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, 2009

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

For the transition period from  to 

Commission file number: 0-23322

 

CASCADE BANCORP

(Name of registrant as specified in its charter)

Oregon		93-1034484
(State of Incorporation)		(IRS Employer Identification #)

1100 N.W. Wall Street, Bend, Oregon		97701
(Address of principal executive offices)		(Zip Code)

(541) 385-6205

(Registrant’s telephone number)

 

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

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

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

 

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

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

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

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

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant at June 30, 2009 (the last business day of the most recent second quarter) was $38,314,205 (based on the closing price as quoted on the NASDAQ Capital Market on that date).

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 28,174,163 shares of no par value Common Stock on March 8, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement on Schedule 14A for its 2010 Annual Meeting of Shareholders to be held on April 26, 2010 are incorporated by reference in this Form 10-K in response to Part III, Items 9, 10, 11, 12 and 13.

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CASCADE BANCORP
  
FORM 10-K
  
ANNUAL REPORT

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		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			16
Item 1B. Unresolved Staff Comments			27
Item 2. Properties			27
Item 3. Legal Proceedings			27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			28
Item 6. Selected Financial Data			30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			55
Item 8. Financial Statements and Supplementary Data			59
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			109
Item 9A. Controls and Procedures			109
Item 9B. Other Information			110
PART III
Item 10. Directors, Executive Officers and Corporate Governance			112
Item 11. Executive Compensation			112
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			112
Item 13. Certain Relationships and Related Transactions, and Director Independence			112
Item 14. Principal Accountant Fees and Services			112
PART IV
Item 15. Exhibits and Financial Statement Schedules			113
Signatures			114

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PART I

ITEM 1. BUSINESS

The disclosures in this Item are qualified by the Risk Factors set forth in Item 1A and the Section entitled “Cautionary Information Concerning Forward-Looking Statements” included in Item 6, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report and any other cautionary statements contained herein or incorporated herein by reference.

Cascade Bancorp

The Company

Cascade Bancorp (NASDAQ: CACB), headquartered in Bend, Oregon and its wholly owned subsidiary, Bank of the Cascades (the “Bank”, and collectively referred to with Cascade Bancorp as “the Company” or “Cascade”) operates in Oregon and Idaho markets. Founded in 1977, the Bank offers full-service community banking through 32 branches in Central Oregon, Southern Oregon, Portland/Salem Oregon and Boise/Treasure Valley Idaho. At December 31, 2009, the Company had total consolidated assets of approximately $2.19 billion, net loans of approximately $1.51 billion and deposits of approximately $1.82 billion. Cascade Bancorp has no significant assets or operations other than the Bank.

Priorities

The Company and Bank have implemented the following priorities and have developed related plans in response to the adverse economic conditions and to comply with terms of its regulatory Order and Written Agreement as discussed under “Supervision and Regulation” below.

The Company believes that within the limits of its control over current and prospective economic conditions it can reasonably execute on the plans and objectives it has set. However it is uncertain that the Company will be able to achieve desired results and outcomes.

Overview & Business Strategy

Since December 2007, the United States has been in a severe recession. Business activity across a wide range of industries and regions is greatly reduced and many businesses are struggling due to the lack of consumer spending and the lack of liquidity in the credit markets. Idaho and Oregon have experienced significant declines in real estate values and unemployment levels are high. This economic adversity has had a direct and adverse effect on the financial condition and results of operations of the Company, making near-term execution of its long-term strategies problematic until such time as economic conditions stabilize and/or improve. The Company and Bank are also operating under joint regulatory agreements with the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Bank of San Francisco (“FRB”) and State of Oregon banking authorities which contain restrictions and requirements consistent with the actions described. More information about the regulatory agreements is provided under “Supervision and Regulation” below.

Accordingly, the Company and Bank have implemented strategies and have developed related plans in response to the adverse economic conditions and to comply with terms of its regulatory Order. The Company continues its efforts to raise additional capital through a sale of its common stock in one or more related

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private offerings. The Company has implemented strategies and plans to stabilize and improve its condition by reducing the level of problem loans and minimizing the severity of associated credit losses to the extent possible. At the same time the Company has worked to reduce the size of the loan portfolio to mitigate credit risk and conserve capital and liquidity. The reduction in loans has targeted loans to customers where the deposit relationship with such customer is not material to the overall banking relationship. To manage liquidity risk the Company has focused primarily on maintaining and expanding core deposits and has funded a significant contingent liquidity reserve. To further conserve capital the Bank has implemented plans to manage revenues and reduce controllable non-interest expense.

Once stable or improving economic conditions return, Cascade intends to return to its long-term goals and strategies, targeting sustainable, above peer diluted earnings per share growth for its shareholders while progressively serving the banking and financial needs of its customers and communities. The Company’s business strategies include: 1) operate in and expand into growth markets; 2) strive to recruit and retain the best relationship bankers in such markets; 3) consistently deliver the highest levels of customer service; and 4) apply state-of-the-art technology for the convenience of customers. Cascade’s mission statement is to “deliver the best in community banking for the financial well-being of customers and shareholders.”

The Company’s original market was Central Oregon where in past years, according to the Environmental Systems Research Institute, Inc. and based primarily on U.S. Census data, population has grown in the 96^th percentile nationally due largely to in-migration of those seeking the quality of life offered by the region. The Company has grown with the community to a point of holding 26% (excluding broker and internet CDs) deposit market share of the Central Oregon market as of June 30, 2009. In past years, management has sought to augment its banking footprint by expanding into other attractive Northwest markets, including Northwest Oregon, Southern Oregon and Boise/Treasure Valley. At December 31, 2009, loans and deposits in the Northwest and Southern Oregon markets total a combined 38% and 26%, respectively of total Company balances. At December 31, 2009, the Company’s Idaho region branches held loans and deposits of approximately 26% and 20%, respectively, of total Company balances. This expansion furthered the diversification of the Company’s banking business into two states and multiple markets.

Subsidiaries

Bank of the Cascades

The Bank is an Oregon State chartered bank, opened for business in 1977 and now operates 32 branches serving communities in Central, Southwest and Northwest Oregon, as well as in the greater Boise, Idaho area. The Bank offers a broad range of commercial and retail banking services to its customers. Lending activities serve small to medium-sized businesses, municipalities and public organizations, professional and consumer relationships. The Bank provides commercial real estate loans, real estate construction and development loans, commercial and industrial loans as well as consumer installment, line-of-credit, credit card, and home equity loans. It originates and services residential mortgage loans that are typically sold on the secondary market. The Bank provides consumer and business deposit services including checking, money market, and time deposit accounts and related payment services, internet banking, electronic bill payment and remote deposits. In addition, the Bank serves business customer deposit needs with a suite of cash management services. The Bank also provides investment and trust related services to its clientele.

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

Cascade Bancorp Statutory Trusts I, II, III and IV

Cascade Bancorp Statutory Trusts I, II, III and IV are wholly-owned subsidiary trusts of Bancorp formed to facilitate the issuance of pooled trust preferred securities (“trust preferred securities”).The trusts were organized in December 2004 (I), March 2006 (II and III), and June 2006 (IV), respectively, in connection with four offerings of trust preferred securities. For more information regarding Bancorp’s issuance of trust preferred securities, see Note 12 “Junior Subordinated Debentures” to the Company’s audited consolidated financial statements included in Item 7 of this report.

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Employees

The Company views its employees as an integral resource in achieving its strategies and long term goals, and considers its relationship with its employees to be strong. Bancorp has no employees other than its executive officers, who are also employees of the Bank. The Bank had 482 full-time equivalent employees as of December 31, 2009, down from 545 at the prior year-end. This modest decrease primarily resulted from attrition of non-essential staff positions and realignment of positions to respond to current market conditions.

Executive Officers of the Registrant

The names, ages as of December 31, 2009, and positions of the current executive officers of Bancorp are listed below.

Officer’s Name		Age		Position
Patricia Moss		56		President and CEO of Cascade Bancorp since 1998. CEO of Bank of the Cascades since 1998.
Michael Delvin		61		Executive Vice President and Chief Operating Officer of Cascade Bancorp since 1998 and President and Chief Operating Officer of Bank of the Cascades since 2004.
Gregory Newton		58		Executive Vice President, Chief Financial Officer and Secretary of Cascade Bancorp and Bank of the Cascades since 2002.
Peggy Biss		52		Executive Vice President, Chief Human Resources Officer of Cascade Bancorp and Bank of the Cascades since 2002.
Michael Allison		53		Executive Vice President and Chief Credit Officer of Cascade Bancorp and Bank of the Cascades since 2009.

Risk Management

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

Credit risk management objectives include loan policies and underwriting practices designed to prudently manage credit risk, and monitoring processes to identify and manage loan portfolio concentrations. Funding policies are designed to maintain an appropriate volume and mix of core relationship deposits and time deposit balances to minimize liquidity risk while efficiently funding its loan and investment activities. Historically the Company has utilized borrowings from reliable counterparties such as the Federal Home Loan Bank of Seattle (“FHLB”) and the FRB to augment its liquidity. However, pursuant to the terms of the regulatory Order and the written agreement described elsewhere in this report, the Company is presently restricted from renewing brokered deposits. Consequently the Company has been reducing its loan portfolio and managing core deposits to mitigate liquidity risk.

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

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Competition

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

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

Government Policies

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

Supervision and Regulation

Regulatory Order

On August 27, 2009, the Bank entered into an agreement (the “Order”) with the FDIC, its principal federal banking regulator, and the Oregon Division of Finance and Corporate Securities (“DFCS”) which requires the Bank to take certain measures to improve its safety and soundness.

In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the DFCS of the Order against the Bank based on certain findings from an examination of the Bank conducted in February 2009 based upon financial and lending data measured as of December 31, 2008. In entering into the stipulation and consenting to entry of the Order, the Bank did not concede the findings or admit to any of the assertions therein.

Under the Order, the Bank is required to take certain measures to improve its capital position, maintain liquidity ratios, reduce its level of non-performing assets, reduce its loan concentrations in certain portfolios, improve management practices and board supervision and to assure that its reserve for loan losses is maintained at an appropriate level. While the Bank successfully completed several of the measures under the Order, it was unable to implement certain measures in the time frame provided, particularly those related to raising capital levels more fully described below.

Among the corrective actions required are for the Bank to develop and adopt a plan to maintain the minimum capital requirements for a “well-capitalized” bank, including a Tier 1 leverage ratio of at least 10% at the Bank level beginning 150 days from the issuance of the Order. As of December 31, 2009 and through the date of this report, the requirement relating to increasing the Bank’s Tier 1 leverage ratio has not been met.

Bank level capital ratios set forth below are substantially higher than the capital ratios at the Company level. This is mainly because regulatory calculations give different treatment to the $66.5 million in Trust Preferred debt proceeds. At the Company level a substantial percentage of Trust Preferred debt is excluded from regulatory capital; while it is fully included at the Bank level. At December 31, 2009, the Company’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 2.40%, 3.18% and 6.35%,

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respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 4.69%, 6.20% and 7.46%, respectively, which do not meet regulatory benchmarks for “adequately-capitalized”. Regulatory benchmarks for an “adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively; “well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. However, as mentioned above, pursuant to the Order, the Bank is required to maintain a Tier 1 leverage ratio of at least 10% to be considered “well-capitalized.”

In October 2009, the Company filed a registration statement on Form S-1 with the SEC pursuant to which it intended to offer up to $108 million of its Common Stock in a public offering, subject to market and other conditions including consummation of the previously announced private offerings with Mr. David F. Bolger (“Bolger”) and an affiliate of Lightyear Fund II, L.P. (“Lightyear”). On December 23, 2009, the Company announced the withdrawal of the registration statement due to market and other conditions. On February 16, 2010, the Company entered into amendments to the stock purchase agreements with each of Bolger and Lightyear which, among other things, extended the stock purchase agreements to May 31, 2010 in order to provide the Company additional time to implement a capital raise. It remains uncertain whether the Bank will be able to increase its capital to required levels.

On October 24, 2009, the Board adopted a three year strategic plan (the “Three Year Financial Plan”) to satisfy certain requirements of the Order. The Three Year Financial Plan includes required comprehensive plans to address capital, credit, liquidity and profitability, with related strategies, action steps and goals for each, as well as targeted financial outcomes as required by the Order. Certain modifications to that plan have been made to reflect fourth quarter 2009 financial results and trends and revisions as to capital raise strategies and timeframes in response to changing capital market conditions. These revisions have been approved by Board and provided to regulators.

In addition, pursuant to the Order, the Bank must retain qualified management and must notify the FDIC and the DFCS in writing when it proposes to add any individual to its board of directors or to employ any new senior executive officer. On August 25, 2009, the Company received regulatory approval to hire Michael Allison as its Chief Credit Officer. In addition, management has augmented resources in the areas of liquidity management, special assets, credit risk management, and preparation of minutes for board of directors and executive meetings to ensure executives can focus on their priorities. The board of directors also approved a corporate resolution on September 21, 2009 providing each member of management with any and all authority deemed necessary to implement the provisions of the Order. Under the Order the Bank’s board of directors must also increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the Bank’s activities. The board of directors has increased the frequency and duration and the scope and depth of matters covered at its board meetings and the board of directors is prepared to meet more frequently as circumstances require. In addition, the chief executive officer is providing a written report in advance of each meeting articulating progress on each major key risk area so that directors are better informed and prepared for more effective deliberations regarding these topics. Additionally, the board of directors has increased its level of oversight in a number of areas, including review of risk management reports, loan portfolio and credit risk reporting and updates, liquidity updates and capital updates.

