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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2003

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

For the transition period from ________ to ________

Commission file number: 0-23322

CASCADE BANCORP

(Exact name of Registrant as specified in its charter)

Oregon
(State or other jurisdiction of
incorporation or organization)		 93-1034484
(I.R.S. Employer Identification No.)

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

(541) 385-6205
(Registrant’s telephone number, including area code)

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 |_|

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 12,594,501 shares of no par value Common Stock as of July 31, 2003.

CASCADE BANCORP & SUBSIDIARY
FORM 10-Q
QUARTERLY REPORT
JUNE 30, 2003

INDEX

PART I: FINANCIAL INFORMATION   Page

Item 1.   Financial Statements (unaudited)    
 
    Condensed Consolidated Balance Sheets:
June 30, 2003 and December 31, 2002		   3
 
    Condensed Consolidated Statements of Income:
Six months and three months ended June 30, 2003 and 2002		   4
 
    Condensed Consolidated Statements of Changes in Stockholders’ Equity:
Six months ended June 30, 2003 and 2002		   5
 
    Condensed Consolidated Statements of Cash Flows:
Six months ended June 30, 2003 and 2002		   6
 
    Notes to Condensed Consolidated Financial Statements   7
 
Item 2.   Management’s Discussion and Analysis of Financial Condition
and Results of Operations		   12
 
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   17
 
Item 4.   Controls and Procedures   17

PART II: OTHER INFORMATION

Item 4.   Submission of Matters to a Vote of Security Holders   18
 
Item 6.   Exhibits and Reports on Form 8-K   18

SIGNATURES   19

CERTIFICATIONS   20

2

PART I

Item 1. FINANCIAL STATEMENTS

Cascade Bancorp & Subsidiary
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(Unaudited)

  June 30,
2003
  December 31,
2002
 
ASSETS                
Cash and cash equivalents:    
      Cash and due from banks     $ 26,258,246   $ 23,983,180  
      Federal funds sold       58,100,000     6,000,000  
 
 
 
            Total cash and cash equivalents       84,358,246     29,983,180  
Investment securities available-for-sale       28,504,352     27,781,266  
Investment securities held-to-maturity       663,161     789,586  
Federal Home Loan Bank stock       2,239,400     2,174,400  
Loans, net       541,108,174     491,503,539  
Premises and equipment, net       11,188,163     10,000,023  
Accrued interest and other assets       17,591,477     16,127,347  
 
 
 
                 Total assets     $ 685,652,973   $ 578,359,341  
 
 
 
 
LIABILITIES & STOCKHOLDERS’ EQUITY    
Liabilities:    
      Deposits:    
            Demand     $ 227,514,899   $ 209,523,869  
            Interest bearing demand       296,352,822     220,683,909  
            Savings       26,613,838     22,471,480  
            Time       46,571,861     49,283,000  
 
 
 
                 Total deposits       597,053,420     501,962,258  
      Borrowings       25,702,919     18,000,000  
      Accrued interest and other liabilities       6,378,446     7,209,368  
 
 
 
                 Total liabilities       629,134,785     527,171,626  
 
Stockholders’ equity:    
      Common stock, no par value;    
            20,000,000 shares authorized;    
            12,586,970 issued and outstanding (12,513,638 in 2002)       18,588,386     18,253,082  
      Retained earnings       37,017,177     32,172,221  
      Accumulated other comprehensive income       912,625     762,412  
 
 
 
                 Total stockholders’ equity       56,518,188     51,187,715  
 
 
 
                 Total liabilities and stockholders' equity     $ 685,652,973   $ 578,359,341  
 
 
 

See accompanying notes.

3

Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Income
Six Months and Three Months ended June 30, 2003 and 2002
(Unaudited)

  Six months ended
June 30,
  Three months ended
June 30,
 
  2003
   2002
   2003
   2002
  
Interest income:                    
      Interest and fees on loans     $ 19,289,808   $ 17,800,560   $ 9,824,961   $ 9,119,857  
      Taxable interest on investments       558,258     528,880     236,395     260,760  
      Nontaxable interest on investments       23,053     19,707     13,454     10,024  
      Interest on federal funds sold       44,198     3,268     30,233     392  
      Dividends on Federal Home Loan Bank stock       65,124     61,200     28,900     31,000  
 
 
 
 
 
              Total interest income       19,980,441     18,413,615     10,133,943     9,422,033  
 
Interest expense:    
      Deposits:    
          Interest bearing demand       1,130,621     1,160,247     593,010     588,572  
          Savings       59,715     72,959     30,714     38,390  
          Time       502,648     970,487     232,728     456,086  
      Borrowings       316,777     255,397     148,834     129,192  
 
 
 
 
 
              Total interest expense       2,009,761     2,459,090     1,005,286     1,212,240  
 
 
 
 
 
 
Net interest income       17,970,680     15,954,525     9,128,657     8,209,793  
Loan loss provision       1,400,000     1,830,000     700,000     900,000  
 
 
 
 
 
Net interest income after loan loss provision       16,570,680     14,124,525     8,428,657     7,309,793  
 
