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, 2012

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)

(877) 617-3400

(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 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 o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter) was $35,957,652 (based on the closing price as quoted on the NASDAQ Capital Market on that date).

There were 47,326,306 shares of no par value Common Stock outstanding as of March 19, 2013.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement on Schedule 14A for its 2013 Annual Meeting of Shareholders to be held on May 14, 2013 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			24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			46
Item 8. Financial Statements and Supplementary Data			47
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			101
Item 9A. Controls and Procedures			101
Item 9B. Other Information			103
PART III
Item 10. Directors, Executive Officers and Corporate Governance			103
Item 11. Executive Compensation			103
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			103
Item 13. Certain Relationships and Related Transactions, and Director Independence			103
Item 14. Principal Accounting Fees and Services			103
PART IV
Item 15. Exhibits, Financial Statement Schedules			104
Signatures			107

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PART I

ITEM 1. BUSINESS.

The disclosures in Item 1 are qualified by the risk factors set forth in Item 1A of this report and the section entitled“Cautionary Information Concerning Forward-Looking Statements” included in Item 7 of this report, and any other cautionary statements contained herein or incorporated herein by reference.

Cascade Bancorp and Bank of the Cascades

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. At December 31, 2012, the Company had total consolidated assets of approximately $1.3 billion, net loans of approximately $0.8 billion and deposits of approximately $1.1 billion. Bancorp has no significant assets or operations other than the Bank.

The Bank is an Oregon state chartered bank, which opened for business in 1977 and operates 31 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. The Bank’s lending activities are focused on small to medium-sized businesses, municipalities and public organizations, and professional and consumer relationships. The Bank provides commercial real estate loans, real estate construction and development loans, and 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 mainly 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 Company is located at 1100 NW Wall Street, Bend, Oregon 97701. The Company’s phone number is (877) 617-3400.

Cease and Desist Order Terminated in March 2013

On March 7, 2013, the Federal Deposit Insurance Corporation (“FDIC”) and the Oregon Division of Finance and Corporate Securities (“DFCS”) terminated the cease and desist order (“the Order”) issued to the Bank in August 2009.

In connection with this termination, the Bank has entered into a memorandum of understanding with the FDIC and the DFCS. The memorandum of understanding requires, among other things, that the Bank maintain a Tier 1 leverage capital ratio of 10.0% and continue to reduce the level of adversely classified assets. The memorandum of understanding continues to prohibit the Bank from paying dividends without the written consent of the FDIC and DFCS.

Capital Raise and Sale of Loans Completed in 2011

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 Item 8 of this report.

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

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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

The Company’s ongoing business strategies include: (1) improve core profitability while continuing to reduce the level of non-performing and adversely risk rated loans; (2) generate loan portfolio growth while diversifying the loan portfolio; (3) expand low-cost relationship deposits to fund asset growth; (4) improve operating efficiency; (5) consistently deliver quality customer service and apply technology to enhance the delivery of banking services; (6) retain a high-performing work force; and (7) target accretive merger and acquisition transactions. Because of the uncertainties of the current economic climate and competitive factors, there can be no assurance that Cascade will be successful executing these strategies. Cascade’s mission statement is to “deliver the best in community banking for the financial well-being of customers and shareholders.”

2012 was a year of transition for Cascade, marked by a return to profitability and a renewed focus on loan origination, including residential mortgage production. Adversely risk rated loans were reduced in 2012. One of the Company’s priorities is to continue to improve its credit quality, and 2012 credit quality metrics support our belief that the Company is making significant progress relative to this priority.

Business Overview

The United States economy is improving but at a slow pace in the aftermath of a severe recession. While beginning to recover, the Company’s primary markets of Oregon and Idaho have experienced significant declines in real estate values, and unemployment levels remain elevated.

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 432 full-time equivalent employees as of December 31, 2012.

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 the implementation of policies that specify various controls and risk tolerances.

Credit risk management objectives include the implementation of loan policies and underwriting practices designed to prudently manage credit risk, and monitoring processes designed to identify and manage loan portfolio risk and concentrations.

Liquidity management 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 the Company’s 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 Federal Reserve Bank of San Francisco (“FRB”), with wholesale funds augmenting liquidity from time to time.

The Company monitors and manages its sensitivity to changing interest rates by utilizing simulation analysis and scenario modeling and by adopting asset and liability strategies and tactics to control the volatility of its net interest income in the event of changes in interest rates.

Operating-related risks are managed through implementation of and adherence to a system of internal controls. Internal controls are subject to 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 works to enhance its risk management strategies and processes over time. However, there are a wide range of complex risks inherent in the Company’s business, and there can be no assurance that internal controls will always detect, contain, eliminate or prevent risks that could result in adverse financial results in the future.

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Competition

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

The Company believes its community banking philosophy, investments in technology, focus on small and medium-sized business, and professional and consumer relationships enable it to compete effectively with other financial services providers in its primary markets. The Bank endeavors to offer attractive financial products and services delivered by effective bankers differentiated by their professionalism and customer service. The Bank’s products and services are designed to be convenient, with flexible delivery alternatives. In addition, the Bank’s lending and deposit officers have significant experience in their respective marketplaces. This enables them to maintain close working relationships with their customers. Also the Bank may buy or sell loan participations with other financial institutions.

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 and held 20% deposit market share in the Bend, Oregon Metropolitan Statistical Area as of June 30, 2012 (excluding broker and Internet CDs) according to the FDIC’s “Deposits Market Share Report.” Prior to 2006 the Company expanded into Oregon’s Interstate 5 markets as well as the greater Boise/Treasure Valley, Idaho area. At December 31, 2012, loans and deposits in Oregon markets account for approximately 77% and 71%, respectively, of total Company balances, while Idaho loans and deposits were approximately 23% and 29%, respectively, of total Company balances. Loan competition in Oregon and Idaho is substantial, and success is dependent on price and terms, as well as effectiveness of bankers in building relationships with customers. The Company is not aware of a comprehensive data base to determine its market share of loans.

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.

Supervision and Regulation

Bancorp and the Bank are 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 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 classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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Quantitative measures established by regulation to ensure capital adequacy require Bancorp and the Bank to maintain minimum amounts and ratios (set forth in the tables included in Note 20 of the “Notes to Consolidated Financial Statements” included in Item 8 of this report) 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 fails to satisfy certain minimum capital requirements. Such actions could potentially include a leverage capital limit, a risk-based capital requirement, 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, 2012 the Bank met the regulatory benchmarks to be “well-capitalized” under the applicable regulations and the Order (discussed below). At December 31, 2011 the Bank did not meet the 10% Tier 1 leverage ratio requirement per the Order, and was considered “adequately capitalized” under the applicable regulations. At December 31, 2012 Bancorp also met the regulatory benchmarks to be “well-capitalized” under applicable regulations and the Written Agreement (discussed below). However, at December 31, 2011 Bancorp did not meet the Written Agreement’s requirement that Bancorp maintain a 10% Tier 1 leverage ratio. As a result, Bancorp filed the required update to its capital plan with the FRB and the DFCS which was accepted by its regulators.

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

In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the DFCS of the Order against the Bank based on certain findings from an examination of the Bank concluded in February 2009 that was based upon financial and lending data measured as of December 31, 2008 (the Report of Examination, or “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 was 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 assure that its reserve for loan losses be maintained at an appropriate level.

Among the corrective actions required were for the Bank to develop and adopt a plan to maintain the minimum capital requirements for a “well-capitalized” bank, including a Tier 1 leverage ratio of at least 10% at the Bank level beginning 150 days from the issuance of the Order. As of December 31, 2012, the requirement relating to increasing the Bank’s Tier 1 leverage ratio was met.

The Order further required the Bank to ensure the level of the reserve for loan losses to be 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, 2012, the requirement that the amount of classified loans as of the ROE be reduced to no more than 75% of capital was 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.

The Order further required the Bank to maintain a primary liquidity ratio (net cash, plus net short-term and marketable assets divided by net deposits and short-term liabilities) of at least 15.00%. As of December 31, 2012, the Bank’s primary liquidity ratio was 26.00%.

In addition, pursuant to the Order, the Bank was required to retain qualified management and to notify the FDIC and the DFCS in writing before adding any individual to its Board or employing any new senior executive officer. Under the Order, the Bank’s Board also was required to increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the Bank’s activities. The Order also restricted 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.

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The Order remained in place and, therefore, the Bank remained subject to the requirements and restrictions set forth therein, until the Order was terminated on March 7, 2013, as discussed above. In connection with this termination, the Bank has entered into a memorandum of understanding with the FDIC and the DFCS.

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. As of December 31, 2012, Bancorp met the 10% Tier 1 leverage ratio requirement per the Written Agreement, however at December 31, 2011 Bancorp did not meet this requirement and was considered “adequately capitalized” under the applicable regulations. As a result, Bancorp filed the required update to its capital plan with the FRB and DFCS which was accepted by its regulators.

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.

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.

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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. During the fourth quarter of 2012, the Bank received regulatory approval to adjust retained earnings to zero at September 30, 2012. The retained earnings account will be replenished through positive earnings from the Bank. Pursuant to its memorandum of understanding with its regulators, as was the case under the Order before it was terminated on March 7, 2013, the Bank is required to seek permission from the FDIC and DFCS prior to payment of cash dividends.

In addition, the appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends, the payment of which would constitute an unsafe or unsound banking practice. The Written Agreement requires Bancorp to seek permission prior to payment of dividends and prior to taking dividends from the Bank. Bancorp has no plans to pay dividends at this time.

