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, 2003

|[  ] |  | 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)
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 an
accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [  ]




The aggregate market value of the voting stock held
by non-affiliates of the Registrant registrant at June 30, 2003 (the last business day of the most recent second quarter) was $201,517,683 (based on
the closing price as quoted on the NASDAQ National 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. 13,266,378 shares of no par value Common Stock on February 27,
2004.


DOCUMENTS INCORPORATED BY REFERENCE

Part III is incorporated by reference from the issuers definitive proxy
statement for the annual meeting of shareholders to be held on April 27, 2004.

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CASCADE BANCORP FORM 10-K ANNUAL REPORT TABLE OF
CONTENTS

|PART I            
|------------------
|                  
|Item
1.           
|Item
2.           
|Item
3            
|Item
4            
|PART II           
|Item
5.           
|Item
6.           
|Item
7.           
|Item
7A.          
|Item
8.           
|Item
9.           
|Item
9A.          
|PART III          
|Item 10
through 14
|PART IV           
|Item
15.          
|SIGNATURES        

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PART I

Item 1.    BUSINESS

Company



Cascade Bancorp (Bancorp) is an Oregon chartered
Financial Holding Company formed in 1990 and headquartered in Bend, Oregon, with its principal subsidiary Bank of the Cascades (the Bank). Together
these entities are referred to as (the Company). At December 31, 2003 the Company had total consolidated assets of approximately $735
million, net loans of approximately $578 million and deposits of approximately $651 million.


Bank of the Cascades



The Bank was chartered as an Oregon State bank in
1976 and opened for business in 1977, with headquarters in Bend, Oregon. The Bank is a community bank offering a full range of financial services to
its business and consumer clients, including residential mortgage, trust and investments. At the beginning of 2003, the Bank had a total of twelve
branches serving the communities in Central Oregon and Salem/Keizer.




During 2003, the Bank expanded into Southern Oregon
with a branch in Medford and, late in the year added a new Portland, Oregon branch targeting the downtown business and professional banking market. In
addition, the Bank expanded its presence in Salem with a West Salem branch that opened in July, 2003. On January 1, 2004 the Company completed its
previously announced acquisition of the single branch office of Community Bank of Grants Pass, Oregon to further its presence in Southern Oregon. These
actions have diversified the Banks markets, expanded its growth potential and increased its branch total to sixteen locations. The Company
announced plans to open up to five new offices between its Central and Southern Oregon markets in 2004, including in the Old Mill district of Bend
which opened February 2, 2004.




A predominate share of the Banks assets are in
Deschutes County, where it is the market share leader in customer deposits holding 31% market share. Additionally, the Bank is the county market share
leader in construction and commercial real estate lending as well as in residential mortgage origination. Over the past decade the population of
Deschutes County has grown at a rate among the fastest of all counties in the United States. This rapid growth has been driven by in-migration of
persons seeking a higher quality of life. The Region is ranked in the Six Best Vacation Destinations and Hometowns by Time Magazine
and as one of the Five Best Places to Retire and the Fourth Best Place for Families to Recreate in the United States by
Money Magazine. With this growth has come increasing real estate, service, healthcare, professional, and tourism/recreational
industries.




With a personal-touch relationship banking strategy,
the Bank offers a broad range of commercial and retail banking services to its customers. Lending activities serve small to medium-sized businesses,
municipalities and public entities, professional and consumer clientele. The Bank provides commercial real estate loans, real estate construction
and development loans, commercial and industrial loans as well as consumer installment, line-of-credit, credit card, and home equity loans. The Bank
originates and services residential mortgage loans that are typically sold on the secondary market. The Bank provides consumer and business deposit
services including checking, money market, and time deposit accounts and related payment services such as cash management, lock box, internet banking
and electronic bill payment.


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 good. Bancorp has no employees other
than its executive officers, who are also employees of the Bank. The Company had 283 full-time employees as of December 31, 2003, up from 238 at the
prior year end. This increase is primarily related to expanding into new markets in Southern Oregon and Portland, Oregon during the year. None of the
employees of the Company are subject to a collective bargaining agreement.


Business Strategy



The Company deploys a distinctive community banking
strategy in its markets of Central Oregon, Salem, Southern Oregon and Portland. A key component of the Companys business strategy is to recruit
and retain the best in-market bankers for competitive advantage. The business strategy is focused on personal-touch relationship


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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. With the closing of its acquisition of the former Community Bank of Grants Pass
on January 1, 2004, the Company added to its Southern Oregon presence, and is targeting additional branch locations in Medford and Grants Pass in
2004.




The Company is deploying a niche strategy in
Portland, focusing its delivery of banking services to business and professional customers in the downtown core. Key to the deployment of this strategy
was the hiring of an experienced Portland banking team from another financial institution in September, 2003.




In addition to targeting growth and increased market
share in its existing locations, the Company may also consider future expansion by de novo branching 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.


Risk Management



The Companys risk management objectives
include loan policies and underwriting practices designed to prudently manage credit risk. Funding policies are designed to maintain an appropriate
volume and mix of core relationship deposits augmented by time deposit balances to efficiently fund its loan and investment activities. The Company may
utilize borrowings or other wholesale funding from reliable counterparties such as the Federal Home Loan Bank and the Federal Reserve Bank. The Company
monitors and manages its sensitivity to changing interest rates by utilizing simulation analysis and scenario modeling.


Factors That May Affect Future Results

Competition



Commercial and consumer banking in Central Oregon,
as well as in the State of Oregon and the nation as a whole, 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.


Geographic Concentration



The Company generates substantially all of its loans
and deposits from customers located within the Companys Central Oregon, Salem, Medford and Portland service areas. As of December 31, 2003,
approximately 78% of total loans and 84% of deposits are attributable to its Central Oregon banking business, while the remaining 22% and 16%,
respectively, stem from Salem area business and the new markets of Medford and Portland. The Company is thus subject to and is directly affected by the
trends and changes in the economic vitality of these regions. Because


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of the rapid population growth of Central Oregon over the past decade, and the
tourism and service nature of the economy in its primary Central Oregon market, its loan concentration has historically been in real estate
construction and commercial real estate loans.

Effects of Government Monetary Policy



The earnings and growth of the Company are affected
not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The
Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating recession, by its open market
operations in U.S. Government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates
charged on loans or paid on deposits. Future changes in monetary policies and their impact on the Company cannot be predicted with
certainty.


SUPERVISION AND REGULATION



Bancorp and the Bank are extensively regulated under
Federal and Oregon law. These laws and regulations are primarily intended to protect depositors and the deposit insurance fund, not shareholders of the
Company. 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
the Company. The operations of the Company may be affected by legislative changes and by the policies of various regulatory authorities. Management is
unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic control or new
Federal or State legislation may have in the future.


Federal Bank Holding Company Regulation



The Company is a one-bank financial holding company
within the meaning of the Bank Holding Company Act (Act), and as such, it is subject to regulation, supervision and examination by the
Federal Reserve Bank (FRB). The Company has been designated a Financial Holding Company as defined in the 1999 Gramm-Leach-Bliley Act (see
description below). The Company is required to file annual reports with the FRB and to provide the FRB such additional information as the FRB may
require.




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




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


The Sarbanes-Oxley Act of 2002



In July 2002, the Sarbanes-Oxley Act of 2002 (the
SOA) was enacted with the intent of protecting investors by improving the accuracy and reliability of corporate disclosures. The SOA, among
other things: requires enhanced financial disclosures; certifications by chief executive officer and chief financial officer as to the accuracy of
financial


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statements; completeness of disclosure and effectiveness of internal controls;
greater independence of audit functions; and increased penalties for accounting and auditing improprieties at publicly traded companies. The SOA
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 SOA.

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 the 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 restricting or prohibiting 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. The new 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------



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.




The Company became a designated Financial
Holding Company in 2000, but does not expect such designation to have a material effect on its financial condition or results of
operations.


Federal and State Bank Regulation



The Bank, 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 to the supervision and regulation of the FDIC.
These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices.


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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 Banks current CRA rating is Satisfactory.




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




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


Interstate Banking Legislation



Under the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the Interstate Act), bank holding companies are permitted to acquire banks located in any state
regardless of the state law in effect at the time. The Interstate Act also provides for the nationwide interstate branching of banks. Under the
Interstate Act, both national and state chartered banks, including Oregon banks, are permitted to merge across state lines and thereby create
interstate branch networks.


Deposit Insurance



As a member institution of the FDIC, the deposits of
the Bank are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund (BIF), and the 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 Banks FDIC insurance expense for 2003 was approximately $81,000.


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, 2003 the Company is considered well capitalized according to these regulatory capital guidelines. See footnote
17 to the Consolidated Financial Statements in this report.




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


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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. The Company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
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, 2003, the Companys Tier 1
capital, total risked-based capital and leverage ratios were 9.88%, 11.21% and 8.55%, 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, 2003, the Company is considered
Well-capitalized.


State Regulations Concerning Cash Dividends



The principal source of Bancorps cash revenues
have been provided from dividends received from the Bank. The Oregon banking laws impose 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 there, 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.


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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. The
Bank and Bancorp are not currently subject to any regulatory restrictions on their dividends other than those noted above.


Item 2.    PROPERTIES



At December 31, 2003, the Company conducted banking
services in fifteen locations throughout Oregon. Nine located in Central Oregon, four in Salem/Keizer, one each in Medford and Portland. Oregon. All
offices are free standing buildings except two locations, one is leased space in a supermarket in Bend and the other is located on the 10th
floor of the Pioneer Tower in Portland. The main office and three other branch buildings are owned and are situated on leased land. The Bank owns land
and buildings at three branch locations. The Bank leases land and buildings at five branch locations. In addition, the Bank leases space for its
Information Systems/Operation Center and Mortgage Center, located in Bend, Oregon. All leases include multiple renewal options. With the completion of
the previously announced acquisition of Community Bank of Grants Pass on January 1, 2004, the Company acquired a branch office which is a free-standing
building, totaling 5,000 square feet of space, which is owned and is situated on owned land and an undeveloped property in South Grants Pass. In
addition, the Bank opened its seventeenth location in February 2004 at the Old Mill district in Bend. This Old Mill building contains approximately
21,800 square feet of leasable space of which the Bank occupies 2,000 square feet and is seeking tenants for the remainder.




The Banks main office is located at 1100 NW
Wall Street, Bend, Oregon, and consists of approximately 15,000 square feet. 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. Monthly rental is $5,290 per month with
adjustments every five years by mutual agreement of landlord and tenant. The main bank branch occupies the ground floor. Human resources, trust &
investments and credit functions occupy approximately 8,400 square feet. A separate drive-up facility is also located on site. In 1999 the Bank
acquired a 3,000 square foot adjacent building and land for future expansion.




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 shareholders during the
fourth quarter of 2003.


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PART II

|Item 5. |  | MARKET FOR CASCADE BANCORPS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- |  | -----------------------------------------------------------------------------------------------------------------



Cascade Bancorp common stock trades on The NASDAQ
Small Cap Market tier of The NASDAQ Stock Market under the symbol CACB. The primary market makers are: RBC Dain Rauscher Inc., Wells Fargo
Investments-Ragen MacKenzie Division, D.A. Davidson & Co., Hoefer & Arnett Inc., Pacific Crest Securities Inc., FTN Midwest Research Securities
Corp., and Keefe, Bruyette & Woods, Inc.




The high and low sales prices shown below are
retroactively adjusted for stock dividends and splits and are based on actual trade statistical information provided by The NASDAQ Stock Market for the
periods indicated.


|     |  |  |  | First Quarter |       | Second Quarter |  | Third Quarter |       | Fourth Quarter
|---- |  |  |  | ------------- | ----- | -------------- |  | ------------- | ----- | --------------
|2003 |  |  |  |               |       |                |  |               |       |               
|High |  |  |  | $             | 15.41 |                |  | $             | 18.49 |               
|Low  |  |  |  | $             | 13.99 |                |  | $             | 14.50 |               
|2002 |  |  |  |               |       |                |  |               |       |               
|High |  |  |  | $             | 12.30 |                |  | $             | 18.38 |               
|Low  |  |  |  | $             | 10.40 |                |  | $             | 12.47 |               



The Company declared a 50% (3:2) stock split in May
2002. The Company announced the establishment of 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
|---- |  |  |  | ------------- | --- | -------------- |  | ------------- | --- | --------------
|
|2004 |  |  |  | $             | .08 |                |  |               | N/A |               
|2003 |  |  |  | $             | .08 |                |  | $             | .08 |               
|2002 |  |  |  | $             | .06 |                |  | $             | .06 |               



At February 28, 2004, the Company had 13,266,378
shares of common stock outstanding held by approximately 4,700 shareholders of record.


