UNITED STATES
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, 2011

or

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 000-23322

 

CASCADE BANCORP

(Exact name of registrant as specified in its charter)

Oregon		93-1034484
(State of Incorporation)		(I.R.S. Employer Identification No.)

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

(541) 385-6205

(Registrant’s telephone number)

 

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

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

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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. x

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer o		Accelerated Filer o		Non-accelerated Filer o (Do not check if a smaller reporting company)		Smaller Reporting Company x

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2011 (the last business day of the registrant’s most recently completed second fiscal quarter) was $64,483,208 (based on the closing price as quoted on the NASDAQ Capital Market on that date).

There were 47,280,012 shares of no par value Common Stock outstanding as of March 12, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement on Schedule 14A for its 2012 Annual Meeting of Shareholders to be held on May 8, 2012 are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

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CASCADE BANCORP

FORM 10-K
ANNUAL REPORT

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		Page
PART I
Item 1. Business			1
Item 1A. Risk Factors			15
Item 1B. Unresolved Staff Comments			23
Item 2. Properties			23
Item 3. Legal Proceedings			23
Item 4. Mine Safety Disclosures			23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
Item 6. Selected Financial Data			24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			48
Item 8. Consolidated Financial Statements and Supplementary Data			49
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			104
Item 9A Controls and Procedures			104
Item 9B. Other Information			105
PART III
Item 10. Directors, Executive Officers and Corporate Governance			108
Item 11. Executive Compensation			108
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			108
Item 13. Certain Relationships and Related Transactions, and Director Independence			108
Item 14. Principal Accounting Fees and Services			108
PART IV
Item 15. Exhibits, Financial Statement Schedules			109
Signatures			112

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PART I

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

Cascade Bancorp and Subsidiaries

Cascade Bancorp (“Bancorp”) is a publicly traded bank holding company that was formed in 1990 and is headquartered in Bend, Oregon. Bancorp’s common stock trades on the NASDAQ Capital Market under the symbol “CACB.” Bancorp and its wholly-owned subsidiary, Bank of the Cascades (the “Bank,” and together with Bancorp, “Cascade” or the “Company”), operate in Oregon and Idaho markets. Founded in 1977, the Bank offers full-service community banking through 32 branches in Central Oregon, Southern Oregon, Northwest Oregon (including the Portland/Salem area), and Boise/Treasure Valley, Idaho. At December 31, 2011, the Company had total consolidated assets of approximately $1.3 billion, net loans of approximately $0.9billion and deposits of approximately $1.1 billion. Bancorp has no significant assets or operations other than the Bank.

Bank of the Cascades

The Bank is an Oregon state chartered bank, which opened for business in 1977 and now operates 32 branches serving communities in Central, Southern, and Northwest Oregon, as well as in the greater Boise/Treasure Valley, 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. The Bank originates 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 trust-related services to its clientele.

The principal office of the Bank is at 1100 NW Wall Street, Bend, Oregon 97701. The Bank’s phone number is (541) 385-6205.

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

The Company established four subsidiary grantor trusts for the purpose of issuing trust preferred securities and common securities. In January 2011, the trust preferred securities, junior subordinated debentures and all related accrued interest were retired in connection with the completion of the Company’s Capital Raise (discussed below). In connection with such retirement, the related trusts were also terminated.

Capital Raise Completed

In January 2011, the Company announced the successful completion of a $177.0 million capital raise (the “Capital Raise”). New capital investment proceeds in the amount of $167.9 million (net of offering costs) were received on January 28, 2011, of which approximately $150.4 million was contributed to the Bank. In addition, approximately $15.0 million of the Capital Raise proceeds were used to retire $68.6 million of the Company’s junior subordinated debentures and related accrued interest of $3.9 million, resulting in an approximately $54.9 million pre-tax gain recorded in the first quarter of 2011. Prior to the Capital Raise, on November 22, 2010, Bancorp effected a one-for-ten reverse stock split. The results of these transactions are reflected in the audited consolidated financial statements that are included in Part II, Item 8 of this report.

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Sale of Loans

In September 2011, the Bank entered into a Commercial Loan Purchase Agreement and Residential Loan Purchase Agreement with a third party pursuant to which the Bank sold approximately $110.0 million (carrying amount) of certain non-performing, substandard, and related performing loans and approximately $2.0 million of other real estate owned (“OREO”) (the “Bulk Sale”). In connection with the Bulk Sale, the Bank received approximately $58.0 million in cash from the buyer, incurred approximately $3.0 million in related closing costs, and recorded loan charge-offs totaling approximately $54.0 million.

Business Strategies

In order to achieve stable and increasingly profitable banking operations in a challenging economic environment, the Company’s ongoing business strategies include: (1) proactively monitor and reduce the level of non-performing and adversely risk rated loans to mitigate credit risk; (2) stabilize and generate prudent loan portfolio growth given economic conditions; (3) stabilize and grow relationship deposits while reducing wholesale funding sources; (4) actively manage operating efficiency; (5) consistently deliver high levels of customer service and apply state-of-the-art technology for the convenience of customers; and (6) retain high performing employees. The Bank has experienced several years of negative loan growth due to the severe economic contraction. The Bank is in the process of striving to grow its loan portfolio by refocusing its lenders toward new loan origination opportunities, rebuilding its residential mortgage production capacity, and by expanding customer awareness of its desire to revitalize consumer and small business lending in the communities it serves. Because of the uncertainties of the current economic climate and competitive factors, there can be no assurance that the execution of these priorities will be successful. Cascade’s mission statement is to “deliver the best in community banking for the financial well-being of customers and shareholders.”

Business Overview

The United States economy is still working on stabilizing after several years of severe recession. However, business activity across a wide range of industries and regions is reduced, and many companies continue to struggle in the aftermath of the economic downturn. The Company’s primary markets of Idaho and Oregon have experienced significant declines in real estate values, and unemployment levels remain elevated. This economic adversity has had a direct and adverse effect on the financial condition and results of operations of the Company despite recent signs of stabilization. The Bank is also operating under joint regulatory agreements with the Federal Deposit Insurance Corporation (“FDIC”) and State of Oregon Banking authorities, and Bancorp is under a regulatory agreement with the Federal Reserve Bank of San Francisco (“FRB”) and State of Oregon Banking authorities. Information about the regulatory agreements is provided under “Supervision and Regulation” below in Item 1 of this report.

The Company’s original market is Central Oregon where in past years, according to the Environmental Systems Research Institute, Inc. and based primarily on U.S. Census data, population growth was 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 22% deposit market share of the Central Oregon market as of June 30, 2011 (excluding broker and internet CDs). In past years, management has sought to augment its banking footprint by expanding into other Northwest markets, including Southern Oregon, Northwest Oregon, and Boise/Treasure Valley, Idaho. At December 31, 2011, loans and deposits in the Northwest and Southern Oregon markets total a combined 34% and 26%, respectively, of total Company balances. At December 31, 2011, the Company’s Idaho region branches held loans and deposits of approximately 24% and 28%, respectively, of total Company balances. This expansion furthered the diversification of the Company’s banking business into two states and multiple markets.

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 436 full-time equivalent employees as of December 31, 2011.

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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. The Board of Directors and related committees review and oversee policies that specify various controls and risk tolerances.

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 risk and 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, as well as taking on wholesale and brokered deposits, to augment its liquidity.

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 the Sarbanes-Oxley Act of 2002. 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 The Company strives to augment and enhance its risk management strategies and processes as prudent and appropriate in managing the wide range of risks inherent in its business. However, there can be no assurance that such strategies and processes will detect, contain, eliminate or prevent risks that could result in adverse financial results in the future.

Competition

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

In addition to larger institutions, numerous “community” banks and credit unions operate in the Bank’s market areas. As a result of weak real estate market conditions over the past few years, a number of banks and credit unions have developed a similar focus as the Bank and these institutions have further increased competition. Additionally, a heightened focus by larger institutions on the Bank’s target market segments, such as small businesses, has led to intensified competition in all aspects of the Bank’s business.

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, its focus on small and medium-sized business, and professional and consumer accounts, enable it to compete effectively with other financial service providers in its markets. 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 Bank’s internal lending limits.

Government Policies

The operations of the Bank 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 (“Federal Reserve”) and U.S. Department of Treasury fiscal policy, and capital adequacy and liquidity constraints imposed by federal and state regulatory agencies.

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Supervision and Regulation

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

Quantitative measures established by regulation to ensure capital adequacy require Bancorp and the Bank to maintain minimum amounts and ratios of Tier 1 capital to average assets and Tier 1 and total capital to risk-weighted assets (all as defined in the regulations).

Federal banking regulators are required to take prompt corrective action if an insured depository institution, such as the Bank, fails to satisfy certain minimum capital requirements. Such actions could potentially include a leverage capital requirement, risk-based capital requirements, and any other measure of capital deemed appropriate by the federal banking regulator for measuring the capital adequacy of an insured depository institution. In addition, payment of dividends by Bancorp and the Bank are subject to restriction by state and federal regulators and availability of retained earnings. At December 31, 2011 the Bank met the regulatory benchmarks to be “well-capitalized” under the applicable regulations primarily due to the Capital Raise completed January 28, 2011. At December 31, 2010, the Bank did not meet the regulatory benchmarks to be “adequately capitalized” under the applicable regulations.

In late August 2009, the Bank entered into an agreement 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 a cease-and-desist order (the “Order”) against the Bank based on certain findings from an examination of the Bank concluded in February 2009 based upon financial and lending data measured as of December 31, 2008 (the “ROE”). 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.

Among the corrective actions required was 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. At December 31, 2011, the Bank met this requirement, primarily due to the Capital Raise completed on January 28, 2011.

The Order further requires the Bank to ensure that 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 ROE to no more than 75% of capital. As of December 31, 2011, the requirement that the amount of classified loans as of the ROE be reduced to no more than 75% of capital had been met. As required by the Order, all assets classified as “Loss” in 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.

Pursuant to the Order, the Bank must also maintain a primary liquidity ratio (net cash, net short-term and marketable assets divided by net deposits and short-term liabilities) of at least 15.00%. At December 31, 2011, the Bank’s primary liquidity ratio was 24.09%.

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 or to employ any new senior executive officer. Under the Order, the Bank’s Board must also increase its participation in the affairs of the

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Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the Bank’s activities. The Order also 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 remains in place until lifted by the FDIC and DFCS, and, therefore, the Bank remains subject to the requirements and restrictions set forth therein.

On October 26, 2009, Bancorp entered into a written agreement with the FRB and DFCS (the “Written Agreement”), which requires Bancorp to take certain measures to improve its safety and soundness. Under the Written Agreement, Bancorp was required to develop and submit for approval, a plan to maintain sufficient capital at Bancorp 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 the completion of the Capital Raise, management believed that Bancorp was in compliance with regulatory capital-related terms of the Written Agreement. However, as of December 31, 2011, Bancorp did not meet the 10% Tier 1 leverage ratio requirement per the Written Agreement, and is therefore required to deliver an updated Capital Plan with the FRB and DFCS in this regard.

The Dodd-Frank Act

On July 21, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape. Numerous provisions of the Dodd-Frank Act affect the Company and its business and operations. Some of the provisions are:

Many aspects of the Dodd-Frank Act are subject to rulemaking, not all of which has been completed, and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank Act’s mandates are discussed further below.

