<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-K/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1997
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 91-1661954
- ---------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
2828 Colby Avenue, Everett, Washington 98201
- ----------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including (425) 339-5500
area code: -------------------------------
Securities registered pursuant to Section None
12(b) of the Act: -------------------------------
Securities registered pursuant to Section Common Stock, par value $0.01
12(g) of the Act: 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 19, 1997, there were issued and outstanding 3,386,039
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 19, 1997, the aggregate value of the Common Stock outstanding
held by nonaffiliates of the registrant was $48.3 million (3,386,039 shares at
$14.25 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, 1997 (the "Annual Report") (Parts I and II).
2. Portions of registrant's Definitive Proxy Statement for the 1997
Annual Meeting of Stockholders (Part III).
<PAGE>
PART IV
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)(2) Independent Auditors' Report
Consolidated Financial Statements
(a) Consolidated Balance Sheets as of June 30, 1996 and June 30, 1997.
(b) Consolidated Statements of Operations for the Years Ended June 30,
1995, 1996 and 1997.
(c) Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1995, 1996 and 1997.
(d) Consolidated Statements of Cash Flows for the Years Ended June 30,
1995, 1996 and 1997.
(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
3.1 Certificate of Incorporation of Cascade Financial Corporation*
3.2 Bylaws of Cascade Financial Corporation*
10.1 Cascade Financial Corporation 1994 Employee Stock Purchase Plan*
10.2 Cascade Financial Corporation 1992 Stock Option and Incentive
Plan**
10.3 Cascade Financial Corporation Employee Stock Ownership Plan**
10.4 Cascade Financial Corporation 1997 Stock Option Plan***
13 Cascade Financial Corporation 1997 Annual Report to
Stockholders
21 Subsidiaries****
(b) Reports on Form 8-K
No Forms 8-K were filed during the quarter ended June 30, 1997.
- ----------------------
* 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.
*** Incorporated by reference to Appendix E to the Prospectus included in the
Corporation's Registration Statement on Form S-4 (File No. 333-24203)
**** Previously filed
-34-
<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: October 10, 1997 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 Date: October 10, 1997
Officer)
Date: October 10, 1997
By: /s/ C.F. Safstrom By: /s/ Ronald E Thompson
---------------------------- ---------------------------
C.F. Safstrom Ronald E. Thompson
President and Director Director
Date: October 10, 1997 Date: October 10, 1997
By: /s/ Robert Disotell By: /s/ G. Brandt Westover
---------------------------- ---------------------------
Robert Disotell G. Brandt Westover
Executive Vice President/Director Director
Date: October 10, 1997 Date: October 10, 1997
By: /s/ David W. Duce By: /s/ Paull Shin
---------------------------- ---------------------------
David W. Duce Paull Shin
Director Director
Date: October 10, 1997 Date: October 10, 1997
By: /s/ Gary Meisner By: /s/Joan M. Earl
---------------------------- ---------------------------
Gary Meisner Joan M. Earl
Director Director
Date: October 10, 1997 Date: October 10, 1997
By: /s/ Dwayne Lane
----------------------------
Dwayne Lane
Director
Date: October 10, 1997
-35-
<PAGE>
1997
ANNUAL REPORT
[Logo]
<PAGE>
[Logo]
TABLE OF CONTENTS
Message to Stockholders. . . . . . . . . . . . . . . . . . 2
Five-Year Financial Highlights . . . . . . . . . . . . . . 3
Business Strategy. . . . . . . . . . . . . . . . . . . . . 4
Financial Condition and Results of Operations. . . . . . . 5
Comparison of Operating Results. . . . . . . . . . . . . . 6
Common Stock Information . . . . . . . . . . . . . . . . . 8
Independent Auditors' Report . . . . . . . . . . . . . . . 9
Corporate Information . . . . . . . . . . . . Inside Back Cover
BOARD OF DIRECTORS
Frank M. McCord (1)
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER
David W. Duce (3)
VICE CHAIRMAN, ATTORNEY, DUCE & BASTIAN
C. Fredrick Safstrom (1)
PRESIDENT, CHIEF OPERATING OFFICER
Robert G. Disotell
EXECUTIVE VICE PRESIDENT
Dennis R. Murphy, Ph.D. (2)
DEAN AND PROFESSOR OF ECONOMICS, WESTERN WASHINGTON UNIVERSITY
Joan M. Earl (2)
DEPUTY COUNTY EXECUTIVE, SNOHOMISH COUNTY
Gary L. Meisner (2)
PRESIDENT, CLEARVIEW MANAGEMENT, INC.
G. Brandt Westover (1)
VICE PRESIDENT, PAINE WEBBER, INC.
Ronald E.Thompson (1)
PRESIDENT, WRE COMMERCIAL & PROPERTY MANAGEMENT
Paull H. Shin, Ph.D. (3)
PROFESSOR OF HISTORY, SHORELINE COMMUNITY COLLEGE
Dwayne Lane (3)
PRESIDENT, DWAYNE LANE AUTO CENTERS
Henry M. Robinett (2)
VICE PRESIDENT, BOYDEN REALTY
David R. O'Connor (1)
CO-OWNER, MOBILE COUNTRY CLUB
(1) MEMBER OF THE EXECUTIVE COMMITTEE.
(2) MEMBER OF THE AUDIT AND FINANCE COMMITTEE.
(3) MEMBER OF THE PERSONNEL AND COMPENSATION COMMITTEE.
CASCADE BANK EXECUTIVE OFFICERS
Frank M. McCord
CHAIRMAN, CHIEF EXECUTIVE OFFICER
C. Fredrick Safstrom
PRESIDENT, CHIEF OPERATING OFFICER
J. Wesley Cochran
EXECUTIVE VICE PRESIDENT, BRANCH BANKING
Robert G. Disotell
EXECUTIVE VICE PRESIDENT, RETAIL LENDING
Steven R. Erickson
EXECUTIVE VICE PRESIDENT, INCOME PROPERTY AND CONSTRUCTION LENDING
David R. Little
EXECUTIVE VICE PRESIDENT, BUSINESS BANKING
James J. Palm
EXECUTIVE VICE PRESIDENT, WHOLESALE LENDING
Russell E. Rosendal
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY/TREASURER
Vera E. Wildauer
SENIOR VICE PRESIDENT, MARKETING DIRECTOR
1
<PAGE>
TO OUR STOCKHOLDERS, EMPLOYEES, AND CUSTOMERS:
This last year has been a very exciting one for our company. We made many
changes to enhance stockholder value for the long term. And, in the coming
months you will begin to see the results of these efforts as Cascade expands
into a full service community bank.
