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<SEC-DOCUMENT>0000891020-02-000374.txt : 20020415
<SEC-HEADER>0000891020-02-000374.hdr.sgml : 20020415
ACCESSION NUMBER: 0000891020-02-000374
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020401
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CASCADE FINANCIAL CORP
CENTRAL INDEX KEY: 0000928911
STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035]
IRS NUMBER: 911661954
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-25286
FILM NUMBER: 02595588
BUSINESS ADDRESS:
STREET 1: 2828 COLBY AVE
CITY: EVERETT
STATE: WA
ZIP: 98201
BUSINESS PHONE: 4252598551
MAIL ADDRESS:
STREET 1: 2828 COLBY AVE
CITY: EVERETT
STATE: WA
ZIP: 98201
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>v80226e10-k.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from June 30, 2001 to December 31, 2001.
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware
(State or other jurisdiction of incorporation or organization) 91-1661954
- -------------------------------------------------------------- ---------------------------------------
(I.R.S. Employer I.D. Number)
2828 Colby Avenue, Everett, Washington 98201
- -------------------------------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 339-5500
---------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
---------------------------------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
---------------------------------------
</TABLE>
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 twelve 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of
registrant at March 21, 2002 was $61.61 million (based on $9.70 per share). The
number of shares of registrant's Common Stock outstanding at March 21, 2002 was
6,351,354.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the six months ended December
31, 2001, including the Selected Financial Data and the Management
Discussion and Analysis attached as Exhibit 13 (the "Annual Report") (Part
I, II & IV).
2. Portions of registrant's Definitive Proxy Statement for the December 31,
2001 Annual Meeting of Stockholders (the "Proxy Statement") (Part III).
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Cascade Financial Corporation (the "Corporation") is a bank holding company
incorporated in the state of Delaware in 1994. The consolidated entity includes
the Corporation and its wholly owned subsidiaries. At December 31, 2001, the
Corporation's wholly-owned subsidiaries were Cascade Bank ("Cascade" or the
"Bank") and Cascade Capital Trust I. The executive offices of the Corporation
are located at 2828 Colby Avenue, Everett, Washington 98201, and the telephone
number is (425) 339-5500.
The Bank has been serving the people of Snohomish and King Counties since
1916 when it was organized as a mutual savings and loan association. On
September 15, 1992, the Bank completed its conversion from a federal mutual to a
federal stock savings bank. The Corporation was organized on August 18, 1994 for
the purpose of becoming the holding company for Cascade Bank. On October 23,
1994, the stockholders of the Bank approved a plan to reorganize the Bank into
the holding company form of ownership. The reorganization was completed on
November 30, 1994, on which date the Bank became the wholly-owned subsidiary of
the Corporation, and the stockholders of the Bank became stockholders of the
Corporation. Subsequent to the acquisition of Cascade, the primary activity of
the Corporation has been holding the stock of the Bank. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Bank.
In July of 2001, the Bank converted its charter from that of a federal stock
savings bank to a Washington state commercial bank, and the Corporation elected
to be treated as a financial holding company with the Federal Reserve Board.
Following this conversion, the Corporation changed its fiscal year end from June
30 to December 31 to align its reporting period with those of its commercial
bank peers.
The Corporation conducts its business from its main office in Everett,
Washington, and thirteen other full service offices in the greater Puget Sound
region. At December 31, 2001, the Corporation had total assets of $762.0
million, total deposits of $420.0 million and stockholders' equity of $47.7
million. The savings deposits of the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC"), up to the limits specified by law.
The Bank, a full service community bank, offers a wide range of products and
services. Cascade Investment Services, Inc., a subsidiary of Cascade Bank,
markets annuity products, mutual funds and insurance products to customers and
non-customers in the Bank's market areas. Management believes offering these
product lines increases customer awareness, expands product lines and provides a
valuable alternative to the deposit products offered by the Bank. Revenues from
the subsidiary increase the Bank's other income.
FORWARD LOOKING STATEMENTS
In addition to historical information, this Form 10-K contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the
express purpose of availing Cascade Financial Corporation of the protections of
the safe harbor provisions of the PSLRA. The forward-looking statements
contained herein are subject to factors, risks, and uncertainties that may cause
actual results to differ materially from those projected. The following items
are among the factors that could cause actual results to differ materially from
the forward-looking statements: general economic conditions, including their
impact on capital expenditures; business conditions in the banking industry;
recent world events and their impact on interest rates, businesses and
customers; the regulatory environment; new legislation; vendor quality and
efficiency; employee retention factors; rapidly changing technology and evolving
banking industry standards; competitive standards; competitive factors,
including increased competition with community, regional, and national financial
institutions; fluctuating interest rate environments; and similar matters.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only at the date of the
statement. The Corporation undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date of this report. Readers should carefully review the risk factors
described in this and other documents the Corporation files from time to time
with the Securities and Exchange Commission. There can be no assurance that any
of the strategies described in this Form 10-K will be implemented, or if
implemented, achieve the amounts described or within the time periods currently
estimated. Sentences containing words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "should," "projected," or similar words may
constitute such forward looking statements.
-2-
<PAGE>
Market Area
Headquartered in Everett, Washington, the Corporation serves its customers
from fourteen full service offices, ten in Snohomish County and four in King
County. Located in the center of the western Washington region, Snohomish and
King counties have experienced significant growth in recent years, although
currently the area is facing an economic slowdown.
Despite the relocation of its corporate headquarters, the Boeing Company is
the largest employer in the Puget Sound Area and in Snohomish County. The
transplantation of Boeing's headquarters will not have a material impact on the
local economy. However, the slowdown in air travel caused by a weakening economy
and the tragic events of September 11, 2001 have had a material impact on the
orders for the commercial jet airliners produced in our market area. Boeing
Company press releases showed a decrease of its commercial airplane deliveries
of approximately 2% in 2001 and an estimated decline between 25% and 27% in 2002
from deliveries forecasted prior to the terrorist attacks. Consequently Boeing
announced employment layoffs approximating 30,000 by mid-2002, starting in
December 2001. The full impact and timing of airline and aerospace industry job
reductions on the Puget Sound economy are not yet known; however, economic
activity in many areas served by the Company has weakened. The recently
announced layoffs by Boeing may create problems if there are outstanding loans
to employees who are laid-off and not hired by other companies, to
subcontractors that have had canceled or delayed orders from Boeing, or other
businesses impacted by the general slowing of economic activity. Significant
Boeing layoffs in past years have not affected our asset quality, however, there
is no assurance that any future Boeing layoffs will not adversely affect the
Corporation's loan portfolio.
Our market area in King County includes the growing cities east of Seattle
and Lake Washington. This area's economy has been dominated by Microsoft, with
other high technology companies playing an important role. Slowdowns and
retrenchment with a number of these firms has led to slower economic growth than
in the past with a potential impact on the financial services firms that serve
the area. The commercial real estate market in east King County has experienced
an increase in vacancy rates recently.
Over recent years, the economy in the Corporation's market area has become
more dependent upon the health care and biotechnology industries, two industries
which have been less affected by the recent economic slowdown. One of the
largest health care employers is Providence Everett Medical Center Group, which
is also an innovator in new diagnostic and treatment technologies. Snohomish
County and Northeast King County is home to numerous biotechnology companies,
including Advanced Technology Labs, a manufacturer of medical equipment.
As a gateway to Asia, the Bank's market area has also benefited from the
expansion of world trade. Economic weakness in either the United States or Asia
will reduce that trade. Such slowdowns in the international flow of goods and
services could prove detrimental to the economy of the market area and
potentially the quality of our loan portfolios.
Business Strategy
The Corporation is in the process of implementing its business plan to
increase the Bank's emphasis on commercial banking. The Corporation is
attempting to pursue the following strategies:
- - Increasing the percentage of its assets consisting of business,
construction, and commercial real estate loans with higher risk-adjusted
returns, shorter maturities and greater sensitivity to interest rate
fluctuations.
- - Increasing deposits by attracting lower cost transaction accounts (such as
checking, savings and money market accounts) through an enhanced branch
network and internet banking.
- - Diligently searching for sources of fee based revenue, e.g. credit life
insurance.
- - Maintaining cost-effective operations by efficiently offering products and
services.
- - Maintaining its capital position at or above the "well-capitalized" (as
defined for regulatory purposes) level.
The primary objectives of these strategies are to: enhance shareholder value
measured through increasing return on equity and/or increasing earnings per
share, and to increase the opportunity for quality earning asset growth, deposit
generation, and fee-based income activities. However, the shift in emphasis to
commercial banking does inherently contain additional risks (See "LOAN
PORTFOLIO" below).
-3-
<PAGE>
Competition
The Bank competes for both loans and deposits. The Puget Sound metropolitan
area has a high density of financial institutions, including major national
banks, several local community banks, and credit unions.
The Bank's competition for loans comes principally from other commercial
banks, the larger of whom offer quick, low documentation credit approval and
attractive pricing. Conversely, many of the local community banks have
specialized in commercial real estate and business lending and therefore may
have a more established reputation in that market. Cascade competes for loans
principally through its ability to customize competitively priced financing to
the needs of its customers, and its local decision-making.
Geographic location is still the primary factor in choosing a bank for the
checking relationship. As a result, the Bank's competition for checking deposits
comes primarily from the large, national banks with a broad network of
locations. Online banking continues to be an important convenience service to
attract checking customers from larger banks. In addition, Cascade has recently
made an arrangement with US Bank to allow customers to use Washington State US
Bank ATMs without a surcharge. Community banks, savings institutions, as well as
other nonbanking financial institutions, provide the greatest competition for
the various savings vehicles such as money market deposit accounts and
certificates of deposit.
As with all banks, the Bank faces competition from non-banking sources, such
as mutual funds, other financial services companies and credit unions. Changes
in technology create challenges for the Bank.
The Corporation anticipates continuing opportunities to arise from the
effects of substantial consolidation among financial institutions in Washington
that has occurred to date. Federal law allows mergers or other combinations,
relocations of a bank's main office and branching across state lines. Several
other financial institutions, which have greater resources than the Bank,
compete for banking business in the Bank's market area. Among the advantages of
some of these institutions are their ability to make larger loans, finance
extensive advertising and promotion campaigns, access international money
markets and allocate their investment assets to regions of highest yield and
demand.
In addition to competition from other banking institutions, the Bank
continues to experience increased competition from non-banking companies such as
credit unions, financial services companies and brokerage houses. Recent
amendments to the federal banking laws to eliminate certain barriers between
banking and commercial firms are expected to result in even greater competition
in the future.
LOAN PORTFOLIO
General. The Bank originates business, real estate and consumer loans. Total
loans equaled $613.3 million at December 31, 2001. The total loans were adjusted
by loans in process, deferred loan fees, and the allowance for loan losses for a
net loan balance of $576.2 million. At December 31, 2001, $125.3 million or
20.4% of loans consisted of business loans; $104.1 million or 17.0% were real
estate construction loans; $62.9 million or 10.3% of loans consisted of
commercial real estate; $58.4 million or 9.5% were consumer loans; $152.8
million or 24.9% of the Bank's loans consisted of loans secured by one-to-four
family residential properties; and $109.7 million or 17.9% consisted of
multi-family loans, which brings the total loans secured by first liens on
residential real estate to $262.4 million or 42.8% of loans.
-4-
<PAGE>
Loan Portfolio Analysis. The following table sets forth the Corporation's
loan portfolio by type of loan and by type of security at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At June 30, At June 30,
2001 2001 2000
------------------------ ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
-------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan
Real estate mortgage
Residential(1) $262,460 45.55 272,363 48.22 288,660 53.46
Commercial 62,938 10.92 56,913 10.08 54,320 10.06
Construction 104,131 18.07 103,206 18.27 73,488 13.61
Business 125,342 21.75 113,708 20.13 86,298 15.98
Consumer(2) 58,381 10.13 60,406 10.69 62,061 11.49
-------- ------ ------- ------ ------- ------
Total Loans 613,252 106.42 606,596 107.39 564,827 104.60
Less:
Loans in process 28,220 4.90 33,337 5.90 17,132 3.17
Deferred loan fees, net 2,502 0.43 2,703 0.48 2,719 0.50
Allowance for loan losses 6,304 1.09 5,687 1.01 5,004 0.93
-------- ------ ------- ------ ------- ------
Total loans, net $576,226 100.00% 564,869 100.00 539,972 100.00
======== ====== ======= ====== ======= ======
Type of Security
Real estate mortgage
One-to-four family(2) $295,941 51.36 307,049 54.35 290,857 53.86
Multi-family 109,734 19.04 107,360 19.01 112,721 20.87
Commercial 62,938 10.92 56,913 10.08 54,320 10.06
Land loans 2,546 0.44 3,269 0.58 29 0.01
-------- ------ ------- ------ ------- ------
Other 142,093 24.66 132,005 23.37 106,900 19.80
Total Loans 613,252 106.42 606,596 107.39 564,827 104.60
Less:
Loans in Process 28,220 4.90 33,337 5.90 17,132 3.17
Deferred loan fees, net 2,502 0.43 2,703 0.48 2,719 0.50
Allowance for loan losses 6,304 1.09 5,687 1.01 5,004 0.93
-------- ------ ------- ------ ------- ------
Total loans, net $576,226 100.00% 564,869 100.00 539,972 100.00
======== ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
At June 30, At June 30, At June 30,
1999 1998 1997
---------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan
Real estate mortgage
Residential(1) 263,987 57.93 238,582 62.01 245,649 71.99
Commercial 49,066 10.77 31,746 8.25 25,250 7.40
Construction 54,500 11.96 47,861 12.44 33,361 9.78
Business 61,676 13.53 41,494 10.79 24,601 7.21
Consumer(2) 52,219 11.45 48,506 12.61 31,578 9.26
------- ----- ------- ----- ------- ------
Total Loans 481,448 105.64 408,189 106.10 360,439 105.64
Less:
Loans in process 19,087 4.19 16,966 4.41 12,865 3.77
Deferred loan fees, net 2,371 0.52 2,346 0.61 2,494 0.73
Allowance for loan losses 4,254 0.93 4,143 1.08 3,879 1.14
------- ----- ------- ----- ------- ------
Total loans, net 454,736 100.00 384,734 100.00 341,201 100.00
======= ====== ======= ====== ======= ======
Type of Security
Real estate mortgage
One-to-four family(2) 261,822 57.45 251,805 65.45 241,050 70.65
Multi-family 85,893 18.85 62,736 16.31 58,662 17.19
Commercial 49,066 10.77 31,746 8.25 25,250 7.40
Land loans 106 0.02 232 0.06 606 0.18
Other 84,561 18.55 61,670 16.03 34,871 10.22
------- ----- ------- ----- ------- ------
Total Loans 481,448 105.64 408,189 106.10 360,439 105.64
Less:
Loans in Process 19,087 4.19 16,966 4.41 12,865 3.77
Deferred loan fees, net 2,371 0.52 2,346 0.61 2,494 0.73
Allowance for loan losses 4,254 0.93 4,143 1.08 3,879 1.14
------- ----- ------- ----- ------- ------
Total loans, net 455,736 100.00 384,734 100.00 341,201 100.00
======= ====== ======= ====== ======= ======
</TABLE>
- -------------
(1) Includes construction loans converted to permanent loans, multi-family and
land loans.
(2) Includes home equity loans and HELOCs.
-5-
<PAGE>
At December 31, 2001, loans in process, attributed to construction loans,
totaled $28.2 million or 4.6% of total loans; deferred fees were $2.5 million or
.41%; and the allowance for loan losses was $6.3 million or 1.03% of loans.
Business Loans. Business loans increased from $113.7 million at June 30,
2001 to $125.3 million at December 31, 2001. Unsecured business loans totaled
$9.4 million at December 31, 2001. The Bank's business loan portfolio consists
primarily of commercial business loans to small and medium sized businesses
operating in Snohomish and King counties. These loans are secured primarily by
real estate, receivables, equipment, other assets of the business and personal
property, and the personal guarantee of the borrower. These loans typically have
variable-rate terms or fixed rates with maturities of up to five years. The Bank
also offers unsecured operating lines of credit. Business loans are underwritten
by the Bank on the basis of the borrower's cash flow and ability to service debt
from earnings, as well as the underlying collateral value. The borrower is
generally required to provide the Bank with financial statements, tax returns,
current financial information on any and all guarantors, and other reports that
show trends in their financial condition; and to update this information
annually. Business loans also include owner occupied real estate loans with
terms comparable to the Bank's income producing property loans. In addition, as
the business banking activity increases, the Bank expects to expand its lower
cost deposit franchise through the growth of commercial checking as a source of
funding.
Business loans are inherently sensitive to adverse conditions in the
economy. In the case of loans secured by accounts receivable, the availability
of funds for the repayment of such loans may be substantially dependent on the
ability of the borrower to collect amounts due from its customers. The
collateral securing other loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business.
Accordingly, the repayment of a business loan depends primarily on the
successful operation of the borrower's business and creditworthiness of the
borrower (and any guarantors), while liquidation of collateral is a secondary
and often insufficient source of repayment.
The robust growth of the Business loan portfolio in recent years means that
a portion of these loans are not well seasoned on Cascade's books. While most of
these borrowers are established businesses with successful track records, they
have not weathered an economic downturn as Cascade customers, and it is
uncertain how the current economic downturn will effect these loans.
Construction Loans. The Bank originates construction loans on one-to-four
family homes either to individual borrowers as custom construction loans or to
builders as speculative construction loans. Construction loans generally have
terms of 12-18 months. The interest rates charged on construction loans are
indexed to the prime rate and vary depending on the characteristics of the loan,
particularly the credit risk inherent in the project. All construction loans
require approval by various levels of Bank personnel, depending on the size of
the loan. The Bank has attempted to increase its construction loan portfolio
because these loans have relatively high margins, floating interest rates and
short-term maturities and because of the historically favorable housing market
in the Puget Sound area. At June 30, 2001 and December 31, 2001, the
Corporation's construction loans were $103.2 million (including $33.3 million of
loans in process) and $104.1 million (including $28.2 million of loans in
process) or 17.0% of the gross loan portfolio for each period. Of this amount,
$73.3 million was to builders, $11.4 million was to individuals for custom home
construction and $19.4 million represented acquisition and development loans.
The Bank's maximum outstanding commitment to one builder totaled $6.8 million
involving one construction project which is performing in accordance with the
terms of the loan.
Construction loans involve further credit risks because loan funds are
advanced upon the security of the project under construction that is of
uncertain value before completion. The Bank's risk of loss on a construction
loan is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction or development and the estimated
cost (including interest) of the construction. If the estimate of construction
costs proves to be inaccurate, the Bank may be required to advance additional
funds to complete the development. If upon completion of the project, the
estimate of the marketability of the property is inaccurate, the borrower may be
unable to sell the completed project in a timely manner or obtain adequate
proceeds to repay the loan. Delays may arise from labor problems, material
shortages and other unpredictable contingencies in completing the project.
Furthermore, if the estimate of value of a completed project is inaccurate, the
Bank may be confronted with a project with a value that is insufficient to
assure full repayment. As a result, these loans may involve the disbursement of
substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of the borrower or guarantor to repay
principal and interest.
-6-
<PAGE>
Commercial Real Estate Loans. Commercial real estate loans totaled $62.9
million or 10.3% of the Bank's loans at December 31, 2001. All commercial real
estate loans are secured by properties in western Washington, mainly in the
Puget Sound region. Improved property such as office buildings and small
commercial business properties such as strip shopping centers secure the Bank's
commercial real estate loans. These loans are primarily fixed rate with a
maximum reset on the interest rate of five years. At December 31, 2001, the
largest commercial real estate and land loan in the Bank's portfolio was $4.0
million, which was performing according to its terms at that date.
Multi-family Loans. Multi-family loans totaled $109.7 million or 17.9% of
loans at December 31, 2001. The multi-family portfolio is principally comprised
of small to medium-size apartment projects (generally $2.5 million in loan
amount or less) with loan-to-value ratios in the 70% to 80% range. All new loan
originations are in the Puget Sound region with adjustable rates.
Multi-family residential and commercial real estate lending affords the Bank
an opportunity to receive interest at rates higher than those generally
available from one-to-four family mortgage loans. However, loans secured by such
properties usually are greater in amount and may involve a greater degree of
risk than one-to-four family residential mortgage loans. Because payments on
loans secured by multi-family residential and commercial properties are often
dependent on the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real estate
market or the economy.
One-to-Four Family Residential Loans. At December 31, 2001 residential loans
totaled $152.7 million or 24.9% of loans. The Bank presently originates both
fixed rate and adjustable rate mortgage ("ARMs") loans secured by one-to-four
family properties with maturities of up to 30 years. Newly originated ARMs have
interest rates that adjust based on the One Year Constant Maturity Treasury
Index. Borrower demand for ARMs versus fixed-rate mortgage loans is a function
of the level of interest rates, the shape of the yield curve, and the
differences between the interest rates and loan fees offered for fixed-rate
mortgage loans and the rates and loan fees for ARMs.
Fixed rate residential loans are generally sold and the servicing released
to one of the Bank's correspondents. The loans are sold on a "best efforts"
basis. The Bank no longer packages its loans to sell as mortgage backed
securities. The Bank had $1.2 million in loans held for sale at December 31,
2001 and $1.4 million in loans held for sale at June 30, 2001. The Corporation
has implemented measures, including adoption of a practice under which the
Corporation generally originates long-term, fixed-rate mortgage loans only when
such loans are written to specifications promulgated by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association
("FNMA"), or the Federal Housing Administration and Veterans Administration
(collectively "FHA/VA"), and qualify for sale in the secondary market. ARM loans
are generally held in the Bank's portfolio. The Bank has greatly reduced its
emphasis on mortgage banking and mortgage lending in the past two years. These
balances are not material and therefore the Bank does not include them as a
separate line item on the balance sheet.
Residential lending consists primarily of conforming and nonconforming first
mortgage loans secured by single-family residential properties located
principally in Snohomish and King counties. The Bank's conforming residential
loans meet the Federal Home Loan Mortgage Corporation's underwriting standards
with respect to credit, debt ratios and documentation. The Bank's nonconforming
residential loans are those that do not conform to agency underwriting
guidelines, due to the size of the loan, as a result of credit histories,
debt-to-income ratios, reliance on the borrower's stated income, non-owner
occupied property, rural property, or other exceptions from agency guidelines.
The Bank's non-conforming loans may be made to lower credit grade borrowers. At
December 31, 2001, $39.2 million or 6.4% of the Bank's total outstanding loan
portfolio and 25.7% of the Bank's one-to-four family residential loan portfolio
consisted of nonconforming one-to-four family residential loans. In exchange for
the additional risk associated with nonconforming loans, borrowers generally are
required to pay a higher interest rate and receive a lower maximum loan-to-value
ratio than for a conforming loan borrower.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on fixed-rate and adjustable-rate residential one-to-four family owner occupied
loans to 80% or less, of the lesser of the appraised value or purchase price of
the underlying residential property. Non-owner occupied one-to-four family
residential loans are generally limited to 75% or less, of the lesser of the
appraised value or purchase price of the underlying residential property. The
loan-to-value ratio, maturity and other provisions of the loans made by the Bank
are generally reflected in the policy of making less than the maximum loan
permissible under federal regulations, according to established lending
practices, market conditions and
-7-
<PAGE>
underwriting standards maintained by the Bank. Generally, all residential loans
originated with a loan-to-value ratio above 80% have private mortgage insurance
in an amount sufficient to reduce the Corporation's exposure to 75% or below. At
December 31, 2001, residential loans on non-accrual equaled $762,000, which
represents eight single family residential loans.
Consumer Loans. The Bank's consumer loan activities take two forms: home
equity loans or lines of credit; and installment loans. Home equity loans are
secured by a junior lien in priority on the borrower's home. Such loans may have
a combined loan-to-value ratio of up to 90% of the value of the home securing
the loan. Home equity loans are fixed amount loans which may have fixed or
floating interest rates. Home equity lines of credit can be drawn upon at any
time by the customer up to a specific amount. All these loans are at a floating
rate. The balance outstanding for both types of home equity loans decreased
slightly to $41.6 million at December 31, 2001 as compared to $42.1 million at
June 31, 2001. At December 31, 2001 and June 31, 2001, the total amount of
unused lines of credit were $40.2 million and $24.4 million, respectively. The
second type of consumer loans are installment loans in which boats, automobiles,
and recreational vehicles serve as collateral.
This portfolio was $16.8 million at December 31, 2001 as compared to $18.3
million outstanding at June 30, 2001. Although boat loans total $12.3 million of
the Corporation's installment loans at December 31, 2001, the Corporation has
significantly decreased its origination of boat loans and expects this amount to
decline further in the future. Installment loans are secured by depreciating
assets such as automobiles or boats. Therefore, any repossessed collateral for a
defaulted installment loan may not provide an adequate source of repayment of
the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrower's continuing financial ability, and thus, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various Federal and state laws, including
Federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans.
Loan Maturity and Repricing
The following table sets forth information at December 31, 2001, regarding
the dollar amount of Business and Construction loans maturing in the
Corporation's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include deferred
loan fees. Construction loans are net of loans in process.
<TABLE>
<CAPTION>
With With
variable fixed rate
rate (for rate (for
maturities maturities
Due in one Due in one Due after of more of more
year or to five five than one than one
less years years Total year) year)
---------- ---------- --------- -------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Construction Loans $61,568 $14,364 -- $75,932 $13,772 $592
Business Loans $44,660 $64,571 $16,111 $125,342 $22,042 $58,640
</TABLE>
Asset Quality
Banking regulations require that each insured institution review and
classify its assets regularly. In addition, in connection with examinations of
insured institutions, bank examiners have authority to identify problem assets
and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets must have one or more defined weaknesses and are characterized by the
distinct possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or payment in full, based on currently existing facts, conditions and
values, questionable, and there is a high possibility of loss. An asset
classified loss is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset, or
-8-
<PAGE>
portion thereof, is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss or charge off such amounts.
Cascade established the Credit Administration Division in 2001 to assure
that the Bank maintains the quality of its loan portfolio. Management has
comprehensive monthly and quarterly review procedures for identifying and
classifying assets for weaknesses. Reserves are maintained for assets classified
as substandard or doubtful. The objective of these review procedures is to
identify any trends and determine the levels of loss exposure to evaluate the
need for an adjustment to the reserve accounts.
Delinquencies. A report containing delinquencies of all loans is reviewed
monthly by the Asset Review Committee and periodically by the Board of
Directors. Procedures taken with respect to delinquent loans differ depending on
the particular circumstances of the loan. The Bank's general procedures provide
that when a loan becomes delinquent, the borrower is contacted, usually by
phone, within 15 to 30 days. When the loan is over 30 days delinquent, the
borrower is contacted in writing. Typically, the Bank will initiate foreclosure
action against the borrower when principal and interest become 90 days or more
delinquent. In any event, interest income is reduced by the full amount of
accrued and uncollected interest on loans once they become 90 days delinquent,
go into foreclosure or are otherwise determined to be uncollectible. Once
interest has been paid to date or management considers the loan fully
collectable, it is returned to accrual status. An allowance for loss is
established when, in the opinion of management, the fair value less sales costs
of the property collateralizing the loan is less than the outstanding principal
and the collectibility of the loan's principal becomes uncertain. It is intended
that the Bank's allowance for loan losses be adequate to cover known potential
and reasonably estimated unknown losses. At December 31, 2001 and June 30, 2001,
the Bank had $2.0 million and $1.3 million, respectively, of loans accounted for
on a nonaccrual basis (i.e., loans upon which management believes the future
collectibility of interest is uncertain).
Allowance for Loan Losses/Non-Performing Assets
Management provides for possible loan losses by maintaining an allowance.
The level of the allowance is determined based upon judgments regarding the size
and nature of the loan portfolio, historical loss experience, the financial
condition of borrowers, the level of nonperforming loans, and anticipated
general economic conditions. Additions to the allowance are charged to expense.
Loans are charged against the allowance when management believes the collection
of principal is unlikely.
During 2001, the economy in the Corporation's market area began to
experience its first recession in a decade. The recession's impact on the
Corporation's loan portfolio is less than certain in that this is the first
economic downturn the Corporation has faced when a significant portion of its
loans were made to small businesses. As Cascade Bank has evolved from a thrift
into a commercial bank, the inherent risk in its loan portfolio has increased,
resulting in the trend of increasing the allowance for loan losses. Also
impacting the allowance for loan losses has been the slowing of the economy in
the Corporation's market area.
