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<SEC-DOCUMENT>0000928911-05-000002.txt : 20050314
<SEC-HEADER>0000928911-05-000002.hdr.sgml : 20050314
<ACCEPTANCE-DATETIME>20050311183406
ACCESSION NUMBER: 0000928911-05-000002
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20041231
FILED AS OF DATE: 20050314
DATE AS OF CHANGE: 20050311
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CASCADE FINANCIAL CORP
CENTRAL INDEX KEY: 0000928911
STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022]
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: 05676704
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>c10k-1204.txt
<DESCRIPTION>FORM 10-K
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1661954
- -------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
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
---------------
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of Common Stock held by non-affiliates of
registrant at March 10, 2005 was $151.4 million (based on the last reported
sale on such date). The number of shares of registrant's Common Stock
outstanding at March 10, 2005 was 9,586,048.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the year ended December 31,
2004, 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 Annual Meeting
of Stockholders (the "Proxy Statement") (Part III).
<PAGE>
Cascade Financial Corporation
FORM 10-K
December 31, 2004
TABLE OF CONTENTS
Page
PART I ----
Item 1. Description of Business 3
Loan Portfolio 5
Asset and Liability Management Activities 13
Investment Portfolio 15
Deposits 16
Return on Equity and Assets 17
Borrowings 17
Regulation 18
Taxation 23
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 26
Item 9A. Controls and Procedures 26
Item 9B. Other Information 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters............................ 29
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accountant Fees and Services 29
PART IV
Item 15. Exhibits and Financial Statement Schedules 30
-2-
<PAGE>
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: higher than expected
loan delinquency rates; 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.
Item 1. Description of Business
- --------------------------------
General
- -------
Cascade Financial Corporation (the "Corporation") is a bank holding
company incorporated in the state of Washington that was formed in 1994.
The consolidated entity includes the Corporation and its wholly owned
subsidiaries. At December 31, 2004, the Corporation's wholly-owned
subsidiaries were Cascade Bank ("Cascade" or the "Bank"), Cascade Capital
Trust I and Capital Trust II. The executive offices of the Corporation are
located at 2828 Colby Avenue, Everett, Washington 98201. The telephone number
is (425) 339-5500 and the web site is www.CascadeBank.com.
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. In July 2001, the Bank converted from a
federal stock savings bank to a Washington state commercial bank.
The Corporation was organized on August 18, 1994, for the purpose of
becoming the holding company for Cascade Bank. 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 June of 2004, the Corporation completed the acquisition of Issaquah
Bancshares ("Issaquah"). Issaquah Bank, the only operating subsidiary of
Issaquah, was merged into Cascade Bank and conducts business as the Issaquah
Division of Cascade Bank.
In July of 2001, the Corporation elected to be treated as a financial
holding company with the Federal Reserve Board. In May of 2003, the Corporation
transferred its state of domicile from Delaware, which it had maintained since
its formation as a holding company in 1994, to Washington. 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 seventeen other full service offices in the greater Puget
Sound region. At December 31, 2004, the Corporation had total assets of $1.1
billion, total deposits of $721.9 million and stockholders' equity of $96.3
million.
-3-
<PAGE>
The Bank, a full-service commercial bank, offers a wide range of products
and services. The deposits of the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC"), up to the limits specified by law.
Market Area
- -----------
Headquartered in Everett, Washington, the Corporation serves its customers
from eighteen full service offices, eleven in Snohomish County and seven 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 recovering from an economic slowdown.
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, the
Boeing Company, with other high technology companies playing an important role.
The commercial real estate vacancy rates in east King County began improving
in 2004.
Everett is the home port of the Navy's carrier battle ship, the USS Abraham
Lincoln. The contribution that the Navy makes to the economy is not dependent
on other trends. 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. Snohomish County
and Northeast King County are home to numerous biotechnology companies. Many
of these companies were severely impacted by the recession that began in 2000.
As a result, certain segments of the commercial real estate market were soft
in the 2002-2004 period.
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 could 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, customer service center and online banking.
* Diligently searching for additional sources of fee-based revenue.
* 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.
* Exploring prudent means to grow the business internally and through
acquisitions.
The primary objectives of these strategies are to: enhance shareholder value
measured through increasing returns, 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).
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 primary focus for loans is small to medium sized businesses,
builders and developers, and real estate investors in the Puget Sound area.
The major competitors for the Bank are large commercial and community banks.
The large banks often compete on the basis of competitive pricing, while the
community banks compete on the basis of local decision-making, loan structuring
flexibility, and promises of a higher level of service.
-4-
<PAGE>
The Bank's primary competitors for residential mortgages are mortgage
bankers and local thrifts. The Bank's competitors for consumer business are
numerous, including banks, captive finance subsidiaries of auto companies,
etc. Cascade has made a conscious decision to de-emphasize consumer lending
in that intense competition has led to very low margins in this area.
Geographic location is still the primary factor in choosing a bank for the
checking account relationship. As a result, the Bank's competition for
checking deposits comes primarily from the large institutions 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 US Bank
ATMs without a surcharge. Community banks, savings institutions, as well as
other non-banking financial institutions, provide the greatest competition for
the various savings vehicles such as money market deposit accounts and
certificates of deposit.
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.
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.
LOAN PORTFOLIO
- --------------
General. The Bank originates business, real estate and consumer loans.
Total loans equaled $856.4 million at December 31, 2004. Total loans were
adjusted by loans in process, deferred loan fees, and the allowance for loan
losses for a net loan balance of $794.5 million. At December 31, 2004, $292.1
million or 34.1% of loans consisted of business loans; $157.1 million or 18.3%
were real estate construction loans; $178.7 million or 20.9% of loans consisted
of commercial real estate; $30.1 million or 3.5% were consumer loans; $106.0
million or 12.4% of the Bank's loans consisted of loans secured by one-to-four
family residential properties; and $92.4 million or 10.8% consisted of multi-
family loans. Total loans secured by first liens on residential real estate
was $198.4 million or 23.2% of total loans. The corporation sells almost all
its 30 year fixed-rate loans and the vast majority of its 15 year fixed-rate
loans in the secondary mortgage market. The Corporation had non-mandatory
forward commitments totaling $784 and $2,177 to sell loans into the secondary
market at December 31, 2004, and December 31, 2003, respectively.
-5-
<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.
At December 31,
2004 2003 2002
Amount Percent Amount Percent Amount Percent
--------------- --------------- ---------------
(Dollars in thousands)
Type of Loan
- ------------
Real estate mortgage
Residential (1) $198,347 23.16% $192,777 31.71% $216,914 37.63%
Commercial 178,704 20.87 83,856 13.79 63,108 10.95
Construction 157,088 18.34 93,704 15.41 104,790 18.18
Business 292,117 34.11 204,446 33.63 142,273 24.68
Consumer (2) 30,125 3.52 33,163 5.46 49,331 8.56
--------------------------------------------------
Total loans 856,381 100.00 607,946 100.00 576,416 100.00
Less:
Loans in process 49,657 30,962 20,669
Deferred loan fees, net 2,695 2,179 2,198
Allowance for loan losses 9,563 7,711 6,872
--------------------------------------------------
Total loans, net $794,466 $567,094 $546,677
==================================================
Type of Security
- ----------------
Real estate mortgage
One-to-four family (2) $281,161 32.83% $221,130 36.38% $262,474 45.52%
Multi-family 92,372 10.79 87,212 14.35 94,245 16.35
Commercial 178,704 20.87 83,856 13.79 63,108 10.95
Land loans 3,546 0.41 1,786 0.29 1,720 0.30
Other 300,598 35.10 213,962 35.19 154,869 26.88
--------------------------------------------------
Total loans 856,381 100.00 607,946 100.00 576,416 100.00
Less:
Loans in process 49,657 30,962 20,669
Deferred loan fees, net 2,695 2,179 2,198
Allowance for loan losses 9,563 7,711 6,872
--------------------------------------------------
Total loans, net $794,466 $567,094 $546,677
==================================================
At December 31, At June 30,
2001 2001 2000
Amount Percent Amount Percent Amount Percent
--------------- --------------- ---------------
(Dollars in thousands)
Type of Loan
- ------------
Real estate mortgage
Residential (1) $262,460 42.80% $272,363 44.90% $288,660 51.11%
Commercial 62,938 10.26 56,913 9.38 54,320 9.62
Construction 104,131 16.98 103,206 17.01 73,488 13.01
Business 125,342 20.44 113,708 18.75 86,298 15.28
Consumer (2) 58,381 9.52 60,406 9.96 62,061 10.98
--------------------------------------------------
Total loans $613,252 100.00 $606,596 100.00 $564,827 100.00
==================================================
Less:
Loans in process 28,220 33,337 17,132
Deferred loan fees, net 2,502 2,703 2,719
Allowance for loan losses 6,304 5,687 5,004
--------------------------------------------------
Total loans, net $576,226 $564,869 $539,972
==================================================
-6-
<PAGE>
At December 31, At June 30,
2001 2001 2000
Amount Percent Amount Percent Amount Percent
--------------- --------------- ---------------
(Dollars in thousands)
Type of Loan
- ------------
Real estate mortgage
One-to-four family (2) 295,941 48.26% $307,049 50.62% $290,857 51.49%
Multi-family 109,734 17.89 107,360 17.70 112,721 19.96
Commercial 62,938 10.26 56,913 9.38 54,320 9.62
Land loans 2,546 0.42 3,269 0.54 29 0.01
Other 142,093 23.17 132,005 21.76 106,900 18.92
--------------------------------------------------
Total loans $613,252 100.00 $606,596 100.00 $564,827 100.00
==================================================
Less:
Loans in process 28,220 33,337 17,132
Deferred loan fees, net 2,502 2,703 2,719
Allowance for loan losses 6,304 5,687 5,004
--------------------------------------------------
Total loans, net $576,226 $564,869 $539,972
==================================================
- -----------------
(1) Includes construction loans converted to permanent loans, multi-family and
land loans.
(2) Includes home equity loans and HELOCs.
At December 31, 2004, loans in process attributed to construction loans
totaled $49.7 million; deferred fees were $2.7 million; and the allowance for
loan losses was $9.6 million.
Business Loans. Business loans increased from $204.4 million at December
31, 2003, to $292.1 million at December 31, 2004. Unsecured business loans
totaled $11.5 million at December 31, 2004. 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 secured and unsecured operating lines of credit.
Business loans are underwritten by the Bank on the basis of the borrower's cash
flow, ability to service debt from earnings, and 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 commercial real
estate 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.
Construction Loans. The Bank originates construction loans on one-to-four
family homes either to borrowers as custom construction loans or to builders as
speculative construction loans. Construction loans generally have maturities of
12-18 months. The interest rates charged on construction loans are typically
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. The historically strong housing market in the
Puget Sound area has made construction lending attractive. At December 31,
2004, and December 31, 2003, the Corporation's construction loans were $157.1
million (including $49.7 million of loans in process) or 18.3% of the total
loan portfolio and $93.7 million (including $31.0 million of loans in process)
or 15.4% of the total loan portfolio, respectively. Of this amount, $123.9
million was to builders, including $45.8 million for land acquisition and
development, and $26.8 million was to individuals for custom home construction.
The strength of the local housing market led to a rapid turnover in this
portfolio as builders were able to quickly sell new homes. The Bank's maximum
outstanding commitment to one builder at December 31, 2004 totaled $10.2
-7-
<PAGE>
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.
Commercial Real Estate Loans. Commercial real estate loans totaled $178.7
million or 20.9% of the Bank's total loans at December 31, 2004, compared to
$83.9 million or 13.8% of the portfolio at December 31, 2003. 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, 2004, the
largest commercial real estate and land loan in the Bank's portfolio was $7.4
million, which was performing according to its terms at that date.
Commercial real estate loans are also sensitive to local economic
conditions. An economic recession can lead to increased vacancies that would
lower the borrower's ability to service the debt. Commercial real estate loans
also have a degree of interest rate risk in that if rates fall borrowers
refinance, if rates rise the Bank could experience a squeeze on net interest
margin if the Bank does not accurately fund these loans, which often have a
fixed rate for the initial five years of the loan.
Multi-family Loans. Multi-family loans totaled $92.4 million or 10.8% of
the total loan portfolio at December 31, 2004. The multi-family portfolio is
principally comprised of small to medium-size apartment projects with loan-to-
value ratios usually up to 75%. 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. In addition, the low interest rate environment
and robust housing market has induced many erstwhile renters to purchase
houses. This has led to higher vacancy rates in some areas.
One-to-Four Family Residential Loans. At December 31, 2004, residential
loans totaled $106.0 million or 12.4% of the total loan portfolio. Residential
lending consists primarily of first mortgage loans secured by single family
residential properties located principally in Snohomish and King Counties. The
Bank originates both fixed rate and adjustable rate mortgages ("ARMs") with
maturities up to 30 years. ARM loans are generally held in the Bank's
portfolio. 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 no loans held for sale at December 31, 2004, and no
loans held for sale at December 31, 2003. Loans held for sale are not material
and therefore the Bank does not include them as a separate line item on the
balance sheet. The Bank has greatly reduced its emphasis on mortgage banking
and mortgage lending in the past four years.
The Bank's conforming residential loans meet the Federal Home Loan Mortgage
Corporation's underwriting standards with respect to credit, borrower 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
-8-
<PAGE>
borrower's stated income, non-owner occupied property, rural property, or other
exceptions from agency guidelines.
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. These loans are at a
floating rate with a floor on that rate. The balance outstanding for both types
of home equity loans decreased to $21.6 million at December 31, 2004, as
compared to $23.6 million at December 31, 2003. At December 31, 2004 and
December 31, 2003, the total amount of unused lines of credit were $22.7
million and $34.6 million, respectively. The second category of consumer loans
are installment loans in which boats, automobiles, and recreational vehicles
serve as collateral. This portfolio was $8.5 million at December 31, 2004, as
compared to $9.5 million outstanding at December 31, 2003. Although boat loans
total $4.1 million of the Corporation's installment loans at December 31, 2004,
the Corporation has significantly decreased its origination of boat loans and
expects this amount to decline further in the future. Since installment loans
are secured by depreciating assets any repossessed collateral for a defaulted
loan may not provide an adequate source of repayment of the outstanding loan
balance. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower. Consumer loan collections are
dependent on the borrower's continuing financial ability, and are more likely
to be adversely affected by job loss, divorce, illness or personal bankruptcy.
The Loan Maturity Table
- -----------------------
The following table sets forth information at December 31, 2004 regarding
the dollar amount of loans maturing in the Corporation's portfolio based on
their contractual terms to maturity, but does not include scheduled payments
or potential prepayments. Loan balances do not include deferred loan fees.
Construction loans are net of loans in process.
<TABLE>
<CAPTION>
With variable With fixed
rate (for rate(for
maturities maturities
Due in one Due in one Due after of (more of more
year or less to five years five years Total than one year) than one year)
------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Business $56,728 $118,711 $121,300 $296,739 $119,173 $120,862
Construction 66,660 42,828 - 109,488 40,076 2,873
Commercial Real Estate 9,066 33,457 116,076 158,599 100,097 49,436
Multi-family 1,653 5,991 91,006 98,650 89,393 7,604
Home Equity/Consumer 4,947 4,719 24,611 34,277 21,035 8,304
Residential 1,692 5,950 101,329 108,971 93,132 14,147
</TABLE>
Asset Quality
- -------------
Banking regulations require that each insured institution review and
classify its assets regularly. In addition, bank examiners have the authority
to identify problem assets and, if appropriate, require them to be adversely
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 sufficient weaknesses that make collection or payment in full, based on
currently existing facts, conditions and values, questionable. 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
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. The bank uses
two other asset classification categories for potential problem loans. They
are watch and special mention. Borrowers with declining earnings, strained
cash flow, increasing leverage and/or weakening market fundamentals that
indicate above average risk are classified as watch. Loans on special mention
represent borrowers who exhibit potential credit weaknesses or trends deserving
bank management's close attention.
-9-
<PAGE>
Cascade established the Credit Administration Division in 2001 which is
intended to assure that the Bank maintains the quality of its loan portfolio.
Management has comprehensive monthly and annual 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 each 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 usually contacted in writing. Typically, the Bank will initiate
foreclosure or other corrective 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, 2004 and December 31, 2003, the Bank had $532,000 and $1.9
million, respectively, of loans accounted for on a non-accrual basis.
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 non-performing 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. Increases in the allowance for loan
losses made through provisions were primarily a result of loan growth,
awareness of the greater risk inherent in business lending and the impact of
the economic climate on the loan portfolio.
Management measures the reasonableness 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. Adversely classified loans may be
individually analyzed, to determine an estimated loss amount. A loss rate is
also assigned to these adversely classified loans, but at a higher rate due to
the greater risk of loss. Past due and impaired loans are actively managed to
minimize the potential loss.
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. 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.
-10-
<PAGE>
The following table presents information with respect to the Corporation's
non-performing assets and restructured loans at the dates indicated.
December 31,
2004 2003 2002
-----------------------
(Dollars in thousands)
Non-performing loans:
Commercial loans:
Commercial $ - $ 128 $ 132
Commercial real estate 488 - -
-----------------------
488 128 132
Residential 34 1,704 742
Consumer loans 10 89 82
-----------------------
Total non-performing loans 532 1,921 956
Other real estate 868 474 461
-----------------------
Total non-performing assets $1,400 $2,395 $1,417
=======================
Restructured loans $ 95 $3,467 $ -
Total non-performing loans to net loans .07% .34% .17%
Total non-performing loans to total assets .05 .22 .12
Total non-performing assets to total assets .13 .27 .18
The Corporation's non-performing assets at December 31, 2004, consisting of
non-performing loans and other real estate, totaled $1.4 million or 0.13% of
total assets. This is a decrease from $2.4 million or 0.27% of total assets at
December 31, 2003, and a decrease from $1.4 million or 0.18% of total assets at
December 31, 2002.
Loans are generally placed on non-accrual when they become past due over 90
days 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 decreased to $532,000 at December 31, 2004, compared to
a $1.9 million at December 31, 2003, and $1.0 million at December 31, 2002. The
decrease in non-performing loans from December 31, 2003, to December 31, 2004
is due to a decrease in non-performing residential 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. Other real estate is carried at the lower of the estimated fair
value or the principal balance of the foreclosed loans. Non-performing other
real estate was $868,000 at December 31, 2004, an increase from $474,000 at
December 31, 2003, and an increase from $461,000 at December 31, 2002. All
real estate owned was single-family residential real estate.
Interest income that would have been recognized for the year ended December
31, 2004, December 31, 2003, and December 31, 2002, had non-accrual loans been
current in accordance with their contractual terms amounted to $2,000, $90,000,
and $32,000, respectively.
-11-
<PAGE>
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).
Year Ended December 31,
2004 2003 2002
-------------------------------
Balance at beginning of period $ 7,711 $ 6,872 $ 6,304
Issaquah Bank balance at June 2004 1,394 - -
Charge Offs:
Business 310 295 1,028
Commercial Real Estate - 95 -
Single-Family Residence 34 59 249
Consumer and other 97 302 164
Recoveries: (223) (315) (114)
-------------------------------
Net charge-offs (recoveries): 218 436 1,327
Provision for loan losses 675 1,275 1,895
-------------------------------
Balance at end of period 9,563 7,711 6,872
Average loans outstanding $691,372 $565,453 $566,302
===============================
Ratio of net charge-offs during
the period to average loans
outstanding .03% .08% .23%
Ratio of allowance for loan losses
to average loans outstanding 1.38 1.36 1.21
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 may 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 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).
December 31,
---------------------------------------------
2004 2003 2002
Amount %* Amount %* Amount %*
------------- ------------- -------------
Business $4,181 34.11% $2,833 33.63% $2,918 24.68%
Commercial Real Estate 583 20.87 787 13.79 274 10.95
Single-Family Residential 432 12.37 745 17.37 745 21.28
Multifamily 616 10.79 245 14.35 366 16.35
Real Estate Construction 1,295 18.34 642 15.41 1,887 18.18
Consumer and Other 513 3.52 444 5.45 252 8.56
Unallocated 1,943 - 2,015 - 430 -
---------------------------------------------
Total allowance for loan losses $9,563 100.0% $7,711 100.0% $6,872 100.0%
* Percent of loans in each category to total loans.
-12-
<PAGE>
The provision for loan losses for the year ended December 31, 2004, totaled
$675,000 compared to $1,275,000 for the year ended December 31, 2003, and
$1,895,000 for the year ended December 31, 2002. The decrease in the provision
for loan losses for the twelve month period ended December 31, 2004, was due to
the decrease in actual adversely classified loans (which includes the
substandard and doubtful categories) under the Bank's loan classification
system. Adversely classified loans decreased to $9.3 million at December 31,
2004, from $12.0 million at December 31, 2003.
ASSET AND LIABILITY MANAGEMENT ACTIVITIES
- -----------------------------------------
A prime focus of the Bank's asset/liability management activity is interest
rate risk management. 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 and guidelines on the amount of risk deemed appropriate. The Bank's
net interest income and the fair value of its capital are measured under
different interest rate scenarios. The Board, through the Asset/Liability
Management Policy, has established targets for maximum negative impact that
changes in interest rates have on the Bank's net interest income, the fair
value of equity and adjusted capital/asset ratios under certain interest rate
shock scenarios. Cascade uses a simulation model to measure rate risk and the
impact on net interest income, the fair value of equity, and the fair value
capital/asset ratio. In general the Bank seeks to manage its rate risk through
its balance sheet. The Bank focuses on originating more interest rate
sensitive assets, such as prime-based loans, while reducing its long-term,
fixed rate assets through the sale of 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.