Noninterest income:    
      Service charges on deposit accounts       2,917,184     2,089,486     1,565,095     1,082,972  
      Mortgage loan origination and processing fees       1,806,067     1,237,304     877,538     513,674  
      Gains on sales of mortgage loans, net       1,069,194     317,990     531,419     204,178  
      Mortgage loan servicing fees (net of    
          amortization of mortgage servicing rights and    
              impairment, if any)       (1,194,462 )   (72,974 )   (549,718 )   (26,437 )
      Other income       1,490,315     1,201,842     862,509     618,612  
 
 
 
 
 
              Total noninterest income       6,088,298     4,773,648     3,286,843     2,392,999  
 
Noninterest expense:    
      Salaries and employee benefits       7,185,068     5,997,619     3,559,786     3,069,988  
      Net occupancy and equipment       1,329,799     1,143,449     689,687     572,870  
      Other expenses       2,998,636     2,993,809     1,546,195     1,399,751  
 
 
 
 
 
              Total noninterest expense       11,513,503     10,134,877     5,795,668     5,042,609  
 
 
 
 
 
 
Income before income taxes       11,145,475     8,763,296     5,919,832     4,660,183  
Provision for income taxes       4,290,779     3,414,379     2,296,332     1,816,920  
 
 
 
 
 
Net income     $ 6,854,696   $ 5,348,917   $ 3,623,500   $ 2,843,263  
 
 
 
 
 
 
Basic earnings per common share     $ 0.55   $ 0.43   $ 0.29   $ 0.23  
 
 
 
 
 
Diluted earnings per common share     $ 0.53   $ 0.42   $ 0.28   $ 0.22  
 
 
 
 
 

See accompanying notes.

4

Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2003 and 2002
(Unaudited)

  Comprehensive
Income
  Common
stock
  Retained
earnings
  Accumulated
other
comprehensive
income
  Total
stockholders’
equity
 
Balance at December 31, 2001           $ 17,859,283   $ 23,701,571   $ 119,216   $ 41,680,070  
Comprehensive Income:    
      Net Income     $ 5,348,917     —     5,348,917     —     5,348,917  
      Other comprehensive income, net of tax:    
            Unrealized gains on    
            securities available-for-sale       467,381     —     —     467,381     467,381  
 
 
Comprehensive income     $ 5,816,298                          
 
 
 
Cash dividends paid             —     (1,494,471 )   —     (1,494,471 )
 
Stock options exercised (70,464 shares)             244,296     —     —     244,296  
 
 
 
 
 
Balance at June 30, 2002           $ 18,103,579   $ 27,556,017   $ 586,597   $ 46,246,193  
 
 
 
 
 
 
Balance at December 31, 2002           $ 18,253,082   $ 32,172,221   $ 762,412   $ 51,187,715  
Comprehensive Income:    
      Net Income     $ 6,854,696     —     6,854,696     —     6,854,696  
      Other comprehensive income, net of tax:    
            Unrealized gains on securities    
                  available-for-sale       150,213     —     —     150,213     150,213  
 
 
Comprehensive income     $ 7,004,909                          
 
 
 
Cash dividends paid             —     (2,009,740 )   —     (2,009,740 )
 
Stock options exercised (78,122 shares)             335,304     —     —     335,304  
 
 
 
 
 
Balance at June 30, 2003           $ 18,588,386   $ 37,017,177   $ 912,625   $ 56,518,188  
 
 
 
 
 

See accompanying notes.

5

Cascade Bancorp & Subsidiary
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 2003 and 2002
(Unaudited)

  Six months ended June 30,  
  2003
  2002
 
Net cash provided by operating activities     $ 5,053,563   $ 5,442,168  
 
Investing activities:    
       Proceeds from maturities and calls of investment securities    
            available-for-sale       8,020,002     6,899,321  
       Purchases of investment securities available-for-sale       (8,498,313 )   (6,301,289 )
       Proceeds from maturities and calls of investment securities    
            held-to-maturity       124,479     149,304  
       Net increase in loans       (49,935,441 )   (45,895,979 )
       Purchases of premises and equipment, net       (1,508,869 )   (87,647 )
 
 
 
            Net cash used in investing activities       (51,798,142 )   (45,236,290 )
 
Financing activities:    
       Net increase in deposits       95,091,162     27,041,001  
       Cash dividends       (2,009,740 )   (1,494,471 )
       Proceeds from issuance of common stock       335,304     244,296  
       Net increase in other borrowings       7,702,919     13,098,445  
 
 
 
            Net cash provided by financing activities       101,119,645     38,889,271  
 
 
 
Net increase (decrease) in cash and cash equivalents       54,375,066     (904,851 )
Cash and cash equivalents at beginning of period       29,983,180     21,439,301  
 
 
 
Cash and cash equivalents at end of period     $ 84,358,246   $ 20,534,450  
 
 
 

See accompanying notes.

