.0 million or 28.4%.




Time deposits increased 13.2% in
2005. Generally, the Company does not attempt to attract high cost time deposits, as they are not believed to contribute 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, |        
|----------------------- |  |  |  | ------------------------ | -------
|
|
|Demand                  |  |  |  | $                        | 392,273
|Interest-bearing demand |  |  |  |                          | 458,767
|Savings                 |  |  |  |                          | 37,094 
|Time                    |  |  |  |                          | 67,557 
|Total
Deposits          |  |  |  | $                        | 955,691



31


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As of December 31, 2005, the
Companys time deposit liabilities had the following times remaining to maturity (dollars in thousands):







|                                |  |  |  | Time deposits of $100,000 or more (1) |        | All other Time deposits (2) | 
|------------------------------- |  |  |  | ------------------------------------- | ------ | --------------------------- | 
|
|3 months or
less                |  |  |  | $                                     | 6,601  |                             | 
|Over 3 months
through 6 months  |  |  |  |                                       | 1,868  |                             | 
|Over 6 months
through 12 months |  |  |  |                                       | 12,944 |                             | 
|Over 12
months                  |  |  |  |                                       | 13,523 |                             | 
|Total                           |  |  |  | $                                     | 34,936 |                             | 






|(1) |  | Time deposits of $100,000 or more represent 3.28% of total
deposits as of December 31, 2005.
|--- |  | --------------------------------------------------------------------------------------------

|(2) |  | All other time deposits represent 2.94% of total deposits as of
December 31, 2005.
|--- |  | ----------------------------------------------------------------------------------



F&M deposits totaled $497.0
million at December 31, 2005. 24.8% of total deposit balances were held in non-interest bearing checking accounts, 45.7% in MMA, Savings and NOW
accounts, and 29.5% in time certificates of deposit. Over time, Cascade expects to deploy certain aspects of its deposit gathering strategy in the
Idaho market to reduce the amount of time certificate of deposits as a percentage of total deposits, with the objective of lowering F&Ms
overall cost of funds.




LIQUIDITY AND SOURCES OF FUNDS




The objective of liquidity
management is to maintain ample cash flows to meet obligations for depositor withdrawals, fund the borrowing needs of loan customers, and to fund
ongoing operations. Core relationship deposits are the primary source of the Banks liquidity. As such, the Bank focuses on deposit relationships
with local business and consumer clients who maintain multiple accounts and services at the Bank. Management views such deposits as the foundation of
its long-term liquidity because it believes such core deposits are more stable and less sensitive to changing interest rates and other economic factors
compared to large time deposits or wholesale purchased funds. The Banks customer relationship strategy has resulted in a relatively higher
percentage of its deposits being held in checking and money market accounts, and a lesser percentage in time deposits. The Bank has no brokered
deposits at this time. The Banks present funding mix is diverse, with approximately 56% of total deposits arising from business and public
accounts and 44% consumer. The composition of demand deposits was 72% business and 28% consumers, while money market and interest-bearing demand
accounts were 55% business and 45% consumer. During the periods presented, deposit growth has generally been sufficient to fund increases in loans.
Management invests excess funds in short-term and overnight money market instruments.




A further source of funds and
liquidity is the Companys capability to borrow from reliable counterparties. The Bank utilizes its investment securities, certain loans, FHLB
Stock and certain deposits to provide collateral to support its borrowing needs.




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




The Banks primary
counterparty for borrowing purposes is the Federal Home Loan Bank (FHLB). At December 31, 2005, the FHLB had extended the Bank a secured line of credit
of $189.8 million that may be accessed for short or long-term borrowings given sufficient qualifying collateral. The Bank also had $29.7 million in
short-term borrowing availability from the Federal Reserve Bank that requires specific qualifying collateral. In addition, the Bank maintained
unsecured lines of credit totaling $31.5 million for the purchase of funds on a short-term basis




32


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from several commercial bank
counterparties. At December 31, 2005 the Bank had aggregate remaining available borrowing sources totaling $186.6 million, given sufficient
collateral.




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, approximately 30% 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, 2005 the Bank had
approximately $446.6 million in outstanding commitments to extend credit, compared to approximately $324.8 million at year-end 2004. Management
believes that the Banks available resources will be sufficient to fund its commitments in the normal course of business.




Management believes the merger
with F&M will not have a material impact on the overall liquidity of Cascade.




JUNIOR SUBORDINATED DEBENTURES AND OTHER
BORROWINGS




In December 2004, the Company
established a subsidiary grantor trust (Cascade Bancorp Trust I) (the Trust), which issued $20 million of trust preferred securities (the TPS) and
$619,000 of common securities. The common securities were purchased by the Company, and represent a 3% minority interest in the Trust. The
Companys investment in the common securities 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 are due and payable on March 15, 2035. The TPS pay quarterly interest at the
3-month London Inter-Bank Offered Rate (LIBOR) plus 1.80%. The Trust used the proceeds received from the issuance of the TPS to purchase $20 million of
junior subordinated debentures (the Debentures) of the Company. The Debentures were issued with substantially the same terms as the TPS and are the
sole assets of the Trust. 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 Trust. The TPS are mandatorily redeemable upon the maturity of the Debentures, or upon earlier
redemption as provided in the Indenture related to the Debentures. The TPS may be called by the Company at par at 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. 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, 2005, the TPS meet applicable regulatory guidelines to qualify as Tier 1
capital.




During 2005 the Companys
increased its long-term borrowings with FHLB to $61.1 million at year-end. These borrowings have a weighted average term to maturity of 6.2 years and
bearing a weighted average interest rate of 4.01%. The Company had short-term borrowings with FRB at December 31, 2005, of $3.2
million.




In connection with the F&M
merger, the Company expects to issue approximately $26.5 million in trust preferred securities to fund the cash portion of the merger consideration and
to supplement regulatory capital. Other borrowings at F&M as of December 31, 2005 included $18.5 million in short term borrowings and approximately
$48.5 million in securities sold under agreements to repurchase.




CAPITAL RESOURCES




The Companys total
stockholders equity at December 31, 2005 was $104.4 million, an increase of $17.9 million from December 31, 2004. 2005 equity was increased
primarily by earnings of $22.4 million for the year, less cash dividends paid to shareholders of $5.6 million. At year-end 2005, net unrealized gains
on investment securities available-for-sale was $.5 million, down from $.8 million at year-end 2004.




Management believes that the
capital resources of the combined Company will be adequate to meet its needs for the foreseeable future. F&M shareholders equity at December
31, 2005 was $42.5 million.




33


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CONTRACTUAL OBLIGATIONS




As of December 31, 2005, the
Company has entered into the following contractual obligations listed below (dollars in thousands):







|                                   |  |  |  | Payments Due by Period |        
|---------------------------------- |  |  |  | ---------------------- | -------
|
|Time deposits
of $100,000 and over |  |  |  | $                      | 34,936 
|Federal Home
Loan Bank advances    |  |  |  |                        | 61,109 
|Junior
subordinated debentures     |  |  |  |                        | 20,619 
|Operating
leases                   |  |  |  |                        | 10,115 
|Total
contractual obligations      |  |  |  | $                      | 126,779



OFF-BALANCE SHEET ARRANGEMENTS




A schedule of significant
off-balance sheet commitments at December 31, 2005 is included in the following table (dollars in thousands):







|Commitments
to extend credit                  |  |  |  | $ | 410,709 | 
|--------------------------------------------- |  |  |  | - | ------- | 
|Commitments
under credit card lines of credit |  |  |  |   | 20,686  | 
|Standby
letters of credit                     |  |  |  |   | 15,228  | 



See Note 12 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.




INFLATION




The general rate of inflation
over the past two years, as measured by the Consumer Price Index, has not changed significantly, and management does not consider the effects of
inflation on the Companys financial position and earnings to be material.


|ITEM
7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|-------- |  | ----------------------------------------------------------



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. 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 Company 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 Company may also target the expansion or contraction of specific investment portfolio or borrowing structures to further affect
its risk profile. In addition, the Company 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 uncertainties described above, 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 include a Stable or unchanged scenario and an Estimated or most likely scenario given current and forecast economic
conditions. At this time, the Estimated scenario approximates market expectations as to the pace and magnitude of fed funds rate increases
as implied by the euro-dollar yield curve. In addition, scenarios titled Rising




34


---



Rates and
Declining 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 earnings 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. Simulated earnings are
compared over a two-year time horizon. The following table defines the market interest rates used in the model for Estimated (most likely),
Rising and Declining interest rate scenarios. These market rates shown are reached gradually over the 2-year simulation
horizon.







|                                                        |  | Actual
      Market
      Rates at
      December 2005 |  | Estimated
      Rates at
      December 2007        |  | Declining
      Rates at
      December 2007 |  | Rising
      Rates at
      December 2007  
|------------------------------------------------------- |  | ------------------------------------------------------ |  | --------------------------------------------------- |  | -------------------------------------------- |  | -------------------------------------------
|Federal
        Funds Rate                              |  | 4.25%                                                  |  | 4.75%                                               |  | 0.50%                                        |  | 10.25%                                     
|Prime
        Rate                                      |  | 7.25%                                                  |  | 7.75%                                               |  | 3.50%                                        |  | 12.75%                                     
|Yield
        Curve Spread 10-year
        to Fed Funds |  | .14%
        Nearly Flat
        Yield Curve           |  | Modest Inversion
        from .14%
        to .06% |  | Steepening
        to 1.90%                  |  | Modestly
        Steepening
        to .25%



The following table presents
percentage changes in simulated future earnings under the above-described scenarios as compared to earnings under the Stable or unchanged
rate scenario calculated as of December 2004. The effect on earnings assumes no changes in non-interest income or expense between
scenarios.







|Stable Rate Scenario compared to: | First Twelve Month Average % Change in Pro-forma Earnings | Second Twelve Month Average % Change in Pro-forma Earnings | 24th Month % Change in Pro-forma Earnings
|--------------------------------- | --------------------------------------------------------- | ---------------------------------------------------------- | -----------------------------------------
|Estimated Rate Scenario           | 1.30                                                      | %                                                          | 2.51                                     
|Rising Rate Scenario              | 5.10                                                      | %                                                          | 14.72                                    
|Declining Rate Scenario           | (4.50                                                     | %)                                                         | (16.00                                   



Managements assessment of
interest rate risk and scenario analysis must be taken in the context of market interest rates and overall economic conditions. Since mid 2004, the
Federal Reserve has engineered a gradual rising in short term market interest rates. Meanwhile, while long term rates remained relatively stable
resulting in a flattening of yield curve between short and long term rates. The yield curve suggests that market participants are anticipating a
relatively stable rate environment over the next several years. At year-end 2005, the national Federal Funds and Prime borrowing rates were at 4.25%
and 7.25%, respectively.




The above rate scenarios provide
a relatively wide dispersion of possible outcomes, with the rising rate scenario modeling an outcome whereby fed funds rate increases significantly
from 4.25% at year end 2005 to 10.25% at Year end 2007, while in the declining scenario rates fall to a very low .50% by the end of the horizon period.
Meanwhile, the estimated scenario models fed funds as increasing to 4.75% and remaining at that level through the horizon period.




