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 June 30, 1996
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)
Delaware 91-0167790
(State or other jurisdiction (IRS Employer
of incorporation or organization) I.D. Number)
2828 Colby Avenue, Everett, Washington 98201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 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 no disclosure of delinquent filers pursuant to
Item 405 of Regulation 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. [ X ]
As of September 20, 1996, there were issued and outstanding 2,050,581
shares of the registrant's Common Stock. The registrant's voting stock is
traded over-the-counter and is listed on the Nasdaq Smallcap Market under the
symbol "CASB." Based on the average of the bid and asked prices for the
Common Stock on September 20, 1996, the aggregate value of the Common Stock
outstanding held by nonaffiliates of the registrant was $33.6 million
(2,050,581 shares at $16.375 per share). For purposes of this calculation,
officers and directors of the registrant are not considered nonaffiliates of
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1996 (the "Annual Report") (Parts I and II).
2. Portions of registrant's Definitive Proxy Statement for the 1996
Annual Meeting of Stockholders (Part III).
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PART I
Item 1. Description of Business
General
Cascade Savings Bank, FSB ("Cascade" or the "Savings Bank") was
organized in 1916 as a mutual savings and loan association, and since 1957
its deposits have been federally insured. On September 15, 1992, the Savings
Bank completed its conversion from a federal mutual to a federal stock
savings bank. Cascade Financial Corporation ("Corporation"), a Delaware
corporation, was organized on August 18, 1994 for the purpose of becoming the
holding company for Cascade. On October 23, 1994, the stockholders of the
Savings Bank approved a plan to reorganize the Savings Bank into the holding
company form of ownership. The reorganization was completed on November 30,
1994, on which date the Savings Bank became the wholly-owned subsidiary of
the Corporation, and the stockholders of the Savings Bank became stockholders
of the Corporation. Prior to completion of the reorganization, the
Corporation had no material assets or liabilities and engaged in no business
activities. Subsequent to the acquisition of Cascade, the Corporation has
engaged in no significant activity other than holding the stock of the
Savings Bank. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to the
Savings Bank. The executive offices of the Corporation are located at 2828
Colby Avenue, Everett, Washington, and the telephone number is (206)
339-5500.
At June 30, 1996, the Corporation had total assets of $334.4 million,
total deposits of $218.0 million and stockholders' equity of $20.8 million.
The savings deposits of the Savings Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF").
Regulatory Issues
Prior to March 1990, the Savings Bank was for many years managed by a
chief executive officer who was subsequently charged by the Office of Thrift
Supervision ("OTS") with illegal actions. The OTS issued an order which
required the former chief executive to pay restitution to the Savings Bank of
$1.0 million. See "Item 3 -- Legal Proceedings -- Former Management." There
has been, and is likely to continue to be intense scrutiny of the Savings
Bank, its affairs and past transactions by regulators, and possibly by
others, with a view toward asserting claims of some type against the Savings
Bank. Exposure of the Corporation to claims and possible litigation may
continue until the completion of the restructuring of the balance sheet, the
improvement of the Corporation's capital position and its core earnings.
Current Business Strategy
The Corporation's principal business activity is the acquisition of
deposits which are used to originate and service one-to-four family
residential, multi-family, and commercial real estate loans. The Corporation
also sells a portion of the long-term fixed rate residential loans it
originates. As a result of planned asset growth, total assets at June 30,
1996 increased by $23.5 million or 7.6% from June 30, 1995. The Corporation
seeks to control its interest rate risk by generally retaining in its
portfolio adjustable rate and balloon loans that are funded with a
combination of Federal Home Loan Bank of Seattle ("FHLB-Seattle") advances
and deposits from the local market area.
Market Area
Headquartered in Everett, Washington, the Corporation conducts business
from six full service offices, four in Snohomish County, and two in King
County. The Corporation has two mortgage origination offices, one each in
Skagit and Whatcom counties. The Corporation serves the savings and
borrowing needs of the diverse geographic communities in which it operates.
Located in the center of the western Washington region, Snohomish and
King counties have experienced significant growth in recent years. Much of
this growth can be attributed to the computer software and import/export
businesses in the region. Snohomish County is a fast growing county and the
significant migration of people to the area has supported growth in all types
of businesses. The Boeing Corporation employs approximately 80,000 people in
the Puget Sound region. Everett was selected as a "home port" for a United
States Navy Nuclear Carrier battle group. Construction is completed on these
facilities and the battle group has begun arriving.
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Proposed Federal Legislation
Recapitalization of SAIF and its Impact on SAIF Premiums. Effective
January 1, 1996, the FDIC substantially reduced deposit insurance premiums
for well-capitalized, well-managed financial institutions that are members of
the Bank Insurance Fund ("BIF"). Under the new assessment schedule,
approximately 92% of BIF members pay the statutory minimum annual assessment
of $2,000. With respect to financial institutions that are members of the
SAIF, the FDIC has retained the existing rate schedule of 23 to 31 basis
points. Cascade is a member of the SAIF rather than the BIF. SAIF premiums
may not be reduced for several years because the SAIF has lower reserves than
the BIF. Because deposit insurance premiums are often a significant
component of noninterest expense for insured depository institutions, the
reduction in BIF premiums may place Cascade at a competitive disadvantage
since BIF-insured institutions (such as most commercial banks) may be able to
offer more attractive loan rates, deposit rates, or both.
Proposed federal legislation would recapitalize the SAIF and resolve the
current premium disparity by requiring savings institutions like Cascade to
pay a one-time assessment to increase SAIF's reserves to $1.25 per $100 of
deposits that is expected to be approximately 80 basis points on the amount
of deposits held by a SAIF-member institution. The payment of a one-time fee
would have the effect of immediately reducing the capital and pre-tax
earnings of SAIF-member institutions by the amount of the fee. Based on
Cascade's assessable deposits of $218.0 million at June 30, 1996, a one-time
assessment of 80 basis points would equal approximately $1.7 million on a
pre-tax basis, or $1.2 million after tax. Management cannot predict whether
any legislation imposing such a fee will be enacted, or, if enacted, the
amount or timing of any one-time fee or whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums. See "REGULATION."
Potential Operational Restrictions Associated with Regulatory Oversight.
Cascade is subject to extensive regulation, supervision and examination by
the OTS, as its chartering authority and primary federal regulator, and by
the FDIC, which insures its deposits up to applicable limits. Cascade is a
member of the FHLB System and is subject to certain limited regulations
promulgated by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). As the holding company of Cascade, the Corporation also is
subject to regulation and oversight by the OTS. Such regulation and
supervision govern the activities in which an 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, whether by the OTS, the FDIC or Congress, could have a material
impact on the Corporation, Cascade and their respective operations. See
"Regulation." Legislation proposing a comprehensive reform of the banking
and thrift industries has recently been discussed in the United States
Congress. Under such legislation, (i) the BIF and the SAIF would be merged,
at which time thrifts and banks would pay the same deposit insurance
premiums, (ii) federal savings associations would be required to convert to a
national bank or a state-chartered bank or thrift, (iii) all savings and loan
holding companies would become bank holding companies and (iv) the OTS would
be merged with the Office of the Comptroller of the Currency. It is
uncertain when or if such legislation may be passed and, if passed, in what
form such legislation may be passed.
Lending Activities
General. The Corporation originates mortgage loans primarily through
its full service office staff and commissioned loan officers. Loan officers'
sales efforts are directed toward establishing and maintaining ongoing
relationships with local real estate brokers, builders, and repeat retail
customers as sources of loan origination referrals. The purpose of the loans
has been primarily for the purchase or refinancing of one-to-four family
properties, but some loans have been for construction of one-to-four family
homes, multi-family, and home equity lending. As of June 30, 1996, $194.8
million or 83% of the Corporation's gross loan portfolio consisted of loans
secured by one-to-four family residential properties (permanent and
construction), $14.7 million or 6% of gross loans consisted of commercial
real estate and land loans and $37.5 million or 15% consisted of multi-family
loans.
To ensure that the yields on its loan portfolio and investments are
interest rate sensitive, the Corporation has implemented several measures,
including (i) adoption of a practice under which the Corporation generally
originates long-term, fixed-rate mortgage loans only when such loans are
written to specifications promulgated by the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA"),
and the Federal Housing Administration and Veterans Administration
(collectively "FHA/VA"), and qualify for sale in the secondary market; and
(ii) when market conditions permit, increased emphasis on the retention of
adjustable rate or balloon mortgages on residential properties. These
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lending practices were adopted to shorten the term of the Corporation's
assets and make the loan portfolio less sensitive to interest rate
volatility.
Quality Control. The Corporation has implemented a quality control
process designed to ensure sound lending practices and compliance with the
guidelines established by FHLMC, FNMA, FHA and VA. The Corporation's
Internal Audit Department conducts reviews of completed transactions to
ensure the Corporation's credit personnel adhere to investors' underwriting
criteria, regulatory conformance and internal policy compliance. In
addition, each operating department performs certain quality control
procedures.
One-to-Four Family Residential Loans. The Corporation presently
originates both fixed rate and adjustable rate mortgage ("ARMs") loans
secured by one-to-four family properties with loan terms of up to 30 years.
Newly originated ARMs have interest rates that adjust based on the One Year
United States Treasury Constant Maturity Index or the Twelfth District Cost
of Funds Index, a lagging index. Borrower demand for ARMs versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectations
of changes in the level of interest rates and the differences between the
interest rates and loan fees offered for fixed-rate mortgage loans and the
rates and loan fees for ARMs.
The Corporation's lending policies generally limit the maximum
loan-to-value ratio on fixed-rate and adjustable-rate residential one-to-four
family owner occupied loans to 80% or less of the lesser of the appraised
value or purchase price of the underlying residential property. Non-owner
occupied one-to-four family residential loans are limited to 70% or less, of
the lesser of the appraised value or purchase price of the underlying
residential property. The loan-to-value ratio, maturity and other provisions
of the loans made by the Corporation are generally reflected in the policy of
making less than the maximum loan permissible under federal regulations,
according to established lending practices, market conditions and
underwriting standards maintained by the Corporation. Loans originated with
a loan-to-value ratio above 80% have typically required private mortgage
insurance.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
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For the Year Ended
June 30,
1992 1993 1994 1995 1996
(In thousands)
Total gross loans at
beginning of period $146,486 129,403 165,916 194,989 227,920
Loans originated:
Single-family
residential 212,606 255,300 277,949 84,425 78,452
Multi-family
residential
and commercial
real estate 1,000 1,815 2,118 3,928 13,040
Single-family
construction 2,148 11,315 22,601 22,708 31,599
Home equity and
installment 111 -- -- -- 8,483
Total loans
originated 215,865 268,430 302,668 111,061 131,574
Loans purchased -- 515 552 369 821
Whole loans sold 190,928 202,419 236,703 43,969 57,286
Loan principal
repayments 38,529 33,304 37,840 32,834 54,502
Other 3,491 (3,291) (396) 1,696 729
Loan activity, net (17,083) 36,513 29,073 32,931 19,878
Total gross loans at
end of period 129,403 165,916 194,989 227,920 247,798
Loans converted to
mortgage-backed
securities:
Loans securitized 149,319 108,835 61,148 15,393 32,330
Mortgage-backed
securities sold 183,676 110,377 45,049 10,623 32,330
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<TABLE>
Loan Portfolio Analysis. The following table sets forth the Corporation's loan portfolio by type of loan
and by type of security as of the dates indicated.
At June 30,
1992 1993 1994 1995 1996
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Type of Loan (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential(1)(2) $ 95,711 77.44% 125,508 79.96 150,086 81.64 184,800 85.31 201,003 86.04
FHA and VA 5,820 4.71 7,099 4.52 2,762 1.50 3,458 1.60 3,085 1.32
Commercial 13,957 11.29 17,721 11.29 18,850 10.25 16,770 7.74 14,739 6.31
Construction 8,434 6.82 10,337 6.59 17,677 9.62 22,708 10.48 28,277 12.10
Land 5,453 4.41 5,251 3.35 5,614 3.05 202 .09 194 .08
Installment 28 .02 -- -- -- -- -- -- 507 .22
Total loans 129,403 104.70 165,916 105.71 194,989 106.07 227,938 105.22 247,805 106.07
Less:
Due to borrowers on
construction loans 1,367 1.11 4,412 2.81 5,980 3.25 6,215 2.87 9,082 3.89
Unearned discounts 966 .78 1,454 .93 1,685 .92 2,146 1.00 2,158 .92
Allowance for
possible loan
losses 3,424 2.77 3,090 1.97 3,485 1.90 2,950 1.35 2,946 1.26
Valuation allowance
on loans held for
sale 50 .04 -- -- -- -- 18 -- 7 --
Total loans, net 123,596 100.00 156,960 100.00 183,839 100.00 216,609 100.00 233,612 100.00
Type of Security:
Residential real estate
Single family(2) $65,535 53.02% 113,439 72.27 146,217 79.54 183,797 84.85 194,825 83.39
Multi-family 44,430 35.95 29,505 18.80 24,308 13.22 27,169 12.54 37,540 16.07
Commercial or
industrial real
estate 13,957 11.29 17,721 11.29 18,850 10.25 16,770 7.74 14,739 6.31
Land 5,453 4.41 5,251 3.35 5,614 3.05 202 .09 194 .08
Other 28 .02 -- -- -- -- -- -- 507 .22
Less:
Due to borrowers on
construction loans 1,367 1.11 4,412 2.81 5,980 3.25 6,215 2.87 9,082 3.89
Unearned discounts 966 .78 1,454 .93 1,685 .92 2,146 1.00 2,158 .92
Allowance for
possible loan
losses 3,424 2.77 3,090 1.97 3,485 1.90 2,950 1.35 2,946 1.26
Valuation allowance
on loans held for
sale 50 .04 -- -- -- -- 18 -- 7 --
Total loans, net 123,596 100.00 156,960 100.00 183,839 100.00 216,609 100.00 233,612 100.00
____________________
(1) Includes construction loans converted to permanent loans.
(2) Includes home equity loans for June 30, 1994 to 1996.
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The following table sets forth the estimated repricing or maturity of the
Corporation's loans and mortgage-backed securities for years ended June 30,
1994, 1995, and 1996 and the dollar amount of such securities and loans at
the date which are scheduled to mature after one year which have fixed or
adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdraft loans are reported as due in
one year or less. Mortgage-backed securities are reported without premiums
or discounts.
June 30, 1994
Mortgage-
Mortgage Installment Total Backed
(In thousands)
Amount repricing or maturing:
Within one year $ 71,693 -- 71,693 14,712
After one year through three
years 13,566 -- 13,566 5,917
After three years through
five years 21,610 -- 21,610 11,146
After five years 88,120 -- 88,120 16,435
Total 194,989 -- 194,989 48,210
Interest rate terms on amounts
due after one year:
Fixed 111,991 -- 111,991 33,498
Adjustable 62,073 -- 62,073 14,712
June 30, 1995
Mortgage-
Mortgage Installment Total Backed
(In thousands)
Amount repricing or maturing:
Within one year $ 78,894 -- 78,894 34,721
After one year through three
years 39,261 -- 39,261 6,502
After three years through
five years 46,501 -- 46,501 13,193
After five years 63,264 -- 63,264 14,723
Total 227,920 -- 227,920 69,139
Interest rate terms on amounts
due after one year:
Fixed 101,281 -- 101,281 34,418
Adjustable 103,833 -- 103,833 34,721
June 30, 1996
Mortgage-
Mortgage Installment Total Backed
(In thousands)
Amount repricing or maturing:
Within one year 101,759 10 101,769 15,269
After one year through three
years 42,399 144 42,543 4,854
After three years through
five years 69,867 996 9,966 4,956
After five years 33,273 254 33,527 18,609
Total 247,298 507 247,805 43,688
Interest rate terms on amounts
due after one year:
Fixed 87,975 32 88,007 28,419
Adjustable 115,525 475 116,000 13,085
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Loan Maturity and Repricing
The following table sets forth information at June 30, 1996 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. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Mortgage loans that have adjustable rates and balloon
repayment dates are shown as maturing at their next repricing date. Loan
balances do not include unearned discounts, unearned income and allowance for
loan losses.
Due After
Due During 3 Through
the Year Ending 5 Years After
June 30, June 30,
1997 1998 1999 1996
(In thousands)
Real estate mortgage $ 64,735 24,695 15,477 67,844
Commercial real estate 10,670 428 992 1,044
Land -- 113 -- --
Installment -- -- -- 507
Construction - Single-
family 26,351 118 576 979
Total loans 101,756 25,354 17,045 70,374
Due After Due After
5 Through 10 Through Due After
10 Years After 15 Years After 15 Years After
June 30, June 30, June 30,
1996 1996 1996 Total
(In thousands)
Real estate mortgage 7,845 7,033 16,459 204,088
Commercial real estate 1,179 426 -- 14,739
Land 81 -- -- 194
Installment -- -- -- 507
Construction - Single-
family 253 -- -- 28,277
Total loans 9,358 7,459 16,459 247,805
The following table sets forth the dollar amount of all loans as of June
30, 1996 due after one year which have fixed interest rates and have floating
or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
(Dollars in thousands)
Real estate mortgage $ 84,759 110,258
Commercial real estate 2,651 4,744
Land 194 --
Installment 32 475
Construction 371 523
Total 88,007 116,000
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Residential Construction Loans. The Corporation originates construction
loans on one-to-four family homes either to individual borrowers as custom
construction loans or to builders as speculative construction loans.
Construction loans generally have terms of twelve months. The interest rates
charged by the Corporation on construction loans are indexed to the prime
rate and vary depending on the loan. The Corporation requires personal
guaranties of payment from the principals of the borrowing entities. All
construction loans require approval by various levels of corporate personnel,
depending on the size of the loan. At June 30, 1995 and June 30, 1996, the
percent of the Corporation's gross loan portfolio that consisted of
one-to-four family construction loans was 10% and 11%, respectively.
Management has sought to increase the residential construction loan portfolio
because of its relatively high margins, beneficial asset/liability
characteristics, and the favorable housing market in the Corporation's market
area. The residential construction portfolio is limited by Board of Director
policy to 15% of assets.
Construction loans involve further credit risks because loan funds are
advanced upon the security of the project under construction which is of
uncertain value before completion. The Corporation'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 Corporation may
be required to advance additional funds to complete the development. If,
upon completion of the project the marketability of the property proves to be
inaccurate, the borrower may be unable to sell the completed project in a
timely manner or obtain adequate proceeds to repay the loan, and the loan may
become nonperforming. Delays may arise from labor problems, material
shortages may be experienced and other unpredictable contingencies may occur.