The allowance for loan losses reflects management's best estimate of
probable losses that have been incurred at the balance sheet date. The allowance
for loan losses is maintained at a level considered adequate by management to
provide for loan losses inherent in the loan portfolio based on management's
assessment of various factors affecting the loan portfolio, including local
economic conditions and growth of the loan portfolio and its composition. Net
charge-offs during these periods have been less than experienced by peer banks.
Increases in the allowance for loan losses made through provisions were
primarily a result of business loan growth, an increase in non-performing
commercial loans, awareness of the greater risk inherent in business lending and
the impact of the deteriorating economic climate on the loan portfolio.
Management determines the amount of the allowance for loan losses by
utilizing a loan grading system to determine risk in the loan portfolio and by
considering the results of credit reviews. The loan portfolio is separated by
quality and then by loan type. Loans of acceptable quality are evaluated as a
group, by loan type, with a loss rate assigned to the total loans in each type,
but unallocated to any individual loan. Conversely, each adversely classified
loan is individually analyzed, to determine an estimated loss amount. A
valuation allowance is also assigned to these adversely classified loans, but at
a higher loss rate due to the greater risk of loss. Past due and impaired loans
are actively managed to minimize the potential loss of principal.
-9-
<PAGE>
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component in most years. The unallocated portion includes
management's judgmental determination of the amounts necessary for qualitative
factors such as the consideration of new products and policies, economic
conditions, concentrations of credit risk, and the experience and abilities of
lending personnel. Loan concentrations, quality, terms, and basic underlying
assumptions remained substantially unchanged during the period.
The following table presents information with respect to the Corporation's
non-performing assets and restructured loans at the dates indicated.
<TABLE>
<CAPTION>
12/31/2001 6/30/2001 6/30/2000 6/30/1999 6/30/1998 6/30/1997
---------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans:
Commercial loans:
Commercial $1,038 166 226 338 199 152
Commercial real estate -- -- -- -- -- --
------ ------ ------ ------ ------ ------
1,038 166 226 338 199 152
Residential 762 1,112 221 618 971 759
Real estate construction and Land -- -- -- -- -- --
Consumer loans 198 37 126 245 751 --
------ ------ ------ ------ ------ ------
Total non-performing loans 1,998 1,315 573 1,201 1,921 911
Other real estate 430 787 528 -- 74 750
------ ------ ------ ------ ------ ------
Total non-performing assets $2,428 2,102 1,101 1,201 1,995 1,661
====== ===== ===== ===== ===== =====
Restructured loans -- -- -- -- -- --
Total non-performing loans to net loans .35% .23 .11 .26 .50 .27
Total non-performing loans to total assets .26 .18 .08 .22 .43 .21
Total non-performing assets to total assets .32 .29 .16 .22 .45 .38
</TABLE>
The Corporation's non-performing assets at December 31, 2001, consisting of
non-performing loans and other real estate, totaled $2.4 million or .32 percent
of total assets. This is an increase from $2.1 million or .29 percent of total
assets at June 30, 2001, and an increase from $1.1 million or .16 percent of
total assets at June 30, 2000.
Loans are generally placed on non-accrual when they become past due over 90
days, or 120 days if they are single-family mortgage loans, or when the
collection of interest or principal is considered unlikely. Loans past due over
90 or 120 days that are not on non-accrual status must be well secured by
tangible collateral and in the process of collection. The Bank does not return a
loan to accrual status until it is brought current with respect to both
principal and interest and future principal and interest payments are no longer
in doubt.
Non-performing loans increased to $2.0 million at December 31, 2001 compared
to $1.3 million at June 30, 2001, and $573,000 at June 30, 2000. The increase in
non-performing loans from June 30, 2001 to December 31, 2001 is due to an
increase in non-performing commercial loans which increased from $166,000 to
$1,038,000 during that six-month period. The increase in non-performing loans
from June 30, 2000 to June 30, 2001 was due primarily to an increase in
residential non-performing loans. Management believes that the allowance for
losses on loans is adequate to provide for losses that may be incurred on
non-performing loans.
Other real estate owned includes property acquired by the Bank through
foreclosure and real estate held for development. Other real estate is carried
at the lower of the estimated fair value or the principal balance of the
foreclosed loans. The real estate held for development portfolio primarily
consists of one land development project. Non-performing other real estate was
$430,000 at December 31, 2001, a decrease from $787,000 at June 30, 2001, and a
decrease from $528,000 at June 30, 2000.
-10-
<PAGE>
At December 31, 2001, in addition to the loans categorized as non-performing
and listed above, the Bank had $6.7 million in potential problem loans,
representing 1.1% of total loans. These loans have potential weaknesses which
may result in deterioration of the repayment prospects at some future date.
These loans are subject to constant management attention.
The level of non-performing loans relative to net loans has increased since
the year ended June 30, 2000. This trend may continue as the Corporation expands
its commercial lending activities. Interest income that would have been
recognized for the six month period ending December 31, 2001, and for the fiscal
years ended June 30, 2001, 2000 and 1999, had non-accrual loans been current in
accordance with their contractual terms amounted to $87,000, $74,000, $32,000
and $86,000, respectively.
The following tables set forth information regarding changes in the
Corporation's allowance for loan losses for the most recent five years (dollars
in thousands).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
12/31/01 12/31/00
-------- --------
(Unaudited)
<S> <C> <C>
Balance at beginning of period $ 5,687 5,004
Charge-offs:
Business 138 48
Commercial Real Estate -- --
Single-Family Residence 42 5
Multi-Family -- --
Real Estate Construction -- --
Consumer and other 26 48
Recoveries: 13 19
Net charge-offs: 193 82
Provision for loan losses 810 420
-------- -----
Balance at end of period 6,304 5,342
Average loans outstanding $580,221 552,512
Ratio of net charge-offs during the
period to average loans outstanding .03 .015
Ratio of allowance for loan losses to
average loans outstanding 1.09 .97
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------
6/30/01 6/30/00 6/30/99 6/30/98 6/30/97
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 5,004 4,254 4,143 3,879 3,336
Charge-offs:
Business 46 53 49 29 178
Commercial Real Estate 2 -- -- -- --
Single-Family Residence 166 16 7 -- 59
Multi-Family -- -- -- -- --
Real Estate Construction -- -- -- -- --
Consumer and other 115 77 267 16 35
Recoveries: 32 126 7 63 5
Net charge-offs (recoveries): 297 20 316 (18) 267
Provision for loan losses 980 770 427 246 810
-------- ------- ------- ------- -------
Balance at end of period 5,687 5,004 4,254 4,143 3,879
======== ======= ======= ======= =======
Average loans outstanding $560,013 517,405 418,207 362,842 307,302
Ratio of net charge-offs during the
period to average loans outstanding .05 -- .08 .01 .09
Ratio of allowance for loan losses to
average loans outstanding 1.02 .97 1.02 1.14 1.26
</TABLE>
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries), and established through a
provision for credit losses charged to expense. Loans are charged against the
allowance for credit losses when management believes that the collectibility of
the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb losses inherent in existing loans, commitments to
extend credit and standby letters of credit based on evaluations of
collectibility, and prior loss experience of loans. The evaluations take into
consideration such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, loan concentrations,
-11-
<PAGE>
specific problem loans, commitments, standby letters of credit, and current
economic conditions that may affect the borrowers' ability to pay.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
Certain loans meet the criteria of troubled debt restructuring as defined in
Statement of Financial Accounting Standards ("SFAS") No. 114 and No. 118,
"Accounting by Creditors for Impairment of a Loan," and "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures," respectively. The
Bank has had no restructured loans during the last five year period.
The following tables set forth information concerning the Company's
allocation of the allowance for loan losses and the percentage of loans by
category at the dates indicated (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
2001
-------------------
Amount %*
------ -----
<S> <C> <C>
Balance at beginning of period
Business $2,927 21.4
Commercial Real Estate 220 10.7
Single-Family
Residential 861 26.1
Multi-Family 442 18.8
Real Estate
Construction 887 13.0
Consumer and Other 356 10.0
Unallocated 611 --
------ -----
Total allowance for loan losses $6,304 100.0%
======
</TABLE>
<TABLE>
<CAPTION>
6/30/01 6/30/00 6/30/99 6/30/98 6/30/97
---------------- ---------------- --------------- --------------- ---------------
Amount %* Amount %* Amount %* Amount %* Amount %*
------ ---- ------ ---- ------ ---- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period
Business $2,203 19.9 1,886 15.8 740 13.3 625 10.6 500 7.1
Commercial Real Estate 569 9.9 544 9.9 1,160 10.6 1,060 8.1 910 7.2
Single-Family Residential 1,097 28.8 1,019 32.1 961 38.5 525 45.0 540 53.8
Multi-Family 672 18.7 619 20.6 460 18.6 630 16.0 590 16.9
Real Estate Construction 771 12.2 569 10.3 450 7.7 857 7.9 551 5.9
Consumer and Other 295 10.5 367 11.3 370 11.3 400 12.4 310 9.1
Unallocated 80 -- -- -- 113 -- 46 -- 478 --
------ ---- ----- ---- ----- ---- ----- ---- ----- ---
Total allowance for loan losses $5,687 5,004 4,254 4,143 3,879
====== ===== ===== ===== =====
</TABLE>
* Percent of loans in each category to total loans.
Provisions for loan losses in the fiscal years ended June 30, 2001, 2000 and
1999 were $980,000, $770,000, and $427,000 respectively. The provision for loan
losses was $810,000 for the six month period ended December 31, 2001, and
$420,000 for the six months ended December 31, 2000. The increase in the
provision for loan losses for the six month period ended December 31, 2001 was
due to the increase in adversely classified loans (which includes the
substandard and doubtful categories) under the Bank's loan classification
system. In conjunction with the newly established Credit Administration Division
which resulted in a refined approach to loan grading, adversely classified loans
increased to $16.6 million at December 31, 2001 from $5.7 million at June 30,
2001. Further, the deterioration in the credit quality of loans to three of the
Bank's borrowers - two are business loans and one is real estate related-
impacted the provision for loan losses. The Bank has established $455,000 of
specific reserves against a total indebtedness of $1.495 million, $547,000 of
which is guaranteed by the Small Business Administration, leaving a $948,000
exposure on which the Bank is reliant on the value of the collateral.
-12-
<PAGE>
ASSET AND LIABILITY MANAGEMENT ACTIVITIES
The Bank uses a variety of tools to measure, monitor, and manage interest
rate risk. The Board of Directors reviews the interest rate risk management
activities of the Bank on a regular basis and has established policies on the
amount of risk deemed appropriate. The Bank's primary rate risk management tool
is a simulation model. The Bank's net interest income and the value of its
capital are measured under different interest rate scenarios. To limit its
interest rate risk, the Bank has focused on originating more interest rate
sensitive assets, such as prime based loans, while reducing its long-term, fixed
rate assets through selling long term residential mortgages in the secondary
market. The vast majority of the loans that the Bank keeps in its portfolio have
repricing periods of five years or less. The Bank often uses FHLB advances to
fund its intermediate term assets. Cascade uses reverse repurchase agreements to
provide inexpensive short term funding. These agreements are generally for three
months or less and provide the Bank with liabilities that reprice relatively
quickly, which helps match the repricing characteristics of our prime based
loans.
While the Bank does not have any outstanding interest rate exchange
agreements or other derivatives, it has used interest rate swaps, caps and
floors in the past to control the amount of its interest rate risk. At December
31, 2001 and June 30, 2001, the Corporation had no caps, floors or swaps
outstanding.
The balance sheets and the section of Management's Discussion and Analysis
titled "Average Balances and an Analysis of Average Rates Earned and Paid"
contained in the Annual Report are incorporated herein by reference.
-13-
<PAGE>
Rate/Volume Analysis. The following table sets forth the effects of changing
rates and volumes on net interest income of the Bank. Information is provided
with respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------------
December 31, 2001 Compared to
Six months ended December 31, 2000
(unaudited)
Increase (Decrease) Due to
-------------------------------------------
Rate/
Rate Volume Volume Net
------- ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets
Mortgage loans(1) $(1,335) 267 528 (540)
Consumer loans(1) (428) (347) 401 (374)
Business loans(1) (1,443) 2,725 (865) 417
------- ----- ---- ----
Total loans (3,206) 2,645 64 (497)
Mortgage-backed securities (66) (823) 458 (431)
Securities (1,128) 1,612 (391) 93
Daily interest-earning
deposits/FHLB Stock (196) 319 (93) 30
Total net change in income on
Interest-earning assets (4,596) 3,753 38 (805)
======= ===== ==== ====
Interest-bearing liabilities
Interest-bearing deposits (5,172) 320 2,386 (2,466)
FHLB advances (446) 973 (280) 247
Other borrowings (1,143) 442 273 (428)
------- ----- ---- ----
Total net change in expenses on
interest-bearing liabilities $(6,761) 1,735 2,379 (2,647)
======= ===== ==== ====
Net increase in net interest
income $ 1,842
====
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------
2001 Compared to Year 2000 Compared to Year
Ended June 30, 2000 Ended June 30, 1999
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ----------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
----- ----- ------ ----- ---- ------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Mortgage loans(1) 755 1,247 31 2,033 301 5,042 59 5,402
Consumer loans(1) 243 488 25 756 (229) 735 (39) 467
Business loans(1) (32) 1,994 (9) 1,953 (95) 2,685 (55) 2,535
----- ----- ---- ----- ---- ------ --- -----
Total loans 966 3,729 47 4,742 (23) 8,462 (35) 8,404
Mortgage-backed securities 45 (104) (2) (61) 99 (2) -- 97
Securities 90 2,889 179 3,158 64 1,597 115 1,776
Daily interest-earning
deposits/FHLB Stock (140) 593 (185) 268 47 50 3 100
Total net change in income on
Interest-earning assets 961 7,107 39 8,107 187 10,107 83 10,377
===== ===== ==== ===== ==== ====== === ======
Interest-bearing liabilities
Interest-bearing deposits 822 (497) (21) 304 257 3,071 48 3,376
FHLB advances 923 3,475 352 4,750 513 3,008 292 3,813
Other borrowings (71) 2,482 (184) 2,227 173 313 216 702
----- ----- ---- ----- ---- ------ --- -----
Total net change in expenses on
interest-bearing liabilities 1,674 5,460 147 7,281 943 6,392 556 7,891
===== ===== ==== ===== ==== ====== === ======
Net increase in net interest
income 826 2,486
===== ======
</TABLE>
(1) Does not include interest on loans 90 days or more past due.
INVESTMENT PORTFOLIO
The Board of Directors sets the investment policy of the Bank. This policy
dictates that investments will generally be made with the intent of holding them
available-for-sale and will be made based on the safety of the principal amount,
interest rate risk, liquidity requirements of the Bank as well as the return on
the investment. The Bank's policy does not permit the purchase of non-investment
grade bonds. The policy permits the investment in various types of assets
permissible under FDIC regulation including: United States Treasury obligations;
securities of certain government sponsored enterprises, mortgage-backed
securities ("MBS"), collateralized mortgage obligations ("CMOs"), state and
municipal government bonds, deposits at the FHLB-Seattle, certificates of
deposit of federally insured institutions, certain bankers' acceptances and
Federal funds. Subject to various restrictions, the Bank may also invest part of
its assets in commercial paper, corporate debt securities and mutual funds, if
those assets conform to FDIC regulations.
Investment securities increased to $156.3 million at December 31, 2001 from
$135.8 million at June 30, 2001, a 15% increase, and from $104.3 million at June
30, 2000. The investment portfolio represented 21% of total assets at December
31, 2001 compared to 19% at June 30, 2001. All investment securities, except
other securities, are AAA rated. Agency MBS (including CMOs) held for investment
decreased from $76.8 million to $56.5 million for the six months ended December
31, 2001. However, agency notes increased from $35.5 million to $76.7 million
for the same period.
Investment securities increased to $156.3 million at December 31, 2001 from
$128.9 million at December 31, 2000, a 21% increase. During the year, an
increased emphasis was placed on Agency Notes as the Corporation sought
-14-
<PAGE>
to capture additional income by obtaining a higher coupon in return for giving
the issuer the option to call the security before its stated maturity.
The following tables set forth the Bank's securities available for sale at
the dates indicated.
<TABLE>
December 31, 2001 June 30, 2001 June 30, 2000 June 30, 1999
--------------------- --------------------- ------------------------- --------------------------
Estimated Estimated Estimated Estimated
Fair Percent of Fair Percent of Fair Percent of Fair Percent of
(Dollars in thousands) Value Portfolio Value Portfolio Value Portfolio Value Portfolio
-------- --------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Agency MBS .............. $ 56,511 37.6% 76,832 59.4 45,442 48.6 29,677 40.8
Agency Notes ............ 76,699 51.0 35,492 27.5 34,940 37.4 35,696 49.1
FHLB stock .............. 13,119 8.7 12,668 9.8 10,945 11.7 7,346 10.1
Other securities ........ 4,009 2.7 4,221 3.3 2,117 2.3 --
-------- ------- ------ ------
Total ................... $150,338 129,213 93,444 72,719
======== ======= ====== ======
</TABLE>
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities available for sale at December
31, 2001. Securities with no stated maturity dates are reported as due within
one year.
<TABLE>
<CAPTION>
One to Five Five to Ten
Less Than Year Years Years Over Ten Years
---------------- ------------- --------------------- ------------------------
Estimated Estimated Estimated Estimated
Fair Fair Fair Fair
(Dollars in thousands) Value Yield Value Yield Value Yield Value Yield
--------- ----- ------- ----- --------- -------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Agency MBS ..... $ -- --% -- -- 1,796 7.00 54,715 6.36
Agency Notes ... 80 3.0 -- -- 44,121 6.26 32,498 6.44
FHLB stock ..... 13,119 7.0 -- -- -- -- -- --
Other securities -- -- -- -- -- -- 4,009 9.44
------- -- ------ ------
Total .......... $13,199 -- 45,917 91,222
======= ====== ======
</TABLE>
The following table sets forth amortized cost and estimated fair values for
Cascade's securities held to maturity at the dates indicated.
<TABLE>
<CAPTION>
December 31, 2001 June 30, 2001
-------------------------------- -------------------------------
Amortized Fair Percent of Amortized Fair Percent of
(Dollars in thousands) Cost Value Portfolio Cost Value Portfolio
--------- ----- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Agency MBS $ 5,989 5,883 100% 6,592 6,456 100%
======= ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
-------------------------------- -------------------------------
Amortized Fair Percent of Amortized Fair Percent of
(Dollars in thousands) Cost Value Portfolio Cost Value Portfolio
--------- ----- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Agency MBS $ 7,851 7,246 71% 1,738 1,699 100
Other...................... 3,000 3,032 29 -- -- --
------- -------- -------- --------
Total...................... $10,851 10,278 1,738 1,699
======= ====== ===== =====
</TABLE>
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities held to maturity at December 31,
2001. Securities with no stated maturity dates are reported as due within one
year.
<TABLE>
<CAPTION>
One to Five Five to Ten
Less Than Year Years Years Over Ten Years
---------------- ------------- --------------------- ------------------------
Estimated Estimated Estimated Estimated
Fair Fair Fair Fair
(Dollars in thousands) Value Yield Value Yield Value Yield Value Yield
--------- ----- ------- ----- --------- -------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Agency MBS........... $ -- --% -- -- -- -- 5,883 6.01
</TABLE>
For further information concerning the Corporation's securities portfolio,
see Note 2 of the Notes to the Consolidated Financial Statements contained in
the Annual Report listed in Item 14.
-15-
<PAGE>
DEPOSITS
The Bank's primary source of funds is customer deposits. In addition to
checking accounts, the Bank offers a variety of interest-bearing accounts
designed to attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank management
based on competitive market factors and the Bank's need for funds. The Bank
traditionally has not purchased brokered deposits and does not intend to do so
in the future.
Deposits increased to $420.0 million at December 31, 2001 from $401.9
million at June 30, 2001, an increase of 5% during this period. Deposits at June
30, 2000 were $398.5 million. The market for retail deposits remains fiercely
competitive. Previously, the Bank paid rates at the higher end of the
competitive range of financial institutions in its market area. In an attempt to
lower the absolute and relative cost of funds, the Bank modified its deposit
pricing strategy by pricing its deposits in the middle of that range.
The following table sets forth the average balances for each major category
of deposit and the weighted average interest rate paid for deposits during the
six months ended December 31, 2001 and for each of the five years ended, June
30, 2001, June 30, 2000, June 30, 1999, June 30, 1998 and June 30, 1997 (dollars
in thousands).
<TABLE>
<CAPTION>
AVERAGE DEPOSITS BY TYPE
12/31/01 6/30/01 6/30/00 6/30/99 6/30/98 6/30/97
--------------- -----------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand deposits $ 23,028 -- 22,072 -- 22,089 -- 18,100 -- 15,347 -- 12,466 --
Interest-bearing
demand deposits 22,051 1.23% 21,783 1.81 18,408 2.11 18,540 2.21 15,185 2.34 16,211 2.29
Money market deposits 94,384 2.98 96,491 4.49 119,219 5.00 69,426 4.66 51,750 4.58 43,071 4.65
Savings 11,073 1.96 10,915 2.83 11,446 3.07 12,781 3.06 14,529 3.14 15,946 3.28
Time certificates 254,836 5.01 242,501 6.22 232,192 5.64 220,921 5.61 205,763 5.84 202,810 5.78
-------- ------- ------- ------- ------- -------
$405,372 393,762 403,354 339,768 302,574 290,504
======== ======= ======= ======= ======= =======
</TABLE>
The following table indicates the amount of the Bank's jumbo certificates of
deposit by time remaining until maturity at December 31, 2001. Jumbo
certificates of deposit require minimum deposits of $100,000 and other time
deposits and rates paid on such accounts are negotiable.
<TABLE>
<CAPTION>
Jumbo Certificates of Deposit
Maturity Period and Other Time Deposits
-------------------------------- -----------------------------
(Dollars in thousands)
<S> <C>
Three months or less $ 35,523
Over three through six months 51,551
Over six through twelve months 32,775
Over twelve months 9,662
--------
Total $129,511
========
</TABLE>
The flow of deposits is influenced significantly by general economic
conditions, changes in the money market and prevailing interest rates. In
addition, there is strong competition for customer dollars from other financial
institutions, mutual funds and non-bank corporations, such as securities
brokerage companies and other diversified companies. The Bank's deposits are
obtained primarily from the areas in which its branches are located. The Bank
relies primarily on customer service and longstanding relationships with
customers to attract and retain these deposits. In the coming year, the Bank
will focus on its deposit gathering activities, and management expects a
significant portion of its deposit growth for fiscal 2002 will occur in its
business deposit products. In the event the Bank were liquidated, certain
depositors would be entitled to full payment of their deposit accounts prior to
any payment being made to the shareholders.
RETURN ON EQUITY AND ASSETS
The section entitled "Selected Financial Data" of the Annual Report listed
in Item 14 is incorporated herein by reference.
-16-
<PAGE>
BORROWINGS
The Bank relies upon advances from the FHLB-Seattle to supplement its supply
of funds and to meet deposit withdrawal requirements. Advances from the
FHLB-Seattle are typically secured by the Bank's first mortgage residential
loans and eligible investment securities. FHLB advances were $226.5 million at
December 31, 2001, compared to $232.1 million at June 30, 2001, a 2% decrease.
FHLB advances were $215.7 million at June 30, 2000.
The FHLB provides credit for member financial institutions. As members,
financial institutions are required to own capital stock in the FHLB, and are
authorized to apply for advances on the security of such stock, certain home
mortgages, and government and agency securities (typically securities that are
obligations of, or guaranteed by, the United States). Advances are made to
member financial institutions pursuant to several different programs. These
programs are generally designed to meet the financial institution's needs while
still reflecting market terms and conditions. The Bank uses advances from the
FHLB to supplement funds available to lend and to meet liquidity guidelines.
Interest rates on these advances vary in response to capital market conditions.
The Bank enters into reverse repurchase agreements with nationally
recognized banks. Reverse repurchase agreements are accounted for as borrowings
by the Bank and are secured by designated investments, primarily the notes of
federal agencies and mortgage-backed securities guaranteed by those agencies.
The proceeds of these transactions are used to meet the cash flow and interest
rate risk management needs of the Bank.
Repurchase agreements increased to $49.8 million at December 31, 2001 from
$36.9 million at June 30, 2001. Repurchase agreements, with notes of Government
Sponsored Enterprises and/or mortgage-backed securities pledged as collateral,
are employed as short term funding vehicles that provide liabilities with
interest rate sensitivity more closely aligned to prime based loans than the
Bank's deposit base.
Cascade Bank has established Fed funds borrowing lines with two of its
correspondent banks. During the six month period ending December 31, 2001,
neither line was used.
The following table sets forth certain information regarding borrowings by
the Corporation at the end of, and during, the periods indicated.
<TABLE>
<CAPTION>
At or for the six
months ended At or for the year ended June 30,
December 31, -----------------------------------
2001 2001 2000 1999
----------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Weighted average rate paid on:
Securities sold under agreements to repurchase 2.16% 4.02 6.46 4.85
FHLB advances 5.79 6.07 6.21 5.01
Maximum amount of borrowings outstanding at
any month end:
Securities sold under agreements to repurchase $ 49,792 54,237 21,696 11,976
FHLB advances 235,322 236,712 215,656 141,996
Approximate average borrowings outstanding
with respect to:
Securities sold under agreements to repurchase $ 38,264 34,231 9,082 5,571
FHLB advances 229,314 221,075 165,524 102,045
Approximate weighted average rate paid on:
Other interest-bearing liabilities* 4.93% 7.05 7.60 4.51
FHLB advances 6.14 6.25 5.68 5.17
</TABLE>
* including Trust Preferred Securities
-17-
<PAGE>
Trust Preferred Securities. On March 1, 2000 Cascade Capital Trust I issued
$10 million par value Trust Preferred Securities. These securities are
considered Tier I capital for the purposes of regulatory capital requirements.
Cascade Capital Trust I, a wholly owned subsidiary of the Corporation, is a
statutory business trust created for the exclusive purposes of issuing and
selling capital securities and utilizing sale proceeds to acquire junior
subordinated debt issued by Cascade Financial Corporation. Accordingly, the
junior subordinated debentures are the sole assets of the Trust, and payments
under the junior subordinated debentures will be the sole revenues of the Trust.
All of the common securities of the Trust are owned by Cascade Financial
Corporation. The Corporation is using the proceeds for general corporate
purposes including stock repurchases and investment in its subsidiary bank. The
Corporation has fully and unconditionally guaranteed the Capital Securities
along with all obligations of Cascade Capital Trust I under the trust
agreements. The Trust preferred securities are included with borrowings as a
separate line item in the consolidated balance sheet and distributions payable
are treated as interest expense in the consolidated statement of operations.
Subsidiary Activity
The Corporation has two subsidiaries: Cascade Bank and Cascade Capital
Trust. The activities of the Corporation are primarily conducted through the
Bank. Accordingly, this Form 10-K principally discusses the Bank's operations.
Cascade Capital Trust I was formed for the exclusive purpose of issuing
Trust Preferred Securities and common securities and using the proceeds to
acquire junior subordinated debentures issued by the Corporation. The junior
subordinated debentures total $10.3 million, have an interest rate of 11.00%,
mature on March 1, 2030 and are the sole assets of Cascade Capital Trust I. The
junior subordinated debentures are prepayable, in whole or in part, at the
Corporation's option on or after March 1, 2010 at declining premiums to
maturity. Proceeds totaling approximately $9.23 million from the issuance of the
junior subordinated debentures were used to increase the capital level of the
Bank.
Real Estate Development
At December 31, 2001, the Bank owned a five-acre parcel which had the
potential of being developed into twenty lots. The property, which was sold in
the first quarter of 2002, was carried at $572,000.
Personnel
At December 31, 2001, the Corporation had 147 full-time equivalent
employees. The Corporation believes that employees play a vital role in the
success of a service company and that the Corporation's relationship with its
employees is good. The employees are not represented by a collective bargaining
unit.
REGULATION
Introduction/General
The following generally refers to certain statutes and regulations affecting
the Corporation and the Bank. This provides only a brief summary of the
regulations impacting the Corporation and is not complete. This discussion is
qualified in its entirety by the statutes and regulations. In addition, some
statutes and regulations exist which impact the Corporation which are not
referenced below.
The Corporation is subject to extensive regulation, supervision and
examination. Such regulation and supervision govern the activities in which the
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities, which are intended to strengthen the financial condition of the
banking industry, including the imposition of restrictions on the operation of
an institution, the classification of assets by the institution and the adequacy
of an institution's allowance for loan losses. Any change in such regulation and
oversight could have an adverse material impact on the Corporation, Cascade and
their respective operations.