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Federal and State Bank Regulation

The Bank is a FDIC-insured bank which is not a member of the Federal Reserve, 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 most recent 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, and certain other transactions with, 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 required 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 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:

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Bancorp, like other bank holding companies, currently is required to maintain Tier 1 capital and “total capital” (the sum of Tier 1 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%. Under the Order, the Bank was required to maintain a Tier 1 leverage ratio of at least 10.00% to be considered “well-capitalized” for regulatory purposes. Following termination of the Order on March 7, 2013, pursuant to its memorandum of understanding with its regulators, the Bank is required to maintain a Tier 1 leverage ratio of 10.00%.

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 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.

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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, 2012, Bancorp’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 10.44%, 14.12%, and 15.39%, respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 10.42%, 14.09%, and 15.36%, 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. As of December 31, 2012, the Bank and Bancorp met the 10% Tier 1 leverage ratio requirement of the Order and the Written Agreement, respectively.

For more information regarding the capital ratios and leverage ratios of Bancorp and the Bank see “Liquidity and Sources of Funds” in Item 7 of this report and Note 20 in the “Notes to Consolidated Financial Statements” included in Item 8 of this report.

New Proposed Capital Rules

On June 12, 2012, the three federal banking regulators (including the Federal Reserve and the FDIC) jointly announced that they were seeking comment on three sets of proposed regulations relating to capital (the “Proposed Rules”). The Proposed Rules would apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. Although parts of the Proposed Rules would apply only to large, complex financial institutions, substantial portions of the Proposed Rules would apply to the Bank and Bancorp. The Proposed Rules include requirements contemplated by the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010, which standards are commonly referred to as “Basel III.”

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The Proposed Rules include new risk-based and leverage capital ratio requirements, which would be phased in beginning in 2013 and be fully implemented January 1, 2015, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to Bancorp and the Bank under the Proposed Rules would be: (i) a new common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital would consist of retained earnings and common stock instruments, subject to certain adjustments.

The Proposed Rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer would consist entirely of common equity Tier 1 capital and, when added to the capital requirements, would result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.

The Proposed Rules would also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions would be phased in beginning in 2013 and be fully implemented January 1, 2015. The prompt correction action rules would be modified to include a common equity Tier 1 capital component and to increase certain other capital requirements for the various thresholds. For example, under the proposed prompt corrective action rules, insured depository institutions would be required to meet the following capital levels in order to qualify as “well capitalized”: (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from current rules).

The Proposed Rules set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn would affect the calculation of risk based ratios. These new calculations would take effect beginning January 1, 2015. Under the Proposed Rules, higher or more sensitive risk weights would be assigned to various categories of assets, including residential mortgages, certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, the Proposed Rules include (i) alternative standards of credit worthiness consistent with the Dodd-Frank Act; (ii) greater recognition of collateral and guarantees; and (iii) revised capital treatment for derivatives and repo-style transactions.

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 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.

The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks and savings institutions to $250,000 per depositor. The Dodd-Frank Act temporary provision for unlimited deposit insurance for non-interest bearing transaction accounts was effective through December 31, 2012,

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 2019. The annual FICO assessment rate for the first and second quarters of 2013 will be 0.64 basis points.

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

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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 higher or lower assessment rates without additional rule-making provided that (1) no one such quarterly adjustment is in excess of 2 basis points and (2) the net 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 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. 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. 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.

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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.

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, subject to certain exceptions, 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. Federal law generally imposes limitations on, and requires collateral for, extensions of credit by an insured depository institution, such as the Bank, and its non-bank affiliates, such as Bancorp. In addition, transactions between an insured depository institution and a non-bank affiliate must generally be on terms at least as favorable to the depository institution as transactions with a non-affiliate.

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 2013 reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts over $12.4 million up to $79.5 million. Net transaction accounts up to $12.4 million are exempt from reserve requirements. The amount of aggregate transaction accounts in excess of $79.5 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. During 2012, the Bank was in compliance with the requirements described above.

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Source of Strength

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 5% 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.

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 their 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 established the Bureau of Consumer Financial Protection as a new independent bureau within the Federal Reserve system that is responsible for regulating consumer financial products and services under federal consumer financial laws. The Bureau of Consumer Financial Protection has 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

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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.

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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ITEM 1A. RISK FACTORS.

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 Item 1; and the information in Item 7, including the Company’s cautionary statements as to forward-looking statements.

Bancorp and the Bank are operating under regulatory agreements which place certain limitations and obligations on Bancorp and the Bank until such time as they are terminated.

On March 7, 2013, the FDIC and DFCS terminated the Order issued to the Bank in August 2009, the requirements of which are described in Item 1 of this report under the heading “Supervision and Regulation.”

In connection with this termination, the Bank has entered into a memorandum of understanding with the FDIC and the DFCS. The memorandum of understanding requires, among other things, that the Bank maintain a Tier 1 leverage capital ratio of 10.0% and continue to reduce the level of adversely classified assets. The memorandum of understanding continues to prohibit the Bank from paying dividends without prior written consent of the FDIC and DFCS.

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. The Written Agreement is described in greater detail under the heading “Supervision and Regulation” in Item 1, above, and elsewhere in this report.

The Written Agreement remains in place until terminated by the FRB and DFCS. Under the 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 regulators including, but not limited to, merger or acquisition activities, certain forms of debt or equity issuance, and executive management changes.

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

Regulators have required Bancorp to obtain permission prior to payment of dividends on its common stock and prior to taking a dividend from the Bank. In addition, pursuant to the memorandum of understanding, 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. The Bank received regulatory approval to adjust retained earnings to zero at September 30, 2012 but the Bank’s payment of dividends will remain constrained under Oregon law by the amount of increases in its returned earnings from that date. 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. Bancorp does not expect to pay dividends to shareholders for the foreseeable future. Restrictions on the payment of dividends are described in greater detail under the heading “Regulations Concerning Cash Dividends” in Item 1, above, which includes a discussion of the Bank’s negative retained earnings, and elsewhere in this report.

Difficult economic and market conditions have adversely affected our industry.

We are operating in a challenging and uncertain economic environment, including generally uncertain global, national and local conditions. The significant economic contraction of 2007 – 2009 adversely affected business activity across a wide range of industries and regions. Businesses and consumers were negatively impacted

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and capital and credit markets experienced volatility and disruption. Economic conditions affect the ability of borrowers to pay interest on and repay principal of outstanding loans and affect the value of collateral securing loans. The economic contraction and related declines in real estate values caused an elevated level of impaired loans, and an associated increase in loan loss provision and charge-offs, leading to Company net losses in 2009, 2010, and 2011.

The Company’s business is closely tied to the economies of Oregon and Idaho 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. In addition, the Company has a significant concentration in real estate lending which is directly affected by local and regional economic conditions. Approximately 77% of the Bank’s loan portfolio at December 31, 2012 consisted of loans secured by real estate located in Oregon and Idaho. The economies of Oregon and Idaho have generally stabilized and/or are recovering. The housing market has improved with prices increasing in 2012. Vacancy rates for commercial properties stabilized and small business owners are increasingly considering bank borrowings in order to grow. However, slow economic growth and the lingering effect of the 2007 – 2009 downturn continue to make for challenging operating conditions which may continue for some time which may have an adverse impact on the Company.

The Company may be required to increase 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. 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 reflect difficulties of individual borrowers resulting from continued financial stress on the borrowers asset values and cash flow abilities due to the weakened economy.

If real estate markets or the economy in general deteriorate or do not sufficiently recover, the Company may 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 is a significant accounting estimate and 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

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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.

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 customer deposits. In addition the Bank has historically had access to advances from the FHLB, the 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. An inability to raise funds through traditional deposits, brokered deposits, borrowings, the sale of securities or loans could have a substantial negative effect on the Company’s liquidity. The Company’s access to funding sources 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, 2012; however, the Company’s 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, disruption in the financial markets or negative views and expectations about the prospects for the banking industry. 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 federal funds. Liquidity also may be affected by the Bank’s routine commitments to extend credit.

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.

The soundness of other financial institutions could adversely affect us.

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 applicable 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.

In 2012, the amount of collateral the Bank was required to pledge against Oregon public deposits was 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.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. There can be no assurance that any such losses would not materially and adversely affect our results of operations.

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Real estate values could decline leading to additional and greater-than-anticipated loan charge-offs and valuation write downs on OREO and OREO-related management and disposition expenses.

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 a security interest in real estate as collateral for loans. In the event of obligor default, the Bank may have the right to foreclose on such collateral and take title to it. At December 31, 2012, the Bank had OREO with a carrying value of approximately $6.6 million. 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 valuation 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 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 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.

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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 preferences 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 needed 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.

We may be subject to more stringent capital and liquidity requirements which would adversely affect our net income and future growth.

On June 12, 2012, the three federal banking regulators (including the Federal Reserve and the FDIC) jointly announced the Proposed Rules, which would apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. As described in further detail above in Item 1, the three federal banking regulators issued the Proposed Rules that would create new increased capital requirements for United States depositary institutions and their holding companies. The Proposed Rules include new risk-based and leverage capital ratio requirements, which are intended to be phased in beginning in 2013 and be fully implemented by January 1, 2015. The Proposed Rules would also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions are intended to be phased in beginning in 2013 and be fully implemented by January 1, 2015.

Although we currently cannot predict the specific impact and long-term effects that the Proposed Rules will have on us and the banking industry more generally, if these rules are adopted we would be required to maintain higher regulatory capital levels which could impact our operations, net income and ability to grow. Furthermore, our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.

The downgrade of U.S. government securities by the credit rating agencies could have a material adverse effect on our operations, earnings, and financial condition.

