The following discussion should be read in conjunction with the Company's unaudited condensed consolidated financial statements and the notes thereto as of September 30, 2008 and the operating results for the nine months and three months then ended, included elsewhere in this report.

Cautionary Information Concerning Forward-Looking Statements

The following section contains forward-looking statements, which are not historical facts and pertain to our future operating results. These statements include, but are not limited to, our plans, objectives, expectations and intentions and are not statements of historical fact. When used in this report, the word "expects," "believes," "anticipates," "could," "may," "will," "should," "plan," "predicts," "projections," "continue" and other similar expressions constitute forward-looking statements, as do any other statements that expressly or implicitly predict future events, results or performance, and such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties and the Company's success in managing such risks and uncertainties may cause actual results to differ materially from those projected, including among others, the risk factors described in this report as well as general business and economic conditions, including conditions in residential and commercial real estate markets; volatility and disruption in financial markets; changes in regulatory conditions or requirements or new legislation; including government intervention in the U.S. financial system; - changes in interest rates including timing or relative degree of change and the interest rate policies of the FRB; competition in the industry, including our ability to attract deposits, changes in the demand for loans and changes in consumer spending, borrowing and savings habits; changes in credit quality and in estimates of future reserve requirements; changes in the level of nonperforming assets and charge-offs; and changes in accounting policies. In addition, these forward-looking statements are subject to assumptions with respect to future business conditions, strategies and decisions, and such assumptions are subject to change.

Results may differ materially from the results discussed due to changes in business and economic conditions that negatively affect credit quality, which may be exacerbated by our concentration of operations in the States of Oregon and Idaho generally, including the Oregon communities of Central Oregon, Northwest Oregon, Southern Oregon, and the greater Boise area, specifically. Likewise, competition or changes in interest rates could negatively affect the net interest margin, as could other factors listed from time to time in the Company's SEC reports. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. Readers should carefully review all disclosures filed by the Company from time to time with the SEC.

Recent Developments

The Emergency Economic Stabilization Act of 2008, signed into law on October 3, 2008, provides authority to the United States Treasury Department ("UST") to, among other things, purchase up to $700 billion of mortgages, mortgage backed securities and certain other financial instruments from financial institutions. On October 14, 2008, the UST announced it will offer to qualifying U.S. banking organizations the opportunity to issue and sell preferred stock, along with warrants to purchase common stock, to the UST on what may be considered attractive terms under the Troubled Asset Relief Program ("TARP") Capital Purchase Program. Although Cascade's capital ratios remain well above the minimum levels required for well capitalized status, it is currently evaluating the TARP Capital Purchase Program. In addition, the FDIC has initiated the Temporary Liquidity Guarantee Program that will provide a 100 percent guarantee for a limited period of time to newly issued senior unsecured debt and non-interest bearing transaction deposits. Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for non-interest bearing transaction deposits. Management is currently evaluating possible participation in the Liquidity Guarantee Programs.

Critical Accounting Policies

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

Reserve for Credit Losses: The Company's reserve for credit losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio and related loan commitments. Arriving at an estimate of the appropriate level of reserve for credit losses (reserve for loan losses and loan commitments) involves a high degree of judgment and assessment of multiple variables that result in a methodology with relatively complex calculations and analysis. Management uses historical information to assess the adequacy of the reserve for loan losses as well as consideration of the prevailing business environment. On an ongoing basis the Company seeks to refine its methodology such that the reserve is responsive to the effect that qualitative and environmental factors have upon the loan portfolio. However, external factors and changing economic conditions may impact the portfolio and the level of reserves in ways currently unforeseen. The reserve for loan losses is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. The reserve for loan commitments is increased and decreased through non interest expense. For a full discussion of the Company's methodology of assessing the adequacy of the reserve for credit losses, see "Reserve for Credit Losses" in Management's Discussion and Analysis of Financial Condition and Results of Operation in the Company's Annual Report on Form 10K.