-18-
<PAGE>
The Corporation
The Corporation is a bank holding company that has elected to be treated as
a financial holding company with the Board of Governors of the Federal Reserve
Board (the "FRB"). The Bank Holding Company Act of 1956, as amended ("BHCA")
subjects the Corporation and its subsidiaries to supervision and examination by
the FRB. The Corporation files annual reports of operations with the FRB.
Bank Holding Company Regulation. In general, the BHCA limits bank holding
company business to owning or controlling banks and engaging in other
banking-related activities. Bank holding companies must obtain the FRB's
approval before they: (1) acquire direct or indirect ownership or control of any
voting shares of any bank that results in total ownership or control, directly
or indirectly, of more than 5 percent of the voting shares of such bank; (2)
merge or consolidate with another bank holding company; or (3) acquire
substantially all of the assets of any additional banks. Subject to certain
state laws, such as age and contingency restrictions, a bank holding company
that is adequately capitalized and adequately managed may acquire the assets of
both in-state and out-of-state banks. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company that is not a bank or a bank holding
company unless the FRB determines that the activities of such company are
incidental or closely related to the business of banking. If a bank holding
company is well-capitalized and meets certain criteria specified by the FRB, it
may engage de novo in certain permissible nonbanking activities without prior
FRB approval.
The Change in Bank Control Act of 1978, as amended, requires a person (or
group of persons acting in concert) acquiring "control" of a bank holding
company to provide the FRB with 60 days' prior written notice of the proposed
acquisition. Following receipt of this notice, the FRB has 60 days within which
to issue a notice disapproving the proposed acquisition, but the FRB may extend
this time period for up to another 30 days. An acquisition may be completed
before expiration of the disapproval period if the FRB issues written notice of
its intent not to disapprove the transaction. In addition, any "company" must
obtain the FRB's approval before acquiring 25% (5% if the "company" is a bank
holding company) or more of the outstanding shares or otherwise obtaining
control over the Corporation.
Financial Holding Company Election/Affiliations. In 2001, the Corporation
elected to be treated as a financial holding company with the FRB, as permitted
under the Gramm-Leach-Bliley Financial Services Modernization Act (the "GLB").
This election allows the Corporation to conduct activities that previously were
unavailable to bank holding companies, provided that notice requirements are
generally required before engaging in any such activities.
The primary purpose of the GLB is to establish a framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the legislation (i) repeals the
historical restrictions on preventing banks from affiliating with securities
firms, (ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (iii) broadens the activities that may
be conducted by national banks and banking subsidiaries of bank holding
companies, (iv) provides an enhanced framework for protecting the privacy of
consumers' information and (v) addresses a variety of other legal and regulatory
issues affecting both day-to-day operations and long-term activities of
financial institutions. The GLB permits bank holding companies to engage in a
wider variety of financial activities than permitted under previous law,
particularly with respect to insurance and securities activities. In addition,
in a change from previous law, bank holding companies are in a position to be
owned, controlled or acquired by any company engaged in financially related
activities, so long as such company meets certain regulatory requirements. To
the extent the legislation permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This consolidation could result in a growing number of larger
financial institutions that offer a wider variety of financial services than the
Corporation currently offers and that can aggressively compete in the markets
currently served by the Corporation.
Transactions with Affiliates. The Corporation and its subsidiaries are deemed
affiliates within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Accordingly, the
Corporation and its subsidiaries must comply with Sections 23A and 23B of the
Federal Reserve Act. Generally, Sections 23A and 23B (1) limit the extent to
which a financial institution or its subsidiaries may engage in "covered
transactions" with an affiliate, as defined, to an amount equal to 10% of such
institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or
-19-
<PAGE>
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.
Tie-In Arrangements. The Corporation and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example, with
certain exceptions, neither The Corporation nor its subsidiaries may condition
an extension of credit on either a requirement that the customer obtain
additional services provided by it or an agreement by the customer to refrain
from obtaining other services from a competitor.
State Law Restrictions. As a Delaware corporation, the Corporation is
subject to certain limitations and restrictions as provided under applicable
Delaware corporate laws.
Securities Registration and Reporting. The Corporation common stock is
registered as a class with the SEC under the Securities Exchange Act of 1934 and
thus the Corporation is subject to the periodic reporting and proxy solicitation
requirements and the insider-trading restrictions of that Act. The periodic
reports, proxy statements, and other information filed by the Corporation under
that Act can be inspected and copied at or obtained from the Washington, D.C.
office of the SEC. In addition, the securities issued by the Corporation are
subject to the registration requirements of the Securities Act of 1933 and
applicable state securities laws unless exemptions are available.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the
Corporation's net income for the past year is sufficient to cover both the cash
dividend and a rate of retention consistent with the Corporation's capital
needs. The FRB also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow to pay dividends.
Capital Requirements. The FRB has established capital adequacy guidelines
for bank holding companies that generally parallel the capital requirements the
FDIC has for the Bank. The FRB regulations provided that capital standards will
be applied on a consolidated basis in the case of a bank holding company with
more than $150 million in total consolidated assets. The Corporation's total
risk based capital must equal 8% of risk weighted assets and 4% must consist of
Tier 1 capital.
Stock Repurchases. Bank holding companies, except for certain "well
capitalized" and highly rated companies, are required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption is equal to
or greater than 10% of consolidated net worth during the preceding twelve
months. The FRB may disapprove any such purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice.
Cascade Bank
General. Applicable federal and state statutes and regulations governing a
bank's operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends, establishment of branches, and dealings with
affiliated persons. The Federal Deposit Insurance Corporation ("FDIC") has
authority to prohibit banks under their supervision from engaging in what they
consider to be unsafe or unsound practices in conducting their business. Cascade
Bank is a state-charted commercial bank subject to extensive regulation and
supervision by both the Washington Department of Financial Institutions ("DFI")
and the FDIC. The federal laws that apply to Cascade Bank regulate, among other
things, the scope of its business, its investments, its reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for loans. The laws and regulations governing Cascade
Bank generally have been promulgated to protect depositors and not to protect
shareholders of such institutions or their holding companies.
CRA. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the FRB or the
FDIC evaluates the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility.
-20-
<PAGE>
The four possible ratings of meeting community credit needs are outstanding,
satisfactory, needs to improve and substantial noncompliance.
Cascade has received an "outstanding" CRA rating, reflecting the Bank's
commitment to meeting the credit needs of the communities it serves.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees
and benefits ("Guidelines"). The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. If a federal
banking agency determines that a financial institution fails to meet any
standard prescribed by the Guidelines, the agency may require Cascade to submit
to the agency an acceptable plan to achieve compliance with the standard.
Management is not aware of any conditions relating to these safety and soundness
standards which would require the submission of a plan of compliance.
Insider Credit Transactions. Cascade Bank is also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Cascade Bank is also subject to certain
lending limits and restrictions on overdrafts to such persons. A violation of
these restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of Cascade Bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 (the "FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems, and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution that fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Management of the Corporation believes that Cascade Bank meets all such
standards, and therefore, does not believe that these regulatory standards
materially affect the Corporation's business operations currently.
Loans to One Borrower. Cascade Bank is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans to one borrower
to 20 percent of unimpaired capital and surplus. At December 31, 2001, the Bank
had no borrowers with balances in excess of the new loans-to-one-borrower limit.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching under certain circumstances. This legislation
generally authorizes interstate branching and relaxes federal law restrictions
on interstate banking. Currently, bank holding companies may purchase banks in
any state, and states may not prohibit such purchases. Additionally, banks are
permitted to merge with banks in other states as long as the home state of
neither merging bank has "opted out." The Interstate Act requires regulators to
consult with community organizations before permitting an interstate institution
to close a branch in a low-income area. With regard to interstate bank mergers,
Washington has "opted in" to the Interstate Act and allows in-state banks to
merge with out-of-state banks subject to certain aging requirements. Washington
law generally authorizes the acquisition of an in-state bank by an out-of-state
bank or bank holding company through the acquisition of or a merger with a
financial institution that has been in existence for at least 5 years prior to
the acquisition.
Deposit Insurance. The deposits of Cascade Bank are currently insured to a
maximum of $100,000 per depositor through the Savings Association Insurance Fund
(the "SAIF") administered by the FDIC. All insured banks are required to
-21-
<PAGE>
pay semi-annual deposit insurance premium assessments to the FDIC. The FDICIA
included provisions to reform the Federal Deposit Insurance System, including
the implementation of risk-based deposit insurance premiums. The FDICIA also
permits the FDIC to make special assessments on insured depository institutions
in amounts determined by the FDIC to be necessary to give it adequate assessment
income to repay amounts borrowed from the U.S. Treasury and other sources, or
for any other purpose the FDIC deems necessary. The FDIC has implemented a
risk-based insurance premium system under which banks are assessed insurance
premiums based on how much risk they present to the SAIF. Banks with higher
levels of capital and a low degree of supervisory concern are assessed lower
premiums than banks with lower levels of capital or a higher degree of
supervisory concern.
Dividends. The principal source of the Corporation's revenue is dividends
received from Cascade Bank. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends that would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that payment
could reduce the amount of its capital below that necessary to meet minimum
applicable regulatory capital requirements. Other than the laws and regulations
noted above, which apply to all banks and bank holding companies, neither the
Corporation nor Cascade Bank is currently subject to any regulatory restrictions
on its dividends.
Capital Adequacy. Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and
banks. If capital falls below minimum guideline levels, the holding company or
bank may be denied approval to acquire or establish additional banks or nonbank
businesses or to open new facilities. The FDIC and FRB use risk-based capital
guidelines for banks and bank holding companies. These are designed to make such
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the FRB has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8 percent, of which at least 4
percent must be Tier I capital. Tier I capital for bank holding companies
includes common shareholders' equity, certain qualifying perpetual preferred
stock and minority interests in equity accounts of consolidated subsidiaries,
less intangibles except as described above. At December 31, 2001, the Bank had
Tier 1 capital equal to $56.1 million or 7.54% of adjusted total assets, which
is $26.3 million above the minimum leverage requirement of 4% as in effect on
that date.
The FDIC also employs a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The FDIC requires a minimum leverage ratio of 3 percent.
However, for all but the most highly rated bank holding companies and for bank
holding companies seeking to expand, the FDIC expects an additional cushion of
at least 1 percent to 2 percent.
FDICIA created a statutory framework of supervisory actions indexed to the
capital level of the individual institution. Under regulations adopted by the
FDIC, an institution is assigned to one of five capital categories depending on
its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. The
Corporation does not believe that these regulations have any material effect on
its operations currently.
Reference is made to Note 11 of the Notes to the Consolidated Financial
Statements in the Annual Report, which is listed as an exhibit under Item 14,
for additional information concerning regulatory capital.
The capital regulations also require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At December 31, 2001, the Bank
had tangible capital of $56.1 million, or 7.54% of adjusted total assets, which
is approximately $26.4 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.
The FDIC risk-based requirement requires financial institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
Tier I capital and supplementary capital. Supplementary capital consists of
certain permanent
-22-
<PAGE>
and maturing capital instruments that do not qualify as Tier I capital and
general valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only to the extent of Tier I capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example,
prudently underwritten permanent one-to-four family first lien mortgage loans
not more than 90 days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
FNMA or FHLMC, have been assigned a risk weight of 50%.
On December 31, 2001, the Bank had total risk-based capital of approximately
$62.4 million, including $56.1 million in Tier I capital and $6.3 million in
qualifying supplementary capital, and risk-weighted assets of $521.3 million, or
total capital of 11.98% of risk-weighted assets. This amount was $20.7 million
above the 8% requirement in effect on that date.
FDIC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound. The FDIC
regulations state that if the FDIC determines that conditions so warrant, it may
impose a greater capital standard on a particular institution.
Management believes that the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, if circumstances were to
materially and adversely impact the future earnings of the Bank, the ability of
the Bank to meet its capital requirements could be impaired.
Prompt Corrective Action. Federal statutes establish a supervisory framework
based on five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8%, a Tier 1 risk-based capital of not less than 4%, and a leverage
ratio of not less than 4%. Any institution which fails to meet these levels will
be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions, which become more
extensive as an institution becomes more severely undercapitalized. Failure by
an institution to comply with applicable capital requirements will result in
restrictions on their activities and lead to enforcement actions, including the
issuance of a capital directive to ensure the maintenance of adequate capital
levels. Banking regulators will take prompt corrective action with respect to
depository institutions that do not meet minimum capital requirements.
At December 31, 2001, Cascade was a "well capitalized" institution under the
prompt corrective action regulations of the FDIC.
Effects of Monetary Policy. The earnings and growth of the Corporation and
its subsidiaries are affected not only by general economic conditions, but also
by the fiscal and monetary policies of the federal government, particularly the
FRB. The FRB can and does implement national monetary policy for such purposes
as curbing inflation and combating recession, but its open market operations in
U.S. government securities, control of the discount rate applicable to
borrowings from the FRB, and establishment of reserve requirements against
certain deposits, influence the growth of bank loans, investments and deposits,
and also affect interest rates charged on loans or paid on deposits. The nature
and impact of future changes in monetary policy and their impact on the
Corporation and its subsidiaries cannot be predicted with certainty.
Prior Regulation. Prior to converting to a commercial bank, the Bank was
subject to supervision by the Office of Thrift Supervision ("OTS"). The OTS is
an office in the Department of the Treasury subject to the general oversight of
the Secretary of the Treasury. The OTS has extensive authority over the
operations of savings associations. Among its functions, the OTS issues and
enforces regulations affecting federally-insured savings associations and
regularly examines these institutions. All savings associations are required to
pay assessments to the OTS to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are determined based on the savings
association's total assets, including consolidated subsidiaries. The Bank's OTS
assessment for the fiscal year ended June 30, 2001 was $111,200. No assessment
for the six months ended December 31, 2001 was issued.
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<PAGE>
TAXATION
Federal Taxation
The Corporation reports its income on a fiscal year basis using the accrual
method of accounting and are subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly
Cascade's reserve for bad debts discussed below. In 2001, the Corporation's
fiscal year was changed to the calendar year. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Corporation.
Tax Bad Debt Reserves
The reserve method of accounting for bad debt reserves was repealed for tax
years beginning after December 31, 1995. As a result, the Bank is no longer able
to calculate its deduction for bad debts using the percentage-of-taxable-income
method. Instead, Cascade is required to compute its deduction based on specific
charge-offs during the taxable year.
Distributions
To the extent that the Bank makes "non-dividend distributions" to the
Corporation that are considered as made (i) from the reserve for losses as of
June 30, 1988 or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in Cascade's taxable income. Non-dividend distributions include distributions in
excess of the Bank's current and accumulated earnings and profits, distributions
in redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of Cascade's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's bad debt reserve. Thus, any
dividends to the Corporation that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for Cascade. The amount of additional taxable income
attributable to an Excess Distribution is an amount that, when reduced by the
tax attributable to the income, is equal to the amount of the distribution.
Thus, if Cascade makes a "non-dividend distribution," then approximately one and
one-half times the amount so used would be included in gross income for federal
income tax purposes.
Dividends-Received Deduction and Other Matters
The Corporation may exclude from its income 100% of dividends received from
the Bank as a member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which the Corporation and the Bank will not
file a consolidated tax return, except that if the Corporation or the Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80% of
any dividends received may be deducted.
Washington Tax
The Bank is subject to a business and occupation tax which is imposed under
Washington law at the rate of 1.5% of gross receipts; however interest received
on loans secured by mortgages or deeds of trust on residential properties and
interest on obligations issued or guaranteed by the United States are not
presently subject to the tax. On August 15, 1994, the Department of Revenue of
the State of Washington began an audit of the Corporation's records for
compliance regarding the business and occupation tax. The Corporation had not
been audited for 18 years. The Department of Revenue has issued a tax billing
for approximately $148,000 of which the Corporation has accrued $104,000 and
paid $16,000. The Corporation has filed an appeal with the Department of
Revenue. A determination has been issued reversing two of the three billing
issues in the audit. The Corporation has filed another appeal regarding the
final issue.
ITEM 2. PROPERTIES
The Corporation owns six full service branch locations and leases eight full
service locations. Owned offices range in size from 3,500 to 52,000 square feet
and have a total net book value at December 31, 2001, including leasehold
improvements, furniture and fixtures, of $8.6 million. The Corporation leases
approximately 15% of its main office and
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<PAGE>
approximately 30% of its Marysville office to non-affiliated parties. See Note 4
of the Notes to the Consolidated Financial Statements contained in the Annual
Report which is listed in Item 14.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is not engaged in any legal proceedings of a material nature
at the present time. Periodically, there have been various claims and lawsuits
involving the Corporation and the Bank, principally as a defendant, such as
claims to enforce liens, condemnation proceedings on properties in which the
Bank holds security interests, claims involving the making and servicing of real
property loans and other issues incident to the Corporation's business. In the
opinion of management and the Corporation's legal counsel, no significant loss
is expected from any of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained on page 16 of the Annual Report listed in Item 14
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the section entitled "Selected Financial Data"
of the Annual Report listed in Item 14 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Annual
Report listed in Item 14 is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the section captioned "Market Risk" in the
Management's Discussion and Analysis section of the Annual Report listed in Item
14 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data in the Annual Report listed
in Item 14 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-26-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal I--Election
of Directors" contained in the Corporation's Definitive Proxy Statement for the
Corporation's December 31, 2001 Annual Meeting of Stockholders (the "Proxy
Statement"), is incorporated herein by reference. Reference is made to the cover
page of this report for information regarding compliance with Section 16(a) of
the Exchange Act.
The following table sets forth information with respect to the executive
officers of the Corporation and the Bank.
<TABLE>
<CAPTION>
Name Age(a) Position
- ---- ------ ---------
<S> <C> <C>
Frank M. McCord(b)(c) 71 Chairman and Chief Executive Officer, Cascade
Financial Corp. Chairman, Cascade Bank
Carol K. Nelson(b)(c) 45 President, Chief Executive Officer and Director
Cascade Bank President, Chief Operating
fficer and Director Cascade Financial Corporation
Robert G. Disotell 47 Executive Vice President, Chief Credit Officer
Steven R. Erickson 46 Executive Vice President, Real Estate Lending
Lars H. Johnson 48 Executive Vice President, Chief Financial Officer(b)
LeAnne M. Frank 32 Executive Vice President, Quality of Service and Technology
David R. Little 55 Executive Vice President, Business Banking
Vera E. Wildauer 43 Executive Vice President, Marketing Director
Debbie E. McLeod 36 Executive Vice President, Retail Banking
</TABLE>
- ------------
(a) At December 31, 2001.
(b) Officer of the Corporation and Bank.
(c) At May 1, 2002, Ms. Nelson will replace Mr. McCord, who is retiring on such
date, as the CEO of the Corporation.
The principal occupation of each executive officer of the Corporation and
Bank is set forth in the Proxy Statement or below. There are no family
relationships among or between the executive officers listed above.
ROBERT G. DISOTELL has been employed by Cascade Bank since 1977 and
currently serves as Executive Vice President of Credit Administration. He is
responsible for overseeing the credit quality of the Bank's loan portfolios. Mr.
Disotell has managed a variety of business groups in his tenure at Cascade,
including Mortgage Banking, Loan Servicing, Secondary Marketing, Retail Banking,
and Community Reinvestment Act (CRA) activities. Mr. Disotell is a resident of
Arlington, Washington.
STEVEN R. ERICKSON is the Executive Vice President of Real Estate Lending
for the Bank, responsible for managing residential and income property lending
and serves as the Assistant Secretary for the Corporation. Mr. Erickson joined
Cascade in 1978. He is a member of the Board of Directors of the Boys and Girls
Club of Snohomish County. He is a resident of Marysville, Washington.
-27-
<PAGE>
LEANNE M. FRANK is the Executive Vice President of Quality of Service and
Technology for the Bank. She has 14 years of consumer banking experience
starting with Rainier Bank and most recently Bank of America, where she served
as Vice President and Region Service Manager. She is currently involved with
Leadership Snohomish County. Ms. Frank is a resident of Marysville, Washington.
LARS H. JOHNSON is the Executive Vice President, Chief Financial Officer and
Secretary/Treasurer of the Bank and Corporation. Mr. Johnson joined Cascade in
April 2000. Mr. Johnson has 25 years of financial management experience,
including the most recent 16 years with the Federal Home Loan Bank of Seattle.
Mr. Johnson is a resident of Edmonds, Washington.
DAVID R. LITTLE is the Executive Vice President responsible for the Business
Banking activities of the Bank. Mr. Little joined Cascade in 1997 following the
merger with American First National Bank, where he served for fourteen years.
Mr. Little has thirty years of banking experience. He is a founding member of
the Everett--Port Gardner Rotary club and is a resident of Everett, Washington.
DEBBIE E. McLEOD is Executive Vice President of Retail Banking for the Bank.
Ms. McLeod joined Cascade Bank in February 2001. She has over 14 years of
commercial banking experience and was previously Vice President and Northern
Region Sales Manager for Bank of America. She is Immediate Past President for
United Way of Skagit County. Ms. McLeod resides in Burlington, Washington.
VERA E. WILDAUER joined Cascade in 1997 as Senior Vice President, Marketing
Director. In 2000, she was elected Executive Vice President, Marketing. Ms.
Wildauer has over 15 years experience in a full range of bank marketing
disciplines among major Washington State financial institutions. In addition to
directing all aspects of marketing, she is also responsible for on-line banking,
loan servicing, and real estate loan operations. She is a member of the Board of
Directors of Bridgeways. Ms. Wildauer is a resident of Bothell, Washington.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge
by any person of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the section captioned "Transactions with Management and Others" of the Proxy
Statement.
-28-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)(2)Independent Auditors' Report
Consolidated Financial Statements
(a) Consolidated Balance Sheets at December 31, 2001 and June 30,
2001
(b) Consolidated Statements of Operations for the six months ended
December 31, 2001 and 2000, and the years ended June 30, 2001,
2000 and 1999
(c) Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the six months ended December 31, 2001 and 2000, and
the years ended June 30, 2001, 2000 and 1999
(d) Consolidated Statements of Cash Flows for the six months ended
December 31, 2001 and 2000, and the years ended June 30, 2001,
2000 and 1999
(e) Notes to Consolidated Financial Statements
All schedules have been omitted, as the required information is either
inapplicable or contained in the Consolidated Financial Statements or related
Notes contained in the Annual Report.
(3) Exhibits
3.1 Certificate of Incorporation of Cascade Financial Corporation
(Incorporated by reference to the Corporation's Proxy statement on Form S-4
(File No. 33-83200)).
3.2 Bylaws of Cascade Financial Corporation (Incorporated by reference
to the Corporation's Registration Statement on Form S-4 (File No. 33-83200)).
10.1 Cascade Financial Corporation 1994 Employee Stock Purchase Plan
(Incorporated by reference to the Corporation's Registration Statement on Form
S-4 (File No. 33-83200)).
10.2 Cascade Financial Corporation 1992 Stock Option for June 30, 1995
and Incentive Plan (Incorporated by reference to the Corporation's Form 10-KSB
for June 30, 1995).
10.3 Cascade Financial Corporation Employee Stock Ownership Plan
(Incorporated by reference to the Corporation's Annual Report on Form 10-KSB for
June 30, 1995).
10.4 Cascade Financial Corporation 1997 Stock Option Plan (Incorporated
by reference to Appendix E to the Prospectus included in the Corporation's
Registration Statement on Form S-4 (File No. 333-24203)).
10.5 Employment Agreement entered into between the Bank and Carol K.
Nelson dated November 27, 2001.
10.6 Form of Change of Control Agreement entered into between the Bank
and its executive officers.
10.7 Cascade Financial Corporation 1997 Elective Equity Plan.
13 Cascade Financial Corporation December 31, 2001 Annual Report to
Stockholders, including the Selected Financial Data and Management Discussion
and Analysis.
21 Subsidiaries
23 Consent of Independent Auditors
(b) Reports on Form 8-K
-29-
<PAGE>
On May 22, 2001, Cascade Financial Corporation filed Form 8-K announcing the
reorganization of the Corporation into a bank holding company with a financial
holding company election. In connection with the reorganization, the
Corporation's subsidiary, Cascade Bank, converted from a federally chartered
stock savings bank to a Washington chartered commercial bank.
On July 27, 2001, Cascade Financial Corporation filed Form 8-K announcing
the completion of the reorganization of the Corporation into a bank holding
company with a financial holding company election, and the completion of the
conversion from a federally chartered stock savings bank to a Washington
chartered commercial bank.
On December 17, 2001, Cascade Financial Corporation filed Form 8-K
announcing the change in its fiscal year-end from June 30 to December 31.
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 FINANCIAL CORPORATION
Date: March 26, 2002 By: /s/ Frank M. McCord
------------------------------------
Frank M. McCord
Chairman and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Lars H. Johnson By: /s/ D. R. Murphy
----------------------------- -----------------------------------
Lars H. Johnson D. R. Murphy
Executive Vice President Director
(Chief Financial Officer) Date: March 26, 2002
Date: March 26, 2002
By: /s/ Carol K. Nelson By: /s/ Ronald E. Thompson
----------------------------- -----------------------------------
Carol K. Nelson Ronald E. Thompson
President and Chief Director
Operating Officer
Date: March 26, 2002 Date: March 26, 2002
By: /s/ Janice Halladay By: /s/ G. Brandt Westover
----------------------------- -----------------------------------
Janice Halladay G. Brandt Westover
Director Director
Date: March 26, 2002 Date: March 26, 2002
By: /s/ David W. Duce By: /s/ Craig Skotdal
----------------------------- -----------------------------------
David W. Duce Craig Skotdal
Director Director
Date: March 26, 2002 Date: March 26, 2002
By: /s/ David O'Connor By: /s/ Dwayne Lane
----------------------------- -----------------------------------
David O'Connor Dwayne Lane
Director Director
Date: March 26, 2002 Date: March 26, 2002
By: /s/ Henry Robinett
-----------------------------
Henry Robinett
Director
Date: March 26, 2002
-31-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>3
<FILENAME>v80226ex10-5.txt
<DESCRIPTION>EXHIBIT 10.5
<TEXT>
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
(Including Amendments to Reflect 2001 Bank Charter Change)
This Agreement is made this 24th day of January, 2001, and amended
November 27, 2001, by and between CASCADE BANK, a State Chartered Banking
Institution (hereafter "Cascade" or "Employer") and CAROL KOBUKE NELSON
(hereafter called "Employee"). The effective date of this Agreement will be the
19th day of February, 2001 ("Effective Date"). Employer and Employee are
sometimes collectively referred to herein as the "Parties."
W IT N E S S E T H:
WHEREAS, Employer's Directors desire to employ Employee as its President
and Chief Executive Officer pursuant to the terms and conditions of this
Agreement; and
WHEREAS, Employee desires to become and remain employed by Employer
pursuant to the terms and conditions of this Agreement;
NOW, THEREFORE, FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES
HEREAFTER SET FORTH, THE SUFFICIENCY OF WHICH IS ACKNOWLEDGED, THE PARTIES AGREE
AS FOLLOWS:
1. EMPLOYMENT DUTIES. Employer hereby agrees to employ Employee and
Employee hereby agrees to be and remain employed as the President and Chief
Executive Officer of Cascade Bank under the terms and conditions hereinafter set
forth. Employee shall fully and faithfully perform all the customary and usual
duties and responsibilities of President and Chief Executive Officer of a State
Chartered, multi-branch financial institution and such additional duties and
responsibilities as may reasonably be delegated and/or directed by Employer's
Board of Directors. Included in Employee's Board delegated duties shall be the
responsibility for all personnel decisions except internal audit. The Board of
Directors in the exercise of their fiduciary duty shall be ultimately
responsible for all personnel decisions. In addition, for the consideration
herein provided, Employee shall fully and faithfully perform all of the
customary and usual duties and responsibilities of the President and Chief
Operating Officer of Cascade Financial Corporation, the sole shareholder of
Cascade Bank, and such additional duties and responsibilities as may be
delegated and/or directed by the Board of Directors of Cascade Financial
Corporation.
Subject to any required approval by the Shareholder(s) of Cascade Bank
and/or Cascade Financial Corporation, as the case may be the Board of Directors
of Cascade Bank and Cascade Financial Corporation shall appoint or nominate and
recommend Employee for election as a member of their respective Boards of
Directors and, if so appointed or elected, Employee shall serve in that capacity
until the end of the term or until her removal therefrom.