The recent debate in Congress regarding the national debt ceiling, federal budget deficit concerns, and overall weakness in the economy resulted in actual and threatened downgrades of United States government securities by the various major credit ratings agencies, including Standard and Poor’s and Fitch Ratings. While the federal banking agencies including the Federal Reserve and the FDIC have issued guidance indicating that, for risk-based capital purposes, the risk weights for United States Treasury securities and other securities issued or guaranteed by the United States government, government agencies, and government-sponsored entities will not be affected by the downgrade, the downgrade of United States government securities by Standard and Poor’s and the possible future downgrade of the federal government’s credit rating by one or both of the other two major rating agencies (which has been forewarned by Fitch Ratings), could create uncertainty in the United States and global financial markets and cause other events which, directly or indirectly, could adversely affect our operations, earnings, and financial condition.

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 Deposit Insurance Fund 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. An increase in the risk category of the Bank, adjustments to assessment rates, and/or a special assessment could have a material adverse effect on the Company’s earnings.

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Changes in the Federal Reserve’s monetary or fiscal policies could adversely affect our results of operations and financial condition.

Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The Federal Reserve affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

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.

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 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

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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 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.

The Company’s future successes and profitability are substantially dependent upon the management and banking abilities of its senior executives. A new Chief Executive Officer, Chief Credit Officer and Chief Banking Officer were hired in 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 portfolio may be negatively affected by changes or disruptions in the market for these securities.

The Company’s investment portfolio securities include obligations of, and 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 investment securities held within our investment portfolio to fall in value or become less liquid. The FRB’s actions to increase the money supply (sometimes referred to as quantitative easing) may be curtailed or ended which may cause a decline in the value of securities held by the Company. Uncertainty surrounding the credit risk associated with mortgage collateral or guarantors may cause material discrepancies in valuation estimates obtained from third parties. Volatile market conditions may reduce 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 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, and investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or remediate hazardous or toxic substances 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 contaminated site. If the Company becomes subject to significant environmental liabilities, its business, financial condition, and results of operations could be adversely affected.

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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.

The Company is exposed to the risk that third parties that owe it money 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 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.

The expiration of unlimited FDIC insurance on certain noninterest-bearing transaction accounts may increase our interest expense and reduce our liquidity

On December 31, 2012, unlimited FDIC insurance on certain noninterest-bearing transaction accounts under the transaction account guarantee program expired. Under this program, prior to its expiration, all funds in a noninterest-bearing transaction account were insured in full by the FDIC from December 31, 2010 through December 31, 2012. This temporary unlimited coverage was in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general deposit insurance rules.

The reduction in FDIC insurance on these noninterest-bearing transaction accounts to the standard $250,000 maximum may cause depositors to move funds previously held in such noninterest-bearing accounts to interest-bearing accounts, which would increase our costs of funds and negatively impact our results of operations, or may cause depositors to withdraw their deposits and invest funds in investments perceived as being more secure, such as securities issued by the United States Treasury. This could reduce our liquidity, or require us to pay higher interest rates to retain deposits and maintain our liquidity and could adversely affect our earnings.

The Federal Reserve’s repeal of the prohibition against payment of interest on demand deposits (Regulation Q) and the elimination of the FDIC’s TAG program may increase competition for such deposits and ultimately increase interest expense.

A major portion of our net income comes from our interest rate spread, which is the difference between the interest rates paid by us on amounts used to fund assets and the interest rates and fees we receive on our interest-earning assets. Our interest-earning assets include outstanding loans extended to our customers and securities held in our investment portfolio. We fund assets using deposits and other borrowings. On July 14, 2011, the Federal Reserve issued final rules to repeal Regulation Q, which prohibited the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System. The final rules implement Section 627 of the Dodd-Frank Act, which repealed Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. As a result, banks are now permitted to offer interest-bearing demand deposit accounts to commercial customers, which were previously forbidden under Regulation Q. The repeal of Regulation Q may cause increased competition from other financial institutions for these deposits. If we decide to pay interest on demand accounts, we would expect our interest expense to increase.

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

Due to cumulative losses incurred by the Company in years prior to 2012 and other relevant considerations, the Company is unable to conclude that it is more likely than not that it will realize its net deferred tax asset and, accordingly, has recorded a valuation allowance to fully offset its deferred tax asset at December 31, 2012 and 2011. Realization of deferred tax assets is generally dependent upon the Company’s ability to generate future taxable income. In addition, application of complex tax regulations arising from the Capital Raise may otherwise limit tax deductions. As broadly defined in Section 382 of the Internal Revenue Code, the issuance of common stock in connection with the Company’s Capital Raise in 2011 resulted in an

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“ownership change” of the Company. 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 may be disallowed. 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 one to five years of the date of the ownership change. Given the complexity of application of Section 382 and the carry-forward limitations, a material portion of these potential attributes may be disallowed.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.

Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the United States Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, intervention or sanctions by regulators, and costly litigation or expensive additional controls and systems. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the federal government has imposed and is expected to expand laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations, however it is possible for such safeguards to fail or prove deficient during the implementation phase to avoid non-compliance with such laws.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

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

ITEM 3. LEGAL PROCEEDINGS.

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 these matters will have a material adverse effect on the Company’s condensed consolidated financial position, results of operations or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

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

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, stock splits, and reverse stock splits and are based on actual trade statistical information provided by the NASDAQ Capital Market for the periods indicated.

Quarter Ended		High				Low				Dividend per share
2012
December 31		$	6.26			$	4.68				N/A
September 30		$	5.81			$	4.52				N/A
June 30		$	6.04			$	4.45				N/A
March 31		$	6.24			$	4.32				N/A
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

Holders

As of December 31, 2012 Cascade Bancorp had 47,326,306 shares of common stock outstanding, held of record by approximately 315 holders of record. The last reported sales price of our common stock on the NASDAQ Capital Market on March 20, 2013 was $7.00 per share.

Dividends

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. 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 and prior to receiving dividends from the Bank. Bancorp has no plans to pay dividends at this time. See “Regulations Concerning Cash Dividends” in Item 1 of this report for additional discussion of limitations on the Bank’s and Bancorp’s respective abilities to pay cash dividends.

Issuer Purchases of Equity Securities

No shares were repurchased during the fourth quarter of 2012.

ITEM 6. SELECTED FINANCIAL DATA.

As a smaller reporting company, the Company is not required to provide the information called for by this Item 6.

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

This discussion highlights key information as determined by management but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto as of December 31, 2012 and 2011 and for each of the years in the three-year period ended December 31, 2012 included in Item 8 of this Annual Report on Form 10-K.

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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 report. 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.

Cease and Desist Order Terminated in March 2013

On March 7, 2013, the FDIC and DFCS terminated the Order issued to the Bank in August 2009. In connection with this termination, the Bank has entered into a memorandum of understanding with the FDIC and the DFCS. The memorandum of understanding requires, among other things, that the Bank maintain a Tier 1 leverage capital ratio of 10.0% and continue to reduce the level of adversely classified assets. The memorandum of understanding continues to prohibit the Bank from paying dividends without the prior written consent from the FDIC and DFCS.

2011 Capital Raise

In January 2011, the Company completed a $177.0 million capital raise described in Item 1 of this report. 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. See Note 2 in Item 8 of this report for additional information regarding the Capital Raise.

2011 Bulk Sale of Distressed Assets

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, also described in Item 1 of this report. 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 these transactions.

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 (which consists of our reserve for loan losses and our reserve for loan

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commitments) involves a high degree of judgment and assessment of multiple variables that result in a methodology with relatively complex calculations and analysis. Management uses historical information to assess the adequacy of the reserve for loan losses 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.

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.

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% 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.

Due to cumulative losses incurred by the Company in prior years and related considerations, the Company is unable to conclude that it is more likely than not that it will realize its net deferred tax asset and, accordingly, has recorded a valuation allowance to fully offset its deferred tax asset at December 31, 2012 and 2011. Realization of deferred tax assets is generally dependent upon the Company generating future taxable income, and is subject to limitations arising from the 2011 Capital Raise that could result in permanent impairment of a material portion of the Company’s deferred tax assets and/or limit deductibility of certain losses.

As broadly defined in Section 382 of the Internal Revenue Code, the issuance of common stock in connection with the Company’s Capital Raise in 2011 resulted in an “ownership change” of the Company. 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 may be disallowed. 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 one to five years of the date of the ownership change. Given the complexity of application of Section 382 and the carry-forward limitations, a material portion of these potential attributes may be disallowed.

Other Real Estate Owned and Foreclosed Assets

Other real estate owned and 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

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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.

Economic Conditions

The Company's business is closely tied to the economies of Oregon and 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 slow recovery and uncertain economic outlook constrains business and consumer incomes, cash reserves, and the value of collateral securing loans. Business activity has stabilized generally, along with real estate values, with modestly increasing prices evident in housing. Similarly, unemployment rates have stabilized yet with only modest improvement despite the recovering economy. Businesses are facing challenges due to elevated unemployment and economic uncertainty. The uncertain state of the economy and slow recovery could cause further deterioration of the economies of our primary markets, resulting in an adverse effect on the Company's financial condition and results of operations

Consolidated Results of Operations — Years ended December 31, 2012, 2011, and 2010

Net Income/Loss

Our consolidated results of operations are dependent to a large degree on our net interest income. We also generate other income primarily through service charges and fees, card issuer and merchant service fees, earnings on bank-owned-life insurance (“BOLI”) and mortgage banking income. Our operating expenses consist in large part of compensation, employee benefits expense, occupancy, communications, equipment, insurance expenses, professional and outside services, and expenses related to OREO. Interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.