Using standard interest rate shock methodology (an instantaneous uniform
change in interest rates at all maturities), the Bank is well within the
guidelines established by the Board of Directors for the changes in fair value
of equity and the adjusted capital/asset ratios. The Bank's fair value of
equity decreases 11.6% in an up 200 bp shock scenario and decreases 11.5% in a
down 200 bp shock, within the established guideline of a maximum 30% decline.
The adjusted capital/asset ratio is 9.3% in the up 200 bp scenario and 8.9% in
the down 200 bp scenario, both above the 5% minimum established guideline. The
net interest income increases 3.0% in the up 200 basis point scenario, well
within the guideline of a 10% decline. In the unlikely down 200 bp shock
scenario, the Bank's net income decreases 11.9%, slightly in excess of the 10%
decline guideline. Additional action will be implemented to counter this
exposure in the event of declining short-term interest rates.
Further, since the third quarter of 2003, the Bank has sought to limit
exposure, particularly to rising rates. Limits have been established on the
final maturity of investments and limits have been initiated on the price
volatility of mortgage-backed securities (MBS) (including collateralized
mortgage obligations (CMOs)). Additionally, the Bank extends the maturities of
its liabilities by offering long-term deposit products to customers, and
obtaining longer term FHLB advances. As of December 31, 2004, $196 million of
the $228 million in advances had original maturities greater than one year and
$151 million have remaining maturities greater than one year.
The Bank uses interest rate swaps and has used caps and floors in the past
to control the amount of its interest rate risk. During the third quarter of
2004, the Bank implemented two $25 million interest rate swaps to reduce its
exposure to increasing interest rates. The first of these swaps is a 5 year
pay-fixed instrument used as a cash flow hedge to offset increases in LIBOR in
a $25 million FHLB advance. The second swap is a 10 year, pay-fixed instrument,
originally accounted for as a fair value hedge to offset changes in value of
$26 million of the Bank's available for sale investment portfolio. As of
December 15, 2004, due to narrowing of swap spreads, the hedge lost its "highly
effective designation" and is being marked to market through the Bank's income
statement.
Another major component of asset/liability management is liquidity
management. The Board of Directors has also established liquidity parameters
that seek to assure that the Bank will have sufficient liquidity to meet all
its customer needs for funding and/or deposit withdrawals.
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.
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).
-13-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
---------------------------------------- ----------------------------------------
2004 Compared to Year Ended 2003 Compared to Year Ended
December 31, 2003 December 31, 2002
Increase (Decrease) Due to Increase (Decrease) 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
- -----------------------
Single-family loans (1) $ (873) $ (406) $ 48 $(1,231) $(1,396) $(1,742) $ 235 $(2,903)
Multi-family loans (1) (733) 317 (37) (453) (491) (1,115) 70 (1,536)
Commercial real estate loans (1) (521) 3,456 (340) 2,595 (508) 813 (82) 223
Construction loans (1) 393 632 55 1,080 (484) (150) 14 (620)
Consumer loans (1) - (533) - (533) (157) (1,203) 46 (1,314)
Business loans (1) 48 4,958 21 5,027 (912) 3,251 (316) 2,023
---------------------------------------- ----------------------------------------
Total loans (1,686) 8,424 (253) 6,485 (3,948) (146) (33) (4,127)
Securities available-for sale (1,243) (1,442) 195 (2,490) (1,595) 2,237 (399) 243
Securities held-to-maturity (217) 1,301 (85) 999 (156) 2,426 (281) 1,989
Daily interest-earning deposits 33 (58) (17) (42) (83) (173) 44 (212)
---------------------------------------- ----------------------------------------
Total net change in income on
interest earning assets $(3,113) $ 8,225 $(160) $ 4,952 $(5,782) $ 4,344 $(669) $(2,107)
======================================== ========================================
Interest-bearing liabilities
- ----------------------------
Interest-bearing deposits $(1,258) $ 1,616 $(172) $ 186 $(3,056) $ 1,984 $(484) $(1,556)
FHLB advances (504) 838 (41) 293 (1,364) (530) 60 (1,834)
Other borrowings (205) (125) 17 (313) (334) 38 (7) (303)
-------------------------------------- --------------------------------------
Total net change in expenses on
interest-bearing liabilities $(1,967) $ 2,329 $(196) $ 166 $(4,754) $ 1,492 $(431) $(3,693)
======================================== ========================================
Net increase in net interest income $ 4,786 $ 1,586
======= =======
(1) Does not include interest on loans 90 days or more past due.
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
2002 Compared to Year Ended
December 31, 2001
(unaudited)
Increase (Decrease) Due to
-----------------------------------------
Rate/
Rate Volume Volume Net
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets
- -----------------------
Single-family loans (1) $ (348) $(2,571) $ 68 $(2,851)
Multi-family loans (808) (160) 15 (953)
Commercial real estate loans (211) 102 (4) (113)
Construction loans (1,347) 1,134 (273) (486)
Consumer loans (1) (654) (421) 54 (1,021)
Business loans (1) (1,360) 1,461 (209) (108)
------------------------------------------
Total loans (4,728) (455) (349) (5,532)
Securities available-for-sale (464) 1,608 (94) 1,050
Securities held-to-maturity 13 907 30 950
Daily interest-earning deposits (88) 359 (153) 118
------------------------------------------
Total net change in income on
interest-earning assets $(5,267) $ 2,419 $ (566) $(3,414)
==========================================
Interest-bearing liabilities
- ----------------------------
Interest-bearing deposits (6,871) 2,887 (1,125) (5,109)
FHLB advances (395) (1,598) 45 (1,948)
Other borrowings (833) (208) 63 (978)
------------------------------------------
Total net change in expenses on
interest-bearing liabilities $(8,099) $ 1,081 $(1,017) $(8,035)
==========================================
Net increase in net interest income $ 4,621
======
(1) Does not include interest on loans 90 days or more past due.
</TABLE>
-14-
<PAGE>
INVESTMENT PORTFOLIO
- --------------------
The Board of Directors sets the investment policy of the Bank. This policy
dictates that investments 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 government sponsored enterprises, MBS including
CMOs, state and municipal government bonds, deposits at the FHLB-Seattle,
certificates of deposit of federally insured institutions, investment grade
corporate bonds, 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 decreased to $215.6 million at December 31, 2004, from
$276.5 million at December 31, 2003, a 22% decrease. The investment portfolio
declined to assist in the funding of our loan portfolio throughout the year.
The decline in the portfolio was also the result in the lower spread on
investments compared to funding costs as the Fed began raising short-term rates
in June 2004. The investment portfolio represented 20% of total assets at
December 31, 2004 compared to 31% at December 31, 2003. MBS (including CMOs)
available for sale decreased from $70.5 million to $42.5 million as of December
31, 2004. Agency notes available for sale also decreased from $99.2 million to
$69.8 million. Agency notes held to maturity decreased from $73.8 million to
$65.8 million for the year ended December 31, 2004.
The following tables set forth the Bank's securities available for sale at
the dates indicated.
<TABLE>
<CAPTION>
December 31, 2004 December 31, 2003 December 31, 2002
Estimated Percent of Estimated Percent of Estimated Percent of
(Dollars in thousands) Fair Value Portfolio Fair Value Portfolio Fair Value Portfolio
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MBS $ 42,522 34.22% $ 70,523 37.17% $ 90,073 56.33%
Agency notes 69,882 56.23 99,240 52.30 55,874 34.94
FHLB stock 11,872 9.55 14,741 7.77 13,950 8.73
Corporate/other - - 5,243 2.76 - -
-----------------------------------------------------------------------------
Total $124,276 $189,747 $159,897
=============================================================================
</TABLE>
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities available for sale at December
31, 2004. Securities with no stated maturity dates are reported as due within
one year.
<TABLE>
<CAPTION>
Less Than One Year One to Five Years Five to Ten 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>
MBS $15,809 5.39% $24,598 5.14% $ 2,115 5.24% $ - -%
Agency notes 86 1.00 11,006 4.13 43,108 4.64 15,682 5.12
FHLB stock 11,872 2.00 - - - - - -
Corporate/other - - - - - - - -
------ ------ ------ ------
Total $27,767 $35,604 $45,223 $15,682
====== ====== ====== ======
</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, 2004 December 31, 2003 December 31, 2002
----------------------------------------------------------------------------------------------
Amortized Fair % of Amortized Fair % of Amortized Fair % of
(Dollars in thousands) Cost Value Portfolio Cost Value Portfolio Cost Value Portfolio
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MBS $25,083 $24,584 27.45% $12,587 $12,328 14.44% $ 4,212 $ 4,378 8.77%
Agency notes 65,791 64,506 72.03 73,822 72,709 85.20 44,866 45,261 90.61
Corporate/other 465 465 0.52 310 307 0.36 310 310 0.62
----------------------------------------------------------------------------------------------
Total $91,339 $89,555 $86,719 $85,344 $49,388 $49,949
</TABLE>
-15-
<PAGE>
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities held to maturity at December 31,
2004. Securities with no stated maturity dates are reported as due within one
year.
<TABLE>
<CAPTION>
Less Than One Year One to Five Years Five to Ten 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>
MBS - - $20,901 4.62% $ 3,683 4.60% $ - -%
Agency notes - - 20,504 4.08 17,816 4.63 26,186 5.21
Corporate/other - - - - - - 465 -
------ ------ ------ ------
Total - - $41,405 $21,499 $26,651
====== ====== ====== ======
</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 15.
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.
Deposits increased to $721.9 million at December 31, 2004, from $564.3
million at December 31, 2003, an increase of 27.9% during this period. Deposits
at December 31, 2002 were $509.9 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
years ended December 31, 2004, 2003, and 2002 (dollars in thousands).
<TABLE>
<CAPTION>
Average Deposits by Type
------------------------
December 31, 2004 December 31, 2003 December 31, 2002
Amount Rate Amount Rate Amount Rate
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 59,050 -% $ 38,243 -% $ 29,122 -%
Interest-bearing demand deposits 29,562 0.09 21,854 0.48 22,641 1.04
Money market deposit 145,626 1.37 113,263 1.32 107,363 2.14
Savings 14,895 0.32 11,828 0.46 11,324 1.15
Time certificates 401,620 2.57 357,955 2.60 294,554 3.35
------------------------------------------------------------
$650,753 $543,143 $465,004
============================================================
</TABLE>
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity at December 31, 2004. Jumbo
certificates of deposit require minimum deposits of $100,000 and rates paid
on such accounts are negotiable.
Maturity Period Jumbo Certificates of Deposit
--------------------------------------------------------
(Dollars in thousands)
Three months or less $ 55,624
Over three through six months 110,590
Over six through twelve months 76,809
Over twelve months 34,319
-------
Total $277,342
=======
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
-16-
<PAGE>
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 in 2005 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 15 is incorporated herein by reference.
BORROWINGS
- ----------
The Bank relies on advances from the Federal Home Loan Bank of Seattle
(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, investment securities and other
eligible mortgages secured by real estate. FHLB advances were $228.0 million
at December 31, 2004, compared to $200.0 million at December 31, 2003, a 14.0%
increase. FHLB advances were $197.5 million at December 31, 2002.
The Bank enters into repurchase agreements with its correspondent 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 decreased to $20.9 million
at December 31, 2004, from $39.9 million at December 31, 2003.
Cascade Bank has established Fed funds borrowing lines with two of its
correspondent banks. One line was used for three days during 2004. The usage
was a test of our liquidity management processes.
The following table sets forth certain information regarding borrowings by
the Corporation at the end of, and during, the periods indicated.
At or for the
year ended
December 31,
2004 2003 2002
---------------------------
(Dollars in thousands)
Weighted average rate on:
Securities sold under agreements
to repurchase 2.23% 1.17 1.49
FHLB advances 4.86% 4.85 5.78
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements
to repurchase $ 40,251 40,587 49,666
FHLB advances $237,500 211,750 226,500
Approximate average borrowings outstanding
with respect to:
Securities sold under agreements to repurchase $ 31,085 35,334 34,415
FHLB advances $210,023 194,229 203,022
Approximate weighted average rate paid on:
Other interest-bearing liabilities* 2.79% 3.39 4.00
FHLB advances 5.05% 5.31 5.98
* Including Trust Preferred Securities.
Junior Subordinated Debentures Payable (Trust Preferred Securities). On
March 1, 2000, $10 million of 11 percent Capital Securities due March 1, 2030
were issued by a wholly owned business Trust whose common equity is 100% owned
by Cascade Financial Corporation. The Trust exists for the exclusive purposes
of issuing and selling the capital securities, using the proceeds from the sale
of the capital securities to acquire junior subordinated debentures issued by
Cascade Financial Corporation, and engaging in only those other activities
necessary, advisable, or incidental to the above. The Corporation used the
proceeds for general corporate purposes including stock repurchases and
investment in its subsidiary bank. At December 31, 2003, as a result of the
adoption of FIN 46R, we deconsolidated the Trust and all periods in the
consolidated financial statements have been restated to reflect this change.
The $10.3 million of junior subordinated debentures issued by the Company to
the Trust were reflected as junior subordinated debentures payable in the
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consolidated balance sheet at December 31, 2004. The Trust will redeem the
trust preferred securities when we pay the junior subordinated debentures at
maturity or upon any earlier redemption of the junior subordinated debentures.
Prior to December 31, 2003, the Trust was consolidated and was included in
liabilities in the consolidated balance sheet, as "Trust Preferred Securities.
" The common securities and debentures, along with the related income effects
were eliminated in the consolidated financial statements.
On December 15, 2004, Cascade Financial Corporation issued $5 million of
5.82% capital securities due January 7, 2035. The proceeds from the issuance
were invested in Cascade Bank, which will use the increased capital for general
corporate purposes.
Subsidiary Activity
- -------------------
The Corporation has three subsidiaries: Cascade Bank, Cascade Capital Trust
I and Capital Trust II. 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 $10.2 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.
Cascade Capital Trust II incorporates the same structure for the same
purposes as Capital Trust I. The junior subordinated debentures issued under
Capital Trust II equals $5.2 million and has a rate of 5.82% for the first 5
years of the security, and floats at the 3 month LIBOR plus 190 basis points
thereafter.
Personnel
- ---------
At December 31, 2004, the Corporation had 200 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.
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
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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 non-banking 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.
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 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 Washington corporation, the Corporation is
subject to certain limitations and restrictions as provided under applicable
Washington corporate laws.
Securities Registration and Reporting. The Corporation's 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
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<PAGE>
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.
The corporation is listed as a NASDAQ/Small Capitalization stock. As such,
it is subject to the listing and reporting requirements of the NASD. Failure
to meet these requirements could lead to a delisting of the Corporation's
stock.
Disclosure Controls and Procedures. The Sarbanes-Oxley Act of 2002 and
related rulemaking by the SEC, which effect sweeping corporate disclosure and
financial reporting reform, generally require public companies to focus on
their disclosure controls and procedures. As a result, public companies such
as the Corporation now must have disclosure controls and procedures in place
and make certain disclosures about them in their periodic SEC reports (i.e.,
Forms 10-K and 10-Q) and their chief executive and chief financial officers
must certify in these filings that they are responsible for developing and
evaluating disclosure controls and procedures and disclose the results of an
evaluation conducted by them within the 90-day period preceding the filing of
the relevant report, among other things.
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
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,
investments, loans, legal lending limits, 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 its supervision from
engaging in what it considers 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, the timing of the availability of deposited funds and the nature
and amount of 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. The four possible ratings of meeting
community credit needs are outstanding, satisfactory, needs to improve and
substantial noncompliance. Cascade Bank received a satisfactory CRA rating at
the last examination.
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
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<PAGE>
meet any standard prescribed by the Guidelines, the agency may require the bank
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% of unimpaired capital and surplus. At December 31, 2004, the Bank had no
borrowers with balances in excess of the 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
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.
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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
non-bank 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%, of which at least 4% 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, 2004, the Bank had Tier 1 capital equal to $85.0 million or 8.04%
of average total assets, which is $42.7 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% to 2%.
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 15,
for additional information concerning regulatory capital.
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 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, 2004, the Bank had total risk-based capital of approximately
$94.6 million, including $85.0 million in Tier I capital and $9.6 million in
qualifying supplementary capital (the allowance for loan losses), and
risk-weighted assets of $854.8 million, or total capital of 11.06% of
risk-weighted assets. This amount was $26.2 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.
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<PAGE>
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, 2004, Cascade was a "well capitalized" institution under the
prompt corrective action regulations of the FDIC.
TAXATION
--------
Federal Taxation
- ----------------
The Corporation reports its income on a fiscal year basis using the accrual
method of accounting and is subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly
Cascade's reserve for bad debts as 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.
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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.
Availability of Filings
- -----------------------
You may access, free of charge, copies of the following reports of the
Corporation on the SEC's website at www.sec.gov, or the Bank's website at
www.cascadebank.com:
1) Annual Reports on Form 10-K; and
2) Quarterly Reports on Form 10-Q.
These documents are generally posted within 24 hours after the Corporation
files these documents electronically with the Securities and Exchange
Commission. The Corporation is also willing to provide electronic or paper
copies of its filings (subject to actual copying costs) upon reasonable
request.
Item 2. Properties
- -------------------
The Corporation owns eight full service branch locations and leases ten 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, 2004, including leasehold
improvements, furniture and fixtures, of $12.9 million. The Corporation leases
approximately 5% of its main office, approximately 25% of its Marysville
office, and 50% of its Issaquah West 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 15.
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.
-24-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
(a) Cascade Financial Corporation's common stock is traded on the NASDAQ
Small Cap Market under the symbol CASB. The table below indicates the
high/low trading range of Cascade stock over the last eight quarters:
Quarter Ended High Low
----------------------------------
March 31, 2003 $10.56 9.04
June 30, 2003 13.20 9.16
September 30, 2003 16.00 12.01
December 31, 2003 20.99 14.92
March 31, 2004 $20.63 16.52
June 30, 2004 21.28 15.30
September 30, 2004 17.98 15.25
December 31, 2004 19.72 16.62
(b) Cascade Financial Corporation has only one class of stock outstanding
which is common stock. At December 31, 2004, there were 9,559,822
shares outstanding.
(c) The Table below indicates the cash dividends paid on each share of its
common stock:
Quarter Ended Record Date Payment Date Dividend Declared
------------------------------------------------------------------
December 2003 01/07/04 01/22/04 $0.07
March 2004 04/08/04 04/22/04 0.07
June 2004 07/07/04 07/21/04 0.07
September 2004 10/13/04 10/27/04 0.08
<TABLE>
<CAPTION>
Issuer Purchases of Equity Securities
- -------------------------------------
Total Number Maximum
of Shares Number of
Total Number Purchased as Shares that May
Period of Shares Average Price Part of Publicly yet be Purchased
Beginning Ending Purchased (1) Paid per Share Announced Plan Under the Plan
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 1, 2004 June 30, 2004 - $ - - 200,000
July 1, 2004 July 31, 2004 1,275 $17.81 1,275 198,725
August 1, 2004 August 31, 2004 424 $16.59 - 198,725
September 1, 2004 September 30, 2004 5,000 $16.18 5,000 193,725
October 1, 2004 October 31, 2004 - $ - - 193,725
November 1, 2004 November 30, 2004 55 $18.25 55 193,670
December 1, 2004 December 31, 2004 2,000 $18.90 2,000 191,670
---------------------------------------------------------------
Total 8,754 $17.55 8,330 191,670
===============================================================
</TABLE>
1) During the periods presented there were 424 shares purchased, which were
acquired at current market values as consideration for the exercise of
fully vested options.
2) At its June 2004 meeting, the Board of Directors authorized a stock
repurchase program of up to 200,000 shares of the Corporation's stock.
This program will expire on May 31, 2005.
-25-
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section entitled "Selected Financial Data"
of the Annual Report listed in Item 15 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 15 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 15 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 15 is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
On November 10, 2003, the Audit Committee of the Board of Directors of
Cascade Financial Corporation ("Registrant") engaged the accounting firm of
Moss Adams LLP as independent accountants for the Registrant for the fiscal
year 2004. On November 10, 2003, the Board notified KPMG LLP ("KPMG") that
KPMG would be dismissed upon the completion of its independent audit of the
2003 consolidated financial statements of the Registrant and would not be
retained to serve as the Registrant's independent public accountants for the
fiscal year 2004.
KPMG's report on the consolidated financial statements of the Company for
the years 2003 and 2002, contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle. In connection with its audits of the Company's consolidated
financial statements as of and for the years ended December 31, 2003 and 2002,
there were no disagreements with KPMG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of KPMG, would have
caused KPMG to make reference thereto in its reports on the consolidated
financial statements for such years. During the Company's years ended December
2003 and 2002, there were no "reportable events," as that term is defined in
Item 304(a)(1)(v) of Regulation S-K.
Item 9A. Controls and Procedures
- ---------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Corporation's disclosure controls and procedures (as defined in section
13(a)14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried
out under the supervision and with the participation of the Corporation's Chief
Executive Officer, Chief Financial Officer and several other members of the
Corporation's senior management effective December 31, 2003. The Corporation's
Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Corporation in the reports it files or submits under the Act is (i)
accumulated and communicated to the Corporation's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the year ended December 31, 2004, the
Corporation did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
-26-
<PAGE>
Disclosure Controls and Internal Controls. Disclosure controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in the Corporation's reports filed under the
Securities Exchange Act of 1934 (Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's (SEC) rules and forms. Disclosure controls are also
designed with the objective of ensuring that such information is accumulated
and communicated to our management, as appropriate to allow timely decisions
regarding required disclosure. Internal Controls are procedures which are
designed with the objective of providing reasonable assurance that (1)
transactions are properly authorized; (2) assets are safeguarded against
unauthorized or improper use; and (3) transactions are properly recorded and
reported, all to permit the preparation of financial statements in conformity
with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The Corporation's management
does not expect that our disclosure controls or our internal controls will
prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Corporation have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
As permitted by the Order Under Section 36 of the Securities Exchange Act of
1934 Granting an Exemption from Specified Provisions of Exchange Act Rules
13a-1 and 15d-1 issued by the SEC on November 30, 2004, the Company will file
Management's Annual Report on Internal Control Over Financial Reporting and the
related Attestation Report of the Registered Public Accounting Firm by April
30, 2005 through an amendment to this annual report on Form 10-K.
