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, 2004


|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|---- |  | ----------------------------------------------------------------------------------------



For the
transition period from ______ to ______




Commission file number: 0-23322




CASCADE
BANCORP(Name of registrant as specified in its charter)




|Oregon                                        |  |  |  | 93-1034484                     
|--------------------------------------------- |  |  |  | -------------------------------
|(State of
incorporation)                      |  |  |  | (IRS Employer
Identification #)
|1100 NW Wall Street,
Bend, Oregon             |  |  |  | 97701                          
|(Address of principal
executive offices)      |  |  |  | (Zip
Code)                     
|(541)
385-6205(Registrants telephone number)



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




Securities registered under Section 12(g) of the Exchange Act:Common Stock, no par value(Title of
Class)




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




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




Indicate by check mark whether the registrant is 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 at June 30, 2004 (the last business day of the most recent second quarter) was $297,168,176 (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. 16,825,928 shares of no par value Common Stock on February 28,
2005.


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 25, 2005.






---

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.  
|Item
9B.  
|PART III  
|Item
10.  
|Item
11.  
|Item
12.  
|Item
13.  
|Item
14.  
|PART IV   
|Item
15.  
|Signatures

---

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, 2004 the Company had total consolidated assets of approximately $1
billion, net loans of approximately $847 million and deposits of approximately $851 million.


Bank of the Cascades



The Bank was chartered as an Oregon State bank 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. With the sustained increase in population and economy of its
Central Oregon market, the Company has enjoyed rapid growth in assets and profitability over the past decade. More recently the Company has diversified
its geographic footprint by expanding into growth markets of Portland and Southern Oregon. By year-end 2004 loans and deposits in those markets had
risen to 27% and 17%, respectively, of Company-wide totals. With each and every market expanding at a healthy pace in 2004, total assets reached $1
billion by year-end, up 36.8% for the year. At the end of 2004, the Bank had a total of 21 branches serving the communities in Central Oregon,
Salem/Keizer, Southern Oregon and Portland, up from 15 branches at year-end 2003.




On January 1, 2004 the Company completed its
acquisition of the $46 million (assets) Community Bank of Grants Pass, Oregon to complement its expansion into Southern Oregon. In addition, during
2004, the Company opened a total of five new offices between its Central and Southern Oregon markets. In Central Oregon, a branch opened in the Old
Mill district, East Bend in the Forum shopping center and West Bend in the new Safeway. In Southern Oregon, branches were opened in South Grants Pass
and Ashland. These actions have diversified the Banks markets and expanded its growth potential.




A significant portion of the Banks assets are
in Deschutes County, where it is the market share leader in customer deposits holding 33% market share. The Bank is also the market leader in
construction and commercial real estate lending, and has a large share of the local residential mortgage market. 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 better 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 increased business volume in 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 organizations, professional and consumer relationships. The Bank provides commercial real estate loans, real estate
construction and development loans, commercial and industrial loans as well as consumer installment, line-of-credit, credit card, and home equity
loans. 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, internet banking and electronic
bill payment. In addition, the Bank serves business customer deposit needs with electronic, e-commerce services, funds management services, collection
and disbursement services.


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 320 full-time employees as of December 31, 2004, up


3

---



from 283 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 targets strong growth markets and
deploys a distinctive community banking strategy within such markets. 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 banking, featuring premier
customer service and competitive financial products. The Company is strategically committed to utilizing advanced technology for the convenience of
customers, including customer choice access through branches, ATMs, Internet, and telephone.




The Companys expansion into Southern Oregon is
based upon a community banking strategy, similar to the Companys strategy in its Central Oregon and Salem regions. The Medford branch was opened
in mid-2003, after hiring a well-known banking executive from the area. The Company acquired the former Community Bank of Grants Pass on January 1,
2004, and during the year opened branches in south Grants Pass and Ashland, Oregon. The Company is targeting additional branch locations in Medford in
2005.




The Companys Portland strategy is focused on
attracting high value business and professional banking 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 Oregon is highly
competitive. The Company competes principally with other commercial banks, savings and loan associations, credit unions, mortgage companies, brokers
and other non-bank financial service providers. In addition to price competition for deposits and loans, competition exists with respect to the scope
and type of services offered, customer service levels, convenience, as well as competition in fees and service charges. In addition, improvements in
technology, communications and the Internet have intensified delivery channel competition. Competitor behavior may result in heightened competition for
banking and financial services and thus affect future profitability.




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


4

---

Geographic Concentration



The Company generates substantially all of its loans
and deposits from customers located within the Companys Central Oregon, Salem, Southern Oregon and Portland service areas. As of December 31,
2004, approximately 59% of total loans and 72% of deposits are attributable to its Central Oregon banking business, while the remaining 41% and 28%,
respectively, stem from the Salem, Southern Oregon and Portland markets. The Company is thus subject to and is directly affected by the trends and
changes in the economic vitality of these regions. Because 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


5

---



considers whether the performance of such
activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition or gains in
efficiency in resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of
interest or unsound banking practices.


The Sarbanes-Oxley Act of 2002



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


USA Patriot Act



Under the USA Patriot Act of 2001, adopted by the
U.S. Congress on October 26, 2001 to combat terrorism, FDIC insured banks and commercial banks were required to increase their due diligence efforts
for correspondent accounts and private banking customers. The USA Patriot Act requires 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.


6

---



The Company is a designated Financial Holding
Company 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.




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


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 2004 was approximately $210,000.


7

---

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, 2004 the Company is considered well capitalized according to these regulatory capital guidelines. See footnote
19 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 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, 2004, the Companys leverage,
Tier 1 capital and Total risked-based capital ratios were 10.11%, 10.11% and 11.40%, 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, 2004, the Company is considered
Well-capitalized.


8

---

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 that, to the extent
not already charged against earnings or reflected in a reserve, the following: (1) all bad debts, which are debts on which interest is past due and
unpaid for at least six months, unless the debt is fully secured and in the process of collection; (2) all other assets charged off as required by the
Director of the Department of Consumer and Business Services or a state or federal examiner; (3) all accrued expenses, interest and taxes of the
institution.




In addition, the appropriate regulatory authorities
are authorized to prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. The
Bank and Bancorp are not currently subject to any regulatory restrictions on their dividends other than those noted above.


Check 21



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


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



At December 31, 2004, the Company conducted banking
services in 21 locations throughout Oregon. Twelve locations are in Central Oregon, four in Salem/Keizer, four in Southern Oregon and one in Portland.
All offices are free standing buildings with the exception of three branches, two which operate in leased space in supermarkets in Bend and the third
which operates on the 10th floor of the Pioneer Tower Building in Portland.




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




The main office is located at 1100 NW Wall Street,
Bend, Oregon, and consists of approximately 15,000 square feet (sq. ft.). The building is owned by the Bank and is situated on leased land. The ground
lease term is for 30 years and commenced June 1, 1989. There are ten renewal options of five years each. The current rent is $6,084 per month with
adjustments every five years by mutual agreement of landlord and tenant. The main bank branch occupies the ground floor. Human Resources, Investments
and Credit Services occupy approximately 8,400 square feet. A separate drive-up facility is also located on this site.




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




In 2004, the Bank purchased the Boyd Building with
26,035 square feet in downtown Bend. This building is now occupied by Credit Services, SBA and the Mortgage Division. Including Bank use, the space is
near full occupancy.




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


9

---

|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 2004.


10

---

PART II

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



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


|     |  | First Quarter |  | Second Quarter |  | Third Quarter |  | Fourth Quarter
|---- |  | ------------- |  | -------------- |  | ------------- |  | --------------
|2004 |  |               |  |                |  |               |  |               
|High |  | $18.78        |  | $20.00         |  | $19.65        |  | $22.44        
|Low  |  | $15.42        |  | $15.48         |  | $16.96        |  | $18.53        
|2003 |  |               |  |                |  |               |  |               
|High |  | $12.33        |  | $14.79         |  | $15.08        |  | $13.86        
|Low  |  | $11.19        |  | $11.60         |  | $13.40        |  | $14.32        



The Company declared a 25% (5:4) stock split in
March 2004. The Company announced a policy of declaring regular quarterly cash dividends in 1997. The dividends declared and paid listed below have
been retroactively adjusted for past stock dividends and stock splits.


|     |  | First Quarter |  | Second Quarter |  | Third Quarter |  | Fourth Quarter
|---- |  | ------------- |  | -------------- |  | ------------- |  | --------------
|
|2005 |  | $   .08       |  | N/A            |  | N/A           |  | N/A           
|2004 |  | $   .06       |  | $  .06         |  | $  .07        |  | $  .07        
|2003 |  | $   .06       |  | $  .06         |  | $  .06        |  | $  .06        



At February 28, 2005, the Company had 20,000,000
shares of common stock authorized with 16,825,928 shares issued and outstanding, held by approximately 5,600 shareholders of record.




Information regarding securities authorized for
issuance under the Companys equity plans is located on page 58 (Note 17) of this annual report and is incorporated by reference.


|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


11

---



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,
other than as may be required by SEC regulations.




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


Critical Accounting Policies



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




Reserve for Loan Losses:  Arriving
at an appropriate level of reserve for loan losses involves a high degree of judgment. The Companys reserve for loan losses provides for probable
losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the
reserve 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              |  |  |  | $                        | 47,069   
|Loans,
gross                       |  |  |  |                          | 862,708  
|Total
assets                       |  |  |  |                          | 1,004,809
|Total
deposits                     |  |  |  |                          | 851,397  
|Non-interest
bearing deposits      |  |  |  |                          | 340,652  
|Core Deposits
(1)                  |  |  |  |                          | 824,814  
|Total
shareholders equity (2)     |  |  |  |                          | 86,432   

12

---

|                                                                    |  | Years
      ended December 31,
|------------------------------------------------------------------- |  | ------------------------------
|
|Income
        Statement Data                                       |  |                               
|Interest
        income                                             |  | $                             
|Interest
        expense                                            |  |                               
|Net
        interest income                                         |  |                               
|Loan
        loss provision                                         |  |                               
|Net
        interest income after loan loss provision               |  |                               
|Non-interest
        income                                         |  |                               
|Non-interest
        expenses                                       |  |                               
|Income
        before income taxes                                  |  |                               
|Provision
        for income taxes                                  |  |                               
|Net
        income                                                  |  | $                             
|Share
        Data (2)                                              |  |                               
|Basic
        earnings per common share                             |  | $                             
|Diluted
        earnings per common share                           |  | $                             
|Book
        value per common share                                 |  | $                             
|Tangible
        book value per common share                        |  | $                             
|Cash
        dividends declared per common share                    |  | $                             
|Ratio
        of dividends declared to net income                   |  |                               
|Basic
        Average shares outstanding                            |  |                               
|Fully
        Diluted average shares outstanding                    |  |                               
|Key
        Ratios                                                  |  |                               
|Return
        on average total shareholders equity (book)         |  |                               
|Return
        on average total shareholders equity (tangible) (3) |  |                               
|Return
        on average total assets                              |  |                               
|Net
        interest spread                                         |  |                               
|Net
        interest margin                                         |  |                               
|Total
        revenue (net int inc + non int inc)                   |  | $                             
|Efficiency
        ratio (4)                                        |  |                               
|Asset
        Quality Ratios                                        |  |                               
|Loan
        loss reserve                                           |  | $                             
|Reserve
        to ending total loans                               |  |                               
|Non-performing assets (5)                                           |  | $                             
|Non-performing assets to total assets                               |  |                               
|Delinquent
        >30 days to total loans                          |  |                               
|Net
        Charge offs                                            |  | $                             
|Net
        loan charge-offs (annualized)                           |  |                               
|Mortgage
        Activity                                           |  |                               
|Mortgage
        Originations                                       |  | $                             
|Total
        Servicing Portfolio (sold loans)                      |  | $                             
|Capitalized
        Mortgage Servicing Rights (MSRs)               |  | $                             
|Capital
        Ratios                                              |  |                               
|Average
        shareholders equity to average assets              |  |                               
|Leverage
        ratio (6)                                          |  |                               
|Total
        risk-based capital ratio (6)                          |  |                               

13

---



Notes:


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

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

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

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

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

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

14

---

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



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




This discussion highlights key information as
determined by management but may not contain all of the information that is important to you. For a more complete understanding, the following should
be read in conjunction with the Companys audited consolidated financial statements and the notes thereto as of December 31, 2004 and 2003 and for
each of the three years in the period ended December 31, 2004 included elsewhere in this report.


HIGHLIGHTS AND SUMMARY OF PERFORMANCE

Overview & Business Strategy



Management and directors of Cascade Bancorp have
developed and implemented long-term goals and strategies with the objective of achieving sustainable double-digit EPS growth for its shareholders while
progressively serving the banking and financial needs of its customers and communities. The Companys business strategy includes: 1) operate in,
and expand into growth markets; 2) recruit and retain the best relationship bankers in such markets; 3) consistently deliver the highest level of
customer service, and; 4) apply state-of-the-art technology for the convenience of customers.




The Companys original market is Central
Oregon, whose population has grown in the 98% percentile of the nation due largely to in-migration of ‘quality-of-life seekers. The region
has natural high-desert beauty, bountiful recreational and cultural choices, good weather, and premier healthcare. The Company and Bank have grown with
the community during the last 25 years, to a point of holding a 33% share of this fast growing market. The combination of a fast growing economy and
powerful market share contributed to sustained high performance over the past decade. In recent years, management has sought to augment this solid
growth by prudently expanding into other attractive Oregon markets, now including Salem, Portland, and Southern Oregon. The latter two markets were
entered in mid-2003, and during 2004 attained breakeven after less than one year of operation. At year-end 2004, loans and deposits in these new
markets total 27% and 17% respectively of total Company balances. This growth has had the additional benefit of diversifying the Companys
concentration of assets into several Oregon markets. Investing in the start-up phase of the new markets slowed 2004 earnings growth from its historical
levels, however, earnings momentum appears positive at year-end. According to Thompson Financial, analysts current consensus for 2005 earnings
estimate for CACB is $1.10 per diluted share, an increase of 18% over 2004 actual earnings of $.93 per diluted share. The following table reflects the
strong and sustained growth and returns the Company has achieved:







|Compound Annual Growth    |  |  |  | 1 year |      | 3 year |  | 5 year
|------------------------- |  |  |  | ------ | ---- | ------ |  | ------
|Earnings Per
Share Growth |  |  |  |        | 7.7  | %      |  |       
|Net Income
Growth         |  |  |  |        | 14.7 | %      |  |       
|Loan
Growth               |  |  |  |        | 46.3 | %      |  |       
|Deposit
Growth            |  |  |  |        | 30.8 | %      |  |       

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 technological advantage in 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


15

---



to assist management in directing and monitoring results. As
indicated by its financial success, the Company has generally achieved its goals by meeting or exceeding key performance benchmarks.