Furthermore, if the estimate of value proves to be inaccurate, the
Corporation may be confronted with, at, or prior to the maturity of the loan,
a project with a value that is insufficient to assure full repayment.
Home Equity/Line of Credit Lending. Loans are made either independently
through the Corporation's retail offices or in connection with the closing of
a residential mortgage loan. Management views these loans as important in
building the Corporation's orientation toward consumer financial services,
and anticipates this portfolio to grow rapidly in the future, subject to
mutual conditions. At June 30, 1995 and 1996, the total amount of
outstanding commitments was $2.5 million and $5.9 million, respectively, and
the principal amount outstanding was $3.6 million and $6.8 million,
respectively.
Multi-family Loans. Multi-family loans totaled $37.3 million or 15% of
the gross loan portfolio at June 30, 1996. Management has reentered the
multi-family market since the general credit quality and of the multi-family
portfolio has been far superior to the commercial real estate portfolio. The
multi-family portfolio is limited, by policy, to 20% of assets. New loans
originations are all in the Puget Sound region with adjustable rates. The
multi-family portfolio is principally comprised of small to medium-size
apartment projects ($2.5 million in loan amount or less) with loan-to-value
ratios in the 70% to 80% range. Total multi-family originations for the
years ended June 30, 1995 and 1996 totaled $3.9 million and $11.5 million,
respectively.
Commercial Real Estate and Land Loans. Commercial real estate and land
loans totaled 6% of the Corporation's gross loan portfolio at June 30, 1996.
All commercial real estate and land loans are secured by properties in the
western Washington area, mainly in the Puget Sound region. The Corporation's
commercial real estate loans are secured by improved property such as office
buildings and small commercial business properties such as strip shopping
centers. At June 30, 1996, the largest commercial real estate and land loan
in the Corporation's portfolio was $4.1 million, which was performing
according to its terms at that date.
Installment Loans. During 1996, an installment loan program was
initiated and Management anticipates, subject to mutual conditions, an
increase in installment lending on collateral such as boats, automobiles, and
recreational vehicles, as well as a limited amount of unsecured personal
loans. At June 30, 1996, the Corporation's portfolio of installment loans
was $507,000.
Asset Quality
OTS regulations require that each insured institution review and
classify its assets regularly. In addition, in connection with examinations
of insured institutions, OTS examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss.
Substandard assets must
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have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses
make collection or liquidation in full based on currently existing facts,
conditions and values questionable, and there is a high possibility of loss.
An asset classified loss is considered uncollectible and of such little value
that its continuance as an asset of the institution is not warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or 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.
Delinquencies. A report containing delinquencies of all loans is
reviewed monthly by the Management Committee and periodically by the Board of
Directors. Procedures taken with respect to delinquent loans differ
depending on the particular circumstances of the loan. The Corporation's
general procedures provide that when a loan becomes delinquent, the borrower
is contacted, usually by phone, within 15 to 30 days. When the loan is over
30 days delinquent, the borrower is contacted in writing. Typically, the
Corporation will initiate foreclosure action against the borrower when
principal and interest become 90 days or more delinquent. In any event,
interest income is reduced by the full amount of accrued and uncollected
interest on loans once they become 90 days delinquent, go into foreclosure or
are otherwise determined to be uncollectible. Once interest has been paid to
date or management considers the loan fully collectable, it is returned to
accrual status. An allowance for loss is established when, in the opinion of
management, the fair value less sales costs of the property collateralizing
the loan is less than the outstanding principal and the collectability of the
loan's principal becomes uncertain. It is intended that the Corporation's
allowance for loan losses be adequate to cover known potential and reasonably
estimated unknown losses. As of June 30, 1995 and 1996, the Corporation had
$597,000 and $373,000, respectively, of loans accounted for on a nonaccrual
basis (i.e., loans upon which management believes the future collectability
of interest is uncertain).
The aggregate amounts of the Corporation's classified assets, and of the
Corporation's general and specific loss allowances and charge-offs for the
period then ended, were as follows:
At June 30,
1993 1994 1995 1996
(In thousands)
Substandard $14,930 12,693 8,165 2,527
General loss allowances 2,890 3,185 2,650 2,646
Specific loss allowances 200 300 300 300
Charge-offs 434 100 200 4
Allowances for Loan Losses
It is management's policy to maintain adequate allowances for estimated
losses on known and inherent risks in the loan portfolio. Generally, the
allowances are based on, among other things, the size and composition of the
loan portfolio, historical loan loss experience, evaluation of economic
conditions, and in various sectors of the Corporation's customer base,
detailed analysis of individual loans for which collectibility may not be
assured and determination of the existence and realizable value of the
collateral and guarantees securing the loan. Management has allocated the
allowance to various portfolio segments; however, the allowance is applicable
to the loan portfolio in its entirety.
While the Corporation believes it has established its existing allowance
for loan losses in accordance with generally accepted accounting principles
("GAAP") at June 30, 1996, there can be no assurance that regulators, when
reviewing the Corporation's loan portfolio in the future, will not require
the Corporation to increase its allowance for loan losses, thereby adversely
affecting the Corporation's financial condition and earnings.
The Corporation did not record any provisions for losses on loans for
the year ended June 30, 1996 and recorded a reversal of loan loss provisions
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for the year ended June 30, 1995 of $335,000. The principal reason for the
recovery in fiscal 1995 was the payoff of a $5.1 million land loan, and
continued improvements in the Corporation's asset quality. At June 30, 1995
and 1996, the Corporation had an allowance for loan losses of $3.0 million
and $2.9 million, respectively.
The following table sets forth information with respect to the
Corporation's nonperforming assets at the dates indicated.
At June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
Loans accounted for on
nonaccrual basis:
Real estate --
Residential $ 540 214 357 597 373
Commercial 1,252 1,251 1,272 -- --
Land 4,608 4,608 5,082 -- --
Total 6,400 6,073 6,711 597 373
Accruing loans which
are contractually
past due 90 days
or more:
Real estate --
Residential -- -- -- -- --
Commercial -- -- -- 1,219 --
Total -- -- -- 1,219 --
Total of nonaccrual
and 90 days
past due loans 6,400 6,073 6,711 1,816 373
Real estate owned 6,341 2,381 150 1,643 747
Other nonperforming
assets -- -- -- -- --
Total nonperforming
assets 12,741 8,454 6,861 3,459 1,120
Total loans delinquent
90 days or more to
net loans 5.18% 3.87 3.65 0.84 0.16
Total loans delinquent
90 days or more to
total assets 3.72 2.73 2.60 0.58 0.11
Total nonperforming
assets to total
assets 7.41 3.80 2.66 1.11 0.36
Certain loans meet the criteria of troubled debt restructurings as
defined in SFAS 114 and 118, Accounting by Creditors for Impairment of a
Loan, and Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures, respectively. See Note 3 of the Notes to the Consolidated
Financial Statements contained in the Annual Report for information
concerning troubled debt restructurings.
At June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
Restructured loans $6,311 6,287 4,186 4,168 4,150
Interest foregone
on restructured
loans 166 198 192 148 97
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The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percentage by category as of the dates
indicated.
At June 30,
1992 1993 1994
Amount % Amount % Amount %
(Dollars in thousands)
Real estate - mortgage:
Residential $ 360 0.35 -- 0.00 -- 0.00
Commercial 200 1.45 200 1.13 300 1.59
Real estate - construction -- 0.00 -- 0.00 -- 0.00
Consumer -- 0.00 -- 0.00 -- 0.00
Land acquisition &
development -- 0.00 -- 0.00 -- 0.00
Unallocated 2,864 n/a 2,890 n/a 3,185 n/a
Total allowance for
loan losses to
net loans 3,424 2.70 3,090 1.93 3,485 1.86
At June 30,
1995 1996
Amount % Amount %
(Dollars in thousands)
Real estate - mortgage:
Residential -- 0.00 -- 0.00
Commercial 300 1.79 300 2.04
Real estate - construction -- 0.00 -- 0.00
Consumer -- 0.00 -- 0.00
Land acquisition &
development -- 0.00 -- 0.00
Unallocated 2,650 n/a 2,646 n/a
Total allowance for
loan losses to
net loans 2,950 1.36 2,946 1.26
The following table sets forth an allocation of the unallocated
allowance by loan category as of the dates indicated. The unallocated
allowance is however applicable to the loan portfolio in its entirety.
At June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
Real estate - mortgage:
Single-family residential $ 100 210 320 390 290
Multi-family 1,410 520 330 270 380
Commercial 650 1,090 1,120 910 410
Real estate - construction 110 160 150 220 260
Land acquisition and
development 20 20 900 -- --
Unallocated 574 890 365 860 1,306
Unallocated allowance for
loan losses to net
loans 2,864 2,890 3,185 2,650 2,646
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The following table sets forth an analysis of the Corporation's
allowance for possible loan losses for the periods indicated.
For the Year
Ended June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
Allowance at beginning of period $3,219 3,424 3,090 3,485 2,950
Provision for loan losses 1,364 100 495 (335) --
Charge offs:
Residential real estate 180 400 -- -- --
Commercial real estate 843 -- 100 200 --
Real estate construction 136 9 -- -- --
Consumer -- -- -- -- 4
Land -- 25 -- -- --
Total charge offs 1,159 434 100 200 4
Net charge offs 1,159 434 100 (535) 4
Balance at end of period 3,424 3,090 3,485 2,950 2,946
Ratio of allowance to net loans
outstanding at the end of
the period 2.70% 1.93 1.86 1.36 1.26
Ratio of net charge offs to
average loans outstanding
during the period 0.84 0.35 0.06 0.27 --
Ratio of loan loss allowance to
nonperforming assets 26.87 36.55 50.79 83.52 263.04
Ratio of loan and real estate
owned allowance to
nonperforming assets 30.04 41.18 50.79 83.52 263.04
Asset and Liability Management Activities
The Corporation may use interest rate exchange agreements ("swaps") and
interest rate caps to control the amount of its interest rate risk by more
closely matching the repricing characteristics of its earning assets and
costing liabilities or to reduce the cost of longer liabilities. Swaps are
agreements in which the Corporation and another party, generally the
FHLB-Seattle, and primary dealers of United States government securities,
agree to exchange interest payments on a notional principal amount. Caps are
agreements whereby for a fixed fee, the Corporation will receive cash
payments if a particular interest rate exceeds the predetermined level. Caps
and swaps are one component of the Corporation's asset/liability management
program. Depending on customer preferences for loan and deposit products,
the Corporation may increase its use of interest rate swaps and caps. The
Board of Directors reviews the outstanding hedging transactions of the
Corporation periodically. At June 30, 1996, the Corporation had $5.0 million
notional amount of caps outstanding. See Note 7 of the Notes to the
Consolidated Financial Statements contained in the Annual Report for
additional information.
Investment Activities
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal
governments, deposits at the FHLB-Seattle, certificates of deposit of
federally insured institutions, certain bankers' acceptances and federal
funds. Subject to various restrictions, such savings institutions may also
invest part of their assets in commercial paper, corporate debt securities
and mutual funds, the assets of which conform to the investments that
federally chartered savings institutions are otherwise authorized to make
directly. Savings institutions are also required to maintain liquid assets
at minimum levels that are set by the OTS. See "REGULATION -- Federal Home
Loan Bank System." The Corporation may decide to increase its liquidity
above the required levels depending upon the availability of funds and
comparative yields on investments in relation to return on loans. For the
month ended June 30, 1996, Cascade's regulatory liquidity was 6.06%.
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The Board of Directors sets the investment policy of the Corporation.
This policy dictates that investments will generally be made with the intent
of holding them available-for-sale and will be made based on the safety of
the principal amount, interest rate risk, liquidity requirements of the
Corporation and the return on the investments. The Corporation's policy does
not permit investment in noninvestment grade bonds and permits investment in
various types of liquid assets permissible under OTS regulation, which
include United States Treasury obligations, securities of various federal
agencies, mortgage-backed securities ("MBS"), Small Business Administration
securities ("SBA"), collateralized mortgage obligations ("CMOs"), certain
certificates of deposits of insured banks, repurchase agreements and federal
funds.
Investment decisions are made by the Management Committee, which meets
at least weekly and consists of three members of the Board of Directors, the
Chief Financial Officer and other members of senior management. The
Management Committee acts within policies established by the Board of
Directors. At June 30, 1995 and 1996, the Corporation's securities portfolio
totaled approximately $77.7 million and $82.0 million, respectively. 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.
Subsidiary Activity
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount
in excess of 1% is used primarily for community, inner-city and community
development projects. Cascade's investment in its service corporations did
not exceed these limits at June 30, 1996. At June 30, 1996, Cascade's
investment in its subsidiaries was $169,000.
On October 1, 1992, the Corporation began marketing annuity products,
mutual funds and property and casualty insurance to customers and
noncustomers in its market areas through a subsidiary, Cascade Investment
Services, Inc. Management believes offering these product lines increases
customer awareness and will increase the Corporation's noninterest income.
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The following table summarizes the carrying value and estimated market
value of the Corporation's portfolio of investment securities at the dates
indicated.
At June 30,
1992 1993 1994
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
Investment securities: (In thousands)
United States government
agency securities
and obligations
SBA $ -- -- -- -- -- --
MBS 8,225 8,250 28,736 29,380 48,946 46,929
CMO 6,716 6,852 7,983 8,085 -- --
Corporate securities
and mutual funds -- -- 7,134 7,176 11,315 11,315
Total investment
securities 14,941 15,102 43,853 44,641 60,261 58,244
FHLB-Seattle stock 1,764 1,764 2,102 2,102 2,333 2,333
At June 30,
1995 1996
Carrying Market Carrying Market
Value Value Value Value
Investment securities: (In thousands)
United States government
agency securities
and obligations
SBA -- -- 13,721 13,721
MBS 69,896 69,360 43,213 42,709
CMO -- -- -- --
Corporate securities
and mutual funds 4,507 4,507 21,069 21,069
Total investment
securities 74,403 73,867 78,003 77,499
FHLB-Seattle stock 3,319 3,319 4,014 4,014
The following table sets forth the Corporation's securities portfolio at
carrying value at the dates indicated.
At June 30,
1992 1993 1994
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
United States (In thousands)
government
securities
SBA $ -- 0.00 -- 0.00 -- 0.00
MBS 8,225 55.05 28,736 65.53 48,946 81.22
CMO 6,716 44.95 7,983 18.20 -- 0.00
Corporate
securities and
mutual funds -- 0.00 7,134 16.27 11,315 18.78
Total 14,941 100.00 43,853 100.00 60,261 100.00
At June 30,
1995 1996
Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
United States (In thousands)
government
securities
SBA -- 0.00 13,721 17.59
MBS 69,896 93.94 43,213 55.40
CMO -- 0.00 -- 0.00
Corporate
securities and
mutual funds 4,507 6.06 21,069 27.01
Total 74,403 100.00 78,003 100.00
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Deposit Activities and Other Sources of Funds
General. The Corporation's primary sources of funds are deposits,
proceeds from principal and interest payments on loans and mortgage-backed
securities, proceeds from loan sales, FHLB-Seattle advances and reverse
repurchase agreements. Deposits and loan repayments are the major source of
Cascade's funds for lending and other investment purposes. Loan repayments
are a relatively stable source of funds, while deposit inflows and outflows
and loan prepayments are significantly influenced by general interest rates
and money market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources, or
on a longer term basis for general business purposes.
Deposit Accounts. The Corporation offers a variety of deposit accounts
having a range of interest rates and terms. The Corporation's deposits
consist of passbook, negotiable order of withdrawal ("NOW"), money market,
and certificate accounts. The flow of deposits is influenced significantly
by general economic conditions, changes in the money market and prevailing
interest rates, and competition. The Corporation's deposits are obtained
primarily from the areas in which its branches are located. The Corporation
relies primarily on customer service and longstanding relationships with
customers to attract and retain these deposits. Individual certificate
accounts in excess of $100,000 are not actively solicited by the Corporation
but are accepted at rates at or below other funding sources. The Corporation
does not accept accounts by any agent or broker acting on behalf of the
Corporation.
In the unlikely event Cascade is liquidated, certain depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the shareholders. Substantially all of Cascade's depositors are
residents of the State of Washington.
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The following table sets forth information concerning the Corporation's
deposits at June 30, 1996. The indicated interest rates are those currently
being offered at August 27, 1996.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
(In thousands)
1.90% None NOW accounts $100 $8,038 3.60%
3.00 None Regular savings 100 7,922 4.10
3.45 None Money market accounts 2,500 34,982 9.90
0.00 None Non-interest checking 100 1,555 .40
Certificates of Deposit
4.37 0 - 3 mos. Fixed term, fixed rate 1,000 1,469 1.51
5.02 4 - 6 mos. Fixed term, fixed rate 1,000 11,182 5.51
5.17 7 - 12 mos. Fixed term, fixed rate 1,000 54,811 24.19
5.27 13 - 24 mos. Fixed term, fixed rate 1,000 23,725 8.45
5.12 25 - 48 mos. Fixed term, fixed rate 1,000 11,009 7.82
5.22 49 - 120 mos. Fixed term, fixed rate 1,000 28,002 11.40
4.99 Various Variable rate 1,000 462 .08
5.14 Various Jumbo certificates 100,000 34,906 15.66
218,063 100.00
The following table indicates the amount of the Corporation's jumbo
certificates of deposit by time remaining until maturity as of June 30, 1996.
Jumbo certificates of deposit require minimum deposits of $100,000 and rates
paid on such accounts are negotiable.
Jumbo
Certificates
Maturity Period of Deposits
(In thousands)
Three months or less $ 11,000
Three through six months 6,266
Six through twelve months 10,597
Over twelve months 7,043
Total 34,906
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Borrowings. Savings deposits are the primary source of funds for
Cascade's lending and investment activities and for its general business
purposes. The Corporation has in the past, however, relied upon advances
from the FHLB-Seattle to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB-Seattle are
typically secured by the Corporation's first mortgage loans, and stock issued
by the FHLB-Seattle. At June 30, 1995 and 1996, the Corporation had $61.2
million and $68.5 million, respectively, in advances from the FHLB-Seattle.
The Corporation's current credit limit with the FHLB-Seattle is 30% of total
assets.
The Corporation enters into reverse repurchase agreements with
nationally recognized primary securities dealers. Reverse repurchase
agreements are accounted for as borrowings by the Corporation and are secured
by designated investments, and mortgage-backed securities. The proceeds of
these transactions are used to meet the cash flow needs of the Corporation.
At June 30, 1995 and 1996, the Corporation had $23.3 million and $20.4
million, respectively, in outstanding reverse repurchase agreements.
The Corporation has an unused commitment of $2.0 million from a
regional commercial bank to purchase Fed funds on an unsecured basis.