6

Cascade Bancorp & Subsidiary
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(Unaudited)

1. Basis of Presentation

     The accompanying interim condensed consolidated financial statements include the accounts of Cascade Bancorp (Bancorp), a financial holding company, and its wholly owned subsidiary, Bank of the Cascades (the Bank) (collectively, “the Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

     The interim condensed consolidated financial statements have been prepared by the Company without audit and in conformity with accounting principles generally accepted in the United States for interim financial information. Accordingly, certain financial information and footnotes have been omitted or condensed. In the opinion of management, the condensed consolidated financial statements include all necessary adjustments (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and income and expenses for the periods. Actual results could differ from those estimates.

     The balance sheet data as of December 31, 2002 was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2002 Annual Report to Shareholders.

     The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2002 consolidated financial statements, including the notes thereto, included in the Company’s 2002 Annual Report to Shareholders.

     Certain amounts for 2002 have been reclassified to conform with the 2003 presentation.

     All issued and outstanding shares, weighted average shares and per share amounts in the accompanying condensed consolidated financial statements have been retroactively adjusted to reflect stock dividends and splits.

2. Stock-Based Compensation

     The Company accounts for its stock option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock issued to Employees”, and related Interpretations (See Note 8). No stock-based employee compensation cost is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effects on net income and earnings per common share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” to stock-based employee compensation for the six months and three months ended June 30, 2003 and 2002:

  Six months ended
June 30,
  Three months ended
June 30,
 
  2003
   2002
   2003
   2002
  
Net income - as reported     $ 6,854,696   $ 5,348,917   $ 3,623,500   $ 2,843,263  
Deduct: Total stock-based employee    
      compensation expense determined under    
      fair value based method for all awards,    
      net of related income tax effects       (260,312 )   (261,899 )   (128,662 )   (130,949 )
 
 
 
 
 
Pro forma net income     $ 6,594,384   $ 5,087,018   $ 3,494,838   $ 2,712,314  
 
 
 
 
 
 
Earnings per common share:    
      Basic - as reported     $ 0.55   $ 0.43   $ 0.29   $ 0.23  
      Basic - pro forma     $ 0.53   $ 0.41   $ 0.28   $ 0.22  
      Diluted - as reported     $ 0.53   $ 0.42   $ 0.28   $ 0.22  
      Diluted - pro forma     $ 0.51   $ 0.40   $ 0.27   $ 0.21  

7

3. Investment Securities

     Investment securities at June 30, 2003 and December 31, 2002 consisted of the following:

  Amortized cost
   Gross
unrealized
gains
  Gross
unrealized
losses
  Estimated fair
value
 
June 30, 2003                            
Available-for-sale    
U.S. Agency mortgage-backed securities     $ 19,749,513   $ 423,916   $ 1,004   $ 20,172,425  
U.S. Government and agency securities       3,000,000     246,307     —     3,246,307  
Equity securities       1,245,107     794,280     —     2,039,387  
Mutual fund       333,766     —     —     333,766  
Obligations of state and    
     political subdivisions       2,703,989     18,817     10,339     2,712,467  
 
 
 
 
 
      $ 27,032,375   $ 1,483,320   $ 11,343   $ 28,504,352  
 
 
 
 
 
Held-to-maturity    
Obligations of state and    
     political subdivisions     $ 663,161   $ 72,190   $ —   $ 735,351  
 
 
 
 
 
 
December 31, 2002    
Available-for-sale    
U.S. Agency mortgage-backed securities     $ 18,978,850   $ 512,270   $ 31,874   $ 19,459,246  
U.S. Government and agency securities       6,000,000     215,930     —     6,215,930  
Equity securities       1,245,107     515,165     —     1,760,272  
Mutual fund       327,613     18,205     —     345,818  
 
 
 
 
 
      $ 26,551,570   $ 1,261,570   $ 31,874   $ 27,781,266  
 
 
 
 
 
Held-to-maturity    
Obligations of state and    
     political subdivisions     $ 789,586   $ 48,952   $ —   $ 838,538  
 
 
 
 
 

4. Loans and Reserve for Loan Losses

     The composition of the loan portfolio at June 30, 2003 and December 31, 2002 was as follows:

  June 30, 2003   % of
gross
loans		   December 31, 2002   % of
gross
loans		    
 
 
      Commercial     $ 123,091,975     22 % $ 106,750,996     21 %  
      Real Estate:    
             Construction/lot       125,255,021     23 %   105,584,546     21 %  
             Mortgage       50,491,253     9 %   43,004,558     9 %  
             Commercial       220,132,277     40 %   208,539,566     42 %  
      Consumer       32,548,646     6 %   37,044,655     7 %  
 
 
      Loans, gross       551,519,172     100 %   500,924,321     100 %  
      Less:    
      Reserve for loan losses       8,389,475           7,669,145          
      Deferred loan fees       2,021,523           1,751,637          
 
 
 
              10,410,998           9,420,782          
 
 
 
      Loans, net     $ 541,108,174         $ 491,503,539          
 
 
 

     Mortgage real estate loans include mortgage loans held for sale of approximately $5,608,000 at June 30, 2003 and approximately $4,185,000 at December 31, 2002.