Highlights  2004 Financial Performance



For The Fourth Quarter
2004


| |  | Record Net Income at $4.6 million, up 29.6% vs. year ago
quarter
|- |  | ----------------------------------------------------------------

| |  | Earnings Per Share (diluted) at $.26, up 21.9% vs. year ago
quarter
|- |  | -------------------------------------------------------------------

| |  | Net Interest Margin 5.69%, vs. 5.76% prior quarter and 5.73%
year ago quarter
|- |  | -----------------------------------------------------------------------------



For The Full Year
2004


| |  | Record Net Income up 14.7% to $16.0 million
|- |  | -------------------------------------------

| |  | Earnings Per Share (diluted) up 7.7% to $.93
|- |  | --------------------------------------------

| |  | Loans and Deposits up 46.4% and 30.8.%, respectively, for the
year
|- |  | ------------------------------------------------------------------

| |  | Return on Equity 20.4% for the year; above 20% ten years
running
|- |  | ----------------------------------------------------------------



The Company continued its strong and sustained loan
and deposit growth during 2004, leading to a 46.4% increase in loans while deposits grew 30.8%, driving year-end total assets over $1 billion for the
first time. Rapid loan and deposit increases stemmed from strong growth in new markets (Portland and Southern Oregon) augmented by double-digit
expansion in the combined Central Oregon and Salem markets. Aggregate loan totals in the Companys new markets stood at $234.8 million at December
31, 2004 driven by an average organic loan growth of over $40 million each quarter of 2004 (excludes $36 million in loans from the acquisition of
Community Bank Grants Pass). Combined deposits were $147.8 million at year-end, enabling new markets to locally fund over 60% of their loan growth.
Loans in new markets have grown to 27.3% of total Company loans and 17.4% of deposits in just 18 months of operation.




For the year, 2004 net income was up 14.7% to $16.0
million. This year-over-year increase in net income was accomplished despite the initial earnings drag of expenditures in new markets in early 2004.
Earnings per share (diluted) for 2004 were $.93, up 7.7% from 2003. Return on equity was 20.4% for the full year and return on assets continued well
above peer banks at 1.83% for the full year 2004.


Loan growth and credit quality



During the year ended December 31, 2004, total loans
outstanding increased 46.4% to $859.6 million. Portland and Southern Oregon markets contributed about two-thirds of total Company loan growth during
the fourth quarter, while loans in the Companys Central Oregon market increased 16.7% (annualized) for the quarter.




Underlying loan credit quality remained sound, with
delinquent loans greater than 30 days past due at just .02% of total loans, while net loan charge-offs for the quarter were $.4 million, or .19%
(annualized) of total loans. The reserve for loan losses (which included reserves for unfunded loan commitments of approximately $2.1 million at
December 31, 2004, in accordance with industry peer group practice) increased 32.1% in 2004 to $12.4 million and stood at a prudent 1.44% of total
loans outstanding at year-end. The reserve was at 1.49% of loans for the third quarter and 1.60% a year ago. This ratio has trended modestly lower in
tandem with improving regional macro-economic fundamentals and enhanced geographic diversification, which reduced required reserves for commercial real
estate related 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



At December 31, 2004, deposits were $851.4 million,
up 30.8% or $200.2 million from a year ago. The Company continues to be successful in attracting and retaining non-interest commercial checking
accounts with its quality service and sophisticated deposit and treasury management products. This has led to a year-over-year


16

---



increase of 38.8% in non-interest checking
balances, which now represent approximately 40% of total deposits. Management believes it is likely that 2004s robust 30.8% growth rate in
deposits will slow somewhat in 2005 as a stronger economy and higher market interest rates lure monies from the safe-haven of banks into stock or other
investment vehicles.




With the lower overall interest rate environment
during most of 2004, the Company continued its ongoing success in attracting non-interest bearing deposits, which averaged 38.9% of total deposits in
2004, while the Companys average overall cost of funds fell to .63% in 2004 compared to .68% in 2003. Non-interest bearing accounts are viewed as
core relationship deposits.


Non-interest income and expense



Non-interest income decreased 3.4% to $12.9 million
compared to 2003, as higher bank service fee income was offset by declining net mortgage revenues. 2004 service fee income was at $6.7 million, up
11.8% year over year, primarily as a result of growing customer transaction volumes and utilization of overdraft protection products. Mortgage revenue
appears to have stabilized after the refinance boom of 2003. Fourth quarter net mortgage revenue was $.5 million, comparable to the prior quarter, and
now represents 18.2% of non-interest income, down from nearly 30.9% for the same period in 2003. The Company originated $31.1 million in residential
mortgages during the fourth quarter, comparable to the $33.3 million in the immediately preceding quarter. For the full year 2004, mortgage
originations declined to $141.4 million from a record $304.7 million in 2003 as interest rates rose from their historical lows and noticeably slowing
mortgage refinance volumes.




Non-interest expense for the year increased 19.0%
compared to 2003. Expenses increased primarily for human resources, including staffing increases to meet growing business volumes and support for new
markets, along with incentive-based bonuses that are directly tied to the increasing profitability of the Company. Expenses incurred in new market
areas accounted for about two-thirds of the year over year increase in non-interest expenses. It is anticipated that non-interest expense growth in
2005 will be above 10% due to the full year effect of the Companys new market expansion in 2004 coupled with further investment in operations
infra-structure, new branches, and recruitment of additional banking professionals.


RESULTS OF OPERATIONS  Years ended December 31, 2004, 2003,
and 2002

Net Interest Income/Net Interest Margin



Net interest income (gross interest income net of
funding costs) was $46.0 million in 2004 compared to $36.8 and $33.2 million in 2003 and 2002, respectively. In percentage terms, net interest income
was up 24.9% and 10.8% in 2004 and 2003, respectively. Four 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 increased net interest income. Second, the generational low
interest rate climate compressed average yields on earning assets, tending to lower interest income. Third, the cost of funds also declined due to the
ongoing low interest-rate climate, tending to offset a portion of the impact of lower yields on assets. Fourth, over the past few months the Federal
Reserve has begun to gradually increase interest rates, leading to a modest uptick in loan yields and cost of funds since mid-2004. The following
provides insight into these component factors.




2004 interest income increased a strong 24.7% over
the prior year primarily as a result of a 46.4% growth in outstanding loans. Average yields on earning assets fell to 6.35% in 2004 compared to 6.68%
in 2003, however, with the prime rate increasing from a cycle low of 4% in mid-2004 to 5.25% by year-end, fourth quarter 2004 yields increased modestly
after 16 quarters of decline. In 2003 interest income advanced 7.7% as growth in earning assets offset the ongoing effects of low market interest
rates. Earning asset yields were 6.68% in 2003 compared to 7.69% in 2002.




While deposit volumes grew at 30.8% and 29.7% in
2004 and 2003, respectively, interest expense increased 22.5% in 2004 after a 14.0% decline in 2003. In the latter half of 2004, market rates began
increasing and rates paid on interest bearing liabilities was trending up at year-end. Having been at the trough in market interest rates, the cost of
interest bearing deposits and borrowings in 2004 averaged 1.00%, comparable to 1.06% in 2003 and 1.52% in 2002.


17

---



Compared to peer banks, the Company has historically
maintained a relatively low cost of funds. An important factor in achieving and sustaining this advantage has been the Companys high percentage
of non-interest bearing deposits. Such deposits averaged about 38.9% and 37.5% of total deposits in 2004 and 2003, respectively, and are a reflection
of the Companys relationship and business banking strategy, high customer service standards, and 33% deposit market share in Central Oregon.
Because of this relatively high proportion of non-interest bearing deposits, the overall cost of funds was .63% in 2004 compared to .68% in 2003, and
..97% for 2002. With broadly increasing competition for deposits as well as competitive new markets where the Company does not enjoy a large market
share, the proportion of non-interest bearing deposits may ease over time.




The above combination of factors caused the
Companys net interest margin (NIM) to fall to 5.74% in 2004 from 6.03% in 2003 and 6.75% in 2002. 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. Management forecasts that the net interest margin will likely remain
between 5.60% and 5.80% over the next 12 to 18 months assuming interest rates follow the financial markets expected gradual path to modestly higher
rates.




The Company has a very stable NIM profile according
to its interest rate risk model. The model predicts that the Companys earnings would be slightly enhanced in the event of higher than expected
market interest rates, a result of its strong core deposit base (led by its 33% deposit market share in Central Oregon) and its growing portfolio of
floating rate loans. Floating rate loans have risen from 32% to 43% of total loans during the past three years. Over that horizon, fixed rate loans
have declined from 31% to 15%, while periodically adjustable loans (typically 3 to 5 year re-pricing) have increased from 37% to 42%. In the unlikely
event of a dramatic decline in interest rates (Fed Funds falling below 1%), the model predicts earnings growth would be satisfactory, but moderately
below expected levels because falling loan yields would compress against an already low cost of funds. The margin can also be affected by external
factors including aggressive price offerings on loans or deposits by competitors. Please see cautionary Forward Looking Statements as well
as further information on interest rate risk located in this report.


18

---

Average Balances and Average Rates Earned and Paid



The following table sets forth for 2004, 2003, and
2002 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, 2004 |         | Year
      ended
      December 31, 2003 |  | Year
      ended
      December 31, 2002 |       
|------------------------------------------------------------- |  | ---------------------------------------- | ------- | ---------------------------------------- |  | ---------------------------------------- | ------
|
|Assets                                                        |  |                                          |         |                                          |  |                                          |       
|Taxable
        securities                                    |  | $                                        | 34,503  |                                          |  | $                                        | 1,093 
|Non-taxable
        securities (1)                            |  |                                          | 3,606   |                                          |  |                                          | 92    
|Interest
        bearing balances from Federal Home Loan Bank |  |                                          | 14,555  |                                          |  |                                          | 194   
|Federal
        funds sold                                    |  |                                          | 8,710   |                                          |  |                                          | 111   
|Federal
        Home Loan Bank stock                          |  |                                          | 2,390   |                                          |  |                                          | 63    
|Loans
        (2)(3)                                          |  |                                          | 737,421 |                                          |  |                                          | 49,358
|Total
        earning assets                                  |  |                                          | 801,185 |                                          |  |                                          | 50,911
|Reserve
        for loan losses                               |  |                                          | (10,943 | )                                        |  |                                          |       
|Cash
        and due from banks                               |  |                                          | 47,620  |                                          |  |                                          |       
|Premises
        and equipment, net                           |  |                                          | 18,659  |                                          |  |                                          |       
|Other
        Assets                                          |  |                                          | 15,929  |                                          |  |                                          |       
|Total
        assets                                          |  | $                                        | 872,450 |                                          |  |                                          |       
|Liabilities & Stockholders Equity                            |  |                                          |         |                                          |  |                                          |       
|Int.
        bearing demand deposits                          |  | $                                        | 376,424 |                                          |  |                                          | 3,241 
|Savings
        deposits                                      |  |                                          | 33,928  |                                          |  |                                          | 117   
|Time
        deposits                                         |  |                                          | 53,001  |                                          |  |                                          | 806   
|Other
        borrowings                                      |  |                                          | 25,686  |                                          |  |                                          | 739   
|Total
        interest bearing liabilities                    |  |                                          | 489,039 |                                          |  |                                          | 4,903 
|Demand
        deposits                                       |  |                                          | 295,108 |                                          |  |                                          |       
|Other
        liabilities                                     |  |                                          | 9,790   |                                          |  |                                          |       
|Total
        liabilities                                     |  |                                          | 793,937 |                                          |  |                                          |       
|Stockholders equity                                          |  |                                          | 78,513  |                                          |  |                                          |       
|Total
        liabilities & equity                            |  | $                                        | 872,450 |                                          |  |                                          |       
|                                                              |  |                                          |         |                                          |  |                                          |       
|Net
        interest income                                   |  |                                          |         |                                          |  | $                                        | 46,008
|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 2004, $1,885,000 in 2003, and $1,493,000 in 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

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

19

---

Analysis of Changes in Interest Income and Expense



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




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


|                                                |  | Year
      ended December 31,
|----------------------------------------------- |  | -----------------------------
|
|
|
|Interest
        income:                        |  |                              
|Interest
        and fees on loans              |  | 10,059                       
|Taxable
        securities                      |  | 74                           
|Non-taxable
        securities                  |  | 26                           
|Interest
        bearing balances due from FHLB |  | (20                          
|Federal
        Home Loan Bank stock            |  | (58                          
|Federal
        funds sold                      |  | (5                           
|Total
        interest income                   |  | 10,076                       
|Interest
        expense:                       |  |                              
|Interest
        on deposits:                   |  |                              
|Interest
        bearing demand                 |  | 792                          
|Savings                                         |  | 8                            
|Time                                            |  | (92                          
|Other
        borrowings                        |  | 192                          
|Total
        interest expense                  |  | 900                          
|Net
        interest income                     |  | 9,176                        

Non-interest Income



Total non-interest income was down 3.4% at $12.9
million from 2003, following a 38.5% increase in 2003. Higher bank service fee income in 2004 was offset by declining net mortgage revenues. 2004
service fee income was at $6.7 million, up 11.8% year over year, primarily as a result of growing customer transaction volumes and utilization of
overdraft protection products. Mortgage revenue appears to have stabilized after the refinance boom of 2003.


Home Mortgage Originations and Mortgage Related Revenue



The Companys 2004 mortgage originations
declined to $141.4 million from a record $304.7 million in 2003 and $224 million in 2002, as interest rates rose from their historical lows. Net
mortgage revenues decreased to $2.4 million in 2004, down 57.4% from $4.1 million in the prior year.




The general level and direction of interest rates
directly influence the volume and profitability of mortgage banking. Financial markets indicate a trend toward modestly higher interest rates in 2005,
and the Mortgage Bankers Association has predicted a slowdown in mortgage activity.




The Company mainly sells the residential mortgage
loans it originates to Fannie Mae, a U.S. Government sponsored enterprise. The Company services such loans for Fannie Mae and is paid approximately
..25% per annum


20

---

on the outstanding balances for
providing this service. Such  revenues are included in the above mortgage banking
results. Mortgages serviced for Fannie Mae totaled $502.4 million at December 31, 2004
and $514.2  million at December 31, 2003, upon which were recorded related Mortgage
Servicing Rights (MSRs) of approximately $4.7 million for each of these  years.



The Company capitalizes the estimated market value
of MSRs into income upon the sale of each originated mortgage loan. The Company amortizes MSRs in proportion to the servicing income it receives from
Fannie Mae over the estimated life of the underlying mortgages, considering prepayment expectations and refinancing patterns. In addition, the Company
amortizes, in full, any remaining MSRs balance that is specifically associated with a serviced loan that is refinanced or paid-off.




As a result of its fair value analysis, in 2004 the
Company recaptured previously recorded MSR valuation allowances totaling approximately $.3 million, reducing this allowance to zero. The carrying value
of the MSRs at December 31, 2004 was 0.93% of serviced loans compared to 0.91% a year ago.


Non-interest Expenses



Total non-interest expenses for 2004 were $29.6
million, an increase of 19.0% compared to 2003, consistent with an increase of 18.2% in 2003. Expenses relating to new markets start-up costs were $4.5
million for 2004, which accounts for about two-thirds of the increase for the full year. 2004 expense increases occurred for human resources, including
staffing increases to meet growing business volumes and support for new markets, along with incentive-based bonuses that are directly tied to the
increasing profitability of the Company. 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 50.2%, 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 non-interest expense growth in 2005 will be above
10% due to the full year effect of the Companys new market expansion in 2004 coupled with further investment in operations infra-structure, new
branches, and recruitment of additional banking professionals.


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 36.8% to $1.005 billion at
December 31, 2004 compared to $734.7 million at December 31, 2003. The increase in total assets was driven by continued growth in loans, which grew
$272.4 million or 46.4% to $859.6 million at year-end 2004, following a 17.7% increase in 2003. Growth in total assets was primarily funded by a $200.2
million or 30.8% increase in deposits.




The Company had no significant derivative financial
instruments as of December 31, 2004 and 2003.




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


Loan Portfolio Composition



Net loans represent 84% of total assets as of
December 31, 2004. 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
increased the commercial loan portion of the portfolio for diversification, growth and interest rate risk management purposes. It is expected that the
proportion of commercial


21

---



loans 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 significant agricultural loans.