2. TERM OF EMPLOYMENT. The term of this Agreement shall be three (3)
years, from the Effective Date. The Board of Directors shall annually consider
whether or not to extend this Agreement for an additional year (to provide a
rolling three-year term). The decision of Employer's Board of Directors
regarding any annual extension of this Agreement and the compensation and bonus
to be paid during such extension shall remain within the sole and absolute
discretion of said Board, provided the Board of Directors may consider, among
other things, the following performance criteria: Employer's profitability;
Safety and Soundness
-1-
<PAGE>
examination CAMELS ratings; Compliance examination ratings; Regulatory capital
requirements for a well-capitalized institution; Managing existing capital to
maximize return on equity; and Maintaining sufficient capital to achieve
business goals. This Agreement may be terminated prior to the expiration of its
term or any extension thereof as hereafter provided.
3. Compensation and Bonuses. Upon execution and delivery of this
Agreement by Employee, Employer shall initially pay to Employee a signing bonus
in the gross amount of Fifty Thousand Dollars ($50,000.00).
Employer shall pay Employee an annual base salary of Two Hundred
Thousand Dollars ($200,000.00), payable in equal installments, not less than
monthly during the term of her employment, together with bonuses to be
determined as follows:
(a) For the fiscal year ending June 30, 2001 a bonus of Thirty
Thousand Dollars ($30,000.00) at the first pay period in July, 2001;
(b) For the fiscal year ending June 30, 2002, a bonus equal to
the greater of One Hundred Thousand Dollars ($100,000.00); or seven and
one-half percent (7-1/2%) of the amount, if any, by which the net profit
before taxes (exclusive of all extraordinary gains and losses) according
to Employer's audited financial statements ("NPBT") (calculated after
deducting bonuses of all employees) for said fiscal year exceeds the
NPBT for the fiscal year ending June 30, 2001; provided, however,
Employer shall advance to Employee a portion of said bonus in the sum of
Twenty-Five Thousand Dollars ($25,000.00) per quarter for the first
three quarters of the fiscal year and the balance immediately following
receipt of the annual audited financial statements; and
(c) For the fiscal year ending June 30, 2003, a bonus equal to
the greater of One Hundred Thousand Dollars ($100,000.00); or one and
one-half percent (1-1/2%) of the NPBT (calculated after deducting
bonuses of all employees) for said fiscal year ending June 30, 2003;
provided however Employer shall advance to Employee a portion of said
bonus in the sum of Twenty-Five Thousand Dollars ($25,000.00) per
quarter for each of the first three quarters of said fiscal year, and
the balance paid immediately following receipt of the audited financial
statements.
(d) For the portion of the Term of this Agreement extending from
July 1, 2003 through February 19, 2004, a bonus equal to one and
one-half percent (1-1/2%) of the NPBT (calculated after deducting
bonuses for all employees) for said period ending with the end of the
term of this Agreement; provided Employer shall advance to Employee as a
loan against the potential bonus to be earned, for said period, the sum
of Twenty-Five Thousand Dollars ($25,000.00) per quarter. The remainder
of such bonus, if any, shall be paid immediately following the
expiration of said term. Provided further, if Employee has received
advance payments which exceed the total bonus earned hereunder, Employee
shall immediately repay to Employer the amount of the excess.
-2-
<PAGE>
Employer's Board of Directors shall annually review Employee's base
salary. All compensation paid shall be subject to deduction for required Social
Security, Federal Income Tax withholding and other mandated deductions.
4. STOCK OPTIONS. Employer herewith grants to Employee this 24th day of
January, 2001, contemporaneously with the execution and delivery of this
Agreement, the option to acquire One Hundred Thousand (100,000) shares of
capital stock in Cascade Financial Corporation in accordance with the terms and
conditions of its 1997 Stock Option Plan as set forth below: Employee's options
shall vest in accordance with the terms and provisions of said Stock Option
Plan. Employee will be eligible for annual grants of additional option shares
based on performance. In the event of a "Change in Control" (as defined in said
Stock Option Plan), all options that have been granted to Employee shall
automatically vest.
The foregoing Option shall be divided into two parts as follows:
(a) Incentive Stock Option. Of the One Hundred Thousand (100,000)
option shares, 65,573 shares shall be Incentive Stock Option shares as
defined in said Stock Option Plan; and
(b) Non-Qualified Stock Options Shares. Of the One Hundred
Thousand (100,000) option shares, the remainder (34,427 shares), after
deducting the Incentive Stock Option shares granted pursuant to
subparagraph 4(a) above, shall be granted to Employee in her capacity as
a Director as a "Director Option" and Non-Qualified Stock Option as
defined in said Stock Option Plan.
5. EMPLOYEE BENEFITS. Employee shall be entitled to the following paid
benefits:
(a) A contribution to a 401(k) plan acceptable to Cascade Bank at
a rate equivalent to the offering to similar employees, subject to the
same terms and conditions as similar employees, and subject to maximums
as allowed by federal law. Terms of this Agreement are subject to the
provisions of the formal Plan Document and subject to vesting provisions
of the current plan;
(b) An allowance of Twenty-Five (25) benefit days (for vacation
and sick leave) (accrued at a monthly rate) per year. A maximum of
twelve and one-half days of unused benefit days allowed may be cashed in
at the end of each year;
(c) Health insurance under a plan selected by Cascade Bank, for
single, individual coverage;
(d) Dental insurance under a plan selected by Cascade Bank, for
single, individual coverage;
(e) Life insurance in the amount of the approved benefit offering
of the applicable year; provided Employee shall have the option to pay
additional premiums for increased coverage;
-3-
<PAGE>
(f) Voluntary participation (paid by Employee), as eligible, in
all approved benefit offerings of the applicable year, subject to the
terms of formal Plan Documents; and
(g) Voluntary participation (paid by Employee), as eligible, in
all approved disability insurance offerings selected by Cascade Bank in
its sole discretion.
6. BUSINESS EXPENSES. Cascade Bank will pay or reimburse Employee for
reasonable and necessary business expenses incurred by Employee, which are
directly related to the performance of her duties of employment, including
travel, professional memberships and professional development, subject to
documentation by Employee and approval by Cascade Bank's Board of Directors or
its Chairperson. Employer will pay Employee's current club monthly membership
dues at the Everett Golf and Country Club.
7. NO CONFLICTS OF INTERESTS/CONFIDENTIALITY. Employee shall devote
full-time and attention to Employer's business, shall fully and faithfully abide
by Employer's conflict of interest and code of ethics policies and directives
and shall maintain the confidentiality of the Employer's confidential and/or
proprietary information possessed by, accessible or known to Employee. To the
extent that such activities do not interfere with her duties under Section 1 of
this Agreement, Employee may participate in other businesses as a passive
investor, but (a) Employee may not actively participate in the operation or
management of those businesses, and (b) Employee may not, without Employer's
prior written consent, make or maintain any investment in a business with which
Employer has now or in the future a competitive or commercial relationship.
Irrespective of anything hereinabove set forth, Employee may not, without
Employer's prior written consent, engage in any activity or have an ownership
interest in any entity that creates a conflict of interest with Employer.
8. FEDERAL REGULATORY PROVISIONS.
(a) If Employee is suspended and/or temporarily prohibited from
participating in the conduct of the bank's affairs by a notice served
under section 8 (e)(3) or (g)(l) of Federal Deposit Insurance Act (12
U.S.C. 1818 (e)(3) and (g)(1)) the Employer's obligations under the
contract shall be suspended as of the date of service unless staved by
appropriate proceedings. If the charges in the notice are dismissed,
Employer may in its discretion (i) pay the Employee all or part of the
compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
(b) If Employee is removed and/or permanently prohibited from
participating in the conduct of the Employer's affairs by an order
issued under section 8 (e)(4) or (g)(l) of the U.S.C. 1818 (e)(4) or
(g)(1)), all obligations of Employer under the contract shall terminate
as of the effective date of the order, but vested rights of the
contracting Parties shall not be affected.
-4-
<PAGE>
(c) If Cascade Bank is in default (as defined in section 3(x)(l)
of the Federal Deposit Insurance Act), all obligations under the
contract shall terminate as of the date of default, but this paragraph
(d) shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated,
except to the extent determined that continuation of the contract is
necessary to the continued operation of Cascade Bank:
(i) By the Director of the Federal Deposit Insurance
Corporation ("Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation enters into an agreement to
provide assistance to or on behalf of Cascade Bank under the
authority contained in 13(c) of the Federal Deposit Insurance
Act; or
(ii) By the Director or his or her designee, at the time
the Director or his or her designee approves a supervisory merger
to resolve problems related to operation of Cascade Bank or when
Cascade Bank is determined by the Director to be in an unsafe or
unsound condition.
9. TERMINATION/SEVERANCE.
(a) In the event (i) Employer terminates this Agreement prior to
the expiration of its term or any extension thereof, other than
termination for Cause (as defined in Section 9(c) below), or (ii)
Employee terminates this Agreement with Good Reason (as defined in
Section (d) below), Employee shall immediately receive the annual
compensation and bonuses provided for in Section 3 of this Agreement for
the balance of the term of this Agreement, or two times the amount of
her then current year base salary and bonus whichever is greater;
provided, however, the extent that said severance benefit or pay
constitutes a "golden parachute payment" or a "prohibited
indemnification payment" as defined in 12 U.S.C. Section 1828 (k), said
payment shall be made only to the extent permitted under such
regulations; provided, further, Employer shall seek all required
approvals and/or consents to permit payment of said severance benefit to
the maximum extent.
Notwithstanding the foregoing, to the extent that any portion of
said severance benefit or pay constitutes an "excess parachute payment"
under Section 280G of the United States Internal Revenue Code, said
severance benefit or pay shall be reduced by the amount of the tax
deduction disallowed to Employer as a result of such excess parachute
payment.
(b) Employer's Board of Directors may terminate Employee's
employment at any time, but any termination by the Employer's Board of
Directors other than termination for Cause, shall not prejudice
Employee's right to compensation or other benefits under the contract.
The Employee shall have no right to receive compensation or other
benefits for any period after termination for Cause.
-5-
<PAGE>
(c) "Cause" means any one or more of the following: termination
because of Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, insubordination, willful
violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach
of any provision of this Agreement.
(d) "Good Reason" means any one or more of the following:
Reduction of the base salary or an alteration of the bonus formulas set
forth in Section 3 of this Agreement during the term of this Agreement
without Employee's consent; the assignment of Employee without her
consent of any duties materially inconsistent with Employee's position
as of the date of this Agreement; or a relocation or transfer of
Employee's principal place of employment that would require Employee to
commute on a regular basis more than 30 miles each way from the
Employer's main office as of the date of this Agreement; during the
period within three (3) years following a "change in control" (as
defined in Section 10 below), any change by the Employer in the exact
title and/or responsibilities of the Employee.
(e) In the event Employee voluntarily terminates her employment
prior to expiration of the initial term of this Agreement, to enable her
to enter into any business or arrangement with another person or entity
in competition with Cascade Bank or Cascade Financial Corporation
whether as an employee, owner, partner, joint venturer, or otherwise,
Employee shall immediately pay to Employer as liquidated damages, the
sum of One Hundred Thousand Dollars ($100,000.00) and Employer shall
have the right to offset said liquidated damages against any amount
otherwise owing to Employee by Employer at the time of such termination.
Additionally, Employee agrees not to actively solicit or offer jobs on
behalf of herself or any competing person or entity to any employees of
Cascade Bank or Cascade Financial Corporation. The parties agree that
Cascade Bank and Cascade Financial Corporation would be substantially
damaged in the event Employee terminated her employment prior to the
expiration of this Agreement and that said damages are and would be
extremely difficult if not impossible to calculate and that the
foregoing liquidated damage provision is a reasonable estimate of the
amount of such damages.
10. CHANGE IN CONTROL. If, at any time within three (3) years after a
change in control (as defined below) of Cascade Bank or Cascade Financial
Corporation, the Employee is terminated without Cause or Employee terminates for
good reason, the Employee shall receive severance benefit/pay as follows: (i) if
the termination is within 12 months after the change in control, the severance
benefit/pay will be three times the Employee's annual compensation and bonus for
the prior year paid pursuant to Section 3, otherwise; (ii) if the termination
occurs more than 12 months after the change in control, the severance
benefit/pay will be as provided in Section 9(a) above.
Except in the event Employee is terminated by Employer, the severance
benefit/pay provided for in this section 10, shall not be payable under either
of the following circumstances:
-6-
<PAGE>
Employee fails to remain employed and fully and faithfully carry out and
discharge her duties and responsibilities including duties and responsibilities
assigned in connection with any change of control transaction(s) until thirty
(30) days following the closing of such change of control transaction(s) or
until relieved of said duties and responsibilities by Employer's Board of
Directors, whichever occurs first; or a change of control is effectuated through
a transaction or combination of transactions while Cascade Bank and/or Cascade
Financial Corporation is financially distressed and/or said transactions are
undertaken pursuant to regulatory mandate, or with regulatory assistance.
For purposes of this Section 10, for a period of one (1) year following
any change in control, any change in the exact title and/or responsibilities of
Employee will be deemed an involuntary termination of Employee without cause.
For purposes of this Agreement, a "change in control" shall mean:
(a) An event of a nature that would be required to be reported in
response to Item 1(a) of the current report on Form 8-K, as in effect on
the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act");
(b) Any "person", as such term is used in Sections 13(d) and
14(d) of the Exchange Act, other than Cascade Financial Corporation or
any subsidiary or subsidiaries of Cascade Financial Corporation that are
part of the affiliated group (as defined in Section 1504 of the Internal
Revenue Code of 1986, as amended, without regard to subsection (b)
thereof), is or becomes the beneficial owner (as defined in Rule 13d-3
under the Exchange Act) directly or indirectly of securities of Cascade
Bank or Cascade Financial Corporation representing 25% or more of the
combined voting power of Cascade Bank's or Cascade Financial
Corporation's outstanding securities;
(c) Individuals who are members of the Board of Directors of
Cascade Financial Corporation (the "Board") on the Commencement Date
(the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director
subsequent to the Commencement Date whose election was approved by a
vote of at least three-quarters of the directors comprising the
Incumbent Board or whose nomination for election by Cascade Financial
Corporation's stockholders was approved by the nominating committee
serving under an Incumbent Board or who was appointed as a result of a
change at the direction of the Federal Reserve Board or the Federal
Deposit Insurance Corporation ("FDIC"), shall be considered a member of
the Incumbent Board;
(d) The stockholders of Cascade Financial Corporation approve a merger,
consolidation or acquisition of Cascade Financial Corporation or Cascade
Bank, with or by any other corporation or entity, other than (1) a
merger, consolidation or acquisition which would result in the voting
securities of Cascade Financial Corporation outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity)
more than 50% of the
-7-
<PAGE>
combined voting power of the voting securities of Cascade Financial
Corporation or such surviving entity outstanding immediately after such
merger or consolidation or (2) a merger or consolidation effected to
implement a recapitalization of Cascade Financial Corporation or Cascade
Bank (or similar transaction) in which no person (as hereinabove
defined) acquires more than 25% of the combined voting power of Cascade
Financial Corporation's then outstanding securities; or
(e) The stockholders of Cascade Financial Corporation approve a
plan of complete liquidation of Cascade Financial Corporation or Cascade
Bank or an agreement for the sale or disposition by Cascade Financial
Corporation of all or substantially all of Cascade Financial
Corporation's or Cascade Bank's assets (or any transaction having a
similar effect); provided that the term "Change of Control" shall not
include an acquisition of securities by an employee benefit plan of
Cascade Bank or Cascade Financial Corporation or a change in the
composition of the Board at the direction of the Federal Reserve Board
or the FDIC.
11. INDEPENDENT LEGAL COUNSEL. Employee acknowledges that she has had
the opportunity to review and consult with her own personal legal counsel
regarding this Agreement.
12. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be resolve exclusively by binding
arbitration in accordance with the Commercial Rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction.
13. GOVERNING LAW. This Agreement shall be governed by the law of the
State of Washington and shall be subject to applicable federal laws and
regulations.
14. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the Parties hereto. The Parties intend that the terms of this Agreement shall be
the final expression of their Agreement with respect to the subject matter
hereof and may not be contradicted by evidence of any prior or contemporaneous
agreement or understanding. The Parties further intend that this Agreement shall
constitute the complete and exclusive statement of its terms and that no
extrinsic evidence whatsoever may be introduced in any judicial, administrative,
arbitral, or other legal proceeding involving this Agreement. This Agreement may
not be changed orally, but may only be changed by an Agreement in writing,
proved by the Employer's Board of Directors and the Employee executed and
delivered by their duly authorized representatives. The provisions of this
Agreement are severable; the invalidity of any provision will not affect the
validity of other provisions of this Agreement.
-8-
<PAGE>
IN WITNESS WHEREOF, Employer has caused this Agreement to be executed by
its duly authorized Board Representative and Employee has signed this Agreement.
EMPLOYER EMPLOYEE
CASCADE BANK
By:__________________________________ __________________________________
Its:_________________________________
-9-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6
<SEQUENCE>4
<FILENAME>v80226ex10-6.txt
<DESCRIPTION>EXHIBIT 10.6
<TEXT>
<PAGE>
Exhibit 10.6
CHANGE OF CONTROL/SEVERANCE AGREEMENT
THIS CHANGE OF CONTROL/SEVERANCE AGREEMENT (the "Agreement") is made and
entered into as of this day of , 20 (the "Commencement Date"), by
and between CASCADE BANK, a commercial bank chartered under the laws of the
State of Washington (the "Bank"), and (the "Executive").
WHEREAS, the Executive is currently serving as and has agreed to continue
to serve in the employ of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes the substantial
contribution the Executive has made to the Bank and wishes to provide Executive
with certain benefits for the period provided in this Agreement in the event of
a change of control (as defined herein) of the Bank or of its holding company,
Cascade Financial Corporation (the "Holding Company").
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, the parties hereto agree as
follows:
1. Certain Definitions.
(a) The term "Change of Control" means: (i) an event of a nature that would
be required to be reported in response to Item 1(a) of the current report on
Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (ii) any
"person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act,
other than the Holding Company, any Consolidated Subsidiaries (as hereinafter
defined), is or becomes the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act) directly or indirectly of securities of the Bank or the Holding
Company representing 25% or more of the combined voting power of the Bank's or
Holding Company's outstanding securities; (iii) individuals who are members of
the Board of Directors of the Holding Company (the "Board") on the Commencement
Date (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
Commencement Date whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board or whose
nomination for election by the Holding Company's stockholders was approved by
the nominating committee serving under an incumbent Board or who was appointed
as a result of a change at the direction of the Federal Reserve Board or the
Federal Deposit Insurance Corporation ("FDIC"), shall be considered a member of
the Incumbent Board; (iv) the stockholders of the Holding company approve a
merger, consolidation or acquisition of the Holding Company or the Bank, with or
by any other corporation or entity, other than (1) a merger, consolidation or
acquisition which would result in the voting securities of the Holding company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Holding Company or such surviving entity outstanding
immediately after such merger or consolidation or (2) a merger or consolidation
effected to implement a recapitalization of the Holding Company or the Bank (or
similar transaction) in which no person (as hereinabove defined) acquires more
than 25% of the combined voting power of the Holding Company's then outstanding
securities; or (v) the stockholders of the Holding Company approve a plan of
<PAGE>
complete liquidation of the Holding Company or the Bank or an agreement for the
sale or disposition by the Holding Company of all or substantially all of the
Holding Company's or the Bank's assets (or any transaction having a similar
effect); provided that the term "Change of Control" shall not include an
acquisition of securities by an employee benefit plan of the Bank or the Holding
Company or a change in the composition of the Board at the direction of the
Federal Reserve Board or the FDIC. Upon a Change of Control, the provisions
hereof shall become immediately operative.
(b) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Holding Company that are part of the affiliated group (as
defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the
"Code"), without regard to subsection (b) thereof) that includes the Bank.
(c) The term "Good Reason" means the occurrence, without the Executive's
express written consent, of a material diminution of or interference with the
Executive's duties, responsibilities or benefits, including (without limitation)
any of the following circumstances:
(i) a requirement that the Executive be based at any location not
within 40 miles of the Executive's then existing job location,
providing that such new location is not closer to Executive's
home;
(ii) a material demotion, or loss of title or loss of significant
authority of the Executive;
(iii) a reduction in the Executive's salary or a material adverse
change in the Executive's perquisites, benefits or vacation,
other than as part of an overall program applied uniformly and
with equitable effect to all members of the senior management of
the Bank;
(iv) a successor bank or company fails or refuses to assume the
Bank's obligations under this Agreement, as required in Section
4(a) hereof; or
(v) any purported termination of the Executive's employment, except
for Termination for Cause that is not effected pursuant to a
Notice of Termination satisfying the requirements of Section 6
hereof (and, if applicable, the requirements of Section 1(d)
hereof), which termination shall not be effective for purposes
of this Agreement.
(d) The term "Termination for Cause" means termination of the employment of
the Executive because of the Executive's personal dishonesty, incompetence,
willful misconduct, breach of a fiduciary duty involving personal profit,
intentional failure to perform stated duties, insubordination, willful violation
of any law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of this Agreement or any other agreement between Executive and the Bank or the
Holding Company. The Executive shall not be entitled to any payment or benefit
hereunder in the event a termination occurs by reason of a voluntary retirement,
voluntary termination other than for reasons specified in Section 1(c) hereof,
disability, or Termination for Cause.
-2-
<PAGE>
2. Term of the Agreement.
(a) The term of this Agreement shall be a period of thirty-six calendar
months beginning on the Commencement Date. Commencing on the first anniversary
date of this Agreement and continuing on each anniversary thereafter, the Board
of Directors of the Bank may act to extend the term of this Agreement for an
additional year, such that the remaining term of this Agreement would be for
thirty-six calendar months, unless either party elects not to extend this
Agreement further by giving written notice thereof to the other party, subject
to earlier termination, as provided herein.
(b) Nothing in this Agreement shall be deemed to prohibit the Bank at any
time from terminating the Executive's employment during the term of this
Agreement with or without notice for any reason, provided, however, that the
relative rights and obligations of the Bank and the Executive in the event of
any such termination shall be determined under this Agreement.
3. Severance Benefits.
(a) If after a Change of Control, the Bank shall terminate the Executive's
employment other than Termination for Cause, or the Executive shall terminate
employment with the Bank for Good Reason within twenty-four (24) months
following a Change of Control, the Bank shall: (i) pay the Executive (or in the
event of Executive's subsequent death, Executive's beneficiary or estate, as the
case may be), as severance pay, a sum equal to two (2) times Executive's annual
compensation. For purposes of this Agreement, "annual compensation" shall mean
all wages, salary, bonus, and other compensation, if any, paid by the Bank as
consideration for the Executive's services during the twelve (12) month period
ending on the last day of the month preceding the effective date of a Change of
Control which is or would be includable in the gross income of the Executive
receiving the same for federal income tax purposes. Such amount shall be paid to
Executive in a lump sum no later than sixty (60) days after the date of
Executive's termination; and (ii) cause to be continued for twenty-four (24)
months after the effective date of a Change of Control, life, medical, dental,
and disability coverage substantially identical to the coverage maintained by
the Bank or the Holding Company for the Executive prior to the effective date of
a Change of Control, except to the extent such coverage may be changed in its
application to all Bank or Holding Company employees on a nondiscriminatory
basis.
(b) Notwithstanding the provisions of Section 3(a) above, if a payment to
the Executive who is a "disqualified individual" shall be in an amount which
includes an "excess parachute payment", the payment hereunder to the Executive
shall be reduced to the maximum amount which does not include an "excess
parachute payment". The terms "disqualified individual" and "excess parachute
payment" shall have the meaning defined in Section 280G of the Code.
(c) The Executive shall not be required to mitigate the amount of any
payment or benefit provided for in Section 3(a) of this Agreement by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
provided for in Section 3(a) of this Agreement be reduced by any compensation
earned or benefit received by the Executive as the result of employment by
another employer. This Agreement shall not be construed as a contract
-3-
<PAGE>
of employment or as providing the Executive any right to be retained in the
employ of the Holding Company or the Bank or any affiliate thereof.
4. Assignment.
(a) This Agreement is personal to each of the parties hereto, and neither
party may assign or delegate any of its rights or obligations hereunder without
first obtaining the written consent of the other party; provided, however, that
the Bank shall require any successor or assignee of (whether direct or indirect,
by purchase, merger, consolidation, operation of law or otherwise) to all or
substantially all of the business and/or assets of the Bank, to expressly assume
and agree to perform the Bank's obligations under this Agreement.
(b) This Agreement shall be binding upon and inure to the benefit of the
Executive, Bank, and Holding Company, and their respective successors and
assigns.
5. Required Regulatory Provisions. Any payments made to Executive pursuant
to this Agreement, or otherwise, are subject to and conditioned upon compliance
with 12 U.S.C. Section 1828(k) and any rules and regulations promulgated
thereunder, including 12 C.F.R. Part 359.
6. Deliver of Notices. For the purposes of this Agreement, all notices and
other communications to any party hereto shall be in writing and shall be deemed
to have been duly given when delivered or sent by certified mail, return receipt
requested, postage prepaid, to the party's address identified herein. Any
purported termination by the Bank or the Executive in connection with a Change
of Control shall be communicated by a Notice of Termination to the other party.
For purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which indicates the specific termination provision in this Agreement and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for the termination of Executive's employment under the
provision so indicated.
7. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
8. Headings. The headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
9. Severability. The provisions of this Agreement shall be deemed severable
and the invalidity or unenforceability of any provision shall not affect the
validity of the other provisions hereof.
10. Governing Law. This Agreement shall be governed by the laws of the
State of Washington.
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by binding arbitration,
conducted before a panel of three arbitrators in a location selected by the
Executive within 50 miles of the location of the Bank, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrators' award in any court having jurisdiction.
-4-
<PAGE>
12. Reimbursement of Fees. All reasonable legal fees and expenses paid or
incurred by Executive pursuant to any dispute or question of interpretation
relating to this Agreement shall be paid or reimbursed by the Bank if Executive
is successful on the merits pursuant to an arbitration award or legal judgment.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: CASCADE BANK
- -------------------------- -------------------------------------
By:----------------------------------
Its:---------------------------------
Address:-----------------------------
-----------------------------
EXECUTIVE
-------------------------------------
Address:-----------------------------
-----------------------------
-5-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.7
<SEQUENCE>5
<FILENAME>v80226ex10-7.txt
<DESCRIPTION>EXHIBIT 10.7
<TEXT>
<PAGE>
EXHIBIT 10.7
CASCADE FINANCIAL CORPORATION
1997 ELECTIVE EQUITY PLAN
1. Purpose; Effective Date. The Cascade Financial Corporation 1997
Elective Equity Plan (the "Plan") is designed to promote the interests of
Cascade Financial Corporation and its subsidiaries by providing key employees of
the Company and its subsidiaries and non-employee members of the Company's Board
of Directors (the "Board") with the opportunity to elect to receive common stock
of the Company ("Common Stock") in lieu of a percentage of their otherwise
payable cash compensation. The Plan shall be effective upon adoption by the
Board.
2. Administration. The authority to manage and control the operation and
administration of the Plan shall be vested in the Board. Subject to the
limitations of the Plan, the Board shall have the sole and complete the
authority: (a) to interpret the Plan and to adopt, amend and rescind
administrative guidelines and other rules and regulations relating to the Plan;
(b) to correct any defect or omission or to reconcile any inconsistency in the
Plan or in any award made hereunder; and (c) to make all other determinations
and to take all other actions necessary or advisable for the implementation and
administration of the Plan. The Board's determinations on matters within its
authority shall be conclusive and binding upon the Company and all other
persons.
3. Eligibility. Participants in the Plan shall include (i) such
employees of the Company or its subsidiaries as the Board, in its sole
discretion, may, from time to time, designate as participants and (ii)
non-employee members of the Board. The Board shall consider such factors as it
deems pertinent in selecting employee participants.
4. Shares Covered by the Plan. The stock to be awarded under the Plan
shall be shares of Common Stock and may be unissued shares or reacquired shares
(including shares purchased in the open market), or a combination of the two, as
the Board may from time to time determined; provided, however, that the
aggregate number of shares of Common Stock which may be awarded under the Plan
shall not exceed seventy-five thousand (75,000).
5. Plan Awards. On or before the last day of the Company's fiscal year,
a participant may elect, by written notice to the Company, to receive shares of
Common Stock in lieu of up to 20% (100% in the case of a participant who is a
non-employee Board member) of the participant's otherwise payable Compensation
for the succeeding fiscal year. The number of shares (rounded up to the nearest
whole share) payable to an electing participant shall be equal to the (A) the
dollar value of the percentage of Compensation covered by a participant's
election (b) divided by the Adjusted Fair Market Value of the Common Stock on
the measurement date, which date shall be the first business day of the fiscal
year. For purposes of the Plan, (A) "Adjusted Fair Market Value" of the Common
Stock shall be a price per share determined by the Personnel and Compensation
Committee of the Board and (B) "Compensation" shall mean (i) in the case of a
participant who is an employee, the participant's base salary and (ii) in the
case of a participant who is a non-employee Board member, the participant's
retainer.