8

     Transactions in the reserve for loan losses for the six months ended June 30, 2003 and 2002 were as follows:

  Six months ended
June 30,
 
  2003
   2002
  
      Balance at beginning of period     $ 7,669,145   $ 6,555,256  
      Provision charged to operations       1,400,000     1,830,000  
      Recoveries       166,150     158,206  
      Loans charged off       (845,820 )   (1,149,367 )
 
 
 
      Balance at end of period     $ 8,389,475   $ 7,394,095  
 
 
 

5. Non-Performing Assets

     Risk of nonpayment exists with respect to all loans, which could result in the classification of such loans as non-performing. The following table presents information with respect to non-performing assets at June 30, 2003 and December 31, 2002:

  Six months ended
June 30,
  
  2003
   2002
  
      Loans on non-accrual status     $ 1,463,538   $ 970,348  
      Loans past due 90 days or more    
            but not on non-accrual status       —     203,108  
      Other real estate owned       147,892     331,485  
 
 
 
      Total non-performing assets     $ 1,611,430   $ 1,504,941  
 
 
 
 
      Percentage of non-performing assets    
            to total assets       0.23 %   0.26 %

     The accrual of interest on a loan is discontinued when, in management’s judgment, the future collectibility of principal or interest is in doubt. Loans placed on non-accrual 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 non-accrual status, it is the Bank’s policy to reverse, and charge against current income, interest previously accrued but uncollected. Interest subsequently collected on such loans is credited to loan principal if, in the opinion of management, full collectibility of principal is doubtful. Interest income that was reversed and charged against income in 2003 and 2002 was immaterial.

     At June 30, 2003, except as discussed above, there were no potential material problem loans where known information about possible credit problems of the borrower caused management to have serious doubts as to the ability of such borrower to comply with the present loan repayment terms.

6. Mortgage Servicing Rights

     At June 30, 2003 and December 31, 2002, the Bank held servicing rights to mortgage loans with principal balances of approximately $495,472,000 and $453,536,000, respectively. Because these loans are sold to Fannie Mae, a U.S. government sponsored enterprise; they are not included in loan balances in the accompanying condensed consolidated balance sheets. The sales of these mortgage loans are subject to specific underwriting documentation standards and requirements, which may result in repurchase risk. However, as of June 30, 2003, management is not aware of any material mortgage loans that will be repurchased.

     Other assets in the accompanying condensed consolidated balance sheets as of June 30, 2003 and December 31, 2002 include approximately $3,973,000 and $4,071,000, respectively, of capitalized mortgage servicing rights (MSRs) accounted for at the lower of origination value less accumulated amortization, or current fair value.

9

Transactions in the Company’s MSRs for the six months ended June 30, 2003 and 2002 were as follows:

  Six months ended
June 30,
 
  2003
   2002
  
      Balance at beginning of period, net     $ 4,071,370   $ 3,602,536  
      Additions       1,683,944     939,828  
      Amortization       (1,257,361 )   (486,296 )
 
 
 
      Balance before valuation allowance       4,497,953     4,056,068  
      Valuation allowance       (525,000 )   —  
 
 
 
      Balance at end of period     $ 3,972,953   $ 4,056,068  
 
 
 

     The fair value of MSRs was approximately $4,091,000 and $4,416,000 at June 30, 2003 and 2002, respectively.

7. Basic and diluted earnings per common share

     The Company’s basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. The Company’s diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding plus the incremental shares arising from the dilutive effect of unexercised “in the money” stock options.

     The numerators and denominators used in computing basic and diluted earnings per common share for the six months and three months ended June 30, 2003 and 2002 can be reconciled as follows:

  Six months ended
June 30,
  Three months ended
June 30,
 
  2003
   2002
   2003
   2002
  
Net income     $ 6,854,696   $ 5,348,917   $ 3,623,500   $ 2,843,263  
 
 
 
 
 
 
Weighted-average shares outstanding - basic       12,559,771     12,449,989     12,573,439     12,466,204  
Basic net income per common share     $ 0.55   $ 0.43   $ 0.29   $ 0.23  
 
 
 
 
 
 
Incremental shares arising from the dilutive    
      effect of “in the money” stock options       383,872     375,723     388,549     417,002  
Weighted-average shares outstanding - diluted       12,943,643     12,825,712     12,961,988     12,883,206  
Diluted net income per common share     $ 0.53   $ 0.42   $ 0.28   $ 0.22  
 
 
 
 
 

8. Adoption of New Accounting Standards

     In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. In addition, SFAS No. 148 amends Accounting Principles Board (APB) Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. As of June 30, 2003, the Company had not implemented the fair value based method of accounting for stock-based compensation under SFAS No. 148 or decided whether it would implement this method in the future. However, the related disclosures of SFAS No. 148 are included within the accompanying notes, as applicable.

     In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. Certain guarantees are subject to the disclosure requirements of FIN 45 but not to the recognition provisions. Such guarantees include, among others, a guarantee accounted for as a derivative instrument under SFAS No. 133, a parent’s guarantee of debt owed to a third party by its subsidiary or vice versa, and a guarantee which is based on performance, not price. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The effect of adopting FIN 45 did not have a material effect on the Company’s condensed consolidated financial statements.