The Order further requires the Bank to ensure the level of the reserve for loan losses is maintained at appropriate levels to safeguard the book value of the Bank’s loans and leases, and to reduce the amount of classified loans as of the date of the Order to no more than 75% of capital. On September 21, 2009, the board of directors revised, adopted and implemented its policy for determining the adequacy of the reserve for loan losses to include an assessment of market conditions and other qualitative factors. The Bank’s policy otherwise continues to provide for a comprehensive determination of the adequacy of its reserve for loan losses which is to be reviewed promptly and regularly at least once each calendar quarter and be properly reported, and any deficiency in the allowance must be remedied in the calendar quarter it is discovered, by a charge to current operating earnings. As of December 31, 2009 and through the date of this report, the requirement that the amount of classified loans as of the date of the Order be reduced to no more than 75% of capital has not been met. However, as required by the Order, all assets classified as “Loss” in the Bank’s

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report of examination from February 2009 (the “ROE”) have been charged-off. The Bank has also developed and implemented a process for the review and approval of all applicable asset disposition plans.

The Bank also must adopt and implement plans to reduce delinquent loans and reduce loans and other extensions of credit to borrowers in the troubled commercial real estate market sector. The Order also requires the Bank to develop a written three-year strategic plan, a plan for improving and sustaining earnings, and a plan to preserve liquidity. The Three Year Financial Plan adopted by the board of directors addresses these items.

The Order restricts the Bank from taking certain actions without the consent of the FDIC and the DFCS, including paying cash dividends, and from extending additional credit to certain types of borrowers. The Bank has not paid cash dividends since the third quarter of 2008. In addition, the Bank has put processes and controls in place to ensure extensions of credit, directly or indirectly, are not granted to those who are related to borrowers of loans charged-off or classified as “Loss”, “Substandard” or “Doubtful” in the ROE. The Bank has also acknowledged that neither the loan committee nor the board of directors will approve any extension to a borrower classified “Substandard” or “Doubtful” in the ROE without first collecting all past due interest in cash.

The Order further requires the Bank to maintain a primary liquidity ratio (net cash, net short-term and marketable assets divided by net deposits and short-term liabilities) of at least 15%. During the third quarter of 2009, the Company substantially increased its interest bearing balances held mainly at the FRB. This action was taken to bolster the Bank’s liquidity as part of its contingency planning to help ensure ample and sufficient liquidity under a wide variety of adverse stress-test conditions. On September 21, 2009, the board of directors adopted a written liquidity and funds management policy, and adopted a plan to comply with the Order with respect to liquidity. The implementation of the plan has resulted in a primary liquidity ratio exceeding 15% and a reduction in reliance on non-core funding. At December 31, 2009, the balances held at the FRB were $314.6 million or approximately 14% of total assets and our primary liquidity ratio was 22.5%. This contingent liquidity has the effect of lowering the Company’s net interest income because such assets presently earn only an overnight rate of approximately 0.25%, which is below the cost of deposits. Subject to the restriction on liquidity ratios in the Order, the Company intends to redeploy such assets into higher earning loans and investments at such time as management and the board of directors believe is prudent and within the context of the Order. The board of directors has adopted a liquidity contingency policy and will undertake an ongoing assessment of the adequacy of current and prospective liquidity of the Bank on a monthly basis and will consider results of liquidity stress test analyses at least quarterly.

In order for the Bank to meet the capital requirements of the Order, as of December 31, 2009, the Bank is targeting a minimum of approximately $150 million of additional equity capital. The economic environment in our market areas and the duration of the downturn in the real estate market will continue to have a significant impact on the implementation of the Bank’s business plans. While the Company plans to continue its efforts to aggressively pursue and evaluate opportunities to raise capital, there can be no assurance that such efforts will be successful or that the Bank’s plans to achieve objectives set forth in the Order will successfully improve the Bank’s results of operation or financial condition or result in the termination of the Order from the FDIC and the DFCS. In addition, failure to increase capital levels consistent with the requirements of the Order could result in further enforcement actions by the FDIC and/or DFCS or the placing of the Bank into conservatorship or receivership. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts or classification of liabilities that may result from the outcome of any regulatory action, which would affect the Company’s ability to continue as a going concern.

On October 26, 2009, the Company entered into a written agreement with the FRB and DFCS (the “Written Agreement”), which requires the Company to take certain measures to improve its safety and soundness. Under the Written Agreement, the Company is required to develop and submit for approval, a plan to maintain sufficient capital at the Company and the Bank within 60 days of the date of the Written Agreement. The Company submitted a strategic plan on October 28, 2009 and as of December 31, 2009 and

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through the date of this report the Company is in compliance with the terms of the Written Agreement with the exception of requirements tied to or dependent upon execution of a capital raise.

Federal and State Law

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

Bank Holding Company Regulation

Bancorp is a one-bank holding company within the meaning of the Bank Holding Company Act (“Act”), and as such, is subject to regulation, supervision and examination by the Federal Reserve Bank (“FRB”). Bancorp is required to file annual reports with the FRB and to provide the FRB such additional information as the FRB may require.

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

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

State Regulations Concerning Cash Dividends

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

In addition, the appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. Because of the elevated credit risk and associated loss incurred in 2008 and 2009, the Company suspended payment of cash dividends beginning in the fourth quarter of 2008. Meanwhile regulators have required the Company to seek permission prior to payment of dividends on common stock or on Trust Preferred Securities. In addition, the Bank is required to seek permission prior to payment of cash dividends from the Bank to Bancorp.

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Federal and State Bank Regulation

The Bank is a FDIC insured bank which is not a member of the Federal Reserve System, is subject to the supervision and regulation of the DFCS, respectively, and to the supervision and regulation of the FDIC. These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices.

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

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

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

Capital Adequacy

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

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

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

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

Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3.0% for financial holding companies and national banks that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other financial holding companies and national banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well-capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%. The FDIC has advised the Bank that a minimum leverage ratio of 10.0% was required to be maintained within 150 days of the Order in order for the Bank to be considered “well-capitalized” for regulatory purposes. As of December 31, 2009, and through the date of this report, this requirement has not been met.

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

The U.S. banking and thrift agencies are developing proposed revisions to their existing capital adequacy regulations and standards based on Basel II. A definitive final rule for implementing the advanced approaches of Basel II in the United States, which applies only to certain large or internationally active banking organizations, or “core banks” — defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more, became effective as of April 1, 2008. Other U.S. banking organizations may elect to adopt the requirements of this rule (if they meet applicable qualification requirements), but they are not required to apply them. The rule also allows a banking organization’s primary federal supervisor to determine that the application of the rule would not be appropriate in light of the bank’s asset size, level of complexity, risk profile, or scope of operations. The Company is not required to comply with the advanced approaches of Basel II.

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In July 2008, the agencies issued a proposed rule that would give banking organizations that do not use the advanced approaches the option to implement a new risk-based capital framework. This framework would adopt the standardized approach of Basel II for credit risk, the basic indicator approach of Basel II for operational risk, and related disclosure requirements. While this proposed rule generally parallels the relevant approaches under Basel II, it diverges where United States markets have unique characteristics and risk profiles, most notably with respect to risk weighting residential mortgage exposures. Comments on the proposed rule were due to the agencies by October 27, 2008, but a definitive final rule has not been issued. The proposed rule, if adopted, would replace the agencies’ earlier proposed amendments to existing risk-based capital guidelines to make them more risk sensitive (formerly referred to as the “Basel I-A” approach).

On September 3, 2009, the United States Treasury Department issued a policy statement (the “Treasury Policy Statement”) entitled “Principles for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms.” The Treasury Policy Statement was developed in consultation with the U.S. bank regulatory agencies and contemplates changes to the existing regulatory capital regime that would involve substantial revisions to, if not replacement of, major parts of the Basel I and Basel II capital frameworks and affect all regulated banking organizations and other systemically important institutions. The Treasury Policy Statement calls for, among other things, higher and stronger capital requirements for all banking firms. The Treasury Policy Statement suggested that changes to the regulatory capital framework be phased in over a period of several years. The recommended schedule provides for a comprehensive international agreement by December 31, 2010, with the implementation of reforms by December 31, 2012, although it does remain possible that U.S. bank regulatory agencies could officially adopt, or informally implement, new capital standards at an earlier date.

On December 17, 2009, the Basel Committee issued a set of proposals (the “Capital Proposals”) that would significantly revise the definitions of Tier 1 capital and Tier 2 capital, with the most significant changes being to Tier 1 capital. Most notably, the Capital Proposals would disqualify certain structured capital instruments, such as trust preferred securities, from Tier 1 capital status. The Capital Proposals would also re-emphasize that common equity is the predominant component of Tier 1 capital by adding a minimum common equity to risk-weighted assets ratio and requiring that goodwill, general intangibles and certain other items that currently must be deducted from Tier 1 capital instead be deducted from common equity as a component of Tier 1 capital. The Capital Proposals also leave open the possibility that the Basel Committee will recommend changes to the minimum Tier 1 capital and total capital ratios of 4.0% and 8.0%, respectively.

Concurrently with the release of the Capital Proposals, the Basel Committee also released a set of proposals related to liquidity risk exposure (the “Liquidity Proposals,” and together with the Capital Proposals, the “2009 Basel Committee Proposals”). The Liquidity Proposals have three key elements, including the implementation of (i) a “liquidity coverage ratio” designed to ensure that a bank maintains an adequate level of unencumbered, high-quality assets sufficient to meet the bank’s liquidity needs over a 30-day time horizon under an acute liquidity stress scenario, (ii) a “net stable funding ratio” designed to promote more medium and long-term funding of the assets and activities of banks over a one-year time horizon, and (iii) a set of monitoring tools that the Basel Committee indicates should be considered as the minimum types of information that banks should report to supervisors and that supervisors should use in monitoring the liquidity risk profiles of supervised entities.

Comments on the 2009 Basel Committee Proposals are due by April 16, 2010, with the expectation that the Basel Committee will release a comprehensive set of proposals by December 31, 2010 and that final provisions will be implemented by December 31, 2012. The U.S. bank regulators have urged comment on the 2009 Basel Committee Proposals. Ultimate implementation of such proposals in the U.S. will be subject to the discretion of the U.S. bank regulators and the regulations or guidelines adopted by such agencies may, of course, differ from the 2009 Basel Committee Proposals and other proposals that the Basel Committee may promulgate in the future.

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Prompt Corrective Action

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

Under the regulations adopted by the federal regulatory authorities, a bank will be: (i) ”well-capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) ”adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well-capitalized”; (iii) ”undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) ”significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) ”critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

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

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

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At December 31, 2009, the Company’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 2.40%, 3.18% and 6.35%, respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 4.69%, 6.20% and 7.46%, respectively, which do not meet regulatory benchmarks for “adequately-capitalized”. Regulatory benchmarks for an “adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively; “well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively.

For information regarding the capital ratios and leverage ratios of Bancorp and the Bank see the discussion under the section captioned “Liquidity and Sources of Funds” included in Item 6 Management’s Discussion and Analysis of Financial Condition and Results of Operation and Note 21 — Regulatory Matters in the notes to consolidated financial statements included in Item 7 Financial Statements and Supplementary Data, elsewhere in this report.

Deposit Insurance

The deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating (“CAMELS rating”). The risk matrix utilizes four risk categories which are distinguished by capital levels and supervisory ratings.

In December 2008, the FDIC issued a final rule that raised the then current assessment rates uniformly by 7 basis points for the first quarter of 2009 assessment, which resulted in annualized assessment rates for institutions in the highest risk category (“Risk Category 1 institutions”) ranging from 12 to 14 basis points (basis points representing cents per $100 of assessable deposits). In February 2009, the FDIC issued final rules to amend the DIF restoration plan, change the risk-based assessment system and set assessment rates for Risk Category 1 institutions beginning in the second quarter of 2009. For Risk Category 1 institutions that have long-term debt issuer ratings, the FDIC determines the initial base assessment rate using a combination of weighted-average CAMELS component ratings, long-term debt issuer ratings (converted to numbers and averaged) and the financial ratios method assessment rate (as defined), each equally weighted. The initial base assessment rates for Risk Category 1 institutions range from 12 to 16 basis points, on an annualized basis. After the effect of potential base-rate adjustments, total base assessment rates range from 7 to 24 basis points. The potential adjustments to a Risk Category 1 institution’s initial base assessment rate, include (i) a potential decrease of up to 5 basis points for long-term unsecured debt, including senior and subordinated debt and (ii) a potential increase of up to 8 basis points for secured liabilities in excess of 25% of domestic deposits.

In May 2009, the FDIC issued a final rule which levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. The special assessment was part of the FDIC’s efforts to rebuild the DIF. Deposit insurance expense during 2009 included $1.1 million recognized in the second quarter related to the special assessment.

In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. The Bank received a letter of exemption from the FDIC regarding this prepayment assessment and therefore will continue to be assessed on a quarterly basis.

FDIC insurance expense for the Company totaled $6.9 million, $1.7 million and $0.8 million in 2009, 2008 and 2007, respectively. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation. Under the Federal Deposit Insurance Reform Act of 2005, which became law in 2006, the Bank received a one-time assessment credit of $0.3 million. This credit was utilized to partially offset $1.1 million of assessments during 2007. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has

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engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Temporary Liquidity Guarantee Program

In November 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP was announced by the FDIC in October 2008, preceded by the determination of systemic risk by the Secretary of the Department of Treasury (after consultation with the President), as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012 (extended from June 30, 2012 by subsequent amendment), certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and before October 31, 2009 (extended from June 30, 2009 by subsequent amendment) and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC insured institutions through June 30, 2010 (extended from December 31, 2009, subject to an opt-out provision, by subsequent amendment). The Company elected to participate in both guarantee programs and did not opt out of the six-month extension of the transaction account guarantee program. Coverage under the TLGP was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranged from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage was 10 basis points per quarter during 2009 on amounts in covered accounts exceeding $250,000. During the six-month extension period in 2010, the fee assessment increases to 15 basis points per quarter for institutions that are in Risk Category 1 of the risk-based premium system.