In 2012 the Company recorded net income of $6.0 million, compared to a net loss of ($47.3) million in 2011 and a net loss of ($13.7) million in 2010. During these periods, net income (loss) per share was $0.13, ($1.08) and ($4.87), respectively. The return to profitability in 2012 is attributable to significantly reduced credit costs, including a lower loan loss provision and reduced cost incurred in connection with the disposition of OREO. The Company recorded a $1.1 million loan loss provision in 2012, significantly below the $75.0 million loan loss provision made in 2011 and the $24.0 million loan loss provision made in 2010. 2012 OREO-related expenses declined to $1.7 million, compared to $17.9 million in 2011 and $14.6 million in 2010. 2012 also benefited from revitalized residential mortgage originations which contributed $4.3 million to 2012 net income, compared to $0.5 million in 2011 and $0.6 million in 2010.

Net Interest Income

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.

Net interest income was $49.9 million in 2012, a $5.5 million or 10.0% decrease from 2011. Net interest income decreased $5.8 million or 9.5% in 2011 over 2010. Yields earned on assets decreased to 4.52% for 2012 as compared to 4.66% in 2011 and 4.87% in 2010 due to declining market interest rates and because lower yielding securities increased while loan balances decreased. Meanwhile, the average rates paid on interest bearing liabilities for 2012 decreased to 0.67% compared to 1.24% in 2011 and 1.55% in 2010.

2012 total interest income decreased $12.2 million or 18.2% due mainly to significantly lower average earning loans. 2011 total interest income decreased approximately $17.9 million or 21.0% also due to lower average earning loans as well as interest reversals on loans being placed on non-accrual, and interest foregone on non-performing loans. Total interest expense declined by $6.7 million or 57.3% in 2012 as compared to 2011

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mainly due to reduced volumes of time deposits and borrowings which carry higher rates than core deposits. Similarly 2011 interest expense declined $12.0 million or 50.7% as compared to 2010 as higher cost liabilities were reduced including borrowings from FHLB and extinguishment of the Debentures.

The overall decline in net interest income from 2010 through 2012 was largely a result of declining average loan balances over the same periods. The Company is working to increase loan balances through continued marketing efforts in our banking area.

Net Interest Margin (NIM)

The Company’s net interest margin (“NIM”) increased to 4.11% for 2012 compared to 3.85% for 2011 and 3.51% for 2010. The increase was primarily due to lower cost of funds resulting from a reduction in higher cost liabilities.

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The following table presents further analysis of the components of Cascade’s NIM and sets forth for 2012, 2011, and 2010 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company:

		Year ended December 31, 2012												Year ended December 31, 2011												Year ended December 31, 2010
		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
Interest on securities		$	257,987			$	5,839				2.26	%		$	134,370			$	4,961				3.69	%		$	132,093			$	5,613				4.25	%
Interest bearing balances due from banks & FRB			83,735				208				0.25	%			211,952				533				0.25	%			223,393				561				0.25	%
Federal funds sold			23				—				0.00	%			2,261				2				0.09	%			3,025				5				0.17	%
Federal Home Loan Bank stock			10,441				—				0.00	%			10,472				—				0.00	%			10,472				—				0.00	%
Loans(1)(2)(3)			862,057				48,832				5.66	%			1,080,120				61,604				5.70	%			1,377,674				78,801				5.72	%
Total earning assets/interest income			1,214,243				54,879				4.52	%			1,439,175				67,100				4.66	%			1,746,657				84,980				4.87	%
Reserve for loan losses			(39,691	)											(38,768	)											(56,677	)
Cash and due from banks			30,142												32,280												79,662
Premises and equipment, net			33,906												34,610												36,362
Accrued interest and other assets			59,751												85,638												108,920
Total assets		$	1,298,351											$	1,552,935											$	1,914,924
Liabilities and Stockholders' Equity
Interest bearing demand deposits		$	501,141				1,051				0.21	%		$	482,526				2,100				0.44	%		$	664,254				4,811				0.72	%
Savings deposits			36,910				23				0.06	%			33,445				55				0.16	%			30,680				78				0.25	%
Time deposits			144,485				2,017				1.40	%			268,592				5,559				2.07	%			535,906				11,791				2.20	%
Other borrowings			60,000				1,908				3.18	%			156,963				3,990				2.54	%			303,433				7,060				2.33	%
Total interest bearing liabilities/interest expense			742,536				4,999				0.67	%			941,526				11,704				1.24	%			1,534,273				23,740				1.55	%
Demand deposits			394,382												399,251												342,760
Other liabilities			24,260												27,919												15,390
Total liabilities			1,161,178												1,368,696												1,892,423
Stockholders' equity			137,173												184,239												22,501
Total liabilities and stockholders' equity		$	1,298,351											$	1,552,935											$	1,914,924
Net interest income						$	49,880											$	55,396											$	61,240
Net interest spread											3.85	%											3.42	%											3.32	%
Net interest income to earning assets											4.11	%											3.85	%											3.51	%

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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,												Year ended December 31,
		2012 over 2011												2011 over 2010
		Total Increase (Decrease)				Amount of Change Attributed to								Total Increase (Decrease)				Amount of Change Attributed to
						Volume				Rate								Volume				Rate
Interest income:
Interest and fees on loans		$	(12,772	)		$	(12,438	)		$	(334	)		$	(17,197	)		$	(17,020	)		$	(177	)
Interest on investment securities			878				4,564				(3,686	)			(652	)			99				(751	)
Interest on interest bearing deposits			(325	)			(322	)			(3	)			(28	)			(29	)			1
Interest on federal funds sold			(2	)			(2	)			—				(3	)			(1	)			(2	)
Total interest income			(12,221	)			(8,198	)			(4,023	)			(17,880	)			(16,951	)			(929	)
Interest expense:
Interest on deposits:
Interest bearing demand			(1,049	)			81				(1,130	)			(2,711	)			(1,316	)			(1,395	)
Savings			(32	)			6				(38	)			(23	)			7				(30	)
Time deposits			(3,542	)			(2,569	)			(973	)			(6,232	)			(5,881	)			(351	)
Other borrowings			(2,082	)			(2,465	)			383				(3,070	)			(3,408	)			338
Total interest expense			(6,705	)			(4,947	)			(1,758	)			(12,036	)			(10,598	)			(1,438	)
Net interest income		$	(5,516	)		$	(3,251	)		$	(2,265	)		$	(5,844	)		$	(6,353	)		$	509

Loan Loss Provision

The loan loss provision was $1.1 million in 2012, $75.0 million in 2011 and $24.0 million in 2010. The decrease in 2012 was a result of lower charge-offs in the current year, and reflects a generally improving credit risk profile. The 2011 increase in our provision level over 2010 was mainly due to charge-offs incurred in the Bulk Sale, as well as risk rating changes within the loan portfolio and higher than expected loss on impaired loans. At December 31, 2012, the reserve for loan losses was approximately $27.3 million while the reserve for unfunded commitments was $0.4 million, as compared to a reserve for loan losses of $43.9 million and a reserve for unfunded commitments of $1.6 million at December 31, 2011.

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 increased $2.1 million or 19.4% in 2012 compared to 2011 due primarily to a $3.8 million increase in gain on sale of residential mortgage originations. Mortgage volumes were significantly higher in 2012 due to improving market conditions and lower interest rates. Somewhat offsetting improved mortgage revenue were lower service charges which continued to decline in 2012 due to lower transaction volumes and effects of regulatory changes. 2011 total non-interest income decreased $2.4 million or 18.0% compared to 2010 due to lower service charges as a result of declining transaction volumes and effects of regulatory changes. Specifically, the Dodd-Frank Act placed limitations on charges for overdraft protection and other fees, contributing to a $1.7 million year-over-year decline. Partially offsetting the 2011 declines were increased income from BOLI of $1.1 million.

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Non-interest Expenses

Non-interest expense was lower in virtually all categories in 2012, and in total decreased $27.4 million or 32.9% compared to 2011. Much of the reduction was a result of lower credit-related costs that reflect the improving economy. Specifically OREO expenses declined $16.2 million or 90.4% compared to 2011 due to significantly lower valuation allowance additions and lower operating costs. This improvement was achieved in part because of stabilizing real estate prices as well as the 2011 provision of a $5.0 million OREO valuation allowance to expedite disposition of the portfolio. This strategy resulted in a reduction of OREO from $21.3 million at year end 2011 to $6.6 million at December 31, 2012. OREO expenses also benefited from lower operating costs on a declining portfolio. Noninterest expenses were also lower due to several other favorable changes in 2012 as compared to 2011. The reserve for unfunded commitments was reduced by $1.1 million in 2012 as result of changing estimates of applicable loss factors and usage levels for unused loan commitments. Prepayment penalties on borrowings declined from $1.3 million in 2011 to zero in 2012. In addition, 2011 other expenses were higher than in 2012 due in large part to our $3.4 million write-off of our core deposit intangible (“CDI”) in 2011, a litigation settlement in 2011, and costs attendant to our CEO transition that were incurred in 2011.

2011 non-interest expense increased $9.5 million or 12.8% compared to 2010. The elevated 2011 expense included a $3.3 million increase related to OREO valuation, disposition, and operating costs, a one-time $3.4 million charge to fully impair our CDI asset, and $1.3 million in costs for prepayment of certain borrowings. Also salaries and employee benefits increased $2.4 million primarily related to executive management transition costs. Professional services increased $2.0 million from 2010, mainly due to professional fees and other expense related to our CEO transition, while costs related to settlement of litigation recorded in other expenses helped increase other expenses by $1.6 million from the 2010 level. Partially offsetting these increases was a $4.8 million reduction in FDIC insurance expense costs compared to 2010 resulting from the Company’s improved capital ratios and consequent lower insurance assessment rate. Also the FDIC insurance assessment base was changed from average quarterly deposits to average quarterly assets effective April 1, 2011, which generally benefited community banks including the Company.