Our merger with American First National Bank was completed in July 1997. While
Cascade's balance sheet already grew by 10% during the year ended June 30, 1997,
this merger increases the Bank's assets by an additional 19%. These two
companies blend very complementary strengths - serving to build a powerful
enterprise for customers, stockholders, and employees. American First National
Bank specialized in commercial and consumer lending, while Cascade's historical
strength is in mortgage lending. Together, we can offer a broader range of
community banking services through more branch locations in Snohomish County.
Our strategy for the coming year will be to focus on these new products and
services, with a special emphasis on serving the small business market. This
will provide a higher rate of return while diversifying our loan portfolio.
For the second consecutive year, Cascade's checking accounts have received
national recognition as being the best in our market place. In their May issue,
MONEY MAGAZINE named Cascade Bank's Free Checking of the best values in the
Puget Sound Region. And with recent additions of services like Visa-Registered
Trademark- CheckCard and our 24-hour TellerPhone, Cascade is well-positioned to
serve the banking needs of today's busy consumers.
The local Puget Sound economy continued its growth and our loan demand has been
strong. Good quality, higher yielding loans have been added to our loan
portfolio. During the year, the Bank's loan portfolio grew by 28% as many lower
earning investments were replaced with higher earning loan products. These loans
include a wide array of products, ranging from residential and consumer loans to
those oriented to the business market. Because most of these loans have
adjustable rates, our exposure to interest fluctuations has been reduced.
In 1996, Congress enacted legislation that resulted in comparable FDIC insurance
premiums for the entire banking industry. As a result, Cascade recorded a charge
of $1.2 million before taxes for the recapitalization of the Savings Association
Insurance Fund (SAIF). The long term effect of this legislation, however, will
be to increase Cascade's annual net earnings by at least $300,000.
Finally, we were especially pleased to declare our fifth consecutive 25% stock
dividend during this past year.
We appreciate the commitment of our employees during the past year and believe
our team is well qualified to provide outstanding customer service and improve
shareholder value.
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.
[Picture] Sincerely, [Picture]
/s/ Frank M. McCord /s/ Fred Safstrom
Frank M. McCord Fred Safstrom
Chairman and Chief President and Chief
Executive Officer Operating Officer
2
<PAGE>
<TABLE>
<CAPTION>
FIVE-YEAR FINANCIAL HIGHLIGHTS
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS (UNAUDITED)
June 30, 1993 1994 1995 1996 1997
AT YEAR END
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $222,421 258,049 310,943 334,431 368,126
Loans 156,960 183,839 216,609 233,612 305,820
Cash and securities 23,127 65,794 83,484 90,635 51,309
Deposits 166,143 181,131 199,938 218,063 244,795
Stockholders' equity 14,367 16,369 19,282 20,810 22,558
FOR THE YEAR
--------------------------------------------------------------------------------------------------------------------
Interest income 14,333 16,545 23,378 24,776 26,315
Interest expense 9,329 9,142 13,933 16,563 17,388
Net interest income 5,004 7,403 9,445 8,213 8,927
Provision for (recovery of) loan losses 100 495 (335) -- --
Net interest income after provision
for loan losses 4,904 6,908 9,780 8,213 8,927
Other income 6,411 5,135 2,478 2,226 1,410
Other expense 8,975 9,006 7,879 7,004 8,512**
Income before Federal income taxes 2,340 3,037 4,379 3,435 1,825
Federal income taxes 802 1,033 1,489 1,167 621
Net income 1,538 2,004 2,890 2,268 1,204**
Per share earnings (primary) .58 .73 1.03 .80 .42
Weighted average number of shares
outstanding (primary) 2,633,904 2,748,148 2,818,286 2,846,970 2,869,167
FINANCIAL RATIOS
--------------------------------------------------------------------------------------------------------------------
Return on average assets .77% .85 .98 .71 .58
Return on average equity 12.05 12.98 15.75 11.31 9.45
Net interest margin 2.81 3.31 3.32* 2.68 2.63
Allowance for loan losses to net loans 1.93 1.86 1.36 1.29 .95
Nonperforming assets to total assets 3.80 2.66 .11 .34 .41
</TABLE>
* MARGIN FOR 1995 INCLUDES RECOVERY OF $2.1 MILLION OF DELINQUENT
INTEREST. MARGIN WITHOUT THIS RECOVERY IS 2.59%
** INCLUDES THE ONETIME SAIF RECAPITALIZATION CHARGE OF $1.2
MILLION. NET INCOME WITHOUT THIS CHARGE WAS $2.0 MILLION.
3
<PAGE>
BUSINESS STRATEGY
Our business strategy is designed to increase long-term shareholder value. The
critical elements of this strategy include:
- Providing world class service to customers
- Expanding commercial banking for small and mid-sized businesses
- Increasing branch office locations
- Maintaining strong credit quality
- Improving operating efficiency
- Reducing our exposure to interest rate risk
We are currently increasing our portfolio of business, consumer, multifamily,
and construction loans that have relatively high margins. This asset growth will
be funded by increasing deposit relationships with businesses and individuals.
Cascade Bank provides a full array of deposit products to serve the needs of
businesses and individuals through branches, ATM's, the EXCHANGE-Registered
Trademark-/ACCEL-Registered Trademark- point-of-sale system, Cascade's
TELLERPHONE banking system, and other electronic banking channels.
CONSUMER BANKING
Our consumer banking strategy is based on growth through aggressive marketing
and increasing the number of account relationships with each customer we serve.
A high priority will be increasing the number of checking accounts since this is
the most important relationship for many customers and a source of low-cost
deposits.
(DOLLARS IN THOUSANDS)
Balances Outstanding at June 30, 1995 1996 1997
Deposits $ 199,938 218,063 244,795
One-to-four family home loans 157,518 159,749 181,841
Home equity loans 3,553 6,792 17,580
Consumer installment loans -- 507 9,745
BUSINESS BANKING
Our merger with American First National Bank provided a team of experienced
commercial bankers. Additional business bankers have also been recruited to
service the business banking needs of the geographic areas we serve. We believe
there is a great opportunity to attract many new clients who want personal
service and products tailored to their needs.
Cascade provides loans to businesses, developers, builders, owners and investors
of residential and commercial real estate properties in the Puget Sound region.
(DOLLARS IN THOUSANDS)
Balances Outstanding at June 30, 1995 1996 1997
Construction loans 22,708 28,277 31,314
Multifamily loans 27,169 37,540 57,655
Commercial real estate loans 16,770 14,739 25,250
4
<PAGE>
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REVIEW OF FINANCIAL CONDITION
Total assets increased to $368.1 million at June 30, 1997, a 10% increase over
1996. Total loans increased by $72.2 million to $305.8 million from $233.6 at
June 30, 1996 and $183.8 million at June 30, 1995. Most of this increase was due
to portfolio originations of nonconforming residential loans, multifamily loans,
home equity loans and loans on commercial real estate. Cash and securities
decreased to $51.3 million from $90.6 million in 1996 and $83.5 million in 1995.