Regulatory Reform

In June 2009, the U.S. President’s administration proposed a wide range of regulatory reforms that, if enacted, may have significant effects on the financial services industry in the United States. Significant aspects of the administration’s proposals that may affect the Company included, among other things, proposals: (i) to reassess and increase capital requirements for banks and bank holding companies and examine the types of instruments that qualify as regulatory capital; (ii) to combine the OCC and the Office of Thrift Supervision into a National Bank Supervisor with a unified federal bank charter; (iii) to expand the current eligibility requirements for financial holding companies such as Bancorp so that the financial holding company must be “well capitalized” and “well managed” on a consolidated basis; (iv) to create a federal consumer financial protection agency to be the primary federal consumer protection supervisor with broad examination, supervision and enforcement authority with respect to consumer financial products and services; (v) to further limit the ability of banks to engage transactions with affiliates; and (vi) to subject all “over-the-counter” derivatives markets to comprehensive regulation.

The U.S. Congress, state lawmaking bodies and federal and state regulatory agencies continue to consider a number of wide-ranging and comprehensive proposals for altering the structure, regulation and competitive relationships of the nation’s financial institutions, including rules and regulations related to the administration’s proposals. Separate comprehensive financial reform bills intended to address the proposals set forth by the administration were introduced in both houses of Congress in the second half of 2009 and remain under review by both the U.S. House of Representatives and the U.S. Senate. In addition, both the U.S. Treasury Department and the Basel Committee have issued policy statements regarding proposed significant changes to the regulatory capital framework applicable to banking organizations as discussed above. The Company cannot predict whether or in what form further legislation or regulations may be adopted or the extent to which the Company may be affected thereby.

Incentive Compensation

On October 22, 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies (the “Incentive Compensation Proposal”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Proposal, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide

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incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Banking organizations are instructed to begin an immediate review of their incentive compensation policies to ensure that they do not encourage excessive risk-taking and implement corrective programs as needed. Where there are deficiencies in the incentive compensation arrangements, they must be immediately addressed.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In addition, on January 12, 2010, the FDIC announced that it would seek public comment on whether banks with compensation plans that encourage risky behavior should be charged at higher deposit assessment rates than such banks would otherwise be charged.

The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain and motivate its key employees.

Other Legislative and Regulatory Initiatives

In addition to the specific proposals described above, from time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to Bancorp or any of its subsidiaries could have a material effect on the business of the Company.

Community Reinvestment Act

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

Financial Privacy

The federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure

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of certain personal information to a nonaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Anti-Money Laundering and the USA Patriot Act

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

Office of Foreign Assets Control Regulation

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

Interstate Banking Legislation

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

Available Information

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

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

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ITEM 1A. RISK FACTORS

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

Before making an investment decision investors should carefully consider the specific risks detailed in this section and other risks facing the Company including, among others, those certain risks, uncertainties and assumptions identified herein by management that are difficult to predict and that could materially affect the Company’s financial condition and results of operations and other risks described in this Form 10-K, the information in Part I, Item 1 “Business,” Part II, Item 6 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s cautionary statements as to “Forward-Looking Statements” contained therein.

Risks Related to Our Business

The Bank was issued a regulatory order from the FDIC and the DCFS which prohibits the Bank from paying dividends to the Company without the consent of the FDIC and the DCFS and places other limitations and obligations on the Bank.

On August 27, 2009, the Bank entered into an agreement with the FDIC, its principal federal banking regulator, and the DFCS which requires the Bank to take certain measures to improve its safety and soundness.

In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the DFCS of a regulatory order against the Bank based on certain findings from an examination of the Bank conducted in February 2009 based upon financial and lending data measured as of December 31, 2008 (the “Order”). In entering into the stipulation and consenting to entry of the order, the Bank did not concede the findings or admit to any of the assertions therein.

Under the Order, the Bank is required to take certain measures to improve its capital position, maintain liquidity ratios, reduce its level of non-performing assets, reduce its loan concentrations in certain portfolios, improve management practices and board supervision and to assure that its Reserve for Loan Losses is maintained at an appropriate level. While the Bank successfully completed several of the measures under the Order as of December 31, 2009, it was unable to implement certain measures in the time frame provided, particularly those related to raising capital levels.

Among the corrective actions required are for the Bank to develop and adopt a plan to maintain the minimum capital requirements for a “well-capitalized” bank, including a Tier 1 leverage ratio of at least 10% at the Bank level beginning 150 days from the issuance of the Order. As of December 31, 2009 and through the date of this report, the requirement relating to increasing the Bank’s Tier 1 leverage ratio has not been met.

In addition, pursuant to the Order, the Bank must retain qualified management and must notify the FDIC and the DFCS in writing when it proposes to add any individual to its board of directors or to employ any new senior executive officer. Under the Order the Bank’s board of directors must also increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the Bank’s activities.

The Order further requires the Bank to ensure the level of the reserve for loan losses is maintained at appropriate levels to safeguard the book value of the Bank’s loans and leases, and to reduce the amount of classified loans as of the date of the Order to no more than 75% of capital. As of December 31, 2009 and through the date of this report, the requirement that the amount of classified loans as of the date of the Order be reduced to no more than 75% of capital has not been met. However, as required by the Order, all assets classified as “Loss” in the Bank’s report of examination from February 2009 (the “ROE”) have been charged-off. The Bank has also developed and implemented a process for the review and approval of all applicable asset disposition plans.

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The Order restricts the Bank from taking certain actions without the consent of the FDIC and the DFCS, including paying cash dividends, and from extending additional credit to certain types of borrowers.

The Order further requires the Bank to maintain a primary liquidity ratio (net cash, net short-term and marketable assets divided by net deposits and short-term liabilities) of at least 15%.

The Bank was required to implement these measures under various time frames, all of which have expired. While the Bank successfully completed several of the measures, it was unable to implement certain measures in the time frame provided, particularly those related to raising capital levels. In order for the Bank to meet the 10% capital requirement of the Order, as of December 31, 2009, the Bank is targeting a minimum of approximately $150 million of additional equity capital. The economic environment in our market areas and the duration of the downturn in the real estate market will continue to have a significant impact on the implementation of the Bank’s business plans. While the Company plans to continue its efforts to aggressively pursue and evaluate opportunities to raise capital, there can be no assurance that such efforts will be successful or that the Bank’s plans to achieve objectives set forth in the Order will successfully improve the Bank’s results of operation or financial condition or result in the termination of the Order from the FDIC and the DFCS. In addition, failure to increase capital levels consistent with the requirements of the Order could result in further enforcement actions by the FDIC and/or DFCS or the placing of the Bank into conservatorship or receivership.

On October 26, 2009, the Company entered into a written agreement with the FRB and DFCS (the “Written Agreement”), which requires the Company to take certain measures to improve its safety and soundness. Under the Written Agreement, the Company is required to develop and submit for approval, a plan to maintain sufficient capital at the Company and the Bank within 60 days of the date of the Written Agreement. The Company submitted a strategic plan on October 28, 2009 and as of December 31, 2009 and through the date of this report the Company is in compliance with the terms of the Written Agreement with the exception of requirements tied to or dependent upon execution of a capital raise.

We have failed to comply with certain provisions of our regulatory order.

The Order to which the Bank is subject requires, among other obligations described elsewhere in this report, that we increase our regulatory capital and reduce our troubled assets. Our obligation to increase regulatory capital was subject to a deadline of January 26, 2010. As of the date of this report, we have been unable to raise capital or achieve this goal by other means.

At December 31, 2009, the Company’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 2.40%, 3.18% and 6.35%, respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 4.69%, 6.20% and 7.46%, respectively, which do not meet regulatory benchmarks for “adequately-capitalized”. Regulatory benchmarks for an “adequately-capitalized” designation are 4%, 4% and 8% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively; “well-capitalized” benchmarks are 5%, 6%, and 10% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. However, as mentioned above, pursuant to the Order, the Bank is required to maintain a Tier 1 leverage ratio of at least 10% to be considered “well-capitalized.” We can provide no assurances that we will be able to raise additional capital in the foreseeable future given the present condition of financial markets. If we fail to raise additional capital or take other measures that will cause our regulatory capital levels to increase, regulators may take additional measures that could include receivership or a forced divestiture of our assets and deposits. Any such measures, if taken, may have a material adverse effect upon the value of our common stock.

Because of our condition and uncertainties as to the implementation of management plans there is doubt about our ability to continue as a going concern.

The consolidated financial statements have been prepared based upon the Company’s judgment that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Accordingly, the consolidated financial statements do not include any adjustments to reflect the possible future effects that may result from the outcome of various uncertainties as discussed below.

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The effects of the severe economic contraction caused the Company to incur net losses for the years ended December 31, 2009 and 2008. The Company and the Bank do not currently meet the definition of an “adequately capitalized institution” and are thus operating under significant regulatory restrictions including a requirement to achieve certain capital requirements, enhance liquidity and improve the credit quality of the Bank’s assets (see Note 21). In response, the Company has implemented plans to meet the requirements of the August 27, 2009 agreement with the FDIC, its principal federal banking regulator, and the DFCS which requires the Bank to take certain measures to improve its safety and soundness (the Order) including an ongoing effort to raise capital. Additional plans and actions to preserve existing capital and to conserve liquidity include (1) improve asset quality and reduce non performing asset totals; (2) reduce loan portfolio totals and thereby reduce required capital; (3) retain core deposits while reducing brokered deposits; and (4) continued reduction of discretionary expenses.

Based upon its plans and expectations management believes the Company has sufficient capital and liquidity to achieve realization of assets and the discharge of liabilities in the normal course of business. However, uncertainties exist as to future economic conditions and regulatory actions, and the successful implementation of plans to improve the Company’s financial condition and meet the requirements of the Order. These uncertainties raise doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the lack of success in implementing its plans or the occurrence of other events that could adversely affect its condition or operations.

The Company expects to continue to be adversely affected by current economic and market conditions.

The Company’s business is closely tied to the economies of Idaho and Oregon in general and is particularly affected by the economies of Central, Southern and Northwest Oregon, as well as the Greater Boise, Idaho area. Since mid-2007 the country has experienced a significant economic downturn. Business activity across a wide range of industries and regions has been negatively impacted and local governments and many businesses are being challenged due to the lack of consumer spending and the lack of liquidity in the credit markets. Unemployment has increased significantly in Idaho and Oregon, and may remain elevated for some time.

The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where the Company operates. The current downturn in the economy and declining real estate values have had a direct and adverse effect on the financial condition and results of operations for the Company. This is particularly evident in the residential land development and residential construction segments of the Bank’s loan portfolio. Developers or home builders whose cash flows are dependent on sale of lots or completed residences have experienced reduced ability to service their loan obligations and the market value of underlying collateral has decreased dramatically. The impact on the Company has been an elevated level of impaired loans, an associated increase in provisioning expense and charge-offs for the Company, leading to a net loss for 2008 and 2009. It is expected that the level of provisioning expense and charge-offs will significantly decrease in 2010 as compared to 2009.

In order to reduce our exposure in the residential land development and residential construction development category of loans the Company has formalized collateral valuation practices to ensure timely recognition of asset collateral support, redefined the roles and responsibility of key credit risk officers to focus on problem portfolios, designed and executed multiple stress test scenarios to identify problem assets and potential problem assets and initiated weekly asset review on residential land development and residential construction development problem assets. The Company has also improved documentation standards to verify borrower’s financial condition and collateral values, improved management information systems and internal controls to track performance and value of such portfolios, created a Special Assets Group to manage and monitor the residential land development and residential construction development portfolio and created an oversight committee to review resolution and sales of the construction/lot/land development portfolio. In addition, the Company has significantly reduced loan limits in the portfolio.

On August 25, 2009, the Company replaced its Chief Credit Officer, and we have hired an Other Real Estate Owned specialist. The Company continues to re-evaluate and re-appraise the properties in the

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residential land development and residential construction development portfolio on a frequent basis, and to track sales for contingent properties to monitor sales values.

In addition, the Company has aggressively collected on guarantees and improved overall collection procedures. The Company has also aggressively pursued portfolio exposure reduction through active curtailment of additional advances on existing facilities when able and proactively recognized and resolved problem exposures through, among other things, write-offs, write-downs, and note sales.

The Company also established clear guidance on asset concentration targets as a percentage of capital for the residential land development and residential construction development category of loans which we expect will result in much lower exposure in the future.

In 2009 deposits stabilized and together with loan reductions enabled the Company to build a substantial contingent liquidity reserve. However, the Company’s condition, regulatory restrictions and ongoing economic uncertainty may affect deposit resources and access to borrowings in the future. These conditions may also increase the Company’s need for additional capital which may not be available on terms acceptable to the Company, if at all.

The banking industry and the Company operate under certain regulatory requirements that are expected to further impair our revenues, operating income and financial condition.

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

The Company has a significant concentration in real estate lending. The sustained downturn in real estate within the Company’s markets has had and is expected to continue to have a negative impact on the Company.

Approximately 70% of the Bank’s loan portfolio at December 31, 2009 consisted of loans secured by real estate located in Oregon and Idaho. Declining real estate values and a severe constriction in the availability of mortgage financing have negatively impacted real estate sales, which has resulted in customers’ inability to repay loans. In addition, the value of collateral underlying such loans has decreased materially. During 2008 and 2009, we experienced significant increases in non-performing assets relating to our real estate lending, primarily in our residential real estate portfolio. We will see a further increase in non-performing assets if more borrowers fail to perform according to loan terms and if we take possession of real estate properties. Additionally, if real estate values continue to further decline, the value of real estate collateral securing our loans could be significantly reduced. If any of these effects continue or become more pronounced, loan losses will increase more than we expect and our financial condition and results of operations would be adversely impacted.

In addition, the Bank’s loans in other real estate portfolios including commercial construction and commercial real estate have experienced and are expected to continue to experience reduced cash flow and reduced collateral value. Approximately 44% of the Bank’s loan portfolio at December 31, 2009 consisted of loans secured by commercial real estate. Nationally, delinquencies in these types of portfolios are increasing significantly. While our portfolios of these types of loans have not been as adversely impacted as residential loans, there can be no assurance that the credit quality in these portfolios will not decrease significantly and may result in losses that exceed the estimates that are currently included in the reserve for credit losses, which could adversely affect the Company’s financial conditions and results of operations. See also “Financial Condition — Loan Portfolio and Credit Quality” in Item 6 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report for further information.