The following table details categories of non-interest expense for the years ended December 31, 2012, 2011, and 2010, and the changes therein:

		2012				2011				2012 to 2011 change				2010				2011 to 2010 change
Salaries and employee benefits		$	31,559			$	31,434			$	125			$	29,046			$	2,388
Occupancy			4,598				4,710				(112	)			4,649				61
Communications			1,541				1,653				(112	)			1,727				(74	)
Equipment			1,547				1,583				(36	)			1,778				(195	)
FDIC insurance			2,519				3,271				(752	)			8,084				(4,813	)
OREO			1,725				17,936				(16,211	)			14,616				3,320
Professional services			3,999				4,356				(357	)			2,308				2,048
Increase (decrease) in reserve for unfunded loan commitments			(1,110	)			609				(1,719	)			237				372
CDI impairment			—				3,436				(3,436	)			—				3,436
Prepayment penalties on FHLB and other borrowings			—				1,291				(1,291	)			—				1,291
Other expenses			9,463				12,920				(3,457	)			11,304				1,616
		$	55,841			$	83,199			$	(27,358	)		$	73,749			$	9,450

2011 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.

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Income Taxes

Due to cumulative losses incurred by the Company in years prior to 2012 and other relevant factors, the Company is unable to conclude that it is more likely than not that it will realize its net deferred tax asset and, accordingly, has recorded a valuation allowance to fully offset its deferred tax asset at December 31, 2012 and 2011. Realization of deferred tax assets is dependent upon the Company generating future taxable income, and is subject to limitations arising from the 2011 Capital Raise that could result in permanent impairment of a material portion of the Company’s deferred tax assets and/or limit deductibility of certain losses. As of December 31, 2012, the Company maintained a 100% valuation allowance against its deferred tax asset. This amount represented a $10.8 million decrease from year-end 2011 due to changes in temporary differences between the financial statement and tax recognition of revenue and expenses and a reduction of deferred tax assets due to Section 382 of the Internal Revenue Code.

As broadly defined in Section 382 of the Internal Revenue Code, the issuance of common stock in connection with the Company’s Capital Raise in 2011 resulted in an “ownership change” of the Company. 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 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. Management determined the amount of the deferred tax valuation allowance at December 31, 2012 and December 31, 2011 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.

The Company recorded an income tax provision of $0.08 million in 2012, an income tax provision of $10.3 million in 2011 and a tax benefit of $9.5 million in 2010. The 2011 provision of $10.3 million also includes a credit for income taxes of approximately $11.8 million related to the Company’s loss from operations excluding the extraordinary gain.

Financial Condition

Balance Sheet Overview

At December 31, 2012, total assets were $1.3 billion, comparable to total assets at December 31, 2011. Total net loans declined $24.1 million to $829.1 million at December 31, 2012 compared to $853.2 million at December 31, 2011. The lower loan balance was a result of borrower payoffs and paydowns. The investment portfolio increased to $259.4 million at December 31, 2012 as compared to $212.0 million a year earlier as the Company deployed excess liquidity into securities. As a result of the redeployment of excess liquidity, total cash and cash equivalents at December 31, 2012 decreased $15.4 million or 12.0% compared to December 31, 2011. OREO balances at December 31, 2012 were $6.6 million compared to $21.3 million at December 31, 2011, a $14.7 million or 69.2% decline from December 31, 2011. The decline in OREO balances from 2011 to 2012 was primarily a result of dispositions of OREO as a result of a Board decision in late 2011 to strategically expedite the liquidation of OREO as part of the effort to reduce classified assets during 2012.

Total deposits decreased $10.6 million or 1.0% at December 31, 2012 as compared to December 31, 2011. Core deposits (deposits, excluding time) increased 2.3% from December 31, 2011 levels, partially offsetting a $31.6 million decline in time deposits. The shift of deposits from time deposits and interest bearing demand deposits into demand deposits and savings deposits is evidence of an improving deposit mix as customers are moving their cash to more liquid funds, including operating accounts, as opposed to placing their balances in less liquid, term accounts.

Total borrowings at December 31, 2012 remained unchanged from the balance at December 31, 2011, while total stockholders equity increased $7.9 million from December 31, 2011 to December 31, 2012. The increase in total stockholders equity is a result of recording net income of $6.0 million in the year ended December 31, 2012 coupled with increases in accumulated other comprehensive income and common stock.

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

Investment Securities

The following table shows the carrying value of the Company’s portfolio of investments at December 31, 2012, 2011, and 2010:

(dollars in thousands)		2012				2011				2010
U.S. Agency mortgage backed securities (MBS) *		$	221,315			$	193,877			$	97,301
Non-agency MBS			20,854				4,115				5,038
U.S. Agency asset-backed securities			9,855				11,013				12,199
Commerical paper			5,000				—				—
Obligations of state and political subdivisions			1,023				1,334				1,806
Total debt securities			258,047				210,339				116,344
Tax credit investments			790				1,154				1,231
Mutual fund			520				501				472
Total investment securities		$	259,357			$	211,994			$	118,047

Mortgage-backed securities, or MBS, include collateralized mortgage obligations and adjustable rate mortgages, as well as direct pass through securities. Prepayment speeds on mortgages underlying MBS may cause the average life of such securities to be shorter (or longer) than expected.

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The Company’s investment portfolio increased by $47.4 million or 22.3% from December 31, 2011 to December 31, 2012 as a result of increased purchases of investment securities by the Bank in 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, 2012:

(dollars in thousands) Type and maturity
		Carrying Value				Weighted Average Yield(1)
U.S. Agency and non-agency MBS
Due within 1 year		$	671				0.49	%
Due after 1 but within 5 years			38				4.61	%
Due after 5 but within 10 years			49,052				2.39	%
Due after 10 years			192,408				2.38	%
Total U.S. Agency MBS			242,169				2.38	%
U.S. Agency asset-backed securities
Due after 10 years			9,855				4.16	%
Total U.S. Agency asset-backed securities			9,855				4.16	%
Commercial paper
Due within 1 year			5,000				0.42	%
Total State and Political Subdivisions			5,000				0.42	%
Obligations of state and political subdivisions(1)
Due after 1 but within 5 years			1,023				3.83	%
Total State and Political Subdivisions			1,023				3.83	%
Total debt securities			258,047				2.42	%
Mutual fund			520				5.55	%
Tax credit investments			790				-32.57	%
Total investment securities		$	259,357				2.32	%

The Company’s investment portfolio estimated duration at December 31, 2012 and 2011 is approximately 4.2 years and 3.4 years, respectively while weighted average life is 5.7 years and 8.6 years at December 31, 2012 and 2011, respectively.

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, 2012 and 2011, the investment portfolio had gross unrealized losses on available-for-sale securities of approximately $0.4 million. Management does not believe that these unrealized losses are other-than-temporary.

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Loan Portfolio and Credit Quality

Loan Portfolio Composition

Net loans represented approximately 63.7% of total assets as of December 31, 2012. The Company makes most 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)		2012				% of gross loans				2011				% of gross loans				2010				% of gross loans				2009				% of gross loans				2008				% of gross loans
Commercial real estate:
Owner occupied		$	196,821				22.9	%		$	250,213				27.8	%		$	315,723				25.7	%		$	347,274				22.4	%		$	342,395				17.5	%
Non-owner occupied and other			328,480				38.3	%			313,311				34.8	%			396,309				32.3	%			383,630				24.7	%			389,372				19.9	%
Total commercial real estate loans			525,301				61.2	%			563,524				62.6	%			712,032				58.0	%			730,904				47.1	%			731,767				37.4	%
Construction			45,650				5.3	%			60,971				6.8	%			158,463				12.9	%			320,025				20.6	%			575,054				29.3	%
Residential real estate			85,494				10.0	%			83,089				9.2	%			102,486				8.4	%			116,804				7.5	%			124,224				6.3	%
Commerical and industrial			162,213				18.9	%			150,637				16.8	%			205,692				16.8	%			326,678				21.1	%			468,418				23.9	%
Consumer			39,506				4.6	%			40,922				4.6	%			47,687				3.9	%			56,546				3.7	%			61,420				3.1	%
Total loans			858,164				100.0	%			899,143				100.0	%			1,226,360				100.0	%			1,550,957				100.0	%			1,960,883				100.0	%
Less:
Deferred loan fees			(1,846	)							(2,085	)							(2,647	)							(3,281	)							(4,699	)
Reserve for loan losses			(27,261	)							(43,905	)							(46,668	)							(58,586	)							(47,166	)
Loans, net		$	829,057							$	853,153							$	1,177,045							$	1,489,090							$	1,909,018

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, 2012:

		Central Oregon								Northwest Oregon								Southern Oregon								Idaho								Total
(dollars in thousands)		Amount				% of gross loans				Amount				% of gross loans				Amount				% of gross loans				Amount				% of gross loans				Amount				% of gross loans
Commercial real estate:
Owner occupied		$	99,525				25.0	%		$	27,096				16.5	%		$	17,185				17.7	%		$	53,015				26.6	%		$	196,821				22.9	%
Non-owner occupied and other			125,033				31.4	%			97,181				59.3	%			51,575				53.2	%			54,691				27.4	%			328,480				38.3	%
Total commercial real estate loans			224,558				56.4	%			124,277				75.8	%			68,760				70.9	%			107,706				54.0	%			525,301				61.2	%
Construction			16,489				4.1	%			10,214				6.2	%			6,213				6.4	%			12,734				6.4	%			45,650				5.3	%
Residential real estate			44,564				11.2	%			5,275				3.2	%			6,622				6.8	%			29,033				14.5	%			85,494				10.0	%
Commerical and industrial			93,551				23.5	%			19,426				11.9	%			12,055				12.4	%			37,181				18.6	%			162,213				18.9	%
Consumer			18,490				4.8	%			4,709				2.9	%			3,297				3.5	%			13,010				6.5	%			39,506				4.6	%
Total loans			397,652				100.0	%			163,901				100.0	%			96,947				100.0	%			199,664				100.0	%			858,164				100.0	%