In managements judgment, at
this date the interest rate risk profile of the Company is relatively well balanced considering the range of outcomes under the different scenarios.
The model indicates that should future interest rates actually follow the most likely path (estimated rate scenario), the net interest
margin would remain within the recent range of 5.50% to 5.70%. 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 Company has a large portion of non-interest bearing funds (approximately 40% of total deposits) that are assumed to be relatively
insensitive to changes in interest rates. 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 very low levels assumed in the declining scenario, yields on loans
and securities would compress against an already low cost of funds. Importantly in this declining rate scenario, the model assumes a substantial
portion of loans would prepay/refinance at lower rates, contributing to margin compression. In this scenario where fed fund rates fall to just .50%,
the model indicates that the net interest margin could average approximately .30% below the range noted above, while other financial performance
benchmarks including ROA and ROE would remain at sound levels (though lower than in other scenarios). Management has concluded that the degree of
margin and earnings volatility under the above scenarios is acceptable




35


---



because of its relatively low
likelihood as compared to the cost of mitigating this risk and because the model suggests that the Company would still generate reasonable returns
under such circumstances. Please carefully review the following information as to 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.




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; (7) other unanticipated credit conditions or other events impacting volatility in market conditions and interest rates.




With respect to the pending
acquisition of Farmers and Merchants State Bank of Idaho, management has reviewed the simulation results and interest sensitivity profile as generated
by the simulation model in use at F&M. It appears that the net interest margin of the combined company could be approximately 20 basis points lower
than Cascade on a stand alone basis. This is mainly due to F&Ms higher portion of investment securities that carrying a yield below that of
loans, and because F&M has a higher overall cost of funds. The combined company may have a modestly lower sensitivity to changes in interest rates
than Cascade alone. This is because F&M has a higher portion of loans that float with prime and a lower portion of non interest bearing deposits as
compared to Cascade. Managements estimates in this regard are preliminary, subject to the forecast and model risks enumerated above.




In the opinion of management, the
use of interest rate gap analysis is less valuable than the above method in measuring and managing 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 2005, the Companys one-year
cumulative interest rate gap analysis indicates that rate sensitive assets maturing or available for re-pricing within one-year exceeded rate sensitive
liabilities by approximately $15.4 million.




Interest Rate Gap Table




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.




36


---



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, 2005 (dollars in thousands):







|                                                                     |  |  |  | Within 90 days |         | After 90 days within one year |  | After one year within five years |         | After five years |  | Total
|-------------------------------------------------------------------- |  |  |  | -------------- | ------- | ----------------------------- |  | -------------------------------- | ------- | ---------------- |  | -----
|INTEREST
EARNING ASSETS:                                             |  |  |  |                |         |                               |  |                                  |         |                  |  |      
|Investments
& fed funds sold                                         |  |  |  | $              | 64,934  |                               |  | $                                | 3,999   |                  |  | $    
|Interest
bearing balances with FHLB                                  |  |  |  |                | 7,242   |                               |  |                                  |        |                  |  |      
|Loans                                                                |  |  |  |                | 478,283 |                               |  |                                  | 99,035  |                  |  |      
|Total
interest earning assets                                        |  |  |  | $              | 550,459 |                               |  | $                                | 103,034 |                  |  | $    
|                                                                    
|INTEREST
BEARING LIABILITIES:                                        |  |  |  |                |         |                               |  |                                  |         |                  |  |      
|Interest-bearing demand deposits                                     |  |  |  | $              | 426,808 |                               |  | $                                | 106,702 |                  |  | $    
|Savings
deposits                                                     |  |  |  |                | 17,590  |                               |  |                                  | 17,590  |                  |  |      
|Time
deposits                                                        |  |  |  |                | 14,380  |                               |  |                                  | 31,189  |                  |  |      
|Total
interest bearing deposits                                      |  |  |  |                | 458,778 |                               |  |                                  | 155,481 |                  |  |      
|Junior
subordinated debentures                                       |  |  |  |                | 20,619  |                               |  |                                  |        |                  |  |      
|Other
borrowings                                                     |  |  |  |                | 3,242   |                               |  |                                  |        |                  |  |      
|Total
interest bearing liabilities                                   |  |  |  | $              | 482,639 |                               |  | $                                | 155,481 |                  |  | $    
|Interest rate
sensitivity gap                                        |  |  |  | $              | 67,821  |                               |  | $                                | (52,447 | )                |  | $    
|Cumulative
interest rate sensitivity gap                             |  |  |  | $              | 67,821  |                               |  | $                                | 15,374  |                  |  | $    
|Interest rate
gap as a percentage of total interest earning assets   |  |  |  |                | 5.74    | %                             |  |                                  | (4.44   | )%               |  |      
|Cumulative
interest rate gap as a percentage of total earning assets |  |  |  |                | 5.74    | %                             |  |                                  | 1.30    | %                |  |      



37


---

|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    |  |  |  |     
|                                                          
|Consolidated
Balance Sheets at December 31, 2005 and 2004  |  |  |  |     
|                                                          
|For the Years
Ended December 31, 2005, 2004 and 2003:      |  |  |  |     
|                                                          
|Consolidated
Statements of Income                          |  |  |  |     
|                                                          
|Consolidated
Statements of Changes in Stockholders Equity |  |  |  |     
|                                                          
|Consolidated
Statements of Cash Flows                      |  |  |  |     
|                                                          
|Notes to
Consolidated Financial Statements                 |  |  |  |     



38


---



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 accompanying consolidated balance
sheets of Cascade Bancorp and its subsidiary, Bank of the Cascades (collectively, the Company) as of December 31, 2005 and 2004, and the
related consolidated statements of income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended
December 31, 2005. We also have audited managements assessment, included in the accompanying Managements Report on Internal Control Over
Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). The Companys management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on these consolidated financial statements, an opinion on managements assessment, and an opinion on the effectiveness of the
Companys internal control over financial reporting 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 audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.




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 accounting principles generally accepted in the United States. 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 preparation of financial statements in accordance with accounting principles generally accepted in the United States, 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 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, 2005 and
2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States. Also, in our opinion, managements assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on the COSO criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2005, based on the COSO criteria.




Portland, OregonJanuary 27, 2006




39


---



CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE
SHEETS DECEMBER 31, 2005 AND 2004







|                                                                                                                                             |  |  |  | 2005 |               | 2004
|-------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ------------- | ----
|ASSETS                                                                                                                                      
|Cash and cash
equivalents:                                                                                                                   |  |  |  |      |               |     
|Cash and due
from banks                                                                                                                      |  |  |  | $    | 35,532,104    |     
|Interest
bearing deposits with Federal Home Loan Bank                                                                                        |  |  |  |      | 7,242,440     |     
|Federal funds
sold                                                                                                                           |  |  |  |      | 64,934,548    |     
|Total cash
and cash equivalents                                                                                                              |  |  |  |      | 107,709,092   |     
|Investment
securities available-for-sale                                                                                                     |  |  |  |      | 55,448,640    |     
|Investment
securities held-to-maturity, estimated fair value of $3,828,856 ($1,999,026 in 2004)                                              |  |  |  |      | 3,837,310     |     
|Federal Home
Loan Bank stock                                                                                                                 |  |  |  |      | 3,240,700     |     
|Loans,
net                                                                                                                                   |  |  |  |      | 1,035,016,697 |     
|Premises and
equipment, net                                                                                                                  |  |  |  |      | 22,688,198    |     
|Bank-owned
life insurance                                                                                                                    |  |  |  |      | 16,047,099    |     
|Accrued
interest and other assets                                                                                                            |  |  |  |      | 25,683,214    |     
|Total
assets                                                                                                                                 |  |  |  | $    | 1,269,670,950 |     
|                                                                                                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                        
|Liabilities:                                                                                                                                 |  |  |  |      |               |     
|Deposits:                                                                                                                                    |  |  |  |      |               |     
|Demand                                                                                                                                       |  |  |  | $    | 430,463,105   |     
|Interest
bearing demand                                                                                                                      |  |  |  |      | 533,510,409   |     
|Savings                                                                                                                                      |  |  |  |      | 35,179,285    |     
|Time                                                                                                                                         |  |  |  |      | 66,227,372    |     
|Total
deposits                                                                                                                               |  |  |  |      | 1,065,380,171 |     
|Junior
subordinated debentures                                                                                                               |  |  |  |      | 20,619,000    |     
|Other
borrowings                                                                                                                             |  |  |  |      | 64,350,302    |     
|Accrued
interest and other liabilities                                                                                                       |  |  |  |      | 14,945,972    |     
|Total
liabilities                                                                                                                            |  |  |  |      | 1,165,295,445 |     
|Stockholders equity:                                                                                                                        |  |  |  |      |               |     
|Common stock,
no par value; 35,000,000 shares authorized (20,000,000 in 2004); 16,953,515 shares issued and outstanding (16,738,627 in 2004) |  |  |  |      | 33,705,919    |     
|Retained
earnings                                                                                                                            |  |  |  |      | 70,570,994    |     
|Unearned
compensation on restricted stock                                                                                                    |  |  |  |      | (442,773      | )   
|Accumulated
other comprehensive income                                                                                                       |  |  |  |      | 541,365       |     
|Total
stockholders equity                                                                                                                   |  |  |  |      | 104,375,505   |     
|Total
liabilities and stockholders equity                                                                                                   |  |  |  | $    | 1,269,670,950 |     



See accompanying notes.




40


---



CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF INCOME YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003







|                                                                  |  |  |  | 2005 |            | 2004 |  | 2003
|----------------------------------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Interest and
dividend income:                                     |  |  |  |      |            |      |  |     
|Interest and
fees on loans                                        |  |  |  | $    | 69,688,931 |      |  | $   
|Taxable
interest on investment securities                         |  |  |  |      | 1,719,020  |      |  |     
|Nontaxable
interest on investment securities                      |  |  |  |      | 159,201    |      |  |     
|Interest on
interest bearing deposits with Federal Home Loan Bank |  |  |  |      | 796,695    |      |  |     
|Interest on
federal funds sold                                    |  |  |  |      | 463,693    |      |  |     
|Dividends on
Federal Home Loan Bank stock                         |  |  |  |      | 10,000     |      |  |     
|Total
interest and dividend income                                |  |  |  |      | 72,837,540 |      |  |     
|Interest
expense:                                                 |  |  |  |      |            |      |  |     
|Deposits:                                                         |  |  |  |      |            |      |  |     
|Interest
bearing demand                                           |  |  |  |      | 8,350,665  |      |  |     
|Savings                                                           |  |  |  |      | 126,054    |      |  |     
|Time                                                              |  |  |  |      | 1,654,311  |      |  |     
|Junior
subordinated debentures and other borrowings               |  |  |  |      | 3,154,073  |      |  |     
|Total
interest expense                                            |  |  |  |      | 13,285,103 |      |  |     
|Net interest
income                                               |  |  |  |      | 59,552,437 |      |  |     
|Loan loss
provision                                               |  |  |  |      | 3,050,000  |      |  |     
|Net interest
income after loan loss provision                     |  |  |  |      | 56,502,437 |      |  |     
|Noninterest
income:                                               |  |  |  |      |            |      |  |     
|Service
charges on deposit accounts, net                          |  |  |  |      | 6,218,510  |      |  |     
|Mortgage
banking income, net                                      |  |  |  |      | 2,256,159  |      |  |     
|Card issuer
and merchant service fees, net                        |  |  |  |      | 2,386,319  |      |  |     
|Earnings on
bank-owned life insurance                             |  |  |  |      | 708,824    |      |  |     
|Gain on sale
of other real estate owned                           |  |  |  |      | 195,714    |      |  |     
|Gains on
sales of investment securities available-for-sale        |  |  |  |      |           |      |  |     
|Other                                                             |  |  |  |      | 1,303,365  |      |  |     
|Total
noninterest income                                          |  |  |  |      | 13,068,891 |      |  |     
|Noninterest
expenses:                                             |  |  |  |      |            |      |  |     
|Salaries and
employee benefits                                    |  |  |  |      | 20,668,913 |      |  |     
|Equipment                                                         |  |  |  |      | 1,454,965  |      |  |     
|Occupancy                                                         |  |  |  |      | 2,349,304  |      |  |     
|Communications                                                    |  |  |  |      | 952,346    |      |  |     
|Advertising                                                       |  |  |  |      | 693,512    |      |  |     
|Other                                                             |  |  |  |      | 8,082,239  |      |  |     
|Total
noninterest expenses                                        |  |  |  |      | 34,201,279 |      |  |     
|Income before
income taxes                                        |  |  |  |      | 35,370,049 |      |  |     
|Provision for
income taxes                                        |  |  |  |      | 12,934,000 |      |  |     
|Net
income                                                        |  |  |  | $    | 22,436,049 |      |  | $   
|Basic
earnings per common share                                   |  |  |  | $    | 1.33       |      |  | $   
|Diluted
earnings per common share                                 |  |  |  | $    | 1.29       |      |  | $   



See accompanying notes.