Item 9B. Other Information
- ---------------------------
None.
-27-
<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 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, and to the section therein captioned "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.
Name Age (a) Position
- ---- ------- --------
David M. Duce 45 Chairman, Cascade Financial Corporation
Chairman, Cascade Bank
Carol K. Nelson (b) 48 President, Chief Executive Officer and
Director of Cascade Bank and Cascade
Financial Corporation
Robert M. Ittes 54 President, Issaquah Bank Division of
Cascade Bank
Robert G. Disotell 50 Executive Vice President, Chief Credit
Officer
Steven R. Erickson(b) 49 Executive Vice President, Real Estate
Lending
Lars H. Johnson(b) 51 Executive Vice President, Chief
Financial Officer
LeAnne M. Frank 35 Executive Vice President, Chief
Administrative Officer
Robert F. Wojcik 55 Executive Vice President,
Business Banking
Debbie E. McLeod 39 Executive Vice President, Retail
Banking
(a) At December 31, 2004.
(b) Officer of the Corporation and Bank.
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 M. ITTES is President of the Issaquah Bank Division of the Bank. He
joined Cascade Bank in 2004 as a result of the Bank's acquisition of Issaquah
Bancshares, Inc. Mr. Ittes' responsibilities include managing the business
lending activities in the Issaquah and North Bend market areas. His community
activities include serving on the boards of the Issaquah Chamber of Commerce,
Issaquah Schools Foundation/Communities In School Issaquah, and the Issaquah
Historical Society. He is also involved in government relations activities,
both with the Washington Bankers Association and the Eastside Business
Alliance. Mr. Ittes is a resident of Sammamish, Washington.
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 commercial and income property lending
and serves as the Assistant Secretary for the Corporation. Mr. Erickson joined
-28-
<PAGE>
Cascade in 1978. He is a member of the Board for Big Brothers and Big Sisters
of Snohomish County, Advisory Board Member for Snohomish County's Pre-Diversion
Program, and Trustee of the Boys and Girls Club of Snohomish County. He is a
resident of Marysville, Washington.
LARS H. JOHNSON is the Executive Vice President, Chief Financial Officer of
the Bank and Corporation and also serves as the corporate secretary. Mr.
Johnson joined Cascade in April 2000. Mr. Johnson has 30 years of financial
management experience, including 16 years with the Federal Home Loan Bank of
Seattle. Mr. Johnson is a resident of Edmonds, Washington.
LEANNE M. FRANK is the Executive Vice President and Chief Administrative
Officer for the Bank. She has 18 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 a 2002 graduate of Leadership
Snohomish County and has served as Vice President of the Everett Theatre
Society Board. Ms. Frank is a resident of Everett, Washington.
ROBERT F. WOJCIK is the Executive Vice President of Business Banking for the
Bank, responsible for managing business relationships consisting of business
loans, business deposits, lines of credit, owner occupied commercial real
estate and other business services. Mr. Wojcik joined Cascade Bank in August
2004. He has 26 years of commercial banking experience, recently retiring from
Bank of America after 25 years in commercial banking. Mr. Wojcik is a Trustee
for the Snohomish County YMCA and has been involved in numerous other community
organization as a board member, coach and volunteer.
DEBBIE E. McLEOD is Executive Vice President of Retail Banking for the Bank.
Ms. McLeod joined Cascade Bank in February 2001. She has over 15 years of
commercial banking experience and was previously Vice President and Northern
Region Sales Manager for Bank of America. Ms. McLeod is a past Board Chair for
United Way of Skagit County and is a Director of United Way of Snohomish
County. Ms. McLeod resides in Burlington, 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.
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
The information required by this Item is incorporated herein by reference to
the section captioned "INDEPENDENT AUDITORS" of the Proxy Statement."
-29-
<PAGE>
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1)(2) Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements
(a) Consolidated Balance Sheets at December 31, 2004, and
December 31, 2003.
(b) Consolidated Statements of Operations for the year ended
December 31, 2004, 2003 and 2002.
(c) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the year ended December 31, 2004,
2003 and 2002.
(d) Consolidated Statements of Cash Flows for the year ended
December 31, 2004, 2003 and 2002.
(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 and Incentive
Plan (Incorporated by reference to the Corporation's Form 10-KSB
for the period ending 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 the period ending 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. (Incorporated by reference to
Exhibit 10.5 of the Corporation's Form 10-K for the period ending
December 31, 2001).
10.6 Form of Change of Control Agreement entered into between the
Bank and its executive officers. (Incorporated by reference to
Exhibit 10.6 of the Corporation's Form 10-K for the period ending
December 31, 2001).
10.7 Cascade Financial Corporation 1997 Elective Equity Plan.
(Incorporated by reference to Exhibit 10.7 of the Corporation's
Form 10-K for the period ending December 31, 2001).
10.8 Employment Agreement Extension with Carol K. Nelson dated
January 27, 2004 (Incorporated by reference to Exhibit 10.6 of
the Corporation's Form 10-Q for the period ending March 31,
2004).
10.9 Cascade Bank Deferred Compensation Plan, Election Form, and
Election Form of Mr. Ittes. (Incorporated by reference to
Exhibits 99.1, 99.2 & 99.3 of the Corporation's Form 8-K filed
with the SEC on December 20, 2004).
13 Cascade Financial Corporation December 31, 2004 Annual Report to
Stockholders, including the Selected Financial Data and
Management Discussion and Analysis.
21 Subsidiaries
23 Consent of Independent Registered Public Accounting Firm - Moss
Adams LLP
23.1 Consent of Independent Registered Public Accounting Firm - KPMG
LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Annual Report on Form 10-K pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
-30-
<PAGE>
(b) Reports on Form 8-K
On December 21, 2004, the Corporation filed a Form 8-K reporting a $.08
quarterly cash dividend under item 2.02 of Form 8-K. The dividend was paid on
January 27, 2005 to shareholders of record on January 13, 2005.
On December 16, 2004, the Corporation filed a Form 8-K announcing that
Cascade Bank, the banking subsidiary of Cascade Financial Corporation, adopted
the Cascade Bank Deferred Compensation Plan, under Item 1.01 of Form 8-K.
On October 20, 2004, the Corporation filed a Form 8-K reporting and attached
press release announcing earnings information for the third quarter and nine
months ended September 30, 2004, under Item 2.02 of Form 8-K.
On October 1, 2004, the Corporation filed a Form 8-K reporting a $.08
quarterly cash dividend under item 8.1 of Form 8-K.
-31-
<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 11, 2005 By: /s/ Carol K Nelson
------------------
Carol K. Nelson
President and Chief
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 11, 2005
Date: March 11, 2005
By: /s/ David W. Duce By: /s/ Ronald E Thompson
----------------- ---------------------
David W. Duce Ronald E. Thompson
Chairman Director
Date: March 11, 2005 Date: March 11, 2005
By: /s/ Janice Halladay By: /s/ G. Brandt Westover
------------------- ----------------------
Janice Halladay G. Brandt Westover
Director Director
Date: March 11, 2005 Date: March 11, 2005
By: /s/ Frank M. McCord By: /s/ Craig Skotdal
------------------- -----------------
Frank M. McCord Craig Skotdal
Director Director
Date: March 11, 2005 Date: March 11, 2005
By: /s/ David O'Connor By: /s/ Dwayne Lane
------------------ ---------------
David O'Connor Dwayne Lane
Director Director
Date: March 11, 2005 Date: March 11, 2005
By: /s/ Henry Robinett By: /s/ Richard Anderson
------------------ --------------------
Henry Robinett Richard Anderson
Director Director
Date: March 11, 2005 Date: March 11, 2005
-32-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>ex13-1204.txt
<DESCRIPTION>2004 ANNUAL REPORT
<TEXT>
EXHIBIT 13
(COVER PAGE)
2004 ANNUAL REPORT
Real
People.
Real
solutions.sm
(picture of Jenifer Schwartz at Snohomish branch with Red and Rover)
Cascade Financial Corporation Logo
<PAGE>
Real
People.
Real community banking
Solutions.
When its doors opened in June 2004, expectations were high that the new
Snohomish branch would enjoy a warm welcome. In fact, deposits flowed into the
bank even before the last floor tile was installed. Within months, deposits had
grown well beyond plan.
This progress is testament to Cascade's excellent reputation and style of
exceptional customer service. Many Cascade employees make their homes in the
area and their roots run deep. They believe it makes sense to bank with a good
neighbor. Red and Rover agree and like to keep things close to home, too.
That's why they choose Cascade.
(Front cover: Red and Rover, loyal Cascade Bank customers, bring in their
lemonade stand earnings to Senior Financial Services Representative Jenifer
Schwartz at our new Snohomish branch.)
Financial Highlights . . . . . . . . . 1
Letter to Shareholders . . . . . . . . 2
Cascade Bank Management Team . . . . . 6
Board of Directors . . . . . . . . . . 8
Management Discussion and Analysis . . 10
Independent Auditors' Report . . . . . 18
Annual Meeting Information . . . . . . 47
<PAGE>
Real
people.
Real partnership
solutions.
Our 2004 Annual Report takes its inspiration from our collaboration with
Cascade Bank customer Brian Basset and his nationally syndicated "Red and
Rover" comic strip.
The friendship between a 10-year-old boy and his beloved dog and their
shared adventures in life and commerce celebrate the idea that staying true
to the fundamentals really counts. Simple things like shared values, loyalty,
and relationships matter when building a lasting friendship or working together
to build Cascade Bank into a preferred community bank that consistently returns
value to shareholders.
Follow Red and Rover as they point out our 2004 performance highlights.
(Image of Brian Basset with cartoon characters Red and Rover at their lemonade
stand.)
Cartoonist Brian Basset with Red and Rover.
<TABLE>
<CAPTION>
FIVE-YEAR FINANCIAL HIGHLIGHTS
Dollars in thousands except for per share and financial ratios.
<S> <C> <C> <C> <C> <C>
12 MONTHS ENDED DECEMBER 31 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
Net interest income $ 32,397 $ 27,610 $ 26,024 $ 21,403 $ 18,738
Other income 4,747 5,306 4,039 3,322 2,399
Net income 10,785 9,599 8,072 5,617 3,821
Earnings per share (diluted) 1.16 1.13 0.98 0.70 0.47
AT DECEMBER 31 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
Assets $1,088,955 $885,220 $804,463 $762,323 $716,439
Loans, net 794,466 567,094 546,677 576,226 548,722
Deposits 721,908 564,314 509,850 419,980 395,976
Stockholders' equity 96,250 63,957 56,640 47,677 41,240
Book value per share 10.07 7.76 6.99 6.16 5.36
FINANCIAL RATIOS 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
Return on assets 1.09% 1.13% 1.05% 0.77% 0.57%
Return on average equity 13.22% 15.81% 15.49% 12.63% 10.16%
Return on tangible equity 16.24% 15.81% 15.49% 12.63% 10.16%
Net interest margin 3.44% 3.35% 3.44% 3.01% 2.86%
Nonperforming loans/total loans 0.07% 0.33% 0.17% 0.34% 0.42%
Efficiency ratio 54.70% 53.87% 54.29% 60.13% 68.62%
</TABLE>
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 financial information for the years
ending December 31, 2001 and 2000, was prepared by management and is unaudited.
Special to Cascade Bank, Red and Rover characters are copyrighted by Brian
Basset and The Washington Post Writers Group, 2005 (c)
1
<PAGE>
CEO Carol K. Nelson and Rover get acquainted as Red watches a winning
friendship take shape.
(Image of Carol Nelson shaking Rover's hand while Red looks on.)
DEAR SHAREHOLDERS, CUSTOMERS, AND EMPLOYEES:
I invite you to share pride in our 2004 accomplishments. We successfully
executed our growth strategy, growing assets to over $1 billion. Net income
increased to a record $10.8 million. Focus on solid banking fundamentals and
exceptional customer service continued to fuel our progress as a market leader.
Cascade is a stronger financial institution today than a year ago.
Cascade's growth strategy includes branch expansion, acquisition, and niche
banking. Our 2004 highlights include the June opening of our newest branch in
the city of Snohomish. The community welcomed the branch, which quickly
surpassed goals for new deposits. We also completed the acquisition of
Issaquah Bancshares, adding two new branches and more than $131 million in
assets. In addition to providing specialized banking for the medical/dental
professional market segment, we launched our Women's Financial Group, dedicated
to serving the banking needs of women business owners and professionals. These
market segments present tremendous potential for Cascade.
Loan and deposit growth, strong credit quality, and efficient operations
are the fundamentals that propel our business forward. Demonstrating continuous
improvement in all areas remains our emphasis as we create results that enhance
shareholder value. We were successful in growing higher-yielding business,
construction, and commercial real estate loans, which we funded with lower-cost
2
<PAGE>
(Image of Red with Rover's leash)
deposits. In fact, total loans grew 40% and total deposits increased 28%. Our
cost of funds decreased with checking accounts showing strong growth. Adding to
our strength is our conservative credit culture. Nonperforming loans dropped to
just .07% of total loans. The charts throughout this report illustrate the
excellent progress we've made against key performance metrics.
Our vision is to be the preferred community bank. Our consistent pattern of
loan and deposit growth, the steady flow of quality referrals we enjoy from
satisfied consumer and commercial customers, and the customer loyalty we earn
through our actions indicate that we are well on our way toward realizing our
vision. Together with our team of experienced, knowledgeable and capable
bankers, we are bringing to life our "real people, real solutions" signature
with each customer touch point and every banking transaction.
Thank you for the confidence and commitment you express to Cascade Bank
through your loyal and valued support.
Sincerely,
/s/ Carol K. Nelson
- -------------------
Carol K. Nelson
President and Chief Executive Officer
Cascade Financial Corporation
February 15, 2005
3
<PAGE>
Real
people.
Real lending
solutions.
Red's proposal for a new lemonade stand was on a slightly smaller scale than
developer Bob Gregg's proposal for The Gregory-a mixed-use project in downtown
Edmonds, Washington. The project occupies a city block and includes 14,000
square feet of commercial space on the ground floor with 28 condominiums above.
Bob says that Cascade Bank knows far more than the average bank about
construction lending. "At Cascade, they get the concept of quick turnaround
on a loan draw. They get the whole construction process."
Red and Rover can rest assured that their lemonade stand will be built by
an expert and financed by one, too.
Red and Rover discuss plans for a new lemonade stand that developer Bob Gregg
will build.
(Image of Bob Gregg showing blueprints of lemonade stand to Red and Rover.)
REVENUE
- -------
$ in millions, 2000 and 2001 are unaudited
(Revenue bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Net Interest Income 18.7 21.4 26.0 27.6 32.4
Other Income 2.4 3.3 4.0 5.3 4.7
NET INCOME
- ----------
$ in millions, 2000 and 2001 are unaudited
(Net Income bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Net Income 3.8 5.6 8.1 9.6 10.8
EFFICIENCY RATIO
- ----------------
%, 2000 and 2001 are unaudited
(Efficiency Ratio bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Efficiency Ratio 68.6 60.1 54.3 53.9 54.7
4
<PGAE>
Real
people.
Real business
solutions.
Red entrusts his smile to Dr. Jacqueline de Leon-Estes-a caring, attentive
orthodontist with a passion for working with children, teens and adults.
A beautiful smile speaks volumes about health and happiness, and Dr. de
Leon-Estes has plenty to grin about. She has grown her Mukilteo, Washington
practice by over 20% since purchasing it with Cascade's help in 2003. Now,
Cascade is helping her manage growth to achieve heightened success. Rover says
it is progress worth barking about.
Red urges Rover to open wide so
Dr. de Leon-Estes can check his teeth.
(Picture of Dr. de Leon-Estes checking Red's teeth while Rover holds Red's
mouth)
TOTAL DEPOSITS
- --------------
$ in millions, 2000 and 2001 are unaudited
(Total Deposits bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Total Deposits 396 420 510 564 722
BUSINESS LOANS
- --------------
$ in millions, 2000 and 2001 are unaudited
(Business Loans bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Business Loans 97 125 142 204 292
LOANS
- -----
December 31, 2004: $804 Million
audited, % of loans
(Loans pie chart here)
Consumer 4%
Commercial R/E 22%
R/E Construction 13%
Residential 13%
Business 36%
Multifamily 12%
5
<PAGE>
(Image of Red pulling a wagon with Rover and bags of groceries)
CASCADE BANK MANAGEMENT TEAM
- ----------------------------
Carol K. Nelson
President and Chief
Executive Officer
(Picture of Carol K. Nelson)
Rob Disotell
EVP, Chief Credit Officer
(Picture of Rob Disotell)
Steve Erickson
EVP, Real Estate Lending
(Picture of Steve Erickson)
LeAnne Frank
EVP, Chief
Administrative Officer
(Picture of LeAnne Frank)
6
<PAGE>
Real
people.
Real community
solutions.
Red and Rover live in a time when houses are affordable and food is plentiful.
Real life can be tough, however, and that is when lending a hand really counts.
At Cascade, our employees offer time, talent, and dollars to many nonprofit
organizations. In fact, our employees initiated a November food drive to
benefit Volunteers of America food banks in Snohomish and King Counties
Together with our customers, we collected enough food to make the holiday
season merrier for 1,600 neighbors - and many of their pets.
Cascade employee Judy Austin gratefully accepts Red and Rover's donation of dog
and people food.
(Picture of Judy Austin next to food bank barrel accepting food donations from
Red and Rover.)
CASCADE BANK MANAGEMENT TEAM
- ----------------------------
Bob Ittes
President, Issaquah
Bank Division
(Picture of Bob Ittes)
Lars Johnson
EVP, Chief Financial Officer
(Picture of Lars Johnson)
Debbie McLeod
EVP, Retail Banking
(Picture of Debbie McLeod)
Bob Wojcik
EVP, Business Banking
(Picture of Bob Wojcik)
7
<PAGE>
(Picture of Red and Rover with Red's piggy bank)
CASCADE FINANCIAL CORPORATION DIRECTORS
- ---------------------------------------
David W. Duce (1)
Chairman of the Board
Cascade Financial Corporation
Attorney
Duce Bastian Peterson
Carol K. Nelson (1, 4)
President and CEO
Cascade Financial Corporation
G. Brandt Westover (1, 3, 5)
Vice Chairman
Cascade Financial Corporation
Senior Vice President
UBS Financial Services, Inc.
Richard L. Anderson, CPA (2)
President
Hascal, Sjoholm & Company, P.S.
Janice Halladay (1, 3, 4, 5)
Retired Bank Executive
Dwayne Lane (3)
President
Dwayne Lane Auto Centers
Frank M. McCord (3)
Retired Bank Chairman and CEO
Dennis R. Murphy, Ph.D. (1, 2)
Dean, College of Business and
Economics
Professor of Economics
Western Washington University
David R. O'Connor (1, 3, 4, 5)
Co-Owner
Mobile Country Club
Henry M. Robinett (2, 4)
General Partner
Boyden, Robinett & Associates L.P.
Craig Skotdal (2, 5)
President
Skotdal Real Estate
Ronald E. Thompson (1, 2, 4, 5)
President
Windermere Commercial
and Property Management of
Snohomish County
1. Executive Committee
2. Audit and Finance Committee
3. Compensation and Personnel Committee
4. Loan Committee
5. Corporate Governance and Nominating Committee
(Pictures of David W. Duce, Carol K. Nelson, G. Brandt Westover, Richard L.
Anderson, Janice Halladay, Dwayne Lane, Frank M. McCord, Dennis R.
Murphy, Ph.D., David R. O'Connor, Henry M. Robinett, Craig Skotdal, Ronald
E. Thompson)
8
<PAGE>
CASCADE FINANCIAL CORPORATION SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data.)
FOR THE
YEAR ENDED
DECEMBER 31,
2004 2003 2002
- ------------------------------------------------------------------------
Interest income $55,316 $50,363 $52,470
Interest expense 22,919 22,753 26,446
Net interest income 32,397 27,610 26,024
Provision for loan losses 675 1,275 1,895
Net interest income after
provision for loan losses 31,722 26,335 24,129
Other income 4,747 5,306 4,039
Other expense 20,317 17,733 16,321
Income before federal income taxes 16,152 13,908 11,847
Net income 10,785 9,599 8,072
Net income per common share, basic (1) 1.20 1.17 1.01
Net income per common share, diluted (1) 1.16 1.13 0.98
Book value per share (1) 10.07 7.76 6.99
AT DECEMBER 31,
2004 2003 2002
- ------------------------------------------------------------------------
Assets $1,088,955 $885,220 $804,463
Loans, net 794,466 567,094 546,677
Cash and securities 228,644 290,537 229,880
Deposits 721,908 564,314 509,850
Borrowings 36,356 50,123 30,879
FHLB advances 228,000 200,000 197,500
Stockholders' equity 96,250 63,957 56,640
Nonperforming loans 532 1,921 956
FINANCIAL RATIOS
FOR THE
YEAR ENDED
DECEMBER 31,
2004 2003 2002
- ------------------------------------------------------------------------
Return on assets 1.09% 1.13% 1.05%
Return on equity 13.22 15.81 15.49
Return on tangible equity 16.24 15.81 15.49
Net interest margin 3.44 3.35 3.44
Efficiency ratio 54.70 53.87 54.29
Average stockholders' equity to
average assets 8.25 7.15 6.75
Total risk based capital to risk
weighted assets 11.06 13.22 13.11
Tier 1 capital to adjusted total assets 8.04 8.34 8.07
(1) Per common share data is retroactively adjusted to reflect all stock splits
and stock dividends.