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

The Company maintains a reserve for credit losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable incurred losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; industry concentrations and other unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the reserve for credit losses inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. Increases in nonperforming loans have a significant impact on our allowance for loan losses. Generally, our non-performing loans and assets reflect operating difficulties of individual borrowers resulting from weakness in the economy of the markets we serve. Our reserve for loan losses was 23.2% and 29.6% of NPAs at December 31, 2009 and 2008, respectively. If real estate markets deteriorate further, we expect that we may continue to experience increased delinquencies and credit losses. While economic conditions have stabilized on a national level, conditions could worsen, potentially resulting in higher delinquencies and credit losses. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan related losses.

Representatives of the Federal Reserve Board, the FDIC, and the DFCS, our principal regulators, have publicly expressed concerns about the banking industry’s lending practices and have particularly noted concerns about real estate-secured lending. Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and our allowance for loan losses. Additional provision for loan losses or charge-off of loans could adversely impact our results of operations and financial condition. See also “Financial Condition — Loan Portfolio and Credit Quality” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.

The Company’s reserve for credit losses may not be adequate to cover future loan losses, which could adversely affect our earnings.

The Company maintains a reserve for credit losses in an amount that we believe is adequate to provide for losses inherent in our portfolio. While we strive to carefully monitor credit quality and to identify loans that may become non-performing, at any time there are loans in the portfolio that could result in losses that have not been identified as non-performing or potential problem loans. Estimation of the allowance requires us to make various assumptions and judgments about the collectability of loans in our portfolio. These assumptions and judgments include historical loan loss experience, current credit profiles of our borrowers, adverse situations that have occurred that may affect a borrower’s ability to meet its financial obligations, the estimated value of underlying collateral and general economic conditions. Determining the appropriateness of the reserve is complex and requires judgment by management about the effect of matters that are inherently uncertain. We cannot be certain that we will be able to identify deteriorating loans before they become non-performing assets, or that we will be able to limit losses on those loans that have been identified. As a result, future significant increases to the reserve for credit losses may be necessary. Additionally, future increases to the reserve for credit losses may be required based on changes in the composition of the loans comprising our loan portfolio, deteriorating values in underlying collateral (most of which consists of real estate in the markets we serve) and changes in the financial condition of borrowers, such as may result from changes in economic conditions, or as a result of incorrect assumptions by management in determining the reserve for credit loss. Additionally, banking regulators, as an integral part of their supervisory function, periodically review our reserve for credit losses. These regulatory agencies may require us to increase the reserve for credit losses which could have a negative effect on our financial condition and results of operations.

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

Liquidity is essential to our business. Our primary funding source is commercial and retail deposits of our customers, brokered deposits, advances from the FHLB, FRB discount window and other borrowings to fund our operations. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future depending on adverse results of operations, financial condition or capital ratings or regulatory restrictions. An inability to raise funds through traditional deposits, brokered deposits, borrowings, the sale of securities or loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. At the onset of the economic downturn in 2007 and through 2008 and early 2009 core deposits declined because customers in general experienced reduced funds available for core deposits. As a result, the amount of our wholesale funding increased. Core deposits stabilized in late 2009, and the Company has established a significant liquidity reserve as of December 31, 2009. However our ability to borrow or attract and retain deposits in the future could be adversely affected by our financial condition, regulatory restrictions, or impaired by factors that are not specific to us, such as FDIC insurance changes including the expiration of TAG program, or further disruption in the financial markets or negative views and expectations about the prospects for the banking industry. We are presently restricted from accepting additional brokered deposits, including the Bank’s reciprocal Certificate of Deposit Account Registry Service (CDARs) program. As of December 31, 2009, we had outstanding brokered deposits totaling $116.5 million, 100% of which will mature in 2010.

The Bank’s primary counterparty for borrowing purposes is the FHLB, and liquid assets are mainly balances held at the FRB. Available borrowing capacity has been reduced as we drew on our available sources. Borrowing capacity from the FHLB of Seattle or FRB may fluctuate based upon the condition of the bank or the acceptability and risk rating of loan collateral, and counterparties could adjust discount rates applied to such collateral at their discretion, and the FRB or FHLB of Seattle could restrict or limit our access to secured borrowings. As with many community banks, correspondent banks have withdrawn unsecured lines of credit or now require collateralization for the purchase of fed funds on a short-term basis due to the present adverse economic environment. In addition, collateral pledged against public deposits held at the Bank has been increased under Oregon law to more than 110% of such balances. The Bank is a public depository and, accordingly, accepts deposit funds that belong to, or are held for the benefit of, the State of Oregon, political subdivisions thereof, municipal corporations and other public funds. In accordance with applicable state law, in the event of default of one bank, all participating banks in the state collectively assure that no loss of funds is suffered by any public depositor. Generally in the event of default by a public depository, the assessment attributable to all public depositories is allocated on a pro rata basis in proportion to the maximum liability of each public depository as it existed on the date of loss. The maximum liability is dependent upon potential changes in regulations, bank failures and the level of public fund deposits, all of which cannot be presently determined. Liquidity also may be affected by the Bank’s routine commitments to extend credit. These circumstances have the effect of reducing secured borrowing capacity.

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

The Company is seeking additional capital to improve capital ratios, but capital may not be available when it is needed.

The Company is required by federal and state regulatory authorities, including under the obligations placed on the Bank by the Order, to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to offset elevated risks arising from adverse economic conditions, support our business, finance acquisitions, if any, or we may otherwise elect to raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic

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conditions and a number of other factors, many of which are outside our control, and on our financial performance. In that regard, current market conditions and investor uncertainty have made it very challenging for financial institutions in general to raise capital. Market conditions and investor sentiment prevented the Company from raising capital through public and private offerings in the fourth quarter of 2009. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects, in addition to any possible action discussed above, that the FDIC or DFCS could take in connection with a failure to comply with or a violation of the Order.

The Company may not be able to obtain such financing or it may be only available on terms that are unfavorable to the Company and its shareholders. In the case of equity financings, dilution to the Company’s shareholders could result and securities issued in such financings may have rights, preferences and privileges that are senior to those of the Company’s current shareholders. Under the Company’s articles of incorporation, the Company may issue preferred equity without first obtaining shareholder approval. In addition, debt financing may include covenants that restrict our operations, and interest charges would detract from future earnings Further, in the event additional capital is not available on acceptable terms through available financing sources, the Company may instead take additional steps to preserve capital, including reducing loans outstanding, selling certain assets and increasing loan participations. The Company reduced its dividend to $.01 in the third quarter of 2008, and eliminated its cash dividend at year end 2008 as part of its effort to preserve capital under current adverse economic conditions. There can be no assurance that dividends on our common stock will be paid in the future, and if paid, at what amount.

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

Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property. We foreclose on and take title to the real estate serving as collateral for many of our loans as part of our business. At December 31, 2009, we had OREO with a carrying value of $29.6 million relating to loans originated in the raw land and land development portfolio and to a lesser extent, other loan portfolios. Increased OREO balances lead to greater expenses as we incur costs to manage and dispose of the properties. We expect that our earnings in 2010 will continue to be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, and other costs associated with property ownership, as well as by the funding costs associated with assets that are tied up in OREO. Moreover, our ability to sell OREO properties is affected by public perception that banks are inclined to accept large discounts from market value in order to quickly liquidate properties. Any decrease in market prices may lead to OREO write downs, with a corresponding expense in our statement of operations. We evaluate OREO property values periodically and write down the carrying value of the properties if the results of our evaluations require it. Further write-downs on OREO or an inability to sell OREO properties could have a material adverse effect on our results of operations and financial condition.

The Company is not in compliance with certain continued listing requirements of the NASDAQ Stock Market.

On December 17, 2009, the Company received a notice letter from The NASDAQ Stock Market regarding its non-compliance with Rule 5550(a)(2) of the NASDAQ Marketplace Rules with respect to the minimum bid price requirement of $1.00 per share. The Company’s common stock has failed to meet the $1.00 minimum bid price for 30 consecutive business days. In accordance with Rule 5810(b) of the NASDAQ Marketplace Rules, the Company has a 180 calendar day grace period, or until June 15, 2010, to comply with the minimum bid price requirement. To regain compliance, the bid price must meet or exceed $1.00 per share for at least ten consecutive business days prior to June 15, 2010. The Company will continue to evaluate its options with respect to meeting this listing qualification within the time period required. If the Company does not regain compliance with the minimum bid price rule by June 15, 2010, NASDAQ will again provide written notification that the Company’s securities are subject to potential delisting. At that time, the Company may appeal the delisting determination to a NASDAQ listing qualifications hearings panel. A delisting of the Company’s common stock from the NASDAQ Stock Market would have a material adverse effect on its financial condition.

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

The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. Current economic conditions have increased bank failures and expectations for further failures, in which case the FDIC ensures payments of deposits up to insured limits from the Deposit Insurance Fund. Either an increase in the risk category of the Bank or adjustments to the base assessment rates, and/or a significant special assessment could have a material adverse effect on our earnings. In addition, the deposit insurance limit on FDIC deposit insurance coverage generally has increased to $250,000 through December 31, 2013. These developments will cause the premiums assessed on us by the FDIC to increase and will materially increase our noninterest expense.

On February 27, 2009, the FDIC issued a final rule that revises the way the FDIC calculates federal deposit insurance assessment rates beginning in the second quarter of 2009. Under the new rule, the FDIC first establishes an institution’s initial base assessment rate. This initial base assessment rate will range, depending on the risk category of the institution, from 12 to 45 basis points. The FDIC will then adjust the initial base assessment (higher or lower) to obtain the total base assessment rate. The adjustments to the initial base assessment rate will be based upon an institution’s levels of unsecured debt, secured liabilities, and certain brokered deposits. The total base assessment rate will range from 7 to 77.5 basis points of the institution’s deposits.

Additionally, on May 22, 2009, the FDIC announced a final rule imposing a special emergency assessment as of June 30, 2009, payable September 30, 2009, of 5 basis points on each FDIC insured deposit any institution’s assets, less Tier 1 capital, as of June 30, 2009, but the amount of the assessment is capped at 10 basis points of domestic deposits. The final rule also allows the FDIC to impose additional special emergency assessments on or after September 30, 2009, of up to 5 basis points per quarter, if necessary to maintain public confidence in FDIC insurance. These higher FDIC assessment rates and special assessments will have an adverse impact on our results of operations. We are unable to predict the impact in future periods; including whether and when additional special assessments will occur, in the event the economic crisis continues. However, the FDIC has indicated that for now it will not impose additional special assessments but instead is requiring institutions to prepay certain assessments.

On November 12, 2009, the FDIC issued a final rule pursuant to which all insured depository institutions were required to prepay on December 31, 2009 their estimated assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Under the rule, however, the FDIC has the authority to exempt an institution from the prepayment requirements if the FDIC determines that the prepayment would adversely affect the safety and soundness of the institution. The Bank has received an exemption from the prepayment requirements. The Bank will continue to pay its insurance assessments on a quarterly basis.

We also participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLGP, for noninterest-bearing transaction deposit accounts. Banks that participate in the TLGP’s noninterest-bearing transaction account guarantee program in 2009 generally paid the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. The guarantee program has been extended through December 31, 2013. Beginning in 2010, participants will be assessed at an annual rate of between 15 and 25 basis points on the amounts in the guaranteed accounts in excess of the amounts covered by the FDIC deposit insurance. To the extent that these TLGP assessments are insufficient to cover any loss or expenses arising from the TLGP program, the FDIC is authorized to impose an emergency special assessment on all FDIC-insured depository institutions. The FDIC has authority to impose charges for the TLGP program upon depository institution holding companies as well. These charges, along with the full utilization of our FDIC deposit insurance assessment credit in early 2009, will cause the premiums and TLGP assessments charged by the FDIC to increase. These actions have significantly increased our noninterest expense in 2009 and will likely do so for the foreseeable future.

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Changes in interest rates could adversely impact the Company.

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

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

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

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

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

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

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

We continually encounter technological change.

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

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

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

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

Cascade Bancorp relies on dividends from the Bank.

Cascade Bancorp is a separate legal entity from the Bank and substantially all of our revenues are derived from Bank dividends. These dividends may be limited by certain federal and state laws and regulations. In addition, any distribution of assets of the Bank upon a liquidation or reorganization would be subject to the prior liens of the Bank’s creditors. Because of the elevated credit risk and associated loss incurred in 2008 and 2009, regulators have required the Company to seek permission prior to payment of dividends on common stock or on Trust Preferred Securities. In addition, pursuant to the Order, the Bank is required to seek permission prior to payment of cash dividends on its common stock. The Company cut its dividend to zero in the fourth quarter of 2008 and deferred payments on its Trust Preferred Securities beginning in the second quarter of 2009. We do not expect the Bank to pay dividends to Cascade Bancorp for the foreseeable future. Cascade Bancorp does not expect to pay any dividends for the foreseeable future. Cascade Bancorp is unable to pay dividends on its common stock until it pays all accrued payments on its Trust Preferred Securities. As of October 31, 2009, we had $66.5 million of TPS outstanding with a weighted average interest rate of 2.83%. The Company elected to defer payments on its TPS beginning in the second quarter of 2009 and as of October 31, 2009, accrued dividends were $1.38 million. If the Bank is unable to pay dividends to Cascade Bancorp in the future, Cascade Bancorp may not be able to pay dividends on its stock or pay interest on its debt, which could have a material adverse effect on the Company’s financial condition and results of operations.