41


---





CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003







|                                                                                                                                                                                                                                                                                                                                                                           |  |  |  | Number of shares |            | Comprehensive income |  | Common stock |            | Retained earnings |  | Unearned compensation on restricted stock |            | Accumulated other comprehensive income |  | Total stockholders equity
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---------------- | ---------- | -------------------- |  | ------------ | ---------- | ----------------- |  | ----------------------------------------- | ---------- | -------------------------------------- |  | --------------------------
|Balances at
December 31, 2002                                                                                                                                                                                                                                                                                                                                              |  |  |  |                  | 15,642,048 |                      |  |              |            |                   |  | $                                         | 18,253,082 |                                        |  | $                         
|Comprehensive
income:                                                                                                                                                                                                                                                                                                                                                      |  |  |  |                  |            |                      |  |              |            |                   |  |                                           |            |                                        |  |                           
|Net
income                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |                  |           |                      |  | $            | 13,954,888 |                   |  |                                           |           |                                        |  |                           
|Other
comprehensive income  unrealized gains on investment securities available-for-sale of approximately $172,000 (net of income taxes of
approximately $107,000), net of reclassification adjustment for net gains on sales of investment securities available-for-sale included in net income
of approximately $146,000 (net of income taxes of approximately $91,000) |  |  |  |                  |           |                      |  |              | 25,954     |                   |  |                                           |           |                                        |  |                           
|Total
comprehensive income                                                                                                                                                                                                                                                                                                                                                 |  |  |  |                  |           |                      |  | $            | 13,980,842 |                   |  |                                           |           |                                        |  |                           
|Fair value of
restricted stock grants                                                                                                                                                                                                                                                                                                                                      |  |  |  |                  |           |                      |  |              |            |                   |  |                                           | 311,850    |                                        |  |                           
|Amortization of
unearned compensation on restricted stock                                                                                                                                                                                                                                                                                                                  |  |  |  |                  |           |                      |  |              |            |                   |  |                                           |           |                                        |  |                           
|Cash dividends
paid (aggregating $.26 per share)                                                                                                                                                                                                                                                                                                                           |  |  |  |                  |           |                      |  |              |            |                   |  |                                           |           |                                        |  |                           
|Stock options
exercised                                                                                                                                                                                                                                                                                                                                                    |  |  |  |                  | 134,546    |                      |  |              |            |                   |  |                                           | 576,609    |                                        |  |                           
|Tax benefit
from non-qualified stock options exercised                                                                                                                                                                                                                                                                                                                     |  |  |  |                  |           |                      |  |              |            |                   |  |                                           | 5,744      |                                        |  |                           
|Balances at
December 31, 2003                                                                                                                                                                                                                                                                                                                                              |  |  |  |                  | 15,776,594 |                      |  |              |            |                   |  |                                           | 19,147,285 |                                        |  |                           
|Comprehensive
income:                                                                                                                                                                                                                                                                                                                                                      |  |  |  |                  |            |                      |  |              |            |                   |  |                                           |            |                                        |  |                           
|Net
income                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |                  |           |                      |  | $            | 16,007,650 |                   |  |                                           |           |                                        |  |                           
|Other
comprehensive incomeunrealized gains on investment securities available-for-sale of approximately $127,000 (net of income taxes of approximately
$78,000), net of reclassification adjustment for net gains on sales of investment securities available-for-sale included in net income of approximately
$113,000 (net of income taxes of approximately $69,000)    |  |  |  |                  |           |                      |  |              | 14,277     |                   |  |                                           |           |                                        |  |                           
|Total
comprehensive income                                                                                                                                                                                                                                                                                                                                                 |  |  |  |                  |           |                      |  | $            | 16,021,927 |                   |  |                                           |           |                                        |  |                           
|Common stock
issued in conjunction with acquisition                                                                                                                                                                                                                                                                                                                        |  |  |  |                  | 772,752    |                      |  |              |            |                   |  |                                           | 11,699,399 |                                        |  |                           
|Amortization of
unearned compensation on restricted stock                                                                                                                                                                                                                                                                                                                  |  |  |  |                  |           |                      |  |              |            |                   |  |                                           |           |                                        |  |                           
|Cash dividends
paid (aggregating $.26 per share)                                                                                                                                                                                                                                                                                                                           |  |  |  |                  |           |                      |  |              |            |                   |  |                                           |           |                                        |  |                           
|Stock options
exercised                                                                                                                                                                                                                                                                                                                                                    |  |  |  |                  | 189,281    |                      |  |              |            |                   |  |                                           | 812,375    |                                        |  |                           
|Tax benefit
from non-qualified stock options exercised                                                                                                                                                                                                                                                                                                                     |  |  |  |                  |           |                      |  |              |            |                   |  |                                           | 419,739    |                                        |  |                           
|Balances at
December 31, 2004                                                                                                                                                                                                                                                                                                                                              |  |  |  |                  | 16,738,627 |                      |  |              |            |                   |  |                                           | 32,078,798 |                                        |  |                           



42




See accompanying notes.


---



CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF CHANGES IN STOCKHOLDERS EQUITY (continued) YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003







|                                                                                                                                                                                   |  | Number
      of shares |  | Comprehensive
      income |            | Common
      stock |  | Retained
      earnings |            | Unearned
      compensation on
      restricted stock |   | Accumulated
      other
      comprehensive
      income (loss) |   | Total
      stockholders
      equity
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | -------------------------- | ---------- | ------------------ |  | ----------------------- | ---------- | ----------------------------------------------------- | - | --------------------------------------------------------------- | - | --------------------------------------
|Balances
        at December 31, 2004                                                                                                                                              |  | 16,738,627             |  |                            |            |                    |  | $                       | 32,078,798 |                                                       | $ | 53,706,929                                                      |   |                                       
|Comprehensive
        income:                                                                                                                                                      |  |                        |  |                            |            |                    |  |                         |            |                                                       |   |                                                                 |   |                                       
|Net
        income                                                                                                                                                                 |  |                       |  | $                          | 22,436,049 |                    |  |                         |           |                                                       |   | 22,436,049                                                      |   |                                       
|Other
        comprehensive loss  unrealized losses on investment securities available-for-sale
        of approximately $261,000 (net of income taxes of approximately $160,000) |  |                       |  |                            | (261,278   | )                  |  |                         |           |                                                       |   |                                                                |   |                                       
|Total
        comprehensive income                                                                                                                                                 |  |                       |  | $                          | 22,174,771 |                    |  |                         |           |                                                       |   |                                                                |   |                                       
|Fair
        value of restricted stock grants                                                                                                                                      |  | 49,986                 |  |                            |            |                    |  |                         | 590,410    |                                                       |   |                                                                |   |                                       
|Amortization
        of unearned compensation on restricted stock                                                                                                                  |  |                       |  |                            |            |                    |  |                         |           |                                                       |   |                                                                |   |                                       
|Cash
        dividends paid (aggregating $.33 per share)                                                                                                                           |  |                       |  |                            |            |                    |  |                         |           |                                                       |   | (5,571,984                                                      | ) |                                       
|Stock
        options exercised                                                                                                                                                    |  | 164,902                |  |                            |            |                    |  |                         | 796,849    |                                                       |   |                                                                |   |                                       
|Tax
        benefit from non-qualified stock options exercised                                                                                                                     |  |                       |  |                            |            |                    |  |                         | 239,862    |                                                       |   |                                                                |   |                                       
|Balances
        at December 31, 2005                                                                                                                                              |  | 16,953,515             |  |                            |            |                    |  | $                       | 33,705,919 |                                                       | $ | 70,570,994                                                      |   |                                       



43




See accompanying notes.


---





CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003







|                                                                                            |  |  |  | 2005 |              | 2004 |  | 2003
|------------------------------------------------------------------------------------------- |  |  |  | ---- | ------------ | ---- |  | ----
|Cash flows
from operating activities:                                                       |  |  |  |      |              |      |  |     
|Net
income                                                                                  |  |  |  | $    | 22,436,049   |      |  | $   
|Adjustments
to reconcile net income to net cash provided by operating activities:           |  |  |  |      |              |      |  |     
|Depreciation
and amortization                                                               |  |  |  |      | 3,407,588    |      |  |     
|Loan loss
provision                                                                         |  |  |  |      | 3,050,000    |      |  |     
|Credit for
deferred income taxes                                                            |  |  |  |      | (1,751,000   | )    |  |     
|Discounts on
sales of mortgage loans, net                                                   |  |  |  |      | 525,867      |      |  |     
|Gains on
sales of investment securities available-for-sale                                  |  |  |  |      |             |      |  |     
|Dividends on
Federal Home Loan Bank stock                                                   |  |  |  |      | (10,000      | )    |  |     
|Deferred
benefit plan expenses                                                              |  |  |  |      | 1,785,216    |      |  |     
|Amortization
of unearned compensation on restricted stock                                   |  |  |  |      | 303,562      |      |  |     
|Increase in
accrued interest and other assets                                               |  |  |  |      | (4,035,206   | )    |  |     
|Increase in
accrued interest and other liabilities                                          |  |  |  |      | 1,510,560    |      |  |     
|Originations
of mortgage loans                                                              |  |  |  |      | (158,774,816 | )    |  |     
|Proceeds from
sales of mortgage loans                                                       |  |  |  |      | 158,822,424  |      |  |     
|Net cash
provided by operating activities                                                   |  |  |  |      | 27,270,244   |      |  |     
|Cash flows
from investing activities:                                                       |  |  |  |      |              |      |  |     
|Purchases of
investment securities available-for-sale                                       |  |  |  |      | (23,511,564  | )    |  |     
|Purchases of
investment securities held-to-maturity                                         |  |  |  |      | (1,886,292   | )    |  |     
|Proceeds from
maturities, calls and prepayments of investment securities available-for-sale |  |  |  |      | 12,632,772   |      |  |     
|Proceeds from
sales of investment securities available-for-sale                             |  |  |  |      |             |      |  |     
|Proceeds from
maturities and calls of investment securities held-to-maturity                |  |  |  |      |             |      |  |     
|Purchase of
Federal Home Loan Bank stock                                                    |  |  |  |      | (659,100     | )    |  |     
|Loan
originations, net                                                                      |  |  |  |      | (191,492,941 | )    |  |     
|Cash acquired
in acquisition of Community Bank of Grants Pass                               |  |  |  |      |             |      |  |     
|Purchases of
premises and equipment, net                                                    |  |  |  |      | (2,444,361   | )    |  |     
|Purchases of
bank-owned life insurance                                                      |  |  |  |      | (1,357,000   | )    |  |     
|Net cash used
in investing activities                                                       |  |  |  |      | (208,718,486 | )    |  |     
|Cash flows
from financing activities:                                                       |  |  |  |      |              |      |  |     
|Net increase
in deposits                                                                    |  |  |  |      | 213,983,625  |      |  |     
|Proceeds from
issuance of junior subordinated debentures                                    |  |  |  |      |             |      |  |     
|Net increase
(decrease) in other borrowings                                                 |  |  |  |      | 27,816,827   |      |  |     
|Cash
dividends paid                                                                         |  |  |  |      | (5,571,984   | )    |  |     
|Stock options
exercised                                                                     |  |  |  |      | 796,849      |      |  |     
|Tax benefit
from non-qualified stock options exercised                                      |  |  |  |      | 239,862      |      |  |     
|Net cash
provided by financing activities                                                   |  |  |  |      | 237,265,179  |      |  |     
|Net increase
(decrease) in cash and cash equivalents                                        |  |  |  |      | 55,816,937   |      |  |     
|Cash and cash
equivalents at beginning of year                                              |  |  |  |      | 51,892,155   |      |  |     
|Cash and cash
equivalents at end of year                                                    |  |  |  | $    | 107,709,092  |      |  | $   