-1-
<PAGE>
With respect to fiscal year 1998 of the Company, a participant may, not
later than 60 days after the effective date of the Plan, make an election (an
"initial election") with respect to Compensation payable during the remainder of
the fiscal year. For purposes of determining the number of shares payable to a
participant with respect to an initial election, the Adjusted Fair Market Value
of the Common Stock shall be determined as of the effective date of the Plan.
As a condition of participation in the Plan, each participant shall
acknowledge in writing to the Company that any shares acquired by the
participant pursuant to the Plan may not, without the prior consent of the
Board, be transferred by the participant for a period of three years from the
measurement date applicable to a specific award. All shares of Common Stock
issued under
The Plan shall bear an appropriate legend reflecting this
transferability restriction. Notwithstanding anything herein to the contrary,
the restriction described in this paragraph shall expire automatically upon a
participant's death or disability (within the meaning of Section 22(e)(3) of the
Internal Code of 1986, as amended).
In the event that, on any date shares are to be issued under the Plan,
an insufficient number of shares remain available for issuance under Section 4,
the remaining shares shall be issued on a proportionate basis to electing
participants and the balance of their compensation subject to the election shall
be payable in cash in accordance with customary payment practices.
6. Amendment and Termination. The Board shall have the right to amend,
modify, suspend or terminate the Plan at any time for any purpose.
7. Liability. No member of the Board or any officer or employee of the
Company or its subsidiaries shall be personally liable for any action, omission
or determination made in good faith in connection with the Plan.
8. Effective Date. This Plan will become effective upon adoption by the
Board. Subject to the availability of shares under Section 4, the Plan shall be
unlimited in duration.
9. Tax Withholding. The Company may withhold from any awards under the
Plan all applicable federal, state or local taxes which it may be required to
withhold.
10. Compliance with Applicable Laws. Common Stock shall not be issued
under the Plan unless and until counsel for the Company shall be satisfied that
any conditions necessary for such issuance to comply with all applicable tax,
securities or other laws or rules or applicable securities exchange requirements
have been fulfilled. In particular, the Company shall not be required to deliver
any shares of Common Stock under the Plan prior to (i) the admission of such
shares to listing on any stock exchange which Common Stock may then be listed,
(ii) the completion of such registration or other qualification of such shares
under applicable law, rules or regulations as the Company shall determine to be
necessary or advisable, and/or (iii) to the extent the shares are not so
registered or qualified under the law of any applicable jurisdiction, the
receipt by the Company of such representations regarding the investment intent
of a Plan participant as may be necessary to comply with applicable securities
law.
-2-
<PAGE>
11. Securities Law Compliance. Participation in the Plan will be
governed by, in addition to general corporate law, the rules and regulations
promulgated by the Securities and Exchange Commission and, in particular,
Section 16 of the Securities and Exchange Act of 1934, as amended (the "Act").
It is the intent of the Company that the Plan satisfy, and be interpreted in a
manner that satisfies, the applicable requirements of Rule 16b-3 under the Act,
so that participants will be entitled to the benefits of such Rule 16b-3, or
other exemption rules under Section 16 of the Act, and will not be subjected to
avoidable liability thereunder. If any provision of the Plan would otherwise
frustrate or conflict with the intent expressed in this Section 12, that
provision to the extent possible shall be interpreted and deemed amended so as
to avoid such conflict. To the extent of any remaining irreconcilable conflict
with such intent, such provisions shall be deemed void.
12. Unfunded Status. The Plan shall be unfunded. The Company shall not
be required to established any special or separate fund or to make any other
segregation of assets to assure the issuance of shares of Common Stock upon the
making of an award under the Plan and the issuance of shares of Common Stock
upon the making of any award shall be subordinate to the claims of the Company's
general creditors.
13. Shareholder Rights. The shares of Common Stock awarded to a
participant under the Plan shall be issued in the name of the participant as
soon as administratively practicable following the applicable measurement date,
and from and after the date of such issuance the participant shall be entitled
to all rights of a shareholder with respect to such Common Stock, including the
right to vote the shares, and the participant shall receive all dividends and
other distributions paid or made with respect thereto.
14. Controlling Laws. The Plan shall be construe and administered in
accordance with the Laws of the State of Washington.
15. Severability. In the event of any provisions of the Plan shall be
held to be illegal or invalid for any reason, such illegality or invalidity
shall not affect the remaining parts of the Plan, and the Plan shall be
construed and endorsed as if such illegal or invalid provisions had never been
contained in the Plan.
16. Effect of Headings. The description headings of the sections of the
Plan are inserted for convenience of reference and identification only and do
not constitute a part of the Plan for purposes of interpretation.
Attest:
/s/ /s/
________________________________ ________________________________
Secretary Frank M. McCord
Chairman and Chief Executive Officer
-3-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>6
<FILENAME>v80226ex13.txt
<DESCRIPTION>EXHIBIT 13
<TEXT>
<PAGE>
Exhibit 13
CASCADE FINANCIAL CORPORATION
12/31/01 ANNUAL REPORT
Financial Highlights......................................1
Letter to Shareholders....................................2
Cascade Bank Management Team..............................14
Board of Directors........................................16
Common Stock Information..................................16
Independent Auditors' Report..............................17
FINANCIAL HIGHLIGHTS
Information other than amounts at December 31, 2001 is unaudited. Dollars in
thousands except for per share and financial ratios.
<TABLE>
<CAPTION>
For the year
ended December 31 2001 2000 1999 1998 1997
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net interest income $ 21,403 18,738 17,911 14,907 12,597.
Other income 3,322 2,399 2,711 2,630 2,033.
Net income 5,617 3,821 4,152 4,048 2,736*
Earnings per share (diluted) 0.87 0.59 0.65 0.63 0.43*
At December 31 2001 2000 1999 1998 1997
--------- ------- ------- ------- -------
Assets $ 762,013 716,129 616,958 489,807 422,530
Loans, net 576,226 548,722 511,735 413,698 359,068
Deposits 419,980 395,976 438,935 335,529 300,095
Stockholders' equity 47,677 41,240 35,371 33,612 29,304
Book value per share 7.70 6.70 5.91 5.64 5.02
Financial ratios 2001 2000 1999 1998 1997
--------- ------- ------- ------- -------
Return on assets 0.77% 0.57 0.75 0.82 0.64*
Return on average equity 12.63 10.16 12.04 12.87 9.85*
Net interest margin 3.01 2.86 3.32 3.47 3.10
% Nonperforming loans 0.34 0.42 0.10 0.27 0.24
Efficiency ratio 60.13 68.62 67.18 64.00 69.16
</TABLE>
Amounts for 1997 have been restated to reflect the acquisition of AmFirst
Bancorporation.
*The 1997 SAIF special assessment of $1.2 million is excluded.
IN 2001, FOLLOWING CASCADE BANK'S CONVERSION FROM A THRIFT INSTITUTION TO A
COMMERCIAL BANK, CASCADE FINANCIAL CORPORATION ("CASCADE") CHANGED ITS FISCAL
YEAR-END FROM JUNE 30 TO DECEMBER 31 TO ALIGN ITS REPORTING PERIODS WITH THOSE
OF ITS COMMERCIAL BANK PEERS. CASCADE'S CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTH PERIOD ENDED DECEMBER 31, 2001, AND ITS FINANCIAL STATEMENTS FOR
THE THREE ANNUAL PERIODS ENDING JUNE 30, 2001, WERE AUDITED BY KPMG LLP.
CASCADE'S FINANCIAL INFORMATION, PREPARED BY MANAGEMENT FOR THE CALENDAR YEARS
ENDED DECEMBER 31, IS UNAUDITED.
<PAGE>
DEAR SHAREHOLDERS, CUSTOMERS,
AND EMPLOYEES --
The calendar year 2001 was one of dynamic change and outstanding performance for
Cascade Financial Corporation. New leadership and the change to a commercial
bank charter served to accelerate our success. We are proud to report a
record-breaking year with profits up 47% over the previous year. Just six months
ago, in our last annual report, we set five year financial targets for
ourselves. Due to our employees' dedicated hard work, we have made excellent
progress toward these targets.
Disciplined focus on building the business, real estate construction, and
commercial real estate segments of our loan portfolio is the primary driver of
our increased profitability. Additionally, the declining interest rate
environment significantly reduced our cost of funds, as we continued to build
deposit relationships with our customers.
While celebrating our success, we also are conscious of the current
environment. The Puget Sound economy has been significantly affected by a wide
variety of factors. Operating efficiently while increasing market share in an
economy in recession requires both discipline and skill. It also means an
attentive relationship with our customers to help them weather a more difficult
time in the business cycle. At Cascade, we have bolstered our Credit
Administration resources to manage through this time.
Not everyone has been adversely affected by the economy. Many of our
customers are thriving. Helping business customers like Pacific Topsoils, Inc.,
profiled on page 7, is the primary way Cascade will continue to grow. Sandy and
Dave Forman's company is representative of the many diverse and healthy
businesses that make up this region's community. We are committed to meeting
their needs, with competitive products and, most importantly, with personal
service that exceeds their expectations.
IN CLOSING, WE WOULD LIKE TO EXPRESS OUR SINCERE APPRECIATION TO ALL THE
STAKEHOLDERS OF CASCADE'S SUCCESS. WE ARE GRATEFUL TO EVERY EMPLOYEE WHO MAKES
OUR VISION A REALITY. A SPECIAL THANKS IS ALSO DUE OUR CUSTOMERS AND
SHAREHOLDERS FOR CHOOSING CASCADE FROM AMONG THE MANY ALTERNATIVES AVAILABLE.
Carol K. Nelson
President and Chief Executive Officer
Cascade Bank
Frank M. McCord
Chairman and Chief Executive Officer
Cascade Financial Corporation
"WE WILL BE THE PREFERRED COMMUNITY BANK WHOSE EMPLOYEES BUILD RELATIONSHIPS TO
DELIVER FINANCIAL SOLUTIONS WITH EXCEPTIONAL SERVICE."
<TABLE>
<CAPTION>
Financial targets 2005 Target 2001 Performance
(unaudited)
<S> <C> <C>
Return on average equity greater than 15% 12.6%
Annual growth in earnings per share 10 to 15% 45%
Ratio of nonperforming loans to total loans less than 1.00% 0.34%
EFFICIENCY RATIO less than 60% 60%
</TABLE>
<PAGE>
PERFORMANCE HIGHLIGHTS:
12 months ended December 31, 2001 versus 2000, unaudited
o Net income increased 47% to $5.6 million, or $0.87 per diluted share,
compared to $3.8 million, or $0.60 per diluted share.
o Net interest income increased 14% to $21.4 million, from $18.7 million.
o Net interest margin grew to 3.01% from 2.86%.
o Other income grew 38% to $3.3 million, compared to $2.4 million.
o Efficiency ratio improved to 60%, compared to 69%.
We realized a 12.63% return on average equity in calendar 2001 from 10.16%
in calendar 2000, and a 0.77% return on average assets in 2001 compared to 0.57%
the prior year.
POSITIONED TO FLOURISH IN CHALLENGING TIMES
Maintaining good credit quality is critical to the success of any financial
institution. The professional commercial lending experience Cascade Bank has
assembled is reflected in our continued healthy credit quality. Cascade's
nonperforming loans were just $2.0 million, or 0.34% of total loans at December
31, 2001. That ratio remains superior at September 2001 to that of commercial
banks with assets of $500 million to $1 billion throughout the United States.
Revenue (in millions of dollars, unaudited) Net interest income Other income Net
Income (in millions of dollars, unaudited)
Nonperforming Loans/Total Loans Comparison
<TABLE>
<CAPTION>
Dec. 31, 2001 Sept. 30, 2001 Dec. 30, 2000
<S> <C> <C> <C>
Cascade 0.34% 0.29 0.42
National Peers -- 0.96 0.77
Washington State Peers -- 0.91 0.74
Most recent peer data available is September 30, 2001. Source: www.fdic.gov
</TABLE>
Also critical to our success is a strong capital base. Cascade's capital
ratios continue to be above the well-capitalized guidelines established by
regulatory agencies. The bank's Capital/Asset Ratio (including trust preferred
securities) at December 31, 2001 was 7.54% compared to 7.15% at December 31,
2000.
Record-breaking results notwithstanding, Cascade is well aware of the
possible impact the economic environment may have on our customers. Between the
contraction in the technology sector, Boeing layoffs, and the shaken travel
industry, the Puget Sound region has and will continue to feel the impact of the
recession.
Given this environment, Cascade has shifted additional resources to
managing credit quality -- and increased its reserve for loan loss by $1.0
million to 1.08% of total loans at December 31, 2001, as compared to December
31, 2000. Cascade's seasoned Business Bankers are working closely with business
customers to foster their financial well-being.
STRATEGIES TO BUILD PROFITABILITY
Serving local businesses and their owners, families, and employees well, remains
Cascade's primary goal. Through personalized, attentive service and a wide range
of products, we meet the diverse needs of our customers.
GROWING DEPOSITS ONE CUSTOMER AT A TIME
Developing deposit relationships with our business banking customers is a
fundamental part of our strategy. Cascade has achieved 6% growth in deposits in
the last year by offering competitive products delivered with exceptional
service.
Building these relationship accounts is key to lowering Cascade's funding
costs and improving profitability. Progress has been made over recent years to
shift the deposit mix to checking accounts versus certificates of deposit. At
December 31, 2001, checking accounts made up 11% of deposits as compared with 5%
at the end of 1997.
<PAGE>
Deposits
While Cascade's deposits are still centered in time deposits, declining
interest rates over the last year have substantially reduced our cost of funds.
Checking Deposits (in millions of dollars, information other than 2001 is
unaudited.)
Checking account balances remained level at December 31, 2001, and remain a
significant challenge for Cascade Bank. With innovative services like online
banking and deposit courier service, we compete against the vast delivery
systems of larger banks for business transaction accounts such as checking and
money market accounts.
Cascade's 14 locations in Snohomish and East King Counties also focus on
building checking relationships in their local communities. Saturday banking at
our six grocery store locations, as well as online banking, meet the banking
needs of today's busy families, who, now more than ever, appreciate personal
service from a local bank.
FINANCING THE LOCAL BUSINESS COMMUNITY
Assets grew 6% to $762 million at December 31, 2001 from $716 million a year
ago. Cascade's net loans grew 5% to $576 million at December 31, 2001. Growth
was fueled by increases in business, real estate construction, and commercial
real estate loans. The exceptional growth in these business segments continues
to improve the diversification of our loan portfolio overall. At December 31,
2001, business, real estate construction, and commercial real estate loans made
up 45% of the loan portfolio, as compared with 24% in 1997.
PACIFIC TOPSOILS INC.
Dave and Sandy Forman have been in the business of delivering landscaping
materials since 1978. Starting out by delivering sod to contractors, they now
ship a variety of materials from nine sites located in Snohomish and King
Counties. Recently the Formans moved their corporate headquarters to South
Everett with help from Cascade Bank. At that location, they also have
maintenance facilities to keep the company's 160 pieces of heavy equipment in
good working order.
Cascade helps Pacific Topsoils, Inc. grow their business with equipment
financing, an operating line, as well as recently completing financing on their
new corporate headquarters in South Everett. "Bob Miller made a point of
understanding our business," said Dave. "He helped us figure out how to put
together the best financing for the situation, and, he did it quickly."
Sandy, who manages the administrative side of the business, also
appreciates Cascade's online banking. "We can keep track of our accounts
online." Staying on top of things is important when dispatching upwards of 250
loads of material on a busy day.
Pacific Topsoils, Inc. is just one of the many local businesses that keep
this community thriving. Cascade is proud to be their bank.
Total Loans
Business Loans (in millions of dollars, information other than 2001 is
unaudited)
<PAGE>
Business loans increased 29% to $125.3 million from $97.0 million at December
31, 2000. Experienced Business Bankers, local decision-making, and exceptional
service make Cascade an ideal choice for small to mid-size businesses in the
Snohomish and east King County markets.
Real Estate Construction Loans (in millions of dollars, information other than
2001 is unaudited)
The real estate construction niche continues to be important to Cascade's
growth. Loans outstanding in this category increased 48% to $75.9 million from
December 31, 2000 to December 31, 2001. Cascade serves the needs of the region's
premier builders in both single and multifamily residential construction. Due to
low interest rates, the housing market has been one of the bright spots in the
current economy. Demand for moderately priced homes, the type that Cascade's
customers specialize in building, has not subsided and is expected to help
stabilize the Puget Sound economy until other sectors of the economy rebound.
CULTIVATING EFFECTIVENESS
A clear vision and focused goals, as outlined in the letter to shareholders, are
key to Cascade's effectiveness. But, this cannot be achieved without dedicated
employees. Our talented team continues to ensure the industry's best practices
are implemented for the maximum benefit of customers and the bank.
Cascade Bank provides financing for many of the top builders in the Puget Sound
region. Our competitive pricing, flexible product line, and responsive service
help our customers focus on building quality homes.
Our people are what set Cascade Bank apart. Our mission is to empower
well-trained, knowledgeable employees to deliver the best financial solutions
and exceed customer service expectations.
Efficiency Ratio (unaudited)
A standard measurement of a bank's performance today is its efficiency ratio.
The efficiency ratio is calculated by dividing non-interest expense by total
revenue, which indicates how much an institution spends to generate a dollar of
revenue. The ratio can be lowered (which is better) by reducing expenses and/or
increasing revenues. At Cascade we are not focusing on solely cutting expenses
because we believe that will result in a loss of customer relationships, which
will ultimately result in an erosion of revenues and profitability. Our plan is
to improve our efficiency ratio by both controlling expenses and improving
revenues.
Cascade's efficiency ratio improved significantly in calendar 2001, and we
are now nearing our stated target of less than 60%. We will strive to reach this
goal by continuing to control costs and improve revenues while maintaining high
standards of service.
EXCEPTIONAL SERVICE
Becoming the preferred community bank in our market requires a concerted effort
on the part of every Cascade team member. Toward that end, customer service
standards have been instituted across business lines to ensure we exceed our
customers' expectations. Additionally, customer service surveys collect customer
feedback to help improve Cascade's delivery.
Our ongoing commitment to the community has also shown record results this
year. Cascade employees increased pledges to United Way by 185% over the
previous year, winning the Silver Award among companies our size. We also
continue to maintain our Community Reinvestment Act rating of "Outstanding."
This is the highest possible rating and recognizes our involvement in the
community combined with progressive lending practices that reach out to low and
moderate income home buyers.
FORWARD LOOKING STATEMENTS
This document contains forward looking statements that have been prepared on the
basis of Cascade's
<PAGE>
best judgments and currently available information. These forward looking
statements are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
control of Cascade. In addition, these forward looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to changes. Factors that could affect actual results include interest
rate trends, the general economic climate in Cascade's market area and the
country as a whole, the ability of Cascade to control costs and expenses,
competitive products and pricing, loan delinquency rates and changes in federal
and state regulation. Accordingly, there can be no assurance that these
strategies will be implemented, or if implemented, will achieve the results
described or within the time periods currently estimated.
CASCADE BANK MANAGEMENT TEAM
1. Carol K. Nelson
President and CEO
2. Robert Disotell
EVP, Chief Credit Officer
3. Steven R. Erickson
EVP, Real Estate Lending
4. LeAnne Frank
EVP, Quality of Service and Technology
5. Lars Johnson
EVP, Chief Financial Officer
6. David R. Little
EVP, Business Banking
7. Debbie McLeod
EVP, Retail Banking
8. Vera E. Wildauer
EVP, Marketing
BOARD OF DIRECTORS
Frank M. McCord
Chairman of
the Board (1)
David W. Duce
Vice Chairman
Attorney
Duce, Bastian,
Peterson and Zielke (3)
Janice Halladay
Retired
Bank Executive (3)
Dwayne Lane
President
Dwayne Lane
Auto Centers (3)
Dennis R. Murphy, Ph.D.
Vice Chairman
Dean, College of Business
and Economics
Professor of Economics
Western Washington University (2)
<PAGE>
Carol K. Nelson
President and CEO
Cascade Bank (1)
David R. O'Connor
Co-Owner
Mobile Country Club (1, 3)
Henry M. Robinett
General Partner
Boyden, Robinett &
Associates L.P. (1, 2)
Craig Skotdal
President
Skotdal Real Estate
(2)
Ronald E. Thompson
President
Windermere Commercial
and Property Management
of Snohomish County (1, 2)
G. Brandt Westover
Vice President
Paine Webber, Inc. (1, 3)
1. Executive Committee
2. Audit and Finance Committee
3. Compensation and Personnel Commit
The common stock of Cascade Financial Corporation is traded on the NASDAQ
SmallCap Market under the symbol CASB. As of December 31, 2001, there were
approximately 2,500 stockholders of record. The following table sets forth
market price information for the Corporation's common stock.
2000 High Low
3/31/00 $ 10.91 6.08
6/30/00 7.73 5.51
9/30/00 6.59 5.45
12/31/00 7.73 6.25
2001 High Low
3/31/01 $ 7.62 6.65
6/30/01 8.18 6.39
9/30/01 9.09 7.04
12/31/01 9.09 7.60
<PAGE>
Independent Auditor's Report
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheets of Cascade
Financial Corporation and subsidiaries (Corporation) as of December 31, 2001 and
June 30, 2001, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for the six month
period ended December 31, 2001, and for each of the years in the three-year
period ended June 30, 2001. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cascade
Financial Corporation and subsidiaries as of December 31, 2001 and June 30,
2001, and the results of their operations and their cash flows for the six month
period ended December 31, 2001, and for each of the years in the three-year
period ended June 30, 2001 in conformity with accounting principles generally
accepted in the United States of America.
KPMG
Seattle, Washington
March 1, 2002
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dollars in thousands December 31, 2001 June 30, 2001
ASSETS: ----------------- -------------
<S> <C> <C>
Cash on hand and in banks $ 8,535 8,025
Interest-bearing deposits in other
financial institutions 3,087 5,855
Securities available-for-sale 150,338 129,213
Securities held-to-maturity 5,989 6,592
Loans 582,530 570,556
Allowance for loan losses (6,304) (5,687)
--------------------------------
Loans, net 576,226 564,869
Premises and equipment, net 8,620 8,977
Accrued interest receivable and
other assets 9,218 9,536
--------------------------------
Total assets $ 762,013 733,067
================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 419,980 401,915
Federal Home Loan Bank (FHLB)
advances 226,500 232,124
Securities sold under agreements
to repurchase 49,792 36,920
Advance payments by borrowers for
taxes and insurance 1,574 1,739
Accrued interest payable, expenses
and other liabilities 5,213 4,295
Deferred Federal income taxes 1,277 1,477
--------------------------------
Total liabilities 704,336 678,470
--------------------------------
Trust preferred securities 10,000 10,000
Stockholders' equity:
Preferred stock, $.01 par value.
Authorized 500,000 shares; no shares
issued or outstanding -- --
Common stock, $.01 par value.
Authorized 8,000,000 shares; issued
and outstanding 6,333,007 shares at
December 31, 2001 and 5,694,195
shares at June 30, 2001 63 57
Additional paid-in capital 10,421 5,484
Treasury stock, 132,092 shares at
December 31, 2001 and 100,935
shares at June 30, 2001, at cost (972) (723)
Retained earnings, substantially restricted 38,012 39,426
Accumulated other comprehensive
Income 153 353
---------------------------------
Total stockholders' equity 47,677 44,597
---------------------------------
Total liabilities and stockholders' equity $ 762,013 733,067
=================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
Dollars in thousands, except share amounts
<TABLE>
<CAPTION>
Six months ended
December 31, Years ended June 30,
-------------------------- -------------------------------------
2001 2000 2001 2000 1999
-------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME: (unaudited)
Loans $ 23,209 23,706 47,897 43,155 34,751
Securities held-to-maturity 187 382 421 306 141
Securities available-for-sale 3,474 3,617 7,288 4,306 2,598
FHLB stock dividends 451 373 787 622 445
Interest-bearing deposits 153 201 296 193 270
-----------------------------------------------------------------------------
Total interest income 27,474 28,279 56,689 48,582 38,205
-----------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 8,035 10,501 20,105 19,801 16,425
FHLB advances 7,047 6,800 13,843 9,093 5,280
Securities sold under
agreements to repurchase 609 1,025 2,014 565 251
Trust preferred securities 581 593 1,166 388 --
-----------------------------------------------------------------------------
Total interest expense 16,272 18,919 37,128 29,847 21,956
-----------------------------------------------------------------------------
Net interest income 11,202 9,360 19,561 18,735 16,249
PROVISION FOR LOAN LOSSES 810 420 980 770 427
-----------------------------------------------------------------------------
Net interest income after
provision for loan losses 10,392 8,940 18,581 17,965 15,822
-----------------------------------------------------------------------------
OTHER INCOME:
Gain on sale of loans
held-for-sale 335 107 336 427 623
Gain on sale of mortgage-
backed securities -- -- -- -- 37
Gain on sale of servicing 22 -- -- -- 633
Gain on sale of securities
available-for-sale, net 294 76 212 -- 17
Service charges 908 854 1,839 1,591 1,244
Other 258 101 256 258 283
-----------------------------------------------------------------------------
Total other income 1,817 1,138 2,643 2,276 2,837
-----------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 3,847 3,623 7,702 7,914 6,541
Occupancy 1,216 1,453 2,719 2,889 2,211
Data processing 133 146 249 234 370
Marketing 187 273 454 509 510
Other 2,078 1,402 3,177 3,071 2,806
-----------------------------------------------------------------------------
Total other expenses 7,461 6,897 14,301 14,617 12,438
-----------------------------------------------------------------------------
INCOME BEFORE FEDERAL
INCOME TAXES 4,748 3,181 6,923 5,624 6,221
Federal income taxes 1,598 1,082 2,357 1,912 2,117
-----------------------------------------------------------------------------
Net income $ 3,150 2,099 4,566 3,712 4,104
=============================================================================
Net income per common share, basic $ 0.51 0.35 0.75 0.61 0.69
Weighted average number of shares
outstanding, basic 6,172,489 6,065,332 6,081,969 6,042,084 5,962,315
Net income per diluted share $ 0.49 0.33 0.71 0.57 0.63
Weighted average number of shares
outstanding, diluted 6,465,467 6,411,499 6,427,574 6,523,426 6,552,197
</TABLE>
<PAGE>
See accompanying notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Dollars in thousands, except share amounts
<TABLE>
Accumulated Total
Additional other stock-
Common paid-in Treasury Retained comprehensive holders'
Shares stock capital stock earnings income (loss) equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
June 30, 1998 5,356,153 $ 54 4,418 -- 27,044 (104) 31,412
Options exercised 98,149 1 374 -- -- -- 375
Net income -- -- -- -- 4,104 -- 4,104
Other comprehensive l
Loss net of tax
benefit of $(814) -- -- -- -- -- (1,652) (1,652)
--------------------------------------------------------------------------------------------
Balances at
June 30, 1999 5,454,302 55 4,792 -- 31,148 (1,756) 34,239
Options exercised 77,575 -- 248 -- -- -- 248
Net income -- -- -- -- 3,712 -- 3,712
Other comprehensive
loss, net of tax
benefit of $(486) -- -- -- -- -- (943) (943)
--------------------------------------------------------------------------------------------
Balances at
June 30, 2000 5,531,877 55 5,040 -- 34,860 (2,699) 37,256
Options exercised 162,318 2 444 -- -- -- 446
Net income -- -- -- -- 4,566 -- 4,566
Shares repurchased (100,935) -- -- (723) -- -- (723)
Other comprehensive
income, net of tax
benefit of $1,466 -- -- -- -- -- 3,052 3,052
--------------------------------------------------------------------------------------------
Balances at
June 30, 2001 5,593,260 57 5,484 (723) 39,426 353 44,597
Stock dividends 572,989 6 4,651 (93) (4,564) -- --
Options exercised 54,429 -- 286 -- -- -- 286
Net income -- -- -- -- 3,150 -- 3,150
Shares repurchased (19,763) -- -- (156) -- -- (156)
Other comprehensive
loss, net of tax
benefit of $(103) -- -- -- -- -- (200) (200)
--------------------------------------------------------------------------------------------
Balances at
December 31, 2001 6,200,915 $ 63 10,421 (972) 38,012 153 47,677
============================================================================================
</TABLE>
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Six months ended December 31, Years ended June 30,
---------------------------- --------------------------------------
2001 2000 2001 2000 1999
---------------------------- --------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Income $ 3,150 2,099 4,566 3,712 4,104
Increase in unrealized
gains (losses) on securities
available-for-sale, net of tax expense
(benefit) of $(3), 1,084, 1,538,
(486), and (808). (6) 2,312 3,192 (943) (1,641)
Less reclassification adjustment for
gains included in net income, net of
tax (benefit) of $(100), (26), (72), 0,
and (6). (194) (50) (140) -- (11)
------------------------------------------------------------------------
Comprehensive Income $ 2,950 4,361 7,618 2,769 2,452
========================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
<TABLE>
<CAPTION>
Six months ended Years ended
December 31, June 30,
--------------------- -----------------------------------
2001 2000 2001 2000 1999
--------------------- -----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 3,150 2,099 4,566 3,712 4,104
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 655 698 1,302 1,405 938
Amortization of retained servicing rights 135 130 268 257 384
Provision (recovery) for losses on:
Loans 810 420 980 770 427
Mortgage servicing rights 30 -- -- (137) 187
Deferred Federal income taxes (98) 49 469 (486) (136)
Additions to mortgage servicing rights (4) (24) (27) (204) (1,042)
Deferred loan fees, net of amortization (201) 215 (16) 348 25
Net gain on sales of securities
available-for-sale (294) (76) (212) -- (17)
Gain on sales of mortgage loan
servicing rights (22) -- -- -- (633)
Gain on sales of REO (18) -- -- -- --
Gain on sales of premises and
equipment (170) -- -- -- --
FHLB stock dividend (451) (373) (787) (622) (445)
Net change in accrued interest
receivable and other assets over
accrued interest payable, expenses
and other liabilities 1,320 (1,004) (2,386) (3,581) (91)
--------------------------------------------------------------------
Net cash provided by
operating activities 4,842 2,134 4,157 1,462 3,701
--------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated, net of
principal repayments (12,177) (9,619) (27,007) (86,546) (71,987)
Purchases of securities held-to-maturity -- -- -- (9,820) (291)
Principal repayments on securities
held-to-maturity 603 652 1,259 707 3,278
Principal repayments on securities
available-for-sale 15,412 3,091 22,652 4,435 7,994
Purchases of securities available-for-sale (96,593) (45,631) (131,635) (25,968) (62,252)
Proceeds from sales of securities
available-for-sale 60,498 21,052 81,730 -- 7,016
Purchases of premises and equipment (348) (433) (1,147) (1,104) (1,608)
Proceeds from sales of premises
and equipment 227 -- -- -- --
Proceeds from sales of mortgage
servicing rights -- -- -- -- 1,579
--------------------------------------------------------------------
Net cash used in investing activities (32,378) (30,888) (54,148) (118,296) (116,271)
--------------------------------------------------------------------
Subtotal, carried forward $(27,536) (28,754) (49,991) (116,834) (112,570)
--------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Dollars in thousands
Six months ended Years ended
December 31, June 30,
-------------------------- ------------------------------------
2001 2000 2001 2000 1999
-------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
(unaudited)
Subtotal, brought forward $ (27,536) (28,754) (49,991) (116,834) (112,570)
-------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of
stock options 286 210 446 248 375
Repurchase of common stock (156) (584) (723) -- --
Net (decrease) increase in deposits 18,065 (2,531) 3,408 36,721 49,268
Net increase (decrease) in FHLB advances (5,624) 7,321 16,468 73,660 68,560
Proceeds from trust preferred offering,
net of issuance costs -- -- -- 9,234 --
Net increase (decrease) in securities
sold under agreements to repurchase 12,872 31,478 31,133 164 (7,440)
Net increase (decrease) in advance
payments by borrowers for taxes
and insurance (165) (240) (221) 13 (6)
---------------------------------------------------------------------
Net cash provided by
financing activities 25,278 35,654 50,511 120,040 110,757
--------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents (2,258) 6,900 520 3,206 (1,813)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 13,880 13,360 13,360 10,154 11,967
--------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 11,622 20,260 13,880 13,360 10,154
====================================================================
Supplemental disclosures of
cash flow information
Cash paid during the year for:
Interest $ 15,655 17,674 35,309 28,709 21,848
Federal income taxes 1,100 825 2,075 1,809 2,438
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Mortgage loans securitized into
FHLMC participation certificates,
held-for-trading and sold $ -- -- -- 8,814 20,137
Net mortgage loans transferred
to real estate owned 211 234 1,147 1,192 534
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Dollars in thousands, except share amounts
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of Cascade Financial Corporation
and subsidiaries (the "Corporation") conform to accounting principles generally
accepted in the United States of America and to general practice within the
financial institutions industry, where applicable. In preparing the consolidated
financial statements, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of income and expense. Actual results could differ from those estimates.