Item 6.    SELECTED FINANCIAL DATA

Cautionary Information Concerning Forward-Looking
Statements



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




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


10

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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 policy upon which our financial condition depends, and which involve the most
complex or subjective decisions or assessments is as follows:




Reserve for Loan Losses:  Arriving
at an appropriate level of reserve for loan losses involves a high degree of judgment. The Companys reserve for loan losses provides for probable
losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the
reserve for loan losses as well as the prevailing business environment; 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 methodology common to the mortgage servicing market.
Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs, and
the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the
avoidance of possible impairment charges in future periods. See also Managements Discussion and Analysis of Financial Condition and Results of
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              |  |  |  | $                        | 34,271 
|Loans,
gross                       |  |  |  |                          | 587,200
|Total
assets                       |  |  |  |                          | 734,712
|Total
deposits                     |  |  |  |                          | 651,155
|Non-interest
bearing deposits      |  |  |  |                          | 245,378
|Core Deposits
(1)                  |  |  |  |                          | 635,177
|Total
shareholders equity (2)     |  |  |  |                          | 61,756 

11

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|                                               |  |  |  | Years ended December 31, |        
|---------------------------------------------- |  |  |  | ------------------------ | -------
|
|Income
Statement Data                          |  |  |  |                          |        
|Interest
income                                |  |  |  | $                        | 40,835 
|Interest
expense                               |  |  |  |                          | 4,003  
|Net interest
income                            |  |  |  |                          | 36,832 
|Loan loss
provision                            |  |  |  |                          | 2,695  
|Net interest
income after loan loss provision  |  |  |  |                          | 34,137 
|Non-interest
income                            |  |  |  |                          | 13,400 
|Non-interest
expense                           |  |  |  |                          | 24,854 
|Income before
income taxes                     |  |  |  |                          | 22,683 
|Provision for
income taxes                     |  |  |  |                          | 8,728  
|Net
income                                     |  |  |  | $                        | 13,955 
|Share Data
(2)                                 |  |  |  |                          |        
|Basic
earnings per common share                |  |  |  | $                        | 1.11   
|Diluted
earnings per common share              |  |  |  | $                        | 1.07   
|Book value
per common share                    |  |  |  | $                        | 4.89   
|Cash
dividends declared per common share       |  |  |  | $                        | 0.32   
|Ratio of
dividends declared to net income      |  |  |  |                          | 28.86  
|Basic Average
shares outstanding               |  |  |  |                          | 12,584 
|Fully Diluted
average shares outstanding       |  |  |  |                          | 12,999 
|Key
Ratios                                     |  |  |  |                          |        
|Return on
average total shareholders equity   |  |  |  |                          | 25.06  
|Return on
average total assets                 |  |  |  |                          | 2.13   
|Net interest
spread                            |  |  |  |                          | 5.62   
|Net interest
margin                            |  |  |  |                          | 6.03   
|Total revenue
(net int inc + non int inc)      |  |  |  | $                        | 50,232 
|Efficiency
ratio (3)                           |  |  |  |                          | 49.48  
|Asset
Quality Ratios                           |  |  |  |                          |        
|Loan loss
reserve                              |  |  |  | $                        | 9,399  
|Reserve to
ending total loans                  |  |  |  |                          | 1.59   
|Non-performing assets (4)                      |  |  |  | $                        | 56     
|Non-performing assets to total assets          |  |  |  |                          | 0.01   
|Delinquent
>30 days to total loans             |  |  |  |                          | 0.04   
|Net Charge
offs                               |  |  |  | $                        | 966    
|Net loan
charge-offs (annualized)              |  |  |  |                          | 0.18   
|Mortgage
Activity                              |  |  |  |                          |        
|Mortgage
Originations                          |  |  |  | $                        | 304,691
|Total
Servicing Portfolio (sold loans)         |  |  |  | $                        | 514,223
|Capitalized
Mortgage Servicing Rights (MSRs)  |  |  |  | $                        | 4,688  
|Capital
Ratios                                 |  |  |  |                          |        
|Average
shareholders equity to average assets |  |  |  |                          | 8.51   
|Leverage
ratio (5)                             |  |  |  |                          | 8.55   
|Total
risk-based capital ratio (5)             |  |  |  |                          | 11.21  



Notes:

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

|(2) |  | Adjusted to reflect 10% stock dividend declared in June 1999, a
20% (6:5) stock split declared in May 2001, and a 50% (3:2) stock split declared in May 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Efficiency ratio is noninterest expense divided by (net interest
income + noninterest income).
|--- |  | ----------------------------------------------------------------------------------------------

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

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

12

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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 flow 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, 2003 and 2002 and for
each of the three years in the period ended December 31, 2003 included elsewhere in this report.


HIGHLIGHTS AND SUMMARY OF PERFORMANCE

OVERVIEW AND KEY PERFORMANCE MEASURES



2003 was an impactful year for the Company, as it
continued its strong growth in existing markets, while expanding into new markets in Southern Oregon (June 2003) and Portland, Oregon (September 2003).
The moves are targeted to help diversify the Companys asset and revenue streams, and to increase its long-term growth potential. 2002 was also a
strong (EPS) growth year, with double digit growth in loans and deposits and a significant increase, stated-below in earnings per share. The lower
interest rate environment led to strong home mortgage originations and revenue during the reporting periods, while customer growth and increased
transaction volumes led to higher banking service fees. The low interest rate climate that has persisted over the report horizon moderated the
Companys net interest margin, as loan yields compressed against an already low cost of funds.




EPS (diluted) increased 17.9% in 2003, which
approximates the Companys five year compound average growth rate for EPS. This followed a 32.9% increase in 2002. Strong financial results were
accomplished in 2003 despite incurring start-up costs related to the expansion into the Southern Oregon (Medford) and Portland, Oregon markets. Net
after tax expenses related to these new markets reduced EPS by ($.07) per diluted share for 2003. Future results for these new markets will depend upon
growth in business volumes as well as the timing and cost of two additional branches planned in the Southern Oregon market. Management estimates an
incremental cost impact ranging from ($.06) to ($.09) on EPS for the full year of 2004, and is targeting breakeven in these new market ventures between
18 and 24 months.


New market initiatives in Southern Oregon and Portland,
Oregon



The Companys expansion into Southern Oregon is
based upon a community banking strategy, similar to its Central Oregon and Salem regions. The Medford branch was opened in mid-2003, and with the
closing of its acquisition of the former Community Bank of Grants Pass on January 1, 2004 the Company added to its Southern Oregon presence, and is
targeting additional branch locations in Medford and Grants Pass in 2004.




The Company is deploying a banking niche strategy in
Portland, delivering boutique banking services to business and professional customers in the downtown core. Key to the deployment of this strategy was
the hiring of an experienced Portland banking team from another financial institution.




At December 31, 2003, combined loan totals in the
Companys new Southern Oregon and Portland markets stood at $27 million while combined deposits were over $13 million.


Subsequent Events



The Company completed its acquisition of Community
Bank of Grants Pass on January 1, 2004, with customer conversion to Bank of the Cascades systems also completed in January. The Companys year-end
2003 financial statements do not include the results of operations of Community Bank of Grants Pass since the transaction closed after year-end. The
combined results will be first reported with the March 31, 2004 quarterly report. At December 31,


13

---

2003, Community Bank of Grants Pass reported $36 million in loans, $42 million in
deposits, $5 million in equity, and $.4 million net income for full year 2003 (unaudited).

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) continuously seek efficiency improvements in all its activities.
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 credit quality, and target 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.


FINANCIAL PERFORMANCE SUMMARY:



Continued rapid growth in loans and deposits along
with a growing customer base and increasing transaction volumes led to strong financial results for the years presented. For the year 2003, net income
was up 19.1% to $14.0 million vs. $11.7 million in 2002 and $8.7 million in 2001. Diluted EPS for 2003 was $1.07, up 17.9% from the $.91 recorded in
2002 and $.68 in 2001. Return on Equity was among the highest of all banks in the nation at 25.06% for the year compared to 25.62% for 2002. Return on
Assets continued well above peer banks at 2.13% for the year compared to 2.20% for 2002.


Loan growth and credit quality



At December 31, 2003, the loan portfolio had grown
to $587 million, up 17.6% compared to a year earlier. Loans in the Companys main Central Oregon market increased 13.4% over the year, while
incremental loan growth in Portland and Medford contributed the majority of overall loan growth during the fourth quarter. 2002 loans were up a strong
18.4% over 2001. Low interest rates and consistent positive economic growth in the Companys main Central Oregon market were important factors
supporting the strong growth in the report years.




The Companys underlying loan credit quality
remained sound throughout the reporting periods. At year end 2003, delinquent loans greater than 30 days past due were at .04% of total loans, while
net loan charge-offs for the year were $1.0 million or only .18% of total loans. The reserve for loan losses at year end stood at a prudent 1.59% of
total loans. Based upon Managements analytical and evaluative assessment of loan quality, the Company believes that its reserve for loan losses
is at an appropriate level under current circumstances and prevailing economic conditions.


Deposit growth



December 31, 2003 deposits were $651.2 million, up
29.7% or $149.2 million from a year ago. A portion of 2003s rapid deposit growth was attributed to deposit activity of several large customers
that may be interim in nature. With the lower overall interest rate environment and its ongoing success in attracting non-interest bearing deposits,
which averaged 37.5% of total deposits in 2003, the Companys average overall cost of funds fell to .68% in 2003 compared to .98% in 2002.
Non-interest bearing accounts are viewed as core relationship deposits.




The Company has a long track record of growing core
deposits to fund loan growth. In 2003, because deposit growth exceeded the increase in loans, the Company had ample excess liquidity. Management
invested these excess funds in short-term and overnight money market instruments, in anticipation that such funds would be deployed to fund incremental
loan growth, especially in new markets.


Non interest income and expense



Non-interest income was up 38.5% at $13.4 million
(pre-tax) for 2003. Contributing to the revenue increase was a $1.4 million or 51.1% increase in mortgage fee revenue, resulting from high origination
volumes of refinance and purchase activity driven by the historic low interest rate environment. Mortgage originations were at a record $304.7 million
for the year, up 35.8% from 2002. Also contributing to higher fee income in 2003 was a $1.8 million,


14

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or 41.4% year over year increase in service charge income, in part resulting from
volume and price increases in the Companys overdraft protection product.



Non-interest expense for the year increased 18.2%
compared to 2002, following an 8.9% increase in the prior year. Expenses incurred in new markets totaled $1.3 million or about 1/3 of the 2003
year-over-year increase in expenses. Expense increases were primarily for human resources, including staffing increases to meet growing business
volumes, support for new markets, along with incentive-based bonuses and variable mortgage commissions that are directly tied to the increasing
profitability of the Company.


RESULTS OF OPERATIONS  Years ended December 31, 2003, 2002,
and 2001

Net Interest Income/Net Interest Margin



Net interest income (gross interest income net of
funding costs) was $36.8 million in 2003 compared to $33.2 and $29.5 million in 2002 and 2001, respectively. In percentage terms, net interest income
was up 10.8% and 12.6% in 2003 and 2002, respectively. Three factors were broadly affecting net interest income over the report horizon. First, the
Company was able to sustain strong double-digit growth in both loans and deposits, which increases net interest income. Second, the generational low
interest rate climate compressed average yields on earning assets, tending to lower net interest income. Third, the cost of funds also declined due to
the ongoing low interest-rate climate, tending to improve net interest income. The following provides insight into these component
factors.




2003 interest income increased a modest 7.8% over
the prior year despite a 17.6% growth in outstanding loans, as portfolio yields continued to decline in the sustained low interest rate climate.
Average yields on earning assets fell to 6.68% in 2003 compared to 7.69% in 2002. Similarly, 2002 interest income declined slightly from the prior year
despite a loan growth of 18.4%. Again falling yields offset higher earning asset volumes, with yields falling to 7.69% in 2002 compared to 9.10% in
2001.




At the same time, the lower interest rate climate
resulted in lower interest expense over the past two years. While deposit volumes grew at 29.7% and 18.4% in 2003 and 2002, respectively, interest
expense declined in both years, falling 14.0% in 2003 after a 46.9% decline in 2002. Average rates paid on interest bearing deposits and borrowings
decreased in 2003 to 1.06% versus 1.52% in 2002 and 3.22% in 2001. An important factor in the Companys overall low cost of funds has been its
strong percentage of non-interest bearing deposits. Such deposits averaged about 36.2% of total deposits in both 2003 and 2002, respectively, and are a
reflection of the Companys relationship banking strategy, high customer service standards, and 31% market share in Central Oregon. Because of
this relatively high proportion of non-interest bearing deposits, the overall cost of funds was .68% in 2003 compared to .97% in 2002, and 2.10% for
2001. With its entry into competitive new markets where the Company does not enjoy a large market share, the proportion of non-interest bearing
deposits may ease over time.




The above combination of factors caused the
Companys net interest margin (NIM) to fall to 6.03% in 2003 from 6.75% in 2002 and versus 7.02% in 2001. 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 ongoing low interest rate climate has caused
a gradual decline in loan yields that compress against an already low cost of funds. Given that the market anticipates a modest increase in interest
rates over the balance of 2004, management forecasts that the margin will likely continue to ease over the next 12-18 months toward a range of 5.75% to
6.00%. In addition, the margins earned in competitive new markets may be narrower than those earned in its existing markets, and may tend to narrow the
margin in the future.


15

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Average Balances and Average Rates Earned and Paid



The following table sets forth for 2003, 2002, and
2001 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, 2003 |         | Year ended December 31, 2002 |  | Year ended December 31, 2001 |       
|----------------------------------------------------- |  |  |  | ---------------------------- | ------- | ---------------------------- |  | ---------------------------- | ------
|
|Assets                                                |  |  |  |                              |         |                              |  |                              |       
|Taxable
securities                                    |  |  |  | $                            | 29,334  |                              |  | $                            | 1,140 
|Non-taxable
securities (1)                            |  |  |  |                              | 2,369   |                              |  |                              | 66    
|Interest
bearing balances from Federal Home Loan Bank |  |  |  |                              | 23,098  |                              |  |                              | 214   
|Federal funds
sold                                    |  |  |  |                              | 11,775  |                              |  |                              | 116   
|Loans
(2)(3)                                          |  |  |  |                              | 544,440 |                              |  |                              | 39,299
|Total earning
assets                                  |  |  |  |                              | 611,016 |                              |  |                              | 40,835
|Reserve for
loan losses                               |  |  |  |                              | (8,415  | )                            |  |                              |       
|Cash and due
from banks                               |  |  |  |                              | 23,062  |                              |  |                              |       
|Premises and
equipment, net                           |  |  |  |                              | 11,540  |                              |  |                              |       
|Other
Assets                                          |  |  |  |                              | 16,979  |                              |  |                              |       
|Total
assets                                          |  |  |  | $                            | 654,182 |                              |  |                              |       
|Liabilities & Stockholders Equity                    |  |  |  |                              |         |                              |  |                              |       
|Int. bearing
demand deposits                          |  |  |  | $                            | 281,438 |                              |  |                              | 2,449 
|Savings
deposits                                      |  |  |  |                              | 26,888  |                              |  |                              | 109   
|Time
deposits                                         |  |  |  |                              | 47,973  |                              |  |                              | 898   
|Other
borrowings                                      |  |  |  |                              | 20,424  |                              |  |                              | 547   
|Total
interest bearing liabilities                    |  |  |  |                              | 376,723 |                              |  |                              | 4,003 
|Demand
deposits                                       |  |  |  |                              | 213,639 |                              |  |                              |       
|Other
liabilities                                     |  |  |  |                              | 8,164   |                              |  |                              |       
|Total
liabilities                                     |  |  |  |                              | 598,526 |                              |  |                              |       
|Stockholders equity                                  |  |  |  |                              | 55,656  |                              |  |                              |       
|Total
liabilities & equity                            |  |  |  | $                            | 654,182 |                              |  |                              |       
|                                                      |  |  |  |                              |         |                              |  |                              |       
|Net interest
income                                   |  |  |  |                              |         |                              |  | $                            | 36,832
|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) |  | Loan related fees included in the above yield calculations:
$2,190,000 in 2003, $1,885,000 in 2002, and $1,493,000 in 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes mortgage loans held for sale.
|--- |  | --------------------------------------

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
result from changes in volume, spread and margin. Volume refers to the dollar level of interest-earning assets and interest-bearing liabilities. Spread
refers to the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. Margin refers to net interest
income divided by interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing
liabilities.


