SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

For the quarterly period ended: September 30, 2003

For the transition period from ________ to ________

Commission file number: 0-23322

CASCADE BANCORP
(Exact name of Registrant as specified in its charter)

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. 12,613,755 shares of no par value Common Stock as of October 31, 2003.

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

INDEX

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PART I

Item 1. FINANCIAL STATEMENTS

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

See accompanying notes.

3

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

See accompanying notes.

4

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

See accompanying notes.

5

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

See accompanying notes.

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

              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.

              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 nine months and three months ended September 30, 2003 and 2002:

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

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

              Mortgage real estate loans include mortgage loans held for sale of approximately $3,896,000 at September 30, 2003 and approximately $4,185,000 at December 31, 2002.

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

              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 September 30, 2003 and December 31, 2002:

              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 September 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.

              At September 30, 2003 and December 31, 2002, the Bank held servicing rights to mortgage loans with principal balances of approximately $511,647,000 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 September 30, 2003, management is not aware of any material mortgage loans that will be subject to repurchase.

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              Other assets in the accompanying condensed consolidated balance sheets include capitalized mortgage servicing rights (MSRs) accounted for at the lower of origination value less accumulated amortization, or current fair value, as noted in the following table. MSRs approximated estimated fair value for the periods presented. (See MD&A – Non-Interest income).

              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 nine months and three months ended September 30, 2003 and 2002 can be reconciled as follows:

              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 September 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.

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              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 did not have a significant 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 did not have a material impact on the Company’s condensed consolidated financial statements or results of operations.

              In July 2003 the Company entered into an agreement (the Agreement) to acquire Community Bank of Grants Pass (GBGP). Under the terms of the Agreement, CBGP shareholders will receive one share of the Company’s common stock for each share of CBGP common stock. The Agreement, which has been approved by the Boards of Directors of the Company and CBGP, is subject to certain conditions for merger transactions of this type, including approval by shareholders of CBGP and regulatory authorities, and satisfaction of other terms and conditions. The pending merger will be accounted for under the purchase method of accounting and is expected to be consummated near the end of the fourth quarter of 2003.

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              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, 2003 and the operating results for the nine 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 State of Oregon generally, and the communities of Central Oregon, Salem/Keizer, Medford and Portland, 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.

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 ENDED SEPTEMBER 30, 2003:

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Financial Performance for the Quarter:

              The Company announced continued strong third quarter 2003 growth and profitability, highlighted by robust deposit growth and solid increase in loan volumes. Net income was up 14.8% to $3.6 million for the third quarter of 2003 compared to $3.1 million for the year ago quarter. EPS (diluted) were $.27, up 13.8% from the third quarter a year earlier. This quarter’s results were reduced by approximately $.02 per share due to start-up phase costs associated with CACB’s recent expansion into the Southern Oregon and Portland, Oregon markets, discussed below. ROE for the third quarter of 2003 was 24.8%. The Company has sustained top tier ROE above 20% for more than 8 consecutive years. Return on Assets was 2.02% for the quarter compared to 2.27% a year earlier. The Company’s ongoing growth and financial results recently placed CACB in the Fortune magazine Small Business list of top 100 growth companies in the nation.

              New Market Initiatives - Southern Oregon and Portland Update:

              “We are very pleased with our continued strong financial results, and are very excited about our prospects for the future with new banking presence in both Southern Oregon and Portland,” said President and CEO Patricia L. Moss. “The opening of these two new markets will generate growth that will complement the strength of our current franchise.” She continued, “Importantly, in both existing and new markets, our professional bankers are effective in developing business and growing enduring customer relationships.”

              The Company reported that the Southern Oregon initiative was progressing well under the direction of Regional EVP William Haden, with the opening in July of its first branch in Medford. A second Southern Oregon location will result from the pending merger with Community Bank of Grants Pass, which is expected to close near the end of the fourth quarter 2003. At the same time, the Company will soon open a business and professional banking office in Portland led by SVP Walt Krumbholz, and staffed by an initial 16 member banking team, many of which are from the former Portland based Bank of the Northwest.