The following is a description of the more significant policies, which the
Corporation follows in preparing and presenting its consolidated financial
statements.
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation, its subsidiaries, Cascade Bank (the "Bank"), Cascade Capital
Trust I (the "Trust"), and the Bank's subsidiary, Cascade Investment
Services, Inc. All significant intercompany balances and transactions have
been eliminated in the consolidation.
On November 27, 2001, the Corporation's Board of Directors voted to
change the Corporation's fiscal year ending June 30 to a calendar year
beginning January 1st and ending December 31st.
(b) CASH EQUIVALENTS
The Corporation considers all interest-bearing deposits and short-term
highly liquid investment securities with an original maturity of three
months or less to be cash equivalents.
(c) LOANS
All of the Corporation's loans are located in the Puget Sound region. At
December 31, 2001, the Corporation's loans are principally secured by
one-to-four-family residences (26%), multifamily residences (19%), real
estate construction (13%), business (21%), consumer assets (10%) and
commercial real estate properties (11%). Accordingly, the ultimate
collectibility of the Corporation's loan portfolio is susceptible to
changes in the economic and real estate market conditions in the Puget
Sound region.
Most of the commercial loans are secured, and the security includes
commercial property, business inventories, commercial equipment and
personal property of the borrowers and/or guarantors. At December 31, 2001,
$9.4 million in commercial loans were unsecured. Home equity loans and
lines of credit account for the majority of the installment loan portfolio.
Real estate loans originated by the Corporation are generally secured
by no less than 80% of the lesser of the appraised value or purchase price
of the underlying property. The Corporation currently requires first
mortgage, residential customers to obtain private mortgage insurance on all
loans above an 80% loan-to-value ratio.
Interest Income
Loans are stated at principal amounts outstanding, net of deferred loan
fees and costs. Interest is accrued only if deemed collectible. Accrual of
interest income is generally discontinued when a loan becomes 90 days past
due and accrued interest amounts are reversed. Once interest has been paid
to date or management considers the loan to be fully collectible, it is
returned to accrual status.
Loan origination fees and certain direct origination costs are
deferred and amortized as an adjustment of the loans' yields over their
contractual lives using the effective interest method. In the event loans
are sold, the remaining net deferred loan origination fees or costs are
recognized as a component of the gains or losses on the sales of loans.
When portfolio loans pay off before their contractual maturity, the
remaining deferred fees or costs are recognized as interest income or
expense.
Loan commitment fees are deferred until loans are funded, at which
time they are amortized into interest income using the effective interest
method. If the commitment period expires, the fees are recognized as
service charges.
Impairment of Loans and Allowance for Loan Losses
An allowance for loan losses is maintained at a level sufficient to provide
for losses based on management's evaluation of known and inherent risks in
the loan portfolio. This evaluation includes analyses of the fair value of
the financial condition of the borrower, collateral securing selected
loans, consideration of historical loss experience and management's
projection of trends affecting credit quality. Interest income is normally
recognized on the accrual basis; however, if a loan is impaired then
interest income is recorded upon the receipt of cash. The difference
between interest income recognized on the accrual basis and cash basis is
not significant.
The Corporation reviews all single family loans, all consumer loans
and multifamily and commercial real estate loans with outstanding principal
balances under $1.0 million for impairment as smaller balance homogeneous
loan groups. The Corporation considers a loan to be impaired when it
becomes
<PAGE>
nonaccrual; if it is a multifamily or commercial real estate loan less than
90 days delinquent and management believes that the borrower may be
experiencing financial difficulty based on indicators such as an
inconsistent payment pattern, low debt coverage ratio, high loan-to-value
ratio; or if it is a restructured debt. The Corporation bases the
measurement of loan impairment for all loans on the fair value of the
loan's underlying collateral. If the recorded investment in a loan exceeds
the measure of impairment, the Corporation recognizes the impairment by
creating a valuation allowance with a corresponding charge to the provision
for loan losses.
Management believes the allowances for losses on loans and real estate
owned are adequate. While management uses available information to
recognize losses on these assets, future additions to the allowances may be
necessary based on changes in economic conditions, particularly in the
western Washington region. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Corporation's allowances for losses on loans. Such agencies may require the
Corporation to recognize additions to the allowances, or change valuations,
based on their judgments about information available to them at the time of
their examinations.
(d) SALES OF LOANS
Loans Held-for-Sale
Any loan that management determines will not be held-to-maturity is
classified as held-for-sale at the time of origination. Loans held-for-sale
are carried at lower of cost or market value, determined on an aggregate
basis. Unrealized losses on such loans are included in gain on sale for
loans held-for-sale. All loans are sold without recourse.
Mortgage Loan Servicing Rights
The Corporation acquires mortgage servicing rights (MSR) through the
origination of mortgage loans and the sale of those loans with servicing
rights retained. The total cost of the mortgage loans sold is allocated to
the MSR and the loans based on their relative fair values. The Corporation
assesses its MSR for impairment based on the fair value of those rights.
The carrying value of the MSR is evaluated on a quarterly basis and any
impairment is recognized through a valuation allowance for each impaired
stratum. For purposes of measuring impairment, the Corporation stratifies
its MSR by various risk characteristics such as loan type, investor type,
interest rate and origination date with appropriate prepayment assumptions
for the various MSR pools. Reversal of the allowance is based upon the
recovery of the fair market value of the amortized asset. The MSR are
included in other assets and are amortized as an offset to service charges
in proportion to, and over, the period of estimated net servicing income.
Loan servicing generally consists of collecting mortgage payments and
certain charges from borrowers, such as late payment fees, maintaining
escrow accounts, and disbursing payments to investors. Loan servicing
income is recognized when earned and is recorded to service charges. Loan
servicing costs are charged to expense as incurred.
The Corporation sells loan servicing rights. Gains and losses from
sales of loan servicing rights are calculated using the specific
identification of the related carrying value.
(e) SECURITIES
Debt and equity securities, including mortgage-backed securities (MBS), are
classified as either trading, available-for-sale, or held-to-maturity.
Securities classified as trading are carried at fair value with unrealized
gains and losses reported in earnings. Securities available-for-sale are
carried at fair value, with unrealized gains and losses reported as a
component of other comprehensive income. Realized gains and losses on sales
are computed using the specific identification methods. Investment
securities held-to-maturity are carried at amortized cost or principal
balance, adjusted for amortization of premiums and accretion of discounts.
Amortization of premiums and accretion of discounts are calculated using a
method that approximates the level yield method. The Corporation has the
ability, and it is management's intention, to hold such securities until
maturity.
(f) REAL ESTATE OWNED
Real estate owned includes real estate acquired in settlement of loans.
Real estate owned is recorded at the lower of cost or fair value, based
upon the most recent appraisal, less estimated costs to sell. Any loss
recorded at the time a foreclosure occurs is classified as a charge-off
against the allowance for loan losses. Losses that result from the ongoing
periodic valuation of these properties are charged to operations in the
period in which they are identified. Real estate owned at December 31, 2001
and June 30, 2001 was $430 and $787, respectively, which is included in
other assets.
(g) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Straight-line depreciation is provided over the estimated useful lives of
the respective assets. Leasehold improvements are amortized over the
estimated useful lives of the improvements, or terms of the related leases,
whichever is shorter.
<PAGE>
(h) FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on the deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(i) STOCK-BASED COMPENSATION
The Corporation measures its employee stock-based compensation arrangements
using the provisions outlined in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees", which is an intrinsic
value-based method of recognizing compensation costs. The Corporation has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compansation". As none of the Corporation's stock options have
an intrinsic value at grant date, no compensation cost has been recognized
for its stock option plans.
(j) RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 141, "Business Combinations", was issued in June 2001. SFAS No.
141 requires that all business combinations after June 30, 2001 be
accounted for using the purchase method. It also defines certain criteria
for intangible assets that are acquired in a business combination, in order
to be recognized and reported separately from goodwill. SFAS No. 141
supersedes Accounting Principles Board Opinion No. 16 (APB 16), "Business
Combinations" and Financial Accounting Standards Board Statement No. 38
(SFAS 38), "Accounting for Preacquisition Contingencies of Purchased
Enterprises".
SFAS No. 142, "Goodwill and Other Intangible Assets", was issued in
June 2001. SFAS No. 142 establishes accounting and reporting standards for
intangible assets. It requires that goodwill and intangible assets with
indefinite useful lives be tested for impairment annually rather than
amortized. SFAS No. 142 supersedes Accounting Principles Bulletin No. 17
(APB 17), "Intangible Assets".
The Corporation does not expect the application of these statements
will have any material effect on the consolidated financial statements.
(k) RECLASSIFICATIONS
Certain June 30, 2000 balances have been reclassfied to conform to the 2001
presentation.
(2) SECURITIES
A summary of securities at December 31, 2001 and June 30, 2001 follows:
<TABLE>
<CAPTION>
December 31, 2001 June 30, 2001
----------------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amor- unreal- unreal- Amor- unreal- unreal-
tized ized ized Fair tized ized ized Fair
cost gain loss value cost gain loss value
----------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
available-for-sale:
Agency MBS $ 56,696 -- 185 56,511 76,492 340 -- 76,832
Agency notes 76,266 433 -- 76,699 35,315 177 -- 35,492
FHLB stock 13,119 -- -- 13,119 12,668 -- -- 12,668
Other 4,025 -- 16 4,009 4,203 18 -- 4,221
----------------------------------------------------------------------------------------------
$ 150,106 433 201 150,338 128,678 535 -- 129,213
==============================================================================================
Securities
held-to-maturity:
Agency MBS $ 5,989 -- 106 5,883 6,592 -- 136 6,456
----------------------------------------------------------------------------------------------
$ 5,989 -- 106 5,883 6,592 -- 136 6,456
==============================================================================================
</TABLE>
As of December 31, 2001 and June 30, 2001, the Corporation was required to
maintain 113,250 and 116,062 shares, respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits was
$1,710 and $1,130 at December 31, 2001 and June 30, 2001, respectively.
Proceeds from the sale of securities available-for-sale and gross realized
gains and losses are summarized as follows for the six months ended December 31,
2001 and for the years ended June 30, 2001 and June 30, 1999. There were no
sales of securities available-for-sale for the year ended June 30, 2000. During
the year ended June 30, 2001, a $3.0 million security previously classified as
held-to-maturity was reclassified to available-for-sale as provided in FAS 115
due to the deterioration of the issuer's creditworthiness. A $30 gain was
recognized when the security was sold.
<PAGE>
<TABLE>
<CAPTION>
Six months ended December 31, 2001
-----------------------------------
Proceeds Gain Loss
-------- ---- ----
<S> <C> <C> <C>
Agency MBS $ 40,998 266 1
Agency notes 19,500 29 --
-------- --- ---
Total $ 60,498 295 1
======== === ===
</TABLE>
<TABLE>
<CAPTION>
Six months ended December 31, 2000
(unaudited)
-----------------------------------
Proceeds Gain Loss
-------- ---- ----
<S> <C> <C> <C>
Agency MBS $ 21,052 76 --
-------- --- ---
Total $ 21,052 76 --
======== === ===
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 2001
-----------------------------------
Proceeds Gain Loss
-------- ---- ----
<S> <C> <C> <C>
Agency MBS $ 36,798 107 86
Agency notes 25,194 12 25
Other 19,738 204 --
-------- --- ---
Total $ 81,730 323 111
======== === ===
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 1999
-----------------------------------
Proceeds Gain Loss
-------- ---- ----
<S> <C> <C> <C>
Agency notes $ 7,016 17 --
-------- --- ---
Total $ 7,016 17 --
======== === ===
</TABLE>
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at December 31, 2001:
<TABLE>
<CAPTION>
Within one over one to over five to over ten
Year five years ten years years total
---------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Amortized Cost
Agency MBS $ -- -- 1,743 54,953 56,696
Agency notes 80 -- 43,736 32,450 76,266
FHLB stock 13,119 -- -- -- 13,119
Other -- -- -- 4,025 4,025
---------- --------- -------- --------- ----------
Total amortized cost $ 13,119 -- 45,479 91,428 150,106
========== ========= ========= ========= ==========
Fair Value
Agency MBS $ -- -- 1,796 54,715 56,511
Agency notes 80 -- 44,121 32,498 76,699
FHLB stock 13,119 -- -- -- 13,119
Other -- -- -- 4,009 4,009
---------- --------- -------- --------- ----------
Total fair value $ 13,199 -- 45,917 91,222 150,338
========== ========= ========= ========= ==========
</TABLE>
The contractual maturities of the Corporations' securities held-to-maturity at
December 31, 2001 were all greater than five years.
U.S. Government agency securities are classified based upon contractual
maturity dates. Actual maturities may differ from contractual maturities because
the borrowers have the right to prepay their obligations. Available-for-sale
securities pledged as collateral to secure public deposits were $1,356 at
December 31, 2001 and $1,476 at June 30, 2001.
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans at December 31, 2001 and June 30, 2001 follows:
<TABLE>
<CAPTION>
December 31, June 30,
2001 2001
------------ ---------
<S> <C> <C>
Residential real estate $ 152,727 165,003
Multifamily real estate 109,733 107,360
Commercial real estate 62,938 56,913
Real estate construction 104,131 103,206
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Business 125,342 113,708
Consumer 58,381 60,406
--------- ---------
Total loans 613,252 606,596
Loans in process (28,220) (33,337)
Deferred loan fees, net (2,502) (2,703)
--------- ---------
Loans $ 582,530 570,556
========= =========
Loans serviced for others $ 78,114 92,510
</TABLE>
Accrued interest on loans was $3,267 and $3,502 at December 31, 2001 and June
30, 2001, respectively.
At December 31, 2001, the composition of the loan portfolio including loans in
process was as follows:
<TABLE>
<CAPTION>
Adjustable
Fixed rate rate
---------- ----------
<S> <C> <C>
Term to maturity
Less than one year $ 25,321 233,681
1-3 years 33,092 111,231
3-5 years 26,663 107,132
5-10 years 21,475 17,416
10-20 years 7,204 70
Over 20 years 1,747 --
---------- --------
Total $ 115,502 469,530
========== ========
</TABLE>
Non-accrual loans totaled $1,999 and $1,315, respectively, at December 31, 2001
and June 30, 2001. If interest on these loans had been recognized, such income
would have been $87 and $74 respectively, for the periods ended December 31,
2001 and June 30, 2001. At December 31, 2001 and June 30, 2001 and 2000, loans
totaling $16,669, $5,625 and $4,174, were impaired, of which $1,512, $574 and
$194 had allocated allowances of $480, $105 and $28, respectively. The remaining
$15,157, $5,051 and $3,980 had no allowances allocated to them because the value
of the underlying collateral of the impaired loans was equal to or exceeded the
recorded investment. Of the $16,669, $5,625 and $4,174 of impaired loans,
$1,401, $1,121 and $572 were under foreclosure. The average balance of impaired
loans during the six months ended December 31, 2001 and the years ended June 30,
2001 and 2000, respectively, was $8,853, $6,065 and $3,243 and the Corporation
recognized $944, $746 and $406 of related interest income on such loans during
the time such loans were impaired.
At December 31, 2001, the Corporation had outstanding commitments of $6,828
to fund loans with fixed interest rates and $3,848 for loans with adjustable
rates.
The Corporation had forward commitments totaling $6,602 and $3,032 to sell
loans into the secondary market at December 31, 2001 and June 30, 2001,
respectively.
A summary of the activity in the allowance for losses on loans follows:
<TABLE>
<CAPTION>
Six months ended
December 31, years ended june 30,
--------------------- -----------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balances at beginning
of year $ 5,687 5,004 5,004 4,254 4,143
Provision for losses 810 420 980 770 427
Recoveries 13 19 32 126 7
Charge-offs (206) (101) (329) (146) (323)
------- ------- ------- ------- -------
Balances at end of year $ 6,304 5,342 5,687 5,004 4,254
======= ======= ======= ======= =======
</TABLE>
(4) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
Estimated December 31, June 30,
useful lives 2001 2001
------------ ------------ ----------
<S> <C> <C> <C>
Land $ 1,239 1,239
Buildings 40 years 7,660 7,619
Leasehold improvements Lease term 1,435 1,544
Furniture and equipment 2-10 years 8,973 8,797
----------- ----------
19,307 19,199
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Accumulated depreciation and amortization (10,687) (10,222)
----------- ----------
$ 8,620 8,977
=========== ==========
</TABLE>
<PAGE>
(5) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
2001 2000
------------ --------
<S> <C> <C>
Non-interest bearing checking accounts $ 23,028 22,072
Interest bearing checking accounts 22,538 24,428
Money market deposit accounts 96,909 88,717
Savings accounts 12,043 11,209
Certificates of deposit 265,462 255,489
----------- -------
$ 419,980 401,915
=========== =======
</TABLE>
Time deposit accounts in amounts of $100 thousand or more totaled $129.5 million
and $93.1 million at December 31, 2001 and June 30, 2001, respectively.
<TABLE>
<CAPTION>
Weighted Deposit
average accounts with Accrued
interest balances in interest
rate on excess of payable on
deposits $100,000 deposits
--------- ------------- ----------
<S> <C> <C> <C>
December 31, 2001 3.12% $ 183,578 712
June 30, 2001 4.60% 160,888 518
</TABLE>
A summary of interest expense on deposits follows:
<TABLE>
<CAPTION>
Six months ended Years ended
December 31, June 30,
-------------------- ---------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Checking and money market accounts $ 1,540 2,752 4,724 6,359 3,642
Savings accounts and time deposits 6,495 7,749 15,381 13,442 12,783
------- ------- ------- ------- -------
$ 8,035 10,501 20,105 19,801 16,425
======= ======= ======= ======= =======
</TABLE>
Maturities of time deposits at December 31, 2001 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C>
2002 $ 241,327
2003 11,176
2004 3,898
2005 4,049
2006 4,985
Thereafter 27
-----------
$ 265,462
===========
</TABLE>
(6) TRUST PREFERRED SECURITIES
On March 1, 2000, $10 million of 11% Capital Securities due March 1, 2030 were
issued by a business Trust whose common equity is 100% owned by Cascade
Financial Corporation. Interest on the Trust Preferred Securities is paid
semi-annually on March and September 1. The Corporation is using the proceeds
for general corporate purposes including stock repurchases and investment in its
subsidiary bank. The Trust preferred securities are included as a separate line
item in the consolidated balance sheet and distributions payable are treated as
interest expense in the consolidated statements of operations. The Trust
preferred securities qualify as Tier I capital under regulatory capital
guidelines.
<PAGE>
(7) FHLB ADVANCES
FHLB advances are summarized as follows:
<TABLE>
<CAPTION>
December 31, 2001 June 30, 2001
---------------------------- ---------------------------
Weighted Weighted
Date of average interest average interest
maturity Amount Rate Amount Rate
---------- -------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
2002 $ 24,000 3.73% 82,009 5.58%
2003 42,500 6.28 33,958 6.15
2004 25,000 6.45 40,500 6.63
2005 45,000 6.27 20,000 6.50
2006 21,000 4.77 15,000 6.67
2007 20,000 6.37 20,000 6.37
Thereafter 49,000 5.80 20,657 5.64
-------- ---- ------- ----
$226,500 5.79% 232,124 6.07%
======== ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Six months ended Year ended
December 31, June 30,
2001 2001
---------------- ----------
<S> <C> <C>
Maximum amount of outstanding FHLB advances at any month-end $ 235,322 236,712
Average amount of outstanding FHLB advances during the year 229,314 221,075
</TABLE>
FHLB advances are collateralized by otherwise unencumbered permanent residential
mortgages and investment grade securities.
The Corporation has $125 million in fixed rate advances as of December 31,
2001 where the FHLB has the option to convert these advances to variable rate
advances after a specified period.
At December 31, 2001, the Bank had an unused line of credit from the
FHLB-Seattle of $40.2 million. The Bank's credit line with the FHLB-Seattle is
35% of total assets or up to approximately $267 million.
(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND LINES OF CREDIT
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) that are treated as financing arrangements.
Accordingly, the obligations to repurchase securities sold are reflected as a
liability in the consolidated balance sheets, and the securities underlying the
agreements remain in the asset accounts. The securities underlying the
agreements are under the Corporation's control and are held by nationally known
government security dealers who are recognized as primary dealers by the Federal
Reserve Board, or other investment banking firms approved by the Corporation's
Board of Directors. Such agreements typically have maturities ranging from 30 to
89 days.
Securities sold under agreements to repurchase the same securities consist of
agency notes and/or mortgage-backed securities summarized as follows:
<TABLE>
<CAPTION>
Underlying securities
-------------------------
Weighted Book value,
average including
Balance interest accrued Market
outstanding rate interest value
------------ -------- ----------- -------
<S> <C> <C> <C> <C>
December 31, 2001 $ 49,792 2.16 50,625 49,723
June 30, 2001 36,920 4.02 40,308 39,728
</TABLE>
Financial data pertaining to reverse repurchase agreements follows:
<TABLE>
<CAPTION>
Six months ended Year ended
December 31, June 30,
2001 2001
---------------- ----------
<S> <C> <C>
Maximum amount of outstanding agreements at any month-end $ 49,792 54,237
Average amount of outstanding agreements during the year 38,264 34,231
</TABLE>
The Corporation has Fed Funds borrowing lines with two of its correspondent
banks. During the fiscal year neither of these lines were used.
<PAGE>
(9) FEDERAL INCOME TAXES
Federal income tax expense includes the following components:
<TABLE>
<CAPTION>
Six months ended Years ended
December 31, June 30,
------------------------ ----------------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current $ 1,696 1,033 1,888 2,398 2,253
Deferred (98) 49 469 (486) (136)
------- ------- ------- ------- -------
$ 1,598 1082 2,357 1,912 2,117
======= ======= ======= ======= =======
</TABLE>
The provision for Federal income tax expense approximates the amount computed
by applying the "expected" Federal income tax rate of 34% to income before
Federal income taxes as there are no significant reconciling items.
The Bank has qualified under provisions of the Internal Revenue Code to
compute federal income taxes after deductions of additions to the bad debt
reserves. At December 31, 2001, the Company had a taxable temporary difference
of approximately $1.3 million that arose before 1988 (base-year amount). In
accordance with Statement of Financial Accounting Standards No. 109, a deferred
tax liability has not been recognized for the temporary difference. Management
does not expect this temporary difference to reverse in the foreseeable future.
The following table presents major components of the net deferred tax
liability resulting from differences between financial reporting and tax bases
at December 31, 2001 and June 30, 2001:
<TABLE>
<CAPTION>
December 31, June 30,
2001 2001
------------ --------
<S> <C> <C>
Deferred tax assets:
Loans $ 1,679 1,455
------- -------
Gross deferred tax assets $ 1,679 1,455
Deferred tax liabilities:
Deferred loan fees (882) (843)
Securities available-for-sale (79) (182)
Premises and equipment (236) (271)
FHLB stock (1,720) (1,566)
Other (39) (70)
------- -------
Gross deferred tax liabilities (2,956) (2,932)
------- -------
Net deferred tax asset (liability) $(1,277) (1,477)
======= =======
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary at
December 31, 2001 or June 30, 2001. Management believes the Corporation will
fully realize its total deferred income tax assets as of December 31, 2001 and
June 30, 2001, based upon its total deferred income tax liabilities, previous
taxes paid, and its current and expected future levels of taxable income.