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At December 31, 2012, the contractual maturities of all loans by category were as follows:

(dollars in thousands)		Due within one year				Due after one year, but within five years				Due after five years				Total
Commercial real estate:
Owner occupied		$	10,087			$	54,165			$	132,569			$	196,821
Non-owner occupied and other			34,832				87,588				206,060				328,480
Total commercial real estate loans			44,919				141,753				338,629				525,301
Construction			19,510				12,607				13,533				45,650
Residential real estate			6,832				33,383				45,279				85,494
Commerical and industrial			39,528				75,658				47,027				162,213
Consumer			2,191				18,420				18,895				39,506
Total loans		$	112,980			$	281,821			$	463,363			$	858,164

At December 31, 2012, variable and adjustable rate loans contractually due after one year totaled $517.3 million and loans with predetermined or fixed rates due after one year totaled $227.9 million.

Commercial 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 commercial 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 $525.3 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 61% of total loans outstanding as of December 31, 2012. Approximately 37% of CRE loans are made to owner-occupied users of the commercial property, while 63% 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.

		2012				% of total CRE				% of gross loans				2011
Commercial Real Estate:
Owner occupied		$	196,821				37	%			23	%		$	250,213
Non-owner occupied			328,480				63	%			38	%			313,311
		$	525,301				100	%			61	%		$	563,524

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 valuation analysis, 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 third 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,

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which could result in the classification of such loans as non-performing. Certain specific types of risks are associated with different types of loans.

Reserve for Loan Losses

The reserve for loan losses represents management's recognition of the assumed and present risks of extending credit and the possible inability or failure of the obligors to make repayment. The reserve is maintained at a level considered adequate to provide for 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, 2012, 2011, and 2010” 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 revision 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 consistence and reflect uncertainties such as lack of seasoning in the revised and enhanced model.

At December 31, 2012, 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

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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.

The Company classifies reserves for unfunded commitments as a liability on its consolidated balance sheet. Such reserves are included as part of the overall reserve for credit losses. Reserves for unfunded commitments totaled approximately $0.4 million and $1.6 million at December 31, 2012 and 2011, 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. Allocation exposure percentages for 2012 moderated in most categories with improvement in overall risk profile as reflected in improved historical loss rates. 2012 construction/lot exposure percentage improved in part due to the reduction of adversely risk rated loans as compared to prior periods. 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. This allocation process may not accurately predict credit losses by loan type or in the aggregate, however the total reserve for loan losses is available to absorb losses that may arise from any loan type or category.

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

		2012												2011
(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		$	11,596				2.2	%			61.2	%		$	21,648				3.8	%			62.6	%
Construction			1,583				3.5	%			5.3	%			5,398				8.9	%			6.8	%
Residential real estate			3,551				4.2	%			10.0	%			3,259				3.9	%			9.2	%
Commercial and industrial			7,267				4.5	%			18.9	%			11,291				7.5	%			16.8	%
Consumer			2,177				5.5	%			4.6	%			2,292				5.6	%			4.6	%
Committed/unfunded			440				—				—				1,550				—				—
Unallocated			1,087				—				—				17				—				—
Total reserve for credit losses		$	27,701				3.2	%			100.0	%		$	45,455				5.1	%			100.0	%

		2010												2009
		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		$	14,338				2.0	%			58.0	%		$	10,799				1.5	%			47.1	%
Construction			12,652				8.0	%			12.9	%			14,486				4.5	%			20.6	%
Residential real estate			4,116				4.0	%			8.4	%			3,092				2.6	%			7.5	%
Commerical and industrial			12,220				5.9	%			16.8	%			18,196				5.6	%			21.1	%
Consumer			2,966				6.2	%			3.9	%			2,807				5.0	%			3.7	%
Committed/unfunded			941				—				—				423				—				—
Unallocated			376				—				—				9,487				—				—
Total reserve for credit losses		$	47,609				3.9	%			100.0	%		$	59,290				3.8	%			100.0	%

		2008
		Reserve for loan and commitment losses				Allocated reserve as a % of loan category				Loan category as a % of total loans
Commerical real estate		$	7,064				1.0	%			37.4	%
Construction			18,722				3.3	%			29.3	%
Residential real estate			1,696				1.4	%			6.3	%
Commerical and industrial			11,614				2.5	%			23.9	%
Consumer			1,893				3.1	%			3.1	%
Committed/unfunded			735				—				—
Unallocated			6,481				—				—
Total reserve for credit losses		$	48,205				2.5	%			100.0	%

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The following table summarizes the Company’s reserve for credit losses and charge-off and recovery activity for each of the last five years:

		Year ended December 31,
(dollars in thousands)		2012				2011				2010				2009				2008
Loans outstanding at end of period, net of deferred loan fees		$	856,318			$	897,058			$	1,223,713			$	1,547,676			$	1,956,184
Average loans outstanding during the period		$	862,057			$	1,080,120			$	1,377,674			$	1,798,723			$	2,054,199
Reserve for loan losses, balance beginning of period		$	43,905			$	46,668			$	58,586			$	47,166			$	33,875
Recoveries:
Commercial real estate:			198				119				166				—				103
Construction			584				1,551				4,193				—				25
Residential real estate			262				164				181				—				78
Commerical and industrial			3,094				1,453				4,221				3,449				1,301
Consumer			311				305				351				296				473
			4,449				3,592				9,112				3,745				1,980
Loans charged off:
Commercial real estate:			(13,079	)			(22,717	)			(3,220	)			(16	)			(2,290	)
Construction			(264	)			(30,824	)			(20,639	)			(10,402	)			(69,534	)
Residential real estate			(2,620	)			(5,217	)			(4,858	)			—				(846	)
Commerical and industrial			(5,024	)			(20,106	)			(12,462	)			(114,942	)			(12,429	)
Consumer			(1,206	)			(2,491	)			(3,851	)			(965	)			(3,183	)
			(22,193	)			(81,355	)			(45,030	)			(126,325	)			(88,282	)
Net loans charged-off			(17,744	)			(77,763	)			(35,918	)			(122,580	)			(86,302	)
Provision charged to operations			1,100				75,000				24,000				134,000				99,593
Reserve for loan losses, balance end of period		$	27,261			$	43,905			$	46,668			$	58,586			$	47,166
Ratio of net loans charged-off to average loans outstanding			2.06	%			7.20	%			2.61	%			6.81	%			4.20	%
Ratio of reserve for loan losses to loans at end of period			3.18	%			4.89	%			3.81	%			3.79	%			2.41	%

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The following table presents information with respect to non-performing assets (“NPAs”) for the years presented. As of December 31, 2012, commercial real estate represented about 53.2% of NPAs; construction 27.0%; residential real estate 7.0%; and commercial and industrial loans 12.8%.

		December 31,
(dollars in thousands)		2012				2011				2010				2009				2008
Loans on nonaccrual status		$	17,220			$	9,111			$	80,997			$	132,110			$	120,468
Loans past due 90 days or more but not on nonaccrual status			1,533				23				7				—				5
OREO			6,552				21,270				39,536				28,860				52,727
Total non-performing assets		$	25,305			$	30,404			$	120,540			$	160,970			$	173,200
Selected ratios:
Non performing loans to total gross loans			2.19	%			1.02	%			6.62	%			8.54	%			6.16	%
NPAs to total gross loans and OREO			2.93	%			3.31	%			9.54	%			10.21	%			8.85	%
NPAs to total assets			1.94	%			2.32	%			7.02	%			7.41	%			7.60	%

The following table presents the composition of NPAs for the years presented:

		December 31,
(dollars in thousands)		2012				2011				2010				2009				2008
Commercial real estate:
Owner occupied		$	4,836			$	1,930			$	6,510			$	6,982			$	9,551
Non-owner occupied and other			8,618				4,619				13,730				17,767				16,248
Total commercial real estate loans			13,454				6,549				20,240				24,749				25,799
Construction			6,833				15,322				72,605				106,752				128,053
Residential real estate			1,774				5,966				10,867				11,580				2,456
Commerical and industrial			3,231				2,544				16,821				17,863				16,877
Consumer			13				23				7				26				15
Total non-performing assets			25,305				30,404				120,540				160,970				173,200

The accrual of interest on a loan is discontinued when, in management’s judgment, the future collectability of principal or interest is in doubt. Loans placed on nonaccrual status may or may not be contractually past due at the time of such determination, and may or may not be secured. When a loan is placed on nonaccrual status, it is the Bank’s policy to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such loans is credited to loan principal if, in the opinion of management, full collectability of principal is doubtful. Interest income that was reversed and charged against income was $0.5 million in 2012, $0.8 million in 2011, and $1.3 million in 2010. Interest income that would have been recorded in 2012 had nonaccrual loans at December 31, 2012 been on accrual status throughout the year would have been $0.8 million.