16

---



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              |  |  |  | $                       | 2,676
|Taxable
securities                      |  |  |  |                         | (12  
|Non-taxable
securities                  |  |  |  |                         | 29   
|Interest
bearing balances due from FHLB |  |  |  |                         | 214  
|Federal funds
sold                      |  |  |  |                         | 31   
|Total
interest income                   |  |  |  |                         | 2,938
|Interest
expense:                       |  |  |  |                         |      
|Interest on
deposits:                   |  |  |  |                         |      
|Interest
bearing demand                 |  |  |  |                         | 171  
|Savings                                 |  |  |  |                         | (37  
|Time                                    |  |  |  |                         | (768 
|Other
borrowings                        |  |  |  |                         | (20  
|Total
interest expense                  |  |  |  |                         | (654 
|Net interest
income                     |  |  |  | $                       | 3,592

Non-interest Income

Total non-interest income was up 38.5% at $13.4 million for 2003, following a 23.4%
increase in 2002. Contributing to the increase in both years were record net mortgage revenues (discussed below) as well as higher bank service fee
income arising from a growing customer base, increased transaction volumes and pricing adjustments. 2003 banking service fees increased by $1.8
million, or 41.4% year over year, in part due to strong customer acceptance and utilization of overdraft protection related products.

Home Mortgage Originations and Mortgage Related Revenue

With mortgage market rates remaining at very low levels throughout 2003, the
Company originated a record volume of mortgages to fund home purchase and refinance activity. The increasing volumes contributed to stronger net
mortgage banking fees over these years. 2003 residential mortgage origination volumes totaled approximately $305 million, compared to $224 million in
2002, and $180 million in 2001. Net mortgage revenues increased to $4.1 million in 2003, up 51.1% from $2.7 million in the prior year.

The general level and direction of interest rates directly influence the volume and
profitability of mortgage banking. The market is predicting higher interest rates in 2004, and the Mortgage Bankers Association has predicted a likely
slowdown in mortgage activity. It is likely that in a higher rate environment the volume of mortgage loans and associated origination fees and gains on
sales of residential mortgage loans would retreat from the record levels of 2003.

The Company routinely 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 $514
million at December 31, 2003 and $454 million at December 31, 2002, upon which were recorded related Mortgage Servicing Rights (MSRs) of approximately
$4.7 million and $4.1 million, respectively.

The Company capitalizes the estimated market value of MSRs into income upon
origination and sale of each mortgage loan. The Company amortizes MSRs in proportion to the servicing income it receives from Fannie Mae

17

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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.

As a result of its fair value analysis, in 2003, the Company recorded a negligible
positive MSRs valuation adjustment, as compared to 2002s impairment charge of $.4 million. Including remaining net valuation allowances, the
carrying value of the MSRs at December 31, 2003 was 0.92% of serviced loans compared to 0.89% a year ago. Net remaining MSRs impairment allowances
total approximately $.3 million at December 31, 2003.

Non-interest Expense

Total non-interest expense for the year was $24.9 million, an increase of 18.2%
compared to 2002, following an increase of 8.9% in 2002. Pretax expenses relating to new markets start-up costs were $1.3 million for 2003, which
accounts for about 33% of the increase for the full year. 2003 expense increases occurred for human resources, including staffing increases to meet
growing business volumes, support for new markets, along with incentive-based bonuses and variable mortgage commissions that are directly tied to the
increasing profitability of the Company. 2002 staff increases were primarily in the Mortgage Center owing to record business volumes, plus additional
loan officer and branch staff positions. During the periods presented, business growth drove higher expenses for new branch locations, equipment,
communication and information systems, marketing, postage, donations, legal and professional services. Despite increased expenses related to new
markets, the Companys efficiency ratio remained stable at about 49.5%, notably better than peer banks for the report periods, as higher costs
were leveraged against increased revenues generated from the strong growth. It is anticipated that the ratio may trend higher in 2004 due to the full
year effect of new market expenses.

Income Taxes

The provision for income taxes increased during the periods presented primarily as
a result of higher pre-tax income.

FINANCIAL CONDITION



Total assets increased 27.0% to $734.7 million at
December 31, 2003 compared to $578.4 million at December 31, 2002. The increase in total assets was driven by continued growth in loans, which grew
$88.6 million or 17.7% to $589.5 million at year-end 2003, following an 18.4% increase in 2002. Loans in the Companys main Central Oregon market
increased 13.4% over the year, while incremental loan growth in Portland and Medford contributed the majority of overall loan growth during the fourth
quarter of 2003. Note that the fourth quarter is historically the Companys slowest growth quarter for loans, due to the seasonal nature of the
construction and tourism industries of its main Central Oregon market.




Growth in total assets was primarily funded by a
$149.2 million or 29.7% increase in deposits. A portion of this rapid deposit growth is attributable to the deposit activity of several large
customers. In addition, some of the rapid deposit growth over the last three years may have been customer reaction to the perceived high volatility and
risk of financial markets since 2000. Such deposits may tend to be interim in nature. The Company continues to be the market share leader in deposits
in its Deschutes County market with over 31% market share.




The Company had no significant derivative financial
instruments as of December 31, 2003 and 2002.


Loan Portfolio Composition



Net loans represent 79% of total assets as of
December 31, 2003. 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 construction and commercial real estate lending. 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. In the past several years the Company has
targeted an increase in the commercial loan segment of the portfolio for diversification and relationship building reasons. It is expected that the
commercial loan segment will continue to expand by virtue of the new markets in Southern Oregon and Portland. However, real estate lending will
continue to be a major concentration within the loan portfolio. The Company has no loans defined as highly leveraged transactions by the Federal
Reserve Bank. The Company has no significant agricultural loans.


18

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The following table presents the composition of the
Companys loan portfolio, at the dates indicated (dollars in thousands):


|                        |  |  |  | December 31, |        
|----------------------- |  |  |  | ------------ | -------
|
|Commercial              |  |  |  | $            | 142,766
|Real
Estate:            |  |  |  |              |        
|Construction/lot        |  |  |  |              | 123,892
|Mortgage                |  |  |  |              | 46,140 
|Commercial              |  |  |  |              | 244,203
|Consumer                |  |  |  |              | 32,490 
|                        |  |  |  |              | 589,491
|Less:                   |  |  |  |              |        
|Reserve for
loan losses |  |  |  |              | 9,399  
|Deferred loan
fees      |  |  |  |              | 2,290  
|                        |  |  |  |              | 11,689 
|                        |  |  |  | $            | 577,801



At December 31, 2003, 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       |  |  |  | $                   | 54,034  |                                      |  | $                    | 69,775  |      
|Real
Estate:     |  |  |  |                     |         |                                      |  |                      |         |      
|Construction/lot |  |  |  |                     | 60,182  |                                      |  |                      | 57,301  |      
|Mortgage         |  |  |  |                     | 11,066  |                                      |  |                      | 9,489   |      
|Commercial       |  |  |  |                     | 6,856   |                                      |  |                      | 46,906  |      
|Consumer         |  |  |  |                     | 4,146   |                                      |  |                      | 14,203  |      
|                 |  |  |  | $                   | 136,284 |                                      |  | $                    | 197,674 |      



Variable and adjustable rate loans contractually due
after one year totaled $189,468 at December 31, 2003 and loans with predetermined or fixed rates due after one year totaled $263,739 at December 31,
2003.


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, 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 41% of total loans outstanding. Approximately 56% of such loans are made to owner-occupied
users of the commercial property, while 44% of CRE loans are to obligors who do not directly occupy the property. 2003 continued to be a strong year in
commercial real estate lending due to low interest rates, continued economic growth in Central Oregon and an apparent investor preference for real
estate assets as compared to financial assets. These factors also affect the trend toward increased non-owner occupied CRE loans as a proportion of
total commercial real estate. 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 (dollars in
thousands):


19

---






|Commercial Real Estate:41.4% of Total Loans |  |  |  | 2003 |         |  | % of total CRE |  |     | 2002 |  |   | % of total CRE |  |  | 2001 |     |   | % of total CRE |  
|------------------------------------------- |  |  |  | ---- | ------- |  | -------------- |  | --- | ---- |  | - | -------------- |  |  | ---- | --- | - | -------------- | -
|Owner
occupied                              |  |  |  | $    | 136,389 |  |                |  | 56  | %    |  | $ | 128,699        |  |  |      | 62  | % |                | $
|Non-owner
occupied                          |  |  |  |      | 107,814 |  |                |  | 44  | %    |  |   | 79,841         |  |  |      | 38  | % |                |  
|                                            |  |  |  | $    | 244,203 |  |                |  | 100 | %    |  | $ | 208,540        |  |  |      | 100 | % |                | $



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 Central Oregon. This portfolio is diversified into three subcategories (dollars in
thousands).







|Real Estate Construction/lot loans:21.0% of Total Loans     |  |  |  | 2003 |         |  | % of total Constr. |  |     | 2002 |  |   | % of total Constr. |  |  | 2001 |     |   | % of total Constr. |  
|----------------------------------------------------------- |  |  |  | ---- | ------- |  | ------------------ |  | --- | ---- |  | - | ------------------ |  |  | ---- | --- | - | ------------------ | -
|Residential
construction  to homeowner                     |  |  |  | $    | 56,881  |  |                    |  | 46  | %    |  | $ | 48,401             |  |  |      | 46  | % |                    | $
|Commercial
construction                                     |  |  |  |      | 26,631  |  |                    |  | 21  | %    |  |   | 24,374             |  |  |      | 23  | % |                    |  
|Residential
speculative construction  to developer/builder |  |  |  |      | 40,380  |  |                    |  | 33  | %    |  |   | 32,809             |  |  |      | 31  | % |                    |  
|                                                            |  |  |  | $    | 123,892 |  |                    |  | 100 | %    |  | $ | 105,584            |  |  |      | 100 | % |                    | $



Residential construction loans are generally made to
customers who own the property and whose credit profile could support 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. Commercial construction loan balances declined between 2001 and 2002 mainly due to the
completion and payoff of several relatively larger construction projects.




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.


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


20

---

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.

Loan Loss Provision



The Banks ratio of reserve for loan losses to
total loans was 1.59% at December 31, 2003 up slightly from 1.53% at December 31, 2002, and up from the 1.55% ratio at December 31, 2001. The loan loss
provision for 2003 was $2.7 million, unchanged from 2002 and down from $3.7 million in 2001. Provision expense is determined by the Companys
ongoing analytical and evaluative assessment of the adequacy of the loan loss reserve. 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 of 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 allocate the reserve. The Companys methodology segments the loan portfolio into homogenous loan pools. Appropriate pool reserve rates
are established based on historical loss rates. Economic and concentration adjustments are also applied to selected pools to reflect current economic
conditions and 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. Logically, the amount of reserves allocated to the largest loan portfolio
categories has increased because of the related growth in loan volumes. The following table reflects an increasing portion of the reserve allocated to
commercial loans. This is the result of applying business cycle loss rates, collateral and concentration variables to this growing portfolio. The 2002
decline in reserve allocated to the mortgage category primarily reflects the historically low loss rate within the portfolio as adjusted for current
economic conditions. The table reflects consumer loans declining from 14% to 6% of total loans since 2000, and an associated reduction in allocated
reserve. This proportional change is mainly a result of the significant growth in commercial and real estate loans compared to consumer loans. The
unallocated portion of the reserve has risen over the past year and is in part due to increased uncertainty that is a consequence of originating loans
in Southern Oregon and Portland, both of which are new markets to the Company.


21

---






|                              |  |  |  | 2003 |       | 2002 | 
|----------------------------- |  |  |  | ---- | ----- | ---- | 
|
|Commercial                    |  |  |  | $    | 2,204 |      | 
|Real
Estate:                  |  |  |  |      |       |      | 
|Construction/lot              |  |  |  |      | 1,833 |      | 
|Mortgage                      |  |  |  |      | 711   |      | 
|Commercial                    |  |  |  |      | 2,153 |      | 
|Consumer                      |  |  |  |      | 1,488 |      | 
|Unallocated                   |  |  |  |      | 1,010 |      | 
|Total reserve
for loan losses |  |  |  | $    | 9,399 |      | 






|                              |  |  |  | 2001 |       | 2000 | 
|----------------------------- |  |  |  | ---- | ----- | ---- | 
|
|Commercial                    |  |  |  | $    | 1,046 |      | 
|Real
Estate:                  |  |  |  |      |       |      | 
|Construction/lot              |  |  |  |      | 917   |      | 
|Mortgage                      |  |  |  |      | 532   |      | 
|Commercial                    |  |  |  |      | 1,238 |      | 
|Consumer                      |  |  |  |      | 2,499 |      | 
|Unallocated                   |  |  |  |      | 323   |      | 
|Total reserve
for loan losses |  |  |  | $    | 6,555 |      | 






|                              |  |  |  | 1999 |      
|----------------------------- |  |  |  | ---- | -----
|
|Commercial                    |  |  |  | $    | 793  
|Real
Estate:                  |  |  |  |      |      
|Construction/lot              |  |  |  |      | 759  
|Mortgage                      |  |  |  |      | 374  
|Commercial                    |  |  |  |      | 675  
|Consumer                      |  |  |  |      | 899  
|Unallocated                   |  |  |  |      | 25   
|Total reserve
for loan losses |  |  |  | $    | 3,525

22

---



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                          |  |  |  | $                       | 589,491
|Average loans
outstanding during the period                 |  |  |  | $                       | 544,440
|Reserve
balance, beginning of period                        |  |  |  | $                       | 7,669  
|Recoveries:                                                 |  |  |  |                         |        
|Commercial                                                  |  |  |  |                         | 173    
|Real
Estate:                                                |  |  |  |                         |        
|Construction                                                |  |  |  |                         |       
|Mortgage                                                    |  |  |  |                         | 18     
|Commercial                                                  |  |  |  |                         | 138    
|Consumer                                                    |  |  |  |                         | 179    
|                                                            |  |  |  |                         | 508    
|Loans charged
off:                                          |  |  |  |                         |        
|Commercial                                                  |  |  |  |                         | (371   
|Real
Estate:                                                |  |  |  |                         |        
|Construction                                                |  |  |  |                         |       
|Mortgage                                                    |  |  |  |                         | (106   
|Commercial                                                  |  |  |  |                         |       
|Consumer                                                    |  |  |  |                         | (996   
|                                                            |  |  |  |                         | (1,473 
|Net loans
charged-off                                       |  |  |  |                         | (965   
|Provision
charged to operations                             |  |  |  |                         | 2,695  
|Reserve
balance, end of period                              |  |  |  | $                       | 9,399  
|Ratio of net
loans charged-off to average loans outstanding |  |  |  |                         | .18    
|Ratio of
reserve for loan losses toloans at end of period   |  |  |  |                         | 1.59   



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


|                                                             |  |  |  | December 31, |    
|------------------------------------------------------------ |  |  |  | ------------ | ---
|
|Loans on
non-accrual status                                  |  |  |  | $            | 56 
|Loans past
due 90 days or more but not on non-accrual status |  |  |  |              |   
|Other real
estate owned                                      |  |  |  |              |   
|Total
non-performing assets                                  |  |  |  | $            | 56 
|Percentage of
non-performing assets to total assets          |  |  |  |              | .01



The accrual of interest on a loan is discontinued
when, in managements judgment, the future collectibility of principal or interest is in doubt. Loans placed on nonaccrual status may or may not
be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on nonaccrual status, it is the
Banks policy to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such
loans is credited to loan principal if, in the opinion of management, full collectibility of principal is doubtful. Interest income that was reversed
and charged against income for the year of 2003 was insignificant and was approximately $100,000 for 2002 and $456,000 for 2001.