The following table sets forth certain information regarding borrowings
by the Corporation at the end of and during the periods indicated:
At June 30,
1994 1995 1996
Weighted average rate paid on:
Securities sold under
agreements to repurchase 4.30% 6.12 5.44
FHLB advances 5.03 6.44 5.86
For the Year
Ended June 30,
1994 1995 1996
Maximum amount of borrowings (In thousands)
outstanding at any month end:
Securities sold under
agreements to repurchase $ 19,327 36,313 24,593
FHLB advances 40,334 62,459 78,792
For the Year
Ended June 30,
1994 1995 1996
Approximate average short-term (Dollars in thousands)
borrowings outstanding
with respect to:
Securities sold under
agreements to repurchase $ 3,814 26,418 21,432
FHLB advances 28,310 53,281 64,104
Approximate weighted average
rate paid on:(1)
Securities sold under
agreements to repurchase 4.31% 5.72 5.76
FHLB advances 4.45 5.99 6.14
_______________
(1) Computed using the weighted rates of each individual transaction.
Competition
The Corporation competes for both loans and deposits. The Puget Sound
metropolitan area has a high density of financial institutions, some of which
are larger and have greater financial resources than the Corporation, and all
of which are competitors of the Corporation to varying degrees. The
Corporation's competition for loans comes principally from savings and loan
associations, corporations, mortgage banking companies, insurance companies,
and commercial banks. Its most direct competition for deposits has
historically come from savings and loan associations, corporations,
commercial banks, and credit unions. The Corporation faces additional
competition for deposits from short-term money market funds and other
corporate and government securities.
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Personnel
As of June 30, 1996, the Corporation had 87 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
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDIA") and the regulations
issued by the OTS and the FDIC to implement these statutes. These laws and
regulation delineate the nature and extent of the activities in which federal
savings associations may engage. Lending activities and other investments
must comply with various statutory and regulatory capital requirements. In
addition, the Savings Bank's relationship with its depositors and borrowers
is also regulated to a great extent, especially in such matters as the
ownership of deposit accounts and the form and content of the Savings Bank's
mortgage documents. The Savings Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other financial institutions.
There are periodic examinations by the OTS and the FDIC to review the Savings
Bank's compliance with various regulatory requirements. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
Any change in such policies, whether by the OTS, the FDIC or Congress, could
have a material adverse impact on the Corporation, the Savings Bank and their
operations. The Corporation, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules
and regulations of, the OTS.
Federal Regulation of Savings Banks
Office of Thrift Supervision
The OTS is an office in the Department of the Treasury subject to the
general oversight of the Secretary of the Treasury. The OTS possesses the
supervisory and regulatory duties and responsibilities formerly vested in the
FHLBB. Among other functions, the OTS issues and enforces regulations
affecting federally-insured savings associations and regularly examines these
institutions.
Federal Deposit Insurance Corporation
The FDIC is an independent federal agency established originally to
insure the deposits, up to prescribed statutory limits, of federally insured
banks and to preserve the safety and soundness of the banking industry. Upon
the enactment of FIRREA on August 9, 1989, the FDIC also became the insurer,
up to the prescribed limits, of the deposit accounts held at federally
insured savings associations and established two separate funds that are
maintained and administered by the FDIC: the BIF and the SAIF. As such, the
FDIC has examination, supervisory and enforcement authority over all savings
associations.
Cascade's accounts are insured by the SAIF. The FDIC insures deposits
at Cascade to the maximum extent permitted by law. Cascade currently pays
deposit insurance premiums to the FDIC based on a risk-based assessment
system established by the FDIC for all SAIF-member institutions. Under
applicable regulations, institutions are assigned to one of three capital
groups which are based solely on the level of an institution's capital --
"well capitalized," "adequately capitalized," and "undercapitalized" -- which
are defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the FDIA, as discussed below.
These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory
concern. The matrix so created results in nine assessment risk
classifications, with rates currently ranging from 0.23% of insured deposits
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% of insured deposits for undercapitalized institutions
that pose a substantial risk of loss to the SAIF unless effective corrective
action is taken. Until the second half of 1995, the same amounts applied to
BIF member institutions. The FDIC is authorized to raise assessment rates in
certain circumstances. Cascade's assessments expensed for the year ended
June 30, 1996, equaled $515,000.
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
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that are members of the BIF. Under the new assessment schedule,
approximately 92% of BIF members pay the statutory minimum annual assessment
of $2,000. With respect to SAIF member institutions, the FDIC has retained
the existing rate schedule of 0.23% to 0.31% of insured deposits. Cascade
is, and after the Conversion will remain, a member of the SAIF rather than
the BIF.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of Cascade.
Federal Home Loan Bank System
The FHLB System, consisting of 12 FHLBs, now is under the jurisdiction
of the Federal Housing Finance Board ("FHFB"). The designated duties of the
FHFB are to: supervise the FHLBs; ensure that the FHLBs carry out their
housing finance mission; ensure that the FHLBs remain adequately capitalized
and able to raise funds in the capital market; and ensure that the FHLBs
operate in a safe and sound manner.
Cascade, as a member of the FHLB-Seattle, is required to acquire and
hold shares of capital stock in the FHLB-Seattle equal to the greater of (i)
1.0% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of
each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Seattle.
Cascade complied with this requirement with an investment in FHLB-Seattle
stock of $4.0 million at June 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Seattle. At
June 30, 1996, Cascade had $68.5 million in advances from the FHLB-Seattle.
Liquidity
Under OTS regulations, each savings institution is required to
maintain an average daily balance of liquid assets (cash, certain time
deposits and savings accounts, bankers' acceptances, and specified U.S.
government, state or federal agency obligations and certain other
investments) equal to a monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary penalties may
be imposed for failure to meet liquidity requirements. The liquidity ratio
of Cascade for the month ended June 30, 1996 was 6.1%.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency
is required to implement a system of prompt corrective action for
institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations intended to implement this
system of prompt corrective action. Under the regulations, an institution
shall be deemed to be (i) "well capitalized" if it has a total risk-based
capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0%
or more, has a leverage ratio of 5.0% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any capital
measure, (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and
a leverage ratio of 4.0% or more (3.0% under certain circumstances) and does
not meet the definition of "well capitalized;" (iii) "undercapitalized" if it
has a total risk-based capital ratio that is less than 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a leverage ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized"
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if it has a ratio of tangible equity to total assets that is equal to or less
than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At June 30, 1996, Cascade was a "well capitalized" institution under the
prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. Federal law requires the federal
banking regulatory agencies to prescribe, by regulation or guideline,
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; and (vi)
compensation, fees and benefits. The federal banking agencies recently
adopted final regulations and Interagency Guidelines Prescribing Standards
for Safety and Soundness ("Guidelines") to implement safety and soundness
standards required by the FDIA. 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. The agencies also proposed asset quality and earnings standards
which, if adopted in final, would be added to the Guidelines. Under the
final regulations, if the OTS determines that Cascade fails to meet any
standard prescribed by the Guidelines, the agency may require Cascade to
submit to the agency an acceptable plan to achieve compliance with the
standard, as required by the FDIA. The final regulations establish deadlines
for the submission and review of such safety and soundness compliance plans.
Qualified Thrift Lender Test
All savings associations are required to meet a QTL test set forth in
the HOLA and regulations of the OTS thereunder to avoid certain restrictions
on their operations. A savings institution that fails to become or remain a
QTL shall either become a national bank or be subject to the following
restrictions on its operations: (1) the association may not make any new
investment or engaging in activities that would not be permissible for
national banks; (2) the association may not establish any new branch office
where a national bank located in the savings institution's home state would
not be able to establish a branch office; (3) the association shall not be
eligible to obtain new advances from any FHLB; and (4) the payment of
dividends by the association shall be subject to the rules regarding the
statutory and regulatory dividend restrictions applicable to national banks.
Also, beginning three years after the date on which the savings institution
ceases to be a qualified thrift lender, the savings institution would be
prohibited from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date
on which a savings association controlled by a company ceases to be a QTL,
the company must register as a bank holding company and becomes subject to
the rules applicable to such companies. A savings institution may requalify
as a qualified thrift lender if it thereafter complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets
on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic
residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; and direct or
indirect obligations of the FDIC. In addition, the following assets, among
others, may be included in meeting the test subject to an overall limit of
20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
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consumer and educational loans (limited to 10% of total portfolio assets);
and stock issued by the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association. Portfolio assets consist of total assets
minus the sum of (i) goodwill and other intangible assets, (ii) property used
by the savings institution to conduct its business, and (iii) liquid assets
up to 20% of the institution's total assets. At June 30, 1996, the qualified
thrift investments of Cascade were approximately 89% of the its portfolio
assets.
Capital Requirements
Under OTS regulations a savings association must satisfy three minimum
capital requirements: core capital, tangible capital and risk-based capital.
Savings associations must meet all of the standards to comply with the
capital requirements.
OTS capital regulations establish a 3% core capital ratio (defined as
the ratio of core capital to adjusted total assets). Core capital is defined
to include common stockholders' equity, noncumulative perpetual preferred
stock and any related surplus, and minority interests in equity accounts of
consolidated subsidiaries, less (i) any intangible assets, except for certain
qualifying intangible assets; (ii) certain mortgage servicing rights; and
(iii) equity and debt investments in subsidiaries that are not "includable
subsidiaries," which is defined as subsidiaries engaged solely in activities
not impermissible for a national bank, engaged in activities impermissible
for a national bank but only as an agent for its customers, or engaged solely
in mortgage-banking activities. In calculating adjusted total assets,
adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to appropriately account for the investments
in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS prompt corrective action regulation
provides that a savings institution that has a core capital leverage ratio of
less than 4% (3% for institutions receiving the highest CAMEL examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be
required to maintain a minimum leverage ratio of 4% to 5%. The OTS will
assess each individual savings association through the supervisory process on
a case-by-case basis to determine the applicable requirement. No assurance
can be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to Cascade.
Savings associations also must maintain "tangible capital" not less than
1.5% of adjusted total assets. "Tangible capital" is defined, generally, as
core capital minus any "intangible assets," other than purchased mortgage
servicing rights.
Each savings institution must maintain total capital equal to at least
8% of risk-weighted assets. Total capital consists of the sum of core and
supplementary capital, provided that supplementary capital cannot exceed core
capital, as previously defined. Supplementary capital includes (i) permanent
capital instruments such as cumulative perpetual preferred stock, perpetual
subordinated debt, and mandatory convertible subordinated debt, (ii) maturing
capital instruments such as subordinated debt, intermediate-term preferred
stock and mandatory convertible subordinated debt, and (iii) general
valuation loan and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount
of credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and
residential construction loans are assigned a 100% risk weight, as are
nonqualifying residential mortgage loans and that portion of land loans and
nonresidential construction loans which do not exceed an 80% loan-to-value
ratio. The book value of assets in each category is multiplied by the
weighing factor (from 0% to 100%) assigned of that category. These products
are then totalled to arrive at total risk-weighted assets. Off-balance sheet
items are included in risk-weighted assets by converting them to an
approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk
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categories in the same manner as balance sheet assets and included
risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from
total capital for purposes of calculating their risk-based capital
requirements. A savings association's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference
between incoming and outgoing discounted cash flows from assets, liabilities
and off-balance sheet contracts) that would result from a hypothetical 200
basis point increase or decrease in market interest rates divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
component in calculating its total capital under the risk-based capital rule.
The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is
a two quarter lag between the reporting date of an institution's financial
data and the effective date for the new capital requirement based on that
data. The rule also provides that the Director of the OTS may waive or defer
an association's interest rate risk component on a case-by-case basis. Under
certain circumstances, a savings association may request an adjustment to its
interest rate risk component if it believes that the OTS-calculated interest
rate risk component overstates its interest rate risk exposure. In addition,
certain "well-capitalized" institutions may obtain authorization to use their
own interest rate risk model to calculate their interest rate risk component
in lieu of the OTS-calculated amount. The OTS has postponed the date that
the component will first be deducted from an institution's total capital
until savings associations become familiar with the process for requesting an
adjustment to its interest rate risk component.
The following table summarizes the capital requirements and the
Corporation's capital position at June 30, 1996:
At June 30, 1996
(Dollars in thousands)
Percent of
Amount Assets
Tangible capital $21,530 6.42%
Tangible capital
requirement 5,027 1.50
Excess 16,503 4.92
Core capital 21,530 6.42
Core capital
requirement 10,055 3.00
Excess 11,475 3.42
Risk-based capital(a) 23,700 13.70
Risk-based capital
requirement(a) 13,843 8.00
Excess 9,857 5.70
(a) Based on total risk-weighted assets.
Limitations on Capital Distributions
OTS regulations impose uniform limitations on the ability of all savings
associations to engage in various distributions of capital such as dividends,
stock repurchases and cash-out mergers. In addition, OTS regulations require
Cascade to give the OTS 30 days' advance notice of any proposed declaration
of dividends, and the OTS has the authority under its supervisory powers to
prohibit the payment of dividends. The regulation utilizes a three-tiered
approach which permits various levels of distributions based primarily upon a
savings association's capital level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application
but upon prior notice to, and no objection made by, the OTS) capital
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distributions during a calendar year up to 100% of its net income to date
during the calendar year plus one-half its surplus capital ratio (i.e., the
amount of capital in excess of its fully phased-in requirement) at the
beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its fully phased-in
capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting
its fully phased-in capital requirement. Capital distributions exceeding
this amount require prior OTS approval. Tier 3 associations are savings
associations with capital below the minimum capital requirement (either
before or after the proposed capital distribution). Tier 3 associations may
not make any capital distributions without prior approval from the OTS.
Cascade is currently meeting the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to,
and no objection made by, the OTS) distribute up to 100% of its net income
during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans to One Borrower
Under the HOLA, savings institutions are generally subject to the
national bank limit on loans to one borrower. Generally, this limit is 15%
of Cascade's unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain financial instruments and
bullion. The OTS by regulation has amended the loans-to-one-borrower rule to
permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.
At June 30, 1996, the Corporation had three borrowers with balances in
excess of current loans-to-one borrower limits, which total $13.9 million and
represent 6.0% of net loans receivable. These loans range in amount from
$4.2 million to $5.3 million. Not included in the above is one loan that the
OTS has determined was originated violating the limits imposed by FIRREA.
The OTS has not required divestiture of this loan that now totals $2.0
million, and represents 0.9% of net loans receivable. Additional loans to
these borrowers will not be permitted until the balance of the borrower's
outstanding loan is below the August 9, 1989 loans-to-one borrower limit.
The Corporation is required to make every effort to bring this loan into
conformance when possible.
Activities of Savings Associations and Their Subsidiaries
When a savings association establishes or acquires a subsidiary or
elects to conduct any new activity through a subsidiary that the association
controls, the savings association shall notify the FDIC and the OTS 30 days
in advance and provide the information each agency may, by regulation,
require. Savings associations also must conduct the activities of
subsidiaries in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes
a serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF
member engage in that activity directly.
Transactions with Affiliates
Savings associations must comply with Sections 23A and 23B of the
Federal Reserve Act ("Sections 23A and 23B") relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
Generally, Sections 23A and 23B: (i) limit the extent to which the insured
association or its subsidiaries may engage in certain covered transactions
with an affiliate to an amount equal to 10% of such institution's capital and
surplus and place an aggregate limit on all such transactions with affiliates
to an amount equal to 20% of such capital and surplus, and (ii) require that
all such transactions be on terms substantially the same, or at least as
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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 guaranty and similar other types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies; (ii) a savings association may not purchase or invest
in securities issued by an affiliate (other than securities of a subsidiary);
and (iii) the OTS may, for reasons of safety and soundness, impose more
stringent restrictions on savings associations but may not exempt
transactions from or otherwise abridge Section 23A or 23B. Exemptions from
Section 23A or 23B may be granted only by the Federal Reserve Board, as is
currently the case with respect to all FDIC-insured banks. Cascade has not
been significantly affected by the rules regarding transactions with
affiliates and is in compliance with such requirements.
Cascade's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require
that such loans be made on terms and conditions substantially the same as
those offered to unaffiliated individuals and not involve more than the
normal risk of repayment. Regulation O also places individual and aggregate
limits on the amount of loans Cascade may make to such persons based, in
part, on Cascade's capital position, and requires certain board approval
procedures to be followed. The OTS regulations, with certain minor
variances, apply Regulation O to savings institutions.
Regulation of the Corporation
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions.
If the Corporation acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become
a multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple
savings and loan association holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management
services for a subsidiary insured institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary insured institution, (iv) holding or
managing properties used or occupied by a subsidiary insured institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above also must be
approved by the OTS prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which
the association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
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TAXATION
Federal Taxation
General. The Corporation and Cascade report their income on a fiscal
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly Cascade's reserve for bad debts discussed
below. 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 Cascade or the Corporation.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as Cascade which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts") were permitted to establish a reserve for bad debts
and to make annual additions thereto, which additions may, within specified
formula limits, have been deducted in arriving at their taxable income.
Cascade's deduction with respect to "qualifying loans," which are generally
loans secured by certain interests in real property, may have been computed
using an amount based on Cascade's actual loss experience, or a percentage
equal to 8% of Cascade's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the nonqualifying
reserve. Cascade's deduction with respect to nonqualifying loans was
computed under the experience method, which essentially allows a deduction
based on Cascade's actual loss experience over a period of several years.
Each year Cascade selected the most favorable way to calculate the deduction
attributable to an addition to the tax bad debt reserve. Cascade used the
percentage method bad debt deduction for the taxable years ended June 30,
1994, 1995 and 1996.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As
result, Cascade will no longer be able to calculate its deduction for bad
debts using the percentage-of-taxable-income method. Instead, Cascade will
be required to compute its deduction based on specific charge-offs during the
taxable year (Cascade anticipates that this will result in a higher effective
tax rate). This legislation also requires savings associations to recapture
into income over a six-year period their post-1987 additions to their bad
debt tax reserves, thereby generating additional tax liability.
Under prior law, if Cascade failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions
to its bad debt reserve. Instead, Cascade would be required to deduct bad
debts as they occur and would additionally be required to recapture its bad
debt reserve deductions ratably over a multi-year period. At June 30, 1996,
Cascade's total bad debt reserve for tax purposes was approximately $473,000.
Among other things, the qualifying thrift definitional tests required Cascade
to hold at least 60% of its assets as "qualifying assets." Qualifying assets
generally include cash, obligations of the United States or any agency or
instrumentality thereof, certain obligations of a state or political
subdivision thereof, loans secured by interests in improved residential real
property or by savings accounts, student loans and property used by Cascade
in the conduct of its banking business. Under current law, a savings
association will not be required to recapture its pre-1988 bad debt reserves
if it ceases to meet the qualifying thrift definitional tests.