Proceeds from the decrease in cash and securities were used to fund the increase
in loans.
Management's long-term strategy is to increase commercial, multifamily,
construction, and consumer loan portfolios. In addition, the bank is now
actively marketing commercial business products and additional consumer loan
products. Management will focus on marketing and expanding these product lines
in the coming year.
Deposits increased to $244.8 million at June 30, 1997 compared with $218.1
million in 1996 and $199.9 million in 1995. Management seeks to fund asset
growth principally through retail deposits from local communities. The
introduction of business deposit accounts will provide a low cost funding source
for commercial lending products while providing a full range of products and
services for new business customers.
ASSET QUALITY
At June 30, 1997, nonperforming loans remained low at $759,000 compared with
$373,000 in 1996 and $597,000 in 1995. Loans classified as substandard
decreased from $6.5 million at June 30, 1995 to $1.4 million in 1996 and
increased slightly to $1.5 million at June 30, 1997.
At June 30, 1997, real estate owned totaled $750,000 compared with $747,000 at
June 30, 1995 and $150,000 in 1994. One property amounted to $421,000 or 56% of
the 1997 total.
ASSET AND LIABILITY MANAGEMENT
Cascade Financial Corporation's principal objective is to achieve long-term
profitability while limiting exposure to fluctuations in interest rates. The
Corporation monitors its interest rate risk using several methodologies,
principally financial modeling. A well-matched balance sheet will not benefit as
much from falling interest rates compared to one with a substantial negative
gap, but will not suffer as much from rising interest rates. Management intends
to reduce risk where appropriate but accept a degree of risk when warranted by
economic circumstances and internal risk tolerance.
The Corporation's asset and liability management strategy has resulted in a
negative one-year gap as a percent of total assets of 23% at June 30, 1997 and
14% at June 30, 1996. There are numerous estimates and assumptions that
significantly influence this calculation. The near term earnings exposure to
rate maturity gaps is evaluated in the context of certain upward and downward
interest rate changes occurring ratably over a twelve month period. At June 30,
1997, a 200 basis point increase in rates would increase forecasted net interest
income by approximately 1%.
The Board of Directors set targets for allowable changes in net interest income,
and net portfolio value. Management actively manages the actual asset and
liability maturities by holding adjustable rate and balloon loans and selling
fixed rate loans. By adjusting the pricing on consumer deposits, differing
deposit maturities can be obtained to lengthen or shorten the repricing time on
liabilities. Cascade Bank can also borrow funds from the Federal Home Loan Bank
of Seattle (the "FHLB-Seattle") for periods of up to twenty years. At various
times, management uses instruments such as interest rate swaps, interest rate
cap agreements, and forward sale commitments to reduce the negative effect that
rising rates could have on net interest income, or to lower the cost of
long-term liabilities. Management, in conjunction with the Board of Directors,
has established conservative policies and guidelines for the use of these
off-balance sheet tools.
5
<PAGE>
COMPARISON OF OPERATING RESULTS
INTEREST INCOME
Total interest income increased to $26.3 million for the year ended June 30,
1997 compared to $24.8 million in 1996 and $23.4 million in 1995. The principal
reason for these increases was the higher average earning asset balance of
$339.1 million in 1997 compared to $306.8 million in 1996 and $284.1 million in
1995.
Interest on loans increased by $2.6 million in 1997 and $1.3 million in 1996
from $18.4 million in 1995. This is the result of an increased average portfolio
balance of $267.8 million in 1997, compared to $227.3 million in 1996 and
$198.6 million in 1995. The yield on loans declined in 1997 to 8.20% from 8.65%
in 1996 due to decreases in general market interest rates and accelerated
payoffs of construction loans. Interest on securities, FHLB stock and
interest-bearing deposits decreased to $4.1 million in 1997 from $5.1 million in
1996 and $5.0 million in 1995 as these lower yielding investments were replaced
by higher yielding loans.
INTEREST EXPENSE
Interest expense increased by $825,000 to $17.4 million for the year ended June
30, 1997 compared with $16.6 million for 1996, and $13.9 million in 1995. The
increase in 1997 resulted from a $27.3 million increases in the average
balances of deposits and borrowings. The average cost of all liabilities
decreased to 5.49% in 1997, compared to 5.68% in 1996 and 5.20% in 1995.
Interest expense on deposits increased by $699,000 to $12.1 million in 1997
compared to $11.4 million in 1996 and $9.1 million in 1995. Management has
sought to fund asset growth with deposits since such funds lead to long-term
customer relationships.
HEDGING 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 Corporation's hedging activities increased interest expense by $13,000 in
1997 compared to decreases of $54,000 and $42,000 during the years ended June
30, 1996 and 1995, respectively. During 1997 and 1996, the Corporation entered
into interest rate cap agreements with notional values totaling $10 million and
$5 million, respectively. The swaps were designated against certain loan and
money market accounts. If the three month Libor exceeds 6%, the net interest
received would be recorded as an increase to interest income on loans. These
hedging activities decreased interest income by $88,000 in 1997 and by $3,000 in
1996. At June 30, 1997 and 1996, $8.5 million and $5 million in interest rate
cap agreements were outstanding.
NET INTEREST INCOME
Net interest income for the year ended June 30, 1997 increased by $714,000 to
$8.9 million compared with $8.2 million in 1996 and $9.4 million in 1995. The
decrease in 1997 and 1996 resulted from a $2.1 million interest recovery in
1995 that was partially offset by an increase of $29.4 million in average
earning assets in 1997 as compared to 1996 and an increase of $22.6 million in
average earning assets in 1996 as compared to 1995. The interest rate margin
decreased five basis points to 2.63% in 1997.
PROVISIONS FOR LOAN LOSSES
The Corporation's loan portfolio maintained its high credit quality in 1997 and
1996, so there were no additional provisions for loan losses during 1997 and
1996. There was a recovery of $335,000 in 1995 upon the repayment of a $5.1
million delinquent loan.
At June 30, 1997, 1996 and 1995, the Corporation's loan loss allowance totaled
$2.9 million, $2.9 million and $3.0 million, respectively and was 1.0%, 1.3% and
1.4% respectively, of net loans.
The Corporation continues to monitor and modify the allowance for loan losses as
economic conditions dictate. Although the Corporation maintains the allowance at
levels that it considers to be adequate to provide for potential losses, there
can be no assurance that such losses will not exceed the estimated amounts.