              The Company’s expansion into the attractive Southern Oregon region began with a new branch in Medford in mid-July 2003. In this short 90-day period, the new office has generated over $6 million in outstanding loans, and holds deposits approaching $4 million. “I am excited about the positive early results, and view it as a tribute to the strong team of bankers we have attracted to our Medford franchise,” said William Haden. “I am anticipating great synergy between Medford and nearby Grants Pass once the merger transaction with Community Bank of Grants Pass closes, and we look forward to opening a second Grants Pass branch in mid-2004.”

              In Portland, the Company reported that its initial team of 16 bankers has started working in temporary quarters until the November move to permanent quarters on the 10th floor in the downtown Pioneer Tower. “We are enthused with the positive response we are receiving from Portland-based business owners and professional partnerships,” said Walt Krumbholz. “We look forward to competitively serving new banking relationship clients with a personal-touch, customer service attitude that is the hallmark of the Company’s culture.”

              The current quarter financial results include certain start-up and initial phase costs of these two initiatives, incrementally reducing EPS in this period by approximately $.02 per share (after-tax). Management estimates that these new ventures will cost an incremental $.03 to $.04 on EPS in the fourth quarter of 2003. For the full year 2004, and depending upon growth in business volumes as well as the timing of two additional branches planned in Southern Oregon, management estimates an incremental cost impact ranging from $.06 to $.09 on EPS. Management is targeting breakeven for these new market ventures between 18 and 24 months, and believes that once breakeven is achieved, there is potential for significant incremental EPS growth for the Company’s shareholders. Please see cautionary note on “Forward Looking Statements” below.

              Loan Growth and Credit Quality:

              At September 30, 2003, the loan portfolio had grown to $564 million, up 17.9% compared to a year ago. The Company’s underlying loan credit quality remained sound. Quality indicators include delinquent loans greater than 30 days past due at just 0.05% of total loans compared to 0.07% a year ago and 0.17% at year end 2002. Meanwhile, net loan charge-offsfor the quarter were a relatively low $.1 million or 0.08% (annualized) of total loans, compared to 0.34% for all of 2002. Non-performing assets were at 0.08% of total assets, below the 0.23% reported in the prior quarter. The Reserve for Loan Losses at period-end stood at a prudent 1.59% of total loans. Based upon Management’s analytical and evaluative assessment of loan quality, the Company believes that its Reserve for Loan Losses is at an appropriate level under current circumstances and prevailing economic conditions.

              Deposit Growth:

              Deposits at September 30, 2003 were $641 million, up 27.7% from a year ago and up 29.8% (annualized) in just the past three months. The third quarter is often strong with seasonal peaks in tourism and construction activity. The Company also reported a strong deposit surge in the second quarter, a portion of which was attributed to deposit activity of several large customers that was believed to be interim in nature. However, these funds were maintained at the Bank during the current quarter, supporting continued robust deposit flows. “The Company’s rapid loan growth has historically been funded by comparable growth in core deposits,” observed Gregory D. Newton, Chief Financial Officer. “The rapid deposit flows of late have created a substantial reserve of funds available to fund future loan growth or to accommodate short term customer cash fluctuations.” The Company reported that this excess liquidity averaged $66.8 million during the quarter, representing almost 10% of total assets, and was invested in low-yielding liquid assets.

              Net Interest Margin for the Quarter:

              Because of the low yield on the excess funds discussed above, the reported Net Interest Margin declined to 5.63% for the quarter. However, adjusted to exclude these funds, the net interest margin on the Company’s core banking business was 6.26% for the third quarter. This compares to a margin of 6.36% in the immediately preceding quarter and 6.70% for the year ago period. Cascade’s margin has been in the high 90th percentile of all banks for a decade, and continues to be well above peer levels. The ongoing low interest rate climate continues to cause declining loan yields that compress against an already low cost of funds. Assuming this relatively low rate climate persists, management forecasts that the core margin (excluding the effect of low yielding excess funds) will continue to ease over the next 12-18 months toward a range of 5.75% to 6.10%. Please see cautionary “Forward Looking Statements” below as well as Form 10K annual report for further information on interest rate risk.

              During the third quarter of 2003 yields earned on loans was 7.06% compared to 7.36% in the prior quarter, down from 7.96% a year earlier. Meanwhile the average overall cost of funds for the quarter ended September 30, 2003 decreased slightly to 0.62% versus 0.73% in the second quarter and 0.95% a year ago.