-9-
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
- ----------------------------------
The following discussion is provided for the consolidated operations of Cascade
Financial Corporation (the "Corporation") as of December 31, 2004. The
Corporation has only one operating subsidiary: Cascade Bank (the "Bank"). The
purpose of this discussion is to focus on significant factors concerning the
Corporation's financial condition and results of operations, and to provide a
more comprehensive review of the Corporation'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 the 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: higher than expected loan delinquency rates,
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; 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.
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.
Acquisition
- -----------
On June 3, 2004, the Corporation acquired Issaquah Bancshares, Inc.,
("Issaquah"). The acquisition was accounted for using the purchase method of
accounting and accordingly, the assets and liabilities were recorded based on
their fair values at the acquisition date. Shares of Issaquah were exchanged
for cash or cash and shares of the Corporation resulting in the issuance of
1,263,423 new shares. The merger enhances Cascade's commercial banking
franchise by expanding Cascade's presence in east King County. Total Issaquah
assets on June 3, 2004, were approximately $131 million and the total value of
the transaction, both cash and stock, was approximately $34.3 million as
measured under the provisions of FAS 141. In addition to the shares issued, the
Corporation paid cash of $9.5 million in connection with the merger. The Bank
booked $26.3 million in intangible assets associated with the transaction
including $25.2 million in goodwill and a $1.1 million core deposit intangible
that will be amortized using straight-line method over an eight year period of
time.
Critical Accounting Policies
- ----------------------------
Corporations may apply certain critical accounting policies requiring
management to make subjective or complex judgments, often as a result of the
need to estimate the effect of matters that are inherently uncertain. The
Corporation considers its only material critical accounting policy to be the
allowance for loan losses. The allowance for loan losses is established through
a provision for loan losses charged against earnings. The balance of the
allowance for loan losses is maintained at the amount management believes will
be adequate to absorb known and inherent losses in the loan portfolio. The
appropriate balance of the allowance for loan losses is determined by applying
estimated loss factors to the credit exposure from outstanding loans. Estimated
loss factors are based on subjective measurements including management's
assessment of the internal risk classifications, changes in the nature of the
loan portfolio, industry concentrations, and the impact of current local,
regional and national economic factors on the quality of the loan portfolio.
Changes in these estimates and assumptions are reasonably possible and may have
a material impact on the Corporation's consolidated financial statements,
results of operation, or liquidity.
For additional information regarding the allowance for loan losses, its
relation to the provision for loan losses and risk related to asset quality,
see Note 4 in the Consolidated Financial Statements for the year ended December
31, 2004, and "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Provision for Loan Losses."
FINANCIAL CONDITION
- -------------------
Total Assets
- ------------
The Corporation's total assets at December 31, 2004, were $1.1 billion,
compared to $885.2 million at December 31, 2003, an increase of 23.0%. The
increase is due to internal growth and the acquisition of Issaquah Bancshares,
Inc. ("Issaquah"), the parent company of Issaquah Bank on June 3, 2004. At the
time of the acquisition Issaquah had $131.0 million in total assets. The
Corporation's total assets at December 31, 2002, were $804.5 million.
Investment Securities
- ---------------------
Securities designated as available for sale decreased to $124.3 million at
December 31, 2004, versus $189.7 million at December 31, 2003. Securities
designated as held to maturity increased to $91.3 million at December 31, 2004,
from $86.7 million a year earlier. The securities in both portfolios consist of
notes issued by Government Sponsored Enterprises ("GSE" e.g. FHLB, FNMA) or
mortgage-backed securities issued by either FNMA or FHLMC or a mortgage
-10-
<PAGE>
conduit. Included in the available for sale portfolio is $11.9 million of
Federal Home Loan Bank of Seattle stock at December 31, 2004. During the year,
the available for sale portfolio held a small position in U.S. Treasury notes
and Corporate notes. All securities held during the year were of investment
grade. All but the corporate notes received the highest credit rating from at
least one of the major rating agencies. The investment portfolio has been used
to leverage our capital base as the growth in equity has exceeded the growth in
the loan portfolio.
The overall investment portfolio declined as investments were called or
sold and the mortgage-backed securities prepaid more quickly than replaced. The
net proceeds from the reduction in the investment portfolio were used to fund
the growth in the loan portfolio.
Loan Portfolio
- --------------
Net loans increased to $794.5 million at December 31, 2004, a 40% increase over
$567.1 million at December 31, 2003. Of that amount, $94.6 million were acquired
from Issaquah and $132.9 million represented internal growth. Net loans were
$546.9 million at December 31, 2002.
Business loans increased from $204.4 million at December 31, 2003, to
$292.1 million at December 31, 2004, a 42.9% increase. The strong growth in
this portfolio was the result of our ability to win new borrowing customers in
a very competitive market. Net construction loans increased to $107.4 million
at December 31, 2004, from $62.7 million at the prior year-end. Total
construction loans, which include loans in process, increased to $157.1 million
from $93.7 million. This portfolio experienced rapid turnover as the housing
market remained very robust during the year. Commercial real estate loans
increased from $83.9 million at December 31, 2003, to $178.7 million at
December 31, 2004. The Corporation's loan focus remains on small businesses,
builders and developers in the Puget Sound area. Construction lending is
directed toward building single-family housing and land development for
single-family housing. The Bank confines its lending to the Puget Sound
region of Washington State.
Total single-family residential loans increased slightly from $105.6
million at December 31, 2003, to $106.0 million at December 31, 2004. High
rates of refinancing activity due to very low interest rates impacted loan
balances in that the Corporation sells the vast majority of its 30 year
fixed-rate loans, its 15 year fixed-rate loans, and many of its conforming
intermediate term hybrid ARMs in the secondary mortgage market. Since these
were the preferred products in the market in 2004, many of the Corporation's
adjustable rate mortgages were refinanced into fixed rate loans and sold.
Multifamily loans outstanding increased from $87.2 million at December 31,
2003, to $92.4 million at December 31, 2004.
Consumer loans dropped $3.0 million to $30.1 million as of December 31,
2004. The Bank's consumer loan portfolio is comprised of home equity loans and
lines of credit, installment loans, and credit card loans. Home equity loans
generally take the form of a second mortgage. In terms of direct consumer
loans, the Bank has not emphasized this line of business, concluding that it is
at a competitive disadvantage against the very aggressive pricing of large
banks, captive finance companies and the specialty credit card issuers.
The chart below indicates the mix of the loan portfolio as of the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
(Dollars in thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Business $292,117 34.11% $204,446 33.63% $142,273 24.68%
Commercial real estate 178,704 20.87 83,856 13.79 63,108 10.95
------------------------------------------------------------
Total business-like loans 470,821 54.98 288,302 47.42 205,381 35.63
Single-family residential 105,975 12.37 105,565 17.37 122,669 21.28
Real estate construction 157,088 18.34 93,704 15.41 104,790 18.18
Consumer 30,125 3.52 33,163 5.45 49,331 8.56
Multifamily loans 92,372 10.79 87,212 14.35 94,245 16.35
------------------------------------------------------------
Total gross loans 856,381 100.00% 607,946 100.00% 576,416 100.00%
------------------------------------------------------------
Loans in process (49,657) (30,962) (20,669)
Allowance for losses on loans (9,563) (7,711) (6,872)
Deferred loan fees and discounts (2,695) (2,179) (2,198)
------------------------------------------------------------
Net loans receivable $794,466 $567,094 $546,677
============================================================
</TABLE>
Allowance for Loan Losses
- -------------------------
Management provides for possible loan losses by maintaining an allowance. The
allowance for loan losses reflects management's best estimate of probable
losses as of a particular balance sheet date, but there is no guarantee that
management's estimate will be sufficient to cover actual loan losses. The
allowance for loan losses is maintained at a level considered adequate based
on management's assessment of various factors affecting the loan portfolio,
including local economic conditions, growth of the loan portfolio, past loss
experience, and its composition. Increases in the allowance for loan losses
made through provisions primarily reflect loan growth, awareness of the greater
risk inherent in business lending and the impact of the 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 specific loss rate assigned to the total loans in
-11-
<PAGE>
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 an assumed higher reserve rate due to the greater risk of loss. Past due and
impaired loans are actively managed to minimize the potential loss of principal.
At December 31, 2004, the allowance for loan losses was $9.6 million (1.38%
of average loans during 2004 and 1.19% of outstanding loans excluding loans in
process) compared to $7.7 million (1.36% of average loans and 1.34% of
outstanding loans excluding loans in process) at December 31, 2003, and $6.9
illion (1.21% of average loans outstanding and 1.24% of loans excluding loans
in process) at December 31, 2002. During 2004, the Corporation added $675,000
to the allowance compared to $1.3 million in 2003. The Corporation assumed the
$1.4 million allowance of Issaquah in the acquisition. The Corporation was able
to prudently decrease its ratio of the allowance to loans outstanding due to
the decrease in net loan charge-offs and small amount of nonperforming loans.
Net loan charge-offs were $218,000 in 2004 (or 0.03% of average loans
outstanding) compared to $436,000 in 2003 (or 0.08% of average loans
outstanding). Charge-offs in business loans accounted for most of the change,
decreasing from $390,000 in the year ended December 31, 2003, to $310,000 in
the year ended December 31, 2004. Net charge-offs were $1.3 million for the
year ended December 31, 2002. The coverage ratio (the allowance for loan
losses to nonperforming loans) was 1,798% at December 31, 2004, 401% at
December 31, 2003, and 719% at December 31, 2002.
Deposit Accounts
- ----------------
Deposit accounts totaled $721.9 million at December 31, 2004, an increase
of $157.6 million or 27.9% over the $564.3 million at December 31, 2003. The
Bank assumed $101.8 million in deposits with the acquisition of Issaquah
Bancshares. Checking account balances grew 79.0% to $112.6 million during the
year as the Bank continued its sales efforts to generate transaction accounts.
Money market deposit accounts grew by 29.8% to $172.6 million aided by low
rates offered by money market funds. Certificates of deposit grew 18.6% to
$436.8 million. As business banking activity increases, management expects
to increase its noninterest bearing accounts through the growth of commercial
checking accounts.
The market for deposits has remained very competitive and may intensify as
the Federal Reserve continues to increase its target Fed funds rate. It remains
a key goal of the Bank to increase its demand deposit accounts.
Other Borrowings
- ----------------
The Bank uses Federal Home Loan Bank of Seattle ("FHLB") advances to provide
intermediate and longer term funding, as well as to augment deposits. At
December 31, 2004, the Bank had $228.0 million in FHLB advances compared to
$200.0 million as of December 31, 2003. For 2004, FHLB advances averaged 18.9%
of assets compared to 22.9% in 2003. Subject to its line of credit with the
FHLB, the availability of collateral, and the parameters of liquidity
management, the Bank will continue to use advances as a funding source.
The Bank also uses repurchase agreements for short term funding to
partially offset the interest rate sensitivity of its prime-based loans. At
December 31, 2004, the Bank had executed $20.9 million in repurchase agreements
compared to $39.9 million a year earlier. In 2000 the Corporation issued $10
million in trust preferred securities, which are termed "junior subordinated
debentures", which mature on March 1, 2030, but are callable at a premium
beginning March 1, 2010. In December 2004, the Corporation issued an additional
$5 million in trust preferred securities/junior subordinated debentures. These
securities have a fixed coupon of 5.82% for the first 5 years and then float at
3-month LIBOR plus 1.90% for the remaining 25 years. The securities are
callable at par after 5 years and are considered Tier 1 capital by financial
institution regulators.
Capital
- -------
Banking regulations require the Bank to maintain minimum levels of capital.
As of December 31, 2004, Cascade Bank remained a "well capitalized" institution
(the FDIC's highest rating), under regulatory guidelines, with a core capital
to asset ratio of 8.04% and a risk-based capital to asset ratio of 11.06%. See
Note 13 of the Consolidated Financial Statements of the Annual Report for a
detail of the Bank's regulatory capital ratios.
Federal Reserve guidelines require the Corporation, on a consolidated
basis, to maintain minimum levels of capital as well. At December 31, 2004, the
Corporation's total risk-based capital to risk weighted assets was 11.18%,
compared to 13.42% at December 31, 2003, and 13.30% at December 31, 2002. The
Corporation projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth and the existing level of cash
dividends, while maintaining a "well capitalized" designation under the FDIC
and Federal Reserve guidelines. The Corporation has paid its shareholders a
cash dividend on a quarterly basis since 2002. In October 2004 the dividend was
increased from $.07 per share to $.08 per share. For the year, the Corporation
returned $2.8 million in dividends to its shareholders compared to $1.7 million
in 2003. The dividend pay out ratio (the ratio of dividends paid to net income)
for 2004 was a modest 26%.
The Corporation is committed to managing capital for maximum shareholder
benefit and maintaining protection for depositors and creditors. The
Corporation manages various capital levels at both the holding company and
subsidiary bank level to attempt to maintain adequate capital ratios and levels
in accordance with external regulations and capital guidelines established by
the Board of Directors of each institution.
-12-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Earnings
- --------
Cascade Financial Corporation earned net income for the year ended December 31,
2004, of $10.8 million, an increase of 12.5% over the $9.6 million net income
in the year ended December 31, 2003. Earnings per fully diluted share (EPS) were
$1.16 in 2004 and $1.13 in 2003. The Corporation incurred $356,000 of
acquisition related expenses in connection with its acquisition of Issaquah,
which translated to approximately $.04 a share. Without those expenses, 2004
diluted EPS would have been $1.20. Higher net interest income due to increased
earning assets and a decrease in the Bank's cost of funds contributed to the
improved results. Income was also enhanced by increased checking fees, which
partially offset the declines in gains on the sale of loans and securities. The
Corporation earned net income of $8.1 million or $0.98 per fully diluted share
for the fiscal year December 31, 2002.
Return on Average Equity
- ------------------------
Return on average equity for the year ended December 31, 2004, was 13.22%
compared to 15.81% for the same period of 2003. Return on average equity for
the fiscal year ending December 31, 2002, was 15.49%.
Return on Average Tangible Equity
- ---------------------------------
Return on average tangible equity (average equity less goodwill) was 16.24%
compared to 15.81% in 2003. The acquisition of Issaquah generated $25.2 million
in goodwill as an asset and a like amount of capital. Eliminating the asset and
reducing the capital by that amount produces tangible equity.
Return on average tangible equity is determined by methods other than in
accordance with Accounting Principles Generally Accepted in the United States
of America ("GAAP"). This measure excludes the average balance of
acquisition-related goodwill and intangibles in determining average tangible
shareholders' equity. Management believes the presentation of this financial
measure excluding the impact of these items provides useful supplemental
information that is essential for a proper understanding of the financial
results of Cascade Financial Corporation. This disclosure should not be viewed
as a substitute for results determined to be in accordance with GAAP, nor is it
necessarily comparable to non-GAAP performance measures that may be presented
by other companies.
A summary of tangible equity follows:
2004 2003
- --------------------------------------------------------------------
Net income $ 10,785 $ 9,599
Average equity 81,575 60,766
Average goodwill & intangibles 15,167 -
------- ------
Average tangible equity 66,408 60,766
Return on average tangible equity 16.24% 15.81%
Net Interest Income
- -------------------
The largest component of the Corporation'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). Interest earned and interest paid is
affected by general economic conditions, including the demand for loans, cost
of deposits, market rates of interest, government policies, and the action of
regulatory authorities. The Corporation's operations are sensitive to changes
in interest rates and the resulting impact on net interest income. Despite the
increase in short term rates in the second half of the year, total interest
costs actually declined by 34 basis points for all of 2004.
Net interest income for the year ended December 31, 2004, increased by
17.4%, or $4.8 million, to $32.4 million from $27.6 million for the year ended
December 31, 2003. The improvement in net interest income was primarily due to
an improvement in our asset/liability mix as loans made up a large percentage
of earning assets and deposits were a large percentage of our liabilities. Net
interest income for the fiscal year ended December 31, 2002, was $26.0 million.
Average earning assets increased 14.4% to $942.8 million for the year ended
December 31, 2004, from $824.4 million for the year ended December 31, 2003.
Average earning assets were $755.4 million for the year ended December 31, 2002.
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.
The net interest margin for the year ended December 31, 2004, was 3.44%,
compared to 3.35% for the year ended December 31, 2003. The yield on earning
assets dropped 24 basis points to 5.87% in 2004.
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 or average
earning asset or interest-bearing liability.
-13-
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividend Cost Balance Dividend Cost Balance Dividend Cost
-----------------------------------------------------------------------------------------
ASSETS (Dollars in thousands)
- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1)
Single-family loans $106,187 $ 6,219 5.86% $112,299 $ 7,450 6.63% $135,021 $ 10,353 7.67%
Multifamily loans 91,410 5,839 6.39 87,028 6,293 7.23 101,485 7,829 7.71
Commercial real estate loans 122,958 7,888 6.37 74,381 5,292 7.11 64,104 5,069 7.91
Construction loans 88,635 5,579 6.34 77,717 4,499 5.79 80,066 5,119 6.39
Consumer loans 32,016 2,254 7.06 39,592 2,787 7.04 56,030 4,101 7.32
Business loans 250,166 16,447 6.57 174,436 11,420 6.55 129,596 9,397 7.25
----------------------------------------------------------------------------------------
Total loans 691,372 44,226 6.40 565,453 37,741 6.67 566,302 41,868 7.39
----------------------------------------------------------------------------------------
Securities available-for-sale 155,563 6,692 4.30 184,558 9,182 4.98 147,625 8,939 6.06
Securities held-to-maturity 91,747 4,326 4.72 65,956 3,327 5.04 23,438 1,337 5.71
Daily interest-earning deposits 4,123 71 1.73 8,455 113 1.34 18,070 326 1.80
----------------------------------------------------------------------------------------
Total securities and interest-
earning deposits 251,433 11,089 4.41 258,969 12,622 4.87 189,133 10,602 5.61
----------------------------------------------------------------------------------------
Total interest-earning assets 942,805 55,315 5.87% 824,422 50,363 6.11% 755,435 52,470 6.95%
Noninterest-earning assets
Office properties and
equipment, net 11,117 8,806 8,605
Real estate, net 769 361 694
Other noninterest-
earning assets 33,976 16,189 7,121
----------------------------------------------------------------------------------------
Total assets $988,667 $849,778 $771,855
========================================================================================
LIABILITIES AND EQUITY
Interest-bearing liabilities
Savings accounts $ 14,895 $ 43 0.29% $ 11,828 $ 55 0.46% $ 11,324 $ 130 1.15%
Checking accounts 29,562 93 0.31 21,854 105 0.48 22,641 235 1.04
Money market accounts 145,626 1,872 1.29 113,263 1,499 1.32 107,363 2,293 2.14
Certificates of deposit 401,620 9,151 2.28 357,955 9,314 2.60 294,554 9,872 3.35
----------------------------------------------------------------------------------------
Total interest-bearing deposits 591,703 11,159 1.89 504,900 10,973 2.17 435,882 12,530 2.87
Other interest-bearing liabilities
FHLB advances 210,023 10,601 5.05 194,229 10,308 5.31 203,089 12,142 5.98
Other interest-bearing liabilities 41,511 1,159 2.79 45,360 1,472 3.24 44,415 1,774 4.00
----------------------------------------------------------------------------------------
Total interest-bearing liabilities 843,237 22,919 2.72% 744,489 22,753 3.06% 683,386 26,446 3.87%
----------------------------------------------------------------------------------------
Other liabilities 63,855 44,523 36,366
----------------------------------------------------------------------------------------
Total liabilities 907,092 789,012 719,752
Stockholders' equity 81,575 60,766 52,103
Total liabilities and
retained earnings $988,667 $849,778 $771,855
========================================================================================
Net interest income (2) $ 32,396 $ 27,610 $ 26,024
========================================================================================
Interest rate spread (3) 3.15% 3.05% 3.08%
Net interest margin (4) 3.44% 3.35% 3.44%
Average interest-earning assets
to average interest-bearing
liabilities 111.81% 110.74% 110.54%
</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.
-14-
<PAGE>
Other Income
- ------------
Other income is derived from sources other than interest and fees on earning
assets. The Corporation's primary sources of other income are service charge
fees on deposit accounts, the accretion of cash surrender value of bank owned
life insurance ("BOLI"), gains on the sale of single-family residential loans,
gains on the sale of securities, and rental income, primarily on space at the
building that formerly served as the headquarters of Issaquah. Other income for
the year ending December 31, 2004, was $4.7 million, compared to $5.3 million
and $4.0 million for the same periods in 2003 and 2002, respectively. This
decrease was attributable primarily to a $627,000 decline in gain on sale of
loans and a $1.3 million decline in gain on sale of securities. Partially
offsetting these declines was an $654,000 increase in checking fees and a
$224,000 increase in other service charges. The lower gain on sale of loans
reflects a decrease in residential mortgage activity, especially refinancings.
The decrease in gain on sale of securities resulted primarily from an interest
rate environment that was stable for longer dated securities, but saw a
dramatic increase in short-term rates as the Fed began increasing its target
Fed funds rate in June 2004.
Other Expense
- -------------
Other expense represents costs not 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 $2.6 million to $20.3 million for the year ended
December 31, 2004, from $17.7 million and $16.3 million for 2003 and 2002,
respectively. The increase in expense was primarily due to costs associated
with the operations of the Issaquah Bank Division, which was acquired in June
2004. Salaries and employee benefits increased overall by $1.9 million to $11.5
million. The increase in expenses was offset by a decline in the payment of
prepayment fees to the Federal Home Loan Bank of Seattle, which were $26,000 in
2004, and $863,000 in 2003. Cascade also incurred $356,000 in acquisition
related expenses in 2004 in association with the merger with Issaquah.