10

     In January 2003, the FASB issued FASB Interpretation No. 46, (FIN46), “Consolidation of Variable Interest Entities”. FIN 46 provides accounting requirements for business enterprises to consolidate related entities in which they are determined to be the primary beneficiary as a result of their variable economic interests. The interpretation provides guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for variable interest entities (“VIEs”) in existence prior to January 31, 2003, and provides consolidation requirements for VIEs created after January 31, 2003. The effect of adopting FIN 46 did not have a material effect on the Company’s condensed consolidated financial statements.

     In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Company’s condensed consolidated financial statements or results of operations.

     In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic companies. The effect of adopting SFAS No. 150 is not expected to have a material impact on the Company’s condensed consolidated financial statements or results of operations.

11

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and the notes thereto as of June 30, 2003 and the operating results for the six 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” and other similar expressions are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Specific risks and uncertainties include, but are not limited to, general business and economic conditions, changes in interest rates including timing or relative degree of change, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business conditions, strategies and decisions, and such assumptions are subject to change.

     Results may differ materially from the results discussed due to changes in business and economic conditions that negatively affect credit quality, which may be exacerbated by our concentration of operations in the areas of Central Oregon, Salem/Keizer and Medford, Oregon. 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.

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 policy upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments is as follows:

     Reserve for Loan Losses: Arriving at an appropriate level of reserve for loan losses involves a high degree of judgment. The Company’s reserve for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. To estimate and assess the adequacy of the reserve for loan losses, management analyzes historical loss information and evaluates how the prevailing economic environment could impact the adequacy of the reserve. However, such analysis may be inexact, and changing economic circumstances could have an unforeseen impact on the estimate. 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. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, see the Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Company’s Annual Report on Form 10K.

HIGHLIGHTS FOR THE QUARTER:

     The Company continued strong second quarter 2003 growth and profitability, highlighted by robust deposit growth and solid increase in loan volumes. Net loans at June 30, 2003 were at $541.1 million, up 17.8% compared to the year ago level. Deposits surged to $597.1 million at quarter end, up 32.0% compared to a year ago and up 18.9% since year end 2002. At June 30, 2003, 97.1% of deposits were “core” in nature (demand, interest bearing demand, savings and time deposits less than $100,000).

     Net income for the quarter ended June 30, 2003 increased 27.4% to approximately $3,623,000, or $.28 diluted earnings per common share, as compared to net income of approximately $2,843,000, or $.22 diluted earnings per common share, for the same period in 2002. For the six months ended June 30, 2003, net income was up 28.2% to approximately $6,855,000 or $.53 diluted net income per common share, up from net income of approximately 5,349,000, or $.42 diluted net income per common share, for the same period in 2002. Stronger earnings during the periods were primarily due to higher net interest income resulting from growth in the Company’s loan portfolio. In addition, net income benefited from a lower provision for loan losses during the six months and three months ended June 30, 2003. The provision was $1,400,000 for the six-month period ended June 30, 2003 compared to $1,830,000 for the year earlier period and was $700,000 for the quarter ended June 30, 2003 compared to $900,000 for the same quarter the prior year. The reduced provision reflects a continued sound credit quality profile, lower delinquent loans, reduced net loan charge-offs and stable non-performing assets. Based upon its ongoing analytic and evaluative assessment, management believes the current level of the loan loss reserve is appropriate.

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     Noninterest income was up 27.5% for the six months and up 37.4% in the first quarter of 2003 as compared to the same periods in 2002. These increases were primarily due to increases in service charge income and strong revenues associated with the origination and sale of residential mortgage loans. Service charge income increased 39.6% and 44.5% for the six months and quarter ended June 30, 2003, respectively, compared to the year ago periods primarily due to higher transaction activity levels, pricing and product line enhancements and customer growth. Net mortgage revenue increased approximately 13.4% for the six months and 24.3% for the quarter ended June 30, 2003 compared to the year ago periods.

     As part of its long-term objective to deliver superior long-term growth in earnings per share, the Company expects to open several new banking offices over the net several quarters. On July 7th, the Company enhanced its current network of three Salem, Oregon branches with the opening of a new West Salem branch. In addition, the Company opened its first branch in Medford, Oregon on July 14, 2003, initiating its expansion into Southern Oregon. The aggregate start-up costs of these investments are expected to reduce earnings per share by approximately $.01 to $.02 per share in each of the next several quarters. Management forecasts that this initial affect on earnings will moderate as loan and deposit volumes build, and that these locations will reach the breakeven point within two years. Plans also call for the opening of a new branch in the Old Mill district of Bend early in 2004, as well as one to two additional branch openings during that year.

     In addition, on July 31, 2003, the Company announced an agreement to acquire Community Bank of Grants Pass (CBGP), a community bank headquartered in Grants Pass, Oregon with approximately $50 million in assets. The transaction will jump-start the Company’s recently announced expansion into Southern Oregon. CBGP shareholders will receive one share of CACB stock for each share of CBGP stock. At CACB’s recent stock price of $18, the value of the transaction is approximately $11.9 million, about 2.3 times book value or 17.6 times the last twelve months earnings reported by CBGP. The Company anticipates the acquisition will be accretive to shareholders within the first full year of operations. The combination is subject to due diligence, regulatory and CBGP shareholder approval.