              Non-Interest Income and Expense for the Quarter:

              Non-Interest Income for the quarter was substantially higher than the year ago period, owing to continued strong service fee income growth, which resulted from higher transaction volumes and service usage. Also, revenues in residential mortgage operations continued strong, reflecting high customer demand for mortgages in the low interest rate environment. The Company originated a record $101.6 million in residential mortgages for our customers during the quarter ended September 30, 2003. This compares to $50.2 million for the year ago quarter and $79.4 million for the immediately preceding quarter. The third quarter’s peak in origination volume resulted from high refinance activity associated with an apparent bottoming of mortgage rates. It is likely that origination volumes will decline in subsequent quarters. Net pre-tax revenue generated from mortgage operations for the third quarter of 2003 was $1.3 million compared to $.9 million for the second quarter. Net mortgage revenue includes origination fees, gains on sale of mortgage loans and servicing income, net of amortization of Mortgage Servicing Rights (MSR) and MSR valuation adjustments. In this regard, the third quarter of 2003 included no MSR valuation adjustments, while the prior quarter included a $.2 million valuation impairment charge (pretax). Including prior impairment charges, the carrying value of the MSR at September 30, 2003 is 0.82% of serviced loans compared to 0.89% a year ago, and 0.80% at the prior quarter end.

              Generally accepted accounting principles require that MSR be recorded at the lower of book value or fair value. Key factors in estimating the fair value of MSR include interest rates and related mortgage prepayment assumptions. These elements were particularly volatile in the third quarter, with market experts calling recent rate swings as sudden and dramatic as they have witnessed. Thus a precise estimation of the fair value of MSR is particularly difficult with the uncertain and volatile state of key estimation factors. Accordingly, under the circumstances until such factors become more stable, management believes that its cumulative MSR impairment totaling approximately $.04 per share (after-tax) is prudent.

              Non-Interest Expense for the third quarter of 2003 increased 29.6% as compared to the same quarter one year ago. Without incremental expenses related to the start-up costs incurred in new markets (discussed above), expense growth would have been up a more moderate 19.3%. Factors contributing to this increase include expenses related to serving increased business volumes along with incentive-based bonuses and variable mortgage commissions that are directly tied to the increasing profitability of the Company.

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RESULTS OF OPERATIONS – Nine months and Three months ended September 30, 2003 and 2002

Net Interest Income

              Net interest income increased 11.2% for the nine months and increased 8.5% for the quarter ended September 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 (NIM). The NIM on the Company’s core banking business was 6.26% for the third quarter, compared to the year ago margin of 6.70%, and the preceding quarter’s margin of 6.36%. The Company’s reported NIM was 5.63% for the third quarter ended September, 2003 taking account of the negligible margin earned on $66.8 million in excess liquidity that was invested in low-yielding overnight assets. These overnight funds averaged about 10% of assets and resulted from rapid deposit growth beginning in late June. These flows were believed to be interim in nature, but have remained on deposit through September. These deposits created a substantial reserve of funds available to fund loan growth or to accommodate short term customer cash fluctuations.

              The ongoing low interest rate climate continues to cause declining loan yields that compress against an already low cost of funds. During the third quarter of 2003, yields earned on loans and investments stood at 6.94% compared to 7.06% in the prior quarter, down from 7.61% a year earlier. Meanwhile the average overall cost of funds for the quarter ended September 30, 2003 was at 0.62% versus 0.73% in the prior quarter and 0.95% 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 lowering the federal funds rate to 1.00% in June 2003 – a level not seen since the 1950s – management forecasts that the core margin will continue to ease over the next 12-18 months toward a range of 5.75% to 6.10%. 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.

              As a result primarily of higher loan volume, total interest income increased $2,119,400 (or 7.5%) for the nine months and $552,600 (or 5.7%) for the quarter ended September 30, 2003 as compared to the same periods in 2002. Total interest expense decreased $630,300 (or 17.3%) for the nine months and decreased $180,900 (or 15.4%) for the quarter ended September 30, 2003 as compared to the same periods in 2002. Interest expense decreased in time deposits over the periods presented, primarily due to a decrease in the volumes and rates paid related to certificates of deposits issued to the State of Oregon through their State community bank CD program.

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Average Balances and Average Rates Earned and Paid

              The following table sets forth for the quarter ended September 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)