Distributions. To the extent that Cascade makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; 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. Nondividend
distributions include distributions in excess of Cascade'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 Cascade's bad debt reserve. Thus, any dividends to the
Corporation that would reduce amounts appropriated to Cascade'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, after the Conversion, Cascade makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" for limits on the payment of dividends by Cascade. Cascade does
not intend to pay dividends that would result in a recapture of any portion
of its tax bad debt reserve.
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Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI.
In addition, only 90% of AMTI can be offset by net operating loss carryovers.
AMTI is increased by an amount equal to 75% of the amount by which Cascade's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including Cascade, whether or
not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from Cascade 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
Cascade will not file a consolidated tax return, except that if the
Corporation or Cascade owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
The Savings Bank is subject to a business and occupation tax which is
imposed under Washington law at the rate of 1.70% 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 records for compliance regarding the business and occupation tax.
The Corporation had not been audited for seventeen years. The Department of
Revenue has issued a tax billing for approximately $270,000 of which the
Corporation has set aside reserves of $120,000. The Corporation has filed an
appeal with the Department of Revenue and believes its appeal will be upheld
or will challenge the issues in court.
Item 2. Description of Properties
The Corporation owns five full service branch locations and leases two
full service locations along with two loan origination offices. Owned
offices range in size from 3,500 to 52,000 square feet and have a total net
book value at June 30, 1996, including leasehold improvements, furniture and
fixtures, of $6.1 million. The Corporation leases approximately 20% of its
main office and approximately 50% of its Marysville office to non-affiliated
parties. See Note 5 of the Notes to the Consolidated Financial Statements
contained in the Annual Report.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Corporation as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Corporation 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.
Former Management. On February 21, 1995, the United States Supreme
Court refused to consider the United States Ninth Circuit Court of Appeals
ruling upholding an OTS restitution order against the Corporation's former
Chairman and Chief Executive Officer. As a result the Corporation recorded
approximately $400,000 of after-tax income from the restitution order. The
OTS has separately brought an enforcement action in relation to security
provided by the former executive, and in March 1994, the United States
District Court for the Western District of Washington entered a judgement
requiring payment of approximately $280,000 to the Corporation by the former
executive. During 1996, $150,000 of this amount was collected. Ultimate
collection of the remaining amount will be recorded as income when received.
On March 30, 1995, the United States District Court granted the
Corporation's motion for summary judgement in a suit brought by the former
executive against the Corporation and several current executive officers.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1996.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The information contained under the caption "Common Stock Information"
in the Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial and other
data.
As of, or for the year ended, June 30,
1992 1993 1994 1995 1996
Dollars in thousands except per share amounts (unaudited)
Financial Condition Data:
Total assets $171,995 222,421 258,049 310,943 334,431
Loans, net 119,212 156,960 183,839 216,609 228,934
Cash and securities 27,216 23,127 65,794 83,484 90,635
Deposits 147,363 166,143 181,131 199,938 218,063
Stockholders' equity 8,710 14,385 16,381 19,294 20,815
Operating Data:
Interest income 18,893 14,333 16,545 23,378 24,776
Interest expense 12,928 9,329 9,142 13,933 16,563
Net interest income 5,965 5,004 7,403 9,445 8,213
Provision for (recovery
of) loan losses 1,140 100 495 (335) --
Net interest income
after provision
for loan losses 4,825 4,904 6,908 9,780 8,213
Other income 5,567 6,411 5,135 2,478 2,226
Other expense 9,597 8,975 9,006 7,879 7,004
Income before Federal
income taxes 795 2,340 3,037 4,379 3,435
Federal income taxes 271 802 1,033 1,489 1,167
Cumulative effect of
accounting change 1,001 -- -- -- --
Net income 1,525 1,538 2,004 2,890 2,268
Per share earnings
(fully diluted) n/a 0.71 0.91 1.28 0.99
Weighted average number
of shares outstanding
(fully diluted) n/a 2,171,648 2,213,213 2,256,306 2,282,033
Key operating ratios:
Return on average assets 0.70% 0.77 0.85 0.98 0.71
Return on average equity 19.90 12.05 12.98 15.75 11.31
Net interest margin (1) 3.21 2.81 3.31 3.32 2.68
Allowance for loan losses
to total loans 2.70 1.93 1.86 1.36 1.29
Ratio of nonperforming
assets to total assets 7.41 3.80 2.66 1.11 0.34
(1) Margin for 1995 includes recovery of $2.1 million of delinquent interest.
Margin without this recovery is 2.59%.
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Quarterly Results:
Quarter Ended Quarter Ended
Sept Dec Mar Jun Sept Dec Mar Jun
30, 31, 31, 30, 30, 31, 31, 30,
1995 1995 1996 1996 1994 1994 1995 1995
(dollars in thousands, except per share data, unaudited)
Results of Operations
Interest income $5,809 5,922 6,189 6,854 6,704 5,469 5,495 5,709
Interest expense 4,150 4,108 4,190 4,113 2,733 3,451 3,730 4,019
Net interest
income 1,659 1,814 1,999 2,741 3,971 2,018 1,765 1,690
Provision for loan
losses -- -- -- -- -- -- (335) --
Other income 548 327 780 571 789 368 735 638
Other expense 1,716 1,611 1,788 1,888 1,967 1,965 2,219 1,728
Income before
income taxes 491 530 991 1,424 2,793 421 616 600
Provision for
income taxes 167 180 337 484 950 143 209 238
Net income 324 350 654 940 1,843 278 407 362
Earnings per common
and common
equivalent share 0.14 0.15 0.29 0.42 0.82 0.12 0.18 0.16
Earnings per common
share, fully
diluted 0.14 0.15 0.29 0.41 0.82 0.12 0.18 0.16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements contained in the Annual Report which are listed
under Item 14 herein are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
-28-
PAGE
<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 1996 Annual Meeting of Stockholders (the
"Proxy Statement"), is incorporated herein by reference. Reference is made
to the cover page of this report for information regarding compliance with
Section 16(a) of the Exchange Act.
The following table sets forth information with respect to the executive
officers of the Corporation and the Savings Bank.
Name Age(a) Position
Frank M. McCord 66 Chairman and Chief
Executive Officer(b)
C. Fredrick Safstrom 42 President, Chief Operating
Officer and Director(b)
Robert G. Disotell 42 Executive Vice President,
Chief Lending Officer and
Director(b)
Russell E. Rosendal 37 Executive Vice President,
Chief Financial Officer
and Secretary/Treasurer(b)
Steven R. Erickson 40 Executive Vice President,
Credit Administration and
Construction Lending
J. Wesley Cochran 42 Senior Vice President
Chief Savings Officer
(a) As of June 30, 1996.
(b) Officer of the Corporation and Savings Bank
The principal occupation of each executive officer of the Corporation
and Savings Bank is set forth below. All of the officers listed above have
held positions with or been employed by the Corporation or Savings Bank for
five years unless otherwise stated. All executive officers reside in
Everett, Washington, unless otherwise stated. There are no family
relationships among or between the executive officers listed above.
FRANK M. McCORD, C.P.A. became Chairman of the Board of Directors,
President and Chief Executive Officer of the Savings Bank in 1990 and
subsequently the Corporation. Mr. McCord was the Managing Partner of KPMG
Peat Marwick, Seattle, Washington office until his retirement in 1986. In
addition to his responsibilities to the Corporation, Mr. McCord is a director
of the Everett Area Chamber of Commerce and serves as it's Chairman, the
Everett Performing Arts Association, and Housing Hope, a local housing
agency. Mr. McCord also serves as a Director of Horizon/CMS Healthcare
Corporation a publicly-held company listed on the New York Stock Exchange,
which is one of the largest diversified health care providers in the United
States. Mr. McCord has previously served as President of the Evergreen Area
Council of Boy Scouts of America, Treasurer of the United Way of King County,
Trustee of Seattle University, a Fellow of Seattle Pacific University,
Treasurer of the Washington Society of Certified Public Accountants, and a
Director of the Seattle Chamber of Commerce.
-29-
PAGE
<PAGE>
C. FREDRICK SAFSTROM joined Cascade in 1976 and has managed several
areas including branch management, secondary marketing, loan underwriting and
regulatory compliance. In June 1990 Mr. Safstrom was elected to the Board of
Directors and in December 1991 was elected President. Mr. Safstrom is a
trustee and the treasurer of the Snohomish County YMCA, a board member of the
Snohomish County Investment Plan Corporation, a director of the Everett
Public Schools Foundation, member of the Everett Rotary, and is active in
various housing related boards and committees.
ROBERT G. DISOTELL has been employed by Cascade for approximately
nineteen years and has managed all areas of the Loan Division. He currently
serves as a Director and an Executive Vice President. As Chief Lending
Officer, he is responsible for mortgage loan production, consumer lending,
and is the Bank's Community Reinvestment Act ("CRA") officer. Mr. Disotell
also serves on the Board of Directors for Catholic Community Services of
Snohomish County. Mr. Disotell is a resident of Arlington, Washington.
RUSSELL E. ROSENDAL is the Executive Vice President, Chief Financial
Officer and Secretary/Treasurer of the Corporation. Mr. Rosendal joined
Cascade in September 1983 and was elected Corporate Secretary/Treasurer in
December 1991. He has served as President of the Puget Sound chapter of the
Financial Managers Society and serves on their Asset/Liability Committee.
Mr. Rosendal is a resident of Mukilteo, Washington.
STEVEN R. ERICKSON is the Executive Vice President of the Savings Bank
responsible for managing business, residential construction, and income
property lending and serves as the Assistant Secretary for the Corporation.
Mr. Erickson joined Cascade in 1978. He is a member of the Board of
Directors of the Boys and Girls Club of Snohomish County. He is a resident
of Marysville, Washington.
J. WESLEY COCHRAN joined Cascade in 1992 as Chief Savings Officer and
Manager of the Everett Main Office Branch. As Chief Savings Officer, he is
responsible for management of the bank's full service offices and deposit
production. In August 1996 he was elected as a Senior Vice President. Mr.
Cochran has a 20 year background in mortgage banking and thrift institution
branch management. Mr. Cochran serves on the boards of the Everett Salvation
Army, American Heart Association, Everett Theater Society and is a member of
the South Everett/Mukilteo Rotary Club. He is a resident of Redmond,
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 "Voting Securities and Principal Holders
Thereof" of the Proxy Statement
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" 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.
-30-
PAGE
<PAGE>
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Certain Transactions with the Corporation" of the Proxy Statement.
PART IV
Item 14. Exhibits Financial Statement Schedules, and Reports on Form 8-K
(a) (1)(2) Independent Auditors' Report
Consolidated Financial Statements
(a) Consolidated Balance Sheets as of June 30, 1995 and June 30, 1996
(b) Consolidated Statements of Operations for the Years Ended June 30,
1994, 1995 and 1996.
(c) Consolidated Statements of Stockholders' Equity for the Years Ended
June 30,1994, 1995 and 1996.
(d) Consolidated Statements of Cash Flows for the Years Ended June 30,
1994, 1995 and 1996.
(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 to Stockholders.
(3) Exhibits
2 Agreement and Plan of Reorganization dated July 19, 1994 by and
between Cascade Savings Bank, FSB; Cascade Financial
Corporation; Cascade Investment Services, a Washington
corporation; and Cascade Interim Federal Savings Bank*
3.1 Certificate of Incorporation of Cascade Financial Corporation*
3.2 Bylaws of Cascade Financial Corporation*
10.1 Cascade Savings Bank, FSB 1994 Employee Stock Purchase Plan*
10.2 Cascade Savings Bank, FSB 1992 Stock Option and Incentive
Plan**
10.3 Cascade Savings Bank, FSB Employee Stock Ownership Plan**
13 Cascade Financial Corporation 1996 Annual Report to
Stockholders
21 Subsidiaries
23 Consent of Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K
No Forms 8-K were filed during the quarter ended June 30, 1996.
_________________
* Incorporated by reference to the Corporation's Registration Statement on
Form S-4 File No. 33-83200.
**Incorporated by reference to the Corporation's Annual Report on Form 10-KSB
For June 30, 1995.
-31-
PAGE
<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: September 27, 1996 By: /s/ Frank M. McCord
Frank M. McCord
Chairman and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Russell E. Rosendal By: /s/ D. R. Murphy
Russell E. Rosendal D. R. Murphy
Executive Vice President Director
(Chief Financial and
Accounting Officer)
Date: September 27, 1996 Date: September 27, 1996
By: /s/ C. F. Safstrom By: /s/ Ronald E Thompson
C. F. Safstrom Ronald E. Thompson
President and Director Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ Robert Disotell By: /s/ G. Brandt Westover
Robert Disotell G. Brandt Westover
Executive Vice President/ Director
Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ David W. Duce By: /s/ Paull Shin
David W. Duce Paull Shin
Director Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ Gary Meisner By: /s/Joan M. Earl
Gary Meisner Joan M. Earl
Director Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ Dwayne Lane
Dwayne Lane
Director
Date: September 27, 1996
PAGE
<PAGE>
EXHIBIT 13
1996 Annual Report to Stockholders
<PAGE>
Logo of
CASCADE FINANCIAL CORPORATION
1996
ANNUAL REPORT
<PAGE>
Cascade Financial Corporation 1996
Table of Contents
Message to Stockholders 2
Financial Highlights 3
Corporate Profile 4
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 5
Independent Auditors' Report 16
Consolidated Financial Statements 17
Common Stock Information Inside Back Cover
Corporate Information Back Cover
PAGE
<PAGE>
To our Stockholders
Cascade Financial Corporation has completed another successful year with
assets now exceeding $334 million. Good progress was made in diversifying our
financial products, expanding our customer base and reducing expenses.
We were especially pleased to declare our fourth consecutive 25% stock
dividend.
With a growing local economy, loan demand has been strong. Good quality,
higher yielding loans have been added to our loan portfolio. These loans
include residential, home equity, consumer, construction, apartment and
commercial real estate. Because most of these loans have adjustable rates, our
exposure to interest fluctuations has been reduced.
The problem loans originated in the 1980s have essentially been resolved.
This results in a stronger balance sheet and a greatly improved core income.
While loan demand has been strong, competition for deposits is intense.
However, checking balances increased 18% in fiscal 1996. Our "Gold Club"
checking was nationally recognized by the country's leading consumer research
magazine. We recently added a free checking product and initiated a marketing
campaign to further increase checking accounts.
We are utilizing both technology and personalized customer service to
grow our consumer banking activities. In 1996 our second in-store branch was
opened in Mukilteo. Later this year we will introduce 24-hour telephone
banking services.
We are closely following legislation in Congress that could have a
significant long term benefit to Cascade Savings Bank and result in comparable
FDIC insurance premiums for the entire banking industry. If such legislation
had been passed in 1996, net earnings would have increased by $300,000.
Our most important goal is to create additional stockholder value over
the long term. To date, $1,000 invested at our conversion to a publicly held
company in September 1992 is worth $7,120.
We are continually grateful for the support of our stockholders,
directors, employees, and customers. Your referrals of new customers are
extremely important and greatly appreciated. We look forward to an exciting
year ahead and invite you to call us with your comments and suggestions.
/s/ Frank M. McCord /s/ Fred Safstrom
Frank M. McCord Fred Safstrom
Chairman and President and
Chief Executive Officer Chief Operating Officer
2
PAGE
<PAGE>
Financial Highlights
[Dollars in thousands except per share amounts (unaudited)]
Years ended
June 30, 1992 1993 1994 1995 1996
Financial
Condition
Total assets $171,995 $222,421 $258,049 $310,943 $334,431
Loans, net 119,212 156,960 183,839 216,609 233,612
Cash and
securities 27,216 23,127 65,794 83,484 90,635
Deposits 147,363 166,143 181,131 199,938 218,063
Stockholders'
equity 8,710 14,372 16,374 19,287 20,815
pard
Operating Data
Interest income $18,893 $14,333 $16,545 $23,378 $24,776
Interest expense 12,928 9,329 9,142 13,933 16,563
Net interest
income 5,965 5,004 7,403 9,445 8,213
Provision for
(recovery of)
loan losses 1,140 100 495 (335) --
Net interest
income after
provision for
loan losses 4,825 4,904 6,908 9,780 8,213
Other income 5,567 6,411 5,135 2,478 2,226
Other expenses 9,597 8,975 9,006 7,879 7,004
Income before
Federal income
taxes 795 2,340 3,037 4,379 3,435
Federal income taxes 271 802 1,033 1,489 1,167
Cumulative effect of
accounting change 1,001 -- -- -- --
Net income 1,525 1,538 2,004 2,890 2,268
Per share earnings
(fully diluted) NA .71 .91 1.28 .99
Weighted average
number of shares
outstanding
(fully diluted) NA 2,171,648 2,213,213 2,256,306 2,282,033
Operating Ratios
Return on average
assets 0.70% .77% .85% .98% .71%
Return on average
equity 19.90 12.05 12.98 15.75 11.31
Net interest
margin 3.21 2.81 3.31 3.32 2.68
Allowance for
loan losses
to net loans 2.70 1.93 1.86 1.36 1.29
Ratio of
nonperforming
assets to total
assets 7.41 3.80 2.66 1.11 .34
* Margin for 1995 includes recovery of $2.1 million of delinquent interest.
Margin without this recovery is 2.59%.
3
PAGE
<PAGE>
Corporate Profile and Business Strategy
Cascade Savings Bank, FSB ("Bank") was organized in 1916 as a mutual
savings and loan association. On September 15, 1992, Cascade completed its
conversion to a federal stock savings bank. On November 30, 1994, a
reorganization into a holding company structure was completed with the Bank
becoming a wholly owned subsidiary of the Cascade Financial Corporation (the
"Corporation").
Cascade's Mission is to...
- -- Deliver excellent financial products and services in the Puget Sound region
- -- Diligently serve our local communities
- -- Achieve superior financial performance to benefit our stockholders,
customers and employees
Business Strategy
Management's strategy is to increase the portfolio of consumer, multifamily,
construction and commercial real estate loans which have relatively high
margins. This asset growth will be funded by increasing deposit relationships
with individuals and small businesses. New deposit customers will be attracted
through additional branches, ATMs, EXCHANGE/ACCEL point-of-sale system,
Cascade's TELLERPHONE banking system and other marketing activities.
Cascade Investment Services, Inc., a subsidiary of the Bank, provides
investment and insurance products to our customers.
Business Banking
Cascade provides loans to developers, builders, owners and investors for
residential and commercial real estate properties in the Puget Sound region.