6
<PAGE>
OTHER INCOME
Other income decreased by $816,000 to $1.4 million in 1997 compared to 1996 and
by $1.1 million as compared to 1995. The principal reasons for the decline in
1997 as compared to 1996 were decreases in gains on sale of loans held-for-sale
and mortgage-backed securities held for trading of $750,000, decreases in gains
on sale of securities available-for-sale of $326,000 and a $150,000 restitution
recovery in 1996 that did not occur in 1997. These decreases were partially
offset by an increase of $419,000 in service charges. The decrease in 1996 as
compared to 1995 resulted from decreases of $350,000 in gains on sale of loans
held for sale and mortgage backed securities held for trading, gains on the sale
of mortgage servicing rights of $238,000 and a decrease of $474,000 in
restitution recovery in 1996. The reduction in gains on sales of loans and the
increase in service charges occurred as a result of the Bank's emphasis, during
the year, on the origination of portfolio lending products that increased the
Bank's net loan and servicing portfolio's and led to an increase in service
charge income.
A Wholesale Lending department was opened during the year and will enable the
bank to increase originations of salable loans and increase mortgage banking
gains. With residential loan portfolios at higher levels, the Bank's retail loan
operations will be able to devote more time to the origination of salable loans
that will help the bank to generate mortgage banking gains and fees.
OTHER EXPENSES
Other expenses increased by $1.5 million to $8.5 million in 1997 as compared to
$7.0 million in 1996 and by $633,000 as compared to $7.9 million in 1995. The
SAIF special assessment of $1.2 million accounted for most of the increase as
compared to both years, but was partially offset by a decrease in federal
deposit insurance premiums of $226,000. Salaries and employee benefits,
marketing and other expenses increased, as anticipated in 1997, due to increased
staffing levels and the introduction of new product lines and services. Expense
increases for marketing, technology and product delivery systems, focusing on
productivity and revenue enhancement, are anticipated as the Bank further
develops its delivery systems for the new products and services introduced in
1997.
LIQUIDITY AND CAPITAL RESOURCES
Cascade is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied 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 5.1%, 7.2% and 9.0% at June 30,
1997, 1996 and 1995, respectively.
The Bank's most liquid assets are cash and cash equivalents, which include
investments in highly liquid, short-term investments. The levels of these assets
are dependent on the Bank's operating, financing and investing activities during
any given period. At June 30, 1997 and 1996, cash and cash equivalents totaled
$8.5 million and $8.6 million, respectively. The Bank's 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 $110 million at June 30,
1997, 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 total costs and availability.
7
<PAGE>
At June 30, 1997 the Bank had outstanding commitments to originate loans of
$27.4 million. The Bank anticipates that it will have sufficient funds available
to meet its current commitments principally through sales in the secondary
market. At that same date, certificates of deposit that are scheduled to mature
in one year or less totaled $143.3 million. Management believes that a
significant portion of such deposits will remain with the Bank.
The following table summarizes the capital requirements and the Bank's capital
position at June 30, 1997:
(DOLLARS IN THOUSANDS) Percent of
Amount Assets
Tangible capital $ 22,821 6.2
Tangible capital requirement 5,526 1.5
----- ---
Excess 17,295 4.7
Core capital 22,821 6.2
Core capital requirement 11.053 3.0
------ ---
Excess 11,768 3.2
Risk-based capital(a) 25,411 10.78
Risk-based capital requirement(a) 18,844 8.00
------ ----
Excess 6,657 2.78
(a) BASED ON TOTAL RISK-WEIGHTED ASSETS.
At June 30, 1997 the Corporation was a "well capitalized" institution under the
prompt corrective action regulation of the OTS.
COMMON STOCK INFORMATION
The common stock of Cascade Financial Corporation is traded on the NASDAQ Stock
Market under the symbol "CASB." As of September 1, 1997 there were
approximately 1,600 stockholders of record.
The following table set forth market price and dividend information for the
Corporation's common stock. Prices have been adjusted for stock splits.
FISCAL 1997 High Low
- --------------------------------------------------------------------------------
First Quarter $14.000 11.250
Second Quarter 14.000 10.500
Third Quarter 14.000 12.500
Fourth Quarter 16.750 11.500
FISCAL 1996
- --------------------------------------------------------------------------------
First Quarter $11.750 10.875
Second Quarter 11.500 10.500
Third Quarter 10.875 10.250
Fourth Quarter 13.750 10.250
In order to retain capital for operations and expansion, the Corporation does
not expect to declare cash dividends on the common stock in the near future.
The Corporation's ability to pay dividends is dependent on the dividend payments
it receives from its subsidiary, Cascade Bank, which are subject to regulations
and the 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 Bank's ability to pay dividends to the Corporation.
8
<PAGE>
[L0GO] [LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Board of Directors
Cascade Financial Corporation:
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Cascade
Financial Corporation and subsidiary (Corporation) as of June 30, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three year-period ended June 30, 1997.