See accompanying notes.




44


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDECEMBER 31, 2005


|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), a financial holding company, and its wholly-owned subsidiary, Bank of the Cascades (the Bank) (collectively,
the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.




Bancorp has also established a subsidiary grantor trust in
connection with the issuance of trust preferred securities (see Note 9). 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 this trust 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 2004.




Certain amounts in 2004 and 2003 have been reclassified to
conform with the 2005 presentation.




Description of business




The Bank conducts a general banking business, primarily
operating in one business segment; and currently operates branches throughout Central Oregon, the Salem/Keizer, Oregon area, and Southern Oregon; and
has a business banking office in Portland, Oregon. Its activities include the usual lending and deposit functions of a commercial bank: commercial,
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 when earned and expenses when incurred. The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States 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 and expenses during the reporting periods. Actual results could differ from those
estimates.




Cash and cash equivalents




For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, 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




For the periods reported, noncash transactions resulted
from a 5-for-4 stock split in 2004; unrealized gains and losses on investment securities available-for-sale, net of income taxes, and issuance of
restricted stock, both as disclosed in the accompanying consolidated statements of changes in stockholders equity; the net capitalization of
originated




45


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




mortgage-servicing rights, as disclosed in Note 6; and
common stock issued in conjunction with the acquisition of Community Bank of Grants Pass (CBGP), as disclosed in Note 11.




During 2005, 2004 and 2003, the Bank paid approximately
$12,983,000, $4,765,000 and $4,069,000, respectively, in interest expense.




During 2005, 2004 and 2003, the Company made income tax
payments of approximately $13,579,000, $10,750,000 and $9,225,000, 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 2005, 2004 or 2003.




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.




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.




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,
2005 and 2004 are temporary.




FHLB stock




The Banks investment in FHLB stock is carried at
cost, which approximates fair 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, 2005, 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. Stock redemptions are at the
discretion of the FHLB.




Loans




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




Interest income on all loans is accrued as earned on the
simple interest method. The accrual of interest on loans is discontinued when, in managements opinion, the borrower may be unable to make
payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received in excess of principal due.




46


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




Loan origination and commitment fees, net of certain direct
loan origination costs, are generally recognized as an adjustment of the yield of the related loan.




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 known and inherent losses in the loan portfolio and related
commitments to loan as of the balance sheet date. The reserve is maintained at a level 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. 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 may be analyzed and reserves
categorized into the allocated reserve, specifically identified reserves for impaired loans or the unallocated reserve.




The allocated portion of the reserve is calculated by
applying loss factors to outstanding loan balances and related 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.




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 all 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 obtainable market price or the
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 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, uncertainty 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. 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.




The Company currently classifies reserves for commitments
to loan in the loan loss reserve in accordance with the industry practice of other banks in its peer group. At some point in the future, management
anticipates that the Company will reclassify such amounts as other liabilities.




Various regulatory agencies, as an integral part of their
examination process, periodically review the Banks reserve for loan losses. Such agencies may require the Bank to recognize additions to the
reserve in the future based on their judgment of the information available to them at the time of their examinations.




47


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




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 is 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.




Other real estate




Other real estate, 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 income and expenses. Other real estate was insignificant at December 31, 2005 and
2004.




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, 2005 and 2004, the carrying value of goodwill and other intangible assets that arose from the acquisition of CBGP totaled approximately
$6.7 million, of which approximately $6.4 million represents goodwill, and is included in accrued interest and other assets in the accompanying
consolidated balance sheets.




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. This impairment test is calculated at the reporting unit level by comparing the estimated fair value of the reporting unit with its net
book value, including goodwill. An impairment loss will be recorded for any goodwill that is determined to be impaired. Goodwill would be 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. Differences in the identification of reporting units and the use of valuation techniques could result in materially
different evaluations of impairment.




The Company performs its annual impairment test for
goodwill during the third quarter of each year. For purposes of this test, the Company identified a single reporting unit. The fair value of the
reporting unit was determined by using the quoted market price of the Companys common stock as of the impairment testing date. For 2005 and 2004,
the Company determined that the fair value of its single reporting unit was significantly in excess of the reporting units carrying value.
Accordingly, based on the results of valuation testing performed, in the opinion of management, the Company has not experienced any such impairment
loss as of and for the years ended December 31, 2005 and 2004.




48


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




Other intangible assets include core deposit intangibles
and other identifiable finite-life intangible assets which are being amortized over their estimated useful lives primarily under the straight-line
method.




Advertising




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




Income taxes




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.




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.




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.




Recently issued accounting
standards




In December 2004, the FASB issued SFAS No. 123 (revised
2004) (SFAS 123R), Share-Based Payment. SFAS 123R establishes standards for the accounting for transactions in which an entity (i)
exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value
of the entitys equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123R will replace SFAS No. 123,
Accounting for Stock-Based Compensation, and will supersede Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations (collectively APB 25). SFAS 123R will eliminate the ability to account for
stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their
fair values on the date of the grant.




SFAS 123R was to be effective for the Company beginning on
July 1, 2005; however, in April 2005 the Securities and Exchange Commission delayed the required implementation date until January 1, 2006. The Company
will transition to fair value based accounting for stock-based compensation 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.




Based on the stock-based compensation awards outstanding as
of December 31, 2005 for which the requisite service is not fully rendered prior to January 1, 2006, the Company expects to recognize additional
pre-tax, annual




49


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




compensation cost of approximately $413,000 for the
year ended December 31, 2006 as a result of the adoption of SFAS 123R. Future levels of compensation cost recognized related to stock-based
compensation awards (including the aforementioned expected costs during the period of adoption) may be impacted by new awards and/or modifications,
repurchases and cancellations of existing awards before and after the adoption of SFAS 123R. See Note 17 for additional stock-based compensation awards
granted in January 2006.




In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections (as amended), a Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 replaces APB Opinion No.
20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 carries
forward the guidance contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in
accounting estimate. However, SFAS No. 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Under
SFAS No. 154, every voluntary change in accounting principle requires retrospective application to prior periods financial statements, unless it
is impracticable to do so. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154
is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect
adoption of SFAS No. 154 to have a material impact on the Companys consolidated financial statements.




In November 2005, the FASB issued FASB Staff Position (FSP)
FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (the FSP). The FSP
addresses the determination of when an investment is considered impaired, whether that impairment is other-than-temporary and the measurement of an
impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP nullifies certain requirements
of FASB Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, while retaining the disclosure requirements of EITF Issue 03-1 which were adopted in 2003. The FSP is effective for reporting
periods beginning after December 15, 2005. The Company does not expect the adoption of the FSP to have a material impact on the Companys
consolidated financial statements.




The American Institute of Certified Public
Accountants Statement of Position (SOP) No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, addresses
accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when
loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP
No. 03-3 applies to loans and debt securities acquired individually, in pools or as part of a business combination and does not apply to originated
loans. The application of SOP No. 03-3 limits the interest income  including accretion of purchase price discounts  that may be recognized
for certain loans and debt securities. Additionally, SOP No. 03-3 does not allow the excess of contractual cash flows over cash flows expected to be
collected to be recognized as an adjustment of yield, loss accrual or valuation allowance, such as the reserve for loan losses. SOP No. 03-3 requires
that increases in expected cash flows subsequent to the initial investment be recognized prospectively through an adjustment of the yield on the loan
or debt security over its remaining life. Decreases in expected cash flows should be recognized as impairment. In the case of loans acquired in a
business combination where the loans show signs of credit deterioration, SOP No. 03-3 represents a significant change from current purchase accounting
practice, whereby the acquirees reserve for loan losses is typically added to the acquirers reserve for loan losses.




SOP No. 03-3 was effective for loans and debt securities
acquired by the Company beginning January 1, 2005. The adoption of this new standard did not have a material impact on the Companys consolidated
financial statements.




50


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




Stock-based compensation




The Company currently measures its stock-based compensation
arrangements under the recognition and measurement principles of APB No. 25. Accordingly, since the exercise price of each stock option which the
Company has granted has been equal to the market value of the underlying common stock on the date of grant, no compensation expense has been
recognized.




SFAS No. 123, as amended by SFAS No. 148, requires pro
forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee
compensation. The following table illustrates the effects on net income and earnings per common share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation for the years ended December 31, 2005, 2004 and 2003:







|                                                                                                                                          |  |  |  | 2005 |            | 2004 |  | 2003
|----------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Net income,
as reported                                                                                                                   |  |  |  | $    | 22,436,049 |      |  | $   
|Deduct: Total
stock-based compensation expense determined under fair value based method for all awards, net of related income tax effects |  |  |  |      | (593,726   | )    |  |     
|Pro forma net
income                                                                                                                      |  |  |  | $    | 21,842,323 |      |  | $   
|Earnings per
common share:                                                                                                                |  |  |  |      |            |      |  |     
|Basic 
as reported                                                                                                                       |  |  |  | $    | 1.33       |      |  | $   
|Basic 
pro forma                                                                                                                         |  |  |  |      | 1.30       |      |  |     
|Diluted
 as reported                                                                                                                     |  |  |  |      | 1.29       |      |  |     
|Diluted
 pro forma                                                                                                                       |  |  |  |      | 1.25       |      |  |     



The effect of applying SFAS No. 123 to stock options
granted in the years ended December 31, 2005, 2004 and 2003 resulted in an estimated weighted-average grant date fair value of $6.91, $6.38 and $4.51,
respectively. The Company used the Black-Scholes option-pricing model with the following weighted-average assumptions to value options granted for the
years ended December 31, 2005, 2004 and 2003:







|                        |  |  |  | 2005    |      | 2004    |  | 2003   
|----------------------- |  |  |  | ------- | ---- | ------- |  | -------
|Dividend
yield          |  |  |  |         | 1.7  | %       |  |        
|Estimated
volatility    |  |  |  |         | 38.5 | %       |  |        
|Risk-free
interest rate |  |  |  |         | 3.7  | %       |  |        
|Estimated
option lives  |  |  |  | 6
years |      | 6
years |  | 5
years



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.