(Dollars in thousands)
Balances Outstanding at
June 30, 1994 1995 1996
Construction loans $17,677 22,708 28,277
Multifamily loans 24,308 27,169 37,540
Commercial real estate loans 18,850 16,770 14,739
Consumer Banking
One-to-four family home loans 127,794 157,518 159,749
Home equity loans 746 3,553 6,792
Consumer loans -- -- 507
Consumer deposits 151,082 166,352 179,381
4
PAGE
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Asset and Liability Management
The Corporation's principal financial objective is to maximize long-term
profitability while limiting exposure to fluctuations in interest rates.
Minimizing interest rate risk reduces the financial benefits of falling
interest rates and the adverse consequences of rising interest rates. The
Corporation intends to reduce risk where appropriate but accept a degree of
risk when warranted by economic circumstances and internal risk tolerance.
Expected interest rate sensitivity of assets and liabilities as of June
30, 1996 is shown on the table on page six. The Corporation's asset and
liability management strategy has resulted in a negative one-year gap as a
percent of total assets of 19% at June 30, 1995 and 14% at June 30, 1996.
There are numerous estimates and assumptions which significantly influence
this calculation. At June 30, 1996, a 200 basis point increase in rates would
reduce forecasted net interest income by approximately 7%.
The Board of Directors sets guidelines for allowable changes in net
interest income. Asset maturities are controlled by holding adjustable rate
and balloon loans and selling fixed rate loans. By adjusting the pricing on
savings deposits, differing deposit maturities can be obtained to lengthen or
shorten the repricing time for liability maturities.
The Bank can also borrow funds from the Federal Home Loan Bank of Seattle
(the "FHLB-Seattle"). At various times instruments such as interest rate
swaps, interest rate cap agreements, and forward sale commitments are used to
reduce the negative effect that rising rates could have on net interest
income, or to lower the cost of long-term liabilities. Management has
established strict policies and guidelines for the use of these off-balance
sheet instruments.
Review of Financial Position
Total assets increased to $334 million at June 30, 1996, an 8% increase
over 1995 and 30% over 1994. Total loans increased by $17 million to $234
million from $217 million at June 30, 1995 and $184 million at June 30, 1994.
Most of this increase was due to originations of nonconforming residential
loans, multifamily loans and residential construction loans. Cash and
securities increased to $91 million in 1996 compared with $83 million in 1995
and $66 million in 1994. This increase was due to management's desire to
maintain the Bank's capital ratio near 6%.
Deposits increased to $218 million at June 30, 1996 compared with $200
million in 1995 and $181 million in 1994. Management has sought to fund asset
growth through retail deposits. Total borrowings increased by $5 million in
1996 and $26 million in 1995 to $89 million at June 30, 1996.
Asset Quality
At June 30, 1996, non-performing loans totaled $373,000 compared to
$597,000 in 1995 and $7 million at June 30, 1994. Loans classified as
substandard decreased from $13 million at June 30, 1994 to $7 million at June
30, 1995 and to $1 million at June 30, 1996.
At June 30, 1996, real estate owned (REO) totaled $747,000 compared to
$1.6 million at June 30, 1995 and $150,000 in 1994. The decrease in REO in
1996 was due to a sale resulting in a $24,000 gain.
5
PAGE
<PAGE>
The gap between interest-sensitive assets and interest-sensitive liabilities
at June 30, 1996 is shown in the following table.
Maturity or Repricing Period
Within 1-3 3-5 5-10 Over 10
One Year Years Years Years Years Total
(Dollars in thousands)
Interest-Sensitive
Assets
Fixed rate mortgage
loans $26,842 38,512 13,737 6,199 7,628 92,918
Adjustable rate
mortgage loans 113,973 13,165 18,660 -- -- 145,798
Mortgage-backed
securities 19,837 10,614 4,060 5,247 3,931 43,689
Investment
securities 43,638 -- -- -- -- 43,638
Interest-earning
assets 204,290 62,291 36,457 11,446 11,559 326,043
Impact of interest
rate caps 5,000 (5,000) -- -- -- --
Total interest-
sensitive assets 209,290 57,291 36,457 11,446 11,559 326,043
Cash on hand
and in banks 3,627
Other assets 4,761
Total assets $334,431
Interest-Sensitive Liabilities
Savings and checking
accounts 15,960 -- -- -- -- 15,960
Money market accounts 34,982 -- -- -- -- 34,982
Certificates of
deposit 123,399 23,766 18,293 108 -- 165,566
Other borrowings 81,833 7,000 -- 159 -- 88,992
Total interest-
sensitive
liabilities 256,174 30,766 18,293 267 -- $305,500
Other liabilities 8,116
Stockholders' equity 20,815
Total liabilities and
stockholders' equity $334,431
Excess (deficiency) of
interest-sensitive
assets over interest-
sensitive
liabilities (46,884) 26,525 18,164 11,179 11,559 20,543
Cumulative excess
(deficiency) of
interest-sensitive
assets (46,884) (20,359) (2,195) 8,984 20,543 --
Ratio of cumulative
gap to total assets (14.01)% (6.01) (0.66) 2.69 6.14 --
6
PAGE
<PAGE>
Average Balance Sheets
Corporate earnings depend on the amount and yield on interest-earning
assets (primarily loans and investments) and the expense of interest-bearing
liabilities (primarily deposit accounts and borrowings). The following table
sets forth average balances of assets and liabilities, interest income from
interest-earning assets, interest expense on interest-bearing liabilities,
percentage yields, interest rate spread, ratio of interest-earning assets to
interest-bearing liabilities and net interest margin. Average balances have
been calculated using the month-end balances. Such average balances are
considered to be representative of the average daily balance for each period
presented.
Assets
For the year (Dollars in thousands)
ended June 30, 1994 1995
Average Interest Yield/ Average Interest Yield/
Balance Income Cost Balance Income Cost
Interest-earning
assets (1)
Mortgage loans $177,059 13,878 7.84 198,568 18,384 9.26
Home equity
and consumer
loans -- -- -- -- -- --
Total loans 177,059 13,878 7.84 198,568 18,384 9.26
Mortgage-backed
securities 34,356 1,918 5.58 78,238 4,477 5.72
Investment and
trading
securities 8,388 349 4.16 3,135 213 6.79
Interest-earning
deposits &
FHLB stock 3,988 400 10.03 4,207 304 7.23
Total interest-
earning assets 223,791 16,545 7.39 284,148 23,378 8.23
Non interest-
earning assets
Office properties
and equipment,
net 7,074 6,471
Real estate, net 133 589
Other non-interest-
earning assets 4,192 2,789
Total assets 235,190 293,997
Assets
For the year (Dollars in thousands)
ended June 30, 1996
Average Interest Yield/
Balance Income Cost
Interest-earning
assets (1)
Mortgage loans $221,827 19,170 8.64
Home equity
and consumer
loans 5,438 480 8.83
Total loans 227,265 19,650 8.65
Mortgage-backed
securities 56,670 3,616 6.38
Investment and
trading
securities 17,542 1,098 6.26
Interest-earning
deposits &
FHLB stock 5,286 412 7.79
Total interest-
earning assets 306,763 24,776 8.08
Non interest-
earning assets
Office properties
and equipment,
net 6,206
Real estate, net 1,807
Other non-interest-
earning assets 4,334
Total assets 319,110
7
PAGE
<PAGE>
(table continued on following page)
1994 1995
Average Interest Yield/ Average Interest Yield/
Balance Income Cost Balance Income Cost
Liabilities and Equity
Interest-bearing
liabilities
Passbook accounts $ 8,901 275 3.08 8,788 271 3.09
Checking accounts 8,028 190 2.36 8,205 182 2.22
Money market
accounts 28,715 1,092 3.80 22,542 894 3.97
Certificates of
deposit 130,947 6,151 4.70 145,061 7,786 5.37
Total deposits 176,591 7,708 4.36 184,596 9,133 4.95
Other interest-
bearing
liabilities
FHLB advances 29,984 1,270 4.24 55,309 3,196 5.78
Other interest-
bearing
liabilities 4,473 164 3.67 28,229 1,604 5.68
Total interest-
bearing
liabilities 211,048 9,142 4.33 268,134 13,933 5.20
Other liabilities 8,705 7,518
Total liabilities 219,753 275,652
Stockholders'
equity 15,437 18,345
Total liabilities
and stockholders'
equity 235,190 293,997
Net interest
income (1)(2) 7,403 9,445
Interest rate
spread (1)(3) 3.06 3.03
Net interest
margin (1)(4) 3.31 3.32
Average interest-
earning assets
to average
interest-bearing
liabilities 106.04 105.97
1996
Average Interest Yield/
Balance Income Cost
Liabilities and Equity
Interest-bearing
liabilities
Passbook accounts $ 7,844 253 3.23
Checking accounts 9,711 165 1.70
Money market
accounts 20,853 896 4.30
Certificates of
deposit 167,150 10,077 6.03
Total deposits 205,558 11,391 5.54
Other interest-
bearing
liabilities
FHLB advances 64,380 3,937 6.12
Other interest-
bearing
liabilities 21,697 1,235 5.69
Total interest-
bearing
liabilities 291,635 16,563 5.68
Other liabilities 7,429
Total liabilities 299,064
Stockholders'
equity 20,046
Total liabilities
and stockholders'
equity 319,110
Net interest
income (1)(2) 8,213
Interest rate
spread (1)(3) 2.40
Net interest
margin (1)(4) 2.68
Average interest-
earning assets
to average
interest-bearing
liabilities 105.19
- --------------------
(1) Does not include interest on loans 90 days or more past due. Includes
recovery of $2.1 million in delinquent interest in 1995.
(2) Interest 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.
8
PAGE
<PAGE>
Yields Earned and Rates Paid
The following table sets forth the weighted average yield on assets, the
weighted average interest rate on liabilities, and the net yield on
interest-earning assets.
For the Years Ended June 30, At June 30,
1994 1995* 1996 1996
Weighted average yield on
loan portfolio 7.84% 9.26 8.65 8.44
Weighted average yield on
mortgage-backed securities 5.58 5.72 6.38 6.16
Weighted average yield on
securities portfolio and
cash equivalents 6.05 7.04 6.61 6.33
Weighted average yield on all
interest-earning assets 7.39 8.23 8.08 7.87
Weighted average rate
paid on deposits 4.36 4.95 5.54 5.33
Weighted average rate paid on FHLB
advances and other borrowings 4.16 5.75 6.01 5.75
Weighted average rate paid on
all interest-bearing
liabilities 4.33 5.20 5.68 5.49
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and
all interest-bearing
liabilities) 3.06 3.03 2.40 2.38
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 3.31 3.32 2.68 NA
* Reduced for the $2.1 million recovery, the yield on loan portfolio, yield
on earning assets, spread, and net interest margin are: 8.21%, 7.49%, 2.29%
and 2.59%, respectively.
9
PAGE
<PAGE>
Rate/Volume Analysis
<TABLE>
The following table sets forth the effects of changing rates and volumes on net interest income.
Information is provided with respect to (i) effects on interest income attributable to changes in volume
(changes in volume in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate
multiplied by change in volume).
Year Ended June 30, 1994 Year Ended June 30, 1994 Year Ended June 30, 1994
Compared to Year Ended Compared to Year Ended Compared to Year Ended
June 30, 1993 June 30, 1993 June 30, 1993
Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
Rate/ Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net Rate Volume Volume Net
(Dollars in thousands)
Interest-
earning
assets
Mortgage
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
loans (1) $(1,168) 4,813 (520) 3,125 2,515 1,686 305 4,506 (1,224) 2,154 (144) 786
Home equity
& consumer
loans (1) (1) (1) 1 (1) -- -- -- -- -- -- 480 480
Total
loans (1) (1,169) 4,812 (519) 3,124 2,515 1,686 305 4,506 (1,224) 2,154 336 1,266
Mortgage-backed
securities (181) 233 (23) 29 48 2,449 62 2,559 515 (1,234) (142) (861)
Securities (605) (851) 355 (1,101) 222 (220)(138) (136) (16) 977 (76) 885
Interest-
earning
deposits 242 (41) (41) 160 (112) 22 (6) (96) 24 78 6 108
Change in
income on
interest-
earning
assets (1,713) 4,153 (228) 2,212 2,673 3,937 223 6,833 (701) 1,975 124 1,398
Interest-
bearing
liabilities
Interest-
bearing
deposits (1,578) 971 (181) (788) 1,029 349 47 1,425 1,096 1,038 124 2,258
FHLB advances (9) 617 (7) 601 462 1,074 390 1,926 186 524 31 741
Other borrowings (18) 20 (2) -- 91 872 477 1,440 3 (371) (1) (369)
Change in expense
on interest-
bearing
liabilities (1,605) 1,608 (190) (187) 1,582 2,295 914 4,791 1,285 1,191 154 2,630
Increase
(decrease)
net interest
income 2,399 2,042 (1,232)
</TABLE>
PAGE
<PAGE>
(1) Does not include interest on loans ninety days or more past due.
(2) Includes $2.1 million interest recovery.
10
PAGE
<PAGE>
OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Interest Income
Interest income increased to $24.8 million for the year ended June 30,
1996 compared with $23.4 million in 1995 and $16.5 million in 1994. The
principal reason for these increases was the higher earning asset balance of
$306.8 million in 1996 compared to $284.1 million in 1995 and $223.8 million
in 1994. Additionally, in 1995 the Corporation recovered $2.1 million in
interest from the payoff of a large delinquent loan. The yield on interest
earning assets adjusted for the interest recovery increased to 8.08% in 1996
from 7.49% in 1995 and 7.39% in 1994 due to the increase in yields on
adjustable rate loans and reinvestment of cash flows at higher interest rates.
Interest on loans, adjusted for the interest recovery increased by $3.4
million in 1996 and $2.4 million in 1995 from $13.9 million in 1994. This
resulted from an increased average portfolio balance of $227.3 million in
1996, compared to $198.6 million in 1995 and $177.1 million in 1994 and an
increase in the yield on loans from 7.84% in 1994 to 8.21% in 1995 and 8.65%
in 1996. Interest on securities, FHLB-Seattle stock and interest-bearing
deposits increased to $5.1 million in 1996 from $5.0 million in 1995 and $2.7
million in 1994.
Interest Expense
Interest expense increased by $2.6 million in 1996 and $4.8 million in
1995. These increases were the result of higher market interest rates and
higher balances of deposits and borrowings to fund the increased earning
assets. The average cost of all liabilities increased to 5.68% in 1996,
compared with 5.20% in 1995 and 4.33% in 1994. Interest expense on deposits
increased by $2.3 million to $11.4 million in 1996 compared to $9.1 million in
1995 and $7.7 million in 1994. Management has sought to fund asset growth with
deposits from new and existing customers. Hedging activities decreased
interest expense by $49,000 and $42,000 during the years ended June 30, 1996
and 1995, respectively. This compares to an increase of $54,000 in the 1994
period. Interest rate swaps and caps are used to reduce interest rate risk or
cost of longer-term liabilities. At June 30, 1996 $5.0 million in interest
rate cap agreements were outstanding. At June 30, 1995 $7.5 million in swaps
were outstanding.
Net Interest Income
Net interest income for the year ended June 30, 1996, decreased by $1.2
million to $8.2 million compared with $9.4 million in 1995 and $7.4 million in
1994. The decrease in 1996 is the result of the $2.1 million interest recovery
offset by an increase in earning assets of $22.6 million and an increase in
the interest rate margin of nine basis points (after adjusting the 1995 margin
for the interest recovery) to 2.68% in 1996. The trend towards reduced
interest margins is occurring throughout the banking industry, especially in
the state of Washington. Washington financial institutions have one of the
highest cost of funds in the nation, based on data recently published by the
federal banking agencies.
Provisions for Loan Losses
No provision for loan losses was considered necessary in 1996. There was
a recovery of $335,000 in 1995 after the repayment of a $5.1 million
delinquent loan. After the repayment management determined the allowance for
11
PAGE
<PAGE>
loan losses was higher than necessary and was reduced accordingly. The
provision for losses in 1994 was $495,000. As the credit quality of the loan
portfolio continued to improve, additional provisions were not considered
necessary in 1996. At June 30, 1996, 1995 and 1994, the loan loss allowance
totaled $2.9 million, $3.0 million and $3.5 million respectively and was 1.2%,
1.3% and 1.9% respectively, of net loans. The allowance for loan losses is
continuously monitored and adjusted as the economic conditions change.
Although the allowance is maintained at levels considered to be adequate to
provide for potential losses, there can be no assurance that such losses will
not exceed the estimated amounts or that additional provisions will not be
necessary in the future.
Other Income
Other income decreased by $252,000 to $2.2 million in 1996 compared to
1995 and by $2.9 million compared to 1994. The principal reason for the
reduction in 1996 was a $474,000 decrease in restitution recovery income and
$238,000 decrease in gains on sales of loan servicing rights. In 1996 gains
from sales of loans and mortgage-backed securities increased by $518,000 and
gains on sales of securities available-for-sale increased to $338,000. The
reduction in other income from 1994 is principally the result of a $2.5
million decrease in gains on sales of mortgage servicing rights due to reduced
mortgage banking activity. Although not assured, management anticipates future
mortgage banking revenues will remain consistent with the 1995- 1996 period.
Other Expenses
Other expenses decreased by $875,000 to $7.0 million in 1996 compared to
$7.9 million in 1995 and $9.0 million in 1994. Salary and employee benefits
expenses decreased by $233,000 in 1996 and $1.1 million in 1995 as a result of
mortgage banking staff reductions and decreased compensation to loan
personnel. A $332,000 restructuring charge was incurred in 1995 to close
certain loan origination offices. This charge was comprised of $95,000 in
required lease payments, $201,000 in equipment and leasehold write-offs on
closed facilities and $36,000 in severance costs.
Marketing expenses decreased $135,000 to $198,000 in 1996 compared to
$330,000 in 1995. Increased expenses for marketing, technology and product
delivery systems are anticipated.
Congress is currently considering a recapitalization of the FDIC
insurance fund which would require the Bank to make a one-time, after-tax
payment of approximately $900,000. The proposed legislation would decrease
the Bank's annual insurance premium by approximately $300,000 after taxes.
12
PAGE
<PAGE>
Liquidity & Capital Resources
Cascade Savings Bank is required to maintain minimum levels of liquid
assets as defined by Office of Thrift Supervision ("OTS") regulations. This
requirement, which may change at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 5.0%. The Bank's
liquidity ratio was 7.2%, 9.0% and 6.3% at June 30, 1996, 1995 and 1994,
respectively.
The Bank's most liquid assets are cash and cash equivalents, which
include short-term investments. The levels of these assets are dependent on
operating, financing and investing activities during any given period. At June
30, 1996 and 1995, cash and cash equivalents totaled $8.6 million and $5.8
million, respectively. The principal sources of funds, exclusive of operating
activities, include proceeds from principal payments on loans and
mortgage-backed securities and proceeds from the sale of loans.