Mortgage Servicing Rights (MSRs): Determination of the fair value of MSRs requires the estimation of multiple interdependent variables, the most impactful of which is mortgage prepayment speeds. Prepayment speeds are estimates of the pace and magnitude of future mortgage payoff or refinance behavior of customers whose loans are serviced by the Company. Errors in estimation of prepayment speeds or other key servicing variables could subject MSRs to impairment risk. On a quarterly basis, the Company engages a qualified third party to provide an estimate of the fair value of MSRs using a discounted cash flow model with assumptions and estimates based upon observable market-based data and methodology common to the mortgage servicing market. Management believes it applies reasonable assumptions under the circumstances, however, because of possible volatility in the market price of MSRs, and the vagaries of any relatively illiquid market, there can be no assurance that risk management and existing accounting practices will result in the avoidance of possible impairment charges in future periods. See also "Non-Interest Income" below and footnote 5 of the Condensed Consolidated Financial Statements.

Goodwill and other intangibles: Net assets of entities acquired in purchase transactions are recorded at fair value at the date of acquisition. Identified intangibles are amortized on a straight-line basis over the period benefited. Goodwill is not amortized, although it is reviewed for impairment on an annual basis or if events or circumstances indicate a potential impairment. The impairment test is performed in two phases. The first step is to estimate the fair value of the reporting unit assuming it is sold in an orderly transaction between knowledgeable market participants. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its estimated fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit's goodwill (as defined in SFAS No. 142, Goodwill and Other Intangible Assets) with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. At September 30, 2008, the Company performed its annual impairment test and concluded that no impairment existed at that time. Management continues to monitor the Company's goodwill for potential impairment on an ongoing basis.

Highlights and Summary of Performance - Third Quarter of 2008

· Credit Quality: Reserve for credit losses increased to $50.9 million or a strong 2.48% of total loans.

· Credit Quality: Non-performing assets (NPA's) eased from immediately preceding (linked) quarter.

· Capital Ratios: up to 11.31% with $47.4 million surplus above "well-capitalized." (tax equivalent basis)

· Earnings Per Share: at $0.01 with net income at $0.3 million.

· Total Deposits: 1.9% below year ago; up 10.8% on a linked-quarter basis.

· Total Loans: up 0.4% year-over-year and down slightly from the linked-quarter.

· Net Interest Margin: 4.42% vs. 4.52% on a linked-quarter basis.

Cascade reported third quarter 2008 diluted earnings per share (EPS-diluted) at $0.01 per share compared to $0.35 for the year-ago quarter and ($0.12) for the linked-quarter. The Company reported positive net income for the third quarter 2008 of $0.3 million versus $10.0 million a year-ago and up from a loss of $3.4 million for the linked-quarter. Year- to-date net income is $3.0 million or $0.11 per share.

Management believes Cascade's credit quality issues continue to be largely confined within the residential development portfolio, which represents approximately 13% of total loans. Accordingly, third quarter 2008 includes a $15.4 million (pre-tax) provision for credit losses and net loan charge-offs of $8.2 million (pre-tax) mainly related to the residential development portfolio. As a result of the heightened provision, the reserve for credit losses increased to nearly $51 million or a solid 2.48% of total loans, up from 2.22% and 1.37% for the linked-quarter and year-ago period, respectively. In addition to its strong reserves, the Company has $163.3 million in tangible capital and is designated a "well-capitalized" bank according to regulatory guidelines with estimated total risk-based capital at 11.31% as of September 30, 2008, exceeding the 10% benchmark by a tax-effected margin of approximately $47.4 million. Further, Cascade's pre-tax, pre-provision earnings are in the top 15% of banks in the nation its size. With the uncertainty in national and global economic outlook no assurance can be given that increased credit quality stress will not occur in the Bank's loan portfolios.

Loan portfolio and credit quality

At September 30, 2008, Cascade's loan portfolio was approximately $2.0 billion, essentially flat as compared to a year-ago and on a linked-quarter basis. Management believes that overall loan growth will likely remain muted until such time as the economic downturn runs its course. We continue to assist consumer and business relationship customers with their credit needs. Because of the nature of its markets, real estate has historically represented a significant portion of the Company's overall loan portfolio and is frequently a material component of collateral for the Company's loans.