RESULTS OF OPERATIONS – Six months and Three months ended June 30, 2003 and 2002

Net Interest Income

     Net interest income increased 12.6% for the six months and increased 11.2% for the quarter ended June 30, 2003 as compared to the same periods in 2002, as interest earned on higher loan volumes outweighed the effect of a lower net interest margin. The net interest margin (NIM) was 6.36% for the second quarter ended June 30, 2003, compared to the year ago margin of 6.89%, and the preceding quarter’s margin of 6.52%. The ongoing low interest rate climate continues to cause declining loan yields that compress against an already low cost of funds. During the second quarter of 2003, yields earned on loans and investments stood at 7.06% compared to 7.26% in the prior quarter, down from 7.90% a year earlier. Meanwhile the average cost of funds for the quarter ended June 30, 2003 was relatively stable at 0.73% versus 0.77% in the first quarter and 1.04% a year ago.

     The net interest margin is a key indicator of profitability in the banking industry, reflecting the difference between rates earned on loans and investments compared to the cost of funds supporting these assets. As market interest rates have declined over the past several years, the banking industry in general has experienced margin compression, as banks have seen lower loan yields on both new and refinanced loans. At the same time, funding costs are already at low levels. With the Federal Reserve recently lowering federal funds rate to 1.00% in June 2003 – a level not seen since the 1950s – management forecasts that by year end 2003 the net interest margin may moderate toward a range between 6.20% and 6.00%. Forecasting the net interest margin is difficult, as unforeseen changes can occur in interest rates, the economy, or shape of the yield curve. In addition, customer and competitor behavior are difficult to predict and can affect yields on loans and rates on deposits. Please see the Company’s Annual Report on Form 10K for further information on interest rate risk.

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     As a result of higher loan volume, total interest income increased approximately $1,566,800 (or 8.5%) for the six months and increased approximately $711,900 (or 7.6%) for the quarter ended June 30, 2003 as compared to the same periods in 2002. Total interest expense decreased approximately $449,300 (or 18.3%) for the six months and decreased approximately $207,000 (or 17.1%) for the quarter ended June 30, 2003 as compared to the same periods in 2002. All categories of interest expense have decreased over the periods presented, with the exception of borrowings expense which increased for both periods presented primarily due to the interest expense incurred on $14 million fixed rate FHLB term advances, which is included in borrowings at period end.

Average Balances and Average Rates Earned and Paid

     The following table sets forth for the quarter ended June 30, 2003 and 2002 information with regard to average balances of assets and liabilities, as well as total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant average yields or rates, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities for the Company: (Dollars in thousands)

  For the quarter ended June 30,
  
  2003
  2002
  
  Average
Balance
  Interest
Income/
Expense
  Average
Yield or
Rates
  Average
Balance
  Interest
Income/
Expense
  Average
Yield or
Rates
 
Assets                                        
      Taxable securities     $ 25,038   $ 237     3.80%   $ 23,978   $ 261     4.37%  
      Non-taxable securities (1)       1,694     13     3.08%     895     10     4.48%  
      Federal funds sold       11,071     30     1.09%     86     —     0.00%  
      Federal Home Loan Bank stock       2,212     29     5.26%     2,075     31     5.99%  
      Loans (2)(3)(4)       535,321     9,825     7.36%     451,072     9,120     8.11%  
 
 
 
 
 
         Total earning assets       575,336     10,134     7.06%     478,106     9,422     7.90%  
      Reserve for loan losses       (8,080 )               (7,174 )            
      Cash and due from banks       21,758                 22,368              
      Premises and equipment, net       10,791                 9,175              
      Accrued interest and other assets       16,896                 16,025              
 
 
 
Total assets     $ 616,701               $ 518,500              
 
 
 
 
Liabilities and Stockholders’ Equity    
      Interest bearing demand deposits     $ 254,379     593     0.94%   $ 187,952     589     1.26%  
      Savings deposits       25,936     30     0.46%     20,914     38     0.73%  
      Time deposits       47,290     233     1.98%     68,822     456     2.66%  
      Other borrowings       22,817     149     2.62%     27,289     129     1.90%  
 
 
 
 
 
         Total interest bearing liabilities       350,422     1,005     1.15%     304,977     1,212     1.59%  
      Demand deposits       204,343                 162,631              
      Other liabilities       7,653                 6,630              
 
 
 
Total liabilities       562,418                 474,238              
Stockholders' equity       54,283                 44,262              
 
 
 
Total liabilities and stockholders’ equity     $ 616,701               $ 518,500              
 
 
 
 
 
 
 
Net interest income           $ 9,129               $ 8,210        
 
 
 
Net interest spread                   5.91%                 6.31%  
 
 
 
Net interest income to earning assets                   6.36%                 6.89%  
 
 
 
(1)   Yields on tax-exempt securities have not been stated on a tax-equivalent basis.
(2)   Average non-accrual loans included in the computation of average loans was insignificant for the periods presented.
(3)   Loan related fees collected and included in the yield calculation totalled approximately $449,000 in 2003 and $470,000 in 2002.
(4)   Includes mortgage loans held for sale.