The Bank has other significant sources of liquidity including
FHLB-Seattle advances, reverse repurchase agreements, and loan sales. If
needed, the Bank has additional borrowing ability with the FHLB-Seattle of
$31.8 million at June 30, 1996, as well as abilities to borrow from primary
dealers of United States government securities through reverse repurchase
agreements. Under these agreements, the Bank collateralizes the borrowings,
generally with mortgage-backed securities or other investment securities.
These borrowings are for short time periods, generally no more than sixty
days. The Bank will utilize a particular source of funds based on comparative
costs and availability.
At June 30, 1996 there were outstanding commitments to originate loans of
$11.3 million. The Bank anticipates that it will have sufficient funds
available to meet its current commitments principally through sales in the
secondary market and deposit growth. Certificates of deposit which are
scheduled to mature in one year or less totaled $123.4 million at June 30,
1996. Management believes that a significant portion of such deposits will
remain with the Bank.
At June 30, 1996 the Bank was a "well capitalized" institution under the
prompt corrective action regulation of the OTS. The following table
summarizes the capital requirements and the Bank's capital position at June
30, 1996:
At June 30, 1996
Percent of
Amount Assets
(Dollars in Thousands)
Tangible capital $21,530 6.4%
Tangible capital requirement 5,027 1.5
Excess 16,503 4.9
Core capital 21,530 6.4
Core capital requirement 10,055 3.0
Excess 11,475 3.4
Risk-based capita l23,699 13.7
Risk-based capital requirement 13,844 8.0
Excess 9,855 5.7
13
PAGE
<PAGE>
Common Stock Information
The common stock of Cascade Financial Corporation is traded on the Nasdaq
Small Cap Market under the symbol "CASB." As of September 1, 1996, there were
approximately 1,100 stockholders of record.
The following table sets forth market prices and dividend information for
the Corporation's common stock. Information prior to the second quarter of
fiscal 1995 relates to the common stock of Cascade Savings Bank, FSB. Prices
have been adjusted for stock splits.
High Low
Fiscal 1996
- ------------
First Quarter $14.625 $13.625
Second Quarter 14.375 13.000
Third Quarter 13.625 12.750
Fourth Quarter 17.250 12.750
Fiscal 1995
- -------------
First Quarter $10.875 $9.625
Second Quarter 11.250 9.875
Third Quarter 12.250 10.500
Fourth Quarter 13.625 10.875
The Corporation's ability to pay dividends is dependent on the
dividend payments received from its subsidiary, Cascade Savings Bank, FSB,
which are subject to regulations and the Savings Bank's continued compliance
with all regulatory capital requirements. See Note 11(b) of the Notes to
Consolidated Financial Statements for information regarding limitations of the
Savings Bank's ability to pay dividends to the Corporation.
In order to retain capital for operations and expansion, the
Corporation does not expect to declare cash dividends in the near future.
Board of Directors
Frank M. McCord
Chairman of the Board, Chief Executive Officer(1)
David W. Duce G. Brandt Westover
Vice Chairman Account Vice President,
Attorney Paine Webber, Inc. (1)
Duce & Bastian (1)(3)
C. Fredrick Safstrom Ronald E. Thompson
Chief Operating Officer President, WRE Commercial
President and Director (1) & Property Management (1)
Robert G. Disotell Paull H. Shin, Ph.D.
Executive Vice President Professor of History,
Shoreline Comm. College (3)
Dennis R. Murphy, Ph.D. Joan M. Earl
Dean and Professor of Deputy County Executive,
Economics, Snohomish County (2)
Western Wash. Univ. (2)
Gary L. Meisner Dwayne Lane
President, Small President, Dwayne Lane
Business Center, Inc. (2) Auto Centers (3)
(1) Member of the Executive Committee.
(2) Member of the Audit and Risk Management Committee.
(3) Member of the Compensation Committee.
Executive Officers
Frank M. McCord C. Fredrick Safstrom
Chairman and Chief President and
Executive Officer Chief Operating Officer
Robert G. Disotell Russell E. Rosendal
Executive Vice President Executive Vice President
Chief Lending Officer Chief Financial Officer and
Secretary/Treasurer
Steven R. Erickson J. Wesley Cochran
Executive Vice President Senior Vice President
Credit Administration and Chief Savings Officer
Construction Lending
14
PAGE
<PAGE>
KPMG Peat Marwick LLP
3100 Two Union Square
601 Union Street
Seattle, WA 98101-2327
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheets of Cascade
Financial Corporation and subsidiary (the Corporation) as of June 30, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years in the three year period ended June 30,
1996. 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 generally accepted auditing
standards. 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 subsidiary as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1996, in conformity with generally accepted
accounting principles.
As discussed in note 1 to the consolidated financial statements,
effective July 1, 1995, the Corporation changed its method of accounting for
impaired loans.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
July 31, 1996
PAGE
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1995 and 1996
(Dollars in thousands)
1995 1996
-------------------------------------
Assets
------
Cash on hand and in banks $ 5,419 3,627
Interest-bearing deposits in other
institutions 343 4,991
Securities available-for-sale
(notes 2 and 9) 7,826 72,076
Loan held-for-sale, net (note 3) 6,040 4,678
Securities held-to-maturity
(fair value of $69, 360 and
$9,437)(notes 2 and 9) 69,896 9,941
Loans, net (notes 3 and 4) 210,569 228,934
Real estate owned, net (note 4) 1,643 747
Premises and equipment, at cost,
net (note 5) 6,359 6,087
Accrued interest receivable and
other assets (notes 2, 3 and 12) 2,848 3,350
----------------------------
310,943 334,431
Liabilities and Stockholders' Equity
------------------------------------
Deposits (notes 6 and 7) 199,938 218,063
Federal Home Loan Bank
advances (note 8) 61,159 68,542
Securities sold under agreements to
repurchase (note 9) 23,285 20,450
Advance payments by borrowers for taxes
and insurance 874 1,207
Principal and interest payable on loans
services for others 35 179
Accrued expenses and other liabilities
(note 6) 4,716 3,584
Deferred Federal income taxes (note 10) 1,649 1,591
-----------------------------
Total liabilities 291,656 313,616
Stockholders' equity (note 11):
Preferred stock, $.01 par value.
Authorized 500,000 shares; no
shares issued or outstanding -- --
Common stock, $.01 par value.
Authorized 5,000,000 shares; issued
and outstanding 2,029,277 shares in
1995 and 2,045,894 shares in 1996 20 20
Additional paid-in capital 4,143 4,250
Retained earning, substantially
restricted 15,142 17,410
Unrealized loss on securities
available-for-sale (18) (865)
Total stockholders' equity 19,287 20,815
----------------------------------
Commitments and contingencies
(notes 2, 3, 7, 11 and 15)
310,943 334,431
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended June 30, 1994, 1995, and 1996
(Dollars in thousands)
1994 1995 1996
------------------------------------
Interest income:
Loans (note 3) $13,878 18,384 19,650
Securities held-to-maturity 1,918 4,477 3,616
Securities available-for-sale 349 213 1,098
FHLB stock dividends 231 182 264
Interest-bearing deposits 169 122 148
Total interest income 16,545 23,378 24,776
Interest expense:
Deposits (notes 6 and 7) 7,708 9,133 11,391
FHLB advance 1,270 3,196 3,937
Securities sold under agreements
to repurchase (note 9) 164 1,604 1,235
Total interest expense 9,142 13,933 16,563
Net interest income 7,403 9,445 8,213
Provision for (recovery of)
loan losses (note 4) 495 (335) --
Net interest income after provision
for loan losses 6,908 9,780 8,213
Other income:
Gain on sale of loans held-for-sale 796 422 506
Gain on sale of mortgage-backed
securities held-for-training 584 85 519
Gain on sale of mortgage servicing rights 2,481 238 --
Service charges 861 471 444
Gain (loss) on sale of securities
available-for-sale (note 2) (29) (104) 338
Gain on sale of real estate owned 62 240 24
Restitution recovery (note 15) -- 624 150
Other 380 502 245
Total other income 5,135 2,478 2,226
Other expenses:
Salaries and employee benefits 4,884 3,801 3,568
Occupancy 1,395 1,352 1,186
Federal deposit insurance premiums 432 471 515
Data processing 291 252 306
Marketing 343 333 198
Restructuring charge -- 332 --
Other 1,661 1,338 1,231
Total other expenses 9,006 7,879 7,004
Income before Federal income taxes 3,037 4,379 3,435
Federal income taxes (note 10) 1,033 1,489 1,167
Net income 2,004 2,890 2,268
Net income per common share, primary $0.91 1.28 1.00
Net income per common share, fully diluted 0.91 1.28 0.99
Weighted average number of shares
outstanding, primary 2,198,519 2,254,697 2,279,098
Weighted average number of
shares outstanding, fully diluted 2,213,213 2,256,306 2,282,033
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1994, 1995, and 1996
(Dollars in thousands)
<TABLE>
Net
Valuation Total
Additional Reserve stock-
Common paid-in Retained for holders'
Shares stock capital earnings Securities equity
Balances at June 30, 1994,
<S> <C> <C> <C> <C> <C> <C>
as previously reported 1,614,498 $ 16 4,108 10,248 -- 14,372
Five for four stock split effective
June 10, 1996, including $7
for fractional shares 408,366 4 (11) -- -- (7)
Balances at June 30, 1994, restated 2,022,864 20 4,097 10,248 -- 14,365
Options exercised 625 -- 5 -- -- 5
Net income for the year ended
June 30, 1994 -- -- -- 2,004 -- 2,004
Balances at June 30, 1994, restated 2,023,489 20 4,102 12,252 -- 16,374
Options exercised 5,788 -- 41 -- -- 41
Net income for the year ended
June 30, 1995 -- -- -- 2,890 -- 2,890
Adjustments on available-
for-sale securities -- -- -- -- (18) (18)
Balances at June 30, 1995, restated 2,029,277 20 4,143 15,142 (18) 19,287
Options exercised 16,617 -- 107 -- -- 107
Net income for the year ended
June 30, 1996 -- -- -- 2,268 -- 2,268
Adjustments available-for-
sale-securities -- -- -- -- (847) (847)
Balances at June 30, 1996 2,045,894 20 4,250 17,410 (865) 20,815
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended June 30, 1994, 1995, and 1996
(Dollars in thousands)
1994 1995 1996
-------------------------------
Cash flows from operating activities:
Net income 2,004 2,890 2,268
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization
of premises and equipments 620 600 553
Other -- (42) (11)
Amortization of retained
servicing rights -- 64 148
Provision for losses
(recover on):
Loans 495 (335) --
Real Estate -- -- 25
Securities 197 (2) --
Additions to mortgage servicing
rights (508) (307) (553)
Deferred loan fees, net of
amortization 232 461 13
Origination of loans held-for-sale (211,292) (34,180) (55,921)
Proceeds from sale of loans
held-for-sale 176,352 28,998 25,462
Proceeds from sale of mortgage
servicing rights 3,158 241 --
Net loss (gain) on sales of:
Loans held-for-sale (796) (422) (506)
Mortgage-backed securities
held-for-training (584) (85) (519)
Securities available-
for-sale (168) 26 (338)
Premises and equipment 143 201 (5)
Real estate owned (63) (240) (24)
Mortgage loan servicing rights (2,481) (238) --
Federal Home Loan Bank stock
dividend received (231) (182) (264)
Deferred Federal income taxes -- 1,338 387
Net change in accrued in interest
receivable and other assets over
principal and interest payable on
loans serviced for others and
accrued expenses and other liabilities (371) (1,015) (1,099)
Total adjustments 10,335 5,589 197
Net cash provided by
operating activities 12,339 8,479 2,465
Cash flows from investing activities:
Loan originated, net of
principal repayments (51,699) (44,378) (19,110)
Purchases of mortgage-backed securities
held-to maturity (15,086) (25,740) --
Principal repayments on mortgage-
backed securities held-to-maturity 10,975 9,560 9,452
Principal repayments on securities
available-for-sale -- -- 4,846
Purchases of securities
available-for-sale (11,331) (5,039) (51,740)
Proceeds from sales of securities
available-for-sale 12,448 11,000 32,455
Proceeds from maturities of securities
and interest-bearing deposits, net 2,656 -- --
Proceeds from sales of real estate owned 2,539 755 1,776
Purchases of real estate owned -- (333) (141)
Purchases of premises and equipment (391) (567) (257)
Proceeds from sales of premises and equipment,
and other assets 694 -- 5
Net cash used in investing
activities (49,195) (54,742) (22,714)
Subtotal, carried forward (36,856) (46,263) (20,249)
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
2
Consolidated Statements of Cash Flows, Continued
1994 1995 1996
-------------------------------
Subtotal, brought forward (36,856) (46,263) (20,249)
Cash flows from financing activities:
Proceeds from issuance of common stock 5 37 100
Net increase in deposits 14,988 18,807 18,125
Proceeds from Federal Home Loan
Bank advances 134,475 100,800 83,133
Payment of Federal Home Loan
Bank advances (128,175) (74,775) (75,750)
Net increases in securities sold under
agreements to repurchase 12,933 3,958 (2,835)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (78) (2) 332
Net cash provided by financing 34,148 48,825 23,105
Net increase (decrease) in cash
and cash equivalents (2,708) 2,562 2,856
Cash and cash equivalents at
beginning of year 5,908 3,200 5,762
Cash and cash equivalents at end of year 3,200 5,762 8,618
Supplemental disclosures of cash flow
information-cash paid during the year for:
Interest 9,370 13,607 16,603
Federal income taxes 1,037 70 852
Supplemental schedule of noncash
investing activities:
Mortgage loans securitized into FHLMC
participation certificates and held-for-
trading and sold 45,048 10,623 32,330
Mortgage loans securitized into FHLMC
participation certificates and held-
for-investment 16,100 4,769 --
Securities reclassified from held-to-
maturity to available-for-sale -- -- 50,503
Net mortgage loans transferred to real
estate owned 95 1,675 740
See accompanying notes to consolidated financial statements.
PAGE
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1994, 1995, and 1996
(Dollars in thousands, except share amounts)
(1) Summary of Significant Accounting Policies
The accounting and financial reporting policies of Cascade Financial
Corporation and subsidiary (the Corporation) conform to generally
accepted accounting principles 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
during the reported periods. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for
loan losses and the valuation of real estate owned, securities, and
capitalized mortgage servicing rights. In connection with the
determination of the allowances for loans and real estate owned,
management obtains independent appraisals for significant properties.
Management believes the allowances for losses on loans and real estate
owned are adequate. While management uses available information to
recognize losses on these assets, future additions to the allowances may
be necessary based on changes in economic conditions, particularly in the
western Washington region. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Corporation's allowances for losses on loans and real estate owned and
the valuation of securities and capitalized mortgage servicing rights.
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 examination.
All of the Corporation's loans are located in the Puget Sound region. At
June 30, 1996, the Corporation's loans are secured by one-to-four-family
residences (79%), multifamily residences (15%) and commercial real estate
properties (6%). Accordingly, the ultimate collectibility of the
Corporation's loan portfolio is susceptible to changes in the economic
and real estate market conditions in the Puget Sound region.
Most loans originated by the Corporation are secured by real estate and
are generally no more than 80% of the lesser of the appraised value or
purchase price of the underlying property. The Corporation currently
requires customers to obtain private mortgage insurance on all loans
above an 80% loan-to-value ratio.
The following is a description of the more significant policies, which
the Corporation follows in preparing and presenting its consolidated
financial statements.
(a) Basis of Presentation
The consolidated financial statements include the accounts of the
Corporation, its subsidiary, Cascade Savings Bank, FSB, (the Savings
Bank), and the Savings Bank's subsidiary, Cascade Investment
Services, Inc. The par value of common stock and additional paid-in
capital of the Corporation have been restated to reflect the new par
value of the holding company which became effective November 30,
1994. The formation of the holding company was treated in a manner
similar to pooling-of-interest accounting.
(b) Cash Equivalents
The Corporation considers all interest-bearing deposits and
short-term highly liquid investment securities with an original
maturity of three months or less to be cash equivalents.
(c) Loans
Loans are stated at principal amounts outstanding, net of deferred
loan fees and costs. Interest is accrued only if deemed
collectible. Accrual of interest income is generally discontinued
when a loan becomes 90 days past due and accrued interest amounts
are reversed. Once interest has been paid to date or management
considers the loan to be fully collectible, it is returned to
accrual status. All loans on which interest is not being accrued
are referred to as loans on nonaccrual status and are classified as
impaired.
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 interest method. In the event
loans are sold, the remaining net deferred loan origination fees or
costs are recognized as a component of the gains or losses on the
sales of loans.
Loan commitment fees are deferred until loans are funded, at which
time they are amortized into interest income using the interest
method. If the commitment period expires, the fees are recognized
as service charges.
(Continued)
PAGE
<PAGE>
2
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(d) Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to
provide for losses based on management's evaluation of known and
inherent risks in the loan portfolio. This evaluation includes
analyses of the fair value of collateral securing selected loans,
consideration of historical loss experience and management's
projection of trends effecting credit quality.
On July 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan, and the related SFAS No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and
Disclosures. There was no effect of adopting the Statements on 1996
results of operations or financial position because the allowance
for losses established under the previous accounting policy
continued to be appropriate following the accounting change. SFAS
114 is applicable to all loans except large groups of
smaller-balance homogeneous loans that are collectively evaluated
for impairment, loans measured at fair value or at the lower of cost
or fair value, leases, and debt securities. The Statements require
disclosures of impaired loans for which it is probable that the
lender will be unable to collect all amounts due according to
original contractual terms of the loan agreement, based on current
information and events.
SFAS 114 requires that the valuation of impaired loans be based on
the present value of expected future cash flows discounted at the
loan's effective interest rate, or as a practical expedient, at the
loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. An impaired loan may not be a
nonaccrual loan.
(e) Sales of Loans
Loans Held-for-Sale
Any loan that management determines will not be held-to-maturity is
classified as held-for-sale at the time of origination. Loans
held-for-sale are carried at lower of cost or market value,
determined on an aggregate basis. Market value is determined for
loan pools with common interest rates using published quotes as of
the close of business. Unrealized losses on such loans are included
in gain on sale for loans held-for-sale. All loans are sold without
recourse.
Mortgage-backed securities held-for-trading
As part of its mortgage-banking activity, the Corporation
securitizes certain loans originated for sale. Mortgage-backed
securities ("MBS") that the Corporation holds for mortgage-banking
purposes are accounted for as trading securities at the time of
origination. These securities are carried at fair value, determined
on an aggregate basis. Fair value is determined for securities
using published quotes as of the close of business. Realized or
unrealized gains or losses on such MBS are included in gain on
sale of MBS held-for-trading.