23

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At December 31, 2003, except as 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, 2003, 2002, and 2001 (dollars in thousands).


|                                                |  |  |  | December 31, |       
|----------------------------------------------- |  |  |  | ------------ | ------
|
|U.S. Agency
mortgage-backed securities          |  |  |  | $            | 25,193
|U.S. Treasury
securities                        |  |  |  |              |      
|U.S.
Government and agency securities           |  |  |  |              | 3,135 
|Obligations
of state and political subdivisions |  |  |  |              | 3,458 
|Total debt
securities                           |  |  |  |              | 31,786
|Mutual
fund                                     |  |  |  |              | 352   
|Equity
securities                               |  |  |  |              | 2,133 
|Total
investment securities                     |  |  |  | $            | 34,271



The following is a summary of the contractual
maturities and weighted average yields of investment securities at December 31, 2003 (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               |  |  |  | $              | 2,527  |                           
|Due after 10
years                           |  |  |  |                | 22,666 |                           
|Total U.S.
Agency mortgage-backed securities |  |  |  |                | 25,193 |                           
|U.S.
Government and Agency Securities        |  |  |  |                |        |                           
|Due after 1
but within 5 years               |  |  |  |                | 3,135  |                           
|Total U.S.
Government and Agency Securities  |  |  |  |                | 3,135  |                           
|State and
Political Subdivisions (1)         |  |  |  |                |        |                           
|Due after 1
but within 5 years               |  |  |  |                | 2,966  |                           
|Due after 5
but within 10 years              |  |  |  |                | 492    |                           
|Total State
and Political Subdivisions       |  |  |  |                | 3,458  |                           
|Total debt
securities                        |  |  |  |                | 31,786 |                           
|Mutual
fund                                  |  |  |  |                | 352    |                           
|Equity
securities                            |  |  |  |                | 2,133  |                           
|Total
Securities                             |  |  |  | $              | 34,271 |                           

---

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

24

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Deposit Liabilities and Time Deposit Maturities



Total deposits at year-end 2003 were $651.2 million,
an increase of $149.2 million or 29.7% compared to year-end 2002. Deposits averaged $570.0 million for the full year 2003, up 26.0% or $117.7 million
from the prior year average. A key competitive advantage of the Company is in its expanding and retaining 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 reached
approximately 37.7% of total deposits at year end, and averaged 37.5% for the year. In 2003, non-interest-bearing demand was up $35.9 million or 17.1%
and interest bearing demand (including money market deposits) up $112.1 million or 50.8%. A portion of this rapid deposit growth is attributable to the
deposit activity of several large customers. In addition, some of the rapid deposit growth over the last several years may have been customer reaction
to the perceived high volatility and risk of financial markets since 2000. Time deposits decreased $5.0 million or 10.2% compared to the prior year
end. 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                  |  |  |  | $                        | 213,639
|Interest-bearing demand |  |  |  |                          | 281,438
|Savings                 |  |  |  |                          | 26,888 
|Time                    |  |  |  |                          | 47,973 
|Total
Deposits          |  |  |  | $                        | 569,938



As of December 31, 2003 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                |  |  |  | $                                     | 5,299  |                             | 
|Over 3 months
through 6 months  |  |  |  |                                       | 2,634  |                             | 
|Over 6 months
through 12 months |  |  |  |                                       | 3,434  |                             | 
|Over 12
months                  |  |  |  |                                       | 4,610  |                             | 
|Total                           |  |  |  | $                                     | 15,977 |                             | 

---

|(1) |  | Time deposits of $100,000 or more represent 2.45% of total
deposits as of December 31, 2003.
|--- |  | --------------------------------------------------------------------------------------------

|(2) |  | All other time deposits represent 4.34% of total deposits as of
December 31, 2003.
|--- |  | ----------------------------------------------------------------------------------

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 64% of its checking account balances arising from business customers and 36% from
consumers, while interest bearing


25

---

demand, including money market balances, and is split almost evenly between
business and consumer deposits. In 2003, because deposit growth exceeded the increase in loans, the Company had ample excess liquidity. Management
invested these excess funds in short-term and overnight money market instruments, in anticipation that such funds would be deployed to fund incremental
loan growth, especially in new markets.



A further source of funds is borrowings from
reliable counterparties. The Bank utilizes its investment securities and certain loan portfolio types to provide collateral to support its borrowing
needs.




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




The Banks primary counterparty for borrowing
purposes is the Federal Home Loan Bank (FHLB). At December 31, 2003 the FHLB had extended the Bank a secured line of credit of $47.9 million that may
be accessed for short or long-term borrowings given sufficient qualifying collateral. The Bank also had $24.0 million in short term borrowing
availability from the Federal Reserve Bank that requires specific qualifying collateral. In addition, the Bank maintained unsecured lines of credit
totaling $24.0 million for the purchase of funds on a short-term basis from several commercial bank counterparties. At December 31, 2003 the Bank had
aggregate remaining available borrowing sources totaling $81.0 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 1/3 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, 2003 the Bank had approximately
$199.5 million in outstanding commitments to extend credit, compared to approximately $148.4 million at year-end 2002. Management believes that the
Banks available resources will be sufficient to fund its commitments in the normal course of business.


Borrowings



For the periods presented, both short and long-term
borrowings were primarily from FHLB. At year-end 2003, long-term borrowings totaled $13.9 million, carrying a weighted average term to maturity of 4.7
years and bearing a weighted average interest rate of 3.17%.




The following table sets forth certain information
with respect to the Companys borrowings at December 31 and during each of 2003, 2002 and 2001 (dollars in thousands):







|                                                            |  |  |  | December 31, |       
|----------------------------------------------------------- |  |  |  | ------------ | ------
|
|FHLB
short-term advances <90 days                           |  |  |  | $            |      
|FHLB
long-term advances >90 days                            |  |  |  |              | 13,865
|FRB
borrowings                                              |  |  |  |              |      
|Total
borrowings outstanding at year-end                    |  |  |  | $            | 13,865
|Weighted
average interest rate at year-end                  |  |  |  |              | 3.17  
|Maximum
amount outstanding at any month-end during the year |  |  |  | $            | 29,831
|Daily average
amount outstanding during the year            |  |  |  | $            | 20,424
|Weighted
average interest rate during the year              |  |  |  |              | 2.68  

26

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CAPITAL RESOURCES



The Companys total stockholders equity
at December 31, 2003 was $61.8 million, an increase of $10.6 million from December 31, 2002. 2003 equity was increased by earnings of $14.0 million for
the year less cash dividends paid to shareholders of $4.0 million. At year-end 2003, net unrealized gains on investment securities available-for-sale
was $.8 million, relatively unchanged from year-end 2002.


CONTRACTUAL OBLIGATIONS



As of December 31, 2003, 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 |  |  |  | $                      | 15,977
|Federal Home
Loan Bank advances    |  |  |  |                        | 13,865
|Operating
Leases                   |  |  |  |                        | 10,476
|Total
contractual obligations      |  |  |  | $                      | 40,318

OFF-BALANCE SHEET ARRANGEMENTS



A schedule of significant off-balance sheet
commitments at December 31, 2003 is included in the following table (dollars in thousands):







|Commitments
to extend credit                  |  |  |  | $ | 176,919 | 
|--------------------------------------------- |  |  |  | - | ------- | 
|Commitments
under credit card lines of credit |  |  |  |   | 16,985  | 
|Standby
letters of credit                     |  |  |  |   | 5,617   | 



See Note 10 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 may take steps to alter its net
sensitivity position by offering deposit and/or loan structures that tend to mitigate its risk profile. In addition, the Company may acquire investment
securities, term borrowing structures, interest rate swaps or other hedging instruments with re-pricing characteristics that tend to moderate interest
rate risk. However, there are no 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 risk management objectives.
Management expects that the January 1, 2004 acquisition of the Community Bank of Grants Pass will not have a material effect on the interest rate risk
profile of the Company.




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


27

---

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. In addition, scenarios titled Rising Rate and Declining Rate 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. 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 2003 |       | Estimated Rates at December 2005 |  | Declining Rates at December 2005 |       | Rising Rates at December 2005
|--------------------------- |  |  |  | ------------------------------------ | ----- | -------------------------------- |  | -------------------------------- | ----- | -----------------------------
|Federal Funds
Rate          |  |  |  |                                      | 1.00% |                                  |  |                                  | 3.50% |                              
|Prime
Rate                  |  |  |  |                                      | 4.00% |                                  |  |                                  | 6.50% |                              
|Treasury
Yield Curve Spread |  |  |  |                                      |       |                                  |  |                                  |       |                              
|30-year to 3
month          |  |  |  | 4.15%
Unchanged Over Horizon Period  |       | 4.15%
flattening to 2.71%        |  | 4.15%
flattening to 2.45%        |       | 4.15%
flattening to .40%     



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 2003. The effect on earnings assumes no changes in non-interest components 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          |  |  |  |                                                           | (1.53 | %)                                                         |  |                                          
|Rising Rate
Scenario             |  |  |  |                                                           | (1.76 | %)                                                         |  |                                          
|Declining
Rate Scenario          |  |  |  |                                                           | (4.18 | %)                                                         |  |                                          



Managements assessment of interest rate risk
and scenario analysis must be taken in the context of market interest rates and overall economic conditions. Market interest rates in 2003 have
remained near their lowest level in decades. However, at present, most economists forecast higher rates ahead as the incipient recovery takes hold. The
yield curve also suggests that market participants are anticipating an upward move in rates over the next several years. At year-end 2003, the national
Federal Funds and Prime borrowing rates were at 1.00% and 4.00%, respectively, each down .25% from the prior year end, and down from 5.50% and 9.00% at
the beginning of the rate decline in early 2001. In the initial stages of this rate cycle, the Company maintained its net interest margin because, as
yields on its loan portfolio fell with market rates, it was able to lower rates paid on deposits and borrowings at about the same pace. However, the
margin has experienced a gradual decline over the past two years as continued lower yields on loans compressed against an already low cost of
funds.




In managements judgment, the interest rate
risk profile of the Company is relatively well controlled at this date. Volatility is modest under the estimated and rising
rate scenarios that both model gradually rising interest rates. This modest sensitivity is because of the composition and re-pricing mix of its assets
and liabilities. The loan portfolio is approximately 40.3% floating rate loans (generally re-pricing with the prime rate), 41.5% loans with adjustable
rates between 3 and 5 years, and 18.2% fixed rate loans. Because of this mix, floating rate loans would increase in yield should market rates go
higher, while yields on adjustable rate loans would re-price upward with some time lag. The re-pricing profile of liabilities is similar. Deposits are
approximately 37.7% demand deposits (with only modestly sensitivity to higher rates), 51.1% money market deposits (which are sensitive to market rates
but have lagged the timing of market rate changes), while time and savings deposits represent about 11.2% of total deposits. Thus, both assets and
liabilities are projected to re-price upward at a relatively similar pace under the increasing rate scenarios. The highest volatility is under the
declining rate scenario, wherein short-term rates fall to near zero. Under this scenario, yields on loans and securities would continue to compress
against an already low cost of funds. In addition, many loans are subject to prepayment risk, and so would be more likely to refinance to lower rates
under this scenario. While management is mindful of this possible outcome, it has concluded that the degree of volatility under this scenario is
acceptable because of its relatively low likelihood.




The above results are only indicative of the
Companys possible range 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


28

---

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. The results 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.




At year-end 2003, 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 $130.4 million, while year-end 2002 rate sensitive assets maturing or available for re-pricing within one-year exceeded
rate sensitive liabilities by approximately $44.6 million. The increase in net asset sensitivity in 2003 is largely the result of an increase in rate
sensitive assets such as money market investments, FHLB balances, and floating rate commercial loans. Rate sensitive liabilities also grew, but not to
the same degree, primarily in interest bearing demand deposits.