A standard measurement used to calculate the 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 years ending December 31,
2004, 2003, and 2002, the Corporation's efficiency ratio was 54.70%, 53.87%,
and 54.29%, respectively. Management continues to look for ways in which to
improve the efficiency ratio by increasing other income and net interest margin
while diligently controlling costs and maintaining high standards of service.
Liquidity Management
- --------------------
Liquidity is a term used to define the Corporation's ability to meet its
financial commitments. The Corporation 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 investments. At December 31, 2004, December 31, 2003, and
December 31, 2002, cash and cash equivalents totaled $13.0 million, $14.1
million, and $20.6 million, respectively. Another source of liquidity is the
Corporation's investment portfolio, which consists of investment grade
securities. These securities are of the highest credit quality and can be sold
or used as collateral to secure borrowings.
The primary source of borrowings is Federal Home Loan Bank of Seattle
(FHLB-Seattle) advances and repurchase agreements. At December 31, 2004,
$147.5 million of additional borrowing capacity remained under Cascade Bank's
existing credit line from the FHLB-Seattle based upon the total, which is 35%
of Cascade's assets. The use of this line of credit is subject to the
availability of eligible collateral, which includes residential mortgages,
investment grade securities, and commercial real estate mortgages. At December
31, 2004, Cascade had unencumbered eligible collateral of approximately $98.7
million to pledge against the line. In addition, Cascade Bank has the ability
to borrow reverse repurchase agreements. Under these agreements, borrowings are
collateralized with mortgage-backed securities or other investment securities.
The Bank has Fed funds borrowing lines with two of its larger correspondent
banks. Cascade used the line once to test the operational aspects of the
facility as part of our liquidity planning process. The Bank also opened a line
of credit with the Federal Reserve Bank of San Francisco. As of December 31,
2004, there were no outstanding balances in any of these lines.
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 Corporation.
Interest Rate Risk Management
- -----------------------------
The Corporation'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 Corporation's
financial condition and results of operations.
The Corporation has taken steps to balance its sensitivity to changes in
interest rates by altering its 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 Corporation'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.
-15-
<PAGE>
Interest rate risk is monitored using several methodologies, principally
financial modeling. The earnings exposure to interest rate changes is evaluated
in the context of certain upward and downward interest rate changes occurring
instantaneously. At December 31, 2004, a 200 basis point increase in rates
would increase forecasted net interest income over a twelve-month period by
approximately 3.0%. A 200 basis point decrease in rates (although unlikely in
the current low interest rate environment) would lower net interest income by
11.9% according to the model, which slightly exceeds the 10% guideline
established by the Bank's Asset/Liability Management Policy.
The changes of the fair value of assets and liabilities and the resulting
impact on the fair value of equity are also modeled under different rate
scenarios. In the 200 basis point increase scenario, the fair value of equity
declines by $12.8 million or 11.6%.
The Bank uses interest rate swaps to manage its interest rate exposure.
The first swap effectively converts the junior subordinated debentures of
Capital Trust I, $10 million notional value, to a LIBOR based borrowing. The
second swap is a $25 million pay-fixed instrument used to effectively convert
floating rate debt to fixed rate and is accounted for as a cash flow hedge. The
third swap is also a $25 million pay-fixed swap that began as a fair value
hedge of investment securities but, due to a narrowing in swap spreads, lost
its "highly effective" status in that the correlation between the change in
value of the hedge and securities was not within our established parameters.
This hedge was terminated in the fourth quarter because it was ineffective. The
final swap is for $10 million and effectively converts a fixed rate CD into a
LIBOR-based liability.
The Corporation does not maintain a trading account for any class of
financial instrument. Moreover, the Corporation is not subject to foreign
currency exchange rate risk or commodity price risk.
The individual categories of assets and liabilities that are subject to
interest rate sensitivity as of December 31, 2004, are shown in the following
table.
<TABLE>
<CAPTION>
<1 year 1-3 years 3-5 years 5-10 years 10 years Total Fair Value
Interest-Sensitive Assets -----------------------------------------------------------------------------------
- ------------------------- (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans, excluding deferred
loan fees $405,847 $219,246 $169,300 $11,738 $ 593 $806,724 $818,230
Investments and other
interest earning assets 25,559 57,480 41,312 76,841 15,817 217,009 213,645
Interest-Sensitive Liabilities
- ------------------------------
Checking accounts $ 8,294 $ 15,833 $ 6,786 $ 6,107 $ 679 $ 37,699 $ 37,699
Money market accounts 34,396 65,667 28,142 25,328 2,814 156,347 156,347
Savings accounts 3,572 6,820 2,923 2,630 292 16,237 16,237
Certificates of deposit (1) 350,661 61,774 23,601 724 - 436,760 436,939
Borrowings 121,868 46,034 16,000 65,000 - 248,902 256,901
Junior subordinated
debentures payable (2) 10,299 - - 5,155 - 15,454 15,454
</TABLE>
(1) Net of $131 mark-to-market on swap.
(2) Net of $(11) mark-to-market on swap (see note 7 to the Consolidated
Financial Statements for the year ended December 31, 2004).
Off-Balance Sheet Transactions: Credit Commitments
- --------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
The Bank underwrites its standby letters of credit using its policies and
procedures applicable to loans in general. Standby letters of credit are made
on an unsecured and secured basis. The Bank has not incurred any losses on its
commitments in 2004 or 2003.
A summary of the notional amount of the Bank's financial instruments with
off-balance sheet risk at December 31, 2004, follows:
THERE
(Dollars in thousands) <1 YEAR 1-3 YEARS 3-5 YEARS AFTER TOTAL
- -------------------------------------------------------------------------------
Commitments to extend credit $126,499 $30,079 $1,062 $33,207 $190,847
Standby letters of credit and
financial guarantees written 4,605 997 - - 5,602
Unused commitments on bankcards - - - 11,103 11,103
-----------------------------------------------
Total $131,104 $31,076 $1,062 $44,310 $207,552
===============================================
-16-
<PAGE>
Contractual Obligations and Commitments
- ---------------------------------------
The following table sets forth the Corporation's long-term contractual
obligations:
PAYMENTS DUE PER PERIOD
THERE
(Dollars in thousands) <1 YEAR 1-3 YEARS 3-5 YEARS AFTER TOTAL
- -------------------------------------------------------------------------------
Certificates of deposit $114,828 $61,647 $23,471 $ 722 $200,668
Federal Home Loan Bank
Advances 49,000 45,000 41,000 65,000 200,000
Capital lease obligations 52 48 - - 100
Operating lease obligations 582 1,164 1,164 6,395 9,305
Junior subordinated debentures
Payable - - - 15,454 15,454
-----------------------------------------------
Total $164,462 $107,859 $65,635 $87,571 $425,527
===============================================
At December 31, 2004, the Corporation's long-term contractual obligations
related to debt totaled $215.5 million. See additional discussion under Note 7
and 8 to the Consolidated Financial Statements for the year ended December 31,
2004.
The Corporation also has operating leases comprised of leases for office
space.
Summation of Factors That May Affect Financial Condition and Future Results
- ---------------------------------------------------------------------------
Credit risk: The most significant risk that may impact Cascade Financial
Corporation would be a deterioration in the quality of the loan portfolio.
Cascade's loan growth has been focused on commercial lending. Historically
for the banking industry, commercial loans have a higher level of losses than
residential loans. The Corporation's ability to meet its profitability and
growth goals would be severely compromised with a large number of impaired
credits. In addition, the Corporation and its subsidiary, Cascade Bank, could
face regulatory restrictions on its activities.
Interest rate risk: While the Corporation actively manages its exposure
to changes in interest rates, volatile interest rates and/or changes in the
shape of the yield curve could have a meaningful impact on Cascade's net
income. Many of the assets and liabilities of the Corporation have embedded
options, which add another layer of complexity in its interest rate risk
practices.
Liquidity: Disruptions in the capital markets could have a major impact
on the Corporation's net income and balance sheet. As a user of Federal Home
Loan Bank advances, repurchase agreements and brokered CDs, interruption or
truncation of these sources of funds could force the Corporation to liquidate
assets at an inauspicious time or cease lending activity, which could adversely
affect customer relationships for many years.
Recently issued accounting standards: In October 2002, the Financial
Accounting Standards Board issued Financial Accounting Standard (FAS) No. 147,
Acquisitions of Certain Financial Institutions-an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9. This Statement addresses FAS No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method, provided interpretive
guidance on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
this Statement removes acquisitions of financial institutions from the scope
of both Statement 72 and Interpretation 9 and requires that those transactions
be accounted for in accordance with FASB Statements No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition,
this Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship, intangible assets, and credit cardholder
intangible assets. This statement was adopted in December 2002 and has not had
an effect on the results of the Corporation's operations or financial position
because there has been no impairment or disposal of assets covered by this
standard.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, addressing consolidation by business enterprises of
certain variable interest entities. Under the provisions of Interpretation No.
46, an enterprise must consolidate a variable interest entity if that
enterprise will absorb a majority of the entity's expected losses, receive a
majority of the entity's residual returns, or both, regardless of the
enterprise's direct or indirect ability to make decisions about the entity's
activities through voting or similar rights. Interpretation No. 46 applies
immediately to interests in variable interest entities created or acquired
after January 31, 2003, and to the first fiscal year or interim period
beginning after June 15, 2003 for interests in variable interest entities
acquired before February 1, 2003. Application of this Interpretation has
required the Corporation's equity interest in Cascade Capital Trust I be
included in the consolidated balance sheet. Previously this interest had been
eliminated in consolidation.
In December 2004 the FASB issued No. 123(R), Shared Based Payment, which is
a revision of No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion 25, which the Corporation had used to report
stock options granted to employees and directors. Statement 123(R) requires
all share-based payments to employees, including stock options, be recognized
in the income statement based on their fair values. The Corporation will adopt
Statement 123(R) effective July 1, 2005.
FORM 10-K
- ---------
A copy of the Corporation'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.
-17-
<PAGE>
Report of Independent Registered Public Accounting Firm
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheet of Cascade
Financial Corporation and subsidiaries (Corporation) as of December 31, 2004,
and the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the year ended December 31, 2004.
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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board of 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 audit provides 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, 2004, and the results
of their operations and their cash flows for the year ended December 31, 2004,
in conformity with accounting principles generally accepted in the United
States of America.
/s/ Moss Adams LLP
Everett, Washington
February 28, 2005
-18-
<PAGE>
KPMG LLP
Suite 900
801 Second Avenue
Seattle, WA 98104
Report of Independent Registered Public Accounting Firm
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheet of Cascade
Financial Corporation and subsidiaries (Corporation) as of December 31, 2003,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2003. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. 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, 2003, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Seattle, Washington
February 20, 2004
KPMG LLP, a limited liability partnership, is the U.S.
member firm of KPMG International, a Swiss cooperative
-19-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
Years ended December 31, 2004, and 2003
DECEMBER 31,
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------
ASSETS
Cash on hand and in banks $ 11,692 $ 13,011
Interest-bearing deposits in other financial
institutions 1,337 1,060
Securities available-for-sale 124,276 189,747
Securities held-to-maturity 91,339 86,719
Loans 804,029 574,805
Allowance for loan losses (9,563) (7,711)
-----------------------
Loans, net 794,466 567,094
Goodwill and intangibles, net 26,292 80
Premises and equipment, net 12,824 8,587
Cash surrender value of bank-owned life insurance 16,650 11,162
Accrued interest receivable and other assets 10,079 7,760
------------------------
Total assets $ 1,088,955 $ 885,220
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 721,908 $ 564,314
Federal Home Loan Bank advances 228,000 200,000
Securities sold under agreements to repurchase 20,902 39,911
Junior subordinated debentures payable 15,454 10,212
Advance payments by borrowers for taxes and insurance 677 1,057
Dividends payable 765 577
Accrued interest payable, expenses and other
liabilities 4,959 4,515
Deferred federal income taxes 40 677
------------------------
Total liabilities 992,705 821,263
------------------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
500,000 shares; no shares issued or outstanding - -
Common stock, $.01 par value. Authorized
25,000,000 shares; issued and outstanding
9,559,822 shares at December 31, 2004, and
8,241,288 shares at December 31, 2003 96 82
Additional paid-in capital 37,326 11,921
Retained earnings, substantially restricted 59,975 52,109
Accumulated other comprehensive income (loss) (1,147) (155)
------------------------
Total stockholders' equity 96,250 63,957
------------------------
Total liabilities and stockholders' equity $ 1,088,955 $ 885,220
========================
(See accompanying notes to consolidated financial statements.)
-20-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2004, 2003, and 2002
YEAR ENDED
DECEMBER 31,
(Dollars in thousands, except share amounts) 2004 2003 2002
- -------------------------------------------------------------------------------
Interest income:
Loans $ 44,226 $ 37,741 $ 41,868
Securities held-to-maturity 4,292 3,327 1,337
Securities available-for-sale 6,291 8,391 8,109
FHLB stock dividends 436 791 831
Interest-bearing deposits 71 113 325
--------------------------------
Total interest income 55,316 50,363 52,470
--------------------------------
Interest expense:
Deposits 11,159 10,973 12,530
FHLB advances 10,601 10,308 12,142
Securities sold under agreements
to repurchase 436 438 626
Junior subordinated debentures payable 723 1,034 1,148
--------------------------------
Total interest expense 22,919 22,753 26,446
--------------------------------
Net interest income 32,397 27,610 26,024
Provision for loan losses 675 1,275 1,895
--------------------------------
Net interest income after provision
for loan losses 31,722 26,335 24,129
--------------------------------
Other income:
Gain on sale of loans held-for-sale 228 855 697
Gain on sale of securities available-for-sale 510 1,790 1,076
Gain on sale of REO 82 48 427
Checking service fees 2,069 1,415 1,007
Other service fees 704 480 602
BOLI 566 598 86
Other 588 120 144
--------------------------------
Total other income 4,747 5,306 4,039
--------------------------------
Other expenses:
Salaries and employee benefits 11,483 9,617 8,793
Occupancy 2,745 2,551 2,287
Data processing 448 284 259
Marketing 547 461 455
Prepayment penalty FHLB 26 863 648
Merger expense 356 - -
Other 4,712 3,957 3,879
--------------------------------
Total other expenses 20,317 17,733 16,321
--------------------------------
Income before provision for federal
income taxes 16,152 13,908 11,847
Provision for federal income taxes 5,367 4,309 3,775
--------------------------------
Net income $ 10,785 $ 9,599 $ 8,072
================================
Net income per common share, basic $ 1.20 $ 1.17 $ 1.01
Weighted average number of shares
outstanding, basic 8,952,493 8,184,455 7,997,713
Net income per share, diluted $ 1.16 $ 1.13 $ 0.98
Weighted average number of shares
outstanding, diluted 9,276,232 8,461,503 8,261,448
(See accompanying notes to consolidated financial statements.)
-21-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2004, 2003, and 2002
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ADDITIONAL COMPREHENSIVE STOCK-
(Dollars in thousands, COMMON PAID-IN RETAINED INCOME HOLDERS'
except share amounts) SHARES STOCK CAPITAL EARNINGS (LOSS), NET EQUITY
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 2001 7,751,144 $78 $10,254 $37,192 $ 153 $47,677
Cash dividends - - - (646) - (646)
Options exercised 405,675 4 1,060 - - 1,064
Net income - - - 8,072 - 8,072
Shares repurchased (51,669) (1) (46) (328) - (375)
Other comprehensive income,
net of tax of $437 - - - - 848 848
-------------------------------------------------------------------------
Balances at December 31, 2002 8,105,150 81 11,268 44,290 1,001 56,640
Cash dividends - - - (1,692) - (1,692)
Options exercised 144,051 1 661 - - 662
Net income - - - 9,599 - 9,599
Shares repurchased (7,913) - (8) (88) - (96)
Other comprehensive loss,
net of tax of $(596) - - - - (1,156) (1,156)
-------------------------------------------------------------------------
Balances at December 31, 2003 8,241,288 82 11,921 52,109 (155) 63,957
Cash dividends - - - (2,777) - (2,777)
Options exercised 63,865 1 634 - - 635
Net income - - - 10,785 - 10,785
Shares repurchased (8,754) - (8) (142) - (150)
Other comprehensive loss,
net of tax of $(537) - - - - (992) (992)
Issaquah Bank merger 1,263,423 13 24,779 - - 24,792
-------------------------------------------------------------------------
Balances at December 31, 2004 9,559,822 $96 $37,326 $59,975 $(1,147) $96,250
</TABLE>
Comprehensive Income
- --------------------
YEARS ENDED
DECEMBER 31,
2004 2003 2002
---------------------------
Net income $10,785 $9,599 $8,072
Increase in unrealized (losses)
gains on securities available
for sale, net of tax expense (benefit)
of $(364), $13, and $803. (655) 25 1,558
Less reclassification adjustment for gains
included in net income, net of tax
benefit of $(173), $(609), and $(366) (337) (1,181) (710)
----------------------------
Comprehensive Income $ 9,793 $8,443 $8,920
============================
(See accompanying notes to consolidated financial statements.)
-22-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,785 $ 9,599 $ 8,072
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment 2,725 1,454 1,218
Provision for losses on loans 675 1,275 1,895
Increase in cash surrender value of bank owned life insurance (488) (542) (80)
Amortization of retained servicing rights 40 230 187
Amortization of core deposit intangible 70 - -
Deferred federal income taxes (100) (236) (205)
Deferred loan fees, net of amortization 516 (19) (304)
Net gain on sales of securities available-for-sale (510) (1,790) (1,076)
Gain/loss on sales of premises and equipment 6 - (1)
Net gain on sale of real estate owned, investment property
and other repossessed assets (82) (48) (427)
Federal Home Loan Bank stock dividend received (436) (791) (831)
Net increase (decrease) in accrued interest receivable
and other assets (under) over accrued interest payable,
expenses and other liabilities 7,172 (1,154) 2,592
-------------------------------------
Net cash provided by operating activities 20,373 7,978 11,040
-------------------------------------
Cash flows from investing activities:
Loans originated, net of principal repayments (230,348) (22,239) 26,413
Purchases of securities held-to-maturity (35,436) (105,085) (66,408)
Proceeds from sales/calls on securities held-to-maturity 26,095 54,913 21,511
Proceeds from sale of investment property - - 956
Principal repayments on securities held-to-maturity 4,876 12,841 1,808
Principal repayments on securities available-for-sale 31,471 96,515 34,460
Purchases of securities available-for-sale (93,167) (337,004) (207,201)
Proceeds from sales of securities available-for-sale 127,261 211,470 166,374
Purchases of premises and equipment (6,974) (799) (1,873)
Proceeds from sales/retirements of premises and equipment 5 19 15
Proceeds from loan participations sold 446 - -
Cash (used for)/provided by acquisition (9,546) - -
Purchase of bank owned life insurance (5,000) - (10,000)
-------------------------------------
Net cash used in investing activities (190,317) (89,369) (33,945)
-------------------------------------
Subtotal, carried forward $(169,944) $(81,391) $(22,905)
-------------------------------------
</TABLE>
(See accompanying notes to consolidated financial statements.)
-23-
<PAGE>
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Subtotal, brought forward $(169,944) $(81,391) $(22,905)
-------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 436 547 995
Dividends paid (2,589) (1,440) (322)
Repurchase of common stock (150) (96) (375)
Net increase in deposits 157,594 54,464 89,870
Net increase (decrease) in Federal Home Loan Bank advances 28,000 2,500 (29,000)
Net (decrease) increase in securities sold under agreements
to repurchase (19,009) 19,342 (29,223)
Net (decrease) in advance payments by borrowers
for taxes and insurance (380) (450) (67)
Proceeds from junior subordinated debentures payable 5,000 - -
-------------------------------------
Net cash provided by financing activities 168,902 74,867 31,878
-------------------------------------
Net increase (decrease) in cash and cash equivalents (1,042) (6,524) 8,973
Cash and cash equivalents at beginning of period 14,071 20,595 11,622
-------------------------------------
Cash and cash equivalents at end of period $ 13,029 $ 14,071 $ 20,595
=====================================
Supplemental disclosures of cash flow information -
Cash paid during the period for:
Interest $ 24,083 $ 23,238 $ 26,453
Federal income taxes 5,802 4,350 3,310
Supplemental schedule of non-cash operating activities:
Retirement of treasury stock in retained earnings - (1,237) -
Supplemental schedule of non-cash investing activities:
Net mortgage loans transferred to real estate owned 1,339 566 1,545
Mark-to-market on securities available-for-sale 1,529 1,752 (1,285)
Tax benefit of non-qualified options exercised 199 115 69
Issaquah Bank merger 24,792 - -
</TABLE>
(See accompanying notes to consolidated financial statements below.)
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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. 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.
The following is a description of the more significant policies that the
Corporation follows in preparing and presenting its consolidated financial
statements.
-24-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(a) Basis of Presentation
- -------------------------
The consolidated financial statements include the accounts of the Corporation,
its subsidiaries, Cascade Bank (the "Bank") and the Bank's subsidiary Cascade
Investment Services, Inc. All significant intercompany balances and
transactions have been eliminated in the consolidation. In January 2003, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities and, in December 2003,
issued Revised Interpretation No. 46 (FIN 46R), Consolidation of Variable
Interest Entities, which replaced FIN 46. Historically, issuer trusts that
issued trust preferred securities have been consolidated by their parent
companies and trust preferred securities have been treated as eligible for Tier
1 capital treatment by bank holding companies under Federal Reserve Board (FRB)
rules and regulations relating to minority interests in equity accounts of
consolidated subsidiaries.