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

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

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

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

The Company’s investment portfolio securities are mainly mortgage backed securities guaranteed by government sponsored enterprises such as FNMA, GNMA, FHLMC and FHLB, or otherwise backed by FHA/VA guaranteed loans; however, volatility or illiquidity in financial markets may cause certain investment securities held within our investment portfolio to become less liquid. This coupled with the uncertainty surrounding the credit risk associated with the underlying collateral or guarantors may cause material

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discrepancies in valuation estimates obtained from third parties. Volatile market conditions may affect the value of securities through reduced valuations due to the perception of heightened credit and liquidity risks in addition to interest rate risk typically associated with these securities. There can be no assurance that the declines in market value associated with these disruptions will not result in impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our results of operations, equity, and capital ratios.

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and prospects could be adversely affected.

FNMA is no longer allowing the Bank to sell its mortgages to FNMA and may potentially force the sale of our MSR’s

On November 13, 2009, FNMA informed the Bank that as a result of the Bank’s capital ratios falling below contractual requirements the Bank no longer qualified as a FNMA designated mortgage loan seller or servicer and the Bank had until December 31, 2009 to improve its capital ratios to meet FNMA’s requirements. As of December 31, 2009, the Bank had not met such requirements, and, accordingly, FNMA has terminated the Bank’s rights to originate and sell mortgage loans directly to FNMA. In addition, FNMA now has the option to terminate its mortgage servicing agreement with the Bank, upon which occurrence the Bank would no longer be allowed to service FNMA loans in the future. Management is in the process of discussing such issues with FNMA and has been evaluating the prospective impact of this development. Possible outcomes include a reduction of the Company’s mortgage banking and mortgage servicing revenues in the future and sale or forced transfer of its mortgage servicing business to a third-party by FNMA. As a result of the actions by FNMA, the Company anticipates that the majority of mortgage loans originated in future periods will be sold to other third-parties and that the Bank will not retain servicing rights. The Company expects that this may result in a significant decrease to future net mortgage servicing income. Management believes that under the circumstances, FNMA will provide the Company with sufficient time to accomplish an orderly disposition of its MSRs. However, there can be no assurance that FNMA will provide for an orderly process nor that a reduction of mortgage banking revenues or possible impairment of MSRs will not occur. Because the estimated fair value of the Company’s MSRs exceeds book value at December 31, 2009, and because management believes it is unlikely FNMA will preemptively transfer the Company’s MSRs to a third-party, no impairment adjustment has been made in connection with this issue as of December 31, 2009. In addition, no valuation allowance for MSRs was recorded as of December 31, 2008 and 2007.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

At December 31, 2009, the Company conducted full-service community banking through 32 branches, including eleven in Central Oregon, three in the Salem/Keizer area, five in Southern Oregon, one office in Portland, and 12 branches serving the greater Boise area.

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

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

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

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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PART II

ITEM 4. (Removed and Reserved.)

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

Cascade Bancorp common stock trades on the NASDAQ Capital Market under the symbol “CACB.” The following table sets forth, for the quarters shown, the range of high and low sales prices of our common stock on the NASDAQ Capital Market and the cash dividends declared on the common stock.

On December 17, 2009, the Company received a notice letter from The NASDAQ Stock Market regarding its non-compliance with Rule 5550(a)(2) of the NASDAQ Marketplace Rules with respect to the minimum bid price requirement of $1.00 per share. The Company’s common stock has failed to meet the $1.00 minimum bid price for 30 consecutive business days. The notice letter has no immediate effect on the listing of the Company’s common stock on The NASDAQ Capital Market. In accordance with Rule 5810(b) of the NASDAQ Marketplace Rules, the Company has a 180 calendar day grace period, or until June 15, 2010, to comply with the minimum bid price requirement. To regain compliance, the bid price must meet or exceed $1.00 per share for at least ten consecutive business days prior to June 15, 2010. If the Company does not regain compliance with the minimum bid price rule by June 15, 2010, NASDAQ will again provide written notification that the Company’s securities are subject to potential delisting. At that time, the Company may appeal the delisting determination to a NASDAQ listing qualifications hearings panel.

The sales price and cash dividends shown below are retroactively adjusted for stock dividends and splits and are based on actual trade statistical information provided by the NASDAQ Capital Market for the periods indicated. Prices do not include retail mark-ups, mark-downs or commissions. As of December 31, 2009 we had approximately 28,174,163 shares of common stock outstanding, held of record by approximately 479 holders of record. The last reported sales price of our common stock on the NASDAQ Capital Market on March 5, 2010 was $0.57 per share.

Quarter Ended		High				Low				Dividend per Share
2009
December 31		$	1.23			$	0.68				N/A
September 30		$	2.39			$	1.05				N/A
June 30		$	2.84			$	1.26				N/A
March 31		$	7.25			$	0.61				N/A
2008
December 31		$	10.00			$	5.07			$	0.01
September 30		$	18.50			$	6.26			$	0.01
June 30		$	10.35			$	7.43			$	0.10
March 31		$	14.48			$	9.01			$	0.10

Dividend Policy

The amount of future dividends will depend upon our earnings, financial conditions, capital requirements and other factors and will be determined by our board of directors. The appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. Because of the elevated credit risk and associated loss incurred in 2008, the Company cut its dividend to zero in the fourth quarter of 2008 and deferred payments on its Trust Preferred Securities in the second quarter of 2009. Cascade Bancorp is unable to pay dividends on its common stock until it makes all accrued payments on its Trust Preferred Securities. Pursuant to the Order, the Bank cannot pay dividends on its common stock without the permission of its regulators. There can be no assurance as to future dividends because they are dependent on the Company’s future earnings, including dividends from the Bank, capital requirements and financial conditions.

The following table sets forth Information regarding securities authorized for issuance under the Company’s equity plans as of December 31, 2009. Additional information regarding the Company’s equity plans is presented in Note 19 of the Notes to Consolidated Financial Statements included in Item 7 of this report.

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Plan Category		# of Securities to Be Issued on Exercise of Outstanding Options (a)				Weighted Average Exercise Price of Outstanding Options (b)				# of Securities Remaining Available for Future Issuance Under Plan (Excluding Securities in Column (a)(c)
Equity compensation plans approved by security holders			990,618			$	12.18				1,353,217
Equity compensation plans not approved by security holders			None				N/A				N/A
Total			990,618			$	12.18				1,353,217

Five-Year Stock Performance Graph

The graph below compares the yearly percentage change in the cumulative shareholder return on the Company’s common stock during the five years ended December 31, 2009 with: (i) the Total Return Index for the NASDAQ Stock Market (U.S. Companies) as reported by the Center for Research in Securities Prices; (ii) the Total Return Index for NASDAQ Bank Stocks as reported by the Center for Research in Securities Prices; and (iii) a peer-group of publicly traded commercial banks. This comparison assumes $100.00 was invested on December 31, 2004, in the Company’s common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and adjusted to give retroactive effect to material changes resulting from stock dividends and splits.

Total Return Performance

		Period Ending
Index		12/31/04				12/31/05				12/31/06				12/31/07				12/31/08				12/31/09
Cascade Bancorp			100.00				115.63				197.34				90.08				44.60				4.49
NASDAQ Composite			100.00				101.37				111.03				121.92				72.49				104.31
SNL Bank NASDAQ			100.00				96.95				108.85				85.45				62.06				50.34
Cascade Bancorp 2009 Peer Group*			100.00				112.11				141.82				100.91				45.33				31.19

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ITEM 6. SELECTED FINANCIAL DATA

The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements as of and for the five years ended December 31, 2009. The following consolidated financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in this report. All of the Company’s acquisitions during the five years ended December 31, 2009 were accounted for using the purchase method. Accordingly, the operating results of the acquired companies are included with the Company’s results of operations since their respective dates of acquisition.

(In thousands, except per share data and ratios; unaudited) Balance Sheet Data (at period end)		Years Ended December 31,
		2009				2008				2007				2006				2005
Investment securities		$	135,763			$	109,691			$	87,015			$	106,923			$	59,286
Loans, gross			1,547,676				1,956,184				2,041,478				1,887,263				1,049,704
Reserve for loan losses			37,586				47,166				33,875				23,585				14,688
Loans, net			1,510,090				1,909,018				2,007,603				1,863,678				1,035,016
Total assets			2,193,877				2,278,307				2,394,492				2,249,314				1,269,671
Total deposits			1,815,348				1,794,611				1,667,138				1,661,616				1,065,379
Non-interest bearing deposits			394,583				364,146				435,503				509,920				430,463
Total common shareholders’ equity (book)(1)			45,067				135,239				275,286				261,076				104,376
Tangible common shareholders’ equity (tangible)(2)			38,679				127,318				160,737				144,947				97,653
Income Statement Data
Interest income		$	106,811			$	137,772			$	171,228			$	138,597			$	72,837
Interest expense			34,135				42,371				62,724				40,321				13,285
Net interest income			72,676				95,401				108,504				98,276				59,552
Loan loss provision			113,000				99,593				19,400				6,000				3,050
Net interest income (loss) after loan loss provision			(40,324	)			(4,192	)			89,104				92,276				56,502
Noninterest income			21,626				19,991				21,225				18,145				13,069
Noninterest expense(3)			93,967				173,671				62,594				52,953				34,201
Income (loss) before income taxes			(112,665	)			(157,872	)			47,735				57,468				35,370
Provision (credit) for income taxes			(19,585	)			(23,306	)			17,756				21,791				12,934
Net income (loss)			(93,080	)			(134,566	)			29,979				35,677				22,436
Share Data(1)
Basic earnings (loss) per common share		$	(3.32	)		$	(4.82	)		$	1.06			$	1.37			$	1.06
Diluted earnings (loss) per common share		$	(3.32	)		$	(4.82	)		$	1.05			$	1.34			$	1.03
Book value per common share		$	1.60			$	4.81			$	9.82			$	9.22			$	4.93
Tangible value per common share		$	1.37			$	4.53			$	5.73			$	5.11			$	4.61
Cash dividends paid per common share		$	0.00			$	0.22			$	0.37			$	0.31			$	0.26
Ratio of dividends declared to net income			0.00	%			-4.56	%			34.86	%			22.65	%			24.79	%
Basic Average shares outstanding			28,001				27,936				28,243				26,062				21,070
Fully Diluted average shares outstanding			28,001				27,936				28,577				26,664				21,780
Key Ratios
Return on average total shareholders’ equity (book)			-83.39	%			-47.90	%			10.92	%			17.48	%			24.04	%
Return on average total shareholders’ equity (tangible)			-89.12	%			-80.51	%			18.83	%			29.81	%			25.93	%
Return on average total assets			-4.06	%			-5.58	%			1.28	%			1.86	%			1.97	%
Pre-tax pre provision return on average assets			0.01	%			1.94	%			2.87	%			3.31	%			3.37	%
Net interest spread			3.11	%			3.90	%			4.20	%			4.65	%			4.85	%
Net interest margin			3.43	%			4.44	%			5.21	%			5.73	%			5.67	%
Total revenue (net int inc + non int inc)		$	94,300			$	115,153			$	129,644			$	116,431			$	72,621
Efficiency ratio(3)			99.65	%			150.61	%			48.22	%			45.49	%			47.10	%

Notes:

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(In thousands, except per share data and ratios; unaudited)		Years Ended December 31,
		2009				2008				2007				2006				2005
Credit Quality Ratios
Reserve for credit losses		$	38,290			$	48,205			$	37,038			$	26,798			$	14,688
Reserve to ending total loans			2.47	%			2.46	%			1.81	%			1.42	%			1.40	%
Non-performing assets(4)		$	161,719			$	173,200			$	55,681			$	3,005			$	40
Non-performing assets to total gross loans and OREO			10.25	%			7.94	%			2.71	%			0.16	%			0.00	%
Non-performing assets to total assets			7.37	%			7.00	%			2.33	%			0.13	%			0.00	%
Delinquent loans >30 days		$	10,085			$	6,249			$	9,622			$	3,397			$	205
Delinquent >30 days to total loans			0.65	%			0.33	%			0.47	%			0.18	%			0.02	%
Net Charge off’s (NCOs)		$	122,580			$	86,302			$	9,110			$	1,282			$	773
Net loan charge-offs (annualized)			6.81	%			4.20	%			0.46	%			0.08	%			0.08	%
Provision for loan losses to NCOs			92	%			115	%			213	%			468	%			395	%
Mortgage Activity
Mortgage Originations		$	177,206			$	121,663			$	170,095			$	176,558			$	158,775
Total Servicing Portfolio (sold loans)		$	542,905			$	512,163			$	493,969			$	494,882			$	498,668
Capitalized Mortgage Servicing Rights (MSR’s)		$	3,947			$	3,605			$	3,756			$	4,096			$	4,439
Capital Ratios
Bancorp
Shareholders’ equity to ending assets			2.05	%			5.94	%			11.50	%			11.61	%			8.22	%
Leverage ratio(4)			2.40	%			8.19	%			9.90	%			9.82	%			9.30	%
Tier 1 risk-based capital (4)			3.17	%			8.94	%			10.00	%			9.99	%			9.83	%
Total risk-based capital(4)			6.35	%			10.22	%			11.27	%			11.26	%			10.72	%
Bank
Shareholders’ equity to ending assets			5.04	%			8.80	%			14.11	%			14.42	%			9.60	%
Leverage ratio(4)			4.69	%			8.09	%			9.74	%			9.67	%			9.17	%
Tier 1 risk-based capital(4)			6.20	%			8.83	%			9.82	%			9.82	%			9.69	%
Total risk-based capital(4)			7.46	%			10.09	%			11.08	%			11.07	%			10.93	%

Notes:

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The following table sets forth the Company’s unaudited data regarding operations for each quarter of 2009 and 2008. This information, in the opinion of management, includes all normal recurring adjustments necessary to fairly state the information set forth:

		2009
		Fourth Quarter				Third Quarter				Second Quarter				First Quarter
Interest income		$	24,722			$	26,091			$	27,663			$	28,335
Interest expense			7,895				8,817				8,812				8,611
Net interest income			16,827				17,274				18,851				19,724
Loan loss provision			28,000				22,000				48,000				15,000
Net interest income (loss) after loan loss provision			(11,173	)			(4,726	)			(29,149	)			4,724
Noninterest income			3,536				8,077				4,956				5,057
Noninterest expenses			29,033				25,739				22,625				16,570
Loss before income taxes			(36,670	)			(22,388	)			(46,818	)			(6,789	)
Provision (credit) for income taxes			11,782				(9,744	)			(18,750	)			(2,873	)
Net loss		$	(48,452	)		$	(12,644	)		$	(28,068	)		$	(3,916	)
Basic net loss per common share		$	(1.73	)		$	(0.45	)		$	(1.00	)		$	(0.14	)
Diluted net loss per common share		$	(1.73	)		$	(0.45	)		$	(1.00	)		$	(0.14	)

		2008
		Fourth Quarter				Third Quarter				Second Quarter				First Quarter
Interest income		$	31,260			$	34,111			$	34,260			$	38,141
Interest expense			9,130				10,146				10,014				13,081
Net interest income			22,130				23,965				24,246				25,060
Loan loss provision			61,339	(1)			15,390				18,364				4,500
Net interest income (loss) after loan loss provision			(39,209	)			8,575				5,882				20,560
Noninterest income			3,951				5,530				5,008				5,502
Noninterest expenses			125,724 (2)				13,809				16,763				17,375
Income (loss) before income taxes			(160,982	)			296				(5,873	)			8,687
Provision (credit) for income taxes			(23,422	)			(51	)			(2,480	)			2,647
Net income (loss)		$	(137,560	)		$	347			$	(3,393	)		$	6,040
Basic net income (loss) per common share		$	(4.92	)		$	0.01			$	(0.12	)		$	0.22
Diluted net income (loss) per common share		$	(4.92	)		$	0.01			$	(0.12	)		$	0.22

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

This discussion highlights key information as determined by management but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto as of December 31, 2009 and 2008 and for each of the years in the three-year period ended December 31, 2009 included in Item 7 of this report.