Interest Rate Gap Table



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, 2003. Maturities are
based on contractual terms and re-pricing amounts are based on actual historical experiences (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                                         |  |  |  | $              | 14,800  |                               |  | $                                |        |                  |  | $    
|Interest
bearing balances with FHLB                                  |  |  |  |                | 38,789  |                               |  |                                  |        |                  |  |      
|Loans                                                                |  |  |  |                | 262,649 |                               |  |                                  | 55,473  |                  |  |      
|Total
interest earning assets                                        |  |  |  | $              | 316,238 |                               |  | $                                | 55,473  |                  |  | $    
|INTEREST
BEARING LIABILITIES:                                        |  |  |  |                |         |                               |  |                                  |         |                  |  |      
|Interest-bearing demand deposits                                     |  |  |  | $              | 103,130 |                               |  | $                                | 104,512 |                  |  | $    
|Savings
deposits                                                     |  |  |  |                |        |                               |  |                                  |        |                  |  |      
|Time
deposits                                                        |  |  |  |                | 14,192  |                               |  |                                  | 19,454  |                  |  |      
|Total
interest bearing deposits                                      |  |  |  |                | 117,322 |                               |  |                                  | 123,966 |                  |  |      
|Other
borrowings                                                     |  |  |  |                |        |                               |  |                                  |        |                  |  |      
|Total
interest bearing liabilities                                   |  |  |  | $              | 117,322 |                               |  | $                                | 123,966 |                  |  | $    
|Interest rate
sensitivity gap                                        |  |  |  | $              | 198,916 |                               |  | $                                | (68,493 | )                |  | $    
|Cumulative
interest rate sensitivity gap                             |  |  |  | $              | 198,916 |                               |  | $                                | 130,423 |                  |  | $    
|Interest rate
gap as a percentage of total interest earning assets   |  |  |  |                | 29.37   | %                             |  |                                  | (10.11  | )%               |  |      
|Cumulative
interest rate gap as a percentage of total earning assets |  |  |  |                | 29.37   | %                             |  |                                  | 19.25   | %                |  |      

29

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|Item 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- |  | -------------------------------------------



The following 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 Auditors                             |  |  |  |     
|Consolidated
Balance Sheets at December 31, 2003 and 2002  |  |  |  |     
|For the Years
Ended December 31, 2003, 2002 and 2001:      |  |  |  |     
|Consolidated
Statements of Income                          |  |  |  |     
|Consolidated
Statements of Changes in Stockholders Equity |  |  |  |     
|Consolidated
Statements of Cash Flows                      |  |  |  |     
|Notes to
Consolidated Financial Statements                 |  |  |  |     

30

---

REPORT OF SYMONDS, EVANS & COMPANY, P.C., INDEPENDENT
AUDITORS

To the Board of Directors and Stockholders of Cascade
Bancorp

We have audited the accompanying consolidated balance sheets of Cascade
Bancorp and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cascade Bancorp and subsidiary as of December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States.

Portland, Oregon January 16, 2004

31

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CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER
31, 2003 AND 2002

|                                                                                                                        |  |  |  | 2003 |             | 2002
|----------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ----------- | ----
|ASSETS                                                                                                                 
|Cash and cash
equivalents:                                                                                              |  |  |  |      |             |     
|Cash and due
from banks                                                                                                 |  |  |  | $    | 34,930,921  |     
|Interest
bearing deposits with Federal Home Loan Bank                                                                   |  |  |  |      | 38,789,177  |     
|Federal funds
sold                                                                                                      |  |  |  |      | 14,800,000  |     
|Total cash
and cash equivalents                                                                                         |  |  |  |      | 88,520,098  |     
|Investment
securities available-for-sale                                                                                |  |  |  |      | 33,609,058  |     
|Investment
securities held-to-maturity, estimated fairvalue of $716,221 ($838,538 in 2002)                              |  |  |  |      | 661,686     |     
|Federal Home
Loan Bank stock                                                                                            |  |  |  |      | 2,295,600   |     
|Loans,
net                                                                                                              |  |  |  |      | 577,801,194 |     
|Premises and
equipment, net                                                                                             |  |  |  |      | 13,828,138  |     
|Accrued
interest and other assets                                                                                       |  |  |  |      | 17,996,170  |     
|Total
assets                                                                                                            |  |  |  | $    | 734,711,944 |     
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                   
|Liabilities:                                                                                                            |  |  |  |      |             |     
|Deposits:                                                                                                               |  |  |  |      |             |     
|Demand                                                                                                                  |  |  |  | $    | 245,378,530 |     
|Interest
bearing demand                                                                                                 |  |  |  |      | 332,792,532 |     
|Savings                                                                                                                 |  |  |  |      | 28,715,391  |     
|Time                                                                                                                    |  |  |  |      | 44,268,539  |     
|Total
deposits                                                                                                          |  |  |  |      | 651,154,992 |     
|Borrowings                                                                                                              |  |  |  |      | 13,864,605  |     
|Accrued
interest and other liabilities                                                                                  |  |  |  |      | 7,936,653   |     
|Total
liabilities                                                                                                       |  |  |  |      | 672,956,250 |     
|Stockholders equity:                                                                                                   |  |  |  |      |             |     
|Common stock,
no par value; 20,000,000 shares authorized; 12,621,275 shares issued and outstanding (12,513,638 in 2002) |  |  |  |      | 19,147,285  |     
|Retained
earnings                                                                                                       |  |  |  |      | 42,100,708  |     
|Unearned
compensation on restricted stock                                                                               |  |  |  |      | (280,665    | )   
|Accumulated
other comprehensive income                                                                                  |  |  |  |      | 788,366     |     
|Total
stockholders equity                                                                                              |  |  |  |      | 61,755,694  |     
|Total
liabilities and stockholders equity                                                                              |  |  |  | $    | 734,711,944 |     

See accompanying notes.

32

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CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS
ENDED DECEMBER 31, 2003, 2002 AND 2001

|                                                                         |  |  |  | 2003 |            | 2002 |  | 2001
|------------------------------------------------------------------------ |  |  |  | ---- | ---------- | ---- |  | ----
|Interest and
dividend income:                                            |  |  |  |      |            |      |  |     
|Interest and
fees on loans                                               |  |  |  | $    | 39,299,069 |      |  | $   
|Taxable
interest on investment securities                                |  |  |  |      | 1,018,475  |      |  |     
|Nontaxable
interest on investment securities                             |  |  |  |      | 65,815     |      |  |     
|Interest on
interest bearing deposits with Federal Home Loan Bank        |  |  |  |      | 214,027    |      |  |     
|Interest on
federal funds sold                                           |  |  |  |      | 116,405    |      |  |     
|Dividends on
Federal Home Loan Bank stock                                |  |  |  |      | 121,392    |      |  |     
|Total
interest and dividend income                                       |  |  |  |      | 40,835,183 |      |  |     
|Interest
expense:                                                        |  |  |  |      |            |      |  |     
|Deposits:                                                                |  |  |  |      |            |      |  |     
|Interest
bearing demand                                                  |  |  |  |      | 2,448,717  |      |  |     
|Savings                                                                  |  |  |  |      | 109,453    |      |  |     
|Time                                                                     |  |  |  |      | 898,014    |      |  |     
|Borrowings                                                               |  |  |  |      | 546,935    |      |  |     
|Total
interest expense                                                   |  |  |  |      | 4,003,119  |      |  |     
|Net interest
income                                                      |  |  |  |      | 36,832,064 |      |  |     
|Loan loss
provision                                                      |  |  |  |      | 2,695,000  |      |  |     
|Net interest
income after loan loss provision                            |  |  |  |      | 34,137,064 |      |  |     
|Noninterest
income:                                                      |  |  |  |      |            |      |  |     
|Service
charges on deposit accounts, net                                 |  |  |  |      | 6,035,350  |      |  |     
|Mortgage
banking income, net                                             |  |  |  |      | 4,114,738  |      |  |     
|Gains
(losses) on sales of investment securities available-for-sale, net |  |  |  |      | 236,435    |      |  |     
|Card issuer
and merchant service fees, net                               |  |  |  |      | 1,692,456  |      |  |     
|Other                                                                    |  |  |  |      | 1,321,421  |      |  |     
|Total
noninterest income                                                 |  |  |  |      | 13,400,400 |      |  |     
|Noninterest
expenses:                                                    |  |  |  |      |            |      |  |     
|Salaries and
employee benefits                                           |  |  |  |      | 15,730,367 |      |  |     
|Equipment                                                                |  |  |  |      | 1,017,960  |      |  |     
|Occupancy                                                                |  |  |  |      | 1,901,901  |      |  |     
|Supplies                                                                 |  |  |  |      | 392,405    |      |  |     
|Communications                                                           |  |  |  |      | 681,661    |      |  |     
|Advertising                                                              |  |  |  |      | 408,424    |      |  |     
|Other                                                                    |  |  |  |      | 4,721,858  |      |  |     
|Total
noninterest expenses                                               |  |  |  |      | 24,854,576 |      |  |     
|Income before
income taxes                                               |  |  |  |      | 22,682,888 |      |  |     
|Provision for
income taxes                                               |  |  |  |      | 8,728,000  |      |  |     
|Net
income                                                               |  |  |  | $    | 13,954,888 |      |  | $   
|Basic
earnings per common share                                          |  |  |  | $    | 1.11       |      |  | $   
|Diluted
earnings per common share                                        |  |  |  | $    | 1.07       |      |  | $   

See accompanying notes.

33

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CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|                                                                                                                                                                                                                                                                                                                                                                           |  |  |  | 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, 2000                                                                                                                                                                                                                                                                                                                                              |  |  |  |                  | 12,383,791 |                      |  |              |            |                   |  | $                                         | 17,768,806 |                                               |  | $                         
|Comprehensive
income:                                                                                                                                                                                                                                                                                                                                                      |  |  |  |                  |            |                      |  |              |            |                   |  |                                           |            |                                               |  |                           
|Net
income                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |                  |           |                      |  | $            | 8,681,755  |                   |  |                                           |           |                                               |  |                           
|Other
comprehensive income  unrealized gains on investment securities available-for-sale of approximately $482,000 (net of income taxes of
approximately $296,000), net of reclassification adjustment for net losses on sales of investment securities available-for-sale included in net income
of approximately $8,000 (net of income taxes of approximately $5,000)   |  |  |  |                  |           |                      |  |              | 489,962    |                   |  |                                           |           |                                               |  |                           
|Comprehensive
income                                                                                                                                                                                                                                                                                                                                                       |  |  |  |                  |           |                      |  | $            | 9,171,717  |                   |  |                                           |           |                                               |  |                           
|Cash dividends
paid (aggregating $.21 per share)                                                                                                                                                                                                                                                                                                                           |  |  |  |                  |           |                      |  |              |            |                   |  |                                           |           |                                               |  |                           
|Stock options
exercised                                                                                                                                                                                                                                                                                                                                                    |  |  |  |                  | 27,699     |                      |  |              |            |                   |  |                                           | 90,477     |                                               |  |                           
|Balances at
December 31, 2001                                                                                                                                                                                                                                                                                                                                              |  |  |  |                  | 12,411,490 |                      |  |              |            |                   |  |                                           | 17,859,283 |                                               |  |                           
|Comprehensive
income:                                                                                                                                                                                                                                                                                                                                                      |  |  |  |                  |            |                      |  |              |            |                   |  |                                           |            |                                               |  |                           
|Net
income                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |                  |           |                      |  | $            | 11,715,035 |                   |  |                                           |           |                                               |  |                           
|Other
comprehensive income  unrealized gains on investment securities available-for-sale of approximately $737,000 (net of income taxes of
approximately $453,000), net of reclassification adjustment for net gains on sales of investment securities available-for-sale included in net income
of approximately $94,000 (net of income taxes of approximately $59,000)  |  |  |  |                  |           |                      |  |              | 643,196    |                   |  |                                           |           |                                               |  |                           
|Comprehensive
income                                                                                                                                                                                                                                                                                                                                                       |  |  |  |                  |           |                      |  | $            | 12,358,231 |                   |  |                                           |           |                                               |  |                           
|Cash dividends
paid (aggregating $.26 per share)                                                                                                                                                                                                                                                                                                                           |  |  |  |                  |           |                      |  |              |            |                   |  |                                           |           |                                               |  |                           
|Stock options
exercised                                                                                                                                                                                                                                                                                                                                                    |  |  |  |                  | 102,148    |                      |  |              |            |                   |  |                                           | 393,799    |                                               |  |                           
|Balances at
December 31, 2002                                                                                                                                                                                                                                                                                                                                              |  |  |  |                  | 12,513,638 |                      |  |              |            |                   |  |                                           | 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     |                   |  |                                           |           |                                               |  |                           
|Comprehensive
income                                                                                                                                                                                                                                                                                                                                                       |  |  |  |                  |           |                      |  | $            | 13,980,842 |                   |  |                                           |           |                                               |  |                           
|Fair value of
restricted stock grants                                                                                                                                                                                                                                                                                                                                      |  |  |  |                  |           |                      |  |              |            |                   |  |                                           | 311,850    |                                               |  |                           
|Amortization of
unearned compensation on restricted stock                                                                                                                                                                                                                                                                                                                  |  |  |  |                  |           |                      |  |              |            |                   |  |                                           |           |                                               |  |                           
|Cash dividends
paid (aggregating $.32 per share)                                                                                                                                                                                                                                                                                                                           |  |  |  |                  |           |                      |  |              |            |                   |  |                                           |           |                                               |  |                           
|Stock options
exercised                                                                                                                                                                                                                                                                                                                                                    |  |  |  |                  | 107,637    |                      |  |              |            |                   |  |                                           | 576,609    |                                               |  |                           
|Tax benefit
from non-qualified stock options exercised                                                                                                                                                                                                                                                                                                                     |  |  |  |                  |           |                      |  |              |            |                   |  |                                           | 5,744      |                                               |  |                           
|Balances at
December 31, 2003                                                                                                                                                                                                                                                                                                                                              |  |  |  |                  | 12,621,275 |                      |  |              |            |                   |  | $                                         | 19,147,285 |                                               |  | $                         

See accompanying notes.