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 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, 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, 1997
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 3,627 4,369
Interest-bearing deposits in other financial institutions 4,991 4,109
Securities available-for-sale (notes 2 and 8) 72,076 36,054
Loans held-for-sale, net (note 3) 4,678 11,133
Securities held-to-maturity (fair value of $9,437
and $6,637) (note 2) 9,941 6,777
Loans (note 3) 231,880 297,577
Allowance for loan losses (note 3) (2,946) (2,890)
----------------------------------------
Loans, net 228,934 294,687
Real estate owned 747 750
Premises and equipment, net (note 4) 6,087 6,220
Accrued interest receivable and other assets
(notes 2, 3 and 11) 3,350 4,027
----------------------------------------
$ 334,431 368,126
----------------------------------------
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes 5 and 6) 218,063 244,795
Federal Home Loan Bank advances (note 7) 68,542 74,659
Securities sold under agreements to repurchase (note 8) 20,450 18,808
Advance payments by borrowers for taxes and insurance 1,207 1,476
Accrued interest payable, expenses and other
liabilities (note 5) 3,768 4,323
Deferred Federal income taxes (note 9) 1,591 1,507
----------------------------------------
Total liabilities 313,621 345,568
----------------------------------------
----------------------------------------
Stockholders' equity (note 10):
Preferred stock, $.01 par value. Authorized
500,000 shares; no shares issued or outstanding -- --
Common stock, $.01 par value. Authorized 8,000,000
shares;issued and outstanding 2,559,277 shares
in 1996 and 2,570,416 shares in 1997 26 26
Additional paid-in capital 4,239 4,317
Retained earnings, substantially restricted 17,410 18,614
Unrealized loss on securities available-for-sale, net (865) (399)
----------------------------------------
Total stockholders' equity 20,810 22,558
Commitments and contingencies (notes 2, 3, 6, 10 and 14)
- ----------------------------------------------------------------------------------------------------------------------------------
$ 334,431 368,126
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1995, 1996, and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans (note 3) $ 18,384 19,650 22,212
Securities held-to-maturity 4,477 2,120 461
Securities available-for-sale 213 2,571 3,182
FHLB stock dividends 182 264 317
Interest-bearing deposits 122 171 143
----------------------------------------
Total interest income 23,378 24,776 26,315
----------------------------------------
Interest expense:
Deposits (notes 5 and 6) 9,133 11,391 12,090
FHLB advances (note 7) 3,196 3,937 4,183
Securities sold under agreements to repurchase (note 8) 1,604 1,235 1,115
----------------------------------------
Total interest expense 13,933 16,563 17,388
----------------------------------------
Net interest income 9,445 8,213 8,927
Provision for (reversal of) loan losses (note 3) (335) -- --
----------------------------------------
Net interest income after provision for loan losses 9,780 8,213 8,927
----------------------------------------
Other income:
Gain on sale of loans held-for-sale 422 506 283
Gain (loss) on sale of mortgage-backed securities
held-for-trading 85 519 (8)
Gain on sale of mortgage servicing rights 238 -- --
Service charges 471 444 863
Gain (loss) on sale of securities available-for-sale (note 2) (104) 338 12
Gain on sale of real estate owned 240 24 3
Restitution recovery (note 14) 624 150 --
Other 502 245 257
----------------------------------------
Total other income 2,478 2,226 1,410
----------------------------------------
Other expenses:
Salaries and employee benefits 3,801 3,568 3,740
Occupancy 1,352 1,186 1,187
Federal deposit insurance premiums 471 515 289
Data processing 252 306 338
Marketing 333 198 320
Restructuring charge 332 -- --
SAIF special assessment -- -- 1,224
Other 1,338 1,231 1,414
----------------------------------------
Total other expenses 7,879 7,004 8,512
----------------------------------------
Income before Federal income taxes 4,379 3,435 1,825
Federal income taxes (note 9) 1,489 1,167 621
----------------------------------------
Net income 2,890 2,268 1,204
----------------------------------------
----------------------------------------
Net income per common share, primary $ 1.03 0.80 0.42
Weighted average number of shares outstanding, primary 2,818,286 2,846,970 2,869,167
----------------------------------------
----------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1996, and 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Net Total
Shares Common paid-in Retained Valuation stock-
stock capital earnings Reserve holders'
for equity
Securities
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1994, as previously
reported 2,023,489 $ 20 4,102 12,252 -- 16,374
Five for four stock split effective June 27,
1997, including $6 for fractional shares 513,383 6 (11) -- -- (5)
-----------------------------------------------------------------------
Balances at June 30, 1994 2,536,872 26 4,091 12,252 -- 16,369
Options exercised 5,788 -- 41 -- -- 41
Net income for the year ended June 30, 1995 -- -- -- 2,890 -- 2,890
Adjustment on available-for-sale securities -- -- -- -- (18) (18)
-----------------------------------------------------------------------
Balances at June 30, 1995 2,542,660 26 4,132 15,142 (18) 19,282
Options exercised 16,617 -- 107 -- -- 107
Net income for the year ended June 30, 1996 -- -- -- 2,268 -- 2,268
Adjustment on available-for-sale securities -- -- -- -- (847) (847)
-----------------------------------------------------------------------
Balances at June 30, 1996 2,559,277 26 4,239 17,410 (865) 20,810
Options exercised 11,139 -- 78 -- -- 78
Net income for the year ended June 30, 1997 -- -- -- 1,204 -- 1,204
Adjustment on available-for-sale securities -- -- -- -- 466 466
-----------------------------------------------------------------------
Balances at June 30, 1997 2,570,416 26 4,317 18,614 (399) 22,558
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1995, 1996, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,890 2,268 1,204
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Depreciation and amortization of premises and equipment 600 553 508
Other (42) (11) (1)
Amortization of retained servicing rights 64 148 202
Provision for losses (recovery) on:
Loans (335) -- --
Real Estate -- 25 59
Securities (2) -- --
Additions to mortgage servicing rights (307) (553) (315)
Deferred loan fees, net of amortization 461 13 257
Origination of loans held-for-sale (34,180) (55,921) (57,273)
Proceeds from sale of loans held-for-sale 28,998 25,462 33,406
Proceeds from sale of mortgage-backed securities held-for-trading 10,708 32,849 17,367
Proceeds from sale of mortgage servicing rights 241 -- --
Net loss (gain) on sales of:
Loans held-for-sale (422) (506) --
Mortgage-backed securities held-for-trading (85) (519) --
Securities available-for-sale 26 (338) (12)
Premises and equipment 201 (5) 1
Real estate owned (240) (24) --
Mortgage loan servicing rights (238) -- --
Federal Home Loan Bank stock dividend received (182) (264) (317)
Deferred Federal income taxes 1,338 387 (323)
Net change in accrued interest receivable and other assets over
principal and interest payable on loans serviced for others and (1,015) (1,099) (13)
accrued expenses and other liabilities
------------------------------------------
Net cash provided by (used in) operating activities 8,479 2,465 (5,250)
------------------------------------------
Cash flows from investing activities:
Loans originated, net of principal repayments (44,378) (19,110) (66,442)
Purchases of mortgage-backed securities held-to maturity (25,740) -- --
Loans securitized for portfolio investments -- -- 52
Principal repayments on mortgage-backed securities held-to-maturity 9,560 9,452 3,164
Principal repayments on securities available-for-sale -- 4,846 7,072
Purchases of securities available-for-sale (5,039) (51,740) (11,040)
Proceeds from sales of securities available-for-sale 11,000 32,455 41,080
Proceeds from sales of real estate owned 755 1,776 343
Additions to real estate owned (333) (141) (24)
Purchases of premises and equipment (567) (257) (643)
Proceeds from sales of premises and equipment, and other assets -- 5 (1)
------------------------------------------
Net cash used in investing activities (54,742) (22,714) (26,439)
------------------------------------------
Subtotal, carried forward (46,263) (20,249) (31,689)
------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
2
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Subtotal, brought forward $ (46,263) (20,249) (31,689)
----------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 37 100 73
Net increase in deposits 18,807 18,125 26,732
Proceeds from Federal Home Loan Bank advances 100,800 83,133 144,400
Repayment of Federal Home Loan Bank advances (74,775) (75,750) (138,283)
Net increase in securities sold under agreements to repurchase 3,958 (2,835) (1,642)
Net increase (decrease) in advance payments by borrowers for taxes and
insurance (2) 332 269
----------------------------------------
Net cash provided by financing activities 48,825 23,105 31,549
----------------------------------------
Net increase (decrease) in cash and cash equivalents 2,562 2,856 (140)
Cash and cash equivalents at beginning of year 3,200 5,762 8,618
-----------------------------------------
Cash and cash equivalents at end of year 5,762 8,618 8,478
----------------------------------------
----------------------------------------
Supplemental disclosures of cash flow information -- cash paid during the year
for:
Interest 13,607 16,603 17,383
Federal income taxes 70 852 1,008
----------------------------------------
----------------------------------------
Supplemental schedule of noncash investing activities:
Mortgage loans securitized into FHLMC participation certificates and held-
for-trading and sold 10,623 32,330 17,419
Mortgage loans securitized into FHLMC participation certificates and held-
for-investment 4,769 -- --
Securities reclassified from held-to-maturity to available-for-sale -- 50,503 --
Net mortgage loans transferred to real estate owned 1,675 740 321
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
June 30, 1995, 1996, and 1997
(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, 1997, the Corporation's loans are principally secured by
one-to-four-family residences (72%), multifamily residences (17%) and
commercial real estate properties (8%). 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 Bank, (the Bank), and the 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 AND INTEREST INCOME
Loans are stated at principal amounts outstanding, net of deferred
loan fees and costs. Interest is accrued only if deemed collectible.