As noted previously, the Company expects to adopt the
provisions of SFAS 123R on January 1, 2006. Among other things, SFAS 123R eliminates the ability to account for stock-based compensation using APB 25
and requires that such transactions be recognized as compensation cost in the consolidated income statement based on their fair values on the date of
the grant.


|2. |  | Cash and due from banks
|-- |  | -----------------------



By regulation, the Bank must meet reserve requirements as
established by the Federal Reserve Bank (FRB) (approximately $17,220,000 and $12,818,000 at December 31, 2005 and 2004, respectively). Accordingly, the
Bank met these requirements by holding cash and maintaining average reserve balances with the FRB in excess of these amounts.




51


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


|3. |  | Investment securities
|-- |  | ---------------------



Investment securities at December 31, 2005 and 2004
consisted of the following:







|                                                |  |  |  | Amortized cost |            | Gross unrealized gains |  | Gross unrealized losses |           | Estimated fair value
|----------------------------------------------- |  |  |  | -------------- | ---------- | ---------------------- |  | ----------------------- | --------- | --------------------
|
|Available-for-sale                              |  |  |  |                |            |                        |  |                         |           |                     
|U.S. Agency
mortgage-backed secrities           |  |  |  | $              | 38,584,298 |                        |  | $                       | 75,534    |                     
|U.S.
Government and agency securities           |  |  |  |                | 11,994,794 |                        |  |                         | 9,819     |                     
|Obligations
of state and political subdivisions |  |  |  |                | 2,667,811  |                        |  |                         |          |                     
|Equity
securities                               |  |  |  |                | 957,478    |                        |  |                         | 1,154,511 |                     
|Mutual
fund                                     |  |  |  |                | 371,088    |                        |  |                         | 5,679     |                     
|                                                |  |  |  | $              | 54,575,469 |                        |  | $                       | 1,245,543 |                     
|Held-to-maturity                                |  |  |  |                |            |                        |  |                         |           |                     
|Obligations
of state and political subdivisions |  |  |  | $              | 3,837,310  |                        |  | $                       | 29,855    |                     
|                                               
|2004                                            |  |  |  |                |            |                        |  |                         |           |                     
|Available-for-sale                              |  |  |  |                |            |                        |  |                         |           |                     
|U.S. Agency
mortgage-backed secrities           |  |  |  | $              | 29,255,143 |                        |  | $                       | 308,044   |                     
|U.S.
Government and agency securities           |  |  |  |                | 10,498,229 |                        |  |                         | 101,633   |                     
|Obligations
of state and political subdivisions |  |  |  |                | 2,741,738  |                        |  |                         | 6,069     |                     
|Equity
securities                               |  |  |  |                | 957,478    |                        |  |                         | 947,627   |                     
|Mutual
fund                                     |  |  |  |                | 356,838    |                        |  |                         | 12,027    |                     
|                                                |  |  |  | $              | 43,809,426 |                        |  | $                       | 1,375,400 |                     
|Held-to-maturity                                |  |  |  |                |            |                        |  |                         |           |                     
|Obligations
of state and political subdivisions |  |  |  | $              | 1,958,736  |                        |  | $                       | 43,393    |                     



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, 2005:







|                                                |  |  |  | Less than 12 months |            | 12 months or more |  | Total |         
|----------------------------------------------- |  |  |  | ------------------- | ---------- | ----------------- |  | ----- | --------
|
|U.S. Agency
mortgage-backed securities          |  |  |  | $                   | 23,922,377 |                   |  | $     | (144,005
|U.S
Government and agency securities            |  |  |  |                     | 6,469,788  |                   |  |       | (25,006 
|Obligations
of state and political subdivisions |  |  |  |                     | 1,443,714  |                   |  |       | (18,555 
|                                                |  |  |  | $                   | 31,835,879 |                   |  | $     | (187,566



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, 2005, 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. The unrealized losses on the above investment
securities are primarily due to increases in market interest rates over the yields available at the time the specific investment securities were
purchased by the Company. Management




52


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




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




The amortized cost and estimated fair value of investment
securities at December 31, 2005, 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.







|                                       |  |  |  | Amortized cost |            | Estimated fair value
|-------------------------------------- |  |  |  | -------------- | ---------- | --------------------
|Available-for-sale                     |  |  |  |                |            |                     
|Due three
months to one year           |  |  |  | $              | 3,869,095  |                     
|Due after one
year through five years  |  |  |  |                | 10,639,858 |                     
|Due after
five years through ten years |  |  |  |                | 185,000    |                     
|Due after ten
years                    |  |  |  |                | 38,552,950 |                     
|Equity
securities                      |  |  |  |                | 957,478    |                     
|Mutual
fund                            |  |  |  |                | 371,088    |                     
|                                       |  |  |  | $              | 54,575,469 |                     
|Held-to-maturity                       |  |  |  |                |            |                     
|Due three
months to one year           |  |  |  | $              | 130,330    |                     
|Due after one
year through five years  |  |  |  |                | 1,889,201  |                     
|Due after
five years through ten years |  |  |  |                | 1,817,779  |                     
|                                       |  |  |  | $              | 3,837,310  |                     



Investment securities with a carrying value of
approximately $57,078,000 and $43,427,000 at December 31, 2005 and 2004, respectively, were pledged to secure public deposits 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, 2005, 2004 and 2003, and no gross realized gains on sales of investment securities during the
year ended December 31, 2005. Gross realized gains on sales of investment securities during the years ended December 31, 2004 and 2003 are as disclosed
in the accompanying consolidated statements of income.


|4. |  | Loans
|-- |  | -----



Loans at December 31, 2005 and 2004 consisted of the
following:







|                             |  |  |  | 2005 |               | 2004
|---------------------------- |  |  |  | ---- | ------------- | ----
|Commercial                   |  |  |  | $    | 320,618,805   |     
|Real
estate:                 |  |  |  |      |               |     
|Construction/lot             |  |  |  |      | 220,229,831   |     
|Mortgage                     |  |  |  |      | 56,724,240    |     
|Commercial                   |  |  |  |      | 417,579,762   |     
|Consumer                     |  |  |  |      | 34,551,748    |     
|Total
loans                  |  |  |  |      | 1,049,704,386 |     
|Less reserve
for loan losses |  |  |  |      | 14,687,689    |     
|Total loans,
net             |  |  |  | $    | 1,035,016,697 |     



53


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




Included in mortgage loans at December 31, 2005 and 2004
were approximately $2,652,000 and $3,225,000, respectively, in mortgage loans held for sale. In addition, the above loans are net of deferred loan fees
of approximately $3,387,000 and $3,149,000 at December 31, 2005 and 2004, respectively.




A substantial portion of the Banks loans are
collateralized by real estate in four major markets (Central Oregon, Salem/Keizer, Southern Oregon and Portland), and, accordingly, the ultimate
collectibility of a substantial portion of the Banks loan portfolio is susceptible to changes in the local economic conditions in such
markets.




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, 2005 and 2004, the
portion of these loans participated to third parties (which are not included in the accompanying consolidated financial statements) totaled
approximately $34,343,000 and $24,630,000, respectively.


|5. |  | Reserve for loan losses
|-- |  | -----------------------



Transactions in the reserve for loan losses for the years
ended December 31, 2005, 2004 and 2003 were as follows:







|                                           |  |  |  | 2005 |            | 2004 |  | 2003
|------------------------------------------ |  |  |  | ---- | ---------- | ---- |  | ----
|Balance at
beginning of year               |  |  |  | $    | 12,411,568 |      |  | $   
|Loan loss
provision                        |  |  |  |      | 3,050,000  |      |  |     
|Loans
charged-off                          |  |  |  |      | (1,266,435 | )    |  |     
|Recoveries of
loans previously charged-off |  |  |  |      | 492,556    |      |  |     
|Reserve
acquired from CBGP                 |  |  |  |      |           |      |  |     
|Balance at
end of year                     |  |  |  | $    | 14,687,689 |      |  | $   



Loans on nonaccrual status at December 31, 2005 and 2004
were approximately $40,000 and $483,000, respectively. Interest income, which would have been realized on such nonaccrual loans outstanding at
year-end, if they had remained current, was insignificant for the years ended December 31, 2005, 2004 and 2003. Loans contractually past due 90 days or
more on which the Company continued to accrue interest at December 31, 2005 and 2004 were insignificant. At December 31, 2005 and 2004, impaired loans
and any related specific valuation allowances were insignificant. The average recorded investment in impaired loans was insignificant for the years
ended December 31, 2005 and 2004. Interest income recognized on impaired loans for the years ended December 31, 2005, 2004 and 2003 was
insignificant.


|6. |  | 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 $499
million, $502 million and $514 million as of December 31, 2005, 2004 and 2003, respectively. These balances are not included in the accompanying
consolidated balance sheets. The sales of these mortgage loans are subject to technical underwriting exceptions and related repurchase risks. However,
as of December 31, 2005 and 2004, management is not aware of any mortgage loans which will have to be repurchased.




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, 2005 and 2004, mortgage loans held for sale were
carried at cost, which approximated estimated market value.




54


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CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




Transactions in the Companys MSRs for the years ended
December 31, 2005, 2004 and 2003 were as follows:







|                             |  |  |  | 2005 |            | 2004 |  | 2003
|---------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Balance at
beginning of year |  |  |  | $    | 4,663,358  |      |  | $   
|Additions                    |  |  |  |      | 1,318,150  |      |  |     
|Amortization                 |  |  |  |      | (1,542,089 | )    |  |     
|Impairment
adjustments       |  |  |  |      |           |      |  |     
|Balance at
end of year       |  |  |  | $    | 4,439,419  |      |  | $   



At December 31, 2005 and 2004, the fair value of the
Companys MSRs was approximately $5.8 million and $5.2 million, respectively. The key assumptions used in estimating the fair value of MSRs at
December 31, 2005 included weighted-average mortgage prepayment rates (PSA) of approximately 189% for the first year, 169% for the second year and 149%
thereafter (257%, 228% and 199%, respectively, in 2004). A 9% discount rate was also applied.




Changes in the valuation allowance for MSRs for the years
ended December 31, 2005, 2004 and 2003 were as follows:







|                             |  |  |  | 2005 |   | 2004 |  | 2003
|---------------------------- |  |  |  | ---- | - | ---- |  | ----
|Balance at
beginning of year |  |  |  | $    |  |      |  | $   
|Impairment
adjustments       |  |  |  |      |  |      |  |     
|Balance at
end of year       |  |  |  | $    |  |      |  | $   



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 effect the estimated fair values of the Companys
MSRs.