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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 quarter ended June 30, 2003, 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):

  2003 compared to 2002
  
  Total
Increase		   Amount of Change
Attributed to
 
  (Decrease)
  Volume
   Rate
  
      Interest income:                
             Interest and fees on loans     $ 705   $ 1,625   $ (920 )
             Investments       7     51     (44 )
 
 
 
 
                 Total interest income       712     1,676     (964 )
 
      Interest expense:    
             Interest on deposits:    
                 Interest bearing demand       4     181     (177 )
                 Savings       (8 )   8     (16 )
                 Time deposits       (223 )   (124 )   (99 )
             Other borrowings       20     (25 )   45  
 
 
 
 
                 Total interest expense       (207 )   40     (247 )
 
 
 
 
 
      Net interest income     $ 919   $ 1,636   $ (717 )
 
 
 
 

Loan Loss Provision

     At June 30, 2003, the reserve for loan losses was 1.53% of total loans, same as year end 2002 and down from 1.58% at June 30, 2002. The loan loss provision was $700,000 in the second quarter of 2003 compared to $900,000 for the comparable period in 2002. This reduction in provision was the result of the Company’s ongoing analytic and evaluative assessment of the adequacy of the loan loss reserve. This assessment reflects a continued sound credit quality profile, lower delinquent loans, reduced net loan charge-offs and stable non-performing assets. Management believes that its reserve for loan losses is at an appropriate level under current circumstances and prevailing economic conditions.

Noninterest Income

     Noninterest income increased 27.5% for the six months, and was up a strong 37.4% for the quarter ended June 30, 2003 as compared to the same periods in 2002. These increases were due to continued growth in service fee income as well as high volumes and revenues in our residential mortgage operations. The Company originated a near-record $79.4 million in residential mortgages for our customers during the quarter ended June 30, 2003. This compares to $41.5 million for the year ago quarter and $82.6 million for the immediately preceding quarter. Net revenue generated from mortgage operations for the six months ended June 30, 2003 was $1,681,000 compared to $1,482,000 for the same period of 2002. Net revenue generated from mortgage operations for the quarter ended June 30, 2003 was $859,000 compared to $691,000 in the year-ago quarter. Net mortgage revenue includes origination fees, gains on sale of mortgage loans and servicing income, net of amortization of servicing rights and valuation adjustments. In this regard, the second quarter of 2003 included a Mortgage Servicing Rights (MSR) valuation adjustment charge of $175,000 (pretax), while the immediately preceding quarter charge was $350,000 (pretax). A valuation charge is recorded when the estimated fair (market) value of MSR falls below its book value, an event that occurs primarily due to fluctuations in national market mortgage interest rates. Including this MSR valuation charge, the carrying value of the MSR at June 30, 2003 is 0.80% of serviced loans compared to 0.97% a year ago.

     The Company’s overall mortgage revenues have grown as a percent of total Company revenues over the past several years. In part, this trend is related to the low mortgage interest rates that have sustained a refinance boom over this period. For example in 2001, the Company’s mortgage revenue averaged approximately 4% of total Company revenue. Net mortgage revenue increased to 7% of revenues during the second quarter of 2003. Management anticipates that when mortgage interest rates eventually increase from today’s historic lows, it is likely that the relatively high mortgage revenue contribution experienced of late will ease back to a more normal share of revenues. In the meantime, strong revenues from mortgage operation have buffered the impact that lower interest rates have on the net interest margin.

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Noninterest Expense

     Noninterest expense increased 13.6% for the six months and 14.9% for the quarter ended June 30, 2003 as compared to the same periods in 2002. These increases in expense are primarily human resource related to meet growing business volumes, along with incentive-based bonuses and variable mortgage commissions that are directly tied to the increasing profitability of the Company. The Company believes that its high-touch service and high-caliber employees are a cost-effective competitive advantage.

Income Taxes

     Income tax expense increased between the periods presented primarily as a result of higher pre-tax income. The Company’s combined Federal and State effective income tax rate for the second quarter of 2003 was 38.8% compared to 39.0% for same quarter in 2002.

FINANCIAL CONDITION

     Assets continued to increase in the second quarter of 2003 with total assets increasing 18.6% to $685.7 million at June 30, 2003 compared to $578.4 million at December 31, 2002. This increase was primarily due to a jump in federal funds sold and solid increases in loan volumes. Federal funds sold increased due to robust deposit growth at quarter end. Net loans outstanding increased 10.1% to $541.1 million at June 30, 2003 as compared to $491.5 million at December 31, 2002. This growth was primarily concentrated in the commercial loan, construction/lot and commercial real estate loan portfolios, up $16.3 million, $19.7 million and $11.6 million, respectively, consistent with the nature of economic growth in the markets served by the Company. The investment portfolio increased slightly to $29.2 million from $28.6 million at year end 2002.

     This asset growth was primarily funded by the increased deposits, with deposits increasing 18.9% to $597.1 million at June 30, 2003 compared to $502.0 million at December 31, 2002. A portion of the deposit increase was attributable to several large customer funds deposited on a temporary basis with the Bank over the quarter end. The majority of the growth was in interest bearing demand deposits.