At September 30, 2008, loans delinquent >30 days were steady at 0.21% of total loans compared to 0.19% for the linked-quarter and 0.46% at year-end 2007. This compares favorably to peer banks whose average delinquency rates were 0.89% at June 30, 2008. The Company's delinquency rates in commercial real estate (CRE) and commercial (C&I) portfolios were 0.03% and 0.08% respectively, indicating continued stable credit quality at this time.

NPA's (including non-performing loans and certain other real estate owned (OREO)) were modestly lower at $109.1 million, or 4.5% of total assets compared to $127.1 million or 5.2% of total assets for the linked-quarter. NPA's are primarily related to the Company's residential land acquisition and development loan portfolio. The decrease in NPA's primarily resulted largely from reclassification of a previously reported non performing OREO to a performing status as discussed below.

OREO was $37.2 million at September 30, 2008 compared to $33.9 million in the prior quarter. During the quarter the Company sold 10 OREO lots, while approximately $5.5 million in assets were added to OREO at estimated fair value, primarily in residential land development assets. Note that beginning with the third quarter approximately $16.2 million of OREO balance is not classified as non-performing because it was determined that the commercial building revenues being received on a particular OREO property exceeded the interest income previously received on the underlying loan. Apart from this adjustment, NPA's were slightly lower as compared to the prior quarter.

The Company carries NPA's at the estimated net realizable fair value; however, because of the uncertain real estate market, no assurance can be given that the ultimate disposition of such assets will be at or above such value. The orderly resolution of non-performing loans as well as expedient disposition of OREO properties is a priority for management.

Management believes the reserve for credit losses is at an appropriate level based on frequently updated evaluation and analysis of portfolio credit quality in conjunction with prevailing economic conditions. With uncertainty as to the depth and duration of the current economic downturn no assurances cannot be given that the reserve will be adequate in future periods or that the level of NPA's will subside. Further provisioning and charge-offs may be required before values stabilize.

Deposits

Customer relationship deposits 1 continued to ease during the third quarter reflecting the slowing economy. Such deposits totaled $1.4 billion at September 30, 2008, down 12.6% compared to a year-ago and down 3.1% on a linked-quarter basis. Total deposits were $1.8 billion at September 30, 2008, down 1.9% compared to a year-ago but up 10.8% on a linked-quarter basis primarily due to increased brokered time deposits. At September 30, 2008 such deposits totaled $211.6 million as compared to $24.7 million at December 31, 2007. Note that Cascade's proportion of time deposits to total deposits continues to remain well below its peer banks because of its focus on relationship deposits.

RESULTS OF OPERATIONS - Nine Months and Three Months ended September 30, 2008 and 2007

Income Statement

Net Income

Net income decreased $26.7 million (or 89.9%) for the nine months and decreased $9.7 million (or 96.5%) for the three months ended September 30, 2008 as compared to the same periods in 2007. These decreases were primarily due to an elevated level of loan loss provisioning for each period presented. Net interest income decreased $8.5 million for the nine months and decreased $3.8 million for the quarter ended September 30, 2008. Non-interest income and non-interest expenses were up slightly for the nine months ended September 30, 2008, meanwhile non-interest income increased 6.4% for the quarter primarily resulting from approximately $0.4 million in gains on sales of investment securities and $0.3 million in realized revenue on a performing OREO property as previously mentioned in this report.

Non-interest expense increased slightly in the nine months ended September 30, 2008 compared to the year earlier period primarily due to expenses related to OREO. Non-interest expense decreased in the third quarter of 2008 primarily due to a $2.1 million reduction in the estimated reserve for unfunded commitments as a result of declining outstanding commitments and lower estimated funding rates.