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Other 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. 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.

Certain significant laws and regulations that apply to the Company are described below. The discussion of these laws and regulations does not purport to be complete, and is qualified in its entirety by reference to the full text of the laws and regulations.

Bank Holding Company Regulation

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

The BHC Act generally requires every bank holding company to obtain the prior approval of the Federal Reserve 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 5.00% 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 Federal Reserve 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 Federal Reserve also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers, as well as Community Reinvestment Act performance.

With certain exceptions, the BHC Act also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5.00% 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 Federal Reserve 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 Federal Reserve 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.

Regulations Concerning Cash Dividends

The principal source of Bancorp’s cash revenues historically has been dividends received from the Bank. 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; and (3) all accrued expenses, interest and taxes of the institution. Since the Bank currently has retained earnings that are a negative $212.2 million, the Bank will not under Oregon law be able to pay any dividends until it has had sufficient positive earnings to return its negative retained earnings to a positive number or the DFCS permits the Bank to apply part of its paid-in capital to reduce the deficit in retained earnings.

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

Federal and State Bank Regulation

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

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 bank 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 bank 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.”

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, including with respect to 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 and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations. The risk-based 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

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purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in one of two tiers, depending on type:

Bancorp, like other bank holding companies, currently is required to maintain Tier 1 capital and “total capital” (the sum of Tier 1 and Tier 2 capital) equal to at least 4.00% and 8.00%, respectively, of its total risk-weighted assets. 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 6.00% and 10.00%, respectively, on a risk-adjusted basis.

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 3.00% for bank holding companies and banks that have the highest supervisory rating. All other bank holding companies and banks are required to maintain a minimum leverage ratio of 4.00%, 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 5.00%. The FDIC has advised the Bank that a minimum leverage ratio of 10.00% 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, 2011, this requirement related to increasing the Bank’s Tier 1 leverage ratio has been met.

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: (1) “well-capitalized” if the institution has a total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater, and a leverage ratio of 5.00% 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; (2) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.00% or greater, a Tier 1 risk-based capital ratio of 4.00% or greater, and a leverage ratio of 4.00% or greater and is not “well-capitalized”; (3) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.00%, a Tier 1 risk-based capital ratio of less than 4.00% or a leverage ratio of less than 4.00%; (4) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.00%, a Tier 1 risk-based capital ratio of less than 3.00% or a leverage ratio of less than 3.00%; and (5) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.00% 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

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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 (1) an amount equal to 5.00% of the depository institution’s total assets at the time it became undercapitalized and (2) 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 that would be applicable 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.

At December 31, 2011, Bancorp’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 9.42%, 13.04%, and 14.34%, respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 10.81%, 14.86%, and 16.15%, respectively, which met regulatory benchmarks for a “well-capitalized” designation. Regulatory benchmarks for a “well-capitalized” designation are 5.00%, 6.00%, and 10.00% for Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital, respectively. However, per the Written Agreement, Bancorp did not meet the 10% Tier 1 leverage ratio requirement and is therefore required to deliver an updated Capital Plan to the FRB and DFCS in this regard.

In December 2010, the Basel Committee on Banking Supervision (the “BCBS”) finalized new capital standards. The BCBS is a committee of banking supervisory authorities of various countries, including the United States. The standards adopted by the BCBS in December 2010 are commonly referred to as “Basel III” and will be phased in over a number of years. Basel III, among other things, imposes more restrictive eligibility requirements for Tier 1 and Tier 2 capital and establishes a minimum Tier 1 common equity (generally common stock, stock surplus and retained earnings) to risk-weighted assets ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0% and a minimum total capital (Tier 1 and Tier 2) to risk-weighted assets ratio of 8.0%. In addition, Basel III imposes constraints on dividends and other distributions if the Tier 1 common equity to risk-weighted assets ratio is less than 7.0%, the Tier 1 capital to risk-weighted assets ratio is less than 8.5% or the total capital to risk-weighted assets ratio is less than 10.5%. Basel III also imposes a Tier 1 leverage ratio of 3.0% based on a measure of total exposure rather than total assets, permits regulators to impose an additional 2.5% common equity buffer during periods of excessive credit growth, caps the level of mortgage servicing rights that can be included in capital and introduces new liquidity standards. It is expected that the United States banking regulators will issue proposed rules outlining

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how Basel III-based requirements will be implemented for depository institutions and their holding companies. If adopted, these rules could result in more stringent capital and liquidity requirements for Bancorp and the Bank.

For more information regarding the capital ratios and leverage ratios of Bancorp and the Bank see “Liquidity and Sources of Fund” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report and Note 20 — Regulatory Matters in the Notes to Consolidated Financial Statements included in Item 8, Consolidated Financial Statements and Supplementary Data, of this report.

Deposit Insurance

Substantially all of 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 Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks and savings institutions to $250,000 per depositor. This change makes permanent temporary coverage increases that had been in effect since October 2008. The Dodd-Frank Act also provides unlimited deposit insurance for non-interest bearing transaction accounts through December 31, 2012, extending a similar but not identical program that had been available since 2008. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.

All FDIC-insured institutions are also required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation, or FICO, an agency of the federal government established to recapitalize a predecessor to the DIF. These assessments, which are adjusted quarterly, will continue until the FICO bonds mature in 2017, through 2017. The annual FICO assessment rate for the first quarter of 2012 is 0.66 basis points.

On November 17, 2009, the FDIC imposed a prepayment requirement on most insured depository organizations, requiring that the organizations prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 and for each calendar quarter for calendar years 2010, 2011, and 2012. Because of its weak financial condition at the time, the Bank received an exemption from the requirement to prepay these assessments and continues to pay them quarterly.

The Dodd-Frank Act requires the FDIC to make numerous changes to the DIF and the manner in which assessments are calculated. The minimum ratio of assets in the DIF to the total of estimated insured deposits was increased from 1.15% to 1.35%, and the FDIC is given until September 30, 2020 to meet the reserve ratio. In December 2010, the FDIC adopted a final rule setting the reserve ratio of the DIF at 2.0%. In February 2011, the FDIC adopted a final rule covering assessments on insured institutions. As required by the Dodd-Frank Act, the February 2011 rule provides that assessments will be based on an insured institution’s average consolidated assets less tangible equity capital, instead of being based on deposits.

For the purpose of determining an institution’s assessment rate, each institution is provided an assessment risk assignment, which is generally based on the risk that the institution presents to the DIF. Insured institutions with assets of less than $10.0 billion are placed in one of four risk categories. These risk categories are generally determined based on an institution’s capital levels and its supervisory evaluation. These institutions will generally have an assessment rate that can range from 2.5 to 45 basis points. However, the FDIC does have flexibility to adopt assessment rates without additional rule-making provided that (1) no quarterly adjustment is in excess of 2 basis points and (2) the cumulative adjustment cannot exceed 2 basis points. In the future, if the reserve ratio reaches certain levels, these assessment rates will generally be lowered.

Incentive Compensation

In June 2010, the Federal Reserve, Office of Comptroller of the Currency, and FDIC issued a comprehensive final guidance on incentive compensation policies 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 guidance, which covers all employees that have the

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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 (1) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (2) be compatible with effective internal controls and risk management, and (3) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

In addition, Section 956 of the Dodd-Frank Act requires certain regulators (including the FDIC, Securities and Exchange Commission (“SEC”) and Federal Reserve) to adopt requirements or guidelines prohibiting excessive compensation or compensation that could lead to material loss as well as rules relating to disclosure of compensation. On April 14, 2011, these regulators published a joint proposed rulemaking to implement Section 956 of the Dodd-Frank Act for depository institutions, their holding companies and various other financial institutions with $1 billion or more in assets. Section 956 prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses. The proposed rule would (1) prohibit incentive-based compensation arrangements for covered persons that would encourage inappropriate risks by providing excess compensation, (2) prohibit incentive-based compensation arrangements for covered persons that would expose the institution to inappropriate risks by providing compensation that could lead to a material financial loss, (3) require policies and procedures for incentive-based compensation arrangements that are commensurate with the size and complexity of the institutions and (4) require annual reports on incentive compensation structures to the institution’s appropriate federal regulator.

The Company is further restricted in its ability to make certain “golden parachute” and “indemnification” payments under Part 359 of the FDIC regulations, and the FDIC also regulates payments to executives under Part 364 of its regulations relating to excessive executive compensation. Lastly, the ability to hire new executive officers without prior notice to the regulators is restricted, and in connection with such notice, the regulators may review the compensation proposals for any such officers.

The Dodd-Frank Act contains a number of provisions relating to compensation applying to public companies such as the Company. The Dodd-Frank Act added a new Section 14A(a) to the Securities Exchange Act of 1934 (“Exchange Act”) that requires companies to include a separate non-binding resolution subject to shareholder vote in their proxy materials approving the executive compensation disclosed in the materials. In addition, a new Section 14A(b) to the Exchange Act requires any proxy or consent solicitation materials for a meeting seeking shareholder approval of an acquisition, merger, consolidation or disposition of all or substantially all of a company’s assets to include a separate non-binding shareholder resolution approving certain “golden parachute” payments made in connection with the transaction. A new Section 10D to the Exchange Act requires the SEC to direct the national securities exchanges to require companies to implement a policy to “claw back” certain executive payments that were made based on improper financial statements.

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 the Bank could have a material effect on the business of the Company.

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Financial Privacy

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

Anti-Money Laundering and the USA Patriot Act

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.

Restrictions on Transactions with Affiliates

The Bank and any subsidiaries it may have are subject to certain restrictions under federal law on extensions of credit by, and certain other transactions with, Bancorp and any non-banking affiliates it may have. In addition, federal law places restrictions on loans from the Bank to executive officers, directors and principal shareholders of the Bank and its affiliates.

Reserve Requirements

The Bank is subject to Federal Reserve regulations under which depository institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW accounts and checking accounts). The regulations generally require that for 2012 reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts over $11.5 million up to $71.0 million. Net transaction accounts up to $11.5 million are exempt from reserve requirements. The amount of aggregate transaction accounts in excess of $71.0 million is subject to a reserve ratio of 10.0%. The amounts of transaction accounts subject to the various reserve ratios are generally adjusted by the Federal Reserve annually.

Regulations and historical practice of the Federal Reserve have required bank holding companies to serve as a “source of strength” for their subsidiary banks. The Dodd-Frank Act codifies this requirement and extends it to all companies that control an insured depository institution. Accordingly, Bancorp is now required to act as a source of strength for the Bank. The appropriate federal banking regulators are required by the Dodd-Frank Act to issue final rules to carry out this requirement

Risk Retention

The Dodd-Frank Act requires that, subject to certain exemptions, securitizers of mortgage and other asset-backed securities retain not less than five percent of the credit risk of the mortgages or other assets. In April 2011, the federal banking regulators, together with the SEC, the Federal Housing Finance Agency and the Department of Housing and Urban Development, published proposed regulations implementing this requirement. Generally, the proposed regulations provide various ways in which the retention of risk requirement can be satisfied and also describe exemptions from the retention requirements for various types of assets, including mortgages. Final regulations have not been adopted.