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







|                        |  |  |  | December 31, |        
|----------------------- |  |  |  | ------------ | -------
|
|Commercial              |  |  |  | $            | 253,041
|Real
Estate:            |  |  |  |              |        
|Construction/lot        |  |  |  |              | 179,932
|Mortgage                |  |  |  |              | 52,737 
|Commercial              |  |  |  |              | 339,788
|Consumer                |  |  |  |              | 37,209 
|                        |  |  |  |              | 862,708
|Less:                   |  |  |  |              |        
|Reserve for
loan losses |  |  |  |              | 12,412 
|Deferred loan
fees      |  |  |  |              | 3,149  
|                        |  |  |  |              | 15,561 
|                        |  |  |  | $            | 847,147



At December 31, 2004, 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       |  |  |  | $                   | 102,567 |                                      |  | $                    | 118,511 |      
|Real
Estate:     |  |  |  |                     |         |                                      |  |                      |         |      
|Construction/lot |  |  |  |                     | 85,700  |                                      |  |                      | 94,232  |      
|Mortgage         |  |  |  |                     | 8,488   |                                      |  |                      | 9,648   |      
|Commercial       |  |  |  |                     | 15,125  |                                      |  |                      | 58,722  |      
|Consumer         |  |  |  |                     | 6,665   |                                      |  |                      | 16,125  |      
|                 |  |  |  | $                   | 197,547 |                                      |  | $                    | 281,036 |      



Variable and adjustable rate loans contractually due
after one year totaled $553.8 million at December 31, 2004 and loans with predetermined or fixed rates due after one year totaled $111.3 at December
31, 2004.


Real Estate Loan Concentration



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




Commercial Real Estate (CRE) loans represent the
largest category within the loan portfolio at approximately 39% of total loans outstanding as of December 31, 2004. Approximately 54% of such loans are
made to owner-occupied users of the commercial property, while 46% of CRE loans are to obligors who do not directly occupy the property. 2004 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


22

---



borrowers business, rents or the
obligors personal income. Management believes that commercial real estate collateral provides an additional measure of security for loans.
Management believes lending to owner-occupied businesses mitigates, but does not eliminate, commercial real estate risk. The following table shows the
breakdown of the two categories (dollars in thousands):







|                   |  |  |  | 2004 |         | % of total CRE |  | 2003 |     | % of total CRE |  | 2002 |         | % of total CRE
|------------------ |  |  |  | ---- | ------- | -------------- |  | ---- | --- | -------------- |  | ---- | ------- | --------------
|
|Owner
occupied     |  |  |  | $    | 185,688 |                |  |      | 55  | %              |  | $    | 136,389 |               
|Non-owner
occupied |  |  |  |      | 154,100 |                |  |      | 45  | %              |  |      | 107,814 |               
|                   |  |  |  | $    | 339,788 |                |  |      | 100 | %              |  | $    | 244,203 |               



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 categories and are listed in the table below
(dollars in thousands):







|                                                         |  |  |  | 2004 |         | % of total Const. |  | 2003 |     | % of total Const. |  | 2002 |         | % of total Const.
|-------------------------------------------------------- |  |  |  | ---- | ------- | ----------------- |  | ---- | --- | ----------------- |  | ---- | ------- | -----------------
|
|Residential
construction  to homeowner                  |  |  |  | $    | 48,247  |                   |  |      | 27  | %                 |  | $    | 56,881  |                  
|Commercial
construction                                  |  |  |  |      | 75,065  |                   |  |      | 42  | %                 |  |      | 26,631  |                  
|Residential
speculative construction  developer/builder |  |  |  |      | 56,620  |                   |  |      | 31  | %                 |  |      | 40,380  |                  
|                                                         |  |  |  | $    | 179,932 |                   |  |      | 100 | %                 |  | $    | 123,892 |                  



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




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




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.


23

---

Reserve for Loan Losses



The reserve for loan losses represents
managements recognition of the assumed and present risks of extending credit and the possible inability or failure of the obligors to make
repayment. The reserve is maintained at a level considered adequate to provide for loan losses based on managements assessment of a variety of
current factors affecting the loan portfolio. Such factors include loss experience, review of problem loans, current economic conditions, and an
overall evaluation of the quality, risk characteristics and concentration of loans in the portfolio. The reserve is increased by provisions charged to
operations and reduced by loans charged-off, net of recoveries. No assurance can be given that, in any particular period, loan losses will not be
sustained that are sizable in relation to the amount reserved, or that changing economic factors or other environmental conditions could cause
increases in the loan loss provision.


Loan Loss Provision



The Banks ratio of reserve for loan losses to
total loans was 1.44% at December 31, 2004, down from 1.59% at December 31, 2003, and 1.53% at December 31, 2002. The loan loss provision for 2004 was
$3.7 million, up from $2.7 million in 2003 and 2002. 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 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.


24

---



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







|                              |  |  |  | 2004 |        | 2003 | 
|----------------------------- |  |  |  | ---- | ------ | ---- | 
|
|Commercial                    |  |  |  | $    | 3,740  |      | 
|Real
Estate:                  |  |  |  |      |        |      | 
|Construction/lot              |  |  |  |      | 1,643  |      | 
|Mortgage                      |  |  |  |      | 572    |      | 
|Commercial                    |  |  |  |      | 2,268  |      | 
|Consumer                      |  |  |  |      | 1,518  |      | 
|Committed/unfunded (1)        |  |  |  |      | 2,077  |      | 
|Unallocated                   |  |  |  |      | 603    |      | 
|Total reserve
for loan losses |  |  |  | $    | 12,421 |      | 






|                              |  |  |  | 2002 |       | 2001 | 
|----------------------------- |  |  |  | ---- | ----- | ---- | 
|
|Commercial                    |  |  |  | $    | 1,198 |      | 
|Real
Estate:                  |  |  |  |      |       |      | 
|Construction/lot              |  |  |  |      | 1,154 |      | 
|Mortgage                      |  |  |  |      | 250   |      | 
|Commercial                    |  |  |  |      | 1,653 |      | 
|Consumer                      |  |  |  |      | 2,198 |      | 
|Committed/unfunded (1)        |  |  |  |      | 639   |      | 
|Unallocated                   |  |  |  |      | 577   |      | 
|Total reserve
for loan losses |  |  |  | $    | 7,669 |      | 






|                              |  |  |  | 2000 |      
|----------------------------- |  |  |  | ---- | -----
|
|Commercial                    |  |  |  | $    | 777  
|Real
Estate:                  |  |  |  |      |      
|Construction/lot              |  |  |  |      | 837  
|Mortgage                      |  |  |  |      | 261  
|Commercial                    |  |  |  |      | 833  
|Consumer                      |  |  |  |      | 1,493
|Committed/unfunded (1)        |  |  |  |      | 370  
|Unallocated                   |  |  |  |      | 449  
|Total reserve
for loan losses |  |  |  | $    | 5,020

---

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



25

---



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                          |  |  |  | $                       | 862,708
|Average loans
outstanding during the period                 |  |  |  | $                       | 737,421
|Reserve
balance, beginning of period                        |  |  |  | $                       | 9,399  
|Recoveries:                                                 |  |  |  |                         |        
|Commercial                                                  |  |  |  |                         | 202    
|Real
Estate:                                                |  |  |  |                         |        
|Construction                                                |  |  |  |                         |       
|Mortgage                                                    |  |  |  |                         | 9      
|Commercial                                                  |  |  |  |                         |       
|Consumer                                                    |  |  |  |                         | 217    
|                                                            |  |  |  |                         | 428    
|Loans charged
off:                                          |  |  |  |                         |        
|Commercial                                                  |  |  |  |                         | (363   
|Real
Estate:                                                |  |  |  |                         |        
|Construction                                                |  |  |  |                         | (151   
|Mortgage                                                    |  |  |  |                         |       
|Commercial                                                  |  |  |  |                         | (17    
|Consumer                                                    |  |  |  |                         | (887   
|                                                            |  |  |  |                         | (1,420 
|Net loans
charged-off                                       |  |  |  |                         | (992   
|Provision
charged to operations                             |  |  |  |                         | 3,650  
|Reserves
acquired from CBGP                                 |  |  |  |                         | 354    
|Reserve
balance, end of period                              |  |  |  | $                       | 12,412 
|Ratio of net
loans charged-off to average loans outstanding |  |  |  |                         | .13    
|Ratio of
reserve for loan losses to loans at end of period  |  |  |  |                         | 1.44   



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


|                                                             |  |  |  | December 31, |    
|------------------------------------------------------------ |  |  |  | ------------ | ---
|
|Loans on
non-accrual status                                  |  |  |  | $            | 483
|Loans past
due 90 days or more but not on non-accrual status |  |  |  |              |   
|Other real
estate owned                                      |  |  |  |              |   
|Total
non-performing assets                                  |  |  |  | $            | 483
|Percentage of
non-performing assets to total assets          |  |  |  |              | .05



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 years of 2004, 2003 and 2002 was insignificant.


26

---



At December 31, 2004, 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, 2004, 2003, and 2002 (dollars in thousands).


|                                                |  |  |  | December 31, |       
|----------------------------------------------- |  |  |  | ------------ | ------
|
|U.S. Agency
mortgage-backed securities          |  |  |  | $            | 29,525
|U.S.
Government and agency securities           |  |  |  |              | 10,584
|Obligations
of state and political subdivisions |  |  |  |              | 4,686 
|Total debt
securities                           |  |  |  |              | 44,795
|Mutual
fund                                     |  |  |  |              | 369   
|Equity
securities                               |  |  |  |              | 1,905 
|Total
investment securities                     |  |  |  | $            | 47,069



Mortgage-backed securities (MBS) are mainly
adjustable rate (ARM) MBS. Prepayment speeds on mortgages underlying MBS may cause the average life of such securities to be shorter (or longer) than
expected. The following is a summary of the contractual maturities and weighted average yields of investment securities at December 31, 2004 (dollars
in thousands):







|Type and maturity                            |  |  |  | Carrying Value |        | Weighted Average Yield (1)
|-------------------------------------------- |  |  |  | -------------- | ------ | --------------------------
|U.S. Agency
mortgage-backed securities       |  |  |  |                |        |                           
|Due after 1
but within 5 years               |  |  |  | $              | 1,940  |                           
|Due after 10
years                           |  |  |  |                | 27,585 |                           
|Total U.S.
Agency mortgage-backed securities |  |  |  |                | 29,525 |                           
|U.S.
Government and Agency Securities        |  |  |  |                |        |                           
|Due after 1
but within 5 years               |  |  |  |                | 10,584 |                           
|Total U.S.
Government and Agency Securities  |  |  |  |                | 10,584 |                           
|State and
Political Subdivisions (1)         |  |  |  |                |        |                           
|Due after 1
but within 5 years               |  |  |  |                | 3,593  |                           
|Due after 5
but within 10 years              |  |  |  |                | 1,093  |                           
|Total State
and Political Subdivisions       |  |  |  |                | 4,686  |                           
|Total debt
securities                        |  |  |  |                | 44,795 |                           
|Mutual
fund                                  |  |  |  |                | 369    |                           
|Equity
securities                            |  |  |  |                | 1,905  |                           
|Total
Securities                             |  |  |  | $              | 47,069 |                           

---

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

27

---

Bank-Owned Life Insurance



The Bank has purchased BOLI to protect itself
against the loss of key employees and certain directors due to death and to offset the Banks future obligations to its employees under its
retirement and benefit plans. During 2004, 2003 and 2002, the Bank purchased $4.9 million, $.3, and $.2 million of BOLI, respectively. The cash
surrender value of these life insurance policies was $14.1 million and $8.6 million at December 31, 2004 and 2003, respectively. The Bank recorded
income from the BOLI policies of $.7 million in 2004, $.4 million in 2003 and 2002.


Deposit Liabilities and Time Deposit Maturities



Total deposits at year-end 2004 were $851.4 million,
an increase of $200.2 million or 30.7% compared to year-end 2003. Deposits averaged $758.5 million for the full year 2004, up 33.1% or $188.5 million
from the prior year average. This growth has been achieved by expanding market share in existing markets augmented by incremental deposit growth in new
markets. In addition, deposit flows across the banking industry may have benefited from customer indifference due to low the interest rate climate and
concerns arising from volatility of the stock market. These behaviors and bias could change and reduce deposit growth into the future.




A key competitive advantage in growing deposits has
been the Companys ability to expand and retain relationships with its loyal customers. This advantage is evidenced in part by the Companys
relatively high proportion of non-interest bearing (checking account) deposits, which reached approximately 40.0% of total deposits at year end, and
averaged 39.0% for the year. In 2004, non-interest-bearing demand was up $95.5 million or 38.9% and interest bearing demand (including money market
deposits) up $92.8 million or 28.7%. A portion of this rapid deposit growth is attributable to the deposit activity of several large
customers.




Time deposits increased slightly in 2004 after a
decline of $10.2 million in 2003. 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                  |  | $                             
|Interest-bearing demand |  |                               
|Savings                 |  |                               
|Time                    |  |                               
|Total
        Deposits  |  | $                             



As of December 31, 2004 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                |  | $                                                 | 5,815  |                                        
|Over
        3 months through 6 months  |  |                                                   | 4,340  |                                        
|Over
        6 months through 12 months |  |                                                   | 8,506  |                                        
|Over
        12 months                  |  |                                                   | 7,922  |                                        
|Total                                   |  | $                                                 | 26,583 |                                        

---

|(1) |  | Time deposits of $100,000 or more represent 3.12% of total
deposits as of December 31, 2004.
|--- |  | --------------------------------------------------------------------------------------------

|(2) |  | All other time deposits represent 3.75% of total deposits as of
December 31, 2004.
|--- |  | ----------------------------------------------------------------------------------

28

---

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 68% of its checking account balances arising from business and public accounts and 32%
from consumers. The composition of money market and interest-bearing demand accounts was 42% business and 58% consumer. During the periods presented,
deposit growth has generally been sufficient to fund increases in loans. Management invests excess funds in short-term and overnight money market
instruments.




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




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, 2004, the FHLB had extended the Bank a secured line of credit of $150.4 million that may
be accessed for short or long-term borrowings given sufficient qualifying collateral. The Bank also had $24.8 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 $26.0 million for the purchase of funds on a short-term basis from several commercial bank counterparties. At December 31, 2004 the Bank had
aggregate remaining available borrowing sources totaling $164.7 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, 2004 the Bank had approximately
$324.8 million in outstanding commitments to extend credit, compared to approximately $199.5 million at year-end 2003. Management believes that the
Banks available resources will be sufficient to fund its commitments in the normal course of business.


JUNIOR SUBORDINATED DEBENTURES AND OTHER BORROWINGS



In December 2004, the Company established a
subsidiary grantor trust (Cascade Bancorp Trust I) (the Trust), which issued $20 million of trust preferred securities (the TPS). The TPS are
subordinated to any other borrowings of the Company and are due and payable on March 15, 2035. The TPS pay quarterly interest at the 3-month London
Inter-Bank Offered Rate (LIBOR) plus 1.80%. The Trust used the proceeds received from the issuance of the TPS to purchase $20 million of junior
subordinated debentures (the Debentures) of the Company. The Debentures were issued with substantially the same terms as the TPS and are the sole
assets of the Trust. The Companys obligations under the Debentures and related agreements, taken together, constitute a full and irrevocable
guarantee by the Company of the obligations of the Trust. The TPS are mandatorily redeemable upon the maturity of the Debentures, or upon earlier
redemption as provided in the Indenture related to the Debentures. The TPS may be called by the Company at par at any time subsequent to March 15,
2010, and may be redeemed earlier upon the occurrence of certain events that impact the income tax or the regulatory capital treatment of the TPS. Upon
establishment of


29

---



the Trust, the Company also purchased a 3% minority interest in
the Trust totaling $619,000, which is included in other assets in Bancorps condensed balance sheet at December 31, 2004. Management believes that
as of December 31, 2004, the TPS meet applicable regulatory guidelines to qualify as Tier 1 capital.