Net Interest Income / Net Interest Margin

Yields on earning assets during the third quarter of 2008 were 6.28% compared to 6.38% in the linked-quarter and down from 8.29% in the year ago quarter. The year-over-year and linked-quarter decline in yields were mainly a result of declining market rates as well as the effect of interest forgone and reversed on non-performing loans. The average rate paid on interest bearing liabilities was relatively flat at 2.35% for the current quarter as compared to 2.37% for the linked-quarter and is below the 4.11% for the year ago quarter due to the declining market rates.

Third quarter 2008 net interest margin (NIM) was 4.42% compared to 4.52% for the linked-quarter, and 5.24% for the year ago quarter. While the overall cost of funds remained unchanged at 1.90% from the prior quarter, the lower NIM was primarily due to interest reversed and foregone on non-performing loans and lower loan fees.

Because one of Cascade's strengths is its relatively high proportion of non-interest bearing deposits, lower market interest rates may modestly compress the Company's NIM as yields decline against an already low cost of funds. Importantly, this effect should also reverse once the economy rebounds. See cautionary "Forward Looking Statements" below and in Cascade's Form 10-K report [and Item 2A below] for further information on risk factors including interest rate risk.

Components of Net Interest Margin

The following table sets forth for the quarter's ended September 30, 2008 and
2007 information with regard to average balances of assets and liabilities, as
well as total dollar amounts of interest income from interest-earning assets and
interest expense on interest-bearing liabilities, resultant average yields or
rates, net interest income, net interest spread and net interest margin for the
Company (dollars in thousands):

                                        Quarter ended                                 Quarter ended
                                     September 30, 2008                            September 30, 2007
                                           Interest       Average                        Interest       Average
                            Average        Income/        Yield or        Average        Income/        Yield or
                            Balance        Expense         Rates          Balance        Expense         Rates
Assets
Taxable securities        $    82,857     $    1,096           5.25 %   $    93,995     $    1,313           5.54 %
Non-taxable securities
(1)                             4,291             40           3.70 %         7,249             66           3.61 %
Interest bearing
balances due from FHLB              -              -           0.00 %            93              1           4.27 %
Federal funds sold              1,457              6           1.63 %         3,423             41           4.75 %
Federal Home Loan Bank
stock                          13,351             45           1.34 %         6,991             11           0.62 %
Loans (1)(2)(3)(4)          2,060,256         33,042           6.36 %     1,997,010         42,631           8.47 %
Total earning
assets/interest income      2,162,212         34,229           6.28 %     2,108,761         44,063           8.29 %
Reserve for loan losses       (39,073 )                                     (24,665 )
Cash and due from banks        50,938                                        51,306
Premises and equipment,
net                            36,492                                        38,141
Bank-owned life
insurance                      33,946                                        32,711
Accrued interest and
other assets                  177,872                                       148,002
Total assets              $ 2,422,387                                   $ 2,354,256

Liabilities and
Stockholders' Equity
Interest bearing demand
deposits                  $   803,886          3,396           1.68 %   $   918,875          8,389           3.62 %
Savings deposits               37,561             36           0.38 %        40,406             49           0.48 %
Time deposits                 401,770          3,045           3.01 %       366,111          4,368           4.73 %
Other borrowings and
F&M Holdback                  471,979          3,669           3.08 %       242,082          3,426           5.61 %
Total interest bearing
liabilities/interest
expense                     1,715,196         10,146           2.35 %     1,567,474         16,232           4.11 %
Demand deposits               407,420                                       476,707
Other liabilities              16,628                                        31,080
Total liabilities           2,139,244                                     2,075,261
Stockholders' equity          283,143                                       278,995
Total liabilities and
stockholders' equity      $ 2,422,387                                   $ 2,354,256

Net interest income                       $   24,083                                    $   27,831

Net interest spread                                            3.93 %                                        4.18 %

Net interest income to
earning assets                                                 4.42 %                                        5.24 %


_____________________

(1) Yields on tax-exempt municipal loans and securities have been stated on a tax-equivalent basis.

(2) Average non-accrual loans included in the computation of average loans was approximately $93.5 million for 2008 and $14.6 million for 2007.