Accrual of interest income is generally discontinued when a loan
becomes 90 days past due and accrued interest amounts are reversed.
Once interest has been paid to date or management considers the loan
to be fully collectible, it is returned to accrual status. 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
(Continued)
<PAGE>
2
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
IMPAIRMENT OF LOANS AND 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. 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.
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. Impaired loans are not all nonaccrual loans.
The Corporation reviews all single family loans, all consumer loans
and multi-family and commercial real estate loans with outstanding
principal balances under $1.0 million for impairment as smaller
balance homogeneous loan groups. The Corporation considers a loan to
be impaired and disclosed under the requirements of SFAS 114 when it
becomes nonaccrual, if it is a multi-family or commercial real estate
loan less than 90 days delinquent and management believes that the
borrower may be experiencing financial difficulty based on indicators
such as an inconsistent payment pattern, payments 60 days delinquent,
low debt coverage ratio, high loan-to-value ratio or if it is a
restructured debt. Nonaccrual loans are those that are 90 days
delinquent or deemed uncollectible. The Corporation bases the
measurement of loan impairment for all loans on the fair value of the
loan's underlying collateral. If the recorded investment of a loan
exceeds the measure of impairment, the Corporation recognizes the
impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses.
(D) SALES OF LOANS
LOANS HELD-FOR-SALE
Any loan that management determines will not be held-to-maturity is
classified as held-for-sale at the time of origination. Loans
held-for-sale are carried at lower of cost or market value, determined
on an aggregate basis. 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.
(Continued)
<PAGE>
3
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 to 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 with appropriate prepayment assumptions for the
various MSR pools. 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.
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 sells loan servicing rights. Gains and losses from
sales of loan servicing rights are calculated using the specific
identification of the related carrying value.
(E) SECURITIES
Debt and equity securities, including 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. Fair value is determined 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
(Continued)
<PAGE>
4
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
(F) 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.
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.
(G) 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.
(H) 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.
In fiscal 1997, the Corporation adopted SFAS No. 121, "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF". The Statement established 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 did not have a
material impact on the results of operations or financial condition of
the Corporation.
(I) 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.
(J) 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. Primary and fully
diluted shares are approximately the same amount. Common stock
equivalents consist of common stock options. Earnings per share
figures have been restated to take into effect the stock split
effected on June 27, 1997. In February 1997, the FASB issued SFAS No.
128, "EARNINGS PER SHARE", which standardizes the international
calculation for earnings per share and required companies with complex
capital structures that have publicly
(Continued)
<PAGE>
5
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
held common stock or potential common stock to present both basic and
diluted earnings per share on the face of the statement of operations.
SFAS 128 becomes effective for periods ending after December 15, 1997.
It is not anticipated that the adoption of this new accounting
standard will have a material impact on the results of operations or
financial position of the Corporation.
(K) RECLASSIFICATIONS
Certain 1995 and 1996 balances have been reclassified to conform to
the 1997 presentation.
(L) 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.
(2) SECURITIES
A summary of securities at June 30 follows:
<TABLE>
<CAPTION>
1996 1997
----------------------------------------- -----------------------------------------
Gross Gross Gross Gross
Amortized unreal- unreal- Fair Amortized unreal- unreal- Fair
cost, net ized ized value cost, net ized ized value
gain losses gain losses
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
Mutual funds $ 21,139 -- 70 21,069 2,943 28 -- 2,971
FHLB stock 4,014 -- -- 4,014 4,332 -- -- 4,332
FHLMC 28,025 -- 1,065 26,960 23,467 -- 587 22,880
FNMA 6,361 -- 49 6,312 -- -- -- --
SBA 13,849 -- 128 13,721 5,916 -- 45 5,871
--------------------------------------------------------------------------------------
73,388 -- 1,312 72,076 36,658 28 632 36,054
Securities held-to-maturity:
Mortgage-backed securities
FHLMC 9,941 -- 504 9,437 6,777 -- 140 6,637
--------------------------------------------------------------------------------------
9,941 -- 504 9,437 6,777 -- 140 6,637
</TABLE>
As of June 30, 1996 and 1997, the Corporation was required to maintain
34,271 and 37,330 shares respectively, of $100 par value FHLB stock and it
is carried at cost.
Accrued interest receivable on securities and interest-bearing deposits was
$250 and $100 at June 30, 1996, and 1997, respectively. Accrued interest
receivable on mortgage-backed securities was $278, and $189 for the same
periods.
(Continued)
<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, determined using the average cost method for mutual funds
and the specific identification method for all other securities are
summarized as follows:
Proceeds Gains Losses
---------------------------------
Securities available-for-sale:
Year ended June 30, 1996
FHLMC - PC's $ 32,406 360 22
---------------------------------
Total 32,406 360 22
---------------------------------
---------------------------------
Year ended June 30, 1997
Mutual Funds 22,000 64 4
FHLMC CMO's 7,143 9 1
SBA's 5,903 -- 32
FNMA MBS 6,034 -- 24
---------------------------------
Total 41,080 73 61
---------------------------------
---------------------------------
The following table shows the contractual maturities of the Corporation's
securities held-to-maturity at June 30, 1997:
<TABLE>
<CAPTION>
Within one Over one Over five Over ten
year to five to ten years Total
years years
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amortized Cost
FHLMC $ -- 6,777 -- -- 6,777
----------------------------------------------------------
Total amortized cost -- 6,777 -- -- 6,777
----------------------------------------------------------
----------------------------------------------------------
Fair Value
FHLMC $ -- 6,637 -- -- 6,637
----------------------------------------------------------
Total fair value -- 6,637 -- -- 6,637
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
7
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at June 30, 1997.