During 2004 the Companys increased its
long-term borrowings with FHLB to $29.7 million at year-end. These borrowings have a weighted average term to maturity of 3.4 years and bearing a
weighted average interest rate of 3.31%. The Company had short-term borrowings with FRB at December 31, 2004, of $6.9 million.


CAPITAL RESOURCES



The Companys total stockholders equity
at December 31, 2004 was $86.4 million, an increase of $24.7 million from December 31, 2003. 2004 equity was increased primarily by the net result of
issuance of $11.7 million in common stock related to the CBGP acquisition plus earnings of $16.0 million for the year, less cash dividends paid to
shareholders of $4.4 million. At year-end 2004, net unrealized gains on investment securities available-for-sale was $.8 million, relatively unchanged
from year-end 2003.


CONTRACTUAL OBLIGATIONS



As of December 31, 2004, 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 |  |  |  | $                           
|Federal
        Home Loan Bank advances    |  |  |  |                             
|Junior
        subordinated debentures     |  |  |  |                             
|Operating
        leases                   |  |  |  |                             
|Total
        contractual obligations      |  |  |  | $                           

OFF-BALANCE SHEET ARRANGEMENTS



A schedule of significant off-balance sheet
commitments at December 31, 2004 is included in the following table (dollars in thousands):







|Commitments
to extend credit                  |  |  |  | $ | 296,914 | 
|--------------------------------------------- |  |  |  | - | ------- | 
|Commitments
under credit card lines of credit |  |  |  |   | 18,893  | 
|Standby
letters of credit                     |  |  |  |   | 9,010   | 



See Note 12 of the Notes to Consolidated
Financial Statements included in Item 8 hereof for a discussion of the nature, business purpose, and importance of off-balance sheet
arrangements.


INFLATION



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


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

Interest Rate Risk and Asset and Liability Management



The goal of the Companys Asset and Liability
Management Policy is to maximize long-term profitability under the range of likely interest rate scenarios. The Board of Directors oversees
implementation of strategies to control interest rate risk. Management hires and engages a qualified independent service provider to assist in
modeling, monthly reporting and assessing interest rate risk. The Companys methodology for analyzing interest rate risk


30

---



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. The January 1, 2004
acquisition of the Community Bank of Grants Pass did 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 establishes a wide range of possible interest rate scenarios over a two-year forecast period. Such scenarios include a
Stable or unchanged scenario and an Estimated or most likely scenario given current and forecast economic conditions. At this
time, the Estimated scenario approximates market expectations as to the pace and magnitude of fed funds rate increases as implied by the
euro-dollar yield curve. In addition, scenarios titled Rising Rates and Declining Rates are established to stress-test the
impact of more dramatic rate movements that are perceived as less likely, but may still possibly occur. Next, net interest income and earnings are
simulated in each scenario. Note that earnings projections include the effect of estimated loan and deposit growth that management deems reasonable,
however, such volume projections are not varied by rate scenario. Simulated earnings are compared over a two-year time horizon. The following table
defines the market interest rates used in the model for Estimated (most likely), Rising and Declining interest rate
scenarios. These market rates shown are reached gradually over the 2-year simulation horizon.


|                                                       |  | Actual Market
      Rates at
      December 2004    |  | Estimated
      Rates at
      December 2006 |  | Declining
      Rates at
      December 2006 |  | Rising
      Rates at
      December 2006
|------------------------------------------------------ |  | --------------------------------------------------- |  | -------------------------------------------- |  | -------------------------------------------- |  | -----------------------------------------
|Federal
        Funds Rate                             |  | 2.25%                                               |  | 4.00%                                        |  | 0.25%                                        |  | 8.25%                                    
|Prime
        Rate                                     |  | 5.25%                                               |  | 7.00%                                        |  | 3.25%                                        |  | 10.75%                                   
|Treasury
        Yield Curve Spread 10-year to 3 month |  | 2.05%
        Unchanged
        Over Horizon Period |  | 2.05%
        increasing
        to 2.25%    |  | 2.05%
        flattening
        to 2.00%    |  | 2.05%
        flattening
        to .50% 



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


|Stable
      Rate Scenario compared to: |  | First Twelve
      Month
      Average % Change in
      Pro-forma Earnings |  | Second Twelve
      Month
      Average % Change in
      Pro-forma Earnings |  | 24th
      Month
      % Change in
      Pro-forma Earnings
|--------------------------------------- |  | --------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | -----------------------------------------------------------
|Estimated
        Rate Scenario         |  | 0.00%                                                                       |  | 3.45%                                                                        |  | 5.49%                                                      
|Rising
        Rate Scenario            |  | 0.00%                                                                       |  | 6.59%                                                                        |  | 9.46%                                                      
|Declining
        Rate Scenario         |  | (3.42%)                                                                     |  | (14.53%)                                                                     |  | (18.34%)                                                   



Managements assessment of interest rate risk
and scenario analysis must be taken in the context of market interest rates and overall economic conditions. In the first half of 2004, market interest
rates remained near their lowest level in decades, but since that time the Federal Reserve has begun to gradually increase rates. At present, most
economists forecast this trend to modestly higher rates will continue. The yield curve also suggests that market participants are anticipating an
upward move in rates over the next several years. At year-end 2004, the national Federal Funds and Prime borrowing rates were at 2.25% and 5.25%,
respectively. In the persistent low rate environment of the past few years, the Company has experienced a modest decline in its net interest margin as
yields on its loan and investment portfolios compressed against an already low cost of funds.




In managements judgment, at this date the
interest rate risk profile of the Company is relatively well balanced considering the range of outcomes under the different scenarios. The model
indicates that in estimated and rising


31

---



rate scenarios, the net interest margin remains
within the recent range of 5.60% to 5.95%. This highest risk scenario 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. Despite these factors, the model indicates
that the net interest margin would likely remain near 5.00% even with rates falling to near zero, and that other financial performance benchmarks
including ROA and ROE would still be sound (though lower than in other scenarios). Management has concluded that the degree of volatility under this
scenario is acceptable because of its relatively low likelihood, and the relative cost of mitigating this risk.




In the more likely scenarios where interest rates
tend to rise, the Company would generate higher earnings, all else equal. This is because of the composition and re-pricing mix of its assets and
liabilities. The loan portfolio is approximately 40.1% floating rate loans (generally re-pricing with the prime rate), 44.4% loans with adjustable
rates between 3 and 5 years, and 15.5% 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 40.0% demand deposits (with modest sensitivity to higher rates), 48.8% money market deposits (which are sensitive to market rates but
have historically lagged the pace of market rate changes), while time and savings deposits represent about 11.2% of total deposits. Thus, both assets
and liabilities would be expected to re-price upward in increasing rate scenarios, but with yields increasing at a relatively faster pace than
liabilities.




Management has also modeled a scenario where the
yield curve flattens dramatically. In this scenario, fed funds rate and 10 year treasury rates converge to within 25 basis points of each other at 4%
and 4.25%, respectively, by the end of the forecast period. At that point, the prime rate is forecast at 7%. Under this rate scenario, earnings show
minor variances to the stable rate scenario, but would fall below the results modeled in the estimated rate scenario. Management believes
this outcome is a consequence and benefit of its relatively low cost of funds and increasing volumes of floating rate loans.




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




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




In the opinion of management, the use of interest
rate gap analysis is less valuable than the above method in measuring and managing interest rate risk. This is because it is a static measure of rate
sensitivity and does not capture the possible magnitude or pace of rate changes. At year-end 2004, the Companys one-year cumulative interest rate
gap analysis indicates that rate sensitive liabilities maturing or available for re-pricing within one-year exceeded rate sensitive assets by
approximately $52.0 million.


32

---

Interest Rate Gap Table



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




Set forth below is a table showing the interest rate
sensitivity gap of the Companys assets and liabilities over various re-pricing periods and maturities, as of December 31, 2004 (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                                         |  |  |  | $              | 13,935  |                               |  | $                                |        |                  |  | $    
|Interest
bearing balances with FHLB                                  |  |  |  |                | 3,041   |                               |  |                                  |        |                  |  |      
|Loans                                                                |  |  |  |                | 375,674 |                               |  |                                  | 76,608  |                  |  |      
|Total
interest earning assets                                        |  |  |  | $              | 392,650 |                               |  | $                                | 76,608  |                  |  | $    
|INTEREST
BEARING LIABILITIES:                                        |  |  |  |                |         |                               |  |                                  |         |                  |  |      
|Interest-bearing demand deposits                                     |  |  |  | $              | 332,445 |                               |  | $                                | 83,111  |                  |  | $    
|Savings
deposits                                                     |  |  |  |                | 18,358  |                               |  |                                  | 18,358  |                  |  |      
|Time
deposits                                                        |  |  |  |                | 14,218  |                               |  |                                  | 27,866  |                  |  |      
|Total
interest bearing deposits                                      |  |  |  |                | 365,020 |                               |  |                                  | 129,335 |                  |  |      
|Junior
subordinated debentures                                       |  |  |  |                | 20,000  |                               |  |                                  |        |                  |  |      
|Other
borrowings                                                     |  |  |  |                | 6,865   |                               |  |                                  |        |                  |  |      
|Total
interest bearing liabilities                                   |  |  |  | $              | 391,885 |                               |  | $                                | 129,335 |                  |  | $    
|Interest rate
sensitivity gap                                        |  |  |  | $              | 765     |                               |  | $                                | (52,727 | )                |  | $    
|Cumulative
interest rate sensitivity gap                             |  |  |  | $              | 765     |                               |  | $                                | (51,962 | )                |  | $    
|Interest rate
gap as a percentage of total interest earning assets   |  |  |  |                | 0.08    | %                             |  |                                  | (5.69   | )%               |  |      
|Cumulative
interest rate gap as a percentage of total earning assets |  |  |  |                | 0.08    | %                             |  |                                  | (5.61   | )%               |  |      

33

---

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



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


|                                                                                                     |  |  |  | Page
|---------------------------------------------------------------------------------------------------- |  |  |  | ----
|Report of
Independent Registered Public Accounting Firm on Internal Control over Financial Reporting |  |  |  |     
|Report of
Independent Registered Public Accounting Firm                                              |  |  |  |     
|Consolidated
Balance Sheets at December 31, 2004 and 2003                                            |  |  |  |     
|For the Years
Ended December 31, 2004, 2003 and 2002:                                                |  |  |  |     
|Consolidated
Statements of Income                                                                    |  |  |  |     
|Consolidated
Statements of Changes in Stockholders Equity                                           |  |  |  |     
|Consolidated
Statements of Cash Flows                                                                |  |  |  |     
|Notes to
Consolidated Financial Statements                                                           |  |  |  |     

34

---

REPORT OF SYMONDS, EVANS & COMPANY, P.C., INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING



To the Board of
Directors and Stockholders of Cascade Bancorp




We have audited
managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that Cascade Bancorp
and its subsidiary, Bank of the Cascades (the Bank) (collectively, Bancorp) maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Bancorps management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of Bancorps internal control over financial reporting based on our
audit.


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

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

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

In our opinion, managements assessment that Bancorp maintained effective
internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also in our
opinion, Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO
criteria.

We have also audited, in accordance with the standards of the PCAOB, the
consolidated balance sheets of Bancorp as of December 31, 2004 and 2003, 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, 2004, and our report dated January 13, 2005
expressed an unqualified opinion on those consolidated financial statements.

Portland, Oregon January 27, 2005

35

---

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



To the Board of
Directors and Stockholders of Cascade Bancorp




We have audited
the accompanying consolidated balance sheets of Cascade Bancorp and subsidiary (collectively, the Company) as of December 31, 2004 and
2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cascade Bancorp and subsidiary as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States.

Portland, Oregon January 13, 2005

36

---



CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER
31, 2004 AND 2003

|                                                                                                                        |  |  |  | 2004 |               | 2003
|----------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ------------- | ----
|ASSETS                                                                                                                 
|Cash and cash
equivalents:                                                                                              |  |  |  |      |               |     
|Cash and due
from banks                                                                                                 |  |  |  | $    | 34,915,710    |     
|Interest
bearing deposits with Federal Home Loan Bank                                                                   |  |  |  |      | 3,040,978     |     
|Federal funds
sold                                                                                                      |  |  |  |      | 13,935,467    |     
|Total cash
and cash equivalents                                                                                         |  |  |  |      | 51,892,155    |     
|Investment
securities available-for-sale                                                                                |  |  |  |      | 45,110,418    |     
|Investment
securities held-to-maturity, estimated fair value of $1,999,026 ($716,221 in 2003)                           |  |  |  |      | 1,958,736     |     
|Federal Home
Loan Bank stock                                                                                            |  |  |  |      | 2,571,600     |     
|Loans,
net                                                                                                              |  |  |  |      | 847,147,231   |     
|Premises and
equipment, net                                                                                             |  |  |  |      | 21,755,058    |     
|Bank-owned
life insurance                                                                                               |  |  |  |      | 14,065,927    |     
|Accrued
interest and other assets                                                                                       |  |  |  |      | 20,307,765    |     
|Total
assets                                                                                                            |  |  |  | $    | 1,004,808,890 |     
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                   
|Liabilities:                                                                                                            |  |  |  |      |               |     
|Deposits:                                                                                                               |  |  |  |      |               |     
|Demand                                                                                                                  |  |  |  | $    | 340,652,463   |     
|Interest
bearing demand                                                                                                 |  |  |  |      | 415,556,155   |     
|Savings                                                                                                                 |  |  |  |      | 36,715,012    |     
|Time                                                                                                                    |  |  |  |      | 58,472,916    |     
|Total
deposits                                                                                                          |  |  |  |      | 851,396,546   |     
|Junior
subordinated debentures                                                                                          |  |  |  |      | 20,000,000    |     
|Other
borrowings                                                                                                        |  |  |  |      | 36,533,475    |     
|Accrued
interest and other liabilities                                                                                  |  |  |  |      | 10,446,424    |     
|Total
liabilities                                                                                                       |  |  |  |      | 918,376,445   |     
|Stockholders equity:                                                                                                   |  |  |  |      |               |     
|Common stock,
no par value; 20,000,000 shares authorized; 16,738,627 shares issued and outstanding (15,776,594 in 2003) |  |  |  |      | 32,078,798    |     
|Retained
earnings                                                                                                       |  |  |  |      | 53,706,929    |     
|Unearned
compensation on restricted stock                                                                               |  |  |  |      | (155,925      | )   
|Accumulated
other comprehensive income                                                                                  |  |  |  |      | 802,643       |     
|Total
stockholders equity                                                                                              |  |  |  |      | 86,432,445    |     
|Total
liabilities and stockholders equity                                                                              |  |  |  | $    | 1,004,808,890 |     

See accompanying notes.