34

---





CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|                                                                                            |  |  |  | 2003 |              | 2002 |  | 2001
|------------------------------------------------------------------------------------------- |  |  |  | ---- | ------------ | ---- |  | ----
|Cash flows
from operating activities:                                                       |  |  |  |      |              |      |  |     
|Net
income                                                                                  |  |  |  | $    | 13,954,888   |      |  | $   
|Adjustments
to reconcile net income to net cash provided by operating activities:           |  |  |  |      |              |      |  |     
|Depreciation
and amortization                                                               |  |  |  |      | 3,426,792    |      |  |     
|Loan loss
provision                                                                         |  |  |  |      | 2,695,000    |      |  |     
|Provision
(credit) for deferred income taxes                                                |  |  |  |      | (1,028,000   | )    |  |     
|Discounts on
sales of mortgage loans, net                                                   |  |  |  |      | 694,125      |      |  |     
|Losses
(gains) on sales of investment securities available-for-sale, net                    |  |  |  |      | (236,435     | )    |  |     
|Dividends on
Federal Home Loan Bank stock                                                   |  |  |  |      | (121,392     | )    |  |     
|Deferred
benefit plan expenses                                                              |  |  |  |      | 681,000      |      |  |     
|Amortization
of unearned compensation on restricted stock                                   |  |  |  |      | 31,185       |      |  |     
|Increase in
accrued interest and other assets                                               |  |  |  |      | (3,041,233   | )    |  |     
|Increase in
accrued interest and other liabilities                                          |  |  |  |      | 46,285       |      |  |     
|Originations
of mortgage loans                                                              |  |  |  |      | (304,691,027 | )    |  |     
|Proceeds from
sales of mortgage loans                                                       |  |  |  |      | 305,699,939  |      |  |     
|Net cash
provided by operating activities                                                   |  |  |  |      | 18,111,127   |      |  |     
|Cash flows
from investing activities:                                                       |  |  |  |      |              |      |  |     
|Purchases of
investment securities available-for-sale                                       |  |  |  |      | (16,963,356  | )    |  |     
|Proceeds from
maturities, calls and prepayments of investment securities available-for-sale |  |  |  |      | 10,989,640   |      |  |     
|Proceeds from
sales of investment securities available-for-sale                             |  |  |  |      | 427,835      |      |  |     
|Proceeds from
maturities and calls of investment securities held-to-maturity                |  |  |  |      | 124,479      |      |  |     
|Loan
originations, net                                                                      |  |  |  |      | (90,695,692  | )    |  |     
|Purchases of
premises and equipment, net                                                    |  |  |  |      | (4,750,406   | )    |  |     
|Purchases of
life insurance contracts                                                       |  |  |  |      | (320,000     | )    |  |     
|Net cash used
in investing activities                                                       |  |  |  |      | (101,187,500 | )    |  |     
|Cash flows
from financing activities:                                                       |  |  |  |      |              |      |  |     
|Net increase
in deposits                                                                    |  |  |  |      | 149,192,734  |      |  |     
|Net increase
(decrease) in borrowings                                                       |  |  |  |      | (4,135,395   | )    |  |     
|Cash
dividends paid                                                                         |  |  |  |      | (4,026,401   | )    |  |     
|Stock options
exercised                                                                     |  |  |  |      | 576,609      |      |  |     
|Tax benefit
from non-qualified stock options exercised                                      |  |  |  |      | 5,744        |      |  |     
|Net cash
provided by financing activities                                                   |  |  |  |      | 141,613,291  |      |  |     
|Net increase
(decrease) in cash and cash equivalents                                        |  |  |  |      | 58,536,918   |      |  |     
|Cash and cash
equivalents at beginning of year                                              |  |  |  |      | 29,983,180   |      |  |     
|Cash and cash
equivalents at end of year                                                    |  |  |  | $    | 88,520,098   |      |  | $   

See accompanying notes.

35

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2003

|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.

All share and per share information in the accompanying consolidated financial
statements have been adjusted to give retroactive effect to a 50% stock split in 2002 and a 20% stock split in 2001.

Certain amounts in 2002 and 2001 have been reclassified to conform with the 2003
presentation.

Description of business

The Bank conducts a general banking business and primarily operates in one business
segment. 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 stock splits;
unrealized gains on investment securities available-for-sale, net of income taxes, as disclosed in the accompanying consolidated statements of changes
in stockholders equity; and the net capitalization of originated mortgage-servicing rights, as disclosed in Note 6.

During 2003, 2002 and 2001, the Bank paid approximately $4,069,000, $4,775,000 and
$8,906,000, respectively, in interest expense.

The Company made income tax payments of approximately $9,225,000, $7,830,000 and
$5,210,000 during 2003, 2002 and 2001, respectively.

36

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 2003, 2002 or 2001.

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.

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. The related
write-downs would be included in earnings as realized losses. Management believes that all unrealized losses on investment securities at December 31,
2003 and 2002 are temporary.

FHLB stock

The Banks investment in FHLB stock is carried at par value, 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, 2003, 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.

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 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 Companys methodology for assessing the appropriate level of the reserve
for loan losses consists of several key elements, which include the allocated allowance, specific allowances for impaired loans and the unallocated
allowance.

37

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The allocated portion of the allowance is calculated by applying loss factors to
outstanding loan balances 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 it is placed on nonaccrual status. All of the Banks
impaired loans at December 31, 2003 and 2002 were on nonaccrual status.

The unallocated portion of the allowance is based upon managements evaluation
of various factors that are not directly measured in the determination of the allocated and specific allowances. 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 allowance 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.

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.

Mortgage loans

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 $514 million, $454 million
and $375 million as of December 31, 2003, 2002, and 2001, 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,
2003 and 2002, 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, 2003 and 2002, mortgage loans held for sale
were carried at cost, which approximated estimated market value.

Mortgage Servicing Rights (MSRs) represent a contract to service mortgage loans
under which the Company is obligated to perform specific loan administration functions and is compensated with contractually specified servicing fees
(see Note 6). Fees earned for servicing mortgage loans are reported as income when the related mortgage loan payments are received. The Company
recognizes MSRs in accrued interest and other assets in the accompanying consolidated balance sheets. MSRs are carried at cost, net of amortization and
any valuation allowance to recognize impairment. MSRs are amortized in proportion to, and over the period of, estimated net servicing
income.

The estimated fair value of MSRs at December 31, 2003 and 2002 was determined based
on comparisons to current market transactions involving MSRs with similar portfolio characteristics and estimates of the net present value

38

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

of expected future cash flows. Such estimates of fair value are affected by point-in-time market assumptions relative to interest rates, increasing or
decreasing mortgage prepayment speeds, the seasoning of the portfolio, discount rates, portfolio coupon rates, interest rate types (i.e., fixed or
variable) and product maturities. In the event that the estimated fair value of MSRs falls below the Companys carrying value, accounting
principles generally accepted in the United States require the Company to record an impairment loss. To mitigate this risk, management amortizes the
MSRs over their expected life and fully amortizes MSRs that are specifically associated with any serviced mortgage loans that are paid off. The Company
does not employ specific hedges to mitigate fair value changes that may occur due to market fluctuations. There can be no assurance regarding the
possible impairment of MSRs in future periods.

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, 2003 and 2002.

Stockholders equity

In April 2002, the Company increased the number of authorized shares of common
stock from 10,000,000 shares to 20,000,000 shares.

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.

Recently issued accounting standards

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of long-lived assets and the associated asset retirement costs. SFAS No. 143 was effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the Companys consolidated financial
statements.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This
interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. Certain guarantees are subject to the
disclosure requirements of FIN 45 but not to the recognition provisions. Such guarantees include, among others, a guarantee accounted for as a
derivative instrument under SFAS No. 133,

39

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Accounting for Derivative Instruments and Hedging Activities, a parents guarantee of debt owed to a third party by its subsidiary or
vice versa, and a guarantee which is based on performance, not price. The disclosure requirements of FIN 45 were effective for the Company as of
December 31, 2002, and required disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be
required to make under the guarantee, and the current amount of the liability, if any, for the guarantors obligations under the guarantee. The
recognition requirements of FIN 45 are applied prospectively to guarantees issued or modified after December 31, 2002. Significant guarantees that have
been entered into by the Company are disclosed in Note 10. The adoption of FIN 45 did not have a material effect on the Companys consolidated
financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amended SFAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based compensation. It
also amended the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based compensation. In addition, SFAS No. 148 amended Accounting Principles Board (APB) Opinion No.
28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. The Company has adopted SFAS
No. 148 and has elected to continue to account for stock-based compensation under APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations (APB No. 25).

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 was generally effective upon issuance and provides accounting requirements for business
enterprises to consolidate related entities in which they are determined to be the primary beneficiary as a result of their variable economic
interests. FIN 46 provides guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. FIN 46 outlines
disclosure requirements for variable interest entities (VIEs) in existence prior to January 31, 2003, and provides consolidation
requirements for VIEs created after January 31, 2003. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, the provisions of
which must be applied to certain VIEs by March 31, 2004. The effect of adopting FIN 46 and related revisions did not have a material effect on the
Companys consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 was effective for
contracts entered into or modified after June 30, 2003 and did not have a material effect on the Companys consolidated financial
statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how a company classifies and measures
certain financial instruments with characteristics of both liabilities and equity. It requires that a company classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 was
effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic companies. The effect of adopting SFAS No. 150
did not have a material effect on the Companys consolidated financial statements.

Stock-based compensation

The Company 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.

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:

40

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

|                                                                                                                                          |  |  |  | 2003 |            | 2002 |  | 2001
|----------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Net income,
as reported                                                                                                                   |  |  |  | $    | 13,954,888 |      |  | $   
|Deduct: Total
stock-based compensation expense determined under fair value based method for all awards, net of related income tax effects |  |  |  |      | (541,294   | )    |  |     
|Pro forma net
income                                                                                                                      |  |  |  | $    | 13,413,594 |      |  | $   
|Earnings per
common share:                                                                                                                |  |  |  |      |            |      |  |     
|Basic 
as reported                                                                                                                       |  |  |  | $    | 1.11       |      |  | $   
|Basic 
pro forma                                                                                                                         |  |  |  |      | 1.07       |      |  |     
|Diluted
 as reported                                                                                                                     |  |  |  |      | 1.07       |      |  |     
|Diluted
 pro forma                                                                                                                       |  |  |  |      | 1.03       |      |  |     

The effect of applying SFAS No. 123 to stock options granted in the years ended
December 31, 2003, 2002 and 2001 resulted in an estimated weighted-average grant date fair value of $5.64, $3.59 and $2.39, 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,
2003, 2002 and 2001:

|                        |  |  |  | 2003    |      | 2002    |  | 2001   
|----------------------- |  |  |  | ------- | ---- | ------- |  | -------
|Dividend
yield          |  |  |  |         | 2.3  | %       |  |        
|Expected
volatility     |  |  |  |         | 47.8 | %       |  |        
|Risk-free
interest rate |  |  |  |         | 3.0  | %       |  |        
|Expected
option lives   |  |  |  | 5
years |      | 5
years |  | 5
years

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

By regulation, the Bank must meet reserve requirements as established by the
Federal Reserve Bank (FRB) in the form of deposits and/or cash. Accordingly, the Bank held average reserves of approximately $5,119,000 and $5,079,000
at December 31, 2003 and 2002, respectively.

3.    Investment securities

Investment securities at December 31, 2003 and 2002 consisted of the
following:

|                                                |  |  |  | Amortized cost |            | Gross unrealized gains |  | Gross unrealized losses |           | Estimated fair value
|----------------------------------------------- |  |  |  | -------------- | ---------- | ---------------------- |  | ----------------------- | --------- | --------------------
|2003                                            |  |  |  |                |            |                        |  |                         |           |                     
|Available-for-sale                              |  |  |  |                |            |                        |  |                         |           |                     
|U.S. Agency
mortgage-backed securities          |  |  |  | $              | 25,075,018 |                        |  | $                       | 174,776   |                     
|U.S.
Government and agency securities           |  |  |  |                | 3,000,000  |                        |  |                         | 135,151   |                     
|Obligations
of state and political subdivisions |  |  |  |                | 2,800,665  |                        |  |                         | 8,260     |                     
|Equity
securities                               |  |  |  |                | 1,120,492  |                        |  |                         | 1,012,373 |                     
|Mutual
fund                                     |  |  |  |                | 341,324    |                        |  |                         | 11,000    |                     
|                                                |  |  |  | $              | 32,337,499 |                        |  | $                       | 1,341,560 |                     
|Held-to-maturity                                |  |  |  |                |            |                        |  |                         |           |                     
|Obligations
of state and political subdivisions |  |  |  | $              | 661,686    |                        |  | $                       | 54,535    |                     

41

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

|                                                |  |  |  |   |            |  |  |   |           | 
|----------------------------------------------- |  |  |  | - | ---------- |  |  | - | --------- | 
|2002                                            |  |  |  |   |            |  |  |   |           | 
|Available-for-sale                              |  |  |  |   |            |  |  |   |           | 
|U.S. Agency
mortgage-backed securities          |  |  |  | $ | 18,978,850 |  |  | $ | 512,270   | 
|U.S.
Government and agency securities           |  |  |  |   | 6,000,000  |  |  |   | 215,930   | 
|Equity
securities                               |  |  |  |   | 1,245,107  |  |  |   | 515,165   | 
|Mutual
fund                                     |  |  |  |   | 327,613    |  |  |   | 18,205    | 
|                                                |  |  |  | $ | 26,551,570 |  |  | $ | 1,261,570 | 
|Held-to-maturity                                |  |  |  |   |            |  |  |   |           | 
|Obligations
of state and political subdivisions |  |  |  | $ | 789,586    |  |  | $ | 48,952    | 

The amortized cost and estimated fair value of investment securities at December
31, 2003, 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 after one
year through five years  |  |  |  | $              | 8,110,245  |                     
|Due after
five years through ten years |  |  |  |                | 200,000    |                     
|Due after ten
years                    |  |  |  |                | 22,565,438 |                     
|Equity
securities                      |  |  |  |                | 1,120,492  |                     
|Mutual
fund                            |  |  |  |                | 341,324    |                     
|                                       |  |  |  | $              | 32,337,499 |                     
|Held-to-maturity                       |  |  |  |                |            |                     
|Due after one
year through five years  |  |  |  | $              | 372,609    |                     
|Due after
five years through ten years |  |  |  |                | 289,077    |                     
|                                       |  |  |  | $              | 661,686    |                     

Investment securities with a carrying value of approximately $31,487,000 and
$23,450,000 at December 31, 2003 and 2002, respectively, were pledged to secure public deposits and for other purposes as required or permitted by
law.

Gross realized gains and losses on sales of investment securities during the years
ended December 31, 2003, 2002 and 2001 were as follows:

|     |  |  |  | Gross realized gains |         | Gross realized losses |  | Net gains (losses) on sales
|---- |  |  |  | -------------------- | ------- | --------------------- |  | ---------------------------
|2003 |  |  |  | $                    | 236,435 |                       |  | $                          
|2002 |  |  |  |                      | 152,746 |                       |  |                            
|2001 |  |  |  |                      | 14,978  |                       |  |                            

42

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

4.    Loans

Loans at December 31, 2003 and 2002 consisted of the following:

|                        |  |  |  | 2003 |             | 2002
|----------------------- |  |  |  | ---- | ----------- | ----
|Commercial              |  |  |  | $    | 142,765,505 |     
|Real
estate:            |  |  |  |      |             |     
|Construction/lot        |  |  |  |      | 123,892,102 |     
|Mortgage                |  |  |  |      | 46,140,163  |     
|Commercial              |  |  |  |      | 244,203,103 |     
|Consumer                |  |  |  |      | 32,489,742  |     
|                        |  |  |  |      | 589,490,615 |     
|Less:                   |  |  |  |      |             |     
|Reserve for
loan losses |  |  |  |      | 9,398,584   |     
|Deferred loan
fees      |  |  |  |      | 2,290,837   |     
|                        |  |  |  |      | 11,689,421  |     
|Loans,
net              |  |  |  | $    | 577,801,194 |     

Included in mortgage loans as of December 31, 2003 and 2002 were approximately
$2,482,000 and $4,185,000, respectively, in mortgage loans held for sale.