Cautionary Information Concerning Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements, which are not historical facts and pertain to our future operating results. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the word “expects,” “believes,” “anticipates,” “could,” “may,” “will,” “should,” “plan,” “predicts,” “projections,” “continue” and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties and the Company’s success in managing such risks and uncertainties may cause actual results to differ materially from those projected, including among others, the risk factors described in this as well as the following factors: our inability to comply in a timely manner with the Order with the FDIC and the DFCS, under which we are currently operating, could lead to further regulatory sanctions or orders, which could further restrict our operations and negatively affect our results of operations and financial condition; local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our results of operations and financial condition; the local housing/real estate market could continue to decline for a longer period than we anticipate; the risks presented by a continued economic recession, which could continue to adversely affect credit quality, collateral values, including real estate collateral and OREO properties, investment values, liquidity and loan originations, reserves for loan losses and charge offs of loans and loan portfolio delinquency rates and may be exacerbated by our concentration of operations in the States of Oregon and Idaho generally, and the Oregon communities of Central Oregon, Northwest Oregon, Southern Oregon and the greater Boise area, specifically; we will be seeking additional capital in the future to improve capital ratios, but capital may not be available when needed or on acceptable terms; interest rate changes could significantly reduce net interest income and negatively affect funding sources; competition among financial institutions could increase significantly; competition or changes in interest rates could negatively affect net interest margin, as could other factors listed from time to time in the Company’s SEC reports; the reputation of the financial services industry could further deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers; and existing regulatory requirements, changes in regulatory requirements and legislation and our inability to meet those requirements, including capital requirements and increases in our deposit insurance premium, could adversely affect the businesses in which we are engaged, our results of operations and financial condition.

These forward-looking statements speak only as of the date of this annual report on Form 10-K. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. Readers should carefully review all disclosures filed by the Company from time to time with the SEC.

Recent Developments

In October 2009, the Company filed a registration statement on Form S-1 with the SEC pursuant to which it intended to offer up to $108 million of its Common Stock in a public offering, subject to market and other conditions including consummation of the previously announced private offerings with Mr. David F. Bolger (“Bolger”) and an affiliate of Lightyear Fund II, L.P. (“Lightyear”). On December 23, 2009, the Company announced the withdrawal of the registration statement due to market and other conditions. On February 16, 2010, the Company entered into amendments to the stock purchase agreements with each of Bolger and Lightyear which, among other things, extended the stock purchase agreements to

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May 31, 2010 in order to provide the Company additional time to implement a capital raise. Because capital raising in the current economic environment is very limited, it is uncertain whether the Bank will be able to increase its capital to required levels.

On November 13, 2009, FNMA informed the Bank that — as a result of the Bank’s capital ratios falling below contractual requirements — the Bank no longer qualified as a FNMA designated mortgage loan seller or servicer and the Bank had until December 31, 2009 to improve its capital ratios to meet FNMA’s requirements. As of December 31, 2009, the Bank had not met such requirements, and, accordingly, FNMA has terminated the Bank’s rights to originate and sell mortgage loans directly to FNMA. In addition, FNMA now has the option to terminate its mortgage servicing agreement with the Bank, upon which occurrence the Bank would no longer be allowed to service FNMA loans in the future. Management is in the process of discussing such issues with FNMA and has been evaluating the prospective impact of this development. Possible outcomes include a reduction of the Company’s mortgage banking and mortgage servicing revenues in the future and sale or forced transfer of its mortgage servicing business to a third-party by FNMA. As a result of the actions by FNMA, the Company anticipates that the majority of mortgage loans originated in future periods will be sold to other third-parties and that the Bank will not retain servicing rights. The Company expects that this may result in a significant decrease to future net mortgage servicing income. Management believes that under the circumstances, FNMA will provide the Company with sufficient time to accomplish an orderly disposition of its MSRs. However, there can be no assurance that FNMA will provide for an orderly process nor that a reduction of mortgage banking revenues or possible impairment of MSRs will not occur. Because the estimated fair value of the Company’s MSRs exceeds book value at December 31, 2009, and because management believes it is unlikely FNMA will preemptively transfer the Company’s MSRs to a third-party, no impairment adjustment has been made in connection with this issue as of December 31, 2009. In addition, no valuation allowance for MSRs was recorded as of December 31, 2008 and 2007.

On December 17, 2009, the Company received a notice letter from The NASDAQ Stock Market regarding its non-compliance with Rule 5550(a)(2) of the NASDAQ Marketplace Rules with respect to the minimum bid price requirement of $1.00 per share. The Company’s common stock has failed to meet the $1.00 minimum bid price for 30 consecutive business days. The notice letter has no immediate effect on the listing of the Company’s common stock on The NASDAQ Capital Market. The Company has a 180 calendar day grace period, or until June 15, 2010, to comply with the minimum bid price requirement. To regain compliance, the bid price must meet or exceed $1.00 per share for at least ten consecutive business days prior to June 15, 2010. The Company will continue to evaluate its options with respect to meeting this listing qualification within the time period required.

Critical Accounting Policies and Accounting Estimates

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

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

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

Mortgage Servicing Rights (MSRs):  Determination of the fair value of MSRs requires the estimation of multiple interdependent variables, the most impactful of which is mortgage prepayment speeds. Prepayment speeds are estimates of the pace and magnitude of future mortgage payoff or refinance behavior of customers whose loans are serviced by the Company. Errors in estimation of prepayment speeds or other key servicing variables could subject MSRs to impairment risk. On a quarterly basis, the Company engages a qualified third party to provide an estimate of the fair value of MSRs using a discounted cash flow model with assumptions and estimates based upon observable market-based data and methodology common to the mortgage servicing market. Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs, and the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the avoidance of possible impairment charges in future periods. Please see “Recent Developments” above for additional information related to FNMA and the Bank’s designation as a seller/servicer. See also “Non-Interest Income” below and Note 7 of the Company’s Condensed Consolidated Financial Statements included in Item 7 of this report.

Deferred Income Taxes:  The Company evaluates deferred income tax assets for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws, our ability to successfully implement tax planning strategies, or variances between our future projected operating performance and our actual results. The Company is required to establish a valuation allowance for deferred income tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred income tax assets will not be realized. In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period. Future adjustments to the deferred income tax asset valuation allowance, if any, will be determined based upon changes in the expected realization of the net deferred income tax assets. The realization of the deferred income tax assets ultimately depends on the existence of sufficient taxable income in either the carry back or carry forward periods under the tax law. Due to the Company’s cumulative tax losses in 2008 and 2009 it was determined that as of December 31, 2009, the Company was not able to meet the ‘more likely than not” standard as to realization of the Deferred Tax asset and accordingly established an allowance against such asset.

Economic Conditions

The Company’s business is closely tied to the economies of Idaho and Oregon in general and is particularly affected by the economies of Central, Southern and Northwest Oregon, as well as the Greater Boise, Idaho area. The uncertain depth and duration of the present economic downturn could continue to cause further deterioration of these local economies, resulting in an adverse effect on the Company’s financial condition and results of operations. Real estate values in these areas have declined and may continue to fall. Unemployment rates in these areas have increased significantly and could increase further. Business activity across a wide range of industries and regions has been impacted and local governments and many businesses are facing serious challenges due to the lack of consumer spending driven by elevated unemployment and uncertainty.

The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the declining value of collateral securing those loans, is reflective of the business environment in the markets where the Company operates. The present significant downturn in economic activity and declining real estate values has had a direct and adverse effect on the condition and results of operations of the Company. This is particularly evident in the residential land

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development and residential construction segments of the Company’s loan portfolio. Developers or home builders whose cash flows are dependent on the sale of lots or completed residences have reduced ability to service their loan obligations and the market value of underlying collateral has been and continues to be adversely affected. The impact on the Company has been an elevated level of impaired loans, an associated increase in provisioning expense and charge-offs for the Company leading to a net loss in 2009 and 2008 of $93.1 million and $134.6 million, respectively. The local and regional economy also has a direct impact on the volume of bank deposits. Core deposits have declined since mid-2006 because business and retail customers have realized a reduction in cash available to deposit in the Bank. However, core deposits showed signs of stabilization in the latter part of 2009.

Financial Highlights and Summary of Q4 and Full Year 2009

2010 Plan

Given the economic environment and its affect on the financial condition of the Company, the following objectives and plans have been implemented and are expected to be continued in 2010: 1) the Company continues its efforts to raise additional capital through the sale of its common stock in one or more private offerings; 2) the Company has implemented strategies and plans to stabilize and reduce its the level of problem loans and minimizing the severity of associated credit losses to the extent possible; 3) the Company has reduced the size of the loan portfolio to lower credit risk and conserve capital and liquidity; 4) the Company has worked to stabilize its core deposits and has funded a significant contingent liquidity reserve; and 5) the Company has implemented plans to reduce controllable non- interest expense.

Fourth Quarter 2009:

The Company recorded a net loss of ($1.73) per share or ($48.5) million in the fourth quarter of 2009 as compared to a net loss of ($137.6) million or ($4.92) per share for the year ago quarter. The quarterly loss was mainly attributable to a $28.0 million provision for loan losses, a $26.8 million charge to create a full allowance against the deferred tax assets at December 31, 2009, $7.5 million in OREO disposition costs and expenses, and a $2.1 million prepayment penalty to extinguish certain higher rate FHLB borrowings. Additionally, net interest income was $1.4 million lower than in the linked-quarter due to reduced average loans outstanding and $0.4 million interest reversed on non performing loans. During the quarter the Company took significant steps to maximize the benefit of recent legislation that extended (for 2009 losses only) net operating loss tax carryback to 5 years. These actions resulted in the Company recording a $43.3 million tax receivable at year-end, which is expected to be realized upon filing of our 2009 tax return. Tax optimization related endeavors included proactive sales of OREO properties, charge-offs and note sales on troubled loans, and prepayment of certain FHLB advances. Linked-quarter credit metrics improved with NPA’s including OREO down 18% along with reduced levels of classified and criticized assets. The net interest margin for the quarter was up at 3.25% compared to 3.13% in the linked-quarter primarily resulting from lower average NPA’s and lower levels of interest reversals on non performing loans compared to the prior quarter.

In October 2009, the Company filed a registration statement on Form S-1 with the SEC pursuant to which it intended to offer up to $108 million of its Common Stock in a public offering, subject to market and other conditions including consummation of the previously announced private offerings with Bolger and Lightyear. On December 23, 2009, the Company announced the withdrawal of the registration statement due to market and other conditions. On February 16, 2010, the Company entered into amendments to the stock purchase agreements with each of Bolger and Lightyear which, among other things, extended the stock purchase agreements to May 31, 2010 in order to provide the Company additional time to implement a capital raise. Because of the Company’s financial condition and challenging capital market conditions it is uncertain whether the Bank will be able to increase its capital to required levels.

Full Year 2009:

The Company recorded a net loss of ($93.1) million or ($3.32) per share compared to a net loss of ($134.6) million or ($4.82) per share for 2008. The annual loss was mainly attributable to 1) elevated credit quality related expenses; 2) a substantial charge against existing deferred tax assets; and 3) lower net interest income primarily because of lower average loan yields and a decline in loans outstanding coupled with a higher volume of non-performing assets. For the year, the Company recorded $113.0 million provision for

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loan losses and $24.1 million in OREO valuation and disposition costs and related expenses reflecting adverse economic conditions effect on borrower’s ability to repay loan obligations. This compares with $99.6 million in provision for loan losses expense and $8.4 million OREO costs in 2008. In addition, the Company recorded a $26.8 million charge to create a full allowance against the Company’s deferred tax assets at December 31, 2009. In order to mitigate credit risk and conserve capital and liquidity, the Bank reduced its loan balances by $408.5 million for the year, but as a consequence net interest income for the year was down $22.7 million due to lower earning asset volumes and the effect of interest reversals and interest foregone on non performing loans. Core deposits appeared to stabilize in the latter half of 2009 and balances were near levels from the prior year end. Non-interest income was up $1.6 million in 2009 compared to 2008 largely because of our gain on sale of merchant services business. Meanwhile human resource costs and controllable/discretionary non-interest expenses were decreased in 2009 compared to the prior year. However, total non-interest expense increased year over year because of a $24.1 million in OREO related expenses including valuation charges and loss on sale compared to $8.4 million in the prior year.