Mortgage banking income, net, consisted of the following
for the years ended December 31, 2005, 2004 and 2003:







|                                        |  |  |  | 2005 |            | 2004 |  | 2003
|--------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Origination
and processing fees         |  |  |  | $    | 1,824,224  |      |  | $   
|Gains on
sales of mortgage loans, net   |  |  |  |      | 688,165    |      |  |     
|Servicing
fees                          |  |  |  |      | 1,285,859  |      |  |     
|Amortization
and impairment adjustments |  |  |  |      | (1,542,089 | )    |  |     
|Mortgage
banking income, net            |  |  |  | $    | 2,256,159  |      |  | $   

|7. |  | Premises and equipment
|-- |  | ----------------------



Premises and equipment at December 31, 2005 and 2004
consisted of the following:







|                                               |  |  |  | 2005 |            | 2004
|---------------------------------------------- |  |  |  | ---- | ---------- | ----
|Land                                           |  |  |  | $    | 3,408,465  |     
|Buildings and
leasehold improvements           |  |  |  |      | 19,344,389 |     
|Furniture and
equipment                        |  |  |  |      | 9,311,638  |     
|                                               |  |  |  |      | 32,064,492 |     
|Less
accumulated depreciation and amortization |  |  |  |      | 9,387,102  |     
|                                               |  |  |  |      | 22,677,390 |     
|Construction
in progress                       |  |  |  |      | 10,808     |     
|Premises and
equipment, net                    |  |  |  | $    | 22,688,198 |     



55


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


|8. |  | Time deposits
|-- |  | -------------



Time deposits in excess of $100,000 aggregated
approximately $34,936,000 and $26,583,000 at December 31, 2005 and 2004, respectively.




At December 31, 2005, the scheduled annual maturities of
all time deposits were approximately as follows:







|2006 |  |  |  | $ | 43,699,000 | 
|---- |  |  |  | - | ---------- | 
|2007 |  |  |  |   | 11,310,000 | 
|2008 |  |  |  |   | 4,943,000  | 
|2009 |  |  |  |   | 5,001,000  | 
|2010 |  |  |  |   | 1,274,000  | 
|     |  |  |  | $ | 66,227,000 | 

|9. |  | Junior subordinated debentures
|-- |  | ------------------------------



In December 2004, the Company established a subsidiary
grantor trust (Cascade Bancorp Trust I) (the Trust), which issued $20 million of trust preferred securities (the TPS) and $619,000 of common
securities. The common securities were purchased by the Company, and represent a 3% minority interest in the Trust. The Companys investment in
the common securities 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 are due and payable on March 15, 2035. The TPS pay quarterly interest at the 3-month London Inter-Bank Offered Rate
(LIBOR) plus 1.80%. The Trust used the proceeds received from the issuance of the TPS to purchase $20 million of junior subordinated debentures (the
Debentures) of the Company. The Debentures were issued with substantially the same terms as the TPS and are the sole assets of the Trust. 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 Trust. The TPS are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the
Indenture related to the Debentures. The TPS may be called by the Company at par at 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. 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, 2005, the TPS meet applicable regulatory guidelines to qualify as Tier 1 capital.


|10. |  | Other borrowings
|--- |  | ----------------



The Bank participates in the FHLBs Cash Management
Advance Program (the Program). At December 31, 2005, the Bank had approximately $61.1 million ($29.7 million at December 31, 2004) in borrowings
outstanding from the FHLB under the Program with fixed interest at rates ranging from 2.96% to 4.90%. 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, 2005, the Bank had remaining available borrowings from the FHLB of approximately $128.7 million. To fully utilize the Banks
available borrowings from the FHLB, the Bank would be required to purchase additional FHLB stock of approximately $4.2 million.




At December 31, 2005, the Bank had approximately $29.4
million in available short-term borrowings from the FRB, collateralized by certain of the Banks loans. The FRB funds available include
participation in the Treasury Tax and Loan program of the federal government. Access to this funding source is limited to $10.0 million and is fully at
the discretion of the U.S. Treasury. At December 31, 2005, the Bank had approximately $3.2 million ($6.8 million at December 31, 2004) in borrowings
outstanding from the FRB. As an additional source of liquidity, the Bank had federal fund borrowing agreements with correspondent banks aggregating
approximately $31.5 million at December 31, 2005.




56


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




At December 31, 2005, the contractual maturities of the
Banks FHLB borrowings outstanding were approximately as follows:







|2006       |  |  |  | $ |           | 
|---------- |  |  |  | - | ---------- | 
|2007       |  |  |  |   | 7,000,000  | 
|2008       |  |  |  |   | 13,000,000 | 
|2009       |  |  |  |   | 4,000,000  | 
|2010       |  |  |  |   | 5,000,000  | 
|Thereafter |  |  |  |   | 32,109,000 | 
|           |  |  |  | $ | 61,109,000 | 

|11. |  | Mergers and acquisitions
|--- |  | ------------------------



Community Bank of Grants Pass




On January 1, 2004, the Company acquired CBGP to complement
its expansion into Southern Oregon. The acquisition of CBGP was accounted for using the purchase method of accounting, and, accordingly, the purchase
price was allocated to the underlying assets and liabilities of CBGP based on estimated fair values at the date of acquisition.




CBGP shareholders received one share of the Companys
common stock for each share of CBGP common stock (772,752 shares), aggregating a total purchase price of approximately $11.7 million. In connection
with the acquisition, the Company recorded goodwill of approximately $6.4 million. Upon completion of the acquisition, CBGP was fully merged into the
Bank. The operating results of CBGP are included in the Companys consolidated financial statements effective January 1, 2004.




F&M Holding Company




Effective December 23, 2005, the Company entered into a
definitive agreement with F&M Holding Company (F&M), under terms of which the Company will acquire F&M in exchange for cash and common
stock of the Company. F&Ms banking subsidiary, Farmers & Merchants State Bank (FMSB), comprised of 11 branches in Boise, Idaho and
surrounding markets, will continue to operate under the Farmers & Merchants name in Idaho. Terms of the definitive agreement call for the Company
to pay $22.5 million in cash and issue 5,325,000 shares of Bancorp common stock. The estimated value of the stock consideration is approximately $124.6
million, and the aggregate estimated total purchase price is approximately $147.1 million.




In addition, F&M has agreed to a holdback of $3.9
million of the $124.6 million related to the uncertain collectibility of specific F&M loans. These holdback funds will be disbursed to F&M upon
performance of the loans according to the terms of the definitive agreement. The acquisition is subject to approval of the Companys shareholders
and banking regulators and is expected to close in the second quarter of 2006.


|12. |  | Commitments, guarantees and contingencies
|--- |  | -----------------------------------------



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,
2005 and 2004, the Bank had no 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 uses the same credit policies in underwriting and offering commitments and conditional obligations as it does for on-balance
sheet financial instruments.




57


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




A summary of the Banks off-balance sheet financial
instruments at December 31, 2005 and 2004 is approximately as follows:







|                                              |  |  |  | 2005 |             | 2004
|--------------------------------------------- |  |  |  | ---- | ----------- | ----
|Commitments
to extend credit                  |  |  |  | $    | 410,709,000 |     
|Commitments
under credit card lines of credit |  |  |  |      | 20,686,000  |     
|Standby
letters of credit                     |  |  |  |      | 15,228,000  |     
|Total
off-balance sheet financial instruments |  |  |  | $    | 446,623,000 |     



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 extension
of credit, is based on managements credit evaluation of the counterparty.




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




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




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 accounting standards generally accepted in the United States 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 both
December 31, 2005 and 2004, 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, 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.




58


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




The Bank leases certain land and facilities under operating
leases, some of which include renewal options and escalation clauses. At December 31, 2005, 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:







|2006                   |  |  |  | $ | 1,319,000  | 
|---------------------- |  |  |  | - | ---------- | 
|2007                   |  |  |  |   | 1,285,000  | 
|2008                   |  |  |  |   | 1,209,000  | 
|2009                   |  |  |  |   | 992,000    | 
|2010                   |  |  |  |   | 885,000    | 
|Thereafter             |  |  |  |   | 4,425,000  | 
|Total minimum
payments |  |  |  | $ | 10,115,000 | 



Total rental expense was approximately $1,254,000,
$1,166,000 and $1,032,000 in 2005, 2004 and 2003, respectively.




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




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, 2005.


|13. |  | Income taxes
|--- |  | ------------



The provision (credit) for income taxes for the years ended
December 31, 2005, 2004 and 2003 was approximately as follows:







|                           |  |  |  | 2005 |            | 2004 |  | 2003
|-------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Current:                   |  |  |  |      |            |      |  |     
|Federal                    |  |  |  | $    | 13,015,000 |      |  | $   
|State                      |  |  |  |      | 1,670,000  |      |  |     
|                           |  |  |  |      | 14,685,000 |      |  |     
|Deferred                   |  |  |  |      | (1,751,000 | )    |  |     
|Provision for
income taxes |  |  |  | $    | 12,934,000 |      |  | $   



The provision 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, 2005, 2004 and
2003 were approximately as follows:







|                                                         |  |  |  | 2005 |            | 2004 |  | 2003
|-------------------------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Expected
federal income tax provision at statutory rates |  |  |  | $    | 12,380,000 |      |  | $   
|State income
taxes, net of federal effect                |  |  |  |      | 981,000    |      |  |     
|Effect of
nontaxable interest income, net                |  |  |  |      | (443,000   | )    |  |     
|Other,
net                                               |  |  |  |      | 16,000     |      |  |     
|Provision for
income taxes                               |  |  |  | $    | 12,934,000 |      |  | $   



59


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




The components of the net deferred tax assets and
liabilities at December 31, 2005 and 2004 were approximately as follows:







|                                              |  |  |  | 2005 |           | 2004
|--------------------------------------------- |  |  |  | ---- | --------- | ----
|Deferred tax
assets:                          |  |  |  |      |           |     
|Reserve for
loan losses                       |  |  |  | $    | 5,774,000 |     
|Deferred
benefit plan expenses, net           |  |  |  |      | 2,030,000 |     
|Other                                         |  |  |  |      | 253,000   |     
|Total
deferred tax assets                     |  |  |  |      | 8,057,000 |     
|                                             
|Deferred tax
liabilities:                     |  |  |  |      |           |     
|Accumulated
depreciation                      |  |  |  |      | 679,000   |     
|Deferred loan
income                          |  |  |  |      | 1,068,000 |     
|Mortgage
servicing rights                     |  |  |  |      | 1,754,000 |     
|Purchased
intangibles related to CBGP         |  |  |  |      | 409,000   |     
|FHLB stock
dividends                          |  |  |  |      | 510,000   |     
|Net
unrealized gains on investment securities |  |  |  |      | 332,000   |     
|Other                                         |  |  |  |      | 31,000    |     
|Total
deferred tax liabilities                |  |  |  |      | 4,783,000 |     
|Net deferred
tax assets                       |  |  |  | $    | 3,274,000 |     



Management believes, based upon the Companys
historical performance, the net deferred tax assets will be recognized in the normal course of operations, and, accordingly, management has not reduced
net deferred tax assets by a valuation allowance.


|14. |  | Basic and diluted earnings per common share
|--- |  | -------------------------------------------



The Companys basic earnings per common share is
computed by dividing net income by the weighted-average number of common shares outstanding during the period. The Companys diluted earnings per
common share is computed by dividing net income by the weighted-average number of common shares outstanding plus dilutive common shares related to
stock options and restricted stock.