<TABLE>
<CAPTION>
Within one Over one Over five Over ten Total
year to five to ten years
years years years
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amortized Cost
FHLMC $ -- 3,010 50 20,407 23,467
SBA -- -- -- 5,916 5,916
Mutual Funds 2,943 -- -- -- 2,943
FHLB Stock 4,332 -- -- -- 4,332
----------------------------------------------------------
Total amortized cost 7,275 3,010 50 26,323 36,658
----------------------------------------------------------
----------------------------------------------------------
Fair Value
FHLMC $ -- 2,951 50 19,879 22,880
SBA -- -- -- 5,871 5,871
Mutual Funds 2,971 -- -- -- 2,971
FHLB Stock 4,332 -- -- -- 4,332
----------------------------------------------------------
Total fair value 7,303 2,951 50 25,750 36,054
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
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.
Available-for-sale securities pledged as collateral to secure public
deposits were $904 in 1996 and $891 in 1997. The Bank is required to hold
securities to meet liquidity requirements as determined by federal banking
regulations. The required ratio is currently 5.00%. The Bank's liquidity
ratio was 7.20% and 5.01% at June 30, 1996 and 1997, respectively.
(Continued)
<PAGE>
8
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans and loans held for sale at June 30 follows:
1996 1997
--------------------------
Real estate mortgage:
One-to-four family $ 159,749 181,841
Multifamily 37,540 57,655
Commercial 14,739 25,250
Home equity 6,792 17,580
Installment 507 9,745
Real estate construction:
One-to-four family 28,277 31,314
Land loans 194 606
--------------------------
Total loans 247,798 323,991
Loans in process (9,082) (12,865)
Deferred loan fees, net (2,158) (2,416)
--------------------------
236,558 308,710
Loans held for sale (4,678) (11,133)
--------------------------
Loans 231,880 297,577
--------------------------
--------------------------
Loans serviced for others $ 78,210 98,516
Accrued interest on loans is $1,535 and $1,902, respectively, at June 30,
1996 and 1997.
At June 30, 1997, the composition of the loan portfolio was as follows:
Fixed Rate Adjustable Rate
----------------------------
Term to Maturity
Less than one year $ 35,272 92,747
1-3 years 21,115 41,040
3-5 years 28,619 71,264
5-10 years 2,351 3,067
10-20 years 8,001 --
Over 20 years 20,515 --
Nonaccrual loans totaled $373 and $759, respectively at June 30, 1996 and
1997. If interest on these loans had been recognized, such income would
have been $8 and $53, respectively for 1996 and 1997. In addition, at June
30, 1996 and 1997, the Corporation had restructured loans aggregating
$4,150 and $0, respectively. During 1995, 1996, and 1997 $280, $330 and
$36, 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 $148, $97 and $6,
respectively for 1995, 1996 and 1997.
At June 30, 1996 and 1997, respectively, loans totaling $1,599 and $1,957,
were impaired of which $1,226 and $1,198 had allocated reserves of $300 and
$300, respectively. The remaining $373 and $759 had no reserves allocated
to them since the value of the impaired loans was equal to or exceeded the
recorded investment. Of the
(Continued)
<PAGE>
9
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$1,599 and $1,957 of impaired loans, $373 and $759 were on nonaccrual
status, $0 and $112 were under foreclosure and $1,226 and $1,198 were
performing but judged to be impaired. The average balance of impaired
loans during the years ended June 30, 1996 and 1997, respectively, was
$1,680 and $2,199 and the Corporation recognized $156 and $140 of related
interest income on such loans during the time within the year that such
loans were impaired.
At June 30, 1996 and 1997, the Corporation had outstanding commitments to
fund loans with fixed interest rates totaling $5,200 and $12,128,
respectively and loans with adjustable rates totaling $6,100 and $15,305,
respectively.
The Corporation has forward commitments to sell loans into the secondary
market totaling $5,014, and $19,296 respectively, at June 30, 1996 and
1997.
A summary of the allowance for losses on loans receivable follows:
Year ended June 30
----------------------------
1995 1996 1997
----------------------------
Loans receivable:
Balances at beginning of year $ 3,485 2,950 2,946
Provision for loss -- -- --
Reversal of prior provision for loss (335) -- --
Recoveries -- -- 3
Charge-offs (200) (4) (59)
----------------------------
Balances at end of year 2,950 2,946 2,890
----------------------------
----------------------------
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) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
June 30
Estimated ------------------
useful lives 1996 1997
--------------------------------
Land $ 713 713
Buildings 40 years 6,485 6,694
Leasehold improvements Lease term 425 494
Furniture and equipment 2-10 years 3,578 3,927
Automobiles 3-4 years 19 21
------------------
11,220 11,849
Less accumulated depreciation and
amortization 5,133 5,629
------------------
6,087 6,220
------------------
------------------
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.
(Continued)
<PAGE>
10
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(5) DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
June 30
--------------
1996 1997
Amount Percent Rate Amount Percent Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Checking accounts:
Noninterest bearing $ 1,555 0.71 2,615 1.07
Interest bearing 8,038 3.69 1.70-2.03 8,246 3.37 1.75-2.00
Money market
deposit accounts 34,982 16.04 4.18-6.00 48,139 19.67 1.75-5.92
--------------------- ------------------
44,575 20.44 59,000 24.11
--------------------- ------------------
Savings accounts 7,922 3.63 3.08 8,133 3.32 3.00
--------------------- ------------------
Time deposits by
interest rate:
3.00-3.99% 32 0.01 118 0.05
4.00-4.99% 8,648 3.97 1,399 0.57
5.00-5.99% 117,089 53.70 149,656 61.13
6.00-6.99% 36,939 16.94 24,701 10.09
7.00-7.99% 2,389 1.10 1,321 0.54
8.00-8.99% 469 0.21 467 0.19
--------------------- ------------------
165,566 75.93 177,662 72.57
--------------------- ------------------
218,063 100.00 244,795 100.00
--------------------- ------------------
--------------------- ------------------
</TABLE>
Deposit
Weighted accounts with Accrued
average balances interest
interest rate on in excess payable on
deposits of $100,000 deposits
June 30, 1996 5.5% 38,682 436
June 30, 1997 5.5% 54,165 411
A summary of interest expense on deposits follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1995 1996 1997
-------------------------------
<S> <C> <C> <C>
Checking accounts $ 1,076 1,063 1,991
Savings accounts and time deposits 8,057 10,328 10,099
-------------------------------
9,133 11,391 12,090
-------------------------------
-------------------------------
</TABLE>
(Continued)
<PAGE>
11
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Maturities of time deposits are as follows:
<TABLE>
<CAPTION>
June 30
----------------------
1996 1997
----------------------
<S> <C> <C>
Years ending June 30:
1997 $ 123,400 --
1998 15,107 143,313
1999 8,657 14,576
2000 13,130 13,187
2001 5,164 5,121
2002 -- 1,318
Thereafter 108 147
----------------------
165,566 177,662
----------------------
----------------------
</TABLE>
(6) 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, 1996 and 1997, the Corporation entered
into interest rate swaps with notional values totaling $0 and $8.5
million, respectively. The net difference between the interest
received and paid on the interest rate swaps of $42, $49 and ($36),
respectively for the years ended June 30, 1995, 1996 and 1997, is
recorded as a decrease (increase) to interest expense on deposits or
interest income on loans as appropriate.