Results of Operations — Years ended December 31, 2009, 2008 and 2007

Net Income/Loss

The Company recorded a net loss of ($93.1) million (or $3.32) per share in 2009 compared to a net loss of ($134.6) million or ($4.82) per share for 2008 and net income of $30.0 million in 2007 or $1.05 per share. The loss in 2009 primarily resulted from a decrease in net interest income of $22.7 million, $113.0 million loan loss provision, a valuation allowance against our deferred tax assets of $26.8 million, and OREO expenses of $24.1 million. The loss in 2008 mainly resulted from the Company’s non-cash impairment of goodwill in the amount of $105.0 million, a $99.6 million loan loss provision as well as a decrease in net interest income of $13.1 million.

Net Interest Income/Net Interest Margin

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

Total interest income decreased approximately $31.0 million (or 22.5%) for 2009 due mainly to lower average earning assets and interest reversals and interest foregone on non-performing loans. In 2008 interest income was down by $33.5 million (or 19.5%) as compared to 2007 primarily because of lower average yields, including interest reversed, and interest foregone on non-performing loans. Total interest expense declined by approximately $8.2 million (or 19.4%) for 2009 primarily due to lower rates. Interest expense dropped $20.4 million (or 32.4%) for 2008 as compared to 2007 as a result of lower rates and reduced volumes of interest bearing deposits and borrowings. Accordingly, net interest income decreased to $72.7 million or 23.8% in 2009 over 2008. Net interest income decreased $13.1 million or 12.1% in 2008 over 2007. Yields earned on assets decreased to 5.03% for 2009 as compared to 6.40% in 2008 and 8.21% in 2007. Meanwhile, the average rates paid on interest bearing liabilities for 2009 decreased to 1.93% compared to 2.49% in 2008 and 4.01% in 2007.

The Company’s net interest margin (NIM) decreased to 3.43% for 2009 as compared to 4.44% for 2008. Three factors contributed to the lower NIM for the year ended December 31, 2009, including interest forgone and reversed on NPA’s, an elevated level of assets held at the FRB for contingent liquidity purposes, lower average customer balances in non-interest bearing deposit accounts, and the effect of lower market interest rates on the Company’s asset and liability mix. The margin can also be affected by factors beyond market interest rates, including loan or deposit volume shifts and/or aggressive rate offerings by competitor institutions. The Company’s financial model indicates a relatively stable interest rate risk profile within a reasonable range of rate movements around the forward rates currently predicted by financial markets.

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Components of Net Interest Margin

The following table presents further analysis of the components of Cascade’s net interest margin and sets forth for 2009, 2008, and 2007 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company:

		Year Ended December 31, 2009												Year Ended December 31, 2008												Year Ended December 31, 2007
(Dollars in thousands)		Average Balance				Interest Income/ Expense				Average Yield or Rates				Average Balance				Interest Income/ Expense				Average Yield or Rates				Average Balance				Interest Income/ Expense				Average Yield or Rates
Assets
Taxable securities		$	101,033			$	5,085				5.03	%		$	85,034			$	4,462				5.25	%		$	93,793			$	5,259				5.61	%
Non-taxable securities(1)			3,643				186				5.11	%			5,211				255				4.89	%			7,952				283				3.56	%
Interest bearing balances due from FRB and FHLB			209,451				486				0.23	%			13				—				0.00	%			3,735				195				5.22	%
Federal funds sold			7,454				17				0.23	%			2,026				31				1.53	%			3,910				187				4.78	%
Federal Home Loan Bank stock			10,472				—				0.00	%			11,458				111				0.97	%			6,991				42				0.60	%
Loans(1)(2)(3)(4)			1,798,723				101,507				5.64	%			2,054,199				133,346				6.49	%			1,974,435				165,690				8.39	%
Total earning assets			2,130,776				107,281				5.03	%			2,157,941				138,205				6.40	%			2,090,816				171,656				8.21	%
Reserve for loan losses			(51,975	)											(38,827	)											(24,498	)
Cash and due from banks			37,836												48,341												55,427
Premises and equipment, net			38,805												37,273												38,307
Other Assets			145,440												207,094												178,682
Total assets		$	2,300,882											$	2,411,822											$	2,338,734
Liabilities and Stockholders’ Equity
Int. bearing demand deposits		$	735,667				7,267				0.99	%		$	844,136				15,540				1.84	%		$	889,069				30,727				3.46	%
Savings deposits			33,275				73				0.22	%			36,761				135				0.37	%			41,327				202				0.49	%
Time deposits			688,430				17,915				2.60	%			386,990				12,850				3.32	%			340,324				15,804				4.64	%
Other borrowings			312,301				8,880				2.84	%			434,112				13,846				3.19	%			294,854				15,991				5.42	%
Total interest bearing liabilities			1,769,673				34,135				1.93	%			1,701,999				42,371				2.49	%			1,565,574				62,724				4.01	%
Demand deposits			407,344												407,980												469,015
Other liabilities			8,659												20,904												29,590
Total liabilities			2,185,676												2,130,883												2,064,179
Stockholders’ equity			115,206												280,939												274,555
Total liabilities & equity		$	2,300,882											$	2,411,822											$	2,338,734
Net interest income						$	73,146											$	95,834											$	108,932
Net interest spread											3.11	%											3.92	%											4.20	%
Net interest income to earning assets											3.43	%											4.44	%											5.23	%

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Changes in Interest Income and Expense

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

		Year Ended December 31,
		2009 over 2008												2008 over 2007
(Dollars in thousands)		Total Increase (Decrease)				Amount of Change Attributed to								Total Increase (Decrease)				Amount of Change Attributed to
					Volume		Rate				Volume							Rate
Interest income:
Interest and fees on loans		$	(31,839	)		$	(16,584	)		$	(15,255	)		$	(32,344	)		$	6,694			$	(39,038	)
Taxable securities			627				840				(213	)			(797	)			(491	)			(306	)
Non-taxable securities			(69	)			(77	)			8				(28	)			(98	)			70
Interest bearing balances due from FRB and FHLB			482				0				482				(195	)			(194	)			(1	)
Federal Home Loan Bank stock			(111	)			(10	)			(101	)			69				27				42
Federal funds sold			(14	)			83				(97	)			(156	)			(90	)			(66	)
Total interest income			(30,924	)			(15,748	)			(15,176	)			(33,451	)			5,848				(39,299	)
Interest expense:
Interest on deposits:
Interest bearing demand			(8,273	)			(1,997	)			(6,276	)			(15,187	)			(1,553	)			(13,634	)
Savings			(62	)			(13	)			(49	)			(67	)			(22	)			(45	)
Time			5,065				10,009				(4,944	)			(2,954	)			2,167				(5,121	)
Other borrowings			(4,966	)			(3,885	)			(1,081	)			(2,145	)			7,552				(9,697	)
Total interest expense			(8,236	)			4,114				(12,350	)			(20,353	)			8,144				(28,497	)
Net interest income		$	(22,688	)		$	(19,862	)		$	(2,826	)		$	(13,098	)		$	(2,296	)		$	(10,802	)

Loan Loss Provision

At December 31, 2009, the reserve for credit losses (reserve for loan losses and reserve for unfunded commitments) was 2.47% of outstanding loans, as compared to 2.46% for 2008 and 1.81% in 2007. The loan loss provision was $113.0 million in 2009, $99.6 million in 2008 and $19.4 million in 2007. Provision expense is determined by the Company’s ongoing analytical and evaluative assessment of the adequacy of the reserve for credit losses. At December 31, 2009, management believes that its reserve for credit losses is at an appropriate level under current circumstances and prevailing economic conditions. For further discussion, see “Reserve for Credit Losses” below. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan related losses or that additional provision expense will not be required should economic conditions remain adverse. See Item 1A “Risk Factors” and “Highlights — Loan Growth and Credit Quality” earlier in this report.

Non-interest Income

Total non-interest income decreased 8.1% in 2009 compared to 2008 after excluding the one-time gain of $3.2 million on the sale of the merchant card processing business. Service charges on deposit accounts were down $1.3 million, card issuer and merchant service fees were down $0.7 million and earnings on bank-owned life insurance was down $0.2 million. These decreases were partially offset by increases in mortgage banking income, gains on sales of investment securities available-for-sale and other income. Non-interest income decreased 5.8% in 2008 compared to 2007 mainly due to earnings on bank-owned life insurance resulting from lowered investment returns in the volatile securities markets that persisted in 2008.

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Mortgage Banking Income — Home Mortgage Originations and Mortgage Related Revenue

The Company provides residential mortgage services on a direct to customer basis and does no business through third party (brokerage) channels. The Company has focused its originations in conventional mortgage products while avoiding sub-prime/option-ARM type products. The low delinquency rate within the Company’s loan servicing portfolio underscores this long-held discipline in mortgage origination. At December 31, 2009, the portfolio contained about 3,750 mortgage loans totaling $543 million with a delinquency rate of loans past due >30 days of only 2.58%, notably below the Mortgage Bankers Association (MBA) national mortgage delinquency rate of 14.41% at September 30, 2009.

Residential mortgage originations totaled $177.2 million in 2009, up 45.4% when compared to $121.7 million in 2008. Related net mortgage revenue was $2.8 million, an increase of 34.6% compared to $2.1 million for the previous year. Non-Interest income arising from mortgage servicing totaled approximately $2.7 million in 2007. The general level and direction of interest rates directly influence the volume and profitability of the yield curve in mortgage banking. A lower interest rate climate continued in 2009 and 2008 which had the affect of decreasing the profitability of mortgage banking due to a lower interest rate yield curve.

Historically, the Company sold a predominant portion of its residential mortgage loans to Fannie Mae, a U.S. Government sponsored enterprise and other secondary market investors. The Company services such loans for Fannie Mae and is paid approximately .25% per annum on the outstanding balances for providing this service. Such revenues are included in the above mortgage banking results. Mortgages serviced for Fannie Mae totaled $542.9 million at December 31, 2009, an increase over $512.2 million at December 31, 2008 and an increase over $494.0 million at December 31, 2007. The related Mortgage Servicing Rights (MSRs) were approximately $3.9 million in 2009 and $3.6 million in 2008.

As described under “Recent Developments”, the Bank received a letter from FNMA advising that the Bank failed to meet FNMA’s minimum required Total Risk Based Capital ratio of 10% as of September 30, 2009. The letter stated that the Bank was being suspended as a Fannie Mae Seller/Servicer effective immediately. It was noted that failure to meet applicable standards would result in termination of the Bank’s Selling and Servicing Contract. As of December 31, 2009, and through the date of this report, the Bank does not meet FNMA’s minimum financial standards. As a result, the Company may not sell mortgage loans to FNMA and FNMA may terminate its agreement to allow the Company to service FNMA loans in the future. Mortgage loans not sold to the Federal National Mortgage Association (“Fannie Mae” or “FNMA”), are generally sold servicing released to other secondary market investors. Loans sold on this basis generate no future servicing fees for the Company.

The estimated fair value of mortgage servicing rights (“MSR”) portfolio is estimated to exceed book value by amounts ranging from $0.8 million to $1.9 million. The Company capitalizes the estimated market value of MSRs into income upon the sale of each originated mortgage loan. The Company amortizes MSRs in proportion to the servicing income it receives from Fannie Mae over the estimated life of the underlying mortgages, considering prepayment expectations and refinancing patterns. In addition, the Company amortizes, in full, any remaining MSRs balance that is specifically associated with a serviced loan that is refinanced or paid-off. At December 31, 2009, expressed as a percentage of loans serviced, the book value of MSR was .73% of serviced mortgage loans, while fair value was approximately .97% of serviced mortgages. Fair value as a percentage of loans serviced was estimated at .89% a year earlier.

Non-interest Expenses

Non-interest expense for 2009 decreased 45.9% to $94.0 million as compared to 2008. After adjusting for the non-cash goodwill impairment charge recorded in 2008, non-interest expense for 2009 increased $25.3 million or 36.9%. The increases in 2009 are attributable to increases in OREO related costs, FDIC insurance, and other professional services, partially offset by a reduction in salaries and employee benefits expense.

OREO expenses were $24.1 million in 2009 compared to $8.4 million in 2008 and were only $0.1 million in 2007. OREO costs and valuation adjustments increased $15.7 million for 2009 compared to 2008, primarily due to depressed real estate values on foreclosed land development properties. In addition, FDIC deposit insurance assessments increased $5.2 million or 305.7% in 2009 when compared to 2008, reflecting

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the FDIC’s higher base assessment rate for 2009 and expenses related to the FDIC’s industry-wide emergency special assessment in the second quarter. FDIC premiums have increased due to the rise in financial institution failures in 2008 and 2009, the Company’s voluntary participation in the Temporary Liquidity Guarantee Program and the FDIC’s rates applicable to banks in the Company’s regulatory classification. Professional fees increased $4.5 million or 175.3% which includes legal, accounting and other professional services in connection with the Company’s efforts to raise capital in the fourth quarter of 2009. Meanwhile, the Company continued to see a reduction in salary expenses, and employee benefits expenses declined as staffing continues to be trimmed in response to the slowing economy, no executive bonuses were paid in 2008, or 2009. Total non-interest expense for 2008 increased 177.5% to $173.7 million as compared to 2007 primarily due to the noncash after-tax goodwill impairment charge and expenses related to the Company’s OREO properties. Human resource costs were down in 2008 compared to 2007 as executive bonuses were foregone in both 2007 and 2008.The Company’s efficiency ratio was 99.9% in 2009 compared to 150.6% in 2008.