60


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




The numerators and denominators used in computing basic and
diluted earnings per common share for the years ended December 31, 2005, 2004 and 2003 can be reconciled as follows:







|                                                                          |  |  |  | Net income (numerator) |            | Weighted-average shares (denominator) |  | Per-share amount
|------------------------------------------------------------------------- |  |  |  | ---------------------- | ---------- | ------------------------------------- |  | ----------------
|2005                                                                      |  |  |  |                        |            |                                       |  |                 
|Basic
earnings per common share Income available to common stockholders  |  |  |  | $                      | 22,436,049 |                                       |  |                 
|Effect of
stock options and restricted stock                              |  |  |  |                        |           |                                       |  |                 
|Diluted
earnings per common share                                         |  |  |  | $                      | 22,436,049 |                                       |  |                 
|                                                                         
|2004                                                                      |  |  |  |                        |            |                                       |  |                 
|Basic
earnings per common share Income available to common stockholders  |  |  |  | $                      | 16,007,650 |                                       |  |                 
|Effect of
stock options and restricted stock                              |  |  |  |                        |           |                                       |  |                 
|Diluted
earnings per common share                                         |  |  |  | $                      | 16,007,650 |                                       |  |                 
|                                                                         
|2003                                                                      |  |  |  |                        |            |                                       |  |                 
|Basic
earnings per common share  Income available to common stockholders |  |  |  | $                      | 13,954,888 |                                       |  |                 
|Effect of
stock options and restricted stock                              |  |  |  |                        |           |                                       |  |                 
|Diluted
earnings per common share                                         |  |  |  | $                      | 13,954,888 |                                       |  |                 

|15. |  | 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, 2005 and 2004 was approximately as follows:







|                             |  |  |  | 2005 |            | 2004
|---------------------------- |  |  |  | ---- | ---------- | ----
|Balance at
beginning of year |  |  |  | $    | 1,170,000  |     
|Additions                    |  |  |  |      | 981,000    |     
|Repayments                   |  |  |  |      | (1,245,000 | )   
|Retirement of
Board member   |  |  |  |      |           |     
|Balance at
end of year       |  |  |  | $    | 906,000    |     

|16. |  | 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.




61


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




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 $1,019,000, $1,481,000 and $1,338,000 for
the years ended December 31, 2005, 2004 and 2003, respectively. Prior to 2005, employees had the option to receive a portion of the Companys
contributions to the Plan in cash.




Beginning in 2005, the Company elected to discontinue this
option and utilized such funds to increase certain employees base salaries. This was to align this benefit with the Companys philosophy of
pay for performance.




Other benefit plans




The Bank has deferred compensation plans for the Board and
certain key executives and managers, a salary continuation plan, a supplemental executive retirement (SERP) plan  adopted in 2004  for
certain key executives, and a fee continuation plan for the Board. 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 and the fee continuation plan for the Board provides 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. Effective in 2004, the fee continuation
plan was discontinued for future members of the Board.




To assist in the funding of these plans, the Bank has
purchased bank-owned life insurance policies on the majority of the participants. The cash surrender value of these policies at December 31, 2005 and
2004 was approximately $16,047,000 and $14,066,000, respectively. At December 31, 2005 and 2004, the liabilities related to the deferred compensation
plans included in accrued interest and other liabilities in the accompanying consolidated balance sheets totaled approximately $3,118,000 and
$2,552,000, respectively. The amount of expense charged to operations in 2005, 2004 and 2003 related to the deferred compensation plans was
approximately $701,000, $476,000 and $481,000, respectively. As of December 31, 2005 and 2004, the liabilities related to the salary continuation, SERP
and fee continuation plans included in accrued interest and other liabilities in the accompanying consolidated balance sheets totaled approximately
$3,000,000 and $1,973,000, respectively. The amount of expense charged to operations in 2005, 2004 and 2003 for the salary continuation, SERP and fee
continuation plans was approximately $1,084,000, $611,000 and $200,000, respectively. For financial reporting purposes, such expense amounts have not
been adjusted for income earned on the bank-owned life insurance policies.


|17. |  | Stock-based compensation plans
|--- |  | ------------------------------



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




The stock-based compensation plans prescribe various terms
and conditions for the granting of stock-based compensation and the total number of shares authorized for this purpose. For ISOs, the option strike
price must be no less than 100% of the stock price at the grant date; and for NSOs, the option strike price can be no less than 85% of the stock price
at the grant date, and all grants to date have been at 100%. Restricted stock must be at fair market value on grant date. At December 31, 2005, 288,434
shares reserved under the stock-based compensation plans were available for future grant. Restricted stock grants are limited to 30% of the shares
available under the




62


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




stock-based compensation plans. 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
date of grant.




Activity related to the stock-based compensation plans for
the years ended December 31, 2005, 2004 and 2003 was as follows:







|                             |  |  |  | 2005 |           | 2004 |  | 2003 |      
|---------------------------- |  |  |  | ---- | --------- | ---- |  | ---- | -----
|
|Balance at
beginning of year |  |  |  |      | 1,030,751 |      |  | $    | 8.33 
|Granted                      |  |  |  |      | 76,108    |      |  |      | 19.02
|Forfeited                    |  |  |  |      |          |      |  |      |     
|Exercised                    |  |  |  |      | (164,902  | )    |  |      | 4.76 
|Balance at
end of year       |  |  |  |      | 941,957   |      |  | $    | 9.82 



Information regarding the number, weighted-average exercise
price and weighted-average remaining contractual life of options by range of exercise price at December 31, 2005 is as follows:







|                |  |  |  | Options outstanding |         | Exercisable options | 
|--------------- |  |  |  | ------------------- | ------- | ------------------- | 
|
|Under
$5.00     |  |  |  |                     | 103,945 |                     | 
|$5.01 
$8.00   |  |  |  |                     | 315,028 |                     | 
|$8.01 
$12.00  |  |  |  |                     | 313,620 |                     | 
|$12.01 
$16.00 |  |  |  |                     | 1,562   |                     | 
|$16.01 
$20.00 |  |  |  |                     | 203,802 |                     | 
|$20.01 
$22.59 |  |  |  |                     | 4,000   |                     | 
|                |  |  |  |                     | 941,957 |                     | 



Exercisable options as of December 31, 2004 and 2003
totaled 778,472 and 837,543, respectively.




In addition, during 2005, the Company granted 31,236 shares
of restricted stock at a market value of $18.90 per share (approximately $590,000). Also, during 2003, the Company granted 18,750 shares of restricted
stock at a market value of $16.63 per share (approximately $312,000). The restricted stock is scheduled to vest over periods ranging from three to five
years from the grant dates. The restricted stock is reported as unearned compensation on restricted stock in the accompanying consolidated balance
sheets at December 31, 2005 and 2004. The unearned compensation on restricted stock is being amortized to expense on a straight-line basis over the
applicable vesting periods.




During January 2006, the Company granted 61,024 additional
stock options and 30,612 additional shares of restricted stock.


|18. |  | Estimated fair value of financial instruments
|--- |  | ---------------------------------------------



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




63


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




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, 2005 and
2004.




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:  The market value of
investment securities, which is based on quoted market values or the market values for comparable securities, represents estimated fair
value.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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, 2005 and 2004 origination rates. The resulting amounts are
adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Bank-owned life
insurance:  The carrying amount approximates the estimated fair value of these instruments.


| |  | Deposits:  The estimated fair value of demand
deposits, consisting of checking, interest bearing demand and savings deposit accounts, is represented by the amounts payable on demand. At the
reporting date, the estimated fair value of time deposits is calculated by discounting the scheduled cash flows using the December 31, 2005 and 2004
rates offered on those instruments.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Junior subordinated debentures and other
borrowings:  The fair value of the Banks junior subordinated debentures and other borrowings are estimated using discounted cash
flow analyses based on the Banks December 31, 2005 and 2004 incremental borrowing rates for similar types of borrowing arrangements.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



64


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




The estimated fair values of the Companys significant
on-balance sheet financial instruments at December 31, 2005 and 2004 were approximately as follows:


|                                                    |  |  |  | 2005 |               | 2004 | 
|--------------------------------------------------- |  |  |  | ---- | ------------- | ---- | 
|
|Financial
assets:                                   |  |  |  |      |               |      | 
|Cash and cash
equivalents                           |  |  |  | $    | 107,709,092   |      | 
|Investment
securities:                              |  |  |  |      |               |      | 
|Available-for-sale                                  |  |  |  |      | 55,448,640    |      | 
|Held-to-maturity                                    |  |  |  |      | 3,837,310     |      | 
|FHLB
stock                                          |  |  |  |      | 3,240,700     |      | 
|Loans,
net                                          |  |  |  |      | 1,035,016,697 |      | 
|Bank-owned
life insurance                           |  |  |  |      | 16,047,099    |      | 
|Financial
liabilities:                              |  |  |  |      |               |      | 
|Deposits                                            |  |  |  |      | 1,065,380,171 |      | 
|Junior
subordinated debentures and other borrowings |  |  |  |      | 84,969,302    |      | 

|19. |  | 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, 2005 and
2004, the Company and the Bank met or exceeded all relevant capital adequacy requirements. To be categorized as well capitalized, the
Company and the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following
tables.




As of December 31, 2005, the most recent notifications from
the FRB and the Federal Deposit Insurance Corporation categorized the Company and the Bank as well capitalized under the regulatory
framework for prompt correction action. To be categorized as well capitalized, the Company and the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since the notifications from the
regulators that management believes would change the Companys or the Banks regulatory capital categorization.




65


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




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







|                                         |  |  |  | Actual |         | Regulatory minimum to be adequately capitalized |  | Regulatory minimum to be well capitalized under
prompt corrective action provisions |     
|---------------------------------------- |  |  |  | ------ | ------- | ------------------------------------------------- |  | ------------------------------------------------------------------------------------- | ----
|
|December
31, 2005:                       |  |  |  |        |         |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  | $      | 116,667 |                                                   |  |                                                                                       | 9.3 
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 116,667 |                                                   |  |                                                                                       | 9.8 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 131,877 |                                                   |  |                                                                                       | 11.1
|                                        
|December
31, 2004:                       |  |  |  |        |         |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  |        | 98,274  |                                                   |  |                                                                                       | 10.1
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 98,274  |                                                   |  |                                                                                       | 10.1
|Total
capital (to risk-weighted assets)  |  |  |  |        | 110,855 |                                                   |  |                                                                                       | 11.4



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







|                                         |  |  |  | Actual |         | Regulatory minimum to be adequately capitalized |  | Regulatory minimum to be well capitalized under
prompt corrective action provisions |     
|---------------------------------------- |  |  |  | ------ | ------- | ------------------------------------------------- |  | ------------------------------------------------------------------------------------- | ----
|
|December
31, 2005:                       |  |  |  |        |         |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  | $      | 114,746 |                                                   |  |                                                                                       | 9.2 
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 114,746 |                                                   |  |                                                                                       | 9.7 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 129,437 |                                                   |  |                                                                                       | 10.9
|                                        
|December
31, 2004:                       |  |  |  |        |         |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  |        | 96,484  |                                                   |  |                                                                                       | 10.0
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 96,484  |                                                   |  |                                                                                       | 9.9 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 108,622 |                                                   |  |                                                                                       | 11.2



66


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


|20. |  | Parent company financial information
|--- |  | ------------------------------------