(10) EARNINGS PER SHARE
The following table presents EPS information:
<TABLE>
<CAPTION>
Six months ended December 31, Years ended June 30,
---------------------------- ------------------------------------------
2001 2000 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 3,150 2,099 4,566 3,712 4,104
Common shares
outstanding (basic) 6,172,489 6,065,332 6,081,969 6,042,084 5,962,315
Effect of dilutive
stock options 292,978 346,167 345,605 481,342 589,882
---------- ---------- ---------- ---------- ----------
Common shares
outstanding (diluted) 6,465,467 6,411,499 6,427,574 6,523,426 6,552,197
========== ========== ========== ========== ==========
EPS, basic 0.51 0.35 0.75 0.61 0.69
EPS, diluted 0.49 0.33 0.71 0.57 0.63
</TABLE>
For purposes of calculating basic and diluted earnings per share, the
numerator of net income is the
<PAGE>
same. There were 138,124, 301,729, 207,567, 98,494, and 32,312 outstanding
options to purchase common stock at December 31, 2001, December 31, 2000, June
30, 2001, 2000 and 1999, respectively, that are considered antidilutive and have
been excluded from the above calculation. Antidilutive options have an exercise
price which is greater than the current market price of the stock.
(11) STOCKHOLDERS' EQUITY
(a) Restrictions on Dividends
Current regulations allow the Bank to pay dividends on its stock if its
regulatory capital would not thereby be reduced below the amount required for
the statutory capital requirements set by the (FDIC) Federal Deposit
Insurance Corporation.
(b) Regulatory Capital
At December 31, 2001, banking regulations required institutions to have a
minimum regulatory tangible and core (or leverage) capital equal to 1.5% and
3%, respectively, of adjusted total assets, and Tier I and total risk-based
capital (RBC) equal to 4% and 8%, respectively, of risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
instituted a risk-based assessment system that defined five capital tiers:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Under these regulations, a
well-capitalized institution must have a Tier I RBC ratio of at least 6%, a
total capital ratio of at least 10% and a leverage ratio of at least 5% and
not be subject to a capital directive order. At December 31, 2001, the Bank
was in compliance with the regulatory requirements for well-capitalized
institutions. As of November 30, 2001, the most recent notification from the
FDIC categorized the Bank as well-capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
<TABLE>
<CAPTION>
Minimum
requirements
for capital Well-capitalized
Actual adequacy requirements
----------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 2001:
Total risk-based capital to
risk-weighted assets (1) $62,426 11.98 41,702 8.00 52,128 10.00
Tier I (core) capital to
risk-weighted assets 56,122 10.77 20,851 4.00 31,277 6.00
Tier I (core) capital to
adjusted total assets 56,122 7.54 29,763 4.00 37,204 5.00
June 30, 2001:
Total risk-based capital to
risk-weighted assets (1) $58,039 11.34 40,951 8.00 51,188 10.00
Tier I (core) capital to
risk-weighted assets 53,019 10.36 20,475 4.00 30,713 6.00
Tier I (core) capital to adjusted
total assets 53,019 7.25 29,246 4.00 36,558 5.00
</TABLE>
(1) The FDIC requires institutions to maintain Tier I capital of not less
than one-half of total capital.
(c) Stock Repurchase Plan
On June 5, 2000, the Corporation commenced a stock repurchase program. The
Board of Directors authorized the repurchase of up to 300,000 shares of the
company's stock, which is approximately 5% of the outstanding common shares.
To date the Corporation has repurchased 132,092 shares for $972, which
represents 2% of the common stock.
<PAGE>
(12) MORTGAGE SERVICING RIGHTS
A summary of capitalized mortgage servicing rights, included in other assets, at
December 31, 2001 and June 30, 2001 follows:
<TABLE>
<CAPTION>
December 31, 2001 June 30, 2001
----------------- -------------
<S> <C> <C>
Balance at beginning of period $ 658 899
Additions 4. 27.
Amortization (135) (268)
Allowance for losses (30) --
----- -----
Balance at end of period $ 497 658.
</TABLE>
(13) EMPLOYEE BENEFIT PLANS
(a) Savings Plan
The Corporation maintains a savings plan under section 401(k) of the
Internal Revenue Code, covering substantially all full-time employees. Under
the plan, employee contributions are matched by the Corporation at a rate of
50% of the first five percent contributed. Such matching becomes vested over
a period of five years of credited service. Employees may make investments
in various stock, fixed income or money market plans, or may purchase stock
in the Corporation. The Corporation contributed $64, $106, $75 and $82 to
the plan for the six months ended December 31, 2001 and the years ended June
30, 2001, 2000, and 1999, respectively.
(b) Employee Stock Ownership Plan
The Corporation established an employee stock ownership plan (ESOP) which
became effective on July 1, 1992 for employees of the Corporation, the Bank,
and its subsidiary who have at least one year of continuous service. The
Corporation pays all ESOP expenses. Shares purchased by the ESOP are held in
a suspense account for allocation among the participants. Benefits become 20%
vested after the third year of service with an additional 20% vesting each
year thereafter until 100% vesting after seven years. Allocations to
individual participant's accounts are based on total compensation during the
year. Forfeitures are reallocated annually among remaining participating
employees. For the six months ended December 31, 2001, and the years ended
June 30, 2001, 2000, and 1999 the Corporation contributed $55, $108, $175,
and $240 respectively, to the ESOP, which is invested in Cascade Financial
Corporation stock. Allocated and unallocated shares at December 31, 2001,
were 173,586 and 0, respectively. The Corporation has the right of first
refusal to purchase the allocated shares of separated employees.
(c) Employee Stock Purchase Plan
The Corporation maintains an employee stock purchase plan, under the terms of
which 167,847 shares of common stock have been authorized for issuance. The
plan allows employees of the Corporation with three months of service the
opportunity to purchase common stock through accumulated salary deductions
during each offering period. On the first day of each six month offering
period (January 1 and July 1 of each year), eligible employees who elect to
participate are granted options to purchase a limited number of shares and
unless the participant withdraws from the plan, the option is automatically
exercised on the last day of each offering period. The aggregate number of
shares to be purchased in any given offering is determined by dividing the
accumulated salary deduction for the period by the lower of 85% of the market
price of a common share at the beginning or end of an offering period.
(d) Stock Options
The Corporation maintains stock option plans pursuant to which shares of
Common Stock have been authorized for issuance to certain key employees and
directors of the Corporation and its subsidiaries upon exercise of stock
options. The options granted under these plans are, in general, exercisable
under a vesting schedule whereby all options become exercisable over seven
years, and expire not more than ten years after the date of grant.
All options granted have limited rights that enable a holder upon a change
in control of the Corporation, to elect to receive cash equal to the
difference between the exercise price of the option and the fair market value
of the common stock on the date of exercise. At December 31, 2001 and June
30, 2001, 484,800 and 471,653 shares, respectively, were fully exercisable.
The Corporation applies Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees" in accounting for its stock option
plans. Had compensation cost on the fair value at the grant dates for the
Corporation's stock option plan been determined consistent with SFAS 123, the
Corporation's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<PAGE>
<TABLE>
<CAPTION>
Six months ended December 31, Years ended June 30,
----------------------------- ---------------------------------------
2001 2000 2001 2000 1999
--------- ----- ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income
As reported $ 3,150 2,099 4,566 3,712 4,104
Pro forma 3,087 2,046 4,439 3,532 3,956
Net income per common share
Basic
As reported 0.51 0.35 0.75 0.61 0.69
Pro forma 0.50 0.34 0.73 0.58 0.66
Diluted
As reported 0.49 0.33 0.71 0.57 0.63
Pro forma 0.48 0.32 0.69 0.54 0.60
</TABLE>
The fair value of options granted under the Corporation's stock option
plan was $3.45, $3.57, $2.40 and $7.25 respectively for the six months ended
December 31, 2001, and the years ended June 30, 2001, 2000, and 1999. The
fair value is estimated on the date of grant with the following weighted
average assumptions used for December 31, 2001, and June 30, 2001, 2000, and
1999: risk-free interest rate of 1.75%, 4.75%, 6.50%, and 5.24%, an expected
life of eight years, no expected cash dividends, and a volatility factor of
24%.
Changes in total options outstanding for the period ended December 31,
2001, and the years ended June 30, 2001, 2000, 1999 were as follows:
<TABLE>
<CAPTION>
Shares Weighted average
under exercise price of
option option shares
------- -----------------
Six months ended December 31, 2001
----------------------------------
<S> <C> <C>
Outstanding at beginning of period 834,672 $ 5.85
Granted during period 13,445 8.11
Exercised during period (54,429) 3.33
10% stock dividend 73,987 --
Forfeited during period (12,459) 8.19
-------
Outstanding at end of period 855,216 $ 5.49
=======
Year ended June 30, 2001
----------------------------------
Outstanding at beginning of year 864,272 $ 5.02
Granted during year 210,080 7.49
Exercised during year (162,318) 2.01
Forfeited during year (77,362) 9.07
-------
Outstanding at end of year 834,672 5.85
=======
Year ended June 30, 2000
----------------------------------
Outstanding at beginning of year 848,345 $ 4.28
Granted during year 122,442 9.49
Exercised during year (77,575) 2.19
Forfeited during year (28,940) 9.86
-------
Outstanding at end of year 864,272 5.02
=======
Year ended June 30, 1999
----------------------------------
Outstanding at beginning of year 684,656 $ 3.87
Granted during year 132,949 10.73
Exercised during year (98,149) 2.85
Five-for-four stock split 151,905 --
Forfeited during year (23,016) 7.30
-------
Outstanding at end of year 848,345 4.28
=======
</TABLE>
<PAGE>
Financial data pertaining to outstanding stock options were as follows:
<TABLE>
<CAPTION>
At December 31, 2001
------------------------------ Weighted
Weighted average
Weighted average exercise
average exercise Number of price of
Ranges of Number of remaining price of exercisable exercisable
exercise option contractual option option option
prices shares life shares shares shares
----------- -------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.15-2.35 203,738 1.06 $ 1.40 203,738 $ 1.40
2.76-6.33 248,401 3.69 4.67 213,493 4.45
6.48-7.05 191,331 8.60 6.91 14,793 7.54
7.27-8.35 81,177 8.20 7.64 8,509 7.77
9.00-10.82 130,569 7.01 10.03 41,712 9.86
------- ------ ------ ------- ------
855,216 5.10 $ 5.49 482,245 $ 3.78
======= ====== ====== ======= ======
</TABLE>
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates presented below are subjective in nature, involve
uncertainties and matters of significant judgment and, therefore, are not
necessarily indicative of the amounts the Corporation could realize in a current
market exchange. The Corporation has not included certain material items in its
disclosure, such as the value of the long-term relationships with the
Corporation's lending and deposit customers since this is an intangible and not
a financial instrument. Additionally, the estimates do not include any tax
ramifications. There may be inherent weaknesses in any calculation technique,
and changes in the underlying assumptions used, including discount rates and
estimates of future cash flows that could materially affect the results. For all
of these reasons, the aggregation of the fair value calculations presented
herein do not represent, and should not be construed to represent, the
underlying value of the Corporation.
The following table presents a summary of the fair value of the Corporation's
financial instruments:
<TABLE>
<CAPTION>
December 31, June 30,
2001 2001
------------------------ ----------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 11,622 11,622 13,880 13,880
Securities available-for-sale 150,338 150,338 129,213 129,213
Securities held-to-maturity 5,989 5,883 6,592 6,456
Loans, net 576,226 589,675 564,869 565,467
Servicing rights 497 551 658 823
Financial liabilities:
Deposit accounts 419,980 419,824 401,915 397,936
Borrowings 276,292 289,156 269,044 274,800
Trust preferred securities 10,000 10,000 10,000 10,000
</TABLE>
Cash and Cash Equivalents
The carrying amount represents fair value.
Securities including mortgage backed securities
Fair values are based on quoted market prices or dealer quotations.
Loans
Fair values are estimated using current market interest rates to discount future
cash flows for each of fifteen different loan segments. Interest rates used to
discount the cash flows are based on U.S. Treasury yields or other market
interest rates with appropriate spreads for each segment. The spread over the
treasury yields or other market rates is used to account for liquidity, credit
quality and higher servicing costs. Prepayment rates are based on expected
future prepayment rates or where appropriate and available, market prepayment
rates.
Servicing Rights
Fair values for mortgage servicing rights are based on quoted market prices
discounted for costs to sell.
Deposit Accounts
<PAGE>
The fair value of deposits with no stated maturity, such as checking accounts,
money market deposit accounts and savings accounts, equals the amount payable on
demand. The fair value of certificates of deposits is calculated based on the
discounted value of contractual cash flows. The discount rate is equal to the
rate currently offered on similar products.
Borrowings
The fair value is calculated based on the discounted cash flow method, adjusted
for market interest rates and terms to maturity.
Trust Preferred Securities
The fair value is based on the discounted cash flow method, adjusted for market
interest rates and terms to maturity. Commitments to Extend Credit and Standby
Letters of Credit The fair value of commitments to extend credit can be
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. It is not practicable to estimate fair
value on these instruments.
(15) CONTINGENCIES
The Corporation is a defendant in various legal proceedings arising in
connection with its business. It is the opinion of management that the financial
position and the results of operations of the Corporation will not be materially
adversely affected by the final outcome of these legal proceedings and that
adequate provision has been made in the accompanying consolidated financial
statements.
At periodic intervals, the Washington State Department of Financial
Institutions and the Federal Deposit Insurance Corporation routinely examine the
Corporation's financial statements as part of their legally prescribed oversight
of the thrift industry. Based on these examinations, the regulators can direct
that the Corporation's financial statements be adjusted in accordance with their
findings.
(16) CONDENSED FINANCIAL INFORMATION OF CASCADE FINANCIAL CORPORATION
Following are the condensed financial statements of Cascade Financial
Corporation (parent only) for the period indicated:
<TABLE>
<CAPTION>
Balance sheet
---------------------------------
December 31, 2001 June 30, 2001
----------------- -------------
<S> <C> <C>
Assets:
Cash $ 518 679
Investment in subsidiary 56,123 53,083
Other assets 1,166 871
------- -------
$57,807 54,633
======= =======
Liabilities and stockholders' equity:
Other liabilities $ 283 389
Trust preferred securities 10,000 10,000
Stockholders' equity 47,524 44,244
------- -------
$57,807 54,633
======= =======
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
---------------------------------------------------------------
Six months ended Years ended
December 31, June 30,
--------------------- -----------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Equity in undistributed net
income of the subsidiary $ 3,740 2,548 5,462 4,124 4,217
Interest income -- Trust
preferred securities 17 -- 42 -- --
Operating expenses (330) (88) (234) (240) (171)
Interest expense-- Trust
preferred securities (581) (593) (1,166) (388) --
------- ------- ------- ------- -------
Income before Federal
income taxes 2,846 1,867 4,104 3,496 4,046
Income tax benefit 304 232 462 216 58
------- ------- ------- ------- -------
Net income $ 3,150 2,099 4,566 3,712 4,104
======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of cash flows
---------------------------------------------------------------
Six months ended Year ended
December 31, June 30,
--------------------- -----------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,150 2,099 4,566 3,712 4,104
Adjustments to reconcile net income to
net cash (used in) operating activities:
Equity in net income of subsidiaries (3,740) (2,548) (5,462) (4,124) (4,217)
(Increase) decrease in other assets (295) 62 85 (913) (41)
(Decrease) increase in other liabilities (106) 46 9 380 (18)
------- ------- ------- ------- -------
Net cash used in operating activities (991) (341) (802) (945) (172)
Cash flows from investing activities:
Dividends received from subsidiaries 700 800 1,700 -- --
Investment in subsidiary -- -- -- (9,709) --
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities 700 800 1,700 (9,709) --
Cash flows from financing activities:
Repurchase of common stock (156) (584) (723) -- --
Proceeds from exercise of stock options 286 210 446 248 375
Proceeds from trust preferred offering -- -- -- 10,000 --
------- ------- ------- ------- -------
Net cash provided by financing activities 130 (374) (277) 10,248 375
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents (161.) 85 621 (406.) 203
------- ------- ------- ------- -------
Cash and cash equivalents:
Beginning of year 679 58 58 464 261
------- ------- ------- ------- -------
End of year $ 518 143 679 58 464
======= ======= ======= ======= =======
</TABLE>
(17) LINES OF BUSINESS
The Corporation's sole operating subsidiary is Cascade Bank, which is managed
along five major lines of business: business banking, retail banking,
construction lending, income property lending and residential lending. The
administrative group, although not considered a line of business, is responsible
for the management of investments, interest rate risk, marketing, data
processing and regulatory and stockholder reporting. The financial performance
of these business lines is measured by the Corporation's profitability reporting
processes, which utilize various management accounting techniques to ensure that
each business line's financial results reflect the underlying performance of
that business.
Each line of business segment is managed by a senior executive. Back office
support is provided to each segment through executives responsible for
information systems, finance and administration.
The principal activities conducted by Business Banking are the origination
and servicing of commercial business loans and associated merchant services.
Retail Banking includes all deposit products, with their related fee income, and
all consumer loan products such as home equity and installment loans and credit
card products. The Construction unit provides financing to builders and
developers for residential construction and land acquisition and development.
The Income Property unit originates loans secured by multifamily properties and
commercial real estate. The Residential unit's activities are the origination of
single family loans and the associated loan servicing activities.
The Bank's reportable business segments are the strategic lines of business
noted above, which are managed by the Management Committee, under the direction
of the President and Chief Executive Officer. The Management Committee, which is
the senior decision making group of the Bank, is comprised of eight members
including the President and Chief Executive Officer. To better assess the
contribution of its various business lines, the Bank generates segment results
that include balances directly attributable to business line activities.
Expenses or activities not directly controlled by business unit managers are
allocated to the Administrative unit. In this way, management can assess the
performance of a particular business. The bank is constantly analyzing its line
of business performance and developing better ways to measure profitability.
The accounting policies of the segments are the same as those described in
"Note 1: Summary of Significant Accounting Policies." Direct revenues and
expenses are allocated to business segments in determining their net income.
Corporate overhead, centralized support costs and other costs are assigned to
the Administration unit. The Corporation evaluates performance based on net
income of the respective business segments. Depreciation is allocated to the
segments based upon the utilization of the assets by
<PAGE>
the segments. All depreciating assets are included in Administration's total
assets.
The organizational structure of the Bank and the allocated methodologies it
employs result in business line financial results that are not necessarily
comparable across companies. As such, the Bank's business line performance may
not be directly comparable with similar information from other financial
institutions.
Following are the condensed financial statements for the Corporation's lines
of business for the periods indicated:
<TABLE>
<CAPTION>
Six months ended December 31, 2001
------------------------------------------------------------------------------------------
Resi- Con- Income Admin-
Business dential struction property Retail istration Total
--------- ------- --------- -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income
statement
Net interest income
after provision
for loan losses $ 2,085 1,244 1,968 1,650 746 2,699 10,392
Other income 21 410 -- 6 656 724 1,817
Other expense 975 948 495 800 820 3,423 7,461
--------- ------- ----- ----- ----- ----- ------
Income before
income taxes 1,131 706 1,473 856 582 -- 4,748
Federal income taxes 380 238 496 288 196 -- 1,598
--------- ------- ----- ----- ----- ----- ------
Net income $ 751 468 977 568 386 -- 3,150
========= ======= ====== ===== ===== ===== =====
At December 31, 2001
Total Assets $ 125,342 152,727 75,911 172,671 58,381 176,981 762,013
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 2001
------------------------------------------------------------------------------------------
Resi- Con- Income Admin-
Business dential struction property Retail istration Total
--------- ------- --------- -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income
statement
Net interest income
after provision
for loan losses $ 3,573 2,713 3,824 2,687 1,331 4,453 18,581
Other income 73 533 -- 5 1,212 820 2,643
Other expense 1,992 2,647 809 1,724 1,856 5,273 14,301
--------- ------- ----- ----- ----- ----- ------
Income before
income taxes 1,654 599 3,015 968 687 -- 6,923
Federal income taxes 562 204 1,025 329 237 -- 2,357
--------- ------- ----- ----- ----- ----- ------
Net income $ 1,092 395 1,990 639 450 -- 4,566
========= ======= ====== ===== ===== ===== =====
At June 30, 2001
Total Assets $ 113,707 161,729 58,796 164,274 60,406 174,155 733,067
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 2000
------------------------------------------------------------------------------------------
Resi- Con- Income Admin-
Business dential struction property Retail istration Total
--------- ------- --------- -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income
statement
Net interest income
after provision
for loan losses $ 3,330 3,811 2,934 3,678 1,253 2,959 17,965
Other income 43 706 -- 8 1,135 384 2,276
Other expense 1,800 5,022 746 1,837 1,869 3,343 14,617
--------- ------- ----- ----- ----- ----- ------
Income (loss) before
income taxes 1,573 (505) 2,188 1,849 519 -- 5,624
Federal income taxes 535 (172) 744 629 176 -- 1,912
--------- ------- ----- ----- ----- ----- ------
Net income (loss) $ 1,038 (333) 1,444 1,220 343 -- 3,712
========= ======= ====== ===== ===== ===== =====
At June 30, 2000
Total Assets $ 86,298 175,911 56,385 167,041 62,060 128,481 676,176
</TABLE>
<PAGE>
(18) SELECTED QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
Quarter ended
-----------------------------
Sept 30 Dec 31
2001 2001
----------- --------
<S> <C> <C>
Interest income $ 13,937 13,537
Interest expense 8,614 7,658
----------- --------
Net interest income 5,323 5,879
Provision for loan losses 270 540
Other income 896 921
Other expense 3,708 3,753
----------- --------
Income before Federal income taxes 2,241 2,507
Federal income taxes 745 853
----------- --------
Net income $ 1,496 1,654
=========== ========
Earnings per share, basic $ 0.24 0.27
Earnings per share, diluted 0.23 0.26
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
2000 2000 2001 2001
----------- -------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 13,840 14,439 14,318 14,092
Interest expense 9,195 9,725 9,277 8,931
----------- -------- ------- -------
Net interest income 4,645 4,714 5,041 5,161
Provision for loan losses 210 210 290 270
Other income 516 623 793 711
Other expense 3,393 3,505 3,722 3,681
----------- -------- ------- -------
Income before Federal income taxes 1,558 1,622 1,822 1,921
Federal income taxes 530 551 623 653
----------- -------- ------- -------
Net income $ 1,028 1,071 1,199 1,268
=========== ======== ======= =======
Earnings per share, basic $ 0.17 0.18 0.20 0.21
Earnings per share, diluted 0.16 0.17 0.18 0.20
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
1999 1999 2000 2000
----------- -------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 11,016 12,053 12,386 13,126
Interest expense 6,339 7,375 7,719 8,414
----------- -------- ------- -------
Net interest income 4,677 4,678 4,667 4,712
Provision for loan losses 210 140 210 210
Other income 486 531 596 664
Other expense 3,476 3,533 3,775 3,833
----------- -------- ------- -------
Income before Federal income taxes 1,477 1,536 1,278 1,333
Federal income taxes 501 522 433 456
----------- -------- ------- -------
Net income $ 976 1,014 845 877
=========== ======== ======= =======
Earnings per share, basic $ 0.16 0.17 0.14 0.14
Earnings per share, diluted 0.15 0.15 0.13 0.14
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
1998 1998 1999 1999
----------- -------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 9,020 9,313 9,612 10,260
Interest expense 5,245 5,395 5,398 5,918
----------- -------- ------- -------
Net interest income 3,775 3,918 4,214 4,342
Provision for loan losses 150 150 127 --
Other income 536 607 1,148 546
Other expense 2,823 2,771 3,211 3,633
----------- -------- ------- -------
Income before Federal income taxes 1,338 1,604 2,024 1,255
Federal income taxes 455 545 691 426
----------- -------- ------- -------
Net income $ 883 1,059 1,333 829
=========== ======== ======= =======
Earnings per share, basic $ 0.15 0.18 0.22 0.14
Earnings per share, diluted 0.14 0.16 0.20 0.13
</TABLE>
<PAGE>
ANNUAL STOCKHOLDERS' MEETING
The Annual Stockholders' meeting will be held at the Everett Golf & Country
Club, 1500 52nd Street SE, Everett, WA, on Wednesday May 8th, 2002 at 6:30 p.m.
Pacific Time.
CORPORATE INFORMATION:
www.cascadebank.com
Main office
2828 Colby Avenue
Everett, Washington
(425) 339-5500
Bellevue
200 108th Avenue NE
Bellevue, Washington
(425) 455-2300
Clearview
17512 SR 9 SE
Snohomish, Washington
(360) 668-1243
Crossroads
15751 NE 15th Street
Bellevue, Washington
(425) 643-6200
Everett/Broadway
2602 Broadway
Everett, Washington
(425) 259-1243
Everett/Evergreen Way
6920 Evergreen Way
Everett, Washington
(425) 353-1243__
Harbour Pointe
11700 Mukilteo Speedway
Mukilteo, Washington
(425) 290-7767
Issaquah
305 Front Street N
Issaquah, Washington
(425) 391-5500
Lake Stevens
8915 Market Place
Everett, Washington
(425) 334-8880
Lynnwood
19419 Highway 99
Lynnwood, Washington
(425) 775-6666
Marysville
<PAGE>
815 State Avenue
Marysville, Washington
(360) 659-7614
North Marysville
3711 88th Street NE
Marysville, Washington
(360) 651-9200
Smokey Point
3532 172nd Street NE
Arlington, Washington
(360) 653-1900
Woodinville
17641 Garden Way NE
Woodinville, Washington
(425) 481-0820
All Shareholders are encouraged to read Cascade's Form 10-K for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission (the
"SEC"). The Form 10-K includes the significant risk factors that could affect
Cascade's projections and future operating performance. This document is
qualified in its entirety by the information contained in the Form 10-K.
The Form 10-K, together with all other information filed by Cascade with the
SEC, is available on the Internet at the SEC's web site at http://www.sec.gov.
The Form 10-K will be furnished by Cascade, upon receipt of written request
addressed to Cascade Financial Corporation, 2828 Colby Avenue, Everett, WA
98201.
Stock Transfer Agent
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606
(800) 356-2017
(800) 231-5469 TDD for Hearing Impaired
(201) 329-8660 Foreign Shareholders
(201) 329-8354 TDD Foreign Shareholders
www.melloninvestor.com
Auditors
KPMG LLP
3100 Two Union Square
601 Union Street
Seattle, Washington 98101
Legal Counsel
Keller Rohrback, LLP
1201 Third Avenue, Suite 3200
Seattle, WA 98101-3052
Special Counsel
Anderson Hunter, PS
2707 Colby Avenue, Suite 1001
Everett, Washington 98201
<PAGE>
Selected Financial Data
And
Management Discussion and Analysis
December 31, 2001
[CASCADE FINANCIAL CORPORATION LOGO]
<PAGE>
CASCADE FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the six month period For the year
ended December 31, ended June 30,
2001 2000 2001 2000 1999 1998 1997(1)
------------------------ -------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $27,474 28,279 56,689 48,582 38,205 33,916 31,568
Interest expense 16,272 18,919 37,128 29,847 21,956 20,118 19,924
Net interest income 11,202 9,360 19,561 18,735 16,249 13,798 11,644
Provision for loan losses 810 420 980 770 427 246 810
Net interest income after
provision for loan
losses 10,392 8,940 18,581 17,965 15,822 13,552 10,834
Other income 1,817 1,138 2,643 2,276 2,837 2,458 1,942
Other expense 7,461 6,897 14,301 14,617 12,438 10,729 10,897
Income before Federal
income taxes 4,748 3,181 6,923 5,624 6,221 5,281 1,879
Net income 3,150 2,099 4,566 3,712 4,104 3,525 2,176
Net income per common
share, basic(2) 0.51 0.35 0.75 0.61 0.69 0.60 0.38
Net income per common
share, diluted(2) 0.49 0.33 0.71 0.57 0.63 0.55 0.34
Book value per share(2) 7.70 6.70 7.25 6.12 5.71 5.33 4.75
</TABLE>
<TABLE>
<CAPTION>
At December 31, At June 30,
2001 2000 2001 2000 1999 1998 1997(1)
----------------------- ---------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets $762,013 716,129 733,067 676,176 557,086 444,155 434,162
Loans, net 576,226 548,722 564,869 539,972 455,736 384,734 341,201
Cash and securities 167,949 138,062 149,685 117,655 84,611 44,103 79,313
Deposits 419,980 395,976 401,915 398,507 361,786 312,518 304,205
Borrowings 59,792 47,265 46,920 15,787 5,951 13,391 19,483
FHLB Advances 226,500 222,977 232,124 215,656 141,996 73,436 74,659
Shareholders' equity 47,667 41,240 44,597 37,256 34,239 31,418 27,543
Non-performing loans 1,999 2,300 1,315 573 1,201 1,921 1,069
</TABLE>
<TABLE>
<CAPTION>
Financial Ratios Financial Ratios
For the six month period For the year
ended December 31, ended June 30,
2001 2000 2001 2000 1999 1998 1997(1)
------------------------ --------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Return on assets 0.85% 0.60% 0.64% 0.60% 0.83% 0.82% 0.33%
Return on equity 13.63% 10.91% 11.26% 10.37% 12.21% 12.05% 5.26%
Net interest margin 3.10% 2.75% 2.84% 3.13% 3.44% 3.40% 2.90%
Efficiency ratio 57.31% 65.70% 64.41% 69.57% 65.17% 65.99% 80.21%
Average shareholders'
equity to average
assets 6.25% 5.45% 5.71% 5.78% 6.77% 6.89% 6.25%
Total risk based capital
to risk weighted assets 11.98% 11.48% 11.34% 11.69% 10.17% 11.35% 11.4%
Tier 1 capital to
adjusted total assets 7.54% 7.14% 7.35% 7.38% 6.36% 7.02% 6.33%
</TABLE>
(1) Amounts for 1997 have been restated to reflect the acquisition of AmFirst
Bancorporation. The 1997 SAIF special assessment of $1.2 million is
excluded.