Applying the provisions of FIN 46R, we deconsolidated our issuer trust as
of December 31, 2003, and all periods in the consolidated financial statements
have been restated to reflect this change. In a Supervisory Letter dated
July 2, 2003, the FRB stated that trust preferred securities continue to
qualify as Tier 1 capital until notice is given to the contrary. The FRB will
review the regulatory implications of any accounting treatment changes and will
provide further guidance if necessary or warranted.
(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) Interest Bearing Deposits with Financial Institutions
- ---------------------------------------------------------
Interest bearing deposits with other financial institutions include
interest-bearing deposits at various financial institutions including the
Federal Home Loan Bank. At times throughout the year, the Bank has balances
that exceed FDIC insurance limits.
(d) Federal Home Loan Bank (FHLB) Stock
- ---------------------------------------
As a member of the FHLB system, the Bank is required to maintain a minimum
level of investment in FHLB stock based on specified percentages of its
outstanding FHLB advances. The Bank's investment in FHLB stock is carried at
par value ($100 per share), which reasonably approximates its fair value. The
Bank may request redemption at par value of any stock in excess of the amount
the Bank is required to hold. Stock redemptions are at the discretion of the
FHLB. During 2002, the FHLB revised its capital structure from the issuance of
one class of stock to two, B (1) and B (2) stock. B (1) stock can be sold back
to the FHLB at cost, but is restricted as to purchase, sale and redemption.
Class B (2) is not a required investment for institutions and is not restricted
to purchase and sale, but has the same redemption restrictions as class B (1)
stock. Included in the balance sheet as of December 31, 2004, the Bank has
$11,872 and $0 of class B (1) and B (2) stock, respectively.
(e) Transfer of Financial Assets
- --------------------------------
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
(f) Mortgage Servicing Rights
- -----------------------------
Servicing assets are recognized when rights are acquired through the sale of
mortgage loans. Capitalized servicing rights are reported in other assets.
Mortgage loans serviced for others include whole loans sold. Loans being
serviced totaled $9.0 million and $16.4 million at December 31, 2004, and
2003, respectively.
(g) Marketing Costs
- -------------------
The Bank expenses most marketing costs as they are incurred but some marketing
costs are capitalized and amortized over the useful life of the expenditure.
Marketing expense was $547, $461 and $455 for the years ended December 31,
2004, 2003, and 2002, respectively.
(h) Comprehensive Income
- ------------------------
Comprehensive income is comprised of net income and other comprehensive income.
Other comprehensive income includes items previously recorded directly to
equity, such as unrealized gains and losses on securities available-for-sale
and certain derivative instruments. Comprehensive income is presented in the
consolidated statement of shareholders' equity.
-25-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(i) Segment Reporting
- ---------------------
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
Bank's operations are solely in the financial services industry and include
providing to its customers traditional banking and other financial services.
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 Bank operates
primarily in the Puget Sound geographical region of Washington State. 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.
(j) Earnings Per Share (EPS) Data
- ---------------------------------
The Corporation displays basic and diluted EPS in the consolidated statement of
income. Basic EPS is computed by dividing net income by the weighted average
number of shares outstanding during the year. Diluted EPS is computed by
dividing net income by diluted weighted average shares outstanding, which
includes common stock equivalent shares outstanding using the treasury stock
method, unless such shares are anti-dilutive. Common stock equivalents include
stock options.
(k) Goodwill and Other Intangible Assets
- ----------------------------------------
Goodwill and other intangible assets represent the excess of the purchase price
over the fair value of net assets acquired by the Corporation. The excess cost
over fair value of net assets acquired consists mainly of goodwill and core
deposit premiums. Core deposit intangibles are amortized on a straight-line
basis over 8 years. Intangibles are evaluated periodically and at least
annually, for impairment.
Goodwill and other intangible assets consisted of the following at December
31, 2004, and 2003:
GROSS CARRYING AMOUNT
----------------------------
Intangible assets carrying value 2004 2003
- --------------------------------------------------------------------------
Core deposit intangible, net $ 1,057 $ -
Goodwill 25,195 -
Mortgage servicing rights, net 40 80
-----------------------------
Total $ 26,292 $ 80
=============================
At December 31, 2004, and 2003, the Company had $70 and $0 of accumulated
amortization related to core deposit intangibles. The Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, and
accordingly no longer amortizes goodwill.
Amortization and write-downs of intangible assets for 2004, and 2003, was
as follows:
AMORTIZATION AND
WRITE-DOWN
YEARS ENDED DECEMBER 31,
------------------------
Intangible assets amortization and impairment 2004 2003
- -------------------------------------------------------------------------------
Core deposit intangible $ 70 $ -
Mortgage servicing rights 40 230
------------------------
Total $ 110 $ 230
========================
Forecasted existing intangible asset amortization for the next five years is
as follows:
Estimated amortization expense
- ----------------------------------------------------------------
For year ended 12/31/05 $ 181
For year ended 12/31/06 141
For year ended 12/31/07 141
For year ended 12/31/08 141
For year ended 12/31/09 141
-26-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(l) Loans
- ---------
All of the Corporation's loans are located in Washington State, primarily
in the Puget Sound region. At December 31, 2004, the Corporation's loans were
classified as one-to-four-family residences (12%), multifamily residences
(11%), real estate construction (18%), business assets (34%), consumer assets
(4%), and commercial real estate properties (21%). 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.
Business loans comprise 34% of the total loan portfolio. Most of the
business loans are secured with collateral such as commercial property,
business inventories, commercial equipment and personal property of the
borrowers and/or guarantors. At December 31, 2004, $22.5 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. Loans are stated at principal amounts outstanding,
net of deferred loan fees and costs.
Interest Income
- ---------------
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 sale 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 believed 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,
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
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 allowance for losses on loans is adequate. While
management uses available information to recognize losses on these assets,
future additions to the allowances will 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.
(m) Sales of Loans
- ------------------
Any loan that management determines will not be held-to-maturity is classified
as held-for-sale at the time of origination. Loans originated and designated as
held-for-sale are carried at cost. Gains or losses on the sale of such loans
are based on the specific identification method. The Bank held no loans for
sale at December 31, 2004, or 2003. All loans are sold without recourse on a
best efforts servicing released basis.
-27-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(n) Securities
- --------------
Debt and equity securities, including MBS, are classified as 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. 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. Investments
with fair values that are less than amortized cost are considered impaired.
Impairment may result from either a decline in the financial condition of the
issuing entity or, in the case of fixed interest rate investments, from rising
interest rates. At each financial statement date, management assesses each
investment to determine if impaired investments are temporarily impaired or if
the impairment is other-than-temporary based upon the positive and negative
evidence available. Evidence evaluated includes, but is not limited to,
industry analyst reports, credit market conditions, and interest rate trends.
If negative evidence outweighs positive evidence that the carrying amount is
recoverable within a reasonable period of time, the impairment is deemed to be
other-than-temporary and the security is written down in the period in which
such determination is made.
(o) 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. Development, improvement
and direct holding costs related to the property are capitalized. 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, 2004, and December 31,
2003, was $868, and $474, respectively, which is included in other assets.
(p) 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.
(q) 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 using the asset and liability method. 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.
(r) 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. 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.
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 the Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation," as amended, the Corporation's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
-28-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
YEAR ENDED
DECEMBER 31,
2004 2003 2002
--------------------------
Net income
As reported $ 10,785 $ 9,599 $ 8,072
Less: SFAS 123 compensation costs 183 140 49
--------------------------
Pro forma $ 10,602 $ 9,459 $ 8,023
==========================
Net income per common share
Basic
As reported $ 1.20 $ 1.17 $ 1.01
Pro forma 1.18 1.16 1.00
Diluted
As reported $ 1.16 $ 1.13 $ 0.98
Pro forma 1.14 1.12 0.97
The fair value of options granted under the Corporation's stock option plan
was $5.36, $4.22, and $3.31, respectively for the years ended December 31,
2004, December 31, 2003, and December 31, 2002. The fair value is estimated on
the date of grant using the Black-Scholes Model. The following weighted average
assumptions were used for December 31, 2004, December 31, 2003, and December
31, 2002: risk-free interest rate of 2.25%, 1.00%, and 1.25%, an expected life
of eight years, cash dividends of $0.32 in 2004, cash dividends of $0.28 in
2003, and no cash dividends in 2002, and a volatility factor of 24%.
Beginning July 1, 2005, the Corporation shall begin accounting for stock
options as required by SFAS 123R. The fair value of the options and all other
equity-based compensation shall be considered a compensation expense at the
time of vesting.
(s) Interest Rate Swap Agreements
- ---------------------------------
For asset/liability management purposes, the Corporation uses interest rate
swap agreements to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Interest rate swaps are
contracts in which a series of interest rate flows are exchanged over a
prescribed period. The notional amount on which the interest payments are
based is not exchanged. Such derivatives are linked to specific assets or
liabilities, and have high correlation between the contract and the underlying
item being hedged, both at inception and throughout the hedge period.
The Corporation utilizes interest rate swap agreements to convert a portion
of its variable-rate debt to a fixed rate (cash flow hedge), or to convert a
portion of its fixed-rate assets to a variable rate (fair value hedge).
Under SFAS No. 133, the gain or loss on a swap designated and qualifying as
a fair value hedging instrument, as well as the offsetting gain or loss on the
hedged item attributable to the risk being hedged, is recognized currently in
earnings in the same accounting period. The effective portion of the gain or
loss on a swap designated and qualifying as a cash flow hedging instrument is
reported as a component of other comprehensive income. The ineffective portion
of the gain or loss on the swap instrument, if any, is recognized currently in
earnings.
Interest rate derivative financial instruments receive hedge accounting
treatment only if they are designated as a hedge and are expected to be, and
are, effective in substantially reducing interest rate risk arising from the
assets and liabilities. Those swaps that do not meet the hedging criteria
discussed below would be recorded at fair value with changes in fair value
recorded in income. Swaps must meet specific effectiveness tests (e.g., over
time the change in their fair values due to the designated hedge risk must be
within 80 to 125 percent of the opposite change in the fair values of the
hedged assets or liabilities). If periodic assessment indicates derivatives no
longer provide an effective hedge, the derivatives contracts would be closed
out and settled or mark- to-market through income.
Beginning January 1, 2001, in accordance with SFAS No. 133, hedges of
variable-rate debt are accounted for as cash flow hedges, with changes in fair
value recorded in derivative assets or liabilities and other comprehensive
income. The net settlement (upon close out or termination) that offsets changes
in the value of the hedged debt is deferred and amortized into net interest
income over the life of the hedged debt. Hedges of fixed-rate assets are
accounted for as fair value hedges, with changes in fair value recorded in
derivative assets or liabilities and interest income. The net settlement
(upon close out or termination) that offsets changes in the value of the
assets adjusts the basis of the assets and is deferred and amortized to
interest income over the life of the assets. The portion, if any, of the net
settlement amount that did not offset changes in the value of the hedged asset
or liability is recognized immediately in noninterest income.
Cash flows resulting from the derivative financial instruments that are
accounted for as hedges of assets and liabilities are classified in the cash
flow statement in the same category as the cash flows of the items being
hedged.
-29-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(t) Reclassifications
- ---------------------
Certain balances have been reclassified to conform to the 2004 presentation.
(u) Recent Accounting Pronouncements
- ------------------------------------
On December 16, 2004, FASB issued Statement No. 123 (revised 2004), Share Based
Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement 123 (R) is
similar to the approach described in Statement No. 123. However, Statement 123
(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
Statement 123 (R) must be adopted no later than July 1, 2005, and we expect
to adopt the Statement on that date. As permitted by Statement 123, the
Corporation currently accounts for share-based payments to employees using the
intrinsic value method as detailed in Opinion 25 and, as such, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123 (R)'s fair value method will have an impact on our
results of operations, although it will have no impact on our overall financial
position. The impact of adoption of Statement 123 (R) cannot be predicted at
this time because it will depend on levels of share-based payments granted in
the future. However, had we adopted Statement 123 (R) in prior periods, the
impact of the standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income and earnings per share
discussed above.
(2) Restricted Assets
- ---------------------
Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances as either cash on hand, in the vault or on deposit
with the Federal Reserve Bank. The minimum reserve balance as of December 31,
2004, and 2003, was approximately $2,821 and $290 respectively.
(3) Securities
- --------------
A summary of securities at December 31, 2004, and December 31, 2003, follows:
<TABLE>
<CAPTION>
DECEMBER 31, 2004
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS GAINS LOSSES LOSSES
AMORTIZED LESS THAN MORE THAN LESS THAN MORE THAN FAIR
COST 1 YEAR 1 YEAR 1 YEAR 1 YEAR VALUE
----------------------------------------------------------------------------
Securities available-for-sale
<S> <C> <C> <C> <C> <C> <C>
MBS $ 43,208 $ 50 $ 20 $ 544 $ 212 $ 42,522
Agency notes 70,910 18 - 652 394 69,882
FHLB Stock 11,872 - - - - 11,872
----------------------------------------------------------------------------
$125,990 $ 68 $ 20 $1,196 $ 606 $124,276
============================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 2004
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS GAINS LOSSES LOSSES
AMORTIZED LESS THAN MORE THAN LESS THAN MORE THAN FAIR
COST 1 YEAR 1 YEAR 1 YEAR 1 YEAR VALUE
----------------------------------------------------------------------------
Securities held-to-maturity
<S> <C> <C> <C> <C> <C> <C>
MBS $ 25,083 $ - $ 30 $ 345 $ 184 $ 24,584
Agency notes 65,791 21 - 367 939 64,506
Corporate/other 465 - - - - 465
----------------------------------------------------------------------------
$ 91,339 $ 21 $ 30 $ 712 $1,123 $ 89,555
============================================================================
</TABLE>
-30-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
DECEMBER 31, 2003
--------------------------------------
GROSS GROSS
AMOR- UNREAL- UNREAL-
TIZED IZED IZED FAIR
COST GAIN LOSSES VALUE
--------------------------------------
Securities available-for-sale
MBS $ 70,200 $636 $313 $70,523
Agency notes 99,677 218 655 99,240
FHLB stock 14,741 - - 14,741
Corporate/other 5,363 - 120 5,243
--------------------------------------
$ 189,981 $854 $1,088 $189,747
======================================
Securities held-to-maturity
MBS $ 12,588 $ 63 $ 323 $ 12,328
Agency notes 73,821 49 1,161 72,709
Corporate/other 310 - 3 307
--------------------------------------
$ 86,719 $112 $1,487 $ 85,344
======================================
At December 31, 2004, Cascade had four securities with a gross unrealized loss
totaling $606 in our available-for-sale portfolio with a fair value of $14.4
million that had an unrealized loss for greater than one year and six
held-to-maturity securities with a gross unrealized loss totaling $1.1 million
with a fair value of $27.0 million that have had an unrealized loss for more
than one year. The majority of the impairment on available-for-sale securities
was in the Agency Notes category, which accounted for 65% of the total
impairment. As of December 31, 2004, the Bank had four available-for-sale and
six held-to-maturity securities included in the temporarily impaired report,
compared to twelve available-for-sale and six held-to-maturity with unrealized
gains. The temporary impairment was less than 1% of the total book value of
investments. Temporarily impaired securities are a result of market value
changes and are expected to regain the lost value with market shifts;
other-than-temporarily impaired securities are a result of contractual failure
by the issuer and are not expected to rebound and are considered not
collectable. The Bank had no securities with other-than-temporary impairments.
Certain investment securities shown above currently have fair values less
than amortized cost and therefore contain unrealized losses. The Corporation
has evaluated these securities and has determined that the decline in value is
temporary and is related to the change in market interest rates since purchase.
All are rated AAA by at least one major rating agency. The decline in value is
not related to any company or industry specific event. The Corporation
anticipates full recovery of amortized cost with respect to these securities at
maturity or sooner in the event of a more favorable market interest rate
environment.
As of December 31, 2004, and 2003, the Corporation maintained 97,501 and
89,722 shares, respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits
was $1,728 and $2,445 at December 31, 2004, and 2003, respectively.
Proceeds from the sale of securities available-for-sale including calls
on securities held-to-maturity and gross realized gains and losses are
summarized as follows for the year ended December 31, 2004, 2003, and 2002.
PROCEEDS GAINS LOSSES
------------------------------------
Year ended December 31, 2004 $ 153,356 $ 510 $ -
Year ended December 31, 2003 266,383 1,790 -
Year ended December 31, 2002 187,885 1,076 -
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at December 31, 2004:
<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
MBS $15,962 $25,028 $ 2,218 $ - $ 43,208
Agency notes 86 11,000 43,937 15,887 70,910
FHLB stock 11,872 - - - 11,872
----------------------------------------------------------------
Total amortized cost $27,920 $36,028 $46,155 $15,887 $125,990
================================================================
Fair Value
MBS $15,809 $24,598 $ 2,115 $ - $ 42,522
Agency notes 86 11,006 43,108 15,682 69,882
FHLB stock 11,872 - - - 11,872
----------------------------------------------------------------
Total fair value $27,767 $35,604 $45,223 $15,682 $124,276
================================================================
</TABLE>
-31-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The following table shows the contractual maturities of the Corporation's
securities held-to-maturity at December 31, 2004:
<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
MBS $ - $21,320 $ 3,763 $ - $ 25,083
Agency notes - 20,927 17,904 26,960 65,791
Corporate/other - - - 465 465
----------------------------------------------------------------
Total amortized cost $ - $42,247 $21,667 $27,425 $ 91,339
================================================================
Fair Value
MBS $ - $20,901 $ 3,683 $ - $ 24,584
Agency notes - 20,504 17,816 26,186 64,506
Corporate/other - - - 465 465
----------------------------------------------------------------
Total fair value $ - $41,405 $21,499 $26,651 $ 89,555
================================================================
</TABLE>
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 $17.6 million at December 31,
2004, and $32.5 million at December 31, 2003. Securities of $103.1 million were
pledged to the FHLB at December 31, 2004, and $54.2 million at December 31,
2003. In addition, $3.7 million was pledged to a third party as collateral for
derivative contracts at December 31, 2004.
(4) Loans and Allowance for Loan Losses
- ---------------------------------------
A summary of loans at December 31, 2004, and 2003, follows:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------------------------
Residential real estate $ 105,975 $ 105,565
Multifamily real estate 92,372 87,212
Commercial real estate 178,704 83,856
Real estate construction 157,088 93,704
Business 292,117 204,446
Consumer 30,125 33,163
--------------------------------
Total loans 856,381 607,946
Loans in process (49,657) (30,962)
Deferred loan fees, net (2,695) (2,179)
--------------------------------
Loans $ 804,029 $ 574,805
================================
Loans serviced for others $ 9,038 $ 16,411
Accrued interest on loans was $3,340 and $2,388 at December 31, 2004, and
December 31, 2003, respectively. Loans to officers and directors totaled $2.7
million at December 31, 2004, and $3.3 million at December 31, 2003. During the
period, repayments totaling $482 were received, additional advances of $18 were
made, and a loan to a former executive officer for $20 is no longer included in
the total.
At December 31, 2004, the composition of the loan portfolio, including
loans in process, was as follows:
ADJUSTABLE
FIXED RATE RATE
--------------------------
Term to maturity
Less than one year $ 13,634 $ 126,958
1-3 years 46,272 53,446
3-5 years 94,022 17,094
5-10 years 47,822 162,882
10-20 years 7,247 37,953
Over 20 years 7,863 191,531
-------------------------
Total $ 216,860 $ 589,864
=========================
-32-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Nonaccrual loans totaled $532, $1,921, and $956, respectively, at December
31, 2004, December 31, 2003, and December 31, 2002. If interest on these loans
had been recognized, such income would have been $2, $90, and $32 respectively,
for the periods ended December 31, 2004, 2003, and 2002. The Corporation has no
commitments to extend additional credit on loans that are nonaccrual. At
December 31, 2004, 2003, and 2002, loans totaling $9,319, $11,969, and $24,564,
were adversely classified, of which there were no allocated allowances. These
loans had no allowances allocated to them because the value of the underlying
collateral of the adversely classified loans was equal to or exceeded the
recorded investment. Of the adversely classified loans, $166, $1,758, and $677
were under foreclosure. The average balance of adversely classified loans for
the year ended December 31, 2004, December 31, 2003, respectively, was $7,152,
and $17,265 and the Corporation recognized $534, and $1,250 of related interest
income on such loans during the time such loans were impaired.
At December 31, 2004, the Corporation had outstanding commitments of
$22,568 to fund loans with fixed interest rates and $21,153 for loans with
adjustable rates.
The Corporation had non-mandatory forward commitments totaling $784 and
$2,177 to sell loans into the secondary market at December 31, 2004, and
December 31, 2003, respectively.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. While approximately 100% of
commercial letters of credit are utilized, a significant portion of such
utilization is on an immediate payment basis. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the borrower. Collateral held
varies but may include accounts receivable, inventory, property, plant, and
equipment, and income-producing commercial properties.
Unfunded commitments under commercial lines of credit, revolving credit
lines and loans in process are commitments for possible future extensions of
credit to existing customers.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, bond financing, and similar transactions. The
Bank underwrites its standby letters of credit using its policies and
procedures applicable to loans in general. Standby letters of credit are made
on an unsecured and secured basis. The Bank has not been required to perform on
any financial guarantees during the past two years. The Bank did not incur any
significant losses on its commitments in 2004 or 2003.