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Consumer Protection Laws and Regulations

The Bank and its affiliates are subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While this list is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the SAFE Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service Members’ Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21^st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages and the loss of certain contractual rights. The Bank has a compliance governance structure in place to help insure its compliance with these requirements.

The Dodd-Frank Act establishes the Bureau of Consumer Financial Protection as a new independent bureau within the Federal Reserve system that will be responsible for regulating consumer financial products and services under federal consumer financial laws. The Bureau of Consumer Financial Protection will have broad rulemaking authority with respect to these laws and exclusive examination and primary enforcement authority with respect to banks with assets of $10 billion or more.

The Dodd-Frank Act also contains a variety of provisions intended to reform consumer mortgage practices. The provisions include (1) a requirement that lenders make a reasonable determination that at the time a residential mortgage loan is consummated the consumer has a reasonable ability to repay the loan and related costs, (2) a ban on loan originator compensation based on the interest rate or other terms of the loan (other than the amount of the principal), (3) a ban on prepayment penalties for certain types of loans, (4) bans on arbitration provisions in mortgage loans and (5) requirements for enhanced disclosures in connection with the making of a loan. The Dodd-Frank Act also imposes a variety of requirements on entities that service mortgage loans.

The Dodd-Frank Act contains provisions further regulating payment card transactions. The Dodd-Frank Act requires the Federal Reserve to adopt regulations limiting any interchange fee for a debit transaction to an amount which is “reasonable and proportional” to the costs incurred by the issuer. The Federal Reserve has adopted final regulations limiting the amount of debit interchange fees that large bank issuers may charge or receive on their debit card transactions. There is an exemption from the rules for issuers with assets of less than $10 billion and the Federal Reserve has stated that it will monitor and report to Congress on the effectiveness of the exemption. Nevertheless, it is unclear whether such smaller issuers (which include the Bank) will, as a practical matter, be able to avoid the impact of the regulations.

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: (1) 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 (2) 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.

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Interstate Banking

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, with certain restrictions, 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 SEC, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports, are accessible free of charge at our website at 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 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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There are a number of risks and uncertainties, many of which are beyond the Company’s control, which 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 Item 1A; other risks facing the Company identified in this report, including, risks, uncertainties and assumptions identified in this report that are difficult to predict and that could materially affect the Company’s financial condition and results of operations; the information in Part I, Item 1, Business, Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Company’s cautionary statements as to “Forward-Looking Statements” contained in Part II, Item 7.

Risks Related to Our Business

Bancorp and the Bank are operating under regulatory agreements and an order which place significant limitations and obligations on Bancorp and the Bank until such time as they are lifted.

In late August 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 cease-and-desist order. 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.

On October 26, 2009, Bancorp entered into a written agreement with the FRB and DFCS, which requires Bancorp to take certain measures to improve its safety and soundness. Under the Written Agreement, Bancorp was required to develop and submit for approval a plan to maintain sufficient capital at Bancorp and the Bank. As of December 31, 2011, Bancorp did not meet the 10% Tier 1 leverage ratio requirement per the Written Agreement, and is therefore required to deliver an updated Capital Plan to the FRB and DFCS in this regard. The Order and Written Agreement, and corrective actions taken in response to them, are described in greater detail under the heading “Supervision and Regulation” in Part I, Item 1, Business, above, and elsewhere in this report.

The Order and Written Agreement remain in place until lifted by the FDIC and DFCS, and FRB and DFCS, respectively. Under the Order and Written Agreement described above, the Company is restricted or prohibited as to certain corporate or banking activities and/or such activities may require the permission of our regulator including, but not limited to, merger or acquisition activities, certain forms of debt or equity issuance, and executive management changes.

The Company is required to maintain capital to meet regulatory requirements, and if the Company fails to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, the financial condition, liquidity, and results of operations, as well as the Company’s ability to maintain regulatory compliance, would be adversely affected.

Bancorp and the Bank must meet regulatory capital requirements and maintain sufficient liquidity. The Company’s ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perfections regarding the banking industry and market condition, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly we cannot assure you that we will be able to raise additional capital if need or on terms acceptable to us. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity, and results of operations would be materially and adversely affected.

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Bancorp relies on dividends from the Bank, and the Bank is currently prohibited from paying dividends to Bancorp.

Because of the elevated credit risk and associated losses incurred in 2009, 2010 and 2011, regulators have required Bancorp to obtain permission prior to payment of dividends on its common stock. In addition, pursuant to the Order, the Bank is required to obtain permission prior to payment of cash dividends on its common stock. Oregon laws prohibit the Bank from paying dividends to Bancorp unless the Bank has positive retained earnings. Although the relevant statute allows the State of Oregon to permit an adjustment of the retained earnings balance, the Bank must become profitable and have positive retained earning prospectively to qualify for such adjustment. Accordingly, we do not expect the Bank to pay any dividends to Bancorp for the foreseeable future and Bancorp does not expect to pay dividends to shareholders for the foreseeable future. Cascade Bancorp is a separate legal entity from the Bank and substantially all of its revenues are derived from Bank dividends. If the Bank is unable to pay dividends to Bancorp in the future, Bancorp may not be able to pay dividends on its stock or pay its creditors, which could have a material adverse effect on the Company’s financial condition and results of operations. Restrictions on the payment of dividends are described in greater detail under the heading “Regulations Concerning Cash Dividends” in Part I, Item 1, Business, above, which includes a discussion of the Bank’s negative retained earnings, and elsewhere in this report.

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

The Company’s business is closely tied to the economies of Idaho and Oregon in general and is particularly affected by the economies of Central, Southern, and Northwest Oregon, as well as the greater Boise/Treasure Valley, 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 has had a direct and adverse effect on the financial condition and results of operations of the Company. The impact on the Company has been an elevated level of impaired loans, and an associated increase in loan loss provision and charge-offs for the Company, leading to net losses for 2009, 2010, and 2011. During 2011 the Company sold approximately $110.0 million (carrying amount) of certain non-performing, substandard, and related performing loans and approximately $2.0 million of OREO, in the Bulk Sale, the result of which decreased impaired loans. However, no assurance can be given that adverse economic or real estate trends will not continue, which could cause an increase in the amount of non-performing and substandard loans in the loan portfolio.

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 79% of the Bank’s loan portfolio at December 31, 2011 consisted of loans secured by real estate located in Oregon and Idaho. Declining real estate values and reduced availability of mortgage financing have negatively impacted cash flows and real estate sales, which has adversely affected customers’ ability to repay loans. In addition, the value of collateral underlying such loans has decreased materially.

The Company has a material amount of adversely risk rated and non-performing assets. If borrowers fail to perform according to loan terms and if the Company takes possession of real estate properties it could experience higher non-performing asset levels in the future. Additionally, if real estate values continue to decline, the value of real estate collateral securing the Company’s loans could be significantly reduced, adversely affecting the Company’s financial condition and results of operations.

In addition, the Bank’s loans in other real estate portfolios including commercial construction and commercial real estate have experienced and may continue to experience reduced cash flow and reduced collateral value. The Bank has a significant concentration in loans secured by commercial real estate.

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Nationally, delinquencies in these types of portfolios are relatively high. While the Company’s portfolios of these types of loans have not been as adversely impacted as residential-related loans, there can be no assurance that the credit quality in these portfolios will not decrease significantly. If they do, it 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 condition and results of operations.

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

The Company maintains a reserve for credit losses in an amount that the Company believes is adequate to provide for losses inherent in the loan portfolio. The level of the reserve 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 the Company 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 the Company’s control, may require an increase in the reserve for loan losses. Increases in non-performing loans have a significant impact on the Company’s reserve for loan losses. Generally, the Company’s non-performing loans and assets reflect operating difficulties of individual borrowers resulting from weakness in the economies of the markets the Company serves.

If real estate markets or the economy in general deteriorate further or do not sufficiently recover for an extended period of time, the Company expects it that it may continue to experience increased delinquencies and credit losses. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan-related losses. Additionally, banking regulators may require the Company to increase its reserve for credit losses in the future, which could have a negative effect on the Company’s financial condition and results of operations.

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

The Company maintains a reserve for credit losses in an amount that the Company believes is adequate to provide for losses inherent in the loan portfolio. While the Company strives to monitor credit quality and to identify adversely risk rated loans on a consistent and timely basis, including those 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 problem or non-performing loans. Estimation of the reserve requires us to make various assumptions and judgments about the collectability of loans in the Company’s loan portfolio. These assumptions and judgments include historical loan loss experience, current credit profiles of the Bank’s 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. The Company cannot be certain that it will be able to identify deteriorating loans before they become non-performing assets, or that it will be able to limit losses on those loans that have been identified. As a result, future 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 the loan portfolio, deteriorating values in underlying collateral (most of which consists of real estate in the markets served) and changes in the financial condition of borrowers, such as those that 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 periodically review the Company’s reserve for credit losses. Regulators may require the Company to increase its reserve for credit losses in the future, which could have a negative effect on the Company’s financial condition and results of operations.

During the year ended December 31, 2011, the Company revised and continued to enhance its methodology for estimating the adequacy of the reserve for loan losses. The reserve for loan losses at December 31, 2011 was significantly affected by the revisions and enhancements to the Company’s methodology for calculating its allowance for loan losses (“ALLL”), as well as by the inclusion of charge-offs

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incurred in the 2011 Bulk Sale of certain loans as it relates to its historical loss factors. The significant revisions to the 2011 methodology included (1) the application of historical loss factors by risk rating for each loan segment, as compared to the prior method which utilized blended historical loss factors, (2) a change to historical look-back periods, and (3) refinement of the qualitative factors and application thereof used to adjust the estimated historical loss factors.

Liquidity risk could impair the Company’s ability to fund operations and jeopardize its financial condition.

Liquidity is essential to the Company’s business. The Company’s primary funding source is commercial and retail deposits customers. In addition the Bank has historically had access to advances from the FHLB, FRB discount window and other wholesale sources such as Internet sourced deposits to fund operations. Although the Company has historically been able to replace maturing deposits and advances as necessary, it might not be able to replace such funds in the future depending on adverse results of operations, financial condition, 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 the Company’s liquidity. The Company’s access to funding sources in amounts adequate to finance 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. The Company has established a significant liquidity reserve as of December 31, 2011; however, the ability to borrow or attract and retain deposits in the future could be adversely affected by the Company’s financial condition or regulatory restrictions, or impaired by factors that are not specific to the Company, such as FDIC insurance changes, further disruption in the financial markets or negative views and expectations about the prospects for the banking industry. Per the terms of the Order, the Bank is presently restricted from accepting additional brokered deposits, including reciprocal Certificate of Deposit Account Registry Service (“CDARS”) program. As of December 31, 2011, the Company had no outstanding brokered deposits and de minimus CDARS.