Capitalized Mortgage Loan Servicing Rights, Loan Servicing Income
and Sale of Loan Servicing Rights
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage
Servicing Rights, an amendment of SFAS 65". SFAS 122 requires
corporations that acquire mortgage servicing rights ("MSR") through
either the purchase or origination of mortgage loans and sells or
securitizes those loans with servicing rights retained allocate the
total cost of the mortgage loans to the MSR and the loans (without
the MSR) based on their relative fair values. The Statement also
requires that corporations assess their MSR for impairment based on
the fair value of those rights. The carrying value of the MSR is
evaluated on a quarterly basis and any impairment is recognized
through a valuation allowance for each impaired stratum. For
purposes of measuring impairment, the Corporation stratifies its MSR
by various risk characteristics such as loan type, investor type,
interest rate and origination date. The MSR are included in other
assets and are amortized as an offset to service charges in
proportion to and over the period of estimated net servicing income.
Management adopted this Statement effective July 1, 1994. As a
result of this adoption net income was increased by $112 for the
year ended June 30, 1995.
(Continued)
PAGE
<PAGE>
3
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
At the time of loan sales, a gain or loss is recognized and a
premium (excess mortgage servicing rights or "EMSR") is recorded
based upon the present value of the difference between the
contractual interest rates of the loans and the current market rate,
reduced by normal servicing fees, over the estimated lives of the
mortgage loans. Amortization of the EMSR is recorded as an addition
to or reduction of service charges using the level-yield method over
the contractual lives of such loans, with appropriate prepayment
assumptions. The carrying value of the ESMR is evaluated as
described above.
Loan servicing generally consists of collecting mortgage payments
and certain charges collected from borrowers such as late payment
fees, maintaining escrow accounts, and disbursing payments to
investors. Loan servicing income is recorded when earned and is
recorded to service charges. Loan servicing costs are charged to
expense as incurred.
The Corporation has periodically sold loan servicing rights. Gains
and losses from sales of loan servicing rights are calculated using
the specific identification of the related carrying value.
(f) Securities
Debt and equity securities, including MBS, are classified as either
trading, available-for-sale, or held-to-maturity. Securities
classified as trading are carried at fair value with unrealized
gains and losses reported in earnings. Securities
available-for-sale are carried at fair value. Realized gains or
losses on the sales of these available-for-sale securities are
recognized using the specific identification method. Unrealized
gains and losses are recognized using published quotes as of the
close of business with unrealized gains and losses reported in
stockholders' equity, net of tax.
Securities and MBS 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 which approximates the level
yield method. The Corporation has the ability, and it is
management's intention, to hold such securities until maturity.
In November 1995, the FASB issued a special report related to the
implementation of SFAS 115 that allowed companies a one-time
reassessment and related reclassification from the held-to-maturity
category to the available-for-sale category without adverse
accounting consequences for the remainder of the portfolio.
Accordingly, on December 31, 1995, the Corporation reclassified
securities with an aggregate amortized cost of $50,503 from the
held-to-maturity category to the available-for-sale category,
resulting in an increase in gross unrealized gains of $367 and gross
unrealized losses of $294.
(g) Asset and Liability Management Activities
The Corporation uses off-balance sheet instruments, including
interest rate exchange agreements ("swaps"), interest rate cap
agreements and forward sales to manage interest rate exposures.
Swap and cap agreements are designated either against specific loan
portfolios or against short-term deposits. The fair value of the
swap and cap agreements are not reported on the balance sheet. The
interest differential paid or received on the agreements is recorded
as an adjustment to interest income or interest expense of the
related asset or liability. Premiums paid for interest rate caps
are deferred and amortized to interest income or expense over the
term of the agreement.
(Continued)
PAGE
<PAGE>
4
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The Corporation uses mandatory and optional forward commitments to
hedge loans held-for-sale and a portion of rate locked loan
applications. To the extent the Corporation's hedging techniques
are not effective, the Corporation may incur mark-to-market losses
in its loans held-for-sale portfolio, thereby adversely affecting
its results of operations. Realized gains or losses and unrealized
losses on hedging operations are included in gain on sale of MBS
held-for-trading. If at any time the off-balance sheet contract no
longer qualifies for hedge accounting treatment, it is
marked-to-market on a prospective basis.
(h) 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 less estimated costs to sell. Any loss recorded at the time a
foreclosure occurs is classified as a charge-off against the
allowance for loan losses. Losses that result from the ongoing
periodic valuation of these properties are established as valuation
allowances and charged to operations in the period in which they are
identified.
(i) Premises and Equipment
Premises and equipment are stated at cost. 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.
(j) Federal Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on the deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(k) Earnings Per Share
Primary earnings per share is computed based on the weighted average
number of shares of common stock outstanding and common stock
equivalents assumed outstanding during the year. Fully diluted
shares outstanding includes the maximum dilutive effect of stock
issuable upon exercise of common stock equivalents. Common stock
equivalents consist of common stock options. Earnings per share
figures have been restated to take into effect stock splits.
(l) Reclassifications
Certain 1994 and 1995 balances have been reclassified to conform to
the 1996 presentation.
(m) Unaudited quarterly financial data
Quarterly financial data is included in "Selected Consolidated
Financial and other Data", in the Corporation's Annual Report on
Form 10-K.
(Continued)
PAGE
<PAGE>
5
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(2) Securities
A summary of securities at June 30 follows:
1995 1996
------------------------------ -------------------------------
Amor- Gross Gross Amor- Gross Gross
tized unreal- unreal- tized unreal- unreal-
cost, ized ized Fair cost, ized ized Fair
net gain losses value net gain losses value
------------------------------- --------------------------------
Securities
available-
for-sale:
Mutual
funds $4,525 -- 18 4,507 21,139 -- 70 21,069
FHLB stock 3,319 -- -- 3,319 4,014 -- -- 4,014
FHLMC -- -- -- -- 28,025 -- 1,065 29,960
FNMA -- -- -- -- 6,361 -- 49 6,312
SBA -- -- -- -- 13,849 -- 128 13,721
----------------------------------------------------------------
7,844 -- 18 7,826 73,388 -- 1,312 72,076
Securities
held-to
maturity:
Mortgage-
backed
securities
FHLMC 61,612 268 748 61,132 9,941 -- 504 9,437
FNMA 8,284 -- 56 8,228 -- -- -- --
-------------------------------------------------------------------
69,896 268 804 69,360 9,941 -- 504 9,437
-------------------------------------------------------------------
77,740 268 822 77,186 83,329 -- 1,816 81,513
As of June 30, 1995 and 1996, the Corporation was required to maintain 30,580,
and 34,271 shares respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits was
$23, and $250 at June 30, 1995, and 1996, respectively. Accrued interest
receivable on mortgage-backed securities was $524, and $278 for the same
periods. At June 30, 1995, all mortgage-backed securities are
held-to-maturity.
Mortgage-backed securities are allocated based upon contractual maturity
dates. Actual maturities may differ from contractual maturities because the
borrowers have the right to prepay their obligations. Held-to-maturity and
available-for-sale securities pledged as collateral to secure public deposits
were $881 and $0 in 1995 and $0 and $904 in 1996, respectively.
(Continued)
PAGE
<PAGE>
6
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Proceeds from the sale of securities available-for-sale and gross realized
gains and losses are summarized as follows:
Proceeds Gains Losses
--------------------------------------
Securities available-
for-sale:
Year ended June 30, 1995
Equity securities $11,000 -- 23
FHLMC-PC's 12,033 -- 81
--------------------------------------
Total 23,033 -- 104
Year ended June
30, 1996
FHLMC-PC's 32,406 360 22
--------------------------------------
Total 32,406 360 22
The following table shows the contractual maturities of the Corporation's
securities held-to-maturity at June 30, 1996:
Over five
Within one Over one to to ten Over ten
year five years years years Total
---------------------------------------------------------
Amortized
Cost
FHLMC $2,244 7,697 -- -- 9,941
Total
amortized
cost 2,244 7,697 -- -- 9,941
Fair Value
FHLMC $2,192 7,245 -- -- 9,437
Total
fair
value 2,192 7,245 -- -- 9,437
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at June 30, 1996:
Over five
Within one Over one to to ten Over ten
year five years years years Total
----------------------------------------------------------
Amortized
Cost
FHLMC $ -- 2,148 1,582 24,295 28,025
FNMA -- -- -- 6,361 6,361
SBA -- -- -- 13,849 13,849
Mutual
Funds 21,139 -- -- -- 21,139
FHLB Stock 4,014 -- -- -- 4,014
----------------------------------------------------------
Total Amortized cost 25,153 2,148 1,582 44,505 73,388
Over five
Within one Over one to to ten Over ten
year five years years years Total
----------------------------------------------------------
Fair Value
FHLMC $ -- 2,030 1,525 23,405 26,960
FNMA -- -- -- 6,312 6,312
SBA -- -- -- 13,721 13,721
Mutual
Funds 21,069 -- -- -- 21,069
FHLB Stock 4,014 -- -- -- 4,014
------------------------------------------------------------
Total fair value 25,083 2,030 1,525 43,438 72,076
(Continued)
PAGE
<PAGE>
7
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(3) Loans
A summary of loans and loans held for sale at June 30 follows:
1995 1996
------------------------------
Real estate mortgage:
One-to-four family $157,518 159,749
Multi-family 27,169 37,540
Commercial 16,770 14,739
Home equity 3,553 6,792
Installment -- --
Real estate construction:
One-to-four family 22,708 28,277
Land loans 202 194
-------------------------------
Total loans 227,920 247,798
Loans in process (6,215) (9,082)
Deferred loan fees, net (2,146) (2,158)
Allowance for loan losses (2,950) (2,946)
--------------------------------
216,609 233,612
Loans held for sale (6,040) (4,678)
Loans, net 210,569 228,934
---------------------------------
Loans services for others $ 46,671 $ 78,210
Accrued interest on loans is $1,333 and $1,535, respectively, at
June 30, 1995 and 1996.
At June 30, 1996, the composition of the loan portfolio was as
follows (in thousands):
Fixed Rate Adjustable Rate
Term to Maturity:
Less than one year $ 35,000 71,763
1-3 years 11,662 29,640
3-5 years 44,517 26,273
5-10 years 8,676 --
10-20 years 7,371 --
Over 20 years 12,896 --
(Continued)
PAGE
<PAGE>
8
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Nonaccrual loans totaled $597 and $373, respectively at June 30, 1995 and
1996. If interest on these loans had been recognized, such income would
have been $24 and $8, respectively for 1995 and 1996. In addition, at
June 30, 1995 and 1996, the Corporation had restructured loans
aggregating $4,168 and $4,150, respectively. During 1994, 1995 and 1996
$267, $280 and $330, respectively was recognized in interest income on
these loans. Had these loans not been restructured and interest accrued
at their original rates, the additional interest income would have been
$192, $148 and $97, respectively for 1994, 1995 and 1996.
At June 30, 1996, loans totaling $1,599 were impaired of which $1,226 had
allocated reserves of $300. The remaining $373 had no reserves allocated
to them since the value of the impaired loans was equal to or exceeded
the recorded investment. Of the $1,599 of impaired loans, $373 were on
nonaccrual status, $0 were under foreclosure and $1,226 were performing
but judged to be impaired. The average balance of impaired loans during
the year was $1,680 and the Corporation recognized $156 of related
interest income. Interest income is normally recognized on the accrual
basis, however, if the impaired loan is nonperforming, then interest
income is recorded on the receipt of cash. The difference between
interest income recognized on the accrual basis and cash basis is not
significant.
At June 30, 1995 and 1996, the Corporation had outstanding commitments to
fund loans with fixed interest rates totaling $8,000 and $5,200,
respectively and loans with adjustable rates totaling $6,300 and $6,100,
respectively.
The Corporation has forward commitments to sell loans into the secondary
market totaling $7,050, and $5,014 respectively, at June 30, 1995 and
1996.
Significant Gain
On August 12, 1994, a $5,100 loan was repaid and the Corporation recorded
an after-tax gain of approximately $1,450. The components of the gain
included deferred interest and reimbursement of legal expenses and other
costs.
(4) Allowance for Losses on Loans Receivable and Real Estate Owned
A summary of the allowance for losses on loans receivable and real estate
owned follows:
Year ended June 30
1994 1995 1996
--------------------------------------
Loans receivable:
Balances beginning of year $3,090 3,485 2,950
Provision for loss 495 -- --
Reversal of prior provision
for losses -- (335) --
Charge-offs (100) (200) (4)
--------------------------------------
Balances at end of year 3,485 2,950 2,946
Real estate owned:
Balances at beginning of year 391 -- --
Provision for loss -- -- --
Charge-offs (391) -- --
-------------------------------------
Balances at end of year -- -- --
(Continued)
PAGE
<PAGE>
9
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(5) Premises and Equipment
A summary of premises and equipment follows:
Estimated June 30
useful lives 1995 1996
----------------------------------------------
Land $ 713 713
Buildings 40 years 6,397 6,485
Leasehold improvements Lease term 394 425
Furniture and equipment 2-10 years 3,453 3,578
Automobiles 3-4 years 19 19
----------------------
10,976 11,220
Less accumulated depreciation
and amortization 4,617 5,133
------------------------
6,359 6,087
The Corporation took a one-time restructuring charge of $332 during the
year ended June 30, 1995 due to a reduction in its mortgage banking
activity. This restructuring charge included a write off of
approximately $200 in premises and equipment.
During 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The
Statement establishes accounting standards for the impairment of
long-lived assets that either will be held and used in operations or that
will be disposed of. The adoption is not anticipated to have a material
impact on the results of operations or financial condition of the
Corporation.
(6) Deposits
A summary of deposits follows:
June 30
---------------------------------------------------
1995 1996
Amount Percent Rate Amount Percent Rate
--------------------------------------------------
Checking accounts:
Noninterest bearing $ 829 0.40% 1,555 0.71
Interest bearing 7,304 3.60 2.05-2.30% 8,038 3.69 1.70-2.03
Money market deposit
accounts 19,740 9.90 2.05-4.45 34,982 16.04 4.18-6.00
-------------------------------------------------------
27,873 13.90 44,575 20.44
-------------------------------------------------------
Savings accounts 8,133 4.10 3.00 7,922 3.63 3.08
Time deposits by
interest rate:
3.00-3.99% 367 0.20 32 0.01
4.00-4.99% 15,502 7.80 8,648 3.97
5.00-5.99% 51,561 25.80 117,089 53.70
6.00-6.99% 91,659 45.80 36,939 16.95
7.00-7.99% 4,172 2.10 2,389 1.10
8.00-8.99% 474 0.20 469 0.21
9.00 and over 197 0.10 0 0.00
163,932 82.00 165,566 75.93
------------------ ------------------
199,938 100.00 218,063 100.00
(Continued)
PAGE
<PAGE>
10
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Deposit
accounts with
Weighted balances in Accrued
average interest excess of interest payable
rate on deposits $100,000 on deposits
---------------------------------------------------------
June 30,
1995 5.8% $33,586 524
June 30,
1995 5.9 38,682 436
A summary of interest expense on deposits follows:
Year ended June 30
1994 1995 1996
------------------------------------
Checking accounts $1,295 1,076 1,063
Savings accounts and
time deposits 6,413 8,057 10,328
-----------------------------------
$7,708 9,133 11,391
Maturities of time
deposits are as follows:
June 30
---------------------------
1995 1996
----------------------------
Years ending June 30:
1996 $118,824 --
1997 17,972 123,400
1998 8,055 15,107
1999 6,185 8,657
2000 12,789 13,130
2001 -- 5,164
Thereafter 107 108
-----------------------------
163,932 165,566
(7) Asset and Liability Management Activities
The Corporation has entered into interest rate swap and cap agreements
with primary dealers, the Federal Home Loan Bank of Seattle ("FHLB") and
other correspondent banks to manage interest rate risk or reduce deposit
costs. Swap and cap agreements expose the Corporation to credit risk in
the event of nonperformance by counterparties to such agreements. This
risk consists primarily of the termination value of agreements where the
Corporation is in a favorable position. The Corporation controls the
credit risk associated with its swap and cap agreements through
counterparty credit review and monitoring procedures. None of the
Corporation's derivative instruments are what are termed leveraged
derivative instruments.
During the years ended June 30, 1995 and 1996, the Corporation entered
into interest rate swaps with notional values totaling $7.5 million and
$0, respectively. These swaps had the effect of reducing the
Corporation's interest expense on deposits. The net difference between
the interest received and paid on the interest rate swaps of $54, $42 and
$49, respectively for the years ended June 30, 1994, 1995 and 1996, is
recorded as a decrease to interest expense on deposits.
On June 28, 1996, the Corporation entered into interest rate cap
agreements with notional values totaling $5,000. These agreements were
designated against certain loans. If three month Libor exceeds 6%, the
net interest received would be recorded as an increase to interest income
on loans.
(Continued)
PAGE
<PAGE>
11
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Interest rate cap agreements at June 30, 1996 are summarized as follows:
Notional amount $5,000
Weighted average maturity 24 months
Strike rate 6.00%
Three month Libor 5.56%
Payment terms Quarterly
(8) FHLB Advances
FHLB advances are summarized as follows:
June 30
------------------------------------
1995 1996
----------------------------------------------------------
Weighted average Weighted average
Maturity date Amount interest rate Amount interest rate
- ---------------------------------------------------------------------------
Year ended June 30:
1996 $30,000 6.27% -- --
1997 21,000 6.74 52,383 5.87
1998 10,000 6.27 16,000 5.81
Thereafter 159 7.67 159 7.67
---------------------------------------------------
$61,159 6.44 68,542 5.86
FHLB advances are collateralized by the investment in FHLB stock and
otherwise unencumbered one-to-four family permanent mortgages equal to
120% of outstanding advances.
(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) which 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 the Federal Home Loan Mortgage Corporation, 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 thirty to 270 days.
Securities sold under agreements to repurchase the same securities
consist of mortgage-backed securities summarized as follows:
Underlying securities
--------------------------
Book value
Weighted including
Balance average interest accrued Market
outstanding rate interest value
-----------------------------------------------------------
June 30,
1995 $23,285 6.12% 25,685 25,100
June 30,
1995 20,450 5.44 21,266 21,120
(Continued)
PAGE
<PAGE>
12
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
A summary of outstanding agreements' activity follows:
Year ended June 30
-------------------
1995 1996
--------------------
Maximum amount of outstanding
agreements at any month-end $36,313 24,261
Average amount of outstanding
agreements during the year 26,418 21,432
The Corporation has a commitment of $2,000 from a regional commercial
bank to purchase Federal funds on an unsecured basis subject to annual
renewal.