A substantial portion of the Banks loans are collateralized by real estate in
the Central Oregon and Salem, Oregon geographic areas, and, accordingly, the ultimate collectibility of a substantial portion of the Banks loan
portfolio is susceptible to changes in the local market conditions in these areas.

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, 2003 and 2002, the portion of these loans
participated to third parties (which are not included in the accompanying consolidated financial statements) totaled approximately $11,901,000 and
$3,975,000, respectively.

5.    Reserve for loan losses

Transactions in the reserve for loan losses for the years ended December 31, 2003,
2002 and 2001 were as follows:

|                                           |  |  |  | 2003 |            | 2002 |  | 2001
|------------------------------------------ |  |  |  | ---- | ---------- | ---- |  | ----
|Balance at
beginning of year               |  |  |  | $    | 7,669,145  |      |  | $   
|Loan loss
provision                        |  |  |  |      | 2,695,000  |      |  |     
|Loans
charged-off                          |  |  |  |      | (1,473,867 | )    |  |     
|Recoveries of
loans previously charged-off |  |  |  |      | 508,306    |      |  |     
|Balance at
end of year                     |  |  |  | $    | 9,398,584  |      |  | $   

Loans on nonaccrual status at December 31, 2003 and 2002 were approximately $56,000
and $971,000, respectively. Interest income, which would have been realized on such nonaccrual loans outstanding at year-end, if they had remained
current, was approximately $3,000, $100,000 and $456,000 during the years ended December 31, 2003, 2002 and 2001, respectively. Loans contractually
past due 90 days or more on which the Company continued to accrue interest at December 31, 2003 and 2002 were insignificant.

At December 31, 2003 and 2002, 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, 2003 and 2002.
Interest income recognized on impaired loans for the years ended December 31, 2003, 2002 and 2001 was insignificant.

43

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CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

6.    Mortgage banking activities

Transactions in the Companys MSRs for the years ended December 31, 2003, 2002
and 2001 were as follows:

|                             |  |  |  | 2003 |            | 2002 |  | 2001
|---------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Balance at
beginning of year |  |  |  | $    | 4,071,370  |      |  | $   
|Additions                    |  |  |  |      | 3,096,576  |      |  |     
|Amortization                 |  |  |  |      | (2,504,501 | )    |  |     
|Impairment
adjustments       |  |  |  |      | 25,000     |      |  |     
|Balance at
end of year       |  |  |  | $    | 4,688,445  |      |  | $   

At December 31, 2003 and 2002, the fair value of the Companys MSRs were
approximately $5.2 million and $4.1 million, respectively (see Managements Discussion and Analysis of Financial Condition and Results of
Operations for further analysis of MSRs). The key assumptions used in estimating the fair value of MSRs at December 31, 2003 include weighted-average
mortgage prepayment rates (PSA) of approximately 301% for the first year, 237% for the second year and 196% thereafter. A 9% discount rate was also
applied.

Changes in the valuation allowance for MSRs for the years ended December 31, 2003,
2002 and 2001 were as follows:

|                             |  |  |  | 2003 |         | 2002 |  | 2001
|---------------------------- |  |  |  | ---- | ------- | ---- |  | ----
|Balance at
beginning of year |  |  |  | $    | 350,000 |      |  | $   
|Impairment
adjustments       |  |  |  |      | (25,000 | )    |  |     
|Balance at
end of year       |  |  |  | $    | 325,000 |      |  | $   

The Company analyzes its MSRs by underlying loan type (primarily fixed and
adjustable) and interest rate. 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 noninterest income, net, consisted of the following for the years
ended December 31, 2003, 2002 and 2001:

|                                                               |  |  |  | 2003 |            | 2002 |  | 2001
|-------------------------------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Origination
and processing fees                                |  |  |  | $    | 3,389,614  |      |  | $   
|Gains on
sales of mortgage loans, net                          |  |  |  |      | 1,976,242  |      |  |     
|Servicing
fees, net of amortization and impairment adjustments |  |  |  |      | (1,251,118 | )    |  |     
|Mortgage
banking noninterest income, net                       |  |  |  | $    | 4,114,738  |      |  | $   

7.    Premises and equipment

Premises and equipment at December 31, 2003 and 2002 consisted of the
following:

|                                               |  |  |  | 2003 |            | 2002
|---------------------------------------------- |  |  |  | ---- | ---------- | ----
|Land                                           |  |  |  | $    | 1,853,299  |     
|Buildings and
leasehold improvements           |  |  |  |      | 8,915,544  |     
|Furniture and
equipment                        |  |  |  |      | 7,258,844  |     
|                                               |  |  |  |      | 18,027,687 |     
|Less
accumulated depreciation and amortization |  |  |  |      | 6,872,548  |     
|                                               |  |  |  |      | 11,155,139 |     
|Construction
in progress                       |  |  |  |      | 2,672,999  |     
|Premises and
equipment, net                    |  |  |  | $    | 13,828,138 |     

44

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CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

8.    Time deposits

Time deposits in excess of $100,000 aggregated approximately $15,977,000 and
$18,457,000 at December 31, 2003 and 2002, respectively.

At December 31, 2003, the scheduled annual maturities of all time deposits were
approximately as follows:

|2004 |  |  |  | $ | 32,490,000 | 
|---- |  |  |  | - | ---------- | 
|2005 |  |  |  |   | 6,832,000  | 
|2006 |  |  |  |   | 3,308,000  | 
|2007 |  |  |  |   | 1,522,000  | 
|2008 |  |  |  |   | 117,000    | 
|     |  |  |  | $ | 44,269,000 | 

9.    Borrowings

The Bank participates in the FHLBs Cash Management Advance Program (the
Program). As of December 31, 2003, the Bank had approximately $13,865,000 ($18,000,000 at December 31, 2002) in borrowings outstanding from the FHLB
under the Program with fixed interest at rates ranging from 2.87% to 3.47%. 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. As of December 31, 2003, the Bank
had remaining available borrowings from the FHLB of approximately $34 million.

The Bank also has approximately $24 million in available 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 $5.6 million and is fully at the discretion of the U.S. Treasury. As an additional source of
liquidity, the Bank has federal fund borrowing agreements with correspondent banks aggregating approximately $24 million at December 31,
2003.

At December 31, 2003, the contractual maturities of borrowings outstanding were
approximately as follows:

|2005       |  |  |  | $ | 4,000,000  | 
|---------- |  |  |  | - | ---------- | 
|2007       |  |  |  |   | 4,000,000  | 
|Thereafter |  |  |  |   | 5,865,000  | 
|           |  |  |  | $ | 13,865,000 | 

10.    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 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 instruments reflect the extent
of the Banks involvement in these particular classes of financial instruments. As of December 31, 2003 and 2002, 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, in the event of nonperformance by the
other party, to the financial instrument 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 Bank uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.

45

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

A summary of the Banks off-balance sheet financial instruments at December
31, 2003 and 2002 is approximately as follows:

|                                              |  |  |  | 2003 |             | 2002
|--------------------------------------------- |  |  |  | ---- | ----------- | ----
|Commitments
to extend credit                  |  |  |  | $    | 176,919,000 |     
|Commitments
under credit card lines of credit |  |  |  |      | 16,985,000  |     
|Standby
letters of credit                     |  |  |  |      | 5,617,000   |     
|Total
off-balance sheet financial instruments |  |  |  | $    | 199,521,000 |     

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 evaluates each customers creditworthiness on a case-by-case basis. 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 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.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral
held, if required, varies as specified above.

The Company 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. 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.

The Bank leases certain land and facilities under operating leases, some of which
include renewal options and escalation clauses. At December 31, 2003, the aggregate minimum rental commitments under operating leases that have initial
or remaining noncancelable lease terms in excess of one year were approximately as follows:

|2004                   |  |  |  | $ | 1,283,000  | 
|---------------------- |  |  |  | - | ---------- | 
|2005                   |  |  |  |   | 1,138,000  | 
|2006                   |  |  |  |   | 927,000    | 
|2007                   |  |  |  |   | 927,000    | 
|2008                   |  |  |  |   | 819,000    | 
|Thereafter             |  |  |  |   | 5,382,000  | 
|Total minimum
payments |  |  |  | $ | 10,476,000 | 

Total rental expense was approximately $1,032,000, $701,000 and $627,000 in 2003,
2002 and 2001, respectively.

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, 2003.

46

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

11.    Income taxes

The provision (credit) for income taxes for the years ended December 31, 2003, 2002
and 2001 was approximately as follows:

|                           |  |  |  | 2003 |            | 2002 |  | 2001
|-------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Current:                   |  |  |  |      |            |      |  |     
|Federal                    |  |  |  | $    | 8,282,000  |      |  | $   
|State                      |  |  |  |      | 1,474,000  |      |  |     
|                           |  |  |  |      | 9,756,000  |      |  |     
|Deferred                   |  |  |  |      | (1,028,000 | )    |  |     
|Provision for
income taxes |  |  |  | $    | 8,728,000  |      |  | $   

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, 2003, 2002 and 2001 were approximately as
follows:

|                                                         |  |  |  | 2003 |           | 2002 |  | 2001
|-------------------------------------------------------- |  |  |  | ---- | --------- | ---- |  | ----
|Expected
federal income tax provision at statutory rates |  |  |  | $    | 7,939,000 |      |  | $   
|State income
taxes, net of federal effect                |  |  |  |      | 958,000   |      |  |     
|Other,
net                                               |  |  |  |      | (169,000  | )    |  |     
|Provision for
income taxes                               |  |  |  | $    | 8,728,000 |      |  | $   

The components of the net deferred tax assets and liabilities at December 31, 2003
and 2002 were approximately as follows:

|                                              |  |  |  | 2003 |           | 2002
|--------------------------------------------- |  |  |  | ---- | --------- | ----
|Deferred tax
assets:                          |  |  |  |      |           |     
|Reserve for
loan losses                       |  |  |  | $    | 3,235,000 |     
|Deferred
benefit plan expenses, net           |  |  |  |      | 838,000   |     
|Other                                         |  |  |  |      | 299,000   |     
|Total
deferred tax assets                     |  |  |  |      | 4,372,000 |     
|Deferred tax
liabilities:                     |  |  |  |      |           |     
|Accumulated
depreciation                      |  |  |  |      | 476,000   |     
|Deferred loan
income                          |  |  |  |      | 130,000   |     
|Mortgage
servicing rights                     |  |  |  |      | 1,838,000 |     
|FHLB stock
dividends                          |  |  |  |      | 474,000   |     
|Net
unrealized gains on investment securities |  |  |  |      | 483,000   |     
|Other                                         |  |  |  |      | 504,000   |     
|Total
deferred tax liabilities                |  |  |  |      | 3,905,000 |     
|Net deferred
tax assets (liabilities)         |  |  |  | $    | 467,000   |     

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

12.    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.

47

---

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, 2003, 2002 and 2001 can be reconciled as follows:

|                                                                          |  |  |  | Net income (numerator) |            | Shares (denominator) |  | Per-share amount
|------------------------------------------------------------------------- |  |  |  | ---------------------- | ---------- | -------------------- |  | ----------------
|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 |                      |  |                 
|2002                                                                      |  |  |  |                        |            |                      |  |                 
|Basic
earnings per common share  Income available to common stockholders |  |  |  | $                      | 11,715,035 |                      |  |                 
|Effect of
stock options                                                   |  |  |  |                        |           |                      |  |                 
|Diluted
earnings per common share                                         |  |  |  | $                      | 11,715,035 |                      |  |                 
|2001                                                                      |  |  |  |                        |            |                      |  |                 
|Basic
earnings per common share Income available to common stockholders  |  |  |  | $                      | 8,681,755  |                      |  |                 
|Effect of
stock options                                                   |  |  |  |                        |           |                      |  |                 
|Diluted
earnings per common share                                         |  |  |  | $                      | 8,681,755  |                      |  |                 

13.    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 year ended December 31, 2003 was approximately as follows:

|Balance at
December 31, 2002 |  |  |  | $ | 1,487,000  |  
|---------------------------- |  |  |  | - | ---------- | -
|Additions                    |  |  |  |   | 1,201,000  |  
|Repayments                   |  |  |  |   | (1,057,000 | )
|Balance at
December 31, 2003 |  |  |  | $ | 1,631,000  |  

14.    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 Companys Board of Directors (the Board), not to exceed the amount deductible for federal income
tax purposes.

Employees have the option to receive a portion of the Companys contributions
to the Plan in cash. Employees vest in the Companys contributions to the Plan over a period of five years. The total amounts charged to
operations

48

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

under the Plan were approximately $1,338,000, $1,229,000 and $1,235,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Other benefit plans

The Bank has deferred compensation plans for members of the Board and certain key
executives and managers, a salary continuation plan for certain key executives and a fee continuation plan for members of 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 plan for certain key executives and the fee continuation
plan for the Board provide defined benefits to the participants upon termination. The defined benefits for substantially all of the key executives and
the Board are for periods of fifteen years and ten years, respectively. The benefits are subject to certain vesting requirements, and vested amounts
are generally payable upon termination in either a lump sum or monthly installments.

The Bank annually expenses amounts sufficient to accrue for the present value of
the benefits payable to the participants under these plans.

These plans also include death benefit provisions for certain participants. To
assist in the funding of these plans, the Bank has purchased life insurance policies on the majority of the participants. The cash surrender value of
these policies at December 31, 2003 and 2002 was approximately $8,558,000 and $7,863,000, respectively, and is included in accrued interest and other
assets in the accompanying consolidated balance sheets. As of December 31, 2003 and 2002, the liabilities related to the deferred compensation plans
included in accrued interest and other liabilities in the accompanying consolidated balance sheets totaled approximately $2,085,000 and $1,614,000,
respectively. The amount of expense charged to operations in 2003, 2002 and 2001 related to the deferred compensation plans was approximately $481,000,
$439,000 and $289,000, respectively. As of December 31, 2003 and 2002, the liabilities related to the salary continuation and fee continuation plans
included in accrued interest and other liabilities in the accompanying consolidated balance sheets totaled approximately $1,410,000 and $1,247,000,
respectively. The amount of expense charged to operations in 2003, 2002 and 2001 for the salary continuation and fee continuation plans was
approximately $200,000, $186,000 and $215,000, respectively. For financial reporting purposes, such expense amounts have not been adjusted for income
earned on the life insurance policies. The amount of income earned (net of related policy load charges, mortality costs and surrender charges incurred)
on the life insurance policies which was included in other noninterest income in the accompanying consolidated statements of income was approximately
$375,000, $359,000 and $320,000 in 2003, 2002 and 2001, respectively.