During our normal loan review procedures, a loan is considered to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair market value of the collateral if the loan is collateral dependent. Impaired loans are currently measured at lower of cost or fair value. Certain small balance homogeneous loans are collectively measured for impairment. Impaired loans are charged to the allowance when management believes, after considering economic and business conditions, collection efforts and collateral position that the borrower’s financial condition is such that collection of principal is not probable. At December 31, 2012, the Company’s recorded investment in certain loans that were considered to be impaired was $68.7 million and specific valuation allowances were $3.8 million. Impaired loans were $72.0 million with specific valuation allowances of $11.2 million at year-end 2011.

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The following table presents the loans accounted for as troubled debt restructurings (“TDRs”) for the years presented:

		December 31,
(dollars in thousands)		2012				2011				2010				2009				2008
TDR balance		$	44,968			$	45,597			$	62,822			$	27,320			$	—
TDRs classifed as non-accrual loans		$	1,406			$	1,851			$	19,539			$	11,849			$	—
Remaining commitments to lend on TDRs		$	962			$	33			$	95			$	328			$	—

The TDRs presented for the years presented above are classified as impaired loans and, in the opinion of management, were reserved appropriately.

Management, to the best of its ability works to properly classify loans. As of December 31, 2012, management was unaware of any loans which are not disclosed above as nonaccrual, past due or TDR and with respect to which there was known information about possible credit problems of the borrowers that caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonaccrual, past due or TDR.

Bank-Owned Life Insurance (BOLI)

The Company has purchased BOLI to protect itself against the loss of certain key employees and directors due to death and to offset the Bank’s future obligations to its employees under its retirement and benefit plans. See Note 1 of the Company’s “Notes to Consolidated Financial Statements” in Item 8 of this report. During 2012 and 2011, the Bank did not purchase any new BOLI. The cash surrender value of the Bank’s total life insurance policies was $35.7 million and $34.7 million at December 31, 2012 and 2011, respectively. The Bank recorded income from the BOLI policies of $1.0 million in 2012, $1.2 million in 2011 and $0.1 million in 2010. During 2010, the Company recorded a $0.7 million gain on a BOLI death claim benefit.

The Company owns both general account and separate account BOLI. The separate account BOLI was purchased in the fourth quarter of 2006 as an investment expected to provide a long-term source of earnings to support existing employee benefit plans. The fair value of the general account BOLI is based on the insurance contract cash surrender value. The cash surrender value of the separate account BOLI is the quoted market price of the underlying securities, further supported by a stable value wrap which mitigates, but may not fully insulate against, changes in the fair market value of the underlying securities.

Liabilities

Deposit Liabilities and Time Deposit Maturities

At December 31, 2012, total deposits were $1.08 billion, down 1.0% from December 31, 2011. Average deposits totaled $1.08 billion for the full year 2012, down 9.0% or $106.9 million on average from the prior year. This decline is mainly related to reduction of time deposits including call and prepayment of internet certificates of deposits towards the end of 2011. Average non-interest-bearing demand deposits in 2012 were $394.3 million, down 1.2% compared to $399.3 million in 2011. The stability of these deposits relates in part to continued customer confidence after the Capital Raise discussed elsewhere in this report. Borrowings at December 31, 2012 remained unchanged from December 31, 2011.

At December 31, 2012 and 2011, the Company did not have any wholesale brokered deposits. Banks that are not “well-capitalized” are restricted from accessing wholesale brokered deposits, and while the Bank meets the requirements necessary for a “well-capitalized” designation, through March 7, 2013 the Order restricted the Bank’s ability to accept additional brokered deposits, including the Bank’s reciprocal Certificate of Deposit Account Registry Service program, for which it previously had a temporary waiver from the FDIC.

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The following table summarizes the average amount of, and the average rate paid on, each of the deposit categories for the periods shown:

		Years ended December 31,
		2012 Average								2011 Average								2010 Average
(dollars in thousands)		Amount				Rate Paid				Amount				Rate Paid				Amount				Rate Paid
Demand		$	394,382				N/A			$	399,251				N/A			$	342,760				N/A
Interest-bearing demand			501,141				0.21	%			482,526				0.44	%			664,254				0.72	%
Savings			36,910				0.06	%			33,445				0.16	%			30,680				0.25	%
Time			144,485				1.40	%			268,592				2.09	%			535,906				2.33	%
Total Deposits		$	1,076,918							$	1,183,814							$	1,573,600

As of December 31, 2012, the Company’s time deposit liabilities had the following times remaining to maturity:

		Time deposits of $100,000 or more(1)								All other Time deposits(2)
(dollars in thousands)		Amount				Percent				Amount				Percent
Due in 3 months or less		$	18,581				22.9	%		$	9,640				20.1	%
Due after 3 months through 6 months			16,900				20.8	%			9,573				19.9	%
Due after 6 months through 12 months			20,759				25.6	%			14,474				30.1	%
Due after 12 months			25,000				30.7	%			14,345				29.9	%
Total		$	81,240				100.0	%		$	48,032				100.0	%

2011 Extinguishment of Junior Subordinated Debentures

The purpose of the Company’s $68.6 million of junior subordinated debentures was to fund the cash portion of the F&M Holding Company acquisition in 2006, to support general corporate purposes and to augment regulatory capital. In January 2011, the Company exchanged the trust preferred securities (“TPS”) for senior notes in the aggregate principal amount of $13.3 million representing 20% of the original balance of the TPS. Following the Capital Raise, the notes were extinguished for cash and the liability for TPS debt was fully extinguished, which resulted in a pre-tax gain of approximately $54.9 million for the Company in the first quarter of 2011.

See Notes 2, 11, and 20 of the “Notes to Consolidated Financial Statements” included in Item 8 of this report for additional details.

Other Borrowings

At December 31, 2012, the Bank had a total of $60.0 million in long-term borrowings from FHLB of Seattle with maturities ranging from 2014 to 2017, bearing a weighted-average rate of 3.13% and no borrowings with the FRB. The borrowings remain unchanged from December 31, 2011. In February, May, and September 2011, the Bank repaid an aggregate of approximately $135.0 million in FHLB advances with maturity dates during 2011 and early 2012. As a result of such early prepayments, the Company incurred prepayment penalties of approximately $0.8 million. In addition, at December 31, 2011, the Bank had $30.0 million in off-balance sheet FHLB letters of credit used for collateralization of public deposits held by the Bank, which is a reduction to the available line of credit with the FHLB, as of December 31, 2012, the Bank had none.

In September 2011, the Bank repaid in full $41.0 million of senior unsecured TLGP debt. The Bank incurred penalties of approximately $0.5 million to repay the debt. The costs included payment of interest through the originally scheduled maturity date of February 12, 2012, charge-off of the remaining issuance costs which were previously being amortized on a straight line basis, and charge-off of the remaining 1.00% per annum FDIC insurance assessment applicable to the TLGP debt. See “Liquidity and Sources of Funds” below in this Item 7 for further discussion.

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Off-Balance Sheet Arrangements

A schedule of significant off-balance sheet commitments at December 31, 2012 is included in the following table (dollars in thousands):

		2012
Commitments to extend credit		$	224,531
Commitments under credit card lines of credit			22,847
Standby letters of credit			4,221
Total off-balance sheet financial instruments		$	251,599

See Note 13 of the “Notes to Consolidated Financial Statements” included in Item 8 hereof for a discussion of the nature, business purpose, and importance of off-balance sheet arrangements.

Stockholder’s Equity and Capital Resources

The Company’s total stockholders’ equity at December 31, 2012 was $140.8 million, an increase of $7.9 million from December 31, 2011. The increase primarily resulted from the net income for the year ended December 31, 2012 of $6.0 million and an increase in accumulated other comprehensive income of approximately $1.0 million.

Federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure of capital deemed appropriate by the federal banking regulator for measuring the capital adequacy of an insured depository institution. As mentioned earlier in this report, as of December 31, 2012, the Bank was operating under the Order and, as of March 7, 2013, the Order was terminated and the Bank has entered into a memorandum of understanding with the FDIC and DFCS. Bancorp is operating under the Written Agreement with its regulators.

At December 31, 2012, Bancorp’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 10.44%, 14.12% and 15.39%, respectively, and the Bank’s Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios were 10.42%, 14.09% and 15.36%, respectively, which meet 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, as mentioned elsewhere in this report, the Bank and Bancorp are required to maintain a Tier 1 leverage ratio of at least 10.00% to be considered “well-capitalized.” Additional information regarding capital resources are located in Note 20 of the “Notes to Consolidated Financial Statements” included in Item 8 of this report.

From time to time the Company makes commitments to acquire banking properties or to make equipment or technology related investments of capital. At December 31, 2012, the Company had no material capital expenditure commitments apart from those incurred in the ordinary course of business.

Liquidity and Sources of Funds

The objective of the Bank’s liquidity management is to maintain ample cash flows to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. At December 31, 2012, liquid assets of the Bank are mainly interest bearing balances held at FRB totaling $78.7 million compared to $88.8 million at December 31, 2011.

Core relationship deposits are the Bank’s primary source of funds. As such, the Bank focuses on deposit relationships with local business and consumer clients who maintain multiple accounts and services at the Bank. The Company views such deposits as the foundation of its long-term liquidity because it believes such core deposits are more stable and less sensitive to changing interest rates and other economic factors compared to large time deposits or wholesale purchased funds. The Bank’s customer relationship strategy has resulted in a relatively higher percentage of its deposits being held in checking and money market accounts, and a lesser percentage in time deposits.

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The Bank augments core deposits with wholesale funds from time to time. Until the Order was terminated on March 7, 2013, the Bank was restricted under the terms of the Order from accepting or renewing brokered deposits. At December 31, 2012 and 2011, the Company did not have any brokered deposits.