37

---

CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS
ENDED DECEMBER 31, 2004, 2003 AND 2002

|                                                                  |  |  |  | 2004 |            | 2003 |  | 2002
|----------------------------------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Interest and
dividend income:                                     |  |  |  |      |            |      |  |     
|Interest and
fees on loans                                        |  |  |  | $    | 49,357,692 |      |  | $   
|Taxable
interest on investment securities                         |  |  |  |      | 1,092,709  |      |  |     
|Nontaxable
interest on investment securities                      |  |  |  |      | 92,330     |      |  |     
|Interest on
interest bearing deposits with Federal Home Loan Bank |  |  |  |      | 194,116    |      |  |     
|Interest on
federal funds sold                                    |  |  |  |      | 111,509    |      |  |     
|Dividends on
Federal Home Loan Bank stock                         |  |  |  |      | 62,600     |      |  |     
|Total
interest and dividend income                                |  |  |  |      | 50,910,956 |      |  |     
|Interest
expense:                                                 |  |  |  |      |            |      |  |     
|Deposits:                                                         |  |  |  |      |            |      |  |     
|Interest
bearing demand                                           |  |  |  |      | 3,240,683  |      |  |     
|Savings                                                           |  |  |  |      | 117,188    |      |  |     
|Time                                                              |  |  |  |      | 806,101    |      |  |     
|Junior
subordinated debentures and other borrowings               |  |  |  |      | 738,651    |      |  |     
|Total
interest expense                                            |  |  |  |      | 4,902,623  |      |  |     
|Net interest
income                                               |  |  |  |      | 46,008,333 |      |  |     
|Loan loss
provision                                               |  |  |  |      | 3,650,000  |      |  |     
|Net interest
income after loan loss provision                     |  |  |  |      | 42,358,333 |      |  |     
|Noninterest
income:                                               |  |  |  |      |            |      |  |     
|Service
charges on deposit accounts, net                          |  |  |  |      | 6,747,052  |      |  |     
|Mortgage
banking income, net                                      |  |  |  |      | 2,361,815  |      |  |     
|Gains on
sales of investment securities available-for-sale        |  |  |  |      | 181,720    |      |  |     
|Card issuer
and merchant service fees, net                        |  |  |  |      | 2,004,018  |      |  |     
|Earnings on
bank-owned life insurance                             |  |  |  |      | 655,755    |      |  |     
|Other                                                             |  |  |  |      | 989,316    |      |  |     
|Total
noninterest income                                          |  |  |  |      | 12,939,676 |      |  |     
|Noninterest
expenses:                                             |  |  |  |      |            |      |  |     
|Salaries and
employee benefits                                    |  |  |  |      | 17,907,486 |      |  |     
|Equipment                                                         |  |  |  |      | 1,241,961  |      |  |     
|Occupancy                                                         |  |  |  |      | 2,182,666  |      |  |     
|Supplies                                                          |  |  |  |      | 433,447    |      |  |     
|Communications                                                    |  |  |  |      | 862,614    |      |  |     
|Advertising                                                       |  |  |  |      | 738,032    |      |  |     
|Other                                                             |  |  |  |      | 6,211,153  |      |  |     
|Total
noninterest expenses                                        |  |  |  |      | 29,577,359 |      |  |     
|Income before
income taxes                                        |  |  |  |      | 25,720,650 |      |  |     
|Provision for
income taxes                                        |  |  |  |      | 9,713,000  |      |  |     
|Net
income                                                        |  |  |  | $    | 16,007,650 |      |  | $   
|Basic
earnings per common share                                   |  |  |  | $    | .96        |      |  | $   
|Diluted
earnings per common share                                 |  |  |  | $    | .93        |      |  | $   

See accompanying notes.

38

---



CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

|                                                                                                                                                                                                                                                                                                                                                                                                                           |  | Number
      of shares |  | Comprehensive
      income |            | Common
      stock |   | Retained
      earnings |  | Unearned
      compensation on
      restricted stock |            | Accumulated
      other
      comprehensive
      income |  | Total
      stockholders
      equity
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | -------------------------- | ---------- | ------------------ | - | ----------------------- |  | ----------------------------------------------------- | ---------- | -------------------------------------------------------- |  | --------------------------------------
|Balances
        at December 31, 2001                                                                                                                                                                                                                                                                                                                                                                                      |  | 15,514,363             |  |                            |            |                    | $ | 17,859,283              |  | $                                                     | 23,701,571 |                                                          |  | $                                     
|Comprehensive
        income:                                                                                                                                                                                                                                                                                                                                                                                              |  |                        |  |                            |            |                    |   |                         |  |                                                       |            |                                                          |  |                                       
|Net
        income                                                                                                                                                                                                                                                                                                                                                                                                         |  |                       |  | $                          | 11,715,035 |                    |   |                        |  |                                                       | 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    |                    |   |                        |  |                                                       |           |                                                          |  |                                       
|Total
        comprehensive income                                                                                                                                                                                                                                                                                                                                                                                         |  |                       |  | $                          | 12,358,231 |                    |   |                        |  |                                                       |           |                                                          |  |                                       
|Cash
        dividends paid (aggregating $.21 per share)                                                                                                                                                                                                                                                                                                                                                                   |  |                       |  |                            |            |                    |   |                        |  |                                                       | (3,244,385 | )                                                        |  |                                       
|Stock
        options exercised                                                                                                                                                                                                                                                                                                                                                                                            |  | 127,685                |  |                            |            |                    |   | 393,799                 |  |                                                       |           |                                                          |  |                                       
|Balances
        at December 31, 2002                                                                                                                                                                                                                                                                                                                                                                                      |  | 15,642,048             |  |                            |            |                    |   | 18,253,082              |  |                                                       | 32,172,221 |                                                          |  |                                       
|Comprehensive
        income:                                                                                                                                                                                                                                                                                                                                                                                              |  |                        |  |                            |            |                    |   |                         |  |                                                       |            |                                                          |  |                                       
|Net
        income                                                                                                                                                                                                                                                                                                                                                                                                         |  |                       |  | $                          | 13,954,888 |                    |   |                        |  |                                                       | 13,954,888 |                                                          |  |                                       
|Other
        comprehensive income  unrealized gains on investment securities
        available-for-sale of approximately $172,000 (net of income taxes of approximately
        $107,000), net of reclassification adjustment for net
        gains on sales of investment securities available-for-sale included in
        net income of approximately $146,000 (net of income taxes of approximately
        $91,000) |  |                       |  |                            | 25,954     |                    |   |                        |  |                                                       |           |                                                          |  |                                       
|Total
        comprehensive income                                                                                                                                                                                                                                                                                                                                                                                         |  |                       |  | $                          | 13,980,842 |                    |   |                        |  |                                                       |           |                                                          |  |                                       
|Fair
        value of restricted stock grants                                                                                                                                                                                                                                                                                                                                                                              |  |                       |  |                            |            |                    |   | 311,850                 |  |                                                       |           |                                                          |  |                                       
|Amortization
        of unearned compensation on restricted stock                                                                                                                                                                                                                                                                                                                                                          |  |                       |  |                            |            |                    |   |                        |  |                                                       |           |                                                          |  |                                       
|Cash
        dividends paid (aggregating $.26 per share)                                                                                                                                                                                                                                                                                                                                                                   |  |                       |  |                            |            |                    |   |                        |  |                                                       | (4,026,401 | )                                                        |  |                                       
|Stock
        options exercised                                                                                                                                                                                                                                                                                                                                                                                            |  | 134,546                |  |                            |            |                    |   | 576,609                 |  |                                                       |           |                                                          |  |                                       
|Tax
        benefit from non-qualified stock options exercised                                                                                                                                                                                                                                                                                                                                                             |  |                       |  |                            |            |                    |   | 5,744                   |  |                                                       |           |                                                          |  |                                       
|Balances
        at December 31, 2003                                                                                                                                                                                                                                                                                                                                                                                      |  | 15,776,594             |  |                            |            |                    | $ | 19,147,285              |  | $                                                     | 42,100,708 |                                                          |  | $                                     

39

See accompanying notes.

---



CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY (continued) YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

|                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Number
      of shares |  | Comprehensive
      income |            | Common
      stock |   | Retained
      earnings |  | Unearned
      compensation on
      restricted stock |            | Accumulated
      other
      comprehensive
      income |  | Total
      stockholders
      equity
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- |  | -------------------------- | ---------- | ------------------ | - | ----------------------- |  | ----------------------------------------------------- | ---------- | -------------------------------------------------------- |  | --------------------------------------
|Balances
        at December 31, 2003                                                                                                                                                                                                                                                                                                                                                                                     |  | 15,776,594             |  |                            |            |                    | $ | 19,147,285              |  | $                                                     | 42,107,708 |                                                          |  | $                                     
|Comprehensive
        income:                                                                                                                                                                                                                                                                                                                                                                                             |  |                        |  |                            |            |                    |   |                         |  |                                                       |            |                                                          |  |                                       
|Net
        income                                                                                                                                                                                                                                                                                                                                                                                                        |  |                       |  | $                          | 16,007,650 |                    |   |                        |  |                                                       | 16,007,650 |                                                          |  |                                       
|Other
        comprehensive income  unrealized gains on investment securities
        available-for-sale of approximately $127,000 (net of income taxes of approximately
        $78,000), net of reclassification adjustment for net
        gains on sales of investment securities available-for-sale included in
        net income of approximately $113,000 (net of income taxes of approximately
        $69,000) |  |                        |  |                            | 14,277     |                    |   |                         |  |                                                       |            |                                                          |  |                                       
|Total
        comprehensive income                                                                                                                                                                                                                                                                                                                                                                                        |  |                       |  | $                          | 16,021,927 |                    |   |                        |  |                                                       |           |                                                          |  |                                       
|Common
        stock issued in conjunction with acquisition                                                                                                                                                                                                                                                                                                                                                               |  | 772,752                |  |                            |            |                    |   | 11,699,399              |  |                                                       |           |                                                          |  |                                       
|Amortization
        of unearned compensation on restricted stock                                                                                                                                                                                                                                                                                                                                                         |  |                       |  |                            |            |                    |   |                        |  |                                                       |           |                                                          |  |                                       
|Cash
        dividends paid (aggregating $.26 per share)                                                                                                                                                                                                                                                                                                                                                                  |  |                       |  |                            |            |                    |   |                        |  |                                                       | (4,401,429 | )                                                        |  |                                       
|Stock
        options exercised                                                                                                                                                                                                                                                                                                                                                                                           |  | 189,281                |  |                            |            |                    |   | 812,375                 |  |                                                       |           |                                                          |  |                                       
|Tax
        benefit from non-qualified stock options exercised                                                                                                                                                                                                                                                                                                                                                            |  |                       |  |                            |            |                    |   | 419,739                 |  |                                                       |           |                                                          |  |                                       
|Balances
        at December 31, 2004                                                                                                                                                                                                                                                                                                                                                                                     |  | 16,738,627             |  |                            |            |                    | $ | 32,078,798              |  | $                                                     | 53,706,929 |                                                          |  | $                                     

40

See accompanying notes.

---



CASCADE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

|                                                                                            |  |  |  | 2004 |              | 2003 |  | 2002
|------------------------------------------------------------------------------------------- |  |  |  | ---- | ------------ | ---- |  | ----
|Cash flows
from operating activities:                                                       |  |  |  |      |              |      |  |     
|Net
income                                                                                  |  |  |  | $    | 16,007,650   |      |  | $   
|Adjustments
to reconcile net income to net cash provided by operating activities:           |  |  |  |      |              |      |  |     
|Depreciation
and amortization                                                               |  |  |  |      | 3,296,552    |      |  |     
|Loan loss
provision                                                                         |  |  |  |      | 3,650,000    |      |  |     
|Provision
(credit) for deferred income taxes                                                |  |  |  |      | 905,000      |      |  |     
|Discounts on
sales of mortgage loans, net                                                   |  |  |  |      | 368,213      |      |  |     
|Gains on
sales of investment securities available-for-sale, net                             |  |  |  |      | (181,720     | )    |  |     
|Dividends on
Federal Home Loan Bank stock                                                   |  |  |  |      | (62,600      | )    |  |     
|Deferred
benefit plan expenses                                                              |  |  |  |      | 1,087,000    |      |  |     
|Amortization
of unearned compensation on restricted stock                                   |  |  |  |      | 124,740      |      |  |     
|Increase in
accrued interest and other assets                                               |  |  |  |      | (7,283,393   | )    |  |     
|Increase in
accrued interest and other liabilities                                          |  |  |  |      | 366,024      |      |  |     
|Originations
of mortgage loans                                                              |  |  |  |      | (141,406,975 | )    |  |     
|Proceeds from
sales of mortgage loans                                                       |  |  |  |      | 140,296,007  |      |  |     
|Net cash
provided by operating activities                                                   |  |  |  |      | 17,166,498   |      |  |     
|Cash flows
from investing activities:                                                       |  |  |  |      |              |      |  |     
|Purchases of
investment securities available-for-sale                                       |  |  |  |      | (20,477,804  | )    |  |     
|Purchases of
investment securities held-to-maturity                                         |  |  |  |      | (1,300,000   | )    |  |     
|Proceeds from
maturities, calls and prepayments of investment securities available-for-sale |  |  |  |      | 8,625,150    |      |  |     
|Proceeds from
sales of investment securities available-for-sale                             |  |  |  |      | 404,573      |      |  |     
|Proceeds from
maturities and calls of investment securities held-to-maturity                |  |  |  |      |             |      |  |     
|Purchase of
Federal Home Loan Bank stock                                                    |  |  |  |      | (162,200     | )    |  |     
|Loan
originations, net                                                                      |  |  |  |      | (235,911,282 | )    |  |     
|Cash acquired
in acquisition of Community Bank of Grants Pass                               |  |  |  |      | 10,192,199   |      |  |     
|Purchases of
premises and equipment, net                                                    |  |  |  |      | (7,856,186   | )    |  |     
|Purchases of
bank-owned life insurance                                                      |  |  |  |      | (4,925,000   | )    |  |     
|Net cash used
in investing activities                                                       |  |  |  |      | (251,410,550 | )    |  |     
|Cash flows
from financing activities:                                                       |  |  |  |      |              |      |  |     
|Net increase
in deposits                                                                    |  |  |  |      | 158,116,554  |      |  |     
|Proceeds from
issuance of junior subordinated debentures                                    |  |  |  |      | 20,000,000   |      |  |     
|Net increase
(decrease) in other borrowings                                                 |  |  |  |      | 22,668,870   |      |  |     
|Cash
dividends paid                                                                         |  |  |  |      | (4,401,429   | )    |  |     
|Stock options
exercised                                                                     |  |  |  |      | 812,375      |      |  |     
|Tax benefit
from non-qualified stock options exercised                                      |  |  |  |      | 419,739      |      |  |     
|Net cash
provided by financing activities                                                   |  |  |  |      | 197,616,109  |      |  |     
|Net increase
(decrease) in cash and cash equivalents                                        |  |  |  |      | (36,627,943  | )    |  |     
|Cash and cash
equivalents at beginning of year                                              |  |  |  |      | 88,520,098   |      |  |     
|Cash and cash
equivalents at end of year                                                    |  |  |  | $    | 51,892,155   |      |  | $   

See accompanying notes.

41

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2004

|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 5-for-4 stock split in 2004 and a 2-for-1 stock split in 2002.

Certain amounts in 2003 and 2002 have been reclassified to conform with the 2004
presentation.

Description of business

The Bank conducts a general banking business, primarily operating in one business
segment, and currently operates branches throughout Central Oregon; the Salem/Keizer, Oregon area and Southern Oregon and has a business banking office
in Portland, Oregon. Its activities include the usual lending and deposit functions of a commercial bank: commercial, real estate, installment, credit
card and mortgage loans; checking, money market, time deposit and savings accounts; Internet banking and bill payment; automated teller machines and
safe deposit facilities. Additionally, the Bank originates and sells mortgage loans into the secondary market and offers trust and investment
services.