(3) Loan related fees recognized during the period and included in the yield calculation totalled approximately $1.1 million in 2008 and $1.5 million in 2007.

(4) Includes mortgage loans held for sale.

Analysis of Changes in Interest Income and Expense

The following table shows the dollar amount of increase (decrease) in the Company's consolidated interest income and expense for the nine months and quarter ended September 30, 2008, and attributes such variance to "volume" or "rate" changes. Variances that were immaterial have been allocated equally between rate and volume categories (dollars in thousands):

                                                    Quarter ended
                                             September 30, 2008 vs. 2007
                                           Total        Volume        Rate
            Interest income:
            Interest and fees on loans   $  (9,589 )   $  1,350     $ (10,939 )
            Investments and other             (245 )       (197 )         (48 )
              Total interest income         (9,834 )      1,153       (10,987 )
            Interest expense:
              Interest bearing demand       (4,993 )     (1,050 )      (3,943 )
              Savings                          (13 )         (3 )         (10 )
              Time deposits                 (1,323 )        425        (1,748 )
              Other borrowings                 243        3,254        (3,011 )
               Total interest expense       (6,086 )      2,626        (8,712 )
            Net interest income          $  (3,748 )   $ (1,473 )   $  (2,275 )

Loan Loss Provision

The loan loss provision was $38.3 million for the nine months and $15.4 million for the three months ended September 30, 2008 due to elevated credit risk in the loan portfolio. At September 30, 2008, the reserve for credit losses (reserve for loan losses and loan commitments) was 2.48% of outstanding loans, as compared to 1.37% for the year ago period. At this date, management believes that its reserve for credit losses is at an appropriate level under current circumstances and prevailing economic conditions. For further discussion, see "Critical Accounting Policies - Reserve for Credit Losses" and "Loan Portfolio and Credit Quality" above. 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 0.1% for the nine months and increased 6.4% for the quarter ended September 30, 2008 compared to the year ago periods. The increase for the quarter was primarily due to $0.4 million in gain on the sales of investment securities. Service charges remained relatively flat in both periods presented however other income was up in 2008 as a result of approximately $0.3 million in realized revenue primarily on the performing OREO property. See "Highlights - Loan Growth and Credit Quality" above for further discussion. Non-Interest Income for the third quarter of 2008 was $5.5 million, up compared to the year-ago quarter and up modestly from the linked-quarter.

As a result of tightening credit conditions in national markets and related home-buyer caution, residential mortgage originations were down 41.3% to $21.3 million for the current quarter ended September 30, 2008 compared to $36.3 million in the linked-quarter and down 45.1% from the year-ago period totaled. Logically, net mortgage related revenue was down in the third quarter of 2008, compared to the linked-quarter and year-ago periods. Note that the Company has focused on originating conventional mortgage products throughout its history while purposefully avoiding sub-prime / option-ARM type products. As a result, the delinquency rate within Cascade's $510 million portfolio of serviced residential mortgage loans is only 0.55%, notably below the national mortgage delinquency rate of 6.41% at September 30, 2008. The fair value of servicing portfolio is estimated to exceed book value by amounts ranging from $1.2 million to $2.3 million.

Non-Interest Expense

Non-interest expense for the nine months was up 2.7% year-over-year but down 9.9% on a linked quarter basis. The 2008 increase was mainly due to higher OREO and related legal costs. The decrease in the current quarter was primarily due to a $2.1 million reduction in the estimated reserve for unfunded commitments as a result of declining outstanding commitments and lower estimated funding rates. Excluding this factor, normalized non interest expense levels for the three months ended September 30, 2008, were down 5.1% compared to the prior quarter and up 3.9% from the year-ago period. When compared to the year-ago quarter, adjusted expenses were higher due to OREO and related costs which totaled approximately $0.5 million. Management anticipates that aside from possible volatility of OREO related costs, normalized non interest expense levels should be flat to down slightly during the next quarter. However, note that the FDIC has recently announced an increase in insurance assessments which may affect non interest expense in the future. Management is presently analyzing the FDIC announcement and its impact on the Company.

. . .