     The Company had no material off balance sheet derivative financial instruments as of June 30, 2003 and December 31, 2002.

LIQUIDITY AND SOURCES OF FUNDS

     It is the Company’s liquidity goal to have sufficient available funds to meet depositor withdrawals as well as to fund borrowing needs of its customers. The Bank’s stable deposit base is the foundation of its long-term liquidity since these funds are not subject to significant volatility as a result of changing interest rates and other economic factors. A further source of liquidity is the Bank’s ability to borrow funds from a variety of reliable counterparties. The Bank may pledge its portfolio of investment securities and certain real estate and business loans to provide collateral to support its borrowing needs.

     The Bank’s primary counterparty for borrowing purposes is the Federal Home Loan Bank (FHLB). At June 30, 2003 the FHLB had extended the Bank a secured line of credit of $89.3 million that may be accessed for short or long-term borrowings given sufficient qualifying collateral. The Bank also had $28.7 million in short term borrowing availability from the Federal Reserve System that requires specific qualifying collateral. In addition, the Bank maintained unsecured lines of credit totaling $24.0 million for the purchase of funds on a short-term basis from several commercial bank counterparties. At June 30, 2003 the Bank had aggregate remaining available borrowing sources totaling $130.3 million, given sufficient collateral.

     Consistent with the year earlier period, at June 30, 2003 the Bank had approximately $170.7 million in outstanding commitments to extend credit. Based on historical experience, management anticipates that a significant portion of the commitments will expire or terminate without funding. Approximately 1/3 of total commitments pertain to various construction projects. Under the terms of such construction commitments and the Company’s loan policies, completion of specified project benchmarks are to be certified by borrower and builder and approved by the Company before funds may be drawn. Management believes that the Bank’s available resources will be sufficient to fund its commitments in the normal course of business.

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Borrowings

     At June 30, 2003 the Bank had a total of approximately $11.7 million in short-term borrowings bearing a weighted-average interest rate of 0.728% and $14.0 million in long-term borrowings from FHLB with maturities ranging from 2005 to 2013, bearing a weighted-average interest rate of 3.17%. At December 31, 2002, the Bank had a total of $18.0 million in long-term borrowings from FHLB bearing a weighted-average interest rate of 2.98%. See “Liquidity and Sources of Funds” section above for further discussion.

CAPITAL RESOURCES

     The Company’s total stockholders’ equity at June 30, 2003 was $56.5 million, an increase of $5.3 million from December 31, 2002. The increase was the net result of earnings of $6.9 million for the six months ended June 30, 2003, less cash dividends to shareholders of $2.0 million during the same period. In addition, at June 30, 2003 the Company had accumulated other comprehensive income of approximately $.9 million.

     At June 30, 2003, the Company’s Tier 1 and total risked-based capital ratios under the Federal Reserve Board’s (“FRB”) risk-based capital guidelines were 9.66% and 10.98%, respectively. The FRB’s minimum risk-based capital ratio guidelines for Tier 1 and total capital are 4% and 8%, respectively.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Management considers interest rate risk to be a significant market risk, which could have the largest material effect on the Company’s financial condition and results of operations.

     There has not been any material change in the market risk disclosure contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in our reports filed or submitted under the Securities Exchange Act of 1934, as amended.

Changes in Internal Controls

     Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls.

17

PART II — OTHER INFORMATION

Item 5. Submission of Matters to a Vote of Security Holders

  (a)   April 21, 2003, Annual Meeting
  (b)   Need not be completed
  (c)   The following matters were voted on at the Annual Meeting of Shareholders held on April 21, 2003:

    Proposal #1:   Election of Directors      
 
        Number of Votes   Number of Votes   Total Number of  
    Director
   “FOR”
   “WITHHELD”
   Votes
  
    Jerol E. Andres   10,902,534   267,721   11,170,255  
 
    Proposal #2:   Approval of First Amendment to the 2002 Stock Option Plan  
 
    Number of Votes   Number of Votes   Number of Votes   Total Number of  
    “FOR”
   “AGAINST”
   “ABSTAIN”
   Votes
  
    9,743,190   1,291,407   144,949   11,179,546  

Item 6. Exhibits and Reports on Form 8-K

  (a)   Exhibits

  31.1   Certification of Chief Executive Officer and Chief Financial Officer

  (b)   Reports on Form 8-K

  The Company filed a report on Form 8-K on July 10, 2003 in regards to release of the Company’s second quarter, 2003 earnings.

  The Company filed a report on Form 8-K on August 4, 2003 in regards to an announcement by press release an agreement to acquire Community Bank of Grants Pass (CBGP), a community bank headquartered in Grants Pass, Oregon.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

        CASCADE BANCORP
       
        (Registrant)


Date 8/13/2003 By   /s/ Patricia L. Moss
       
        Patricia L. Moss, President & CEO


Date 8/13/2003 By   /s/ Gregory D. Newton
       
        Gregory D. Newton, EVP/Chief Financial Officer