At December 31, 2004, and 2003, the following financial instruments with
off-balance sheet risk were outstanding:
2004 2003
------------------------
Commitments to grant loans $ 45,972 $ 17,327
Unfunded commitments under lines of
credit/loans in process 144,875 90,606
Standby letters of credit and financial
guarantees written 5,602 665
Unused commitments on bankcards 11,103 9,324
------------------------
Total $ 207,552 $ 117,922
========================
A summary of the allowance for losses on loans follows:
YEAR ENDED
DECEMBER 31,
2004 2003 2002
--------------------------
Balances at beginning of year $7,711 $6,872 $6,304
Issaquah Bank allowance assumed 1,395 - -
Provision for loss 675 1,275 1,895
Recoveries 223 315 114
Charge-offs (441) (751) (1,441)
---------------------------
Balances at end of year $9,563 $7,711 $6,872
===========================
-33-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(5) Premises and Equipment
- --------------------------
A summary of premises and equipment follows:
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIVES 2004 2003
-------------------------------------------
Land $ 2,577 $ 1,261
Buildings 40 years 10,527 7,873
Leasehold improvements Lease term 1,985 1,644
Furniture and equipment 2-10 years 12,362 9,738
-----------------------
27,451 20,516
Accumulated depreciation and amortization (14,627) (11,929)
-----------------------
$ 12,824 $ 8,587
========================
(6) Deposits
- ------------
Deposits at December 31, 2004, and 2003, are summarized as follows:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------------------
Noninterest bearing checking accounts $ 74,865 $ 39,275
Interest bearing checking accounts 37,699 23,652
Money market deposit accounts 156,347 120,569
Savings accounts 16,237 12,417
Certificates of deposit 436,760 368,401
--------------------------
$721,908 $564,314
==========================
Time deposit accounts in amounts of $100 thousand or more totaled $277.3
million and $239.9 million at December 31, 2004, and December 31, 2003,
respectively.
DEPOSIT ACCOUNTS
WEIGHTED AVERAGE WITH BALANCES ACCRUED INTEREST
INTEREST RATE ON IN EXCESS PAYABLE ON
RATE ON DEPOSITS OF $100,000 DEPOSITS
----------------------------------------------------------
December 31, 2004 1.87% $428,293 $906
December 31, 2003 1.68 323,901 232
A summary of interest expense on deposits follows:
YEAR ENDED DECEMBER 31,
2004 2003 2002
--------------------------------
Checking and money market accounts $ 1,965 $ 1,604 $ 2,528
Savings accounts and time deposits 9,194 9,369 10,002
--------------------------------
$11,159 $10,973 $12,530
================================
Maturities of time deposits at December 31, 2004, are as follows:
Years ending December 31, 2005 $ 350,693
2006 44,524
2007 17,208
2008 18,159
2009 5,452
Thereafter 724
---------
$ 436,760
==========
-34-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(7) Junior Subordinated Debentures Payable (Trust Preferred Securities)
- -----------------------------------------------------------------------
On March 1, 2000, $10.3 million of 11% Capital Securities due March 1, 2030,
were issued by a wholly owned business Trust whose common equity is 100% owned
by Cascade Financial Corporation. The Trust exists for the exclusive purposes
of issuing and selling the capital securities, using the proceeds from the sale
of the capital securities to acquire junior subordinated debentures payable,
issued by Cascade Financial Corporation, and engaging in only those other
activities necessary, advisable or incidental to the above. The Corporation
used the proceeds for general corporate purposes including stock repurchases
and investment in its subsidiary bank. As a result of the adoption of FIN 46R,
we deconsolidated the Trust and all periods in the consolidated financial
statements have been restated to reflect this change. The $10.3 million of
junior subordinated debentures issued by the Company to the Trust were
reflected as junior subordinated debentures payable in the consolidated
balance sheet at December 31, 2003, and 2004. The junior subordinated
debentures will mature on March 1, 2030 unless redeemed prior to such date if
certain conditions are met. The Trust will redeem the trust preferred
securities when we pay the junior subordinated debentures at maturity or
upon any earlier redemption of the junior subordinated debentures.
Prior to December 31, 2003, the Trust was consolidated and was included
in liabilities in the consolidated balance sheet as "Trust Preferred
Securities." The common securities and debentures, along with the related
income effects were eliminated in the consolidated financial statements.
In October 2003, Cascade entered into an interest rate swap agreement
with a third party as a hedge of the interest rate on the Corporation's
junior subordinated debentures. Under the terms of the agreement, Cascade will
receive an 11% fixed rate and pay a floating rate of USD-six month LIBOR-BBA
plus 520 basis points. The rate paid at December 31, 2004, is 7.19%. The
floating rate will reprice the first calendar day of each March and September.
The unrealized loss on the interest rate swap was $11,000 as of December 31,
2004. Unrealized gains or losses on the interest rate swap are recorded as
other assets or liabilities with the corresponding change in the amount of
liability for the junior subordinated debentures. The change in unrealized
gains or losses on the interest rate swap is offset by the corresponding
changes in the unrealized gains or losses on junior subordinated debentures
in the accompanying Consolidated Statements of Operations.
On December 15, 2004, the Corporation issued an additional $5 million in
trust preferred securities/junior subordinated debentures. These securities
have a fixed coupon of 5.82% for the first 5 years and then float at 3-month
LIBOR plus 1.90% for the remaining 25 years. The securities are callable at
par after 5 years. These securities are considered Tier 1 capital by financial
institution regulators. The junior subordinated debentures issued under Capital
Trust II incorporates the same structure for the same purposes as Capital
Trust I.
(8) FHLB Advances
- -----------------
FHLB advances are summarized as follows:
DECEMBER 31, DECEMBER 31,
2004 2003
-----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
MATURITY DATE AMOUNT RATE AMOUNT RATE
--------------------------------------------------------------------------
At December 31,
2004 $ - -% $ 65,000 2.72%
2005 77,000 4.55 45,000 6.27
2006 23,000 4.57 21,000 4.77
2007 22,000 6.06 20,000 6.37
2008 2,000 3.51 - -
2009 39,000 2.97 4,000 5.45
Thereafter 65,000 5.14 45,000 5.83
----------------------------------------
$228,000 4.59% $200,000 4.85%
========================================
YEAR ENDED DECEMBER 31,
2004 2003
-----------------------
Maximum amount of outstanding FHLB
advances at any month-end $237,500 $211,750
Average amount of outstanding FHLB
advances during the year 215,733 194,229
The Corporation had $150.0 million in fixed-rate advances as of December
31, 2004, where the FHLB has the option to convert these advances to variable
rate advances after a specified period.
-35-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
At December 31, 2004, the Bank had an unused line of credit from the
FHLB-Seattle of $147.5 million subject to the availability of eligible
collateral. The Bank's credit line with the FHLB-Seattle is 35% of total
assets, or up to approximately $381.1 million.
FHLB advances are collateralized by otherwise unencumbered permanent
residential mortgages, investment grade securities, and other eligible real
estate mortgages. Federal statute requires all members of the FHLB to
maintain collateral on FHLB borrowings and advances equivalent to the amount
borrowed on a daily basis.
(9) 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 91 days.
Securities sold under agreements to repurchase the same securities consist
of agency notes and/or mortgage-backed securities summarized as follows:
UNDERLYING SECURITIES
---------------------
WEIGHTED- BOOK VALUE,
AVERAGE INCLUDING
BALANCE INTEREST ACCRUED MARKET
OUTSTANDING RATE INTEREST VALUE
-----------------------------------------------
December 31, 2004 $ 20,902 2.38% $20,358 $19,758
December 31, 2003 39,911 1.17 44,046 43,002
Financial data pertaining to reverse repurchase agreements follows:
DECEMBER 31, DECEMBER 31,
2004 2003
------------------------------
Maximum amount of outstanding
agreements at any month-end $40,251 $40,587
Average amount of outstanding
agreements during the year 30,125 35,334
The Bank has Fed funds borrowing lines with two of its correspondent banks.
One line is for $13.0 million and matures July 1, 2005. The other facility is
for $10.0 million and matures June 30, 2005. Interest rates for both lines are
quoted at the time of borrowing. Cascade used one of the lines once to test the
operational aspects of the facility as part of our liquidity planning process.
The Bank also has the ability to borrow from the Federal Reserve Bank of San
Francisco based on the volume of collateral pledged. As of December 31, 2004,
there were no outstanding balances in any of these lines.
(10) Federal Income Taxes
- -------------------------
Federal income tax expense (benefits) includes the following components:
YEAR ENDED
DECEMBER 31,
2004 2003 2002
---------------------------
Current $5,467 $4,545 $3,980
Deferred (100) (236) (205)
----------------------------
$5,367 $4,309 $3,775
============================
For the year ended December 31, 2004, the Corporation's effective tax
rate was 34.6% compared to 31.0% for the year ended December 31, 2003. Tax
benefits related to interest on tax exempt loans and increases in cash
surrender value of bank owned life insurance accounted for the differences in
the effective tax rates between the two years.
Income tax expense differs from that computed by applying the U.S. federal
income tax rate of 34.6% to pretax income for the years ended December 31 as a
result of the following:
2004 2003 2002
-----------------------------
Computed "expected" tax expense $ 5,588 $4,729 $4,028
Bank owned life insurance (169) (184) (27)
Tax exempt interest (69) (89) (79)
Non-deductible acquisition cost 122 - -
Other, net (105) (147) (147)
------------------------------
$ 5,367 $4,309 $3,775
=============================
-36-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Under certain provisions of the Internal Revenue Code, the Corporation was
allowed a statutory bad debt deduction (based upon a percentage of taxable
income before such deduction) for additions to tax bad debt reserves
established for the purpose of absorbing losses on loans or property acquired
through foreclosure. This amount represents allocations of income to bad debt
deductions for tax reporting purposes only. Reduction of amounts so allocated
for purposes other than tax bad debt losses will create income for tax
reporting purposes only, which will be subject to the then-current corporate
income tax rate.
The following table presents major components of the net deferred tax
liability resulting from differences between financial reporting and tax bases
at December 31, 2004, and December 31, 2003:
DECEMBER 31, DECEMBER 31,
2004 2003
------------------------------
Deferred tax assets:
Securities available-for-sale $ 617 $ 80
Loans 2,788 2,539
------------------------------
Gross deferred tax assets 3,405 2,619
Deferred tax liabilities:
Deferred loan fees (1,031) (745)
Core deposit intangible (395) -
Premises and equipment (205) (200)
FHLB stock (1,732) (2,271)
Other (82) (80)
------------------------------
Gross deferred tax liabilities (3,445) (3,296)
------------------------------
Net deferred tax asset (liability) $ (40) $ (677)
==============================
A valuation allowance for deferred tax assets was not considered necessary at
December 31, 2004, or 2003. Management believes the Corporation will fully
realize its total deferred income tax assets as of December 31, 2004, and
2003, based upon its total deferred income tax liabilities, previous taxes
paid and its current and expected future levels of taxable income.
(11) Acquisition
- ----------------
On June 3, 2004, the Company acquired Issaquah Bancshares, Inc., ("Issaquah").
The acquisition was accounted for using the purchase method of accounting and
accordingly, the assets and liabilities were recorded based on their fair
values at the acquisition date. Shares of Issaquah were exchanged for cash or
cash and shares of Cascade. The merger enhances Cascade's commercial banking
franchise by expanding Cascade's presence in east King County. Total Issaquah
assets on June 3, 2004, were approximately $131.0 million and the total value
of the transaction, both cash and stock, was approximately $34.3 million as
measured under the provisions of FAS 141. Cascade issued approximately 1.3
million shares and paid cash of $9.5 million in connection with the merger.
The Bank booked $26.3 million in intangible assets associated with the
transaction including $25.2 million in goodwill and a $1.1 million core deposit
intangible that will be amortized under the straight-line method over an eight
year period of time.
The following information presents unaudited pro forma results of
operations for the years ended December 31, 2004, and 2003, as though the
Issaquah acquisition had occurred on January 1, 2003. The pro forma results
do not necessarily indicate the results that would have been obtained had the
acquisitions actually occurred on January 1, 2003.
YEARS ENDED DECEMBER 31,
(unaudited)
--------------------------
2004 2003
-------- ---------
Net interest income $ 34,736 $ 32,736
Provision for credit losses 700 1,465
Noninterest income 4,983 6,030
Noninterest expense 22,818 21,075
--------- ----------
Income before provision for income taxes 16,201 16,226
Provision for income taxes 5,379 5,088
--------- ---------
Net income $ 10,822 $ 11,138
========= =========
Basic earnings per share $ 1.21 $ 1.18
Diluted earnings per share $ 1.17 $ 1.15
-37-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The fair values of the Issaquah assets acquired and liabilities assumed
as of June 3, 2004, were initially recorded as follows:
Investment securities $ 23,087
Loans and leases, net 94,556
Premises 3,866
Goodwill 25,195
Core deposit intangibles 1,127
Other assets 825
-------
$148,656
=======
Deposits $101,759
Other borrowings 15,200
Other liabilities 960
Acquisition cost, net of cash acquired 30,737
-------
$148,656
=======
As a result of the merger and merger-related activities, the Company
incurred expenses that were classified as merger-related. The components of
these charges for the year ended December 31, 2004, were as follows:
Professional fees $ 354
Other 2
-------
$ 356
(12) Earnings Per Share
- -----------------------
The following table presents EPS information:
YEAR ENDED
DECEMBER 31,
2004 2003 2002
----------------------------------
Net income $ 10,785 $ 9,599 $ 8,072
Common shares outstanding (basic) 8,952,493 8,184,455 7,997,713
Effect of dilutive stock options 323,739 277,048 263,735
------------------------------------
Common shares outstanding (diluted) 9,276,232 8,461,503 8,261,448
====================================
EPS, basic $ 1.20 $ 1.17 $ 1.01
EPS, diluted 1.16 1.13 0.98
For purposes of calculating basic and diluted earnings per share, the numerator
of net income is the same. There were outstanding options to purchase 136,544,
69,199, and 73,164 shares of common stock at December 31, 2004, December 31,
2003, and December 31, 2002, respectively that are considered nondilutive and
have been excluded from the above calculation. Nondilutive options have an
exercise price that is greater than the current market price of the stock.
(13) 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 Federal Deposit Insurance
Corporation (FDIC).
(b) Regulatory Capital
- ----------------------
At December 31, 2004, banking regulations required institutions to have a
minimum total risk-based capital to risk-weighted assets ratio of 8% and a
Tier 1 (core) capital to adjusted total assets ratio of 4%.
At December 31, 2004, the Bank was in compliance with the regulatory
requirements for well-capitalized institutions. As of December 31, 2004, the
most recent notification from the FDIC categorized the Bank as well-capitalized
under the regulatory framework. There are no conditions or events since the
notification that management believes have changed the Bank's category.
-38-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
MINIMUM
REQUIREMENTS
FOR CAPITAL WELL-CAPITALIZED
ACTUAL ADEQUACY REQUIREMENTS
---------------------------------------------------------
CASCADE BANK AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 2004:
Total risk-based capital to risk-weighted assets (1) $94,574 11.06% $68,380 8.00% $85,476 10.00%
Tier I (core) capital to risk-weighted assets 85,011 9.95 34,190 4.00 51,285 6.00
Tier I (core) capital to average total assets 85,011 8.04 42,307 4.00 52,884 5.00
December 31, 2003:
Total risk-based capital to risk-weighted assets (1) $80,588 13.22% $48,759 8.00% $60,949 10.00%
Tier I (core) capital to risk-weighted assets 72,970 11.97 24,380 4.00 36,569 6.00
Tier I (core) capital to average total assets 72,970 8.34 35,000 4.00 43,750 5.00
</TABLE>
The Corporation, as a bank holding company regulated by the Federal Reserve,
is also subject to capital requirements that are similar to those for Cascade
Bank.
<TABLE>
<CAPTION>
MINIMUM
REQUIREMENTS
FOR CAPITAL WELL-CAPITALIZED
ACTUAL ADEQUACY REQUIREMENTS
---------------------------------------------------------
CASCADE FINANCIAL CORP AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 2004:
Total risk-based capital to risk-weighted assets (1) $95,704 11.18% $68,496 8.00% $85,620 10.00%
Tier I (core) capital to risk-weighted assets 86,141 10.06 34,248 4.00 51,372 6.00
Tier I (core) capital to average total assets 86,141 8.14 42,307 4.00 52,884 5.00
December 31, 2003:
Total risk-based capital to risk-weighted assets (1) $81,948 13.42% $48,839 8.00% $61,049 10.00%
Tier I (core) capital to risk-weighted assets 74,316 12.17 24,420 4.00 36,629 6.00
Tier I (core) capital to average total assets 74,316 8.49 35,000 4.00 43,750 5.00
</TABLE>
The FDIC requires institutions to maintain Tier I capital of not less than
one-half of total capital.
(14) Mortgage Servicing Rights
- ------------------------------
A summary of capitalized mortgage servicing rights, included in other assets,
at December 31, 2004, and December 31, 2003, follows:
DECEMBER 31, DECEMBER 31,
2004 2003
----------------------------
Balance at beginning of year $80 $ 310
Additions - -
Amortization (40) (230)
Allowance for losses - -
----------------------------
Balance at end of year $40 $ 80
============================
(15) 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 $12 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 $290, $188, and $92 to the plan for the years ended
December 31, 2004, 2003, and 2002, respectively.
-39-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(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. The shares of Cascade Financial Corporation
stock purchased by the ESOP are held in a suspense account for allocation among
the participants. Benefits become 20% vested after the first year of service
with an additional 20% vesting each year thereafter until 100% vesting after
five 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 years ended December 31, 2004, 2003,
and 2002, the Corporation contributed $14, $54, and $112, respectively, to the
ESOP, which is invested in Cascade Financial Corporation stock. Allocated and
unallocated shares at December 31, 2004, were 182,709 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 182,353 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 ore 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, 2004, and December 31,
2003, 281,256 and 243,842 shares, respectively, were fully exercisable.
Changes in total options outstanding for the year ended December 31,
are as follows:
SHARES WEIGHTED AVERAGE
UNDER EXERCISE PRICE OF
OPTION OPTION SHARES
YEAR ENDED DECEMBER 31, 2004
---------------------------------
Outstanding at beginning of year 654,827 $ 7.24
Granted during year 123,592 18.56
Exercised during year (57,766) 6.02
Forfeited during year (51,083) 11.53
---------------------------------
Outstanding at end of year 669,570 $ 9.13
=================================
YEAR ENDED DECEMBER 31, 2003
---------------------------------
Outstanding at beginning of year 576,100 $ 7.23
Granted during year 96,100 12.34
Exercised during year (115,619) 3.77
Forfeited during year (16,739) 6.85
5-for-4 stock split 114,985 -
--------------------------------
Outstanding at end of year 654,827 $ 7.24
================================
-40-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
YEAR ENDED DECEMBER 31, 2002
------------------------------
Outstanding at beginning of year 855,216 $ 5.49
Granted during year 109,802 8.81
Exercised during year (324,540) 2.83
Forfeited during year (64,378) 8.96
------------------------------
Outstanding at end of year 576,100 $ 7.23
=============================
Financial data pertaining to outstanding stock options were as follows at
December 31, 2004:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE EXERCISE
WEIGHTED EXERCISE NUMBER OF PRICE OF
NUMBER OF AVERAGE PRICE OF EXERCISABLE EXERCISABLE
RANGES OF EXERCISE OPTION REMAINING OPTION OPTION OPTION
PRICES SHARES CONTRACTUAL LIFE SHARES SHARES SHARES
- --------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 3.47 - 5.54 81,288 3.97 $ 4.79 49,938 $ 4.47
5.54 - 5.55 137,499 6.07 5.55 73,937 5.55
5.64 - 7.76 172,041 6.13 6.56 78,735 6.27
7.85 - 12.50 162,700 6.37 10.42 77,521 8.89
14.82 - 19.90 116,042 9.33 18.41 1,125 16.07
- --------------------------------------------------------------------------------------------
$ 3.47 - 19.90 669,570 6.47 $ 9.13 281,256 $ 6.52
============================================================================================
</TABLE>
(16) 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:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------
Financial assets:
Cash and cash equivalents $ 13,029 $ 13,029 $ 14,071 $ 14,071
Securities available-for-sale 124,276 124,276 189,747 189,747
Securities held-to-maturity 91,339 89,555 86,719 85,344
Loans, net 794,466 805,971 567,094 570,799
Servicing rights 40 40 80 80
Financial liabilities:
Deposit accounts 721,908 722,550 564,314 566,760
Borrowings 248,902 256,901 239,911 251,021
Junior subordinated debentures
payable (1) 15,454 15,454 10,212 10,212
Mark-to-market on swaps (522) (522) 98 98
- ---------------------
(1) Net of $11 mark-to-market on swap (see note 6)
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.
-41-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Loans
- -----
Fair values are estimated using current market interest rates to discount
future cash flows for each of the six different loan types. 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.
Deposit Accounts
- ----------------
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.
Junior Subordinated Debentures Payable (Trust Preferred Securities)
- -------------------------------------------------------------------
The fair value is calculated based on the discounted cash flow method,
adjusted for market interest rates and terms to maturity.
(17) On-Balance Sheet Derivative Instruments and Hedging Activities
- -------------------------------------------------------------------
Derivative Financial Instruments
- --------------------------------
The Corporation has derivative financial instruments in the form of interest
rate swap agreements, which derive their value from underlying interest rates.
These transactions involve both credit and market risk. Direct credit exposure
is limited to the net difference between the calculated amounts to be received
and paid, and any change in fair value of the contract in which the
counterparty would owe the Corporation if the contract were terminated. Such
difference, which represents the fair value of the derivative instruments, is
reflected on the Corporation's balance sheet as derivative assets and
derivative liabilities. The Corporation controls the credit risk of its
financial contracts through credit approvals, limits and monitoring procedures,
and does not expect any counterparties to fail to meet their obligations.
Risk Management Policies - Hedging Instruments
- ----------------------------------------------
The primary focus of the Corporation's asset/liability management program is
to monitor the sensitivity of the Corporation's net income and fair value of
equity under varying interest rate scenarios to take steps to control its risks
(see Management Discussion and Analysis - Interest Rate Risk Management).