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




CONDENSED BALANCE SHEETS







|                                           |  |  |  | December 31, |            
|------------------------------------------ |  |  |  | ------------ | -----------
|
|Assets:                                    |  |  |  |              |            
|Cash and cash
equivalents                  |  |  |  | $            | 882,010    
|Investment
securities available-for-sale   |  |  |  |              | 2,111,989  
|Investment in
subsidiary                   |  |  |  |              | 121,738,640
|Other
assets                               |  |  |  |              | 763,316    
|Total
assets                               |  |  |  | $            | 125,495,955
|Liabilities
and stockholders equity:      |  |  |  |              |            
|Junior
subordinated debentures             |  |  |  | $            | 20,619,000 
|Other
liabilities                          |  |  |  |              | 501,450    
|Stockholders equity                       |  |  |  |              | 104,375,505
|Total
liabilities and stockholders equity |  |  |  | $            | 125,495,955



CONDENSED STATEMENTS OF INCOME







|                                                                                                                                             |  |  |  | Years ended December 31, |           
|-------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------------------ | ----------
|
|Income:                                                                                                                                      |  |  |  |                          |           
|Interest and
other dividend income                                                                                                           |  |  |  | $                        | 19,307    
|Gains on
sales of investment securities available-for-sale                                                                                   |  |  |  |                          |          
|Total
income                                                                                                                                 |  |  |  |                          | 19,307    
|Expenses:                                                                                                                                    |  |  |  |                          |           
|Administrative                                                                                                                               |  |  |  |                          | 516,742   
|Interest                                                                                                                                     |  |  |  |                          | 1,025,710 
|Other                                                                                                                                        |  |  |  |                          | 261,442   
|Total
expenses                                                                                                                               |  |  |  |                          | 1,803,894 
|Net income
(loss) before credit (provision) for income taxes, dividends from the Bank and equity in undistributed net earnings of subsidiary |  |  |  |                          | (1,784,587
|Credit
(provision) for income taxes                                                                                                          |  |  |  |                          | 672,443   
|Net income
(loss) before dividends from the Bank and equity in undistributed net earnings of subsidiary                                      |  |  |  |                          | (1,112,144
|Dividends
from the Bank                                                                                                                      |  |  |  |                          | 5,475,000 
|Equity in
undistributed net earnings of subsidiary                                                                                           |  |  |  |                          | 18,073,193
|Net
income                                                                                                                                   |  |  |  | $                        | 22,436,049



67


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)




CONDENSED STATEMENTS OF CASH FLOWS







|                                                                                  |  |  |  | Years ended December 31, |            
|--------------------------------------------------------------------------------- |  |  |  | ------------------------ | -----------
|
|Cash flows
from operating activities:                                             |  |  |  |                          |            
|Net
income                                                                        |  |  |  | $                        | 22,436,049 
|Adjustments
to reconcile net income to net cash provided by operating activities: |  |  |  |                          |            
|Dividends
from the Bank                                                           |  |  |  |                          | 5,475,000  
|Equity in
undistributed net earnings of subsidiary                                |  |  |  |                          | (23,548,193
|Gains on
sales of investment securities available-for-sale                        |  |  |  |                          |           
|Increase in
other assets                                                          |  |  |  |                          | (4,485     
|Increase in
other liabilities                                                     |  |  |  |                          | 22,735     
|Net cash
provided by operating activities                                         |  |  |  |                          | 4,381,106  
|                                                                                 
|Cash flows
from investing activities:                                             |  |  |  |                          |            
|Investment in
subsidiary                                                          |  |  |  |                          |           
|Proceeds from
sales of investment securities available-for-sale                   |  |  |  |                          |           
|Purchase of
investment securities available-for-sale                              |  |  |  |                          |           
|Net cash
provided (used) by investing activities                                  |  |  |  |                          | 4,381,106  
|                                                                                 
|Cash flows
from financing activities:                                             |  |  |  |                          |            
|Cash
dividends paid                                                               |  |  |  |                          | (5,571,984 
|Net proceeds
from issuance of junior subordinated debentures                      |  |  |  |                          |           
|Amortization
of unearned compensation on restricted stock                         |  |  |  |                          | 303,562    
|Stock options
exercised and related tax benefits                                  |  |  |  |                          | 1,036,711  
|Net cash
provided (used) by financing activities                                  |  |  |  |                          | (4,231,711 
|Net increase
(decrease) in cash and cash equivalents                              |  |  |  |                          | 149,395    
|Cash and cash
equivalents at beginning of year                                    |  |  |  |                          | 732,615    
|Cash and cash
equivalents at end of year                                          |  |  |  | $                        | 882,010    



68


---



CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)


|21. |  | Selected quarterly financial data (unaudited)
|--- |  | ---------------------------------------------



The following table sets forth the Companys unaudited
data regarding operations for each quarter of 2005 and 2004. This information, in the opinion of management, includes all normal recurring adjustments
necessary to fairly state the information set forth therein (in thousands, except per share amounts):







|                                              |  |  |  | 2005 |       
|--------------------------------------------- |  |  |  | ---- | ------
|
|Interest and
dividend income                  |  |  |  | $    | 20,991
|Interest
expense                              |  |  |  |      | 4,300 
|Net interest
income                           |  |  |  |      | 16,691
|Loan loss
provision                           |  |  |  |      |      
|Net interest
income after loan loss provision |  |  |  |      | 16,691
|Noninterest
income                            |  |  |  |      | 3,332 
|Noninterest
expenses                          |  |  |  |      | 9,232 
|Income before
income taxes                    |  |  |  |      | 10,791
|Provision for
income taxes                    |  |  |  |      | 3,964 
|Net
income                                    |  |  |  | $    | 6,827 
|Basic
earnings per common share               |  |  |  | $    | 0.40  
|Fully diluted
earnings per common share       |  |  |  | $    | 0.39  






|                                              |  |  |  | 2004 |       
|--------------------------------------------- |  |  |  | ---- | ------
|
|Interest and
dividend income                  |  |  |  | $    | 14,513
|Interest
expense                              |  |  |  |      | 1,596 
|Net interest
income                           |  |  |  |      | 12,917
|Loan loss
provision                           |  |  |  |      | 900   
|Net interest
income after loan loss provision |  |  |  |      | 12,017
|Noninterest
income                            |  |  |  |      | 3,184 
|Noninterest
expenses                          |  |  |  |      | 7,884 
|Income before
income taxes                    |  |  |  |      | 7,317 
|Provision for
income taxes                    |  |  |  |      | 2,763 
|Net
income                                    |  |  |  | $    | 4,554 
|Basic
earnings per common share               |  |  |  | $    | 0.27  
|Fully diluted
earnings per common share       |  |  |  | $    | 0.26  



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




69


---



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



None


|ITEM
9A. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



Evaluation of Disclosure Controls and Procedures




As required by Rule 13a-15 under
the Exchange Act of 1934, the Company carried out an evaluation of the effectiveness of the design and operation of the Companys disclosure
controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the
participation of the Companys management, including the Companys Chief Executive Officer and the Companys Chief Financial Officer.
Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective as of the end of the period covered by this report.




Changes in Internal Controls




There have been no significant
changes in the Companys internal control over financial reporting during the Companys most recent fiscal quarter that have materially
affected, or are reasonably likely to affect, the Companys internal control over financial reporting.




Managements Report on Internal Control Over
Financial Reporting




The management of Cascade Bancorp
and its subsidiary, Bank of the Cascades (collectively, the Company) is responsible for establishing and maintaining adequate internal
control over financial reporting, and preparing annual consolidated financial statements presented in conformity with accounting principles generally
accepted in the United States. The Companys internal control system was designed to provide reasonable assurance to the Companys management
and board of directors regarding the preparation and fair presentation of published financial statements. The Companys internal control system
contains monitoring mechanisms and actions are taken to correct identified deficiencies.




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.




The Companys management
assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2005. 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, 2005, the Companys internal control over financial reporting is
effective based on those criteria.




It is also managements
responsibility to ensure satisfactory compliance with all designated laws regulations, and in particular, those laws and regulations concerning loans
to insiders and dividend restrictions. Management also believes that there was satisfactory compliance during 2005 with designated laws and
regulations.


|ITEM
9B. |  | OTHER INFORMATION
|-------- |  | -----------------



None




70


---



PART III




Part III, items 10 through 14 are
incorporated by reference from the Companys definitive proxy statement issued in conjunction with our Annual Meeting of Shareholders to be filed
within 120 days of the Companys fiscal year end of December 31, 2005. (Directors and Executive Officers; Executive Compensation; Director and
Management Ownership; Related Party Transactions; and Principal Accountant Fees and Services).




PART IV


|ITEM
15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
|-------- |  | ----------------------------------------------------------------

|(a)  (1) |  | The financial statements required in this Annual Report are
listed in the accompanying Index to Consolidated Financial Statements on page 38.
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2)Financial Statement Schedules.
| |  | ---------------------------------



All financial statement schedules
are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements
or the notes thereto.


|(b) |  | Reports on Form 8-K.
|--- |  | --------------------



The Company filed a report on
Form 8-K on October 11, 2005 in regards to release of the Companys fourth quarter and year-end, 2005 earnings.




The Company filed a report on
Form 8-K on December 28, 2005 in regards to the announcement of a definitive agreement to acquire F&M Holding Company, Boise,
Idaho.


|(c) |  | Exhibits.
|--- |  | ---------



The list of exhibits has been
intentionally omitted. Upon written request, we will provide to you, without charge, a copy of the list of exhibits as filed with the Securities and
Exchange Commission. Additionally, we will furnish you with a copy of any exhibit upon written request. Written requests to obtain a list of exhibits
or any exhibit should be sent to Bank of the Cascades, 1100 NW Wall Street, Bend, Oregon 97701, Attention: Investor Relations.




71


---



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.
MossPatricia L. MossPresident/Chief Executive Officer |  |  |  | /s/
Gregory D. NewtonGregory D. Newton Executive Vice President/Chief Financial Officer
|Date:  March 3, 2006                                                  |  |  |  | Date:  March 3, 2006                                                                   



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.
AndresJerol E. Andres, Director/Vice Chairman   |  |  |  | March 9, 2006Date
|------------------------------------------------------------ |  |  |  | -----------------
|                                                            
|Gary L.
CappsGary L. Capps, Director                         |  |  |  | March 9, 2006Date
|                                                            
|/s/ Gary L.
HoffmanGary L. Hoffman, Director/Chairman        |  |  |  | March 9, 2006Date
|                                                            
|/s/ Henry H.
HewittHenry H. Hewitt, Director                 |  |  |  | March 9, 2006Date
|                                                            
|/s/ Judi
JohansenJudi Johansen, Director                     |  |  |  | March 9, 2006Date
|                                                            
|/s/ Patricia
L. MossPatricia L. Moss, Director/President/CEO |  |  |  | March 3, 2006Date
|                                                            
|/s/ Ryan R.
PatrickRyan R. Patrick, Director                 |  |  |  | March 9, 2006Date



72


---

EXHIBITS INDEX





|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 3.2 to registrants Form 10-K Annual Report for the fiscal year ended December 31, 2000, 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.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11.1 | Earnings per Share Computation.  The information called for by this item is located on page 67 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.
|---- | -------------------------------------------------------------------



|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                                                                 
|     |