Method of accounting

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

Cash and cash equivalents

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

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

Supplemental disclosures of cash flow information

For the periods reported, noncash transactions resulted from 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; the net capitalization of originated mortgage-servicing rights, as disclosed in Note 6; and common stock issued in
conjunction with the acquisition of Community Bank of Grants Pass (CBGP), as disclosed in Note 11.

During 2004, 2003 and 2002, the Bank paid approximately $4,765,000, $4,069,000 and
$4,775,000, respectively, in interest expense.

42

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

During 2004, 2003 and 2002, the Company made income tax payments of approximately
$10,750,000, $9,225,000 and $7,830,000, respectively.

Investment securities

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

Investment securities that are purchased and held principally for the purpose of
selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in
noninterest income. The Company had no trading securities during 2004, 2003 or 2002.

Investment securities that are not classified as either held-to-maturity securities
or trading securities are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses excluded from
earnings and reported as other comprehensive income or loss, net of income taxes.

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

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

Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other-than-temporary would result in write-downs of the individual securities to their fair value. In estimating
other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has
been less than cost, (ii) the financial condition and near term prospects of the issuer, and (iii) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value. The related write-downs would be included
in earnings as realized losses. Management believes that all unrealized losses on investment securities at December 31, 2004 and 2003 are
temporary.

FHLB stock

The Banks investment in FHLB stock is carried at cost, which approximates
fair value. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages
of its outstanding mortgages, total assets or FHLB advances. At December 31, 2004, 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 and related commitments to loan as of
the balance sheet date. The reserve is maintained at a level considered adequate to provide for potential loan

43

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

losses based on managements assessment of various factors affecting the
portfolio. The reserve is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically, and,
as adjustments become necessary, they are reported in earnings in the periods in which they become known. The reserve is increased by provisions
charged to operations and reduced by loans charged-off, net of recoveries.

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

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

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

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

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

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

Mortgage servicing rights

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

44

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

Premises and equipment

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

Other real estate

Other real estate, acquired through foreclosure or deeds in lieu of foreclosure, is
carried at the lower of cost or estimated net realizable value. When the property is acquired, any excess of the loan balance over the estimated net
realizable value is charged to the reserve for loan losses. Holding costs, subsequent write-downs to net realizable value, if any, or any disposition
gains or losses are included in noninterest income and expenses. Other real estate was insignificant at December 31, 2004 and 2003.

Goodwill and other intangible assets

Goodwill and other intangible assets represent the excess of the purchase price and
related costs over the fair value of net assets acquired in business combinations under the purchase method of accounting. As of December 31, 2004, the
carrying value of goodwill and other intangible assets that arose from the acquisition of CBGP totaled approximately $6.9 million, of which
approximately $6.4 million represents goodwill, and is included in accrued interest and other assets in the accompanying 2004 consolidated balance
sheet. The amounts of goodwill and other intangible assets were not significant at December 31, 2003.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, goodwill cannot be amortized; however, it must be tested for impairment at least annually. This
impairment test is calculated at the reporting unit level by comparing the estimated fair value of the reporting unit with its net book value,
including goodwill. An impairment loss will be recorded for any goodwill that is determined to be impaired. Goodwill would be tested for impairment
between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
carrying amount. Differences in the identification of reporting units and the use of valuation techniques could result in materially different
evaluations of impairment.

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

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

Advertising

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

Income taxes

Deferred tax assets and liabilities are reflected at currently enacted income tax
rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the provision (credit) for income taxes.

45

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Trust assets

Assets of the Banks trust department, other than cash on deposit at the Bank,
are not included in the accompanying consolidated financial statements because they are not assets of the Bank.

Recently issued accounting standards

The Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board
(FASB) is currently considering EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.
EITF Issue 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and
measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an
impairment is considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time
sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the
investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be
other-than-temporary, then an impairment loss should be recognized equal to the difference between the investments cost and its fair value.
Certain disclosure requirements of EITF Issue 03-1 were adopted in 2003 and the Company began presenting the new disclosure requirements in its
consolidated financial statements for the year ended December 31, 2003, as applicable. The recognition and measurement provisions were initially
effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective
date of these provisions was delayed until the finalization of a FASB Staff Position to provide additional implementation guidance.

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

SFAS 123R is effective for the Company beginning on July 1, 2005. The Company will
transition to fair value based accounting for stock-based compensation using a modified version of prospective application (modified prospective
application). Under modified prospective application, as it is applicable to the Company, SFAS 123R applies to new awards and to awards modified,
repurchased, or cancelled after July 1, 2005. Additionally, compensation cost for the portion of awards for which the requisite service has not been
rendered (generally referring to non-vested awards) that are outstanding as of July 1, 2005, must be recognized as the remaining requisite service is
rendered during the period of and/or the periods after the adoption of SFAS 123R. The attribution of compensation cost for those earlier awards will be
based on the same method and on the same grant-date fair values previously determined for the pro forma disclosures required for companies that did not
adopt the fair value accounting method for stock-based employee compensation. Based on the stock-based compensation awards outstanding as of December
31, 2004 for which the requisite service is not expected to be fully rendered prior to July 1, 2005, the Company expects to recognize additional
pre-tax, quarterly compensation cost of approximately $111,000 beginning in the third quarter of 2005 as a result of the adoption of SFAS 123R. Future
levels of compensation cost recognized related to stock-based compensation awards (including the aforementioned expected costs during the period of
adoption) may be impacted by new awards and/or modifications, repurchases and cancellations of existing awards before and after the adoption of this
standard.

Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 105,
Application of Accounting Principles to Loan Commitments, summarizes the views of the staff of the SEC regarding the application
of

46

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

accounting principles generally accepted in the United States to loan
commitments accounted for as derivative instruments. SAB No. 105 provides that the fair value of recorded loan commitments that are accounted for as
derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, should not incorporate the expected future
cash flows related to the associated servicing of the future loan. In addition, SAB No. 105 requires registrants to disclose their accounting policy
for loan commitments. The provisions of SAB No. 105 must be applied to loan commitments accounted for as derivatives that are entered into after March
31, 2004. The adoption of this accounting standard did not have a material impact on the Companys 2004 consolidated financial
statements.

The American Institute of Certified Public Accountants Statement of Position
(SOP) No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, addresses accounting for differences between the
contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP No. 03-3 applies to loans and debt
securities acquired individually, in pools or as part of a business combination and does not apply to originated loans. The application of SOP No. 03-3
limits the interest income  including accretion of purchase price discounts  that may be recognized for certain loans and debt securities.
Additionally, SOP No. 03-3 does not allow the excess of contractual cash flows over cash flows expected to be collected to be recognized as an
adjustment of yield, loss accrual or valuation allowance, such as the reserve for loan losses. SOP No. 03-3 requires that increases in expected cash
flows subsequent to the initial investment be recognized prospectively through an adjustment of the yield on the loan or debt security over its
remaining life. Decreases in expected cash flows should be recognized as impairment. In the case of loans acquired in a business combination where the
loans show signs of credit deterioration, SOP No. 03-3 represents a significant change from current purchase accounting practice, whereby the
acquirees reserve for loan losses is typically added to the acquirers reserve for loan losses. SOP No. 03-3 is effective for loans and debt
securities acquired by the Company beginning January 1, 2005. The adoption of this new standard is not presently expected to have a material impact on
the Companys consolidated financial statements.

Stock-based compensation

The Company currently measures its stock-based compensation arrangements under the
recognition and measurement principles of APB No. 25. Accordingly, since the exercise price of each stock option which the Company has granted has been
equal to the market value of the underlying common stock on the date of grant, no compensation expense has been recognized. SFAS No. 123, as amended by
SFAS No. 148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for
stock-based employee compensation. The following table illustrates the effects on net income and earnings per common share if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based compensation:

|                                                                                                                                          |  |  |  | 2004 |            | 2003 |  | 2002
|----------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Net income,
as reported                                                                                                                   |  |  |  | $    | 16,007,650 |      |  | $   
|Deduct: Total
stock-based compensation expense determined under fair value based method for all awards, net of related income tax effects |  |  |  |      | (604,578   | )    |  |     
|Pro forma net
income                                                                                                                      |  |  |  | $    | 15,403,072 |      |  | $   
|Earnings per
common share:                                                                                                                |  |  |  |      |            |      |  |     
|Basic 
as reported                                                                                                                       |  |  |  | $    | .96        |      |  | $   
|Basic 
pro forma                                                                                                                         |  |  |  |      | .92        |      |  |     
|Diluted
 as reported                                                                                                                     |  |  |  |      | .93        |      |  |     
|Diluted
 pro forma                                                                                                                       |  |  |  |      | .89        |      |  |     

47

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The effect of applying SFAS No. 123 to stock options granted in the years ended
December 31, 2004, 2003 and 2002 resulted in an estimated weighted-average grant date fair value of $6.38, $4.51 and $2.87, 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,
2004, 2003 and 2002:

|                        |  |  |  | 2004    |      | 2003    |  | 2002   
|----------------------- |  |  |  | ------- | ---- | ------- |  | -------
|Dividend
yield          |  |  |  |         | 1.6  | %       |  |        
|Estimated
volatility    |  |  |  |         | 43.6 | %       |  |        
|Risk-free
interest rate |  |  |  |         | 3.1  | %       |  |        
|Estimated
option lives  |  |  |  | 6
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 $12,818,000 and $5,119,000
at December 31, 2004 and 2003, respectively.

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

Investment securities at December 31, 2004 and 2003 consisted of the
following:

|                                                |  |  |  | Amortized cost |            | Gross unrealized gains |  | Gross unrealized losses |           | Estimated fair value
|----------------------------------------------- |  |  |  | -------------- | ---------- | ---------------------- |  | ----------------------- | --------- | --------------------
|2004                                            |  |  |  |                |            |                        |  |                         |           |                     
|Available-for-sale                              |  |  |  |                |            |                        |  |                         |           |                     
|U.S. Agency
mortgage-backed securities          |  |  |  | $              | 29,255,143 |                        |  | $                       | 308,044   |                     
|U.S.
Government and agency securities           |  |  |  |                | 10,498,229 |                        |  |                         | 101,633   |                     
|Obligations
of state and political subdivisions |  |  |  |                | 2,741,738  |                        |  |                         | 6,069     |                     
|Equity
securities                               |  |  |  |                | 957,478    |                        |  |                         | 947,627   |                     
|Mutual
fund                                     |  |  |  |                | 356,838    |                        |  |                         | 12,027    |                     
|                                                |  |  |  | $              | 43,809,426 |                        |  | $                       | 1,375,400 |                     
|Held-to-maturity                                |  |  |  |                |            |                        |  |                         |           |                     
|Obligations
of state and political subdivisions |  |  |  | $              | 1,958,736  |                        |  | $                       | 43,393    |                     
|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    |                     

48

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Management of the Company does not believe that any of the above gross unrealized
losses on investment securities are other-than-temporary and, accordingly, no impairment adjustments are necessary.

The amortized cost and estimated fair value of investment securities at December
31, 2004, 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  |  |  |  | $              | 14,983,343 |                     
|Due after
five years through ten years |  |  |  |                | 200,000    |                     
|Due after ten
years                    |  |  |  |                | 27,311,767 |                     
|Equity
securities                      |  |  |  |                | 957,478    |                     
|Mutual
fund                            |  |  |  |                | 356,838    |                     
|                                       |  |  |  | $              | 43,809,426 |                     
|Held-to-maturity                       |  |  |  |                |            |                     
|Due after one
year through five years  |  |  |  | $              | 1,070,215  |                     
|Due after
five years through ten years |  |  |  |                | 888,521    |                     
|                                       |  |  |  | $              | 1,958,736  |                     

Investment securities with a carrying value of approximately $43,427,000 and
$31,487,000 at December 31, 2004 and 2003, respectively, were pledged to secure public deposits and for other purposes as required or permitted by
law.

The Company had no gross realized losses on sales of investment securities during
the years ended December 31, 2004, 2003 and 2002. Gross realized gains on sales of investment securities during the years ended December 31, 2004, 2003
and 2002 are as disclosed in the accompanying consolidated statements of income.

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

Loans at December 31, 2004 and 2003 consisted of the following:

|                        |  |  |  | 2004 |             | 2003
|----------------------- |  |  |  | ---- | ----------- | ----
|Commercial              |  |  |  | $    | 253,041,395 |     
|Real
estate:            |  |  |  |      |             |     
|Construction/lot        |  |  |  |      | 179,932,290 |     
|Mortgage                |  |  |  |      | 52,737,011  |     
|Commercial              |  |  |  |      | 339,787,916 |     
|Consumer                |  |  |  |      | 37,209,298  |     
|                        |  |  |  |      | 862,707,910 |     
|Less:                   |  |  |  |      |             |     
|Reserve for
loan losses |  |  |  |      | 12,411,568  |     
|Deferred loan
fees      |  |  |  |      | 3,149,111   |     
|                        |  |  |  |      | 15,560,679  |     
|Loans,
net              |  |  |  | $    | 847,147,231 |     



49

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Included in mortgage loans as of December 31, 2004 and 2003 were approximately
$3,225,000 and $2,482,000, respectively, in mortgage loans held for sale.

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

In the normal course of business, the Bank participates portions of loans to third
parties in order to extend the Banks lending capability or to mitigate risk. At December 31, 2004 and 2003, the portion of these loans
participated to third parties (which are not included in the accompanying consolidated financial statements) totaled approximately $24,630,000 and
$11,901,000, respectively.

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

Transactions in the reserve for loan losses for the years ended December 31, 2004,
2003 and 2002 were as follows:

|                                           |  |  |  | 2004 |            | 2003 |  | 2002
|------------------------------------------ |  |  |  | ---- | ---------- | ---- |  | ----
|Balance at
beginning of year               |  |  |  | $    | 9,398,584  |      |  | $   
|Loan loss
provision                        |  |  |  |      | 3,650,000  |      |  |     
|Loans
charged-off                          |  |  |  |      | (1,419,726 | )    |  |     
|Recoveries of
loans previously charged-off |  |  |  |      | 428,291    |      |  |     
|Reserve
acquired from CBGP                 |  |  |  |      | 354,419    |      |  |     
|Balance at
end of year                     |  |  |  | $    | 12,411,568 |      |  | $   

Loans on nonaccrual status at December 31, 2004 and 2003 were approximately
$483,000 and $56,000, respectively. Interest income, which would have been realized on such nonaccrual loans outstanding at year-end, if they had
remained current, was insignificant for the years ended December 31, 2004, 2003 and 2002. Loans contractually past due 90 days or more on which the
Company continued to accrue interest at December 31, 2004 and 2003 were insignificant.

At December 31, 2004 and 2003, 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, 2004 and 2003.
Interest income recognized on impaired loans for the years ended December 31, 2004, 2003 and 2002 was insignificant.

|6. |  | Mortgage banking activities
|-- |  | ---------------------------

The Bank sells a predominant share of the mortgage loans it originates into the
secondary market. However, it has retained the right to service sold loans with principal balances totaling approximately $502 million, $514 million
and $454 million as of December 31, 2004, 2003, and 2002, 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,
2004 and 2003, 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, 2004 and 2003, mortgage loans held for sale were carried at cost, which
approximated estimated market value.