The Bank’s primary counterparty for borrowing purposes is the FHLB, and liquid assets are mainly held at correspondent banks or the FRB. Borrowing capacity from the FHLB or FRB may fluctuate based upon the condition of the Bank or the acceptability and risk rating of securities or loan collateral, and counterparties could adjust discount rates applied to such collateral at their discretion. The FRB or FHLB could restrict or limit the Company’s access to secured borrowings. Correspondent banks can withdraw unsecured lines of credit or require collateralization for the purchase of fed funds. In 2011, the amount of collateral the Bank was required to pledge against Oregon public deposits was reduced to 50% of the uninsured portion of these Oregon public deposits, but the percentage of collateral required to be pledged could be increased in the future. 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 depository of public funds in excess of collateral pledged, an 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, the occurrence of Oregon bank failures and the level of public fund deposits held by the failing bank, and 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 sources of funds will remain adequate for liquidity needs, and the Bank may be compelled to seek additional sources of financing in the future. There can be no assurance that additional borrowings, if sought, would be available or, if available, would be on favorable terms. If additional financing sources are unavailable or not available on reasonable terms to provide necessary liquidity, the Company’s financial condition, results of operations and future prospects could be materially and adversely affected.

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Real estate values may continue to decrease leading to additional and greater than anticipated loan charge-offs and valuation write downs on OREO.

Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as OREO property. In its normal lending process the Bank may take title to real estate serving as collateral for loans. In the event of obligor default, the Bank may have the right to foreclose on such collateral. At December 31, 2011, Bank had OREO with a carrying value of approximately $21.3 million relating to loans originated in the raw land, land development, residential and commercial real estate, and other portfolios. Generally, higher levels of OREO lead to greater expenses as the Bank incurs costs to manage and dispose of the properties, including personnel costs, insurance, taxes, completion costs, repair costs, and other costs associated with property ownership. There are also funding costs associated with OREO assets. The Bank evaluates OREO property values periodically and establishes valuations reserves, as appropriate, to adjust the carrying value of the properties to the lesser of book or appraised value, net of selling costs and any additional liquidation reserves to expedite the sale of such properties. Decreases in market prices may lead to additional OREO valuation reserves, with a corresponding expense in the Company’s consolidated statement of operations. Further valuation reserves of OREO or an inability to sell OREO properties could have a material adverse effect on the Company’s results of operations and financial condition.

The banking industry and the Company operate under certain regulatory requirements which undergo frequent and often significant changes and that are expected to further impair revenues, operating income and financial condition.

The Company operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by the DFCS, the FDIC, and the Federal Reserve. The regulations affect the Company’s investment practices, lending activities, and dividend policy, among other things. Moreover, federal and state banking laws and regulations undergo frequent and often significant changes and have been subject to significant change in recent years, sometimes retroactively applied, and may change significantly in the future. Changes to these laws and regulations or other actions by regulatory agencies could, among other things, make regulatory compliance more difficult or expensive for the Company, limit the products the Company can offer or increase the ability of non-banks to compete, and could adversely affect the Company in significant but unpredictable ways which in turn could have a material adverse effect on the Company’s financial condition or results of operations. The Company’s compliance with these laws and regulations is costly and restricts certain 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. Failure to comply with these 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 Bank’s deposit insurance premium could be higher in the future, which could have a material adverse effect on its 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 DIF at a certain level; if an FDIC-insured financial institution fails, payments of deposits up to insured limits are made from the Deposit Insurance Fund. Current economic conditions have increased bank failures. An increase in the risk category of the Bank, adjustments to the base assessment rates, and/or a significant special assessment could have a material adverse effect on the Company’s earnings.

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.

Management has concluded a material weakness in internal control over financial reporting exists with respect to the Company’s estimate of the reserve for loan losses. During 2011, management significantly refined and enhanced its model for calculating the reserve for loan losses and concluded that as of

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December 31, 2011, a sufficient period had not yet elapsed to provide the required remediation evidence that revised controls were operating effectively. Management previously disclosed a material weakness in internal control over financial reporting in its Annual Report on Form 10-K for the year ended December 31, 2010 with respect to the Company’s estimate of the reserve for loan losses. At that time, management had refined and enhanced its model and concluded that a sufficient period of time subsequent to December 31, 2010 had not yet elapsed to provide the required remediation evidence that the revised controls were operating effectively. As of December 31, 2011 the enhanced methodology did not change the Company’s conclusion that the total reserve for loan losses was sufficient to cover losses inherent in the loan portfolio. There can be no assurance that the Company’s internal controls and procedures will not fail or be circumvented in the future.

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 financial services business is intensely competitive and the Company’s success will depend on its 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.

The Company’s 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.

The Company continually encounters technological changes, and may have fewer resources than many of its competitors to continue to invest in technological improvements.

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 customers and address those needs by using technology to provide the desired products and services and to create additional efficiencies in its operations. Certain competitors may have substantially greater resources to invest in technological improvements. The Company may not be able to successfully implement new technology-driven products and services or to effectively market these products

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and services to our customers. Failure to implement the necessary technological changes could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

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

The Company expects future success to be driven in large part by the relationships maintained with its clients by its executives and senior lending officers. The Company has entered into employment agreements with several members of senior management. The existence of such agreements, however, does not necessarily ensure that the Company will be able to continue to retain their services. At this date the Company has a vacancy and is actively recruiting for the position of Chief Credit Officer, an important executive role. The vacancy in the Chief Credit Officer position or unexpected loss of key employees could have a material adverse effect on the Company’s business and possibly result in reduced revenues and earnings.

The Company’s future successes and profitability are substantially dependent upon the management and banking abilities of its senior executives, including the new CEO hired effective January 2012.

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 the Company’s 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 the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginnie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and FHLB, or otherwise backed by Federal Housing Administration or Veteran’s Administration 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 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 the Company’s results of operations, equity, and capital ratios.

The Company is exposed to risk of environmental liabilities with respect to properties to which it takes title.

In the course of business, the Company may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. The Company 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 the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If the Company becomes subject to significant environmental liabilities, its business, financial condition, and results of operations could be adversely affected.

The Company’s profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe it money or other assets.

The Company is exposed to the risk that third parties that owe it money or other assets will not perform their obligations. These parties may default on their obligations to the Company due to bankruptcy, lack of liquidity, operational failure or other reasons. The Company’s rights against third parties may not be

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enforceable in all circumstances. In addition, deterioration in the credit quality of third parties whose securities or obligations the Company holds could result in losses and/or adversely affect the Company’s ability to use those securities or obligations for liquidity purposes. The Company relies on representations of potential borrowers and/or guarantors as to the accuracy and completeness of certain financial information. The Company’s financial condition and results of operations could be negatively impacted if the financial statements or other information that the Company relies upon is materially misleading.

Increased and/or special FDIC assessments will hurt the Company’s earnings.

The recent economic recession has caused a high level of bank failures, which has dramatically increased FDIC resolution costs and led to a significant reduction in the balance of the DIF. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased the Company’s deposit insurance costs and negatively impacted earnings. Additional increases in the base assessment rate or additional special assessments would negatively impact earnings.

Recent legislative and required regulatory initiatives will impose restrictions and requirements on financial institutions that could have an adverse effect on the Company’s business.

The United States Congress, the Treasury Department and the FDIC have taken several steps to support the financial services industry, including certain well-publicized programs, such as the Troubled Asset Relief Program as well as programs enhancing the liquidity available to financial institutions and increasing insurance available on bank deposits. These programs have provided an important source of support to many financial institutions. Partly in response to these programs and the current economic climate, the President signed on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Few provisions of the Dodd-Frank Act are effective immediately, with various provisions becoming effective in stages. Many of the provisions require issuance of regulations by the banking regulators and not all of these have been finalized. These rules will increase regulation of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices. These rules will, for example, impact the ability of financial institutions to charge certain banking and other fees, allow interest to be paid on demand deposits, impose new restrictions on lending practices and require depository institution holding companies to maintain capital levels not less than the levels required for insured depository institutions. The Company cannot predict the substance or impact of pending or future legislation or regulation. Compliance with such legislation or regulation may, among other effects, significantly increase costs, limit product offerings and operating flexibility, require significant adjustments in internal business processes, and possibly require the Company to maintain regulatory capital at levels above historical practices.

Realization of deferred tax assets is dependent upon the Company generating future taxable income, and tax limitations applicable to the 2011 Capital Raise could result in permanent impairment of a portion of the Company’s deferred tax assets and/or limit deductibility of certain losses in the future.

Currently, the Company maintains a 100% valuation allowance against its deferred tax assets at December 31, 2011 and 2010. Realization of deferred tax assets is dependent upon the Company’s ability to generate future taxable income. In addition, application of complex tax regulations resulting from the Capital Raise of January 2011 may otherwise limit tax deductions in the future.

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None.

The Company’s headquarters are located in downtown Bend, Oregon and the building is owned by the Bank and is situated on leased land. The Company also owns or leases other facilities within its primary market areas in the regions of Central Oregon, Southern Oregon, Northwest Oregon, and Boise/Treasure Valley, Idaho. The Company considers its properties to be suitable and adequate for its present needs.

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve any of these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

On August 18, 2010, the Bank was sued in an asserted class action lawsuit, Russell Firkins & Rena Firkins v. Bank of the Cascades, Case No. 1:10-cv-414-BLW in the United States District Court for the District of Idaho. The lawsuit alleged that, in 2004, the Bank’s predecessor (Farmers and Merchants Bank), acting as trustee under three similar trust indentures, inappropriately disbursed the proceeds of three bond issuances, allegedly resulting years later in the bondholders’ loss of their collective investment of approximately $23.5 million. Recovery was sought on claims of breach of the indentures, breach of fiduciary duty, and conversion. On November 22, 2010, the lawsuit was dismissed without prejudice for a lack of subject matter jurisdiction in federal court. Following dismissal of the federal action, the parties reached a stipulated agreement settling all claims, and such amount is included in other expenses in the Company’s December 31, 2011 consolidated statement of operations. Based upon the stipulated settlement, a state court complaint was filed in Ada County, Idaho, the class was certified, the court preliminarily approved settlement on behalf of the class, notice to the class of the settlement was effectuated, no class member opted out or objected, the settlement was approved, and judgment was entered on January 17, 2012 dismissing the class action with prejudice. Pursuant to the settlement agreement and judgment, the settlement funds were disbursed to class counsel on January 23, 2012.

On November 10, 2010 the DBSI Funding Corporations' bankruptcy trustee filed an adversary proceeding against the Bank, in re: DBSI INC., et al, James R. Zazzali, as Trustee v. Bank of the Cascades, Adversary Proceeding No. 10-55325 (PJW) in the U.S. Bankruptcy Court, District of Delaware. The trustee claims that the Bank violated the automatic stay by taking control of approximately $250,000 in the DBSI Funding Corporations' accounts shortly after the DBSI bankruptcy filing, and, as a result, the Bank owes sanctions and damages. The parties reached a stipulated agreement settling all claims and a Stipulation of Dismissal was filed by the Trustee on January 6, 2012 dismissing the proceeding with prejudice. The amount of the settlement does not have a material effect on the Company’s consolidated liquidity, financial condition, or results of operations.

Not applicable.

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PART II

Market Information

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. 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. In particular, the table below retroactively reflects a one-for-ten reverse stock split that was effective November 22, 2010. Prices do not include retail mark-ups, mark-downs or commissions.

Quarter Ended		High				Low				Dividend per share
2011
December 31		$	6.01			$	3.80				N/A
September 30		$	10.80			$	5.83				N/A
June 30		$	12.36			$	6.75				N/A
March 31		$	9.99			$	6.24				N/A
2010
December 31		$	9.50			$	4.40				N/A
September 30		$	6.20			$	3.80				N/A
June 30		$	13.90			$	4.80				N/A
March 31		$	9.35			$	4.90				N/A

Holders

As of December 31, 2011 Cascade Bancorp had 47,236,725 shares of common stock outstanding, held of record by approximately 429 holders of record. The last reported sales price of our common stock on the NASDAQ Capital Market on March 21, 2012 was $5.86 per share.