15.    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 stock price at the grant date; and for NSOs, the option strike price can be no less than 85% of stock price at the grant date. At December 31,
2003, 478,366 shares reserved under the stock-based

49

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

compensation plans were available for future grant. Restricted stock grants are limited to 30% of the shares available under the 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, 2003, 2002 and 2001 was as follows:

|                             |  |  |  | 2003 |          | 2002 |  | 2001 |      
|---------------------------- |  |  |  | ---- | -------- | ---- |  | ---- | -----
|
|Balance at
beginning of year |  |  |  |      | 774,042  |      |  | $    | 7.01 
|Granted                      |  |  |  |      | 163,066  |      |  |      | 14.23
|Forfeited                    |  |  |  |      | (15,230  | )    |  |      | 10.00
|Exercised                    |  |  |  |      | (107,637 | )    |  |      | 5.36 
|Balance at
end of year       |  |  |  |      | 814,241  |      |  | $    | 8.62 

Information regarding the number, weighted-average exercise price and
weighted-average remaining contractual life of options by range of exercise price at December 31, 2003 is as follows:

|                |  |  |  | Options outstanding |         | Exercisable options | 
|--------------- |  |  |  | ------------------- | ------- | ------------------- | 
|
|Under
$4.00     |  |  |  |                     | 175,525 |                     | 
|$4.01 
$8.00   |  |  |  |                     | 190,340 |                     | 
|$8.01 
$12.00  |  |  |  |                     | 287,293 |                     | 
|$12.01 
$16.00 |  |  |  |                     | 161,083 |                     | 
|                |  |  |  |                     | 814,241 |                     | 

Exercisable options as of December 31, 2002 and 2001 totaled 694,288 and 649,927,
respectively.

In addition, during 2003, the Company granted 15,000 shares of restricted stock at
a market value of $20.79 per share (approximately $312,000). The restricted stock is scheduled to vest on the fifth anniversary of the date of grant,
or sooner, if certain performance criteria is met. The restricted stock is reported as unearned compensation on restricted stock in the accompanying
consolidated balance sheet at December 31, 2003. The unearned compensation on restricted stock is being amortized to expense on a straight-line basis
over the expected vesting period of approximately 2.5 years.

16.    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 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.

50

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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, 2003 and 2002.

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, 2003 and 2002 origination rates. The resulting amounts
are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Deposits:    The estimated fair value
of demand deposits, consisting of checking, savings and certain interest bearing demand 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,
2003 and 2002 rates offered on those instruments.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Borrowings:    The fair value of the
Banks borrowings are estimated using discounted cash flow analyses based on the Banks current incremental borrowing rates for similar types
of borrowing arrangements.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The estimated fair values of the Companys significant on-balance sheet
financial instruments at December 31, 2003 and 2002 were approximately as follows:

|                          |  |  |  | 2003 |             | 2002 | 
|------------------------- |  |  |  | ---- | ----------- | ---- | 
|
|Financial
assets:         |  |  |  |      |             |      | 
|Cash and cash
equivalents |  |  |  | $    | 88,520,098  |      | 
|Investment
securities:    |  |  |  |      |             |      | 
|Available-for-sale        |  |  |  |      | 33,609,058  |      | 
|Held-to-maturity          |  |  |  |      | 661,686     |      | 
|FHLB
stock                |  |  |  |      | 2,295,600   |      | 
|Loans,
net                |  |  |  |      | 577,801,194 |      | 
|Financial
liabilities:    |  |  |  |      |             |      | 
|Deposits                  |  |  |  |      | 651,154,992 |      | 
|Borrowings                |  |  |  |      | 13,864,605  |      | 

17.    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

51

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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, 2003 and 2002, the Company and
the Bank met or exceeded all relevant capital adequacy requirements.

As of December 31, 2003, 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.

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, 2003:                       |  |  |  |        |        |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  | $      | 60,498 |                                                   |  |                                                                                       | 8.6 
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 60,498 |                                                   |  |                                                                                       | 9.9 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 68,631 |                                                   |  |                                                                                       | 11.2
|December
31, 2002:                       |  |  |  |        |        |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  |        | 50,219 |                                                   |  |                                                                                       | 8.9 
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 50,219 |                                                   |  |                                                                                       | 9.9 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 56,789 |                                                   |  |                                                                                       | 11.2

52

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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, 2003:                       |  |  |  |        |        |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  | $      | 58,809 |                                                   |  |                                                                                       | 8.3 
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 58,809 |                                                   |  |                                                                                       | 9.6 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 66,465 |                                                   |  |                                                                                       | 10.9
|December
31, 2002:                       |  |  |  |        |        |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  |        | 48,350 |                                                   |  |                                                                                       | 8.6 
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 48,350 |                                                   |  |                                                                                       | 9.6 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 54,667 |                                                   |  |                                                                                       | 10.9

18.    Subsequent event

In January 2004, the Company completed the acquisition of Community Bank of Grants
Pass (CBGP). CBGP shareholders received one share of the Companys stock for each share of CBGP stock, aggregating a total purchase of
approximately $11.7 million. Upon completion of this acquisition, CBGP was merged into the Bank. The acquisition was accounted for using the purchase
method of accounting. The purchase price allocation relating to the acquisition is summarized below (dollars in thousands):

|Cash and cash
equivalents |  |  |  | $ | 9,852   |  
|------------------------- |  |  |  | - | ------- | -
|Loans,
net                |  |  |  |   | 35,634  |  
|Premises and
equipment    |  |  |  |   | 1,335   |  
|Other
assets              |  |  |  |   | 207     |  
|Goodwill                  |  |  |  |   | 7,143   |  
|Deposits                  |  |  |  |   | (41,932 | )
|Other
liabilities         |  |  |  |   | (539    | )
|Total
purchase price      |  |  |  | $ | 11,700  |  

This preliminary purchase price allocation is subject to further refinement,
including the determination of core deposit intangibles.

53

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

19.    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                  |  |  |  | $            | 443,417   
|Investment
securities available-for-sale   |  |  |  |              | 2,122,865 
|Investment in
subsidiary                   |  |  |  |              | 59,438,689
|Other
assets                               |  |  |  |              | 135,425   
|Total
assets                               |  |  |  | $            | 62,140,396
|Liabilities
and stockholders equity:      |  |  |  |              |           
|Accrued
liabilities                        |  |  |  | $            | 384,702   
|Stockholders equity                       |  |  |  |              | 61,755,694
|Total
liabilities and stockholders equity |  |  |  | $            | 62,140,396

CONDENSED STATEMENTS OF INCOME






|                                                                                                                                             |  |  |  | Years ended December 31, |           
|-------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------------------ | ----------
|
|Interest and
other dividend income                                                                                                           |  |  |  | $                        | 24,838    
|Gains
(losses) on sales of investment securities available-for-sale, net                                                                     |  |  |  |                          | 236,435   
|Total
income                                                                                                                                 |  |  |  |                          | 261,273   
|Expenses:                                                                                                                                    |  |  |  |                          |           
|Administrative                                                                                                                               |  |  |  |                          | 171,150   
|Interest                                                                                                                                     |  |  |  |                          |          
|Other                                                                                                                                        |  |  |  |                          | 76,738    
|Total
expenses                                                                                                                               |  |  |  |                          | 247,888   
|Net income
(loss) before credit (provision) for income taxes, dividends from the Bank and equity in undistributed net earnings of subsidiary |  |  |  |                          | 13,385    
|Credit
(provision) for income taxes                                                                                                          |  |  |  |                          | (5,000    
|Net income
(loss) before dividends from the Bank and equity in undistributed net earnings of subsidiary                                      |  |  |  |                          | 8,385     
|Dividends
from the Bank                                                                                                                      |  |  |  |                          | 3,225,000 
|Equity in
undistributed net earnings of subsidiary                                                                                           |  |  |  |                          | 10,721,503
|Net
income                                                                                                                                   |  |  |  | $                        | 13,954,888

54

---

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                                                                                   |  |  |  | $                        | 13,954,888 
|Adjustments
to reconcile net income to net cash provided by operating activities:            |  |  |  |                          |            
|Dividends
from the Bank                                                                      |  |  |  |                          | 3,225,000  
|Equity in
undistributed net earnings of subsidiary                                           |  |  |  |                          | (13,946,503
|Losses
(gains) on sales of investment securities available-for-sale, net                     |  |  |  |                          | (236,435   
|Increase in
other assets                                                                     |  |  |  |                          | (5,041     
|Net cash
provided by operating activities                                                    |  |  |  |                          | 2,991,909  
|Cash flows
from investing activities:                                                        |  |  |  |                          |            
|Proceeds from
sales of investment securities available-for-sale                              |  |  |  |                          | 427,835    
|Purchase of
investment securities available-for-sale                                         |  |  |  |                          | (66,785    
|Investment in
the Bank                                                                       |  |  |  |                          |           
|Net cash
provided by investing activities                                                    |  |  |  |                          | 361,050    
|Cash flows
from financing activities:                                                        |  |  |  |                          |            
|Cash
dividends paid                                                                          |  |  |  |                          | (4,026,401 
|Payment from
subsidiary related to amortization of unearned compensation on restricted stock |  |  |  |                          | 31,185     
|Stock options
exercised                                                                      |  |  |  |                          | 576,609    
|Payment from
subsidiary related to tax benefit from non-qualified stock options exercised    |  |  |  |                          | 5,744      
|Decrease in
due to the Bank                                                                  |  |  |  |                          |           
|Net cash used
in financing activities                                                        |  |  |  |                          | (3,412,863 
|Net increase
(decrease) in cash and cash equivalents                                         |  |  |  |                          | (59,904    
|Cash and cash
equivalents at beginning of the year                                           |  |  |  |                          | 503,321    
|Cash and cash
equivalents at end of the year                                                 |  |  |  | $                        | 443,417    

55

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

20.    Selected quarterly financial data
(unaudited)

The following table sets forth the Companys unaudited data regarding
operations for each quarter of 2003 and 2002. 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):



|                                              |  |  |  | 2003 |       
|--------------------------------------------- |  |  |  | ---- | ------
|
|Interest and
dividend income                  |  |  |  | $    | 10,540
|Interest
expense                              |  |  |  |      | 999   
|Net interest
income                           |  |  |  |      | 9,541 
|Loan loss
provision                           |  |  |  |      | 620   
|Net interest
income after loan loss provision |  |  |  |      | 8,921 
|Noninterest
income                            |  |  |  |      | 3,547 
|Noninterest
expenses                          |  |  |  |      | 6,722 
|Income before
income taxes                    |  |  |  |      | 5,746 
|Provision for
income taxes                    |  |  |  |      | 2,231 
|Net
income                                    |  |  |  | $    | 3,515 
|Basic
earnings per common share               |  |  |  | $    | 0.28  
|Fully diluted
earnings per common share       |  |  |  | $    | 0.27  



|                                              |  |  |  | 2002 |      
|--------------------------------------------- |  |  |  | ---- | -----
|
|Interest and
dividend income                  |  |  |  | $    | 9,722
|Interest
expense                              |  |  |  |      | 1,024
|Net interest
income                           |  |  |  |      | 8,698
|Loan loss
provision                           |  |  |  |      | 400  
|Net interest
income after loan loss provision |  |  |  |      | 8,298
|Noninterest
income                            |  |  |  |      | 2,898
|Noninterest
expenses                          |  |  |  |      | 5,882
|Income before
income taxes                    |  |  |  |      | 5,314
|Provision for
income taxes                    |  |  |  |      | 2,072
|Net
income                                    |  |  |  | $    | 3,242
|Basic
earnings per common share (1)           |  |  |  | $    | 0.26 
|Fully diluted
earnings per common share (1)   |  |  |  | $    | 0.25 

---

|(1) |  | Adjusted to give retroactive effect to a three-for-two stock
split declared in May 2002.
|--- |  | ----------------------------------------------------------------------------------------

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

56

---



|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



Our Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing date of this annual report (the Evaluation
Date). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be
included in our reports filed or submitted under the Securities Exchange Act of 1934, as amended.


Changes in Internal Controls



Since the Evaluation Date, there have not been any
significant changes in our internal controls or in other factors that could significantly affect such controls.


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 held on April 27,
2004. (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 30.
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(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 9, 2003 in
regards to release of the Companys fourth quarter and year-end, 2003 earnings.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company filed a report on Form 8-K on December 23, 2003 in
regards to an announcement by press release that shareholders of Community Bank of Grants Pass (CBGP) voted in favor of an acquisition of the company
by Cascade Bancorp.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

57

---

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 /s/ Patricia L. MossPatricia L. MossPresident/Chief Executive OfficerDate: February 26, 2004 |  | CASCADE BANCORP  /s/ Gregory D. NewtonGregory D. Newton Executive Vice President/Chief Financial Officer Date: February 23, 2004
|------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------



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                         |  |  |  | February 23,
2004Date
|-------------------------------------------------------------------- |  |  |  | ---------------------
|                                                                    
|/s/ Gary L. CappsGary L. Capps, Director/Chairman                    |  |  |  | February 23,
2004Date
|                                                                    
|/s/ Gary L. HoffmanGary L. Hoffman, Director/Vice Chairman           |  |  |  | February 23,
2004Date
|                                                                    
|/s/ Patricia L. MossPatricia L. Moss, Director/President/CEO         |  |  |  | February 26,
2004Date
|                                                                    
|/s/ Ryan R. PatrickRyan R. Patrick, Director                         |  |  |  | February 23,
2004Date
|                                                                    
|/s/ James E. PetersenJames E. Petersen, Director/Assistant Secretary |  |  |  | February 23,
2004Date

58

---

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 |  | Material
  Contract.  Advances,
  Security and Deposit Agreement, dated November 18, 1991, between Bank of the
  Cascades and the Federal Home Loan Bank of Seattle.  Filed as Exhibit 10.4 to registrants Form 10-KSB filed
  December 31, 1994, and incorporated herein by reference.                         | 
| |      |  |                                                                                                                                                                                                                                                                                                                  | 
| | 10.4 |  | 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.                                      | 
| |      |  |                                                                                                                                                                                                                                                                                                                  | 
| | 10.5 |  | 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 47 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                                                                                                                                                                              | 

---

---