50

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Transactions in the Companys MSRs for the years ended December 31, 2004, 2003
and 2002 were as follows:

|                             |  |  |  | 2004 |            | 2003 |  | 2002
|---------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Balance at
beginning of year |  |  |  | $    | 4,688,445  |      |  | $   
|Additions                    |  |  |  |      | 1,269,752  |      |  |     
|Amortization                 |  |  |  |      | (1,619,839 | )    |  |     
|Impairment
adjustments       |  |  |  |      | 325,000    |      |  |     
|Balance at
end of year       |  |  |  | $    | 4,663,358  |      |  | $   

At both December 31, 2004 and 2003, the fair value of the Companys MSRs was
approximately $5.2 million. The key assumptions used in estimating the fair value of MSRs at December 31, 2004 include weighted-average mortgage
prepayment rates (PSA) of approximately 257% for the first year, 228% for the second year and 199% thereafter (301%, 237% and 196%, respectively, in
2003). A 9% discount rate was also applied.

Changes in the valuation allowance for MSRs for the years ended December 31, 2004,
2003 and 2002 were as follows:

|                             |  |  |  | 2004 |          | 2003 |  | 2002
|---------------------------- |  |  |  | ---- | -------- | ---- |  | ----
|Balance at
beginning of year |  |  |  | $    | 325,000  |      |  | $   
|Impairment
adjustments       |  |  |  |      | (325,000 | )    |  |     
|Balance at
end of year       |  |  |  | $    |         |      |  | $   

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

Mortgage banking income, net, consisted of the following for the years ended
December 31, 2004, 2003 and 2002:

|                                        |  |  |  | 2004 |            | 2003 |  | 2002
|--------------------------------------- |  |  |  | ---- | ---------- | ---- |  | ----
|Origination
and processing fees         |  |  |  | $    | 1,593,520  |      |  | $   
|Gains on
sales of mortgage loans, net   |  |  |  |      | 766,078    |      |  |     
|Servicing
fees                          |  |  |  |      | 1,297,057  |      |  |     
|Amortization
and impairment adjustments |  |  |  |      | (1,294,840 | )    |  |     
|Mortgage
banking income, net            |  |  |  | $    | 2,361,815  |      |  | $   

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

Premises and equipment at December 31, 2004 and 2003 consisted of the
following:

|                                               |  |  |  | 2004 |            | 2003
|---------------------------------------------- |  |  |  | ---- | ---------- | ----
|Land                                           |  |  |  | $    | 3,299,900  |     
|Buildings and
leasehold improvements           |  |  |  |      | 17,479,550 |     
|Furniture and
equipment                        |  |  |  |      | 8,732,684  |     
|                                               |  |  |  |      | 29,512,134 |     
|Less
accumulated depreciation and amortization |  |  |  |      | 8,134,068  |     
|                                               |  |  |  |      | 21,378,066 |     
|Construction
in progress                       |  |  |  |      | 376,992    |     
|Premises and
equipment, net                    |  |  |  | $    | 21,755,058 |     

51

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

Time deposits in excess of $100,000 aggregated approximately $26,583,000 and
$15,977,000 at December 31, 2004 and 2003, respectively.

At December 31, 2004, the scheduled annual maturities of all time deposits were
approximately as follows:

|2005 |  |  |  | $ | 39,639,000 | 
|---- |  |  |  | - | ---------- | 
|2006 |  |  |  |   | 9,822,000  | 
|2007 |  |  |  |   | 5,222,000  | 
|2008 |  |  |  |   | 1,171,000  | 
|2009 |  |  |  |   | 2,619,000  | 
|     |  |  |  | $ | 58,473,000 | 

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

On December 15, 2004 the Company established a subsidiary grantor trust (Cascade
Bancorp Trust I) (the Trust), which issued $20 million of trust preferred securities (the TPS). The TPS are subordinated to any other borrowings of the
Company and are due and payable on March 15, 2035. The TPS pay quarterly interest at the 3-month London Inter-Bank Offered Rate (LIBOR) plus 1.80%. The
Trust used the proceeds received from the issuance of the TPS to purchase $20 million of junior subordinated debentures (the Debentures) of the
Company. The Debentures were issued with substantially the same terms as the TPS and are the sole assets of the Trust. The Companys obligations
under the Debentures and related agreements, taken together, constitute a full and irrevocable guarantee by the Company of the obligations of the
Trust. The TPS are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the Indenture related to the
Debentures. The TPS may be called by the Company at par at any time subsequent to March 15, 2010, and may be redeemed earlier upon the occurrence of
certain events that impact the income tax or the regulatory capital treatment of the TPS. Upon establishment of the Trust, the Company also purchased a
3% minority interest in the Trust totaling $619,000, which is included in other assets in Bancorps condensed balance sheet at December 31, 2004
(see Note 20). Management believes that as of December 31, 2004, the TPS meet applicable regulatory guidelines to qualify as Tier 1 capital.

|10. |  | Borrowings
|--- |  | ----------

The Bank participates in the FHLBs Cash Management Advance Program (the
Program). As of December 31, 2004, the Bank had approximately $29.7 million ($13.9 million at December 31, 2003) in borrowings outstanding from the
FHLB under the Program with fixed interest at rates ranging from 2.87% to 3.57%. 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, 2004,
the Bank had remaining available borrowings from the FHLB of approximately $120.7 million. To fully utilize the Banks available borrowings from
the FHLB, the Bank would be required to purchase additional FHLB stock of approximately $3.4 million.

The Bank also has approximately $24.8 million in available short-term borrowings
from the FRB, collateralized by certain of the Banks loans. The FRB funds available include participation in the Treasury Tax and Loan program of
the federal government. Access to this funding source is limited to $7.0 million and is fully at the discretion of the U.S. Treasury. As of December
31, 2004, the Bank had approximately $6.8 million in borrowings outstanding from the FRB. The Bank had no borrowings outstanding from the FRB at
December 31, 2003. As an additional source of liquidity, the Bank has federal fund borrowing agreements with correspondent banks aggregating
approximately $26.0 million at December 31, 2004.

52

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

At December 31, 2004, the contractual maturities of the Banks FHLB borrowings
outstanding were approximately as follows:

|2005       |  |  |  | $ | 4,000,000  | 
|---------- |  |  |  | - | ---------- | 
|2006       |  |  |  |   |           | 
|2007       |  |  |  |   | 7,000,000  | 
|2008       |  |  |  |   | 13,000,000 | 
|2009       |  |  |  |   |           | 
|Thereafter |  |  |  |   | 5,700,000  | 
|           |  |  |  | $ | 29,700,000 | 

|11. |  | Acquisition of Community Bank of Grants Pass
|--- |  | --------------------------------------------

On January 1, 2004, the Company completed its acquisition of CBGP to complement its
expansion into Southern Oregon. CBGP shareholders received one share of the Companys common stock for each share of CBGP common stock (772,752
shares), aggregating a total purchase price of approximately $11.7 million. The common stock issued was valued at $14.16 per share, representing an
average of closing market prices for one week before and after the date the acquisition terms were agreed to and announced. The cost of this
acquisition also included the fair value of stock options exchanged of approximately $.8 million. Upon completion of this acquisition, CBGP was merged
into the Bank. Accordingly, CBGPs results of operations have been included in the consolidated financial statements effective January 1, 2004.
The pro forma comparative combined results of operations of the Company and CBGP as if the acquisition had occurred at the beginning of 2003 were not
significant to the accompanying consolidated financial statements. The acquisition was accounted for using the purchase method of
accounting.

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

|Cash and cash
equivalents   |  |  |  | $ | 10,244 | 
|--------------------------- |  |  |  | - | ------ | 
|Loans,
net                  |  |  |  |   | 36,342 | 
|Premises and
equipment, net |  |  |  |   | 1,335  | 
|Core deposit
intangible     |  |  |  |   | 580    | 
|Goodwill                    |  |  |  |   | 6,352  | 
|Other
assets                |  |  |  |   | 95     | 
|Total assets
acquired       |  |  |  |   | 54,948 | 
|Deposits                    |  |  |  |   | 42,125 | 
|Deferred tax
liability      |  |  |  |   | 530    | 
|Other
liabilities           |  |  |  |   | 593    | 
|Total
liabilities assumed   |  |  |  |   | 43,248 | 
|Total
purchase price        |  |  |  | $ | 11,700 | 

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

In the ordinary course of business, the Bank is a party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commitments
under credit card lines of credit and standby letters of credit. These financial instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of amounts recognized in the accompanying consolidated balance sheets. The contractual amounts of these financial
instruments reflect the extent of the Banks involvement in these particular classes of financial instruments. As of December 31, 2004 and 2003,
the Bank had no commitments to extend credit at below-market interest rates and held no significant derivative financial instruments.

53

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

A summary of the Banks off-balance sheet financial instruments at December
31, 2004 and 2003 is approximately as follows:

|                                              |  |  |  | 2004 |             | 2003
|--------------------------------------------- |  |  |  | ---- | ----------- | ----
|Commitments
to extend credit                  |  |  |  | $    | 296,914,000 |     
|Commitments
under credit card lines of credit |  |  |  |      | 18,893,000  |     
|Standby
letters of credit                     |  |  |  |      | 9,010,000   |     
|Total
off-balance sheet financial instruments |  |  |  | $    | 324,817,000 |     

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

The Company considers the fees collected in connection with the issuance of standby
letters of credit to be representative of the fair value of its obligations undertaken in issuing the guarantees. In accordance with applicable
accounting standards related to guarantees, the Company defers fees collected in connection with the issuance of standby letters of credit. The fees
are then recognized in income proportionately over the life of the standby letter of credit agreement. At both December 31, 2004 and 2003, the
Companys deferred standby letter of credit fees, which represent the fair value of the Companys potential obligations under the standby
letter of credit guarantees, were insignificant to the accompanying consolidated financial statements. 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, as amended by SFAS No. 149. However, in the opinion of management, such derivative amounts are not significant, and, therefore, no derivative
assets or liabilities are recorded in the accompanying consolidated financial statements.

54

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Bank leases certain land and facilities under operating leases, some of which
include renewal options and escalation clauses. At December 31, 2004, the aggregate minimum rental commitments under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year were approximately as follows:

|2005                   |  |  |  | $ | 1,210,000 | 
|---------------------- |  |  |  | - | --------- | 
|2006                   |  |  |  |   | 1,046,000 | 
|2007                   |  |  |  |   | 1,012,000 | 
|2008                   |  |  |  |   | 938,000   | 
|2009                   |  |  |  |   | 709,000   | 
|Thereafter             |  |  |  |   | 5,076,000 | 
|Total minimum
payments |  |  |  | $ | 9,991,000 | 

Total rental expense was approximately $1,166,000, $1,032,000 and $701,000 in 2004,
2003 and 2002, respectively.

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

In the ordinary course of business, the Bank becomes involved in various litigation
arising from normal banking activities. In the opinion of management, the ultimate disposition of these actions will not have a material adverse effect
on the Companys consolidated financial statements as of and for the year ended December 31, 2004.

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

The provision (credit) for income taxes for the years ended December 31, 2004, 2003
and 2002 was approximately as follows:

|                           |  |  |  | 2004 |           | 2003 |  | 2002
|-------------------------- |  |  |  | ---- | --------- | ---- |  | ----
|Current:                   |  |  |  |      |           |      |  |     
|Federal                    |  |  |  | $    | 7,144,000 |      |  | $   
|State                      |  |  |  |      | 1,664,000 |      |  |     
|                           |  |  |  |      | 8,808,000 |      |  |     
|Deferred                   |  |  |  |      | 905,000   |      |  |     
|Provision for
income taxes |  |  |  | $    | 9,713,000 |      |  | $   

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, 2004, 2003 and 2002 were approximately as
follows:

|                                                         |  |  |  | 2004 |           | 2003 |  | 2002
|-------------------------------------------------------- |  |  |  | ---- | --------- | ---- |  | ----
|Expected
federal income tax provision at statutory rates |  |  |  | $    | 9,002,000 |      |  | $   
|State income
taxes, net of federal effect                |  |  |  |      | 1,082,000 |      |  |     
|Effect of
nontaxable interest income, net                |  |  |  |      | (321,000  | )    |  |     
|Other,
net                                               |  |  |  |      | (50,000   | )    |  |     
|Provision for
income taxes                               |  |  |  | $    | 9,713,000 |      |  | $   

55

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The components of the net deferred tax assets and liabilities at December 31, 2004
and 2003 were approximately as follows:

|                                              |  |  |  | 2004 |           | 2003
|--------------------------------------------- |  |  |  | ---- | --------- | ----
|Deferred tax
assets:                          |  |  |  |      |           |     
|Reserve for
loan losses                       |  |  |  | $    | 4,597,000 |     
|Deferred
benefit plan expenses, net           |  |  |  |      | 1,261,000 |     
|Other                                         |  |  |  |      | 334,000   |     
|Total
deferred tax assets                     |  |  |  |      | 6,192,000 |     
|Deferred tax
liabilities:                     |  |  |  |      |           |     
|Accumulated
depreciation                      |  |  |  |      | 838,000   |     
|Deferred loan
income                          |  |  |  |      | 554,000   |     
|Mortgage
servicing rights                     |  |  |  |      | 1,839,000 |     
|Purchased
intangibles related to CBGP         |  |  |  |      | 556,000   |     
|FHLB stock
dividends                          |  |  |  |      | 505,000   |     
|Net
unrealized gains on investment securities |  |  |  |      | 492,000   |     
|Other                                         |  |  |  |      | 45,000    |     
|Total
deferred tax liabilities                |  |  |  |      | 4,829,000 |     
|Net deferred
tax assets                       |  |  |  | $    | 1,363,000 |     

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

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

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

56

---

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, 2004, 2003 and 2002 can be reconciled as follows:

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

|15. |  | Transactions with related parties
|--- |  | ---------------------------------

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

An analysis of activity with respect to loans to officers and directors of the Bank
for the years ended December 31, 2004 and 2003 was approximately as follows:

|                                     |  | 2004 |           | 2003 | 
|------------------------------------ |  | ---- | --------- | ---- | 
|
|Balance
        at beginning of year |  | $    | 1,631,000 |      | 
|Additions                            |  |      | 1,176,000 |      | 
|Repayments                           |  |      | (777,000  | )    | 
|Retirement
        of Board member   |  |      | (860,000  | )    | 
|Balance
        at end of year       |  | $    | 1,170,000 |      | 

|16. |  | Benefit plans
|--- |  | -------------

401(k) profit sharing plan

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

57

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 under the Plan were approximately $1,481,000, $1,338,000 and $1,229,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.

Other benefit plans

The Bank has deferred compensation plans for the Board and certain key executives
and managers, a salary continuation plan, and (beginning in 2004) a supplemental executive retirement (SERP) plan for certain key executives and a fee
continuation plan for the Board. In accordance with the provisions of the deferred compensation plans, participants can elect to defer portions of
their annual compensation or fees. The deferred amounts generally vest as deferred. The deferred compensation plus interest is generally payable upon
termination in either a lump-sum or monthly installments.

The salary continuation and SERP plans for certain key executives and the fee
continuation plan for the Board provides specified benefits to the participants upon termination or change of control. The benefits are subject to
certain vesting requirements and vested amounts are generally payable upon termination or change of control in either a lump-sum or monthly
installments. The Bank annually expenses amounts sufficient to accrue for the present value of the benefits payable to the participants under these
plans. These plans also include death benefit provisions for certain participants. Effective in 2004, the fee continuation plan was discontinued for
future members of the Board.