Dividend Policy

The amount of future dividends will depend upon our earnings, financial condition, 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. Pursuant to the Order, the Bank cannot pay dividends on its common stock without the permission of its regulators. Bancorp must obtain permission prior to payment of dividends on its common stock. Accordingly, we do not expect the Bank to pay any dividends to Bancorp for the foreseeable future, and Bancorp does not expect to pay dividends to shareholders for the foreseeable future.

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, 2011. The following consolidated financial data should be read in conjunction with Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report, and the Consolidated Financial Statements and related notes included in Part II, Item 8 of this report.

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(In thousands, except per share data and ratios; unaudited)		Years ended December 31,
		2011				2010				2009				2008				2007
Balance Sheet Data (at period end)
Investment securities		$	210,840			$	116,816			$	135,763			$	109,691			$	87,015
Loans, gross			897,564				1,223,713				1,547,676				1,956,184				2,041,478
Reserve for loan losses			43,905				46,668				58,586				47,166				33,875
Loans, net			853,659				1,177,045				1,489,090				1,909,018				2,007,603
Total assets			1,303,450				1,716,458				2,172,128				2,278,307				2,394,492
Total deposits			1,086,827				1,376,899				1,815,348				1,794,611				1,667,138
Non-interest bearing deposits			371,662				310,164				394,583				364,146				435,503
Total common shareholders’ equity (book)(1)			132,881				10,056				23,318				135,239				275,286
Tangible common shareholders’ equity (tangible)(2)			132,881				5,144				16,930				127,318				160,737
Income Statement Data
Interest and dividend income		$	67,100			$	84,980			$	106,811			$	137,772			$	171,228
Interest expense			11,704				23,740				34,135				42,371				62,724
Net interest income			55,396				61,240				72,676				95,401				108,504
Loan loss provision(3)			75,000				24,000				134,000				99,593				19,400
Net interest income (loss) after loan loss provision			(19,604	)			37,240				(61,324	)			(4,192	)			89,104
Noninterest income			10,967				13,373				21,626				19,991				21,225
Noninterest expenses(4)			83,199				73,749				94,716				173,671				62,594
Income (loss) before income taxes and extraordinary gain			(91,836	)			(23,136	)			(134,414	)			(157,872	)			47,735
Provision (credit) for income taxes			(11,721	)			(9,481	)			(19,585	)			(23,306	)			17,756
Net income (loss) before extraordinary gain			(80,115	)			(13,655	)			(114,829	)			(134,566	)			29,979
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes(5)			32,839				—				—				—				—
Net income (loss)		$	(47,276	)		$	(13,655	)		$	(114,829	)		$	(134,566	)		$	29,979
Share Data(1)
Basic earnings (loss) per common share		$	(1.08	)		$	(4.87	)		$	(41.01	)		$	(48.20	)		$	10.61
Diluted earnings (loss) per common share		$	(1.08	)		$	(4.87	)		$	(41.01	)		$	(48.20	)		$	10.49
Book value per common share		$	2.81			$	3.52			$	8.30			$	48.10			$	98.20
Tangible value per common share		$	2.81			$	1.80			$	6.00			$	45.30			$	57.30
Cash dividends paid per common share		$	0.00			$	0.00			$	0.00			$	2.20			$	3.70
Ratio of dividends declared to net income			0.00	%			0.00	%			0.00	%			-4.56	%			34.86	%
Basic average shares outstanding			43,628				2,805				2,800				2,794				2,824
Fully diluted average shares outstanding			43,628				2,805				2,800				2,794				2,858
Key Ratios
Return on average total shareholders’ equity (book)			-25.65	%			-60.69	%			-102.88	%			-47.90	%			10.92	%
Return on average total shareholders’ equity (tangible)			-26.12	%			-80.93	%			-109.94	%			-80.51	%			18.83	%
Return on average total assets			-3.04	%			-0.71	%			-5.01	%			-5.58	%			1.28	%
Pre-tax pre loan loss provision return on average assets			1.03	%			0.05	%			-1.49	%			1.94	%			2.87	%
Net interest spread			3.42	%			3.32	%			3.11	%			3.90	%			4.20	%
Net interest margin			3.85	%			3.51	%			3.43	%			4.44	%			5.21	%
Total revenue (net int inc + non int inc)		$	66,363			$	74,613			$	94,302			$	115,153			$	129,644
Efficiency ratio(4)			125.37	%			98.84	%			100.44	%			150.61	%			48.22	%

Notes:

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(In thousands, except per share data and ratios; unaudited)		Years ended December 31,
		2011				2010				2009				2008				2007
Credit Quality Ratios
Reserve for credit losses		$	45,455			$	47,609			$	59,290			$	48,205			$	37,038
Reserve to ending total loans			5.06	%			3.89	%			3.83	%			2.46	%			1.81	%
Non-performing assets(4)		$	30,404			$	120,540			$	160,970			$	173,200			$	55,681
Non-performing assets to total assets			2.32	%			7.02	%			7.41	%			7.00	%			2.33	%
Net Charge off’s (NCOs)		$	77,763			$	35,918			$	122,580			$	86,302			$	9,110
Net loan charge-offs (annualized)			7.19	%			2.61	%			6.81	%			4.20	%			0.46	%
Provision for loan losses to NCOs			88	%			67	%			109	%			115	%			213	%
Mortgage Activity
Mortgage Originations		$	28,722			$	28,083			$	177,206			$	121,663			$	170,095
Total Servicing Portfolio (sold loans)		$	0			$	0			$	542,905			$	512,163			$	493,969
Capitalized Mortgage Servicing Rights (MSR’s)		$	0			$	0			$	3,947			$	3,605			$	3,756
Capital Ratios
Bancorp
Shareholders’ equity to ending assets			10.19	%			0.59	%			1.07	%			5.94	%			11.50	%
Leverage ratio(4)			9.42	%			0.41	%			1.11	%			8.19	%			9.90	%
Tier 1 risk-based capital(4)			13.04	%			0.54	%			1.48	%			8.94	%			10.00	%
Total risk-based capital(4)			14.34	%			1.07	%			2.95	%			10.22	%			11.27	%
Bank
Shareholders’ equity to ending assets			11.64	%			4.75	%			4.18	%			8.80	%			14.11	%
Leverage ratio(4)			10.81	%			4.31	%			3.75	%			8.09	%			9.74	%
Tier 1 risk-based capital(4)			14.86	%			5.66	%			4.97	%			8.83	%			9.82	%
Total risk-based capital(4)			16.15	%			6.94	%			6.25	%			10.09	%			11.08	%

Notes:

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The following table sets forth the Company’s unaudited financial data regarding operations for each quarter of 2011 and 2010. This information, in the opinion of management, includes all normal recurring adjustments necessary to fairly state the information set forth:

		2011
		Fourth Quarter				Third Quarter				Second Quarter				First Quarter
Interest income		$	14,914			$	16,174			$	17,708			$	18,304
Interest expense			2,038				2,654				3,042				3,970
Net interest income			12,876				13,520				14,666				14,334
Loan loss provision			14,700				52,800				2,000				5,500
Net interest income (loss) after loan loss provision			(1,824	)			(39,280	)			12,666				8,834
Noninterest income			2,665				2,822				2,812				2,668
Noninterest expenses			26,629				25,418				15,509				15,643
Loss before income taxes and extraordinary net gain			(25,788	)			(61,876	)			(31	)			(4,141	)
Provision (credit) for income taxes			123				(7,456	)			(2,042	)			(2,346	)
Net income (loss) before extraordinary net gain			(25,911	)			(54,420	)			2,011				(1,795	)
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes			—				—				—				32,839
Net income (loss)		$	(25,911	)		$	(54,420	)		$	2,011			$	31,044
Basic and diluted net income (loss) per common share before extraordinary net gain		$	(0.55	)		$	(1.16	)		$	0.04			$	(0.06	)
Basic and diluted net income per common share resulting from extraordinary net gain			—				—				—				0.99
Basic and diluted net income (loss) per common share		$	(0.55	)		$	(1.16	)		$	0.04			$	0.93

		2010
		Fourth Quarter				Third Quarter				Second Quarter				First Quarter
Interest income		$	19,373			$	20,629			$	22,111			$	22,865
Interest expense			5,146				5,739				6,101				6,754
Net interest income			14,227				14,890				16,010				16,111
Loan loss provision			5,000				3,000				2,500				13,500
Net interest income after loan loss provision			9,227				11,890				13,510				2,611
Noninterest income			3,430				2,955				3,737				3,250
Noninterest expenses			21,226				17,191				18,192				17,137
Loss before income taxes			(8,569	)			(2,346	)			(945	)			(11,276	)
Provision (credit) for income taxes			(9,963	)			1,091				(609	)			—
Net income (loss)		$	1,394			$	(3,437	)		$	(336	)		$	(11,276	)
Basic and diluted net income (loss) per common share		$	0.50			$	(1.23	)		$	(0.12	)		$	(4.02	)

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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, 2011 and 2010 and for each of the years in the three-year period ended December 31, 2011 included in Item 8 of this Annual Report on Form 10-K.

Cautionary Information Concerning Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements about the Company’s plans and anticipated results of operations and financial condition. 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 could cause actual results to differ materially from those projected, including among others, the risk factors described in Item 1A of this report.

These forward-looking statements speak only as of the date of this release. 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.

Capital Raise Completed

In January 2011, the Company completed a $177.0 million capital raise (the Capital Raise). Capital Raise proceeds in the amount of $167.9 million (net of offering costs) were received on January 28, 2011, of which approximately $150.4 million was contributed to the Bank. Approximately $15.0 million of the Capital Raise proceeds were used to extinguish $68.6 million of the Company’s junior subordinated debentures (the “Debentures”) and $3.9 million of related accrued interest payable, resulting in a pre-tax extraordinary gain of approximately $54.9 million ($32.8 million after tax). During the second quarter of 2011, the Company received an additional $0.2 million in proceeds from the issuance of an additional 50,000 shares of common stock in connection with the completion of the Capital Raise described above. See Note 2 in Item 8 of this report for additional information regarding the Capital Raise.

Bulk Sale of Distressed Assets Completed

In September 2011, the Bank entered into a Commercial Loan Purchase Agreement and Residential Loan Purchase Agreement with a third party pursuant to which the Bank sold approximately $110.0 million (carrying amount) of certain non-performing, substandard, and related performing loans and approximately $2.0 million of OREO in the Bulk Sale. In connection with the Bulk Sale, the Bank received approximately $58.0 million in cash from the buyer, incurred approximately $3.0 million in related closing costs, and recorded loan charge-offs totaling approximately $54.0 million. See Note 2 in Item 8 of this report for additional information regarding the transaction.

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 estimated 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)

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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 and considers qualitative factors including economic conditions and a range of other factors in its determination of the reserve. On an ongoing basis, the Company seeks to enhance and refine its methodology such that the reserve is at an appropriate level and responsive to changing conditions. However, the Company’s methodology may not accurately estimate inherent loss or external factors and changing economic conditions may impact the loan 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 “Loan Portfolio and Credit Quality” below in this Item 7.