Interest Rate Risk Management - Cash Flow Hedging Instruments
- -------------------------------------------------------------
The Corporation uses long-term variable rate debt as a source of funds for
use in the Corporation's lending and investment activities and other general
business purposes. These debt obligations expose the Corporation to variability
in interest payments due to changes in interest rates. Management believes it
is prudent to limit the variability of a portion of its interest payments and,
therefore, may hedge a portion of its variable-rate interest payments. To meet
this objective, management enters into interest rate swap agreements whereby
the Corporation receives variable interest rate payments and makes fixed
interest rate payments during the contract period.
At December 31, 2004, and 2003, the information pertaining to an
outstanding interest rate swap agreement used to hedge FHLB Advances is as
follows:
DECEMBER 31,
2004 2003
-----------------------
Notional amount $25,000 $ -
Fixed pay rate 4.02% -
Weighted average receive rate 1.83% -
Maturity in years 4.6 -
Unrealized (loss) relating to interest rate swap $ (50) -
This agreement provides for the Corporation to make payments at a
fixed-rate in exchange for receiving payments at a variable-rate determined
by a three-month LIBOR.
At December 31, 2004, and 2003, the unrealized loss relating to use of
the interest rate swap was recorded in derivative liabilities in accordance
with SFAS No. 133.
-42-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Risk management results for the years ended December 31, 2004, and 2003,
related to the balance sheet hedging of long-term debt indicate that the hedge
was 100% effective and that there was no component of the derivative
instrument's gain or loss which was excluded from the assessment of hedge
effectiveness.
Interest Rate Risk Management - Fair Value Hedging Instruments
- --------------------------------------------------------------
The Corporation holds fixed- and variable-rate assets and liabilities. Fixed
rates may expose the Corporation to variability in their fair value due to
changes in the level of interest rates. The Corporation may utilize interest
rate swaps as an asset/liability management strategy to hedge the change in
value of the assets due to changes in interest rate assumptions.
At December 31, 2004, and 2003, the information pertaining to an
outstanding interest rate swap agreement used to hedge junior subordinated
debentures (trust preferred securities) is as follows:
DECEMBER 31,
2004 2003
-----------------------
Notional amount $10,000 $10,000
Weighted average pay rate 6.76% 6.38%
Fixed receive rate 11.00% 11.00%
Maturity in years 26.2 27.2
Unrealized gain relating to interest rate swap $ 11 $ 98
This agreement provides for the Corporation to make payments at a variable
rate determined by a six-month LIBOR in exchange for receiving payments at a
fixed rate.
Risk management results for the years ended December 31, 2004, and 2003,
related to the balance sheet hedging of junior subordinated debentures indicate
that the hedge was 100% effective and that there was no component of the
derivative instrument's gain or loss which was excluded from the assessment of
hedge effectiveness.
At December 31, 2004, and 2003, the information pertaining to an
outstanding interest rate swap agreement used to hedge certificates of deposit
is as follows:
DECEMBER 31,
2004 2003
-----------------------
Notional amount $10,000 $ -
Weighted average pay rate 2.38% -
Fixed receive rate 5.00% -
Maturity in years 9.4 -
Unrealized (loss) relating to interest rate swap $ (131) $ -
This agreement provides for the Corporation to make payments at a variable
rate determined by a three-month LIBOR in exchange for receiving payments at a
fixed rate.
Risk management results for the years ended December 31, 2004, and 2003,
related to the balance sheet hedging of certificates of deposit indicate that
the hedge was 100% effective and that there was no component of the derivative
instrument's gain or loss which was excluded from the assessment of hedge
effectiveness.
At December 31, 2004, the Corporation had an outstanding interest rate swap
agreement that was originally designated to hedge available-for-sale
securities. This agreement provides for the Corporation to make payments at a
fixed rate in exchange for receiving payments at a variable rate determined by
a three-month LIBOR.
As of December 15, 2004, the Corporation determined that due to a narrowing
of swap spreads that the hedge was no longer "highly effective" in that the
change in the fair value of the swap did not sufficiently correlate with the
change in the fair value of the designed securities. Therefore, at December 31,
2004, and 2003, the unrealized loss relating to the use of this swap was
recorded in derivative liabilities and other expense in the income statement,
in accordance with SFAS No. 133.
At December 31, 2004, and 2003, the information pertaining to an
outstanding interest rate swap agreement that was originally designated to
hedge fixed-rate available-for-sale securities is as follows:
DECEMBER 31,
2004 2003
---------------------
Notional amount $25,000 $ -
Fixed pay rate 4.79% -
Weighted average receive rate 1.83% -
Maturity in years 9.6 -
Unrealized (loss) relating to interest rate swap $ (352) $ -
-43-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The Company enters into rate lock commitments to extend credit to borrowers
for generally a 30-day or 60-day period for the origination of loans.
On March 13, 2002, the Financial Accounting Standards Board determined that
loan commitments related to the origination or acquisition of mortgage loans
that will be held for sale must be accounted for as derivative instruments.
Accordingly, the Corporation adopted such accounting on July 1, 2002, and such
commitments, along with any related fees received from potential borrowers, are
recorded at fair value in derivative assets or liabilities, with changes in
fair value recorded in the net gain or loss on sale of mortgage loans. Since
the Corporation originates its saleable loans on a "best effort" basis and
delivers those loans to the purchaser within 10 days at the committed price,
there will generally be no gain or loss recorded on those commitments.
The Corporation had non-mandatory forward commitments totaling $784 and
$2,177 to sell loans into the secondary market at December 31, 2004, and
December 31, 2003, respectively.
(18) 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 banking industry. Based on these examinations, the regulators
can direct that the Corporation's financial statements be adjusted in
accordance with their findings.
(19) Condensed Financial Information of Cascade Financial Corporation
- ---------------------------------------------------------------------
Following are the condensed financial statements of Cascade Financial
Corporation (parent only) for the period indicated:
BALANCE SHEET DECEMBER 31, 2004 DECEMBER 31, 2003
- ------------- ----------------------------------------
Assets:
Cash $ 410 $ 1,272
Investment in subsidiary 110,120 72,823
Other assets 2,585 1,127
-----------------------------------
$ 113,115 $ 75,222
===================================
Liabilities and stockholders' equity:
Other liabilities 1,411 1,053
Junior subordinated debentures payable 15,454 10,212
Stockholders' equity 96,250 63,957
-----------------------------------
$ 113,115 $ 75,222
===================================
INCOME STATEMENT FOR THE YEARS ENDED DECEMBER 31,
- ---------------- 2004 2003 2002
---------------------------------
Equity in undistributed net
income of the subsidiary $ 11,833 $ 10,542 $ 9,113
Interest income - junior subordinated
debentures payable 35 34 34
Operating expenses (704) (429) (464)
Interest expense - junior subordinated
debentures payable (723) (1,034) (1,148)
--------------------------------
Income before provision for federal
income taxes 10,441 9,113 7,535
Provision for federal income taxes 344 486 537
--------------------------------
Net income $ 10,785 $ 9,599 $ 8,072
================================
-44-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
- ----------------------- 2004 2003 2002
---------------------------------
Cash flows from operating activities:
Net income $ 10,785 $ 9,599 $ 8,072
Adjustments to reconcile net income to
net cash (used in) operating activities:
Equity in net income of subsidiaries (11,833) (10,542) (9,113)
Increase (decrease) in other assets (1,303) 38 311
(Decrease) increase in other liabilities 257 (13) 109
---------------------------------
Net cash used in operating activities (2,094) (918) (621)
Cash flows from investing activities:
Dividends received from subsidiaries 12,882 2,100 700
Investment in subsidiary (5,000) - -
Cash (used for) provided by acquisition (9,546) - -
---------------------------------
Net cash provided (used) by investing
Activities (1,664) 2,100 700
Cash flows from financing activities:
Repurchase of common stock (150) (96) (375)
Proceeds from exercise of stock options 635 662 1,064
Dividends paid (2,589) (1,440) (322)
Proceeds from junior subordinated
debentures payable 5,000 - -
---------------------------------
Net cash provided by financing
Activities 2,896 (874) 367
---------------------------------
Net increase (decrease) in cash and cash
Equivalents (862) 308 446
---------------------------------
Cash and cash equivalents:
Beginning of year 1,272 964 518
---------------------------------
End of year $ 410 $ 1,272 $ 964
=================================
Supplemental schedule of non-cash
investing activities:
Issaquah Bank merger 24,792 - -
(20) 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 administrative 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 the segments. All
depreciating assets are included in administrative unit's total assets.
-45-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
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.
<TABLE>
<CAPTION>
Year Ended December 31, 2004
----------------------------
Resi- Constr- Income Admin-
Business dential uction Property Consumer istration Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income statement
Net interest income after
provision for loan losses $ 12,497 $ 912 $ 4,996 $ 8,219 $ 1,573 $ 3,525 $ 31,722
Other income 75 326 7 - 2,545 1,794 4,747
Other expense 1,446 658 435 738 1,550 15,490 20,317
----------------------------------------------------------------------------
Contribution before overhead 11,126 580 4,568 7,481 2,568 (10,171) 16,152
Support transfer 3,544 1,492 1,266 3,063 450 (9,815) -
----------------------------------------------------------------------------
Income before provision for
income tax 7,582 (912) 3,302 4,418 2,118 (356) 16,152
Provision for federal
income taxes 2,465 (297) 1,072 1,431 688 8 5,367
----------------------------------------------------------------------------
Net income $ 5,117 $ (615) $ 2,230 $ 2,987 $ 1,430 $ (364) $ 10,785
============================================================================
At December 31, 2004
Total Assets $292,117 $105,975 $107,431 $271,076 $30,125 $282,231 $1,088,955
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 2003
----------------------------
Resi- Constr- Income Admin-
Business dential uction Property Consumer istration Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income statement
Net interest income after
provision for loan losses $ 7,723 $ 1,334 $ 3,683 $ 6,331 $ 1,521 $ 5,743 $ 26,335
Other income 50 872 8 3 1,744 2,629 5,306
Other expense 1,243 602 334 111 1,311 14,132 17,733
----------------------------------------------------------------------------
Contribution before overhead 6,530 1,604 3,357 6,223 1,954 (5,760) 13,908
Support transfer 1,807 1,134 778 1,645 396 (5,760) -
----------------------------------------------------------------------------
Income before provision for
income tax 4,723 470 2,579 4,578 1,558 - 13,908
Provision for federal
income taxes 1,457 159 801 1,414 478 - 4,309
----------------------------------------------------------------------------
Net income $ 3,266 $ 311 $ 1,778 $ 3,164 $ 1,080 $ - $ 9,599
============================================================================
At December 31, 2003
Total Assets $204,446 $105,565 $ 62,742 $171,068 $33,163 $308,236 $ 885,220
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 2002
----------------------------
Resi- Constr- Income Admin-
Business dential uction Property Consumer istration Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed income statement
Net interest income after
provision for loan losses $ 5,297 $ 1,961 $ 3,931 $ 5,745 $ 2,019 $ 5,176 $ 24,129
Other income 69 812 - 7 1,308 1,843 4,039
Other expense 1,101 628 318 106 1,225 12,943 16,321
----------------------------------------------------------------------------
Contribution before overhead 4,265 2,145 3,613 5,646 2,102 (5,924) 11,847
Support transfer 1,386 1,387 845 1,726 580 (5,924) -
----------------------------------------------------------------------------
Income before provision for
income tax 2,879 758 2,768 3,920 1,522 - 11,847
Provision for federal
income taxes 917 242 882 1,250 484 - 3,775
----------------------------------------------------------------------------
Net income $ 1,962 $ 516 $ 1,886 $ 2,670 $ 1,038 $ - $ 8,072
============================================================================
At December 31, 2002
Total Assets $142,273 $122,669 $ 84,121 $157,353 $49,331 $248,716 $ 804,463
</TABLE>
-46-
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(21) Selected Quarterly Financial Data (Unaudited)
- --------------------------------------------------
QUARTER ENDED
-------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31,
2004 2004 2004 2004
-------------------------------------
Interest income $12,609 $13,096 $14,518 $15,093
Interest expense 5,307 5,250 5,967 6,395
-------------------------------------
Net interest income 7,302 7,846 8,551 8,698
Provision for loan losses 225 150 150 150
Other income 1,153 1,188 1,238 1,168
Other expense 4,467 5,300 5,005 5,545
-------------------------------------
Income before provision for federal
income taxes 3,763 3,584 4,634 4,171
Provision for federal income taxes 1,189 1,300 1,531 1,347
-------------------------------------
Net income $ 2,574 $ 2,284 $ 3,103 $ 2,824
=====================================
Earnings per share, basic $ .31 $ .27 $ .33 $ .30
Earnings per share, diluted .30 .26 .32 .29
QUARTER ENDED
-------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31,
2003 2003 2003 2003
-------------------------------------
Interest income $12,748 $12,532 $12,506 $12,577
Interest expense 6,018 5,821 5,660 5,254
-------------------------------------
Net interest income 6,730 6,711 6,846 7,323
Provision for loan losses 375 300 300 300
Other income 1,615 1,451 1,353 887
Other expense 4,594 4,398 4,333 4,409
-------------------------------------
Income before provision for federal
income taxes 3,376 3,464 3,566 3,501
Provision for federal income taxes 1,072 1,105 1,133 999
-------------------------------------
Net income $ 2,304 $ 2,359 $ 2,433 $ 2,502
=====================================
Earnings per share, basic $ .28 $ .29 $ .30 $ .30
Earnings per share, diluted .28 .28 .29 .29
QUARTER ENDED
-------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31,
2002 2002 2002 2002
-------------------------------------
Interest income $13,373 $13,298 $12,748 $13,051
Interest expense 6,919 6,719 6,456 6,352
-------------------------------------
Net interest income 6,454 6,579 6,292 6,699
Provision for loan losses 700 420 375 400
Other income 972 893 1,146 1,028
Other expense 3,975 4,134 4,098 4,114
-------------------------------------
Income before provision for federal
income taxes 2,751 2,918 2,965 3,213
Provision for federal income taxes 903 906 907 1,058
-------------------------------------
Net income $ 1,848 $ 2,012 $ 2,058 $ 2,155
=====================================
Earnings per share, basic $ .24 $ .25 $ .26 $ .26
Earnings per share, diluted .22 .24 .25 .26
ANNUAL SHAREHOLDERS' MEETING
- ----------------------------
The Annual Shareholders' meeting will be held at the Everett Golf & Country
Club, 1500 52nd Street SE, Everett, Washington, on Tuesday, April 26, 2005
at 6:30 p.m. Pacific time.
-47-
<PAGE>
(BACK COVER)
<TABLE>
<CAPTION>
CORPORATE INFORMATION
- ---------------------
<S> <C> <C>
CASCADE BANK: PINE LAKE QUARTERS
WWW.CASCADEBANK.COM 2902 228th Ave. SE, Issaquah ENDED HIGH LOW
(425) 369-8322 -----------------------
CASCADE SERVICE CENTER 3/31/04 $20.63 16.52
(800) 326-8787 SMOKEY POINT 6/30/04 21.28 15.30
3532 172nd St. NE, Arlington 9/30/04 17.98 15.25
MAIN OFFICE (360) 653-1900 12/31/04 19.72 16.62
2828 Colby Ave., Everett
(425) 257-1745 SNOHOMISH QUARTERS
1101 Ave. 'D,' Snohomish ENDED HIGH LOW
BELLEVUE (360) 862-9800 ------------------------
200 108th Ave. NE, Bellevue 3/31/03 $10.56 9.04
(425) 455-2300 WOODINVILLE 6/30/03 13.20 9.16
17641 Garden Way NE, Woodinville 9/30/03 16.00 12.01
12/31/03 20.99 14.92
CLEARVIEW (425) 481-0820
17512 SR 9 SE, Snohomish STOCK TRANSFER AGENT
(360) 668-1243 ISSAQUAH BANK DIVISION: Mellon Investor Services LLC
ISSAQUAH WEST P.O. Box 3315
CROSSROADS 1055 NW Maple Street, Issaquah South Hackensack, NJ 07606
15751 NE 15th St., Bellevue (425) 392-8000 (800) 839-2983
(425) 643-6200 (201) 329-8660 Foreign
NORTH BEND Shareholders
EVERETT/BROADWAY 139 Bendigo Blvd. N, North Bend www.melloninvestor.com
2602 Broadway, Everett (425) 831-1761
(425) 259-1243 AUDITORS
Moss Adams, LLP
All shareholders are encouraged 2707 Colby Avenue, Suite 801
EVERETT/EVERGREEN WAY to read Cascade's Form 10-K for Everett, WA 98201
6920 Evergreen Way, Everett the year ended December 31, 2004,
(425) 353-1243 as filed with the Securities and LEGAL COUNSEL
Exchange Commission ("SEC"). The Keller Rohrback, LLP
Form 10-K includes the significant 1201 Third Avenue, Suite 3200
HARBOUR POINTE risk factors that could affect Seattle, WA 98101-3052
11700 Mukilteo Speedway, Mukilteo Cascade's projections and future
(425) 290-7767 operating performance. This annual SPECIAL COUNSEL
report is qualified in its entirety Anderson Hunter, PS
ISSAQUAH by the information contained in the 2707 Colby Avenue, Suite 1001
305 Front St. N, Issaquah Form 10-K. Everett, WA 98201
(425) 391-5500 The Form 10-K, together with all
other information filed by Cascade Cascade Financial Corporation Logo
LAKE STEVENS with the SEC, is available on the 2828 COLBY AVENUE, EVERETT, WA 98201
8915 Market Pl., Everett Internet at the SEC's web site at WWW.CASCADEBANK.COM
(425) 334-8880 http://www.sec.gov. The Form 10-K
will be furnished by Cascade, upon
LYNNWOOD receipt of written request
19419 Highway 99, Lynnwood addressed to Cascade Financial
(425) 775-6666 Corporation, 2828 Colby Avenue,
Everett, WA 98201.
MARYSVILLE The common stock of Cascade
815 State Ave., Marysville Financial Corporation is traded
(360) 659-7614 on the NASDAQ SmallCap Market
under the symbol CASB. As of
NORTH MARYSVILLE December 31, 2004, there were
3711 88th St. NE, Marysville approximately 2,760 shareholders
(360) 651-9200 of record. The following table
sets forth market price information
for the Corporation's common stock.
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>ex21-1204.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Cascade Financial Corporation
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- --------------- ------------- ----------------------
Cascade Bank 100% Washington
Cascade Capital Trust I 100% Delaware
Cascade Capital Trust II 100% Delaware
Cascade Investment Services, Inc. (b) 100% Washington
(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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>ex23-1204.txt
<DESCRIPTION>CONSENT MOSS ADAMS LLP
<TEXT>
Exhibit 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Cascade Financial Corporation:
We consent to incorporation by reference in the registration statement
(No. 33-94456) dated July 10, 1995 on Form S-8 and in the registration
statements (No. 333-32272 and No. 333-97929) on Form S-8 of Cascade Financial
Corporation of our report dated February 28, 2005 relating to the consolidated
balance sheet of Cascade Financial Corporation and subsidiaries as of
December 31, 2004 and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for the year
ended December 31, 2004, which report is incorporated by reference into Cascade
Financial Corporation's 2004 Annual Report on Form 10-K from Cascade Financial
Corporation's 2004 Annual Report to Stockholders.
/s/ Moss Adams LLP
Everett, Washington
March 10, 2005
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>6
<FILENAME>ex231-1204.txt
<DESCRIPTION>CONSENT KPMG LLP
<TEXT>
Exhibit 23.1
KPMG LLP
Suite 900
801 Second Ave.
Seattle, WA 98104
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Cascade Financial Corporation:
We consent to incorporation by reference in the registration statement dated
July 10, 1995 on Form S-8 and in the registration statements on Form S-8
(No. 333-32272 and No. 333-97929) of Cascade Financial Corporation of our
report dated February 20, 2004 relating to the consolidated balance sheet
of Cascade Financial Corporation and subsidiaries as of December 31, 2003 and
the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for the two-year period ended
December 31, 2003, which report is incorporated by reference into Cascade
Financial Corporation's 2004 Annual Report on Form 10-K from Cascade Financial
Corporation's 2004 Annual Report to Stockholders.
/s/ KPMG LLP
Seattle, Washington
March 9, 2005
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>7
<FILENAME>ex311-1204.txt
<DESCRIPTION>CEO CERTIFICATION
<TEXT>
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carol K. Nelson, certify that:
1. I have reviewed this annual report on Form 10-K of Cascade Financial
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is likely to affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls
over financial reporting.
Date: March 11, 2005 /s/ Carol K. Nelson
------------------------------
Carol K. Nelson, President and
Chief Executive Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>8
<FILENAME>ex31-1204.txt
<DESCRIPTION>CFO CERTIFICATION
<TEXT>
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lars H. Johnson, certify that:
1. I have reviewed this report on Form 10-K of Cascade Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is likely to affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 11, 2005 /s/ Lars H. Johnson
-------------------
Lars H. Johnson,
Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>9
<FILENAME>ex32-1204.txt
<DESCRIPTION>ANNUAL REPORT CERTIFICATION
<TEXT>
Exhibit 32
----------
CERTIFICATION OF ANNUAL REPORT ON FORM 10-K
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned are the Chief Executive Officer and the Chief Financial
Officer of Cascade Financial Corporation (the "Registrant"). This
Certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. This Certification accompanies the Annual Report on Form 10-K of the
Registrant for the annual period ended December 31, 2004.
We certify that such Annual Report on Form 10-K fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in such 10-K Report fairly presents, in all
material respects, the financial condition and the results of operations of the
Registrant.
Date: March 11, 2005
/s/ Carol K. Nelson
--------------------------
Carol K. Nelson, President
and Chief Executive Officer
/s/ Lars H. Johnson
---------------------------
Lars H. Johnson,
Chief Financial Officer
- -2-
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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