(2) Per common share data is retroactively adjusted to reflect all stock splits
and stock dividends.
- 1 -
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion is provided for the consolidated financial
statements of Cascade Financial Corporation (the "Company") at December 31,
2001. The purpose of this discussion is to focus on significant factors
concerning the Company's financial condition and results of operations, and to
provide a more comprehensive review of the Company's operating results and
financial condition than can be obtained from reading the consolidated financial
statements alone. This discussion should be read with the consolidated financial
statements and the notes thereto.
In addition to historical information, this report contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the
express purpose of availing Cascade Financial Corporation of the protections of
the safe harbor provisions of the PSLRA. The forward-looking statements
contained herein are subject to factors, risks, and uncertainties that may cause
actual results to differ materially from those projected. The following items
are among the factors that could cause actual results to differ materially from
the forward-looking statements: general economic conditions, including their
impact on capital expenditures; business conditions in the banking industry;
recent world events and their impact on interest rates, businesses and
customers; the regulatory environment; new legislation; vendor quality and
efficiency; employee retention factors; rapidly changing technology and evolving
banking industry standards; competitive standards; competitive factors,
including increased competition with community, regional, and national financial
institutions; fluctuating interest rate environments; and similar matters.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date of the
statement. Cascade Financial Corporation undertakes no obligation to publicly
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this report. Readers should carefully
review the risk factors described in this and other documents the Company files
from time to time with the Securities and Exchange Commission.
FINANCIAL CONDITION
Earnings
Cascade Financial Corporation earned net income for the six month period
ended December 31, 2001 of $3.2 million or $0.49 per fully diluted share, an
increase of 52% over the $2.1 million or $0.33 per fully diluted share for the
same period of 2000. Higher net interest income due to increased earning assets
and an increase in net interest margin contributed to the improved results. The
Company earned net income of $4.6 million or $0.71 per fully diluted share, $3.7
million or $0.57 per fully diluted share, and $4.1 million or $0.63 per fully
diluted share for the fiscal years ended June 30, 2001, 2000, and 1999,
respectively.
Total Assets
The Company's total assets at December 31, 2001 were $762.0 million,
compared to $733.1 million at June 30, 2001, an increase of 4%, due to the
increase in net loans and securities available for sale. The Company's total
assets at June 30, 2001, 2000, and 1999 were $733.1 million, $676.2 million, and
$557.1 million, respectively.
Net Loans
Net loans were $576.2 million at December 31, 2001, a 2% increase over the
$564.9 million at June 30 2001. This increase was due primarily to an increase
in total business loans which increased from $113.7 million at June 30, 2001 to
$125.3 million at December 31, 2001. For the same periods, total single-family
residential loans decreased from $165.0 million at June 30, 2001 to $152.7
million at December 31, 2001. Management anticipates this trend of increasing
business loans and decreasing single-family residential loans will continue as
the conversion from a thrift institution to a commercial bank continues.
Deposit Accounts
Deposit accounts totaled $420.0 million at December 31, 2001, a 4.5%
increase over the $401.9 million at June 30, 2001. The bank historically had
paid interest rates on deposits at the higher end of the
- 2 -
<PAGE>
competitive range of financial institutions in its market area, but in an
attempt to lower the absolute and relative cost of funds, the bank has recently
modified its deposit pricing strategy by pricing its deposits in the middle of
that range. In addition, as its business banking activity increases, the bank
expects to increase its non-interest bearing accounts through the growth of
commercial checking accounts.
Return on Average Equity
Return on average equity for the six month period ended December 31, 2001
was 13.63% compared to 10.91% for the same period of 2000. Return on average
equity for the fiscal years ended June 30, 2001, 2000, and 1999 were 11.26%,
10.37%, and 12.21%, respectively.
RESULTS OF OPERATIONS
Net Interest Income
The largest component of the Company's earnings is net interest income. Net
interest income is the difference between interest earned on earning assets
(primarily loans, interest bearing deposits with banks, and investment
securities) and the interest expense associated with interest bearing
liabilities (deposits and borrowings). The volume of and yields earned on
earning assets and the volume of and the rates paid on interest bearing
liabilities determine net interest income. Interest earned and interest paid is
also affected by general economic conditions, including the demand for loans,
availability of deposits, market rates of interest, government policies, and the
action of regulatory authorities. The Company's operations are sensitive to
changes in interest rates and the resulting impact on net interest income.
Interest rates decreased in 2001 and generally resulted in a greater reduction
in funding costs.
Net interest income for the six months ended December 31, 2001 increased by
19%, or $1.8 million, to $11.2 million from $9.4 million for the six month
period ended December 31, 2000. The improvement in net interest income from the
six month period in 2000 was primarily due to increased earning assets and an
increase in net interest margin. Net interest margin is net interest income
expressed as a percent of average earning assets, and represents the difference
between the yield on earning assets and the composite interest rate paid on all
sources of funds.
Net interest income for the fiscal year ended June 30, 2001 increased by
4.4% or $826,000 to $19.6 million from $18.7 million for the same period in 2000
and $16.2 million for the same period 1999. These increases resulted from growth
in earning assets and an increase in the average asset yield, which offset the
contraction in the net interest margin. For the fiscal year ended June 30, 2001,
the increase in net interest income was constrained by the escalation of market
interest rates during the first half of the fiscal year that was not fully
offset by the decrease in rates in the second half of the year. Also, net
interest income was adversely impacted by increased interest expense associated
with a full year's interest on the trust preferred securities. The improvement
in net interest income from June 30, 2000 over 1999 was primarily due to growth
in earning assets.
Average earning assets increased 6.1% to $722.6 million for the six months
ended December 31, 2001 from $681.2 million for the six months ended December
31, 2000. Average earning assets increased to $689.5 million for the fiscal year
ended June 30, 2001, from $598.1 million for the same period in 2000 and $472.7
million for the same period in 1999. Average earning assets increased 15.3% and
average loans increased 8.2% in fiscal 2001 compared to fiscal 2000.
The net interest margin for the six months ended December 31, 2001 was
3.10%, compared to 2.75% for the six months ended December 31, 2000. The
improvement in the margin for these six month periods is primarily attributed to
a larger decline in the cost of funds than the decline in asset yield. The net
interest margin for fiscal years ended June 30, 2001, 2000, and 1999 was 2.84%,
3.13%, and 3.44%, respectively. The volatile nature of interest rates and
intense competition for deposits and loans negatively impacted the net interest
margin from June 30, 1999 through June 30, 2001. In particular, during the first
half of fiscal 2001, the increase in rates decreased the net interest margin as
liabilities repriced more quickly than assets. The 275 basis point drop in the
target federal funds rate from January to June 2001 resulted in a corresponding
drop in Cascade Bank's prime lending rate. The result was the yield on prime
rate based loans repriced downward more quickly than the liabilities funding
those loans.
- 3 -
<PAGE>
For the six months ended December 31, 2001, the yield on earning assets was
7.60% compared to 8.30% for the six month period ended December 31, 2000. This
yield reduction was more than offset by the decrease in the cost of interest
bearing liabilities, which declined from 5.98% for the six month period ended
December 31, 2000 to 4.93% for the six months ended December 31, 2001. For the
fiscal years ended June 30, 2001, 2000, and 1999, the yield on earning assets
was 8.22%, 8.12%, and 8.08%, respectively. For the fiscal years ended June 30,
2001, 2000, and 1999, the cost of interest bearing liabilities was 5.82%, 5.39%,
and 5.11%, respectively.
Average Balances and an Analysis of Average Rates Earned and Paid
The following tables show average balances and interest income or interest
expense, with the resulting average yield or rate by category.
<TABLE>
<CAPTION>
For the six months ended December 31,
2001 2000
-----------------------------------------------------------------
(unaudited)
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividend Cost Balance Dividend Cost
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1)
Mortgage loans $ 400,515 15,986 7.98 397,309 16,526 8.32
Consumer loans 59,809 2,426 8.11 63,756 2,800 8.78
Business loans 119,897 4,797 8.00 91,447 4,380 9.58
-----------------------------------------------------------------
Total loans 580,221 23,209 8.00 552,512 23,706 8.58
Mortgage-backed securities 19,083 596 6.24 31,845 1,027 6.45
Investment securities 104,314 3,065 5.92 82,214 2,972 7.29
Daily interest-earning deposits and
FHLB stock 18,946 604 6.12 14,668 574 7.46
-----------------------------------------------------------------
Total interest-earning assets 722,564 27,474 7.60 681,239 28,279 8.30
Noninterest-earning assets
Office properties and equipment, net 8,753 8,904
Real estate, net 386 606
Other noninterest-earning assets 8,134 12,975
----------- -------
Total assets $ 739,837 703,724
=========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Passbook accounts $ 11,073 109 1.96 11,032 172 3.12
Checking accounts 22,051 136 1.23 21,214 216 2.04
Money market accounts 94,384 1,405 2.98 104,262 2,535 4.86
Certificates of deposit 254,836 6,386 5.01 240,092 7,577 6.31
-----------------------------------------------------------------
Total interest-bearing deposits 382,344 8,035 4.20 376,600 10,501 5.58
Other interest-bearing liabilities
FHLB advances 229,451 7,047 6.14 214,128 6,800 6.35
Other interest-bearing liabilities 48,264 1,190 4.93 42,469 1,618 7.62
-----------------------------------------------------------------
Total interest-bearing liabilities 660,059 16,272 4.93 633,197 18,919 5.98
Other liabilities 33,549 32,176
----------- -------
Total liabilities 693,608 665,373
Stockholders' equity 46,229 38,351
----------- -------
Total liabilities and stockholders'
equity $ 739,837 703,724
=========== =======
Net interest income (2) $11,202 9,360
------- -----
Interest rate spread (3) 2.67 2.33
Net interest margin (4) 3.10 2.75
Average interest-earning assets to average
interest-bearing liabilities 109.47 107.59
</TABLE>
- ----------
(Footnotes appear on following page.)
- 4 -
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended June 30,
----------------------------------------------------------------
2001 2000
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividend Cost Balance Dividend Cost
----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1)
Mortgage loans $ 398,893 33,313 8.35 383,595 31,280 8.15
Consumer loans 63,020 5,496 8.72 57,138 4,740 8.30
Business loans 98,100 9,088 9.26 76,672 7,135 9.31
----------------------------------------------------------------
Total loans 560,013 47,897 8.55 517,405 43,155 8.34
Mortgage-backed securities 29,123 1,871 6.42 30,779 1,932 6.28
Investment securities 83,285 5,755 6.91 40,081 2,680 6.69
Daily interest-earning deposits and
FHLB stock 17,030 1,166 6.85 9,858 815 8.27
----------------------------------------------------------------
Total interest-earning assets 689,451 56,689 8.22 598,123 48,582 8.12
Noninterest-earning assets
Office properties and equipment, net 8,941 9,281
Real estate, net 630 491
Other noninterest-earning assets 11,311 11,559
---------- -------
Total assets $ 710,333 619,454
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Passbook accounts $ 10,915 309 2.83 11,446 351 3.07
Checking accounts 21,783 395 1.81 18,408 389 2.11
Money market accounts 96,491 4,328 4.49 119,219 5,963 5.00
Certificates of deposit 242,501 15,073 6.22 232,192 13,098 5.64
----------------------------------------------------------------
Total interest-bearing deposits 371,690 20,105 5.41 381,265 19,801 5.19
Other interest-bearing liabilities
FHLB advances 221,397 13,843 6.25 160,182 9,093 5.68
Other interest-bearing
liabilities 45,127 3,180 7.05 12,519 953 7.61
----------------------------------------------------------------
Total interest-bearing
liabilities 638,214 37,128 5.82 553,966 29,847 5.39
Other liabilities 31,562 29,710
------ ------
Total liabilities 669,776 583,676
Stockholders' equity 40,557 +35,778
--------- -------
Total liabilities and
stockholders' equity $ 710,333 619,454
========= =======
Net interest income (2) $ 19,561 18,735
========= =======
Interest rate spread (3) 2.40 2.73
Net interest margin (4) 2.84 3.13
Average interest-earning assets to average
interest-bearing liabilities 108.03 107.97
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------
1999
Interest
Average and Yield/
Balance Dividend Cost
---------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1)
Mortgage loans 321,038 25,878 8.06
Consumer loans 48,755 4,273 8.76
Business loans 48,414 4,600 9.50
---------------------------
Total loans 418,207 34,751 8.31
Mortgage-backed securities 30,805 1,835 5.96
Investment securities 14,482 904 6.24
Daily interest-earning deposits and
FHLB stock 9,218 715 7.76
---------------------------
Total interest-earning assets 472,712 38,205 8.08
Noninterest-earning assets
Office properties and equipment, net 9,225
Real estate, net 209
Other noninterest-earning assets 13,947
-------
Total assets 496,093
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Passbook accounts 12,781 391 3.06
Checking accounts 18,540 409 2.21
Money market accounts 69,426 3,233 4.66
Certificates of deposit 220,921 12,392 5.61
---------------------------
Total interest-bearing deposits 321,668 16,425 5.11
Other interest-bearing liabilities
FHLB advances 102,045 5,280 5.17
Other interest-bearing
liabilities 5,571 251 4.50
---------------------------
Total interest-bearing
liabilities 429,284 21,956 5.11
Other liabilities 33,216
-------
Total liabilities 462,500
Stockholders' equity 33,593
------
Total liabilities and
stockholders' equity 496,093
=======
Net interest income (2) 16,249
=======
Interest rate spread (3) 2.97
Net interest margin (4) 3.44
Average interest-earning assets to average
interest-bearing liabilities 110.12
</TABLE>
(1) Does not include interest on loans 90 days or more past due.
(2) Interest and dividends on total interest-earning assets less interest on
total interest-bearing liabilities. (3) Total interest-earning assets yield
less total interest-bearing liabilities cost. (4) Net interest income as an
annualized percentage of total interest-earning assets.
- 5 -
<PAGE>
Provision for Loan Losses
The provision for loan losses for the six month period ended December 31,
2001 was $810,000, compared to $420,000 for the six month period ended December
31, 2000. For the fiscal years ended June 30, 2001, 2000, and 1999, the
provisions for loan losses were $980,000, $770,000, and $422,000, respectively.
Increases in the loan loss provisions were primarily a result of loan growth,
awareness of the greater risk inherent in business lending, and the impact of
the deteriorating economic climate on the loan portfolio.
At December 31, 2001, the allowance for loan losses was $6.3 million (1.09%
of average loans outstanding) compared to $5.7 million (1.02% of average loans
outstanding) at June 30, 2001, $5.0 million (0.97% of average loans outstanding)
at June 30, 2000, and $4.3 million at June 30, 1999 (1.02% of average loans
outstanding). The coverage ratio (the allowance for loan losses to nonperforming
loans) was 315% at December 31, 2001 compared with 432% at June 30, 2001, 873%
at June 30, 2000, and 354% at June 30, 1999.
Net loan charge-offs for the six month period ended December 31, 2001 were
$193,000 (0.03% of average loans outstanding), compared to $297,000 (0.05% of
average loans outstanding) for the fiscal year ended June 30, 2001, $20,000
(0.00% of average loans outstanding) for the fiscal year ended June 30, 2000,
and $316,000 (0.08% of average loans outstanding) for the fiscal year ended June
30, 1999.
Other income
Other income is income derived from sources other than interest and fees on
earning assets. The Company's primary sources of other income are service charge
fees on deposit accounts, mortgage banking services, and gains on the sale of
loans. As part of Cascade Bank's transition to a commercial bank, management
changed its strategy on the origination and retention of single-family
residential mortgage loans. As a result, more of Cascade Bank's single-family
mortgage loan production is now channeled directly to the secondary market.
Other income for the six month period ended December 31, 2001 was $1.8
million, compared to $1.1 million for the same period in 2000. This increase was
attributable primarily to a $228,000 increase in gain on sale of loans, a
$218,000 increase in gain on sale of securities, an increase in service charges,
and a gain on the sale of a building adjacent to the Company's Main Office in
Everett. The higher gain on sale of loans reflects an increase in residential
mortgage activity, especially refinancings. The gain on sale of securities
resulted primarily from steps taken to reposition the investment portfolio to
take advantage of declining interest rates and a steep yield curve.
Other income for the fiscal years ended June 30, 2001, 2000, and 1999 was
$2.6 million, $2.3 million, and $2.8 million, respectively. The increase for the
period ended June 30, 2001 was attributable to $248,000 in growth of fee income
and a $212,000 increase in gain on sale of securities that more than compensated
for the $91,000 decrease in gain on sale of loans. The growth in fee income was
attributable to an increase in transaction fees. The gain on sale of securities
resulted primarily from steps taken to reposition the investment portfolio. The
lower gain on sale of loans, despite an increase in residential mortgage
refinancings, reflects the Company's strategic shift away from mortgage banking.
Other income was $2.8 million in 1999 when the Company's mortgage banking
operations were much larger. Also, the Company realized a $600,000 gain on the
sale of mortgage servicing rights in the fiscal year ended June 30, 1999.
Other expense
Other expense represents all expenses other than costs associated with
deposits and other interest bearing liabilities. It includes expenses associated
with personnel, premises and equipment, data processing, and other operations.
Other expense increased by $564,000 to $7.5 million for the six month
period ended December 31, 2001 from $6.9 million for the same period in 2000.
The increase in expenses was partially the result of the payment of prepayment
fees to the Federal Home Loan Bank of Seattle in the amount of $225,000 to
retire high coupon advances.
- 6 -
<PAGE>
Other expense for the fiscal years ended June 30, 2001, 2000, and 1999 was
$14.2 million, $14.6 million, and $12.4 million, respectively. For the fiscal
year ended June 30, 2001, lower expenses were partially the result of the
reduction in mortgage banking operations, offset in part by $300,000 in
management transition expenses, including employee severance, recruitment fees,
and executive signing bonuses. The increase in other expense between the fiscal
year ended June 30, 1999 and 2000 was primarily the result of opening three new
branches and bringing data processing operations fully in-house.
A standard measurement used to measure overhead costs of financial
institutions is the efficiency ratio. The efficiency ratio is calculated by
dividing other expense by total revenue, which generally indicates how much an
institution spends to generate a dollar of revenue. The lower the efficiency
ratio, the more efficient the institution. For the six month periods ended
December 31, 2001, and 2000, the Company's efficiency ratio was 57.31%, and
65.70%, respectively. Management continues to look for ways in which to improve
its efficiency ratio by increasing other income and net interest margin and
diligently controlling costs while maintaining high standards of service. For
the fiscal years ended June 30, 2001, 2000, and 1999, the Company's efficiency
ratio was 64.41%, 69.57%, and 65.17%, respectively.
Loan Portfolio
Net loans increased to $576.2 million at December 31, 2001 compared to
$564.9 million at June 30, 2001. At June 30, 2001, 2000, and 1999, net loans
were $564.9 million, $540 million, and $455.7 million, respectively.
Changes in the composition of the loan portfolio from June 30, 2001 to
December 31, 2001 evidence the continuing transformation of Cascade Bank from a
thrift into a commercial bank. Business loans increased from $113.7 million at
June 30, 2001 to $125.3 million at December 31, 2001, an increase of 10%.
Construction loans, increased from $103.2 million at June 30, 2001 to $104.1
million at December 31, 2001. Commercial real estate loans increased from $56.9
million at June 30, 2001 to $62.9 million at December 31, 2001, an increase of
11%.
At the same time, the Company's single family residential mortgage loan
portfolio declined by $12.3 million from $165.0 million at June 30, 2001 to
$152.7 million at December 31, 2001. Robust mortgage refinancing activity was
primarily responsible for the decline in balances during this time. Low mortgage
rates prompted many customers to elect to purchase long term fixed rate
mortgages. Since Cascade Bank sells virtually all its fixed rate residential
mortgages with maturities in excess of five years to the secondary market,
Cascade Bank sold a large percentage of its originations.
- 7 -
<PAGE>
The chart below indicates the mix of the loan portfolio as of the dates
indicated:
<TABLE>
<CAPTION>
December 31, 2001 June 30, 2001
Dollars in thousands Amount Percent Amount Percent
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business loans: $125,342 20.4 % $113,708 18.7 %
Business
Commercial real estate 62,938 10.3 56,913 9.4
------------------------------------------------
Total business loans 188,280 30.7 170,621 28.1
Single-family residential 152,727 24.9 165,003 27.2
Real estate construction 104,131 17.0 103,206 17.0
Consumer 58,381 9.5 60,406 10.0
Multi-family loans 109,733 17.9 107,360 17.7
------------------------------------------------
Total gross loans 613,252 606,596
Loans in process (28,220) (33,337)
Allowance for losses on loans (6,304) (5,687)
Deferred loan fees and discounts (2,502) (2,703)
-------- --------
Net loans receivable $576,226 $564,869
======== ========
</TABLE>
Capital
Capital is the shareholders' investment in the Company. Its formation
allows the Company to grow assets and provides flexibility in times of
adversity. Capital grows primarily through the retention of earnings. The
company has never paid a cash dividend to shareholders.
Banking regulations require the Company to maintain minimum levels of
capital. The Company manages its capital to maintain a "well capitalized"
designation (the FDIC's highest rating). As of December 31, 2001, Cascade Bank
remained a "well capitalized" institution, under regulatory guidelines, with a
core capital to asset ratio of 7.54% and a risk based capital to asset ratio of
11.98%. See Note 11 of the Consolidated Financial Statements in the Annual
Report for a detail of the Company's regulatory capital ratios.
At December 31, 2001, the Company's total risk based capital to risk
weighted assets was 11.98%, compared to 11.34% at June 30, 2001, 11.69% at June
30, 2000, and 10.17% at June 30, 1999. The Company projects that earnings
retention and existing capital will be sufficient to fund anticipated asset
growth and the stock repurchase plan, while maintaining a well-capitalized
designation from the FDIC.
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors. The
Company manages various capital levels at both the holding company and
subsidiary bank level to maintain adequate capital ratios and levels in
accordance with external regulations and capital guidelines established by the
Board of Directors of each institution.
In May of 2000 the Board of Directors authorized the purchase of up to 5%
of the Company's outstanding shares of common stock, but only at prices that
generally would not dilute earnings or impair its capital position. During the
six months ended December 31, 2001, the Company repurchased its stock on the
open market in the amount of $156,000 under this program.
Liquidity
Liquidity is the term used to define the Company's ability to meet its
financial commitments. The Company is required by prudent business practice and
its regulators to maintain adequate levels of liquidity. The main liquidity
requirements are funding customer loan requests and deposit outflows of Cascade
Bank. Primary sources of liquidity are cash and cash equivalents, which include
highly liquid, short-term investments. At December 31, 2001, June 30,
- 8 -
<PAGE>
2001, June 30, 2000, and June 30, 1999 cash and cash equivalents totaled $11.6
million, $13.9 million, $13.4 million, and $10.2 million, respectively. The
Company's entire investment portfolio consists of investment grade securities.
The preponderance of these securities are of the highest credit quality, with
moderate interest rate risk.
Other significant sources of liquidity are Federal Home Loan Bank of
Seattle (FHLB-Seattle) advances, reverse repurchase agreements, and loan sales.
As December 31, 2001, $40.2 million of additional borrowing capacity remained
under Cascade Bank's existing credit line from the FHLB-Seattle. The use of this
line of credit is subject to the availability of eligible collateral, which
includes residential mortgages, investment grade securities, and a limited
amount of other real estate related mortgages. In addition, Cascade Bank has the
ability to borrow from primary dealers of United States government securities
through reverse repurchase agreements. Under these agreements, borrowings are
collateralized with mortgage-backed securities or other investment securities.
Cascade Bank has also established Fed funds borrowing lines with two of its
larger correspondent banks. During the six months ended 2001, neither line was
used.
Liquidity management is of critical importance to Cascade Bank in that it
significantly relies upon wholesale sources of funds (e.g. FHLB-Seattle
advances). While these sources have proven to be stable and reliable, an
interruption in the availability of these sources could have an adverse impact
on the operations of the Company.
Market Risk
The Company's results of operations are largely dependent upon its ability
to manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on the Company's
financial condition and results of operations.
The Company has taken steps to balance its sensitivity to changes in
interest rates by altering the interest rate sensitivity asset and liability
mix. The origination of floating rate loans such as business, construction and
other prime based loans is emphasized. The vast majority of fixed rate loans
have repricing periods with a maximum of five years. The mix of floating and
fixed rates assets is designed to mitigate the impact of rate changes on the
Company's net interest income. Virtually all fixed rate residential loans with
maturities greater than five years are sold into the secondary market. Since
most of Cascade Bank's fixed rate loans do not have provisions for prepayment
fees, a drop in rates can precipitate a refinancing of Cascade Bank's assets.
Interest rate risk is monitored using several methodologies, principally
financial modeling. Through financial modeling, rate risk is measured based on
the change in market value of the Company's assets and liabilities under
different interest rate scenarios. Also, the near term earnings exposure to
interest rate changes is evaluated in the context of certain upward and downward
interest rate changes occurring instantaneously. At December 31, 2001, a 200
basis point increase in rates would reduce forecasted net interest income over a
twelve month period by approximately 2%.
- 9 -
<PAGE>
The individual categories of assets and liabilities that are subject to
interest rate sensitivity as of December 31, 2001 are shown in the following
table.
<TABLE>
<CAPTION>
(less
than) Fair
1 year 1-3 years 3-5 years 5-10 years 10 years Total Value
-----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets
Loans 259,002 144,323 133,795 38,891 9,021 585,032 598,481
Investments and other
Interest earning assets 86,477 11,100 1,027 7,393 53,417 159,414 159,308
Interest-Sensitive Liabilities
Checking accounts 22,783 22,783 45,566 44,994
Money market accounts 48,455 48,454 96,909 96,895
Savings accounts 6,021 6,022 12,043 11,909
Certificates of deposits 241,327 15,074 9,034 27 - 265,462 266,026
Borrowings 73,792 67,500 66,000 69,000 - 276,292 289,156
Trust preferred securities 10,000 10,000 10,000
</TABLE>
FORM 10-K
A copy of the Company's annual report on Form 10-K which is filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 is
available to shareholders, at no charge, upon written request to the Secretary
of Cascade Financial Corporation at 2828 Colby Avenue, Everett, Washington
98201.
- 10 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>7
<FILENAME>v80226ex21.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Patent
Cascade Financial Corporation
<Table>
<Caption>
Percentage Jurisdiction or
Subsidiaries(a) of Ownership State of Incorporation
- --------------- ------------- ----------------------
<S> <C> <C>
Cascade Bank 100% Washington
Cascade Capital Trust I 100% Delaware
Cascade Investment Services, Inc.(b) 100% Washington
</Table>
- -------------
(a) The operation of the Corporation's wholly owned subsidiaries are included
in the Corporation's Financial Statements contained in the Annual Report
attached hereto as Exhibit 13.
(b) Wholly-owned subsidiary of Cascade Bank.
-32-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>8
<FILENAME>v80226ex23.txt
<DESCRIPTION>EXHIBIT 23
<TEXT>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cascade Financial Corporation and subsidiaries:
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 33-94456 and No. 333-32272) of Cascade Financial Corporation of our
report dated March 1, 2002 relating to the consolidated balance sheets of
Cascade Financial Corporation and subsidiaries as of December 31, 2001 and June
30, 2001, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for the six-month period ended
December 31, 2001 and for each of the years in the three-year period ended June
30, 2001, which report is incorporated by reference into Cascade Financial
Corporation's 2001 Annual Report on Form 10-K from Cascade Financial
Corporation's 2001 Annual Report to Stockholders.
/s/ KPMG LLP
Seattle, Washington
March 28, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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