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 loan losses. Due to the subjective nature of establishing the asset’s fair value when it 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 non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expenses.

Deferred Income Taxes.  The provision (credit) for income taxes is based on income and expenses as reported for consolidated financial statement purposes using the “asset and liability method” for accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision (credit) for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized. At December 31, 2011 and 2010, the Company had a valuation allowance against its deferred tax assets.

Income tax positions that meet a more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured as described above would be reflected as a liability for unrecognized income tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized income tax benefits would be classified as additional income taxes in the consolidated statements of operations.

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/Treasure Valley, Idaho area. The Company’s financial performance is directly and consequentially affected by the ability of borrowers to pay interest on, and repay principal of, outstanding loans. The severity and duration of the economic downturn has affected and is continuing to affect business and consumer cash flows, reserves, and value of collateral securing loans. 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. Many businesses are facing serious challenges due to elevated unemployment and economic uncertainty.

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Governmental and public entities are facing budget cuts and strains due to debt levels. Recently, the national and regional economies and real estate prices have shown signs of stabilization. Until economic conditions stabilize and recovery of the economy is evident, financial strains of customers may persist.

Year End 2011 Financial Highlights and Summary of the Fourth Quarter of 2011

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Fourth Quarter 2011

The Company recorded a net loss of ($25.9) million or ($0.55) per share in the fourth quarter of 2011, compared to a net loss of ($54.4) million or ($1.16) per share in the third quarter of 2011 and as compared to net income of $1.4 million or $0.50 per share for the fourth quarter a year ago.

The Company’s net loss in the fourth quarter of 2011 resulted primarily from an approximately $14.7 million provision for loan losses, $8.2 million in valuation adjustments on OREO, which includes a $5.0 million general allowance to expedite disposition of OREO, $3.4 million impairment of its remaining CDI, and $0.9 million incurred in costs attendant to the Company’s CEO transition and unrelated settlement of Company litigation. The loan loss provision for the quarter related primarily to the reserve effect of the inclusion of Bulk Sale related charge offs on historical loss factors, risk rating changes within the loan portfolio, and changes in the level of expected losses on impaired loans. These factors resulted in an increased level of reserve for loan losses in the fourth quarter of 2011 to $43.9 million or 4.89% of gross loans as compared to $30.7 million or 3.30% as of September 30, 2011 and compared to $46.7 million or 3.81% at December 31, 2010.

At December 31, 2011, the Bank meets the regulatory requirements to be designated as “well-capitalized” as indicated by a 10.81% Tier 1 leverage ratio. The Bank’s credit quality metrics include lower net charge-offs for the quarter at $1.5 million or 0.65% of loans (annualized). As of December 31, 2011, non-performing assets were 2.33% of total assets, compared to 3.07% as of September 30, 2011 and 7.02% as of December 31, 2010. Troubled Debt Restructured loans (TDRs) were 5.08% of gross loans at December 31, 2011 as compared to 5.98% as of September 30, 2011.

The net interest margin for the quarter was 4.04% compared to 3.70% for the third quarter of 2011 primarily resulting from payoff of higher cost borrowings and wholesale CDs and has further benefited by the decrease in average non-performing asset balances due to the Bulk Sale in the third quarter of 2011.

Full Year 2011

The Company recorded a net loss of ($47.3) million for the year ended December 31, 2011 or ($1.08) per share for 2011 compared to a net loss of ($13.7) million or ($4.87) per share for 2010. The annual loss was mainly due to a loan loss provision of $75.0 million primarily related to charge offs of approximately $54.1 million incurred in the Bulk Sale of approximately $110.0 million of certain non-performing, substandard, and related performing loans; risk rating changes within the loan portfolio; and changes in the level of expected losses on impaired loans. The 2010 loan loss provision was $24.0 million. Somewhat offsetting the 2011 loan loss provision was a gain on extinguishment of $68.6 million of the Company’s Debentures and $3.9 million of related accrued interest payable, resulting in a pre-tax extraordinary gain of approximately $54.9 million ($32.8 million after tax) during the first quarter of 2011.

Net interest income for 2011 was down $5.8 million or 9.5% as compared to the prior year due to continued decline in earning loans. Non-interest income was down $2.4 million in 2011 as compared to the prior year primarily due to decreased service charges as a result of recent regulation and lower transaction volumes. Non-interest expense increased $9.5 million in 2011 as compared to 2010, a result of $3.3 million higher expense related to OREO valuation, disposition, and operating costs, a one-time $3.4 million charge to fully impair the Bank’s CDI, prepayment expense for certain borrowings, costs related to settlement of litigation, professional fees and other expenses related to CEO transition.

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Consolidated Results of Operations — Years ended December 31, 2011, 2010, and 2009

Net Income/Loss

The Company recorded a net loss of ($47.3) million or ($1.08) per share in 2011 compared to a net loss of ($13.7) million or ($4.87) per share for 2010 and a net loss of ($114.8) million or ($41.01) per share for 2009. The primary factors contributing to the 2011 loss include loan loss provision of $75.0 million primarily related to charge offs incurred in the Bulk Sale of approximately $110.0 million of certain non-performing, substandard, and related performing loans; risk rating changes within the loan portfolio; and changes in the level of expected losses on impaired loans. The loss in 2010 primarily resulted from a decrease in net interest income of $11.4 million from 2009 and a $24.0 million loan loss provision. The loss in 2009 primarily resulted from a decrease in net interest income of $22.7 million, a $134.0 million loan loss provision, establishment of a full valuation allowance of $35.5 million against the Company’s deferred tax assets, and OREO expenses of $23.1 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 ($17.9) million or (21.0%) for 2011, and decreased approximately ($21.8) million or (20.4%) for 2010 due mainly to lower average earning loans, interest reversals on loans being placed on non-accrual, and interest foregone on non-performing loans. Total interest expense declined by approximately ($12.0) million or (50.7%) in 2011 mainly due to reduced volumes of interest bearing deposits, including higher cost internet CDs and decreased borrowings due to the early repayment of certain FHLB advances and extinguishment of the Debentures. Interest expense declined ($10.4) million or (30.5%) in 2010 as compared to 2009 mainly due to reduced volumes of interest bearing deposits.

Accordingly, 2011 net interest income decreased to $55.4 million, a ($5.8) million or (9.5%) decrease from 2010. Net interest income decreased ($11.4) million or (15.7%) in 2010 over 2009. Yields earned on assets decreased to 4.66% for 2011 as compared to 4.87% in 2010 and 5.01% in 2009. Meanwhile, the average rates paid on interest bearing liabilities for 2011 decreased to 1.24% compared to 1.55% in 2010 and 1.93% in 2009.

Net Interest Margin (NIM)

The Company’s net interest margin (“NIM”) increased to 3.85% for 2011 compared to 3.51% for 2010 and 3.41% for 2009. The increase was mainly due to lower cost of funds. 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.

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The following table presents further analysis of the components of Cascade’s NIM and sets forth for 2011, 2010, and 2009 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company:

(dollars in thousands)		Year ended December 31, 2011												Year ended December 31, 2010												Year ended December 31, 2009
		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		$	132,855			$	4,902				3.69	%		$	130,010			$	5,533				4.26	%		$	101,033			$	5,089				5.04	%
Non-taxable securities			1,515				59				3.89	%			2,083				80				3.84	%			3,643				138				3.79	%
Interest bearing balances due from FRB and FHLB			211,952				533				0.25	%			223,393				561				0.25	%			209,451				486				0.23	%
Federal funds sold			2,261				2				0.09	%			3,025				5				0.17	%			7,454				17				0.23	%
Federal Home Loan Bank stock			10,472				—				0.00	%			10,472				—				0.00	%			10,472				—				0.00	%
Loans(1)(2)(3)			1,080,120				61,604				5.70	%			1,377,674				78,801				5.72	%			1,798,723				101,081				5.62	%
Total earning assets			1,439,175				67,100				4.66	%			1,746,657				84,980				4.87	%			2,130,776				106,811				5.01	%
Reserve for loan losses			(38,768	)											(56,677	)											(57,268	)
Cash and due from banks			32,280												79,662												37,836
Premises and equipment, net			34,610												36,362												38,805
Other assets			85,638												108,920												145,440
Total assets		$	1,552,935											$	1,914,924											$	2,295,589
Liabilities and Stockholders’ Equity
Int. bearing demand deposits		$	482,526				2,100				0.44	%		$	664,254				4,811				0.72	%		$	735,667				7,267				0.99	%
Savings deposits			33,445				55				0.16	%			30,680				78				0.25	%			33,275				73				0.22	%
Time deposits			268,592				5,559				2.07	%			535,906				11,791				2.20	%			688,430				17,915				2.60	%
Other borrowings			156,963				3,990				2.54	%			303,433				7,060				2.33	%			312,301				8,880				2.84	%
Total interest bearing liabilities			941,526				11,704				1.24	%			1,534,273				23,740				1.55	%			1,769,673				34,135				1.93	%
Demand deposits			399,251												342,760												407,344
Other liabilities			27,919												15,390												8,659
Total liabilities			1,368,696												1,892,423												2,185,676
Stockholders’ equity			184,239												22,501												109,913
Total liabilities & equity		$	1,552,935											$	1,914,924											$	2,295,589
Net interest income						$	55,396											$	61,240											$	72,676
Net interest spread											3.42	%											3.32	%											3.08	%
Net interest income to earning assets											3.85	%											3.51	%											3.41	%

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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,
		2011 over 2010												2010 over 2009
		Total Increase (Decrease)				Amount of Change Attributed to								Total Increase (Decrease)				Amount of Change Attributed to
(dollars in thousands)						Volume				Rate								Volume				Rate
Interest and dividend income:
Interest and fees on loans		$	(17,197	)		$	(17,020	)		$	(177	)		$	(22,280	)		$	(23,548	)		$	1,268
Taxable securities			(631	)			121				(752	)			444				1,460				(1,016	)
Non-taxable securities			(21	)			(22	)			1				(58	)			(56	)			(2	)
Interest bearing balances due from FRB and FHLB			(28	)			(29	)			1				75				30				45
Federal funds sold			(3	)			(1	)			(2	)			(12	)			(10	)			(2	)
Total interest and dividend income			(17,880	)			(16,951	)			(929	)			(21,831	)			(22,124	)			293
Interest expense:
Interest on deposits:
Interest bearing demand			(2,711	)			(1,316	)			(1,395	)			(8,273	)			(705	)			(1,751	)
Savings			(23	)			7				(30	)			(62	)			(6	)			11
Time			(6,232	)			(5,881	)			(351	)			5,065				(3,969	)			(2,155	)
Other borrowings			(3,070	)			(3,408	)			338				(4,966	)			(252	)			(1,568	)
Total interest expense			(12,036	)			(10,598	)			(1,438	)			(8,236	)			(4,932	)			(5,463	)
Net interest income		$	(5,844	)		$	(6,353	)		$	509			$	(13,595	)		$	(17,192	)		$	5,756

Loan Loss Provision

The loan loss provision was $75.0 million in 2011, $24.0 million in 2010 and $134.0 million in 2009. The increase in 2011 was most significantly due to charge offs incurred in the Bulk Sale, along with risk rating changes within the loan portfolio, and changes in the level of expected loss on impaired loans. At December 31, 2011, the reserve for loan losses was approximately $43.9 million while the reserve for unfunded commitments was $1.6 million.