Income Taxes

As of December 31, 2009, the Company had recorded refundable income taxes receivable of approximately $43.3 million related to the carryback of operating losses to prior years and had provided a $26.8 million charge to create a full valuation allowance against its deferred tax assets. For discussion of the Company’s deferred income tax assets see “Critical Accounting Policies — Deferred Income Taxes” above.

Financial Condition

Balance Sheet Overview

At December 31, 2009 total assets were down 3.7% to $2.19 billion compared to year-end 2008. Cash and cash equivalents increased $310.4 million or 16.4% of total assets at December 31, 2009 compared to a negligible percentage at year-end 2008. Total loans have been reduced by $408.5 million to $1.5 billion at December 31, 2009 compared to $1.9 billion at year-end 2008, primarily due to initiative to reduce loans to customers where deposit relationships are not a meaningful part of the overall banking relationship. A portion of the reduction in loan balances was the result of net loan charge-offs of $122.6 million for 2009. The reduction in loan balances has resulted in lower credit risk exposure and has helped to support the Bank’s regulatory capital ratios.

Funding sources have increased in 2009, including TLGP debt issuance and internet listing service deposits. These increases also offset reduced core deposits that have trended down due to the ongoing effects of an adverse economy on local markets. Deposits have also been impacted due to provisions of the Order limiting the use of brokered deposits with deposits showing an increase of only 1.2% in 2009 over 2008.

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

Investment Securities

The following table shows the carrying value of the Company’s portfolio of investments at December 31, 2009, 2008, and 2007:

		December 31,
(Dollars in thousands)		2009				2008				2007
U.S. Agency and non-agency mortgage-backed securities (MBS)		$	116,639			$	93,534			$	65,202
U.S. Government and agency securities			7,481				8,726				10,497
Obligations of state and political subdivisions			3,606				3,741				6,917
U.S. Agency asset-backed securities			7,586				3,260				3,538
Total debt securities			135,312				109,261				86,154
Mutual fund			451				430				412
Equity securities			—				—				449
Total investment securities		$	135,763			$	109,691			$	87,015

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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 Company’s investment portfolio increased by $26.1 million, or 23.8% from December 31, 2008 to December 31, 2009 as a result of increased purchase activity during the year. The following is a summary of the contractual maturities and weighted average yields of investment securities at December 31, 2009:

(Dollars in thousands) Type and Maturity		Carrying Value				Weighted Average Yield (1)
U.S. Agency and non-agency mortgage-backed securities
Due after 5 but within 10 years		$	875				5.19	%
Due after 10 years			115,764				4.49	%
Total U.S. Agency mortgage-backed securities			116,639				4.49	%
U.S. Government and Agency Securities
Due after 5 but within 10 years			7,481				2.25	%
Total U.S. Government and Agency Securities			7,481				2.25	%
State and Political Subdivisions(1)
Due within 1 year			200				3.25	%
Due after 1 but within 5 years			2,202				3.87	%
Due after 5 but within 10 years			1,204				4.04	%
Total State and Political Subdivisions			3,606				3.89	%
U.S. Agency asset-backed securities
Due within 1 year			1,336				5.24	%
Due after 1 but within 5 years			677				5.39	%
Due after 10 years			5,573				6.50	%
Total U.S. Agency asset-backed securities			7,586				6.18	%
Total debt securities			135,312				4.45	%
Mutual fund			451				4.57	%
Total Securities		$	135,763				4.45	%

The average years to maturity of the Company’s investment portfolio was 7.9 years at December 31, 2009 compared to 6.5 years at December 31, 2008. Duration of the portfolio is lower than average life since many of the securities are adjustable rate mortgage securities (ARM’s) with annual interest rate adjustments.

Investments are mainly classified as “available for sale” and consist mainly of MBS and Agency notes backed by government sponsored enterprises, such as the Government National Mortgage Association (“Ginnie Mae”), FNMA and FHLB. The Company regularly reviews its investment portfolio to determine whether any securities are other than temporarily impaired. The Company did not invest in securities backed by sub-prime mortgages and believes its investment portfolio has negligible exposure to such risk at this date. At December 31, 2009, the investment portfolio had gross unrealized losses on available-for-sale securities of approximately $1.4 million and management does not believe that these unrealized losses are other-than-temporary.

Loan Portfolio and Credit Quality

Loan Portfolio Composition.  Net loans represented 69% of total assets as of December 31, 2009. The Company makes substantially all of its loans to customers located within the Company’s service areas. As a result of the economic conditions and characteristics of the Company’s primary markets, including among others, the historical rapid growth in population and the nature of the tourism and service industry found in much of its market areas, Cascade’s loan portfolio has historically been concentrated in real estate related loans. The Company is presently working to reduce its construction/lot portfolio in response to the challenging real estate economy. However achieving significant reduction could prove problematic without some

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improvement in economic conditions and market liquidity as well as in pricing of related real estate assets. Because of the nature of its markets, real estate lending is expected to continue as a major concentration within the loan portfolio. The Company has no significant agricultural loans.

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

(Dollars in thousands)		2009				% of Gross Loans				2008				% of Gross Loans				2007				% of Gross Loans				2006				% of Gross Loans				2005				% of Gross Loans
Commercial		$	420,155				27	%		$	582,831				30	%		$	606,408				30	%		$	560,728				30	%		$	320,619				31	%
Real Estate:
Construction/lot:			308,346				20	%			517,721				26	%			686,829				34	%			588,251				31	%			220,230				21	%
Mortgage			93,465				6	%			96,248				5	%			88,509				4	%			80,860				4	%			56,724				5	%
Commercial			675,728				44	%			703,149				36	%			612,694				30	%			606,340				32	%			417,580				40	%
Consumer			49,982				3	%			56,235				3	%			47,038				2	%			51,083				3	%			34,551				3	%
Total loans			1,547,676				100	%			1,956,184				100	%			2,041,478				100	%			1,887,262				100	%			1,049,704				100	%
Less:
Reserve for loan losses			37,586								47,166								33,875								23,585								14,688
Total loans, net		$	1,510,090							$	1,909,018							$	2,007,603							$	1,863,677							$	1,035,016

The following table provides the geographic distribution of the Company’s loan portfolio by region as a percent of total company-wide loans at December 31, 2009:

(Dollars in thousands)		Central Oregon				% of Gross Loans				Northwest Oregon				% of Gross Loans				Southern Oregon				% of Gross Loans				Idaho				% of Gross Loans				Total				% of Gross Loans
Commercial		$	146,640				26	%		$	108,635				30	%		$	42,811				20	%		$	122,069				30	%		$	420,155				27	%
Real Estate:
Construction/lot			97,496				17	%			93,192				25	%			41,982				19	%			75,676				19	%			308,346				20	%
Mortgage			39,018				7	%			8,874				2	%			8,318				4	%			37,255				9	%			93,465				6	%
Commercial			255,286				46	%			151,683				41	%			118,476				55	%			150,283				38	%			675,728				44	%
Consumer			23,119				4	%			5,853				2	%			3,915				2	%			17,095				4	%			49,982				3	%
Total loans		$	561,559				100	%		$	368,237				100	%		$	215,502				100	%		$	402,378				100	%		$	1,547,676				100	%

At December 31, 2009, the contractual maturities of all loans by category were as follows:

(Dollars in thousands) Loan Category		Due within One Year				Due after One Year, but within Five Years				Due after Five Years				Total
Commercial		$	195,145			$	174,265			$	50,745			$	420,155
Real Estate:
Construction/Lot			225,224				57,273				25,849				308,346
Mortgage			5,344				29,634				58,487				93,465
Commercial			16,610				202,561				456,557				675,728
Consumer			2,807				20,989				26,186				49,982
		$	445,130			$	484,722			$	617,824			$	1,547,676

At December 31, 2009, variable and adjustable rate loans contractually due after one year totaled $991.7 million and loans with predetermined or fixed rates due after one year totaled $110.8 million.

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

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with real estate loans include fluctuating land values, demand and prices for housing or commercial properties, national, regional and local economic conditions, changes in tax policies, and concentration within the Bank’s market area.

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

(a) Residential land development category.  This category is included in the construction/lot portfolio balances above, and represents loans made to developers for the purpose of acquiring raw land and/or for the subsequent development and sale of residential lots. Such loans typically finance land purchase and infrastructure development of properties (i.e. roads, utilities, etc.) with the aim of making improved lots ready for subsequent sale to consumers or builders for ultimate construction of residential units. The primary source of repayment of such loans is generally the cash flow from developer sale of lots or improved parcels of land while real estate collateral, secondary sources and personal guarantees may provide an additional measure of security for such loans. The nationwide downturn in real estate has continued to slow down lot and home sales within the Company’s markets. This has adversely impacted certain developers by lengthening the marketing period of their projects and negatively affecting borrower liquidity and collateral values. Weakness in this category of loans has contributed significantly to the elevated level of provision for loan losses in 2009 and 2008. The situation continues to be closely monitored and an elevated level of provisioning may be required should deterioration continue.

(Dollars in thousands)		2009				% of Category				% of Constr/lot Portfolio				% of Gross Loans				2008
Residential Land Development:
Raw Land		$	35,258				37	%			11	%			2	%		$	72,329
Land Development			51,240				54	%			16	%			3	%			112,234
Speculative Lots			7,981				9	%			3	%			1	%			14,855
		$	94,479				100	%			30	%			6	%		$	199,418
Geographic distribution by region:
Central Oregon		$	48,176				51	%			15	%			3	%		$	74,209
Northwest Oregon			4,095				4	%			1	%			0	%			4,670
Southern Oregon			8,437				9	%			3	%			1	%			12,723
Total Oregon			60,708				64	%			19	%			4	%			91,602
Idaho			33,771				36	%			11	%			2	%			107,816
Grand total		$	94,479				100	%			30	%			6	%		$	199,418

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

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

Speculative construction lending finances builders/contractors who rely on the sale of completed homes to repay loans. The Bank may finance construction costs within residential subdivisions or on a custom site basis. Speculative construction loans decreased in 2009 as a result of the nationwide downturn in residential real estate. This may impact certain builders by lengthening the marketing period for constructed homes and negatively affecting borrower liquidity and collateral values.

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(Dollars in thousands)		2009				% of Category				% of Constr./lot Portfolio				% of Gross Loans				2008
Residential Construction
Pre sold		$	10,115				21	%			3	%			0	%		$	62,153
Lots			11,493				24	%			4	%			1	%			17,331
Speculative Construction			26,819				55	%			9	%			2	%			28,461
		$	48,427				100	%			16	%			3	%		$	107,945
Geographic distribution by region:
Central Oregon		$	24,304				50	%			8	%			2	%		$	43,593
Northwest Oregon			7,246				15	%			2	%			0	%			30,445
Southern Oregon			3,124				6	%			1	%			0	%			5,798
Total Oregon			34,674				72	%			11	%			2	%			79,836
Idaho			13,753				28	%			4	%			1	%			28,109
Grand total		$	48,427				100	%			16	%			3	%		$	107,945

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

The overall decline in 2009 in our commercial construction portfolio is mainly related to project completions. While our portfolios of these types of loans have not experienced the severe credit quality challenges experienced in residential construction projects, there can be no assurance that the credit quality in these portfolios will not be impacted should present challenging economic conditions persist. No assurance can be given that losses will not exceed the estimates that are currently included in the reserve for credit losses, which could adversely affect the Company’s financial conditions and results of operations.

(Dollars in thousands)		2009				% of Category				% of Constr./lot Portfolio				% of Gross Loans				2008
Commercial Construction:
Pre sold		$	29,080				18	%			9	%			2	%		$	27,826
Lots			9,822				6	%			3	%			1	%			16,404
Speculative			99,957				60	%			33	%			6	%			143,719
Speculative Lots			26,581				16	%			9	%			2	%			22,409
		$	165,440				100	%			54	%			11	%		$	210,358
Geographic distribution by region:
Central Oregon		$	24,674				15	%			8	%			2	%		$	49,817
Northwest Oregon			82,059				50	%			27	%			5	%			83,720
Southern Oregon			30,467				18	%			10	%			2	%			33,837
Total Oregon			137,200				83	%			45	%			9	%			167,374
Idaho			28,240				17	%			9	%			2	%			42,984
Grand total		$	165,440				100	%			54	%			11	%		$	210,358

(d) Commercial real estate (CRE) portfolio.  This $675.7 million portfolio generally represents loans to finance retail, office and industrial commercial properties. The expected source of repayment of CRE loans is generally the operations of the borrower’s business, rents or the obligor’s personal income. CRE loans represent approximately 44% of total loans outstanding as of December 31, 2009. Approximately 52% of CRE loans are made to owner-occupied users of the commercial property, while 48% of CRE loans are to obligors

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who do not directly occupy the property. Management believes that lending to owner-occupied businesses may mitigate, but not eliminate, commercial real estate risk. The average loan in the CRE portfolio is only about $0.6 million and 86% of balances are represented in loans under $5 million. This granular and well diversified portfolio has maintained low delinquency and only modest deterioration in the present downturn. However no assurance can be given that residential real estate or other economic factors will not adversely impact the CRE portfolio.

		2009				% of Total CRE				% of Gross Loans				2008
Commercial Real Estate:
Owner occupied		$	348,732				52	%			22	%		$	358,232
Non-owner occupied			326,996				48	%			21	%			344,917
		$	675,728				100	%			44	%		$	703,149

The following table provides the geographic distribution of the Company’s CRE loan portfolio by region as a percent of total company-wide CRE loans at December 31, 2009:

		Central Oregon				% of Total CRE Loans				Northwest Oregon				% of Total CRE Loans				Southern Oregon				% of Total CRE Loans				Idaho				% of Total CRE Loans				Total
Commercial Real Estate:
Owner occupied		$	148,993				10	%		$	42,290				3	%		$	71,006				5	%		$	86,443				6	%		$	348,732
Non-owner occupied			105,122				7	%			109,911				7	%			47,654				3	%			64,309				4	%		$	326,996
Total loans		$	254,115				17	%		$	152,201				10	%		$	118,660				8	%		$	150,752				10	%		$	675,728