On June 28, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities".
This Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities and
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. The
adoption is not anticipated to have a material impact on the results of
operations or financial condition of the Corporation.
(10) Federal Income Taxes
Income tax expense includes the following components:
Year ended June 30
------------------------------------
1994 1995 1996
------------------------------------
Current $1,033 151 780
Deferred -- 1,338 387
-------------------------------------
1,033 1,489 1,167
Deferred Federal income taxes result from temporary differences in the
recognition of income and expense for financial statement and income tax
reporting purposes. The sources of these temporary differences and their
tax effects follow:
Year ended June 30
-------------------
1995 1996
--------------------
Premises and equipment $ -- (12)
Loan fee income for financial
statements recognized for tax
purposes as loans are repaid 207 169
Differences between provision for
loan and securities losses taken
for financial statements and bad debt
deduction for tax purposes 863 141
FHLB stock dividend and redemptions 61 90
Deductible expenses previously
recognized for financial statements 212 --
Accrued expenses and mark-to-market
adjustments 8 22
Prepaid expenses (13) (23)
----------------------
1,338 387
The provision for Federal income tax expense approximates the amount
computed by applying the "expected" Federal income tax rate of 34% to
income before Federal income taxes.
Under provision of the Internal Revenue Code, the Corporation is 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. SFAS 109 provides that savings banks are not required to
(Continued)
PAGE
<PAGE>
13
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
provide a deferred tax liability for additions to the tax bad debt
reserve accumulated as of December 31, 1987, which amount for the
Corporation is $473. 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 June 30:
1995 1996
--------------------------------------
Deferred tax assets:
Securities available-for-sale $ -- 446
Loans 90 --
----------------------------------------
Gross deferred tax assets 90 446
Deferred tax liabilities:
Loans -- (51)
Deferred loan fees (824) (993)
Premises and equipment (370) (358)
FHLB stock (509) (599)
Other (36) (367)
-----------------------------------------
Gross deferred tax liabilities (1,739) (2,037)
-----------------------------------------
Net deferred tax liability (1,649) (1,591)
A valuation allowance for deferred tax assets was not considered
necessary at June 30, 1995 or 1996.
(11) Retained Earnings
(a) Stock Conversion
Concurrent with the 1992 stock conversion, the Savings Bank
established a liquidation account equal to its retained earnings as
reflected in its March 31, 1992 statement of financial condition.
The liquidation account is maintained for the benefit of eligible
depositors who maintain eligible accounts in the Savings Bank after
the conversion. In the event of a complete liquidation of the
Savings Bank (and only in such an event), eligible depositors who
continue to maintain eligible accounts shall be entitled to receive
a distribution from the liquidation account before any liquidating
distribution may be made with respect to common stock.
(b) Restrictions on Dividends
The Savings Bank's liquidation account does not restrict the use or
application of net worth except for the repurchase of stock and the
payment of dividends. Current regulations allow the Savings Bank to
pay dividends on its stock if its regulatory capital would not
thereby be reduced below the amount required for the aforementioned
liquidation account or statutory capital requirements set by the
Office of Thrift Supervision ("OTS").
(c) Regulatory Capital
At June 30, 1996 banking regulations require institutions to have a
minimum regulatory tangible and core (or leverage) capital equal to
1.5% and 3%, respectively, of adjusted total assets, and Tier 1 and
total risk-based capital ("RBC") equal to 4% and 8%, respectively,
of risk-weighted assets. The OTS has adopted a final rule adding an
interest rate risk component to the RBC requirement although
implementation of the regulation has been delayed. Management
currently does not believe the interest rate risk rule will
materially affect the Corporation's current business strategy when
it is implemented.
(Continued)
PAGE
<PAGE>
14
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") instituted a risk-based assessment system that defined
five capital tiers: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Under the regulations, a well capitalized
institution must have a Tier 1 RBC ratio of at least 6%, a total
capital ratio of at least 10% and a leverage ratio of at least 5%
and not be subject to a capital directive order. The Savings Bank
had a tangible capital ratio of 6.4%, Tier 1 RBC ratio of 12.4%, a
total capital ratio of 13.7% and a leverage ratio of 6.4% at June
30, 1996, compared with 6.2%, 12%, 13.2% and 6.2% at June 30, 1995,
respectively. At June 30, 1996, the Savings Bank was in compliance
with the regulatory requirements for well-capitalized institutions.
(12) Mortgage Servicing Rights
A summary of capitalized mortgage servicing rights and excess mortgage
servicing rights at June 30, 1995 and 1996 follows:
June 30
-------------------------------------------------------------------
1995 1996
-------------------------------------------------------------------
Excess Excess
Capitalized mortgage Capitalized mortgage
mortgage servicing servicing mortgage servicing servicing
rights rights rights rights
--------------------------------------------------------------------
Fair value
at beginning
of year $ -- 3 169 74
Additions 222 85 400 153
Amortization 53 11 92 56
Sales -- 3 -- --
Allowance for
losses -- -- -- --
---------------------------------------------------------------
Fair value at
end of year 169 74 477 171
There was no activity in the allowance for loss for the years ended June
30, 1995 and 1996.
(13) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS 107),
Disclosures About Fair Value of Financial Instruments, requires the
Corporation to disclose estimated fair values for its financial
instruments. The fair value estimates, methods and assumptions, set
forth below for the Corporation's financial instruments, are made solely
to comply with the requirements of SFAS 107 and should be read in
conjunction with the financial statements and footnotes in this report.
The fair value estimates 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, 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 Corporation's
financial instruments, as defined by SFAS 107:
(Continued)
PAGE
<PAGE>
15
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
At June 30, 1995 At June 30, 1995
----------------------------------------------------
Carrying Estimated fair Carrying Estimated
value value value fair value
-----------------------------------------------------
Financial assets:
Cash and short-term
securities $5,762 5,762 8,618 8,618
Securities available-
for-sale 7,862 7,862 72,07 72,076
Mortgage-backed
securities 69,896 69,360 9,941 9,437
Loans, net 221,705 224,383 238,716 240,205
Normal servicing rights 169 169 477 540
Excess servicing rights 74 74 171 194
Financial liabilities:
Deposit accounts 199,138 201,651 218,063 218,238
Borrowings 84,444 84,653 88,992 88,921
Interest rate swaps/caps 7,500 7,507 5,000 5,000
Cash and short-term securities
The carrying amount represents fair value.
Securities
Fair values are based on quoted market prices or dealer quotes.
Mortgage-backed securities
Fair values are based on quoted market prices or dealer quotes.
Loans, net
Fair values are estimated using current market interest rates to
discount future cash flows for each of fifteen different loan
segments. Interest rates used to discount the cash flows are based
on U.S. Treasury yields or other market interest rates with
appropriate spreads for each segment. The spread over the treasury
yields or other market rates is used to account for liquidity,
credit quality and higher servicing costs. Prepayment rates are
based on expected future prepayment rates or where appropriate and
available, market prepayment rates.
Servicing rights
Fair values for mortgage servicing rights are based on quoted market
prices discounted for costs to sell.
Deposit accounts
SFAS 107 states 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.
(Continued)
PAGE
<PAGE>
16
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Off-balance sheet financial instruments
Fair values are estimated using market interest rates to discount
the future cash flows of the held-for-sale commitments, sale
agreements, interest rate cap agreements and swaps. Commitments to
originate portfolio loans are valued consistent with the method
described above for loans receivable.
LIMITATIONS
These fair value disclosures are made solely to comply with the
requirements of SFAS 107. The calculations represent management's
best estimates; however, due to the lack of broad markets and the
significant items excluded from this disclosure the calculations do not
represent the underlying value of the Corporation at June 30, 1995 and
1996. These amounts have not been updated since year-end; therefore, the
valuations may have changed significantly since that point in time.
(14) Employee Benefit Plans
(a) Savings Plan
In October 1991, the Corporation adopted a savings plan under
section 401(k) of the Internal Revenue Code, covering substantially
all full-time employees after one year of continuous employment.
Under the plan, employee contributions are partially matched by the
Corporation. 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 $24, $27 and
$24 to the plan for the years ended June 30, 1994, 1995 and 1996,
respectively.
(b) Employee Stock Ownership Plan
The Corporation established an employee stock ownership plan (ESOP)
which became effective on July 1, 1992 for employees of the
Corporation, the Savings Bank, and its subsidiary who have at least
one year of continuous service. The ESOP was initially funded by
the Corporation for $117 which was used to purchase shares in the
conversion. The Corporation pays all ESOP expenses. Shares
purchased by the ESOP are held in a suspense account for allocation
among the participants. Benefits become 20% vested after the third
year of service with an additional 20% vesting each year thereafter
until 100% vesting after seven years. Forfeitures are reallocated
annually among remaining participating employees. For the years
ended June 30, 1994, 1995 and 1996, the Corporation contributed
$100, $75 and $91, respectively to the ESOP, which is invested in
Cascade Financial Corporation stock.
(c) Employee Stock Purchase Plan
The Corporation maintains an employee stock purchase plan, under the
terms of which 78,125 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 an
aggregate of shares of Common Stock have been authorized for
issuance to certain key employees and directors of the Corporation
and it subsidiaries upon exercise of stock options. The options
granted under these plans are, in general, exercisable under a
vesting schedule whereby all options become exercisable over seven
years, and expire not more than ten years after the date of grant.
All options granted have limited rights which 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.
(Continued)
PAGE
<PAGE>
17
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
At June 30, 1995 and 1996, 54,884 and 111,801 shares, respectively,
were fully exercisable. They range in price from $3.07 to $13.60
per share in 1995 and $2.46 to $12.40 per share in 1996.
During 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-based Compensation". The statement requires expanded
disclosures of stock-based compensation arrangements with employees
and encourages (but does not require) application of the fair value
recognition provision in the statement. SFAS No. 123 does not alter
the existing accounting rules for employee stock-based programs.
Companies may continue to follow rules outlined in Accounting
Principles Board Opinion 25 ("APB 25"), but they will now be
required to disclose the pro forma amounts of net income and
earnings per share that would have been reported had the company
elected to follow the fair value recognition provision of SFAS No.
123. The adoption of the disclosure requirements of SFAS No.123
will have no material impact on the results of operations or
financial condition of the Corporation.
Changes in total options outstanding during 1994, 1995 and 1996 are as
follows:
1994
---------------------------------------
Shares Under Option Price Per
Option Share
----------------------------------------
Outstanding at beginning of year 82,656 $6.00
Granted during year 66,100 14.50 to 10.50
Exercised during year (625) 10.50
Two Five-for-four stock splits 82,828 14.50 to 6.00
Forfeited during year (2,764) 14.50 to 3.84
----------------------------------------
Outstanding at end of year 228,195 9.28 to 3.84
1995
---------------------------------------
Shares Under Option Price Per
Option Share
----------------------------------------
Outstanding at beginning of year 228,195 9.28 to 3.84
Granted during year 4,021 17.00 to 10.88
Exercised during year (5,788) 10.88 to 3.84
Two Five-for-four stock splits 52,947 17.00 to 3.84
Forfeited during year (17,636) 9.28 to 3.84
----------------------------------------
Outstanding at end of year 261,739 13.60 to 3.07
1996
---------------------------------------
Shares Under Option Price Per
Option Share
----------------------------------------
Outstanding at beginning of year 261,739 13.60 to 3.07
Granted during year 35,789 17.00 to 13.30
Exercised during year (16,617) 7.42 to 3.07
Two Five-for-four stock splits 66,673 17.00 to 3.07
Forfeited during year (15,346) 17.00 to 3.07
----------------------------------------
Outstanding at end of year 332,238 13.60 to 2.46
(Continued)
PAGE
<PAGE>
18
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(15) Contingencies
The Corporation is a defendant in various legal proceedings arising in
connection with its business. It is the opinion of management that the
financial position 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 OTS and the Federal Deposit Insurance
Corporation ("FDIC") routinely examine the Corporation's financial
statements as part of their legally prescribed oversight of the thrift
industry. Based on these examinations, the regulators can direct that
the Corporation's financial statements be adjusted in accordance with
their findings. A future examination by OTS or the FDIC could include a
review of certain transactions or other amounts reported in the
Corporation's 1996 financial statements. In view of the increasingly
uncertain regulatory environment in which the Corporation operates, the
extent, if any, to which a forthcoming regulatory examination may
ultimately result in adjustments to the 1996 financial statements cannot
presently be determined.
On February 21, 1995, the United States Supreme Court refused to consider
the United States Ninth Circuit Court of Appeals ruling upholding an OTS
restitution order against the Corporation's former Chairman and Chief
Executive Officer. As a result the Corporation recorded approximately
$400 of after-tax income from the restitution order. The OTS has
separately brought an enforcement action in relation to security provided
by the former executive, and in March 1994, the United States District
Court for the Western District of Washington entered a judgement
requiring payment of approximately $280 to the Corporation by the former
executive. During 1996, $150 of this amount was collected. Ultimate
collection of the remaining amount will be recorded as income when
received.
On March 30, 1995, the United States District Court granted the
Corporation's motion for summary judgement in a suit brought by the
former executive against the Corporation and several current executive
officers.
(16) Condensed Financial Information of Cascade Financial Corporation
Following are the condensed financial statements of Cascade Financial
Corporation (Parent only) for the period indicated. The holding company
was formed on November 30, 1994.
Balance Sheet
June 30,
1995 1996
------------------------------------------
Assets:
Cash -- 40
Investment in subsidiary $19,294 21,580
Other Assets -- 63
------------------------------
19,294 21,683
Liabilities and
Stockholders' Equity:
Other Liabilities -- 2
Stockholders' equity 19,294 21,681
----------------------------
19,294 21,683
(Continued)
PAGE
<PAGE>
19
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Statement of Operations
For the periods
November 30, 1994 to June 30, 1995 and
July 1, 1995 to June 30, 1996
1995 1996
-----------------------------
Equity in undistributed net income
of the subsidiary $1,088 $2,356
Operating Expenses -- (135)
Income before Federal income taxes 1,088 2,221
Income tax benefit -- 47
Net income 1,088 2,268
For the periods
November 30, 1994 to June 30, 1995 and
July 1, 1995 to June 30, 1996
1995 1996
-----------------------------
Cash flows from operating activities:
Net income $1,088 2,268
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in net income of subsidiary (1,088) (2,356)
Increase in other assets -- (63)
Increase in other liabilities -- 2
------------------------
Net cash used by operating activities -- (149)
Cash flows from investing activities:
Dividends received from subsidiary -- 50
Net cash provided by financing activities -- 50
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 139
Net cash provided by financing activities -- 139
Net increase in cash and cash equivalents -- 40
Cash and cash equivalents:
Beginning of year -- --
End of year -- 40
PAGE
<PAGE>
(This page left blank intentionally)
PAGE
<PAGE>
Stock Transfer Agent Legal Counsel
Chemical Mellon Shareholder Services Anderson Hunter, PS
50 California Street, 10th Floor P.O. Box 5397
San Francisco, California 94111 Everett, Washington 98606
Auditors Special Counsel
KPMG Peat Marwick LLP Breyer & Aguggia
3100 Two Union Square 1300 I Street NW
601 Union Street Suite 470 East
Seattle, Washington 98101-2327 Washington, D.C. 20005
Annual Meeting
The annual meeting of the stockholders of Cascade Financial Corporation will
be Saturday, October 26, 1996 at 10:00 a.m. at Cascade Savings Bank located at
3828 Colby Avenue, Everett, Washington.
Form 10-K
A copy of the Form 10-K as filed with the Securities and Exchange Commission
will be furnished to stockholders upon written request to the Secretary,
Cascade Financial Corporation, 2828 Colby Avenue, Everett, WA 98201.
Beginning in October 1996, the Corporation's 10-K, 10-Q and other disclosure
documents filed with the Securities and Exchange Commission can be obtained
from the SEC home page on the World Wide Web at htt//www.sec.gov
Full Service Branch Locations
MAIN 2828 Colby Avenue, Everett, Washington
BELLEVUE 200 108th N.E., Bellevue, Washington
HARBOUR POINTE 11700 Mukilteo Speedway, Mukilteo, Washington
ISSAQUAH 305 Front Street, Issaquah, Washington
LYNNWOOD 19419 Highway 99, Lynnwood, Washington
MARYSVILLE 815 State Avenue, Marysville, Washington
MT. VERNON 1725 Continental Place, Suite C, Mt. Vernon, Washington
SMOKEY POINT 3532 172nd St NE, Arlington, Washington
Loan Origination Office
BELLINGHAM 909 Lakeway Drive, Suite 200, Bellingham, Washington
PAGE
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
Cascade Financial Corporation
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
Cascade Savings Bank, FSB 100% United States
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 Savings Bank, FSB.
PAGE
<PAGE>
Exhibit 23
Consent of Auditors
KPMG Peat Marwick LLP
3100 Two Union Square
601 Union Street
Seattle, WA 98101-2327
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Cascade Financial Corporation and Subsidiary:
We consent to incorporation by reference in the registration statement on Form
S-8 of Cascade Financial Corporation of our report dated July 31, 1996
relating to the consolidated balance sheets of Cascade Savings Bank, FSB and
subsidiary as of June 30, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the three
year period ended June 30, 1996, which report appears in the June 30, 1996
Annual Report on Form 10-K of Cascade Savings Bank, FSB. Our report refers to
a change in method of accounting for impaired loans.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
July 31, 1996
PAGE
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 3627
<INT-BEARING-DEPOSITS> 4991
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72076
<INVESTMENTS-CARRYING> 9941
<INVESTMENTS-MARKET> 9437
<LOANS> 233612
<ALLOWANCE> 2946
<TOTAL-ASSETS> 334431
<DEPOSITS> 218063
<SHORT-TERM> 72833
<LIABILITIES-OTHER> 6561
<LONG-TERM> 16159
0
0
<COMMON> 20
<OTHER-SE> 20795
<TOTAL-LIABILITIES-AND-EQUITY> 334431
<INTEREST-LOAN> 19650
<INTEREST-INVEST> 4978
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<INTEREST-TOTAL> 24776
<INTEREST-DEPOSIT> 11391
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<INTEREST-INCOME-NET> 8213
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<EXPENSE-OTHER> 7004
<INCOME-PRETAX> 3435
<INCOME-PRE-EXTRAORDINARY> 2268
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2268
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .99
<YIELD-ACTUAL> 8.08
<LOANS-NON> 373
<LOANS-PAST> 0
<LOANS-TROUBLED> 4150
<LOANS-PROBLEM> 2527
<ALLOWANCE-OPEN> 2950
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<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2946
<ALLOWANCE-DOMESTIC> 1340
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1306
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