The Bank maintains pooled and impaired loan reserves with additional consideration of qualitative factors and unallocated reserves in reaching its determination of the total reserve for loan losses. The level of reserves is subject to review by the Bank’s regulatory authorities who may require adjustments to the reserve based on their evaluation and opinion of economic and industry factors as well as specific loans in the portfolio. For further discussion, see “Critical Accounting Policies and Estimates” and “Loan Portfolio and Credit Quality” elsewhere in Item 7 of this report. There can be no assurance that the reserve for credit losses will be sufficient to cover actual loan related losses.

Non-interest Income

Non-interest income decreased ($2.4) million or (18.0%) in 2011 compared to 2010 primarily due to lower service charges as a result of lower transaction volumes and effects of regulatory changes. The Dodd-Frank Act of 2010 places limitations on certain income opportunities the Bank can charge for overdraft protection fees contributing to a $1.7 million year over year decline. Partially offsetting declines were increased income from bank-owned-life insurance (“BOLI”) of $1.1 million. 2010 total non-interest income decreased ($8.3) million or 38.2% compared to 2009, in part because the earlier year period included a one-time gain of $3.2 million on the sale of our merchant services portfolio. In addition, the sluggish economy contributed to declines in service charge revenue, net mortgage revenue and card issuer and merchant service fees.

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Non-interest Expenses

Non-interest expense increased $9.5 million or 12.8% in 2011 compared to 2010, a result of a $2.4 million increase in salaries and employee benefits primarily related to CEO transition costs and an increase in the estimated period over which future salary continuation and SERP costs will be paid, $3.3 million higher expenses related to OREO valuation, disposition, and operating costs, a one-time $3.4 million charge to fully impair its remaining CDI, one-time costs related to settlement of litigation, and $1.3 million in costs for prepayment of certain borrowings. Partially offsetting these increases was a $4.8 million reduction in FDIC insurance expense costs compared to 2010 due to the Company’s improved capital ratios and consequent lower insurance assessment rate. Also contributing to lower FDIC insurance expense was a change in assessment base from average quarterly deposits to average quarterly assets effective April 1, 2011, which generally benefited community banks including the Company.

2010 non-interest expense was down $21.0 million or 22.1% from 2009, primarily due to a reduction in salaries and employee benefits of $4.1 million, lower OREO expenses of $8.5 million primarily due to decreased valuation adjustments, and a decrease in professional fees of $5.1 million. Also included in 2009 non-interest expense but not in 2010 were $2.1 million in costs related to prepayment of certain borrowings in 2009.

The following table details categories of non-interest expense for the years ended December 31, 2011, 2010, and 2009, and the changes therein:

		Full year 2011				Full year 2010				2011 to 2010 change				Full year 2009				2010 to 2009 change
Salaries and employee benefits		$	31,434			$	29,046			$	2,388			$	33,149			$	(4,103	)
Occupancy			4,710				4,649				61				4,682				(33	)
Communications			1,653				1,727				(74	)			1,982				(255	)
Equipment			1,583				1,778				(195	)			2,153				(375	)
FDIC insurance			3,271				8,084				(4,813	)			6,933				1,151
OREO			17,936				14,616				3,320				23,140				(8,524	)
Professional services			4,356				2,308				2,048				7,362				(5,054	)
Increase (decrease) in reserve for unfunded loan commitments			609				237				372				(335	)			572
CDI impariment			3,436				—				3,436				—				—
Prepayment penalties on FHLB and other borrowings			1,291				—				1,291				2,081				(2,081	)
Other expenses			12,920				11,304				1,616				13,569				(2,265	)
		$	83,199			$	73,749			$	9,450			$	94,716			$	(20,967	)

Extraordinary Gain on Extinguishment of Junior Subordinated Debentures

In conjunction with the Capital Raise in 2011, the Company used approximately $15.0 million of the proceeds to retire $68.6 million of the Company’s junior subordinated debentures and related accrued interest of $3.9 million, resulting in an approximate $54.9 million pre-tax extraordinary gain ($32.8 million after tax) recorded in the first quarter of 2011.

Income Taxes

The Company recorded an income tax provision of $10.4 million in 2011 and a tax benefit of $9.5 million in 2010. The 2011 provision includes an income tax provision of approximately $22.1 million related to the extraordinary gain on the extinguishment of the Debentures, a credit for income taxes of approximately $22.0 million related to the Company’s loss from operations excluding the extraordinary gain and a provision of $10.0 million related to increasing the valuation allowance.

As of December 31, 2011, the Company maintained a valuation allowance of $52.5 million against the deferred tax asset. This amount represented a $16.3 million increase from year-end 2010 due to changes in temporary differences between the financial statement and tax recognition of revenue and expenses, the

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recapture of previously realized deferred tax assets that are now deemed unrealizable, and a reduction of deferred tax assets due to Section 382 of the Internal Revenue Code.

Management determined the amount of the deferred tax valuation allowance at December 31, 2011 and December 31, 2010 by evaluating the nature and amount of historical and projected future taxable income and the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies. The ability to utilize deferred tax assets is a complex process requiring in-depth analysis of statutory, judicial and regulatory guidance and estimates of future taxable income. The amount of deferred taxes recognized could be impacted by changes to any of these variables.

For tax purposes, the issuance of common stock in connection with the Company’s Capital Raise in the first quarter of 2011 resulted in an “ownership change” of the Company, as broadly defined in Section 382 of the Internal Revenue Code. As a result of the ownership change, utilization of the Company’s net operating loss carry-forwards, tax credit carry-forwards and certain built-in losses under federal income tax laws will be subject to annual limitations and potential impairment. The annual limitation placed on the Company’s ability to utilize these potential tax deductions will equal the product of an applicable interest rate mandated under federal income tax laws and the Company’s value immediately before the ownership change. The annual limitation imposed under Section 382 may limit the deduction for both the carry-forward tax attributes and the built-in losses realized within five years of the date of the ownership change. Given the limited carry-forward period assigned to these tax attributes in excess of this annual limit, a portion of these potential attributes have been permanently impaired — and the related deferred tax asset and valuation allowance have been written off in 2011 — and more may be limited or impaired in the future.

Financial Condition

Balance Sheet Overview

At December 31, 2011, total assets were $1.3 billion, a decline of 24.1% from December 31, 2010 mainly due to payoff and paydowns of loans and the September 2011 Bulk Sale of approximately $110.0 million (carrying amount) of certain non-performing, substandard and related performing loans, discussed elsewhere in this report. Total net loans declined $323.4 million to $853.7 million at December 31, 2011 compared to $1.2 billion at December 31, 2010. In addition to payoff and paydowns of loans and the Bulk Sale, a portion of the reduction in loan balances was the result of net loan charge-offs of $77.8 million in 2011, of which approximately $54.1 million was related to the Bulk Sale. The investment portfolio increased to $210.8 million at December 31, 2011 as compared to $116.8 million a year earlier as the Company deployed excess liquidity into securities.

Total deposits decreased $290.1 million or 21.1% at December 31, 2011 as compared to December 31, 2010 due mainly to a $354.8 million or 68.8% decline in time deposits. $293.3 million of this decline was related to the call and prepayment of internet listing service time deposits during 2011. Core deposits (deposits, excluding time) increased 7.5% from year ago levels.

In 2011 the Company extinguished $68.6 million of Debentures and prepaid $135.0 million of FHLB advances and $41.0 million of Temporary Liquidity Guarantee Program (“TLGP”) debt. In addition, the completion of the $177.0 million Capital Raise in the first quarter of 2011 increased cash and cash equivalents as well as total stockholders’ equity, which increased to $132.9 million at December 31, 2011, an increase of $122.8 million or 1,221.4% from 2010. Cash and cash equivalents were $128.4 million or 9.9% of total assets at December 31, 2011 compared to $271.3 million or 15.8% of total assets at December 31, 2010 as a net effect of the balance sheet changes described above.

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.

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Investment Securities

The following table shows the carrying value of the Company’s portfolio of investments at December 31, 2011, 2010, and 2009:

		December 31,
(dollars in thousands)		2011				2010				2009
U.S. Agency mortgage-backed securities (MBS)*		$	193,877			$	97,301			$	116,639
Non-agency MBS			4,115				5,038				—
U.S. Government and agency securities			—				—				7,481
Obligations of state and political subdivisions			1,334				1,806				3,606
U.S. Agency asset-backed securities			11,013				12,199				7,586
Total debt securities			210,339				116,344				135,312
Mutual fund			501				472				451
Total investment securities		$	210,840			$	116,816			$	135,763

MBS are mainly adjustable rate mortgages (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 $94.0 million, or 80.5% from December 31, 2010 to December 31, 2011 as a result of increased purchases as an effort to deploy the excess liquidity held by the Bank into earning assets. The following is a summary of the contractual maturities and weighted average yields of investment securities at December 31, 2011:

(dollars in thousands) Type and maturity		Carrying Value				Weighted Average Yield(1)
U.S. Agency and non-agency MBS
Due after 1 but within 5 years		$	18				6.64	%
Due after 5 but within 10 years			11,527				3.59	%
Due after 10 years			181,428				2.82	%
Total U.S. Agency MBS			192,973				2.87	%
U.S. Agency securities
Due after 1 but within 5 years			5.019				1.70	%
Obligations of state and political subdivisions(1)
Due within 1 year			310				3.99	%
Due after 1 but within 5 years			1,024				3.83	%
Total State and Political Subdivis ions			1,334				3.87	%
U.S. Agency asset-backed securities
Due within 1 year			358				5.81	%
Due after 10 years			10,655				4.07	%
Total U.S. Agency as set-backed securities			11,013				4.13	%
Total debt securities			210,339				2.91	%
Mutual fund			501				4.69	%
Total investment securities		$	210,840				2.92	%

The Company’s investment portfolio estimated duration at December 31, 2011 is approximately 3.4 years while the weighted average life was approximately 8.6 years at both December 31, 2011 and 2010.

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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), Federal National Mortgage Association (Fannie Mae) and FHLB. The Company regularly reviews its investment portfolio to determine whether any securities are other than temporarily impaired. At December 31, 2011, the investment portfolio had gross unrealized losses on available-for-sale securities of approximately $0.4 million as compared to $0.8 million at December 31, 2010, and management does not believe that these unrealized losses are other-than-temporary.