To assist in the funding of these plans, the Bank has purchased bank-owned life
insurance policies on the majority of the participants. The cash surrender value of these policies at December 31, 2004 and 2003 was approximately
$14,066,000 and $8,558,000, respectively. As of December 31, 2004 and 2003, the liabilities related to the deferred compensation plans included in
accrued interest and other liabilities in the accompanying consolidated balance sheets totaled approximately $2,552,000 and $2,085,000, respectively.
The amount of expense charged to operations in 2004, 2003 and 2002 related to the deferred compensation plans was approximately $476,000, $481,000 and
$439,000, respectively. As of December 31, 2004 and 2003, the liabilities related to the salary continuation, SERP and fee continuation plans included
in accrued interest and other liabilities in the accompanying consolidated balance sheets totaled approximately $1,973,000 and $1,410,000,
respectively. The amount of expense charged to operations in 2004, 2003 and 2002 for the salary continuation, SERP and fee continuation plans was
approximately $611,000, $200,000 and $186,000, respectively. For financial reporting purposes, such expense amounts have not been adjusted for income
earned on the bank-owned life insurance policies.

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

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

The stock-based compensation plans prescribe various terms and conditions for the
granting of stock-based compensation and the total number of shares authorized for this purpose. For ISOs, the option strike price must be no less than
100% of 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 and all grants to
date have been at 100%. Restricted stock must be at fair market value on grant date. At December 31, 2004, 395,778 shares reserved under the
stock-based compensation plans were available for future grant. Restricted stock grants are limited to 30% of the shares available under the
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.

58

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Activity related to the stock-based compensation plans for the years ended December
31, 2004, 2003 and 2002 was as follows:

|                                     |  | 2004 |           | 2003 |  | 2002
|------------------------------------ |  | ---- | --------- | ---- |  | ----
|
|Balance
        at beginning of year |  |      | 1,017,801 |      |  | $   
|Granted                              |  |      | 218,140   |      |  |     
|Forfeited                            |  |      | (15,909   | )    |  |     
|Exercised                            |  |      | (189,281  | )    |  |     
|Balance
        at end of year       |  |      | 1,030,751 |      |  | $   

Information regarding the number, weighted-average exercise price and
weighted-average remaining contractual life of options by range of exercise price at December 31, 2004 is as follows:

|                        |  | Options
      outstanding |  | Exercisable
      options
|----------------------- |  | ------------------------- |  | -------------------------
|
|Under
        $5.00     |  | 181,900                   |  | $                        
|$5.01
         $8.00   |  | 387,362                   |  |                          
|$8.01
         $12.00  |  | 327,015                   |  |                          
|$12.01
         $16.20 |  | 134,474                   |  |                          
|                        |  | 1,030,751                 |  | $                        

Exercisable options as of December 31, 2003 and 2002 totaled 837,543 and 867,860,
respectively.

In addition, during 2003, the Company granted 18,750 shares of restricted stock at
a market value of $16.63 per share (approximately $312,000). The restricted stock is scheduled to vest 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 sheets at December 31, 2004 and 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.

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

The following disclosures are made in accordance with the provisions of SFAS No.
107, Disclosures about Fair Value of Financial Instruments, which requires the disclosure of fair value information about financial
instruments where it is practicable to estimate that value.

In cases where quoted market values are not available, the Company primarily uses
present value techniques to estimate the fair value of its financial instruments. Valuation methods require considerable judgment, and the resulting
estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not
necessarily indicate amounts which could be realized in a current market exchange.

In addition, as the Company normally intends to hold the majority of its financial
instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated
fair

59

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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, 2004 and 2003.

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, 2004 and 2003 origination rates. The resulting amounts
are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Deposits:    The estimated fair value
of demand deposits, consisting of checking, 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,
2004 and 2003 rates offered on those instruments.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Junior subordinated debentures and other
borrowings:    The fair value of the Banks junior subordinated debentures and other borrowings are estimated using
discounted cash flow analyses based on the Banks 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, 2004 and 2003 were approximately as follows:

|                                                    |  |  |  | 2004 |             | 2003 | 
|--------------------------------------------------- |  |  |  | ---- | ----------- | ---- | 
|
|Financial
assets:                                   |  |  |  |      |             |      | 
|Cash and cash
equivalents                           |  |  |  | $    | 51,892,155  |      | 
|Investment
securities:                              |  |  |  |      |             |      | 
|Available-for-sale                                  |  |  |  |      | 45,110,418  |      | 
|Held-to-maturity                                    |  |  |  |      | 1,958,736   |      | 
|FHLB
stock                                          |  |  |  |      | 2,571,600   |      | 
|Loans,
net                                          |  |  |  |      | 847,147,231 |      | 
|Bank-owned
life insurance                           |  |  |  |      | 14,065,927  |      | 
|Financial
liabilities:                              |  |  |  |      |             |      | 
|Deposits                                            |  |  |  |      | 851,396,546 |      | 
|Junior
subordinated debentures and other borrowings |  |  |  |      | 56,533,475  |      | 

60

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

|19. |  | Regulatory matters
|--- |  | ------------------

The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. The Companys and the Banks capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require
the Company and the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Tier 1 capital to average assets and Tier 1 and
total capital to risk-weighted assets (all as defined in the regulations). Management believes that as of December 31, 2004 and 2003, the Company and
the Bank met or exceeded all relevant capital adequacy requirements. To be categorized as well capitalized, the Company and the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. For the regulatory reporting periods ended
June 30, 2004 and September 30, 2004, the Company was categorized as adequately capitalized, as its risk-based capital ratios were less
than the required minimum to be categorized as well capitalized. In addition, for the regulatory reporting periods ended March 31, 2004,
June 30, 2004, and September 30, 2004, the Bank was categorized as adequately capitalized. However, the issuance of the TPS in December
2004 (see Note 9) brought the Companys and the Banks regulatory capital categorization to well capitalized as of December 31,
2004.

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, 2004:                       |  |  |  |        |         |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  | $      | 98,274  |                                                   |  |                                                                                       | 10.1
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 98,274  |                                                   |  |                                                                                       | 10.1
|Total
capital (to risk-weighted assets)  |  |  |  |        | 110,855 |                                                   |  |                                                                                       | 11.4
|December
31, 2003:                       |  |  |  |        |         |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  |        | 60,498  |                                                   |  |                                                                                       | 8.6 
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 60,498  |                                                   |  |                                                                                       | 9.0 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 69,370  |                                                   |  |                                                                                       | 10.3

61

---

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, 2004:                       |  |  |  |        |         |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  | $      | 96,484  |                                                   |  |                                                                                       | 10.0
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 96,484  |                                                   |  |                                                                                       | 9.9 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 108,622 |                                                   |  |                                                                                       | 11.2
|December
31, 2003:                       |  |  |  |        |         |                                                   |  |                                                                                       |     
|Tier 1
capital (to average assets)       |  |  |  |        | 58,809  |                                                   |  |                                                                                       | 8.3 
|Tier 1
capital (to risk-weighted assets) |  |  |  |        | 58,809  |                                                   |  |                                                                                       | 8.8 
|Total
capital (to risk-weighted assets)  |  |  |  |        | 66,465  |                                                   |  |                                                                                       | 10.0

The Companys and the Banks ratios for Tier 1 capital to risk-weighted
assets and total capital to risk-weighted assets as of December 31, 2003 have been adjusted in the above tables to retroactively reflect changes to the
methodology to calculate risk-weighted assets which were made in 2004.

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

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

CONDENSED BALANCE SHEETS






|                                           |  |  |  | December 31, |            
|------------------------------------------ |  |  |  | ------------ | -----------
|
|Assets:                                    |  |  |  |              |            
|Cash and cash
equivalents                  |  |  |  | $            | 732,615    
|Investment
securities available-for-sale   |  |  |  |              | 1,905,105  
|Investment in
subsidiary                   |  |  |  |              | 104,054,991
|Other
assets                               |  |  |  |              | 758,831    
|Total
assets                               |  |  |  | $            | 107,451,542
|Liabilities
and stockholders equity:      |  |  |  |              |            
|Junior
subordinated debentures             |  |  |  | $            | 20,000,000 
|Other
liabilities                          |  |  |  |              | 1,019,097  
|Stockholders equity                       |  |  |  |              | 86,432,445 
|Total
liabilities and stockholders equity |  |  |  | $            | 107,451,542

62

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONDENSED STATEMENTS OF INCOME

|                                                                                                                                             |  |  |  | Years ended December 31, |           
|-------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------------------ | ----------
|
|Income:                                                                                                                                      |  |  |  |                          |           
|Interest and
other dividend income                                                                                                           |  |  |  | $                        | 22,438    
|Gains on
sales of investment securities available-for-sale                                                                                   |  |  |  |                          | 181,720   
|Total
income                                                                                                                                 |  |  |  |                          | 204,158   
|Expenses:                                                                                                                                    |  |  |  |                          |           
|Administrative                                                                                                                               |  |  |  |                          | 220,170   
|Interest                                                                                                                                     |  |  |  |                          | 40,000    
|Other                                                                                                                                        |  |  |  |                          | 274,368   
|Total
expenses                                                                                                                               |  |  |  |                          | 534,538   
|Net income
(loss) before credit (provision) for income taxes, dividends from the Bank and equity in undistributed net earnings of subsidiary |  |  |  |                          | (330,380  
|Credit
(provision) for income taxes                                                                                                          |  |  |  |                          | 125,545   
|Net income
(loss) before dividends from the Bank and equity in undistributed net earnings of subsidiary                                      |  |  |  |                          | (204,835  
|Dividends
from the Bank                                                                                                                      |  |  |  |                          | 3,350,000 
|Equity in
undistributed net earnings of subsidiary                                                                                           |  |  |  |                          | 12,862,485
|Net
income                                                                                                                                   |  |  |  | $                        | 16,007,650

63

---

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                                                                        |  |  |  | $                        | 16,007,650 
|Adjustments
to reconcile net income to net cash provided by operating activities: |  |  |  |                          |            
|Dividends
from the Bank                                                           |  |  |  |                          | 3,350,000  
|Equity in
undistributed net earnings of subsidiary                                |  |  |  |                          | (16,212,485
|Gains on
sales of investment securities available-for-sale                        |  |  |  |                          | (181,720   
|Increase in
other assets                                                          |  |  |  |                          | (623,406   
|Increase in
other liabilities                                                     |  |  |  |                          | 659,000    
|Net cash
provided by operating activities                                         |  |  |  |                          | 2,999,039  
|Cash flows
from investing activities:                                             |  |  |  |                          |            
|Investment in
subsidiary                                                          |  |  |  |                          | (20,000,000
|Proceeds from
sales of investment securities available-for-sale                   |  |  |  |                          | 404,573    
|Purchase of
investment securities available-for-sale                              |  |  |  |                          | (69,839    
|Net cash
provided (used) by investing activities                                  |  |  |  |                          | (19,665,266
|Cash flows
from financing activities:                                             |  |  |  |                          |            
|Cash
dividends paid                                                               |  |  |  |                          | (4,401,429 
|Net proceeds
from issuance of junior subordinated debentures                      |  |  |  |                          | 20,000,000 
|Amortization
of unearned compensation on restricted stock                         |  |  |  |                          | 124,740    
|Stock options
exercised and related tax benefits                                  |  |  |  |                          | 1,232,114  
|Net cash
provided (used) in financing activities                                  |  |  |  |                          | 16,955,425 
|Net increase
(decrease) in cash and cash equivalents                              |  |  |  |                          | 289,198    
|Cash and cash
equivalents at beginning of year                                    |  |  |  |                          | 443,417    
|Cash and cash
equivalents at end of year                                          |  |  |  | $                        | 732,615    

64

---

CASCADE BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

The following table sets forth the Companys unaudited data regarding
operations for each quarter of 2004 and 2003. 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):



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



|                                              |  |  |  | 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 (1)           |  |  |  | $    | 0.22  
|Fully diluted
earnings per common share (1)   |  |  |  | $    | 0.22  

---

|(1) |  | Adjusted to give retroactive effect to a five-for-four stock
split declared in June 2004.
|--- |  | -----------------------------------------------------------------------------------------

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

65

---



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



None


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

Evaluation of Disclosure Controls and Procedures



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


Changes in Internal Controls



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


Managements Report on Internal Control Over Financial
Reporting



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




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




The Companys management assessed the
effectiveness of the Companys internal control over financial reporting as of December 31, 2004. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated Framework. Based
on our assessment we believe that, as of December 31, 2004, the Companys internal control over financial reporting is effective based on those
criteria.




The Companys independent registered public
accounting firm, Symonds, Evans & Company, P.C., have issued an audit report on our assessment of the Companys internal control over
financial reporting. This report appears on page 35 of this annual report.


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



None


66

---

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 25,
2005. (Directors and Executive Officers; Executive Compensation; Director and Management Ownership; Related Party Transactions; and Principal
Accountant Fees and Services).


PART IV

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

|(a)  (1) |  | The financial statements required in this Annual Report are
listed in the accompanying Index to Consolidated Financial Statements on page 34.
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(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 12, 2004 in
regards to release of the Companys fourth quarter and year-end, 2004 earnings.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company filed a report on Form 8-K on December 17, 2004 in
regards to the announcement of a Trust Preferred Issuance of $20 million.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------

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

67

---

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. Moss              | 
|Patricia
      L. Moss                  | 
|President/Chief
      Executive Officer | 
|Date:
      2/25/05                     | 



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


|/s/
        Jerol E. Andres
        Jerol E. Andres, Director                         |  |  |  | 2/25/05
        Date
|------------------------------------------------------------------------------------- |  |  |  | --------------------
|                                                                                      |  |  |  |                     
|/s/
        Gary L. Capps
        Gary L. Capps, Director/Chairman                    |  |  |  | 2/25/05
        Date
|                                                                                      |  |  |  |                     
|/s/
        Gary L. Hoffman
        Gary L. Hoffman, Director/Vice Chairman           |  |  |  | 2/25/05
        Date
|                                                                                      |  |  |  |                     
|/s/
        Henry H. Hewitt
        Henry H. Hewitt, Director                         |  |  |  | 2/25/05
        Date
|                                                                                      |  |  |  |                     
|/s/
        Patricia L. Moss
        Patricia L. Moss, Director/President/CEO         |  |  |  | 2/25/05
        Date
|                                                                                      |  |  |  |                     
|/s/
        Ryan R. Patrick
        Ryan R. Patrick, Director                         |  |  |  | 2/25/05
        Date
|                                                                                      |  |  |  |                     
|/s/
        James E. Petersen
        James E. Petersen, Director/Assistant Secretary |  |  |  | 2/25/05
        Date

68

---

EXHIBITS INDEX

3.1
    
    Articles of Incorporation.  As amended, filed as exhibit 3.1 to registrants Form 10-Q report for the quarter ended June 30, 1997, and incorporated herein by reference.3.2
    
    Bylaws.  As amended and restated, filed as exhibit 3.2 to registrants Form 10-K Annual Report for the fiscal year ended December 31, 2000, and is incorporated herein by reference.10.1
    
    Registrants 1994 Incentive Stock Option Plan.  Filed as an exhibit to registrants Registration Statement on Form 10-SB, filed in January 1994, and incorporated herein by reference.10.2
    
    Incentive Stock Option Plan Letter Agreement.Entered into between registrant and certain employees pursuant to registrants 1994 Incentive Stock Option Plan.  Filed as an exhibit to registrants
Registration Statement on Form 10-SB, filed in January, 1994, and incorporated herein by reference.10.3
    
    Deferred Compensation Plans.  Established for the Board, certain key executives and managers during the fourth quarter ended December 31, 1995.  Filed as exhibit 10.5 to registrants Form 10-KSB filed
December 31, 1995, and incorporated herein by reference.10.4
    
    2002 Equity Incentive Plan.  Filed as an exhibit to the registrants filing on Form S-8/A, as filed with the Securities and Exchange Commission on April 23, 2003, and incorporated herein by
reference.11.1
    
    Earnings per Share Computation.  The information called for by this item is located on page 57 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