With the recapitalization of the Bank in January 2011 and its becoming compliant with FDIC capital standards, restrictions on its acceptance of public fund deposits were subsequently lifted. Current rules imposed by the Oregon State Treasury require that the Bank collateralize 50% of the uninsured public funds held by the Bank. At December 31, 2012, the Bank was in compliance with this statute.

The Bank also utilizes borrowings and lines of credit as sources of funds. At December 31, 2012, the FHLB had extended the Bank a secured line of credit of $260.3 million (20% of total assets) accessible for short or long-term borrowings given sufficient qualifying collateral. As of December 31, 2012, the Bank had qualifying collateral pledged for FHLB borrowings totaling $146.1 million of which the Bank had utilized $60.0 million in secured borrowings. At December 31, 2012, the Bank also had undrawn borrowing capacity at FRB of approximately $27.2 million supported by specific qualifying collateral. Borrowing capacity from FHLB or FRB may fluctuate based upon the acceptability and risk rating of loan collateral, and counterparties could adjust discount rates applied to such collateral at their discretion. Also, FRB or FHLB could restrict or limit our access to secured borrowings. Correspondent banks have extended $40.1 million in unsecured or collateralized short term lines of credit for the purchase of federal funds. At December 31, 2012, the Company had no outstanding borrowings under these federal fund borrowing agreements.

Liquidity may be affected by the Bank’s routine commitments to extend credit. At December 31, 2012, the Bank had approximately $251.6 million in outstanding commitments to extend credit, compared to approximately $176.0 million at year-end 2011. The increase relates to commitments to extend credit as part of the Bank’s efforts to grow loans. At this time, management believes that the Bank’s available resources will be sufficient to fund its commitments in the normal course of business.

The investment portfolio also provides a secondary source of funds as investments may be pledged for borrowings or sold for cash. This liquidity is limited, however, by counterparties’ willingness to accept securities as collateral and the market value of securities at the time of sale could result in a loss to the Bank. As of December 31, 2012, the Company held unpledged investments with a book value that totaled $134.6 million compared to $115.4 million at December 31, 2011.

The Order, which remained in effect until it was terminated on March 7, 2013, required the Bank to maintain a primary liquidity ratio (net cash, plus net short-term and marketable assets divided by net deposits and short-term liabilities) of at least 15%. As of December 31, 2012, the Bank’s primary liquidity ratio was 26.0%.

Bancorp is a single bank holding company and its primary ongoing source of liquidity is 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. The Bank received regulatory approval to adjust retained earnings to zero at September 30, 2012. Accordingly, Bank payment of dividends is constrained by the amount of increases in retained earnings from that date. In addition, pursuant to its memorandum of understanding with its regulators, as was the case under the Order before it was terminated on March 7, 2013, the Bank is required to seek permission from its regulators prior to payment of cash dividends. Per the Written Agreement, Bancorp must receive permission from its regulators prior to taking dividends from the Bank

Additional information regarding limits on the payment of dividends may be found throughout Item 1 of this report, including under the headings “Supervision and Regulation and Regulations Concerning Cash Dividends”, in Item 5 of this report and in Note 20 of the “Notes to the Consolidated Financial Statements” included in Item 8 of this report.

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Certain Ratios

Below are key ratios for the Company for the periods provided:

(In thousands, except per share data and ratios)		2012				2011				2010
Key Ratios
Return on average total shareholders' equity			4.34%				-25.65	%			-60.69	%
Return on average total assets			0.46%				-3.04	%			-0.71	%
Total shareholders equity to average total assets			10.55%				11.86	%			1.18	%
Total efficiency ratio(1)			88.68%				125.37	%			98.84	%

Management believes that the above ratios may be useful to analysts and investors in evaluating the performance of our Company. The key ratios described above should be read in conjunction with the financial statements of the Company and related notes thereto and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

Inflation

The effect of changing prices on financial institutions is typically different than on non-banking companies since a substantial portion of a bank's assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor magnitude of the changes to interest rates can be directly correlated to price level indices; therefore, the Company can best counter inflation over the long term by managing sensitivity to interest rates of its net interest income and controlling levels of non-interest income and expenses.

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

As a smaller reporting company, the Company is not required to provide the information called for by this Item 7A.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

		Page
Report of Independent Registered Public Accounting Firm — BDO USA, LLP			48
Report of Independent Registered Public Accounting Firm — Delap LLP			49
Consolidated Balance Sheets at December 31, 2012 and 2011			50
For the Years Ended December 31, 2012, 2011, and 2010:
Consolidated Statements of Operations			51
Consolidated Statements of Comprehensive Income (Loss)			52
Consolidated Statements of Changes in Stockholders' Equity			53
Consolidated Statements of Cash Flows			54
Notes to Consolidated Financial Statements			55

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Cascade Bancorp
Bend, Oregon

We have audited the accompanying consolidated balance sheet of Cascade Bancorp as of December 31, 2012 and the related consolidated statement of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cascade Bancorp at December 31, 2012, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cascade Bancorp’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 25, 2013 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

Spokane, Washington
March 25, 2013

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Cascade Bancorp

We have audited the accompanying consolidated balance sheet of Cascade Bancorp and its subsidiary, Bank of the Cascades (collectively,“the Company’), as of December 31, 2011, and the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2011. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cascade Bancorp and its subsidiary as of December 31, 2011, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

/s/ Delap LLP

Lake Oswego, Oregon
March 26, 2012

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CASCADE BANCORP AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2012 AND 2011
(Dollars in thousands)

		2012				2011
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	31,354			$	33,657
Interest bearing deposits			81,651				94,759
Federal funds sold			23				23
Total cash and cash equivalents			113,028				128,439
Investment securities available-for-sale			257,544				209,506
Investment securities held-to-maturity, estimated fair value of $1,863 ($2,566 in 2011)			1,813				2,488
Federal Home Loan Bank (FHLB) stock			10,285				10,472
Loans held for sale			2,329				506
Loans, net			829,057				853,153
Premises and equipment, net			34,239				34,181
Bank-owned life insurance (BOLI)			35,705				34,683
Other real estate owned (OREO), net			6,552				21,270
Accrued interest and other assets			10,865				8,752
Total assets		$	1,301,417			$	1,303,450
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand		$	410,258			$	371,662
Interest bearing demand			496,674				520,612
Savings			40,030				33,720
Time			129,272				160,833
Total deposits			1,076,234				1,086,827
FHLB advances			60,000				60,000
Accrued interest and other liabilities			24,408				23,742
Total liabilities			1,160,642				1,170,569
Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; none issued or outstanding			—				—
Common stock, no par value; 100,000,000 shares authorized; 47,326,306 shares issued and outstanding (47,236,725 in 2011)			330,024				329,056
Accumulated deficit			(192,933	)			(198,884	)
Accumulated other comprehensive income			3,684				2,709
Total stockholders' equity			140,775				132,881
Total liabilities and stockholders' equity		$	1,301,417			$	1,303,450

 
 
The accompanying notes are an integral part of the consolidated financial statements.

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CASCADE BANCORP AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010
(Dollars in thousands, except per share amounts)

		2012				2011				2010
Interest and dividend income:
Interest and fees on loans		$	48,832			$	61,604			$	78,801
Interest on investment securities			5,839				4,961				5,613
Interest on interest bearing deposits			208				533				561
Interest on federal funds sold			—				2				5
Total interest and dividend income			54,879				67,100				84,980
Interest expense:
Deposits:
Interest bearing demand			1,051				2,100				4,811
Savings			23				55				78
Time			2,017				5,559				11,791
Junior subordinated debentures, other borrowings, and TLGP senior unsecured debt			1,908				3,990				7,060
Total interest expense			4,999				11,704				23,740
Net interest income			49,880				55,396				61,240
Loan loss provision			1,100				75,000				24,000
Net interest income (loss) after loan loss provision			48,780				(19,604	)			37,240
Noninterest income:
Service charges on deposit accounts, net			3,244				4,493				6,219
Card issuer and merchant service fees, net			2,632				2,478				2,562
Earnings on BOLI			1,022				1,213				87
Mortgage banking income, net			4,319				513				631
Gains on sales of investment securities available-for sale			—				—				644
Other income			1,874				2,270				3,230
Total noninterest income			13,091				10,967				13,373
Noninterest expenses:
Salaries and employee benefits			31,559				31,434				29,046
Occupancy			4,598				4,710				4,649
Communications			1,541				1,653				1,727
Equipment			1,547				1,583				1,778
FDIC insurance			2,519				3,271				8,084
OREO			1,725				17,936				14,616
Professional services			3,999				4,356				2,308
Increase (decrease) in reserve for unfunded loan commitments			(1,110	)			609				237
CDI impairment			—				3,436				—
Prepayment penalties on FHLB and TLGP borrowings			—				1,291				—
Other expenses			9,463				12,920				11,304
Total noninterest expenses			55,841				83,199				73,749
Income (loss) before income taxes and extraordinary net gain			6,030				(91,836	)			(23,136	)
(Provision) credit for income taxes			(79	)			11,721				9,481
Net income (loss) before extraordinary net gain			5,951				(80,115	)			(13,655	)
Extraordinary gain on extinguishment of junior subordinated debentures, net of income taxes			—				32,839				—
Net income (loss)		$	5,951			$	(47,276	)		$	(13,655	)
Basic and diluted net income (loss) per common share:
Income (loss) before extraordinary net gain		$	0.13			$	(1.83	)		$	(4.87	)
Extraordinary net gain			—				0.75				—
Net income (loss)		$	0.13			$	(1.08	)		$	(4.87	)