Loan Portfolio and Credit Quality

Loan Portfolio Composition.  Net loans represented approximately 65.5% of total assets as of December 31, 2011. 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, Cascade’s loan portfolio is concentrated in real estate related loans, and 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 December 31 loan portfolio, at the dates indicated:

(dollars in thousands)		2011				% of gross loans				2010				% of gross loans				2009				% of gross loans				2008				% of gross loans				2007				% of gross loans
Commercial real estate:
Owner occupied		$	250,213				27.8	%		$	315,723				25.7	%		$	347,274				22.4	%		$	342,395				17.5	%		$	316,604				15.5	%
Non-owner occupied and other			313,311				34.8	%			396,309				32.3	%			383,630				24.7	%			389,372				19.9	%			338,579				16.5	%
Total commercial real estate loans			563,524				62.6	%			712,032				58.1	%			730,904				47.1	%			731,767				37.3	%			655,183				32.0	%
Construction			60,971				6.8	%			158,463				12.9	%			320,025				20.6	%			575,054				29.3	%			719,200				35.1	%
Residential real estate			83,595				9.3	%			102,486				8.4	%			116,804				7.5	%			124,224				6.3	%			114,298				5.6	%
Commercial and industrial			150,637				16.7	%			205,692				16.8	%			326,678				21.1	%			468,418				23.9	%			507,025				24.7	%
Consumer			40,922				4.5	%			47,687				3.9	%			56,546				3.6	%			61,420				3.1	%			53,482				2.6	%
Total loans			899,649				100.0	%			1,226,360				100.0	%			1,550,957				100.0	%			1,960,883				100.0	%			2,049,188				100.0	%
Less:
Deferred loan fees			(2,085	)							(2,647	)							(3,281	)							(4,699	)							(7,710	)
Reserve for loan losses			(43,905	)							(46,668	)							(58,586	)							(47,166	)							(33,875	)
Loans, net		$	853,659							$	1,177,045							$	1,489,090							$	1,909,018							$	2,007,603

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, 2011:

(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 real estate:
Owner occupied		$	113,866				30	%		$	28,490				17	%		$	41,991				32	%		$	65,866				30	%		$	250,213				28	%
Non-owner occupied and other			120,126				32	%			93,172				54	%			52,157				39	%			47,856				22	%			313,311				35	%
Total commercial real estate loans			233,992				62	%			121,662				71	%			94,148				71	%			113,722				52	%			563,524				63	%
Construction			19,439				5	%			18,466				11	%			8,675				7	%			14,391				7	%			60,971				7	%
Residential real estate			30,032				8	%			8,817				5	%			10,229				8	%			34,517				16	%			83,595				9	%
Commercial and industrial			74,887				20	%			16,707				10	%			15,489				12	%			43,554				20	%			150,637				17	%
Consumer			19,599				5	%			5,598				3	%			3,507				3	%			12,218				6	%			40,922				5	%
Total loans		$	377,949				100	%		$	171,250				100	%		$	132,048				100	%		$	218,402				100	%		$	899,649				100	%

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At December 31, 2011, 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 real estate:
Owner occupied		$	9,971			$	65,118			$	175,124			$	250,213
Non-owner occupied			41,975				78,336				193,000				313,311
Total commerical real estate loans			51,946				143,454				368,124				563,524
Construction			23,923				30,222				6,826				60,971
Residential real estate			10,684				26,874				46,037				83,595
Commercial and industrial			52,426				64,520				33,691				150,637
Consumer			6,053				12,891				21,978				40,922
		$	145,032			$	277,961			$	476,656			$	899,649

At December 31, 2011, variable and adjustable rate loans contractually due after one year totaled $570.6 million and loans with predetermined or fixed rates due after one year totaled $184.0 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. Risks associated 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 provides information on the Company’s real estate loan portfolio. 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.

The $563.5 million commercial real estate or “CRE” 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 63% of total loans outstanding as of December 31, 2011. Approximately 44% of CRE loans are made to owner-occupied users of the commercial property, while 56% of CRE loans are to obligors who do not directly occupy the property. Management believes that lending to owner-occupied businesses may mitigate, but not eliminate, commercial real estate risk. However no assurance can be given that residential real estate or other economic factors will not adversely impact the CRE portfolio.

		2011				% of total CRE				% of gross loans				2010
Commercial Real Estate:
Owner occupied		$	250,213				44	%			28	%		$	315,723
Non-owner occupied			313,311				56	%			35	%			396,309
		$	563,524				100	%			63	%		$	712,032

Lending and Credit Management.  The Company has a comprehensive risk management process to control, underwrite, monitor and manage credit risk in lending. The underwriting of loans relies principally on an analysis of an obligor’s historical and prospective cash flow augmented by collateral assessment, credit bureau information, as well as business plan assessment. Ongoing loan portfolio monitoring is performed by a centralized credit administration function including review and testing of compliance to loan policies and procedures augmented from time to time with 3^rd party credit reviews. Internal and external auditors and bank regulatory examiners periodically sample and test certain credit files as well. Risk of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing.

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Reserve for Loan Losses.  The reserve for loan losses represents management’s recognition of the assumed and present risks of extending credit and the possible inability or failure of the obligors to make repayment. The reserve is maintained at a level considered adequate to provide for losses on loans and unfunded commitments based on management’s current assessment of a variety of current factors affecting the loan portfolio. Such factors include loss experience, review of problem loans, current economic conditions, and an overall evaluation of the quality, risk characteristics and concentration of loans in the portfolio. The level of reserve for credit losses is also determined after consideration of bank regulatory guidance and recommendations and is subject to review by regulatory authorities who may require increases to the reserve based on their evaluation of the information available to them at the time of their examination of the Bank. The reserve is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The reserve is increased by provisions charged to operations and reduced by loans charged-off, net of recoveries. See “Loan Loss Provision” under “Consolidated Results of Operations – Years ended December 31, 2011, 2010, and 2009” above in this Item 7.

During the year ended December 31, 2011, the Company revised and continued to enhance its methodology for estimating the adequacy of the reserve for loan losses. The significant revisions and enhancements to the methodology included (1) the application of historical loss factors by risk rating for each loan segment, as compared to the prior method which utilized blended historical loss factors, (2) a change to historical look-back periods, and (3) refinement of the qualitative factors and application thereof used to adjust the estimated historical loss factors. The reserve for loan losses at December 31, 2011 was significantly affected by the revisions and enhancements to the Company’s methodology, as well as by the inclusion of charge-offs incurred in the 2011 Bulk Sale of certain loans as it relates to its historical loss factors. A description of the significant revisions and enhancements to the methodology for estimating the reserve for loan losses is as follows:

Application of historical loss factors by risk rating for each loan segment and change in look-back period, as compared to the prior method which utilized blended quarterly historical loss factors:

Under the previous method, historical loss factors were computed using a rolling 12-quarter basis, then weighted 50% for the most current four quarters, 35% for the next four preceding quarters, and 15% for the final four preceding quarters. The previous method applied these historical loss factors without regard to risk rating. Under the previous method, each of 12 quarterly look-back periods in the model included charge-off experience for the preceding quarter. Under the enhanced method, historical loss factors are calculated using a minimum of 12 quarterly look-back periods applied by risk rating to each loan segment. Each look-back period includes charge-off experience by risk rating for each loan segment for the preceding four quarters. Historical loss rates for each period are averaged and multiplied by current loan balances for each risk rating category within loan segments to estimate loss reserve. In addition, the Company made minor refinements to its loan segment groups according to related risk attributes and applied statistical smoothing techniques considered appropriate to the change in method.

Refinement of qualitative factors:

The Company refined the qualitative factors used to adjust the historical loss factors by more explicitly detailing the specific qualitative factors to be considered and the determination of the resulting quantitative amounts. In addition, certain qualitative factors are included in the estimate of total reserve for loan losses to achieve directional consistency and reflect uncertainties such as lack of seasoning in the revised and enhanced model.

At December 31, 2011, management believes that the Company’s reserve is at an appropriate level under current circumstances and prevailing economic conditions. However, the total amount of actual loan losses may vary significantly from the estimated amount. No assurance can be given that in any particular period, the reserve for credit losses will be sufficient, or that loan losses will not be sustained that are sizable in relation to the amount reserved, or that changing economic factors or other environmental conditions will not require increases in the loan loss provision.

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The Company classifies reserves for unfunded commitments as a liability on the consolidated balance sheet. Such reserves are included as part of the overall reserve for credit losses. Reserves for unfunded commitments totaled approximately $1.6 million and $0.9 million at December 31, 2011 and 2010, respectively.

Allocation of Reserve for Credit Losses.  Allocation of reserves is a function of historical loss factors as applied to rating of loans within each segment of the portfolio. The higher reserve for loan losses in recent years is attributable to the effect the adverse economy has had on the ability of obligors to repay loans as measured by internal risk rating of various loans. The unallocated portion of the reserve reflects the level of uncertainty as to the future direction and severity of the economic environment. Prior to December 31, 2011, the level of unallocated reserves included amounts now captured in the current methodology through certain loss factors and qualitative considerations. While a combination of evidence demonstrating greater clarity on construction/lot exposure and reduced exposure levels has lessened concern in this loan portfolio, risk in other asset categories continues. Typical factors leading to changes in reserve allocation include changes in debt service coverage ratios, guarantor and/or collateral valuation as well as economic conditions that may have a specific or generalized impact on the relative risks inherent in various loan portfolios. Although this allocation process may not accurately predict credit losses by loan type or in the aggregate, the total reserve for loan losses is available to absorb losses that may arise from any loan type or category.

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

		2011												2010
(dollars in thousands)		Reserve for loan and commitment losses				Allocated reserve as a % of loan category				Loan category as a % of total loans				Reserve for loan and commitment losses				Allocated reserve as a % of loan category				Loan category as a % of total loans
Commercial real estate		$	21,648				3.84	%			62.64	%		$	14,338				2.01	%			58.06	%
Construction			5,398				8.85	%			6.78	%			12,652				7.98	%			12.92	%
Residential real estate			3,259				3.90	%			9.29	%			4,116				4.02	%			8.36	%
Commercial and industrial			11,291				7.50	%			16.74	%			12,220				5.94	%			16.77	%
Consumer			2,292				5.60	%			4.55	%			2,966				6.22	%			3.89	%
Committed/unfunded			1,550				—				—				941				—				—
Unallocated			17				—				—				376				—				—
Total reserve for credit losses		$	45,455				5.06	%			100.00	%		$	47,609				3.89	%			100.00	%

		2009												2008
		Reserve for loan and commitment losses				Allocated reserve as a % of loan category				Loan category as a % of total loans				Reserve for loan and commitment losses				Allocated reserve as a % of loan category				Loan category as a % of total loans
Commercial real estate		$	10,799				1.48	%			47.13	%		$	7,064				0.97	%			37.32	%
Construction			14,486				4.53	%			20.63	%			18,722				3.26	%			29.33	%
Residential real estate			3,092				2.65	%			7.53	%			1,696				1.37	%			6.34	%
Commercial and industrial			18,196				5.57	%			21.06	%			11,614				2.48	%			23.89	%
Consumer			2,807				4.96	%			3.65	%			1,893				3.08	%			3.13	%
Committed/unfunded			423				—				—				735				—				—
Unallocated			9,487				—				—				6,481				—				—
Total reserve for credit losses		$	59,290				3.83	%			100.00	%		$	48,205				2.46	%			100.00	%

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		2007
		Reserve for loan and commitment losses				Allocated reserve as a % of loan category				Loan category as a % of total loans
Commercial real estate		$	3,901				0.60	%			31.97	%
Construction			13,433				1.87	%			35.10	%
Residential real estate			1,521				1.33	%			5.58	%
Commercial and industrial			10,388				2.05	%			24.74	%
Consumer			1,684				3.15	%			2.61	%
Committed/unfunded			2,414				—				—
Unallocated			3,697				—				—
Total reserve for credit losses		$	37,038				1.81	%			100.00	%