During 1996 and 1997, the Corporation entered into interest rate cap
agreements with notional values totaling $5 million and $10 million,
respectively. These agreements were designated against certain loans.
If the three month Libor exceeds 6%, the net interest received would
be recorded as an increase to interest income on loans.
Interest rate cap agreements at June 30, 1996 and 1997 are summarized
as follows:
---------------------------
1996 1997
---------------------------
Notional amount $5,000 $10,000
Weighted average maturity 24 months 24 months
Strike rate 6.00% 6.00%
Three month Libor 5.56% 5.75%
Payment terms Quarterly Quarterly
(Continued)
<PAGE>
12
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(7) FHLB ADVANCES
FHLB advances are summarized as follows:
<TABLE>
<CAPTION>
June 30
----------------------------------
1996 1997
------------------------------- ---------------------------
Weighted Weighted
Maturity date Amount average interest Amount average interest
rate rate
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 30:
1997 $ 52,383 5.87 % $ -- -- %
1998 16,000 5.81 60,500 5.86
1999 -- -- 14,000 5.94
Thereafter 159 7.67 159 7.67
----------------------------------------------------------
$ 68,542 5.86 74,659 5.88
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
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.
(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND LINES OF CREDIT
The Corporation enters into sales of securities under agreements to
repurchase (reverse repurchase agreements) 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 89 days.
Securities sold under agreements to repurchase the same securities
consist of mortgage-backed securities summarized as follows:
<TABLE>
<CAPTION>
Underlying securities
Book value,
Weighted- including
Balance average interest accrued Market
outstanding rate interest value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1996 $ 20,450 5.44% $21,266 $21,120
June 30, 1997 18,808 5.63% 19,597 18,970
</TABLE>
A summary of outstanding agreements' activity follows:
Year ended June 30
--------------------
1996 1997
--------------------
Maximum amount of outstanding
agreements at any month-end $ 24,261 22,006
Average amount of outstanding
agreements during the year 21,432 19,948
(Continued)
<PAGE>
13
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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", and established, among other things, new criteria for
determining whether a transfer of financial assets in exchange for
cash or other consideration should be accounted for as a sale or as a
pledge of collateral in a secured borrowing. As issued, SFAS 125 is
effective for all transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. In
December 1996, the FASB issued SFAS 127, "DEFERRAL OF THE EFFECTIVE
DATE OF CERTAIN PROVISIONS OF FSB STATEMENT NO. 125". SFAS 127 defers
for one year the effective date of certain provisions of SFAS 125.
The corporation will implement SFAS 125, as amended by SFAS 127 as
required.
(9) FEDERAL INCOME TAXES
Income tax expense includes the following components:
Year ended June 30,
------------------------
1995 1996 1997
------------------------
Current $ 151 780 944
Deferred 1,338 387 (323)
------------------------
1,489 1,167 621
------------------------
------------------------
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:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1995 1996 1997
-------------------------
<S> <C> <C> <C>
Premises and equipment $ -- (12) (1)
Loan fee income for financial statements recognized
for tax purposes as loans are repaid 207 169 (217)
Difference between provision for loan and securities losses taken
for financial statements and bad debt deduction for tax purposes 863 141 (155)
FHLB stock dividend and redemptions 61 90 108
Deductible expenses previously recognized for financial statements 212 -- --
Accrued expenses and mark-to-market adjustments 8 22 (29)
Prepaid expenses (13) (23) (29)
-------------------------
1,338 387 (323)
-------------------------
-------------------------
</TABLE>
The provision for Federal income tax expense approximates the amount
computed by applying the "expected" Federal income tax rate of 34% to
income before Federal income taxes.
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 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
(Continued)
<PAGE>
14
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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:
1996 1997
-------------------
Deferred tax assets:
Securities available-for-sale $ 446 206
Loans -- 105
Other -- 22
-------------------
Gross deferred tax assets 446 333
Deferred tax liabilities:
Loans (51) --
Deferred loan fees (993) (776)
Premises and equipment (358) (357)
FHLB stock (599) (707)
Other (36) --
-------------------
Gross deferred tax liabilities (2,037) (1,840)
-------------------
Net deferred tax liability (1,591) (1,507)
-------------------
-------------------
A valuation allowance for deferred tax assets was not considered
necessary at June 30, 1996 or 1997. Management believes that the
Corporation will fully realize its total deferred income tax assets as
of June 30, 1997 based upon its total deferred income tax liabilities
and its current level of operating income.
(10) RETAINED EARNINGS
(a) STOCK CONVERSION
Concurrent with the 1992 stock conversion, the 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 Bank after the
conversion. In the event of a complete liquidation of the 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 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 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>
15
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. At June 30,
1997, the Bank was in compliance with the regulatory requirements
for well-capitalized institutions. As of September 30, 1996,
the most recent notification from the Office of Thrift
Supervision categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management
believes have changed the institution's category.
<TABLE>
<CAPTION>
Minimum to be
Actual Minimum for Capital categorized as Well-
adequacy purposes Capitalized under
prompt corrective
action provisions
-----------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1996:
Total capital to risk-weighted assets (1) $ 23,700 13.70 % 13,843 8.00 17,304 10.00
Tier I capital to risk-weighted assets 21,530 12.44 n/a n/a 10,383 6.00
Tier I leverage to average assets 21,530 6.67 n/a n/a 8,358 5.00
Core capital to total assets 21,530 6.42 10,055 3.00 n/a n/a
Tangible capital to total assets 21,530 6.42 5,027 1.50 n/a n/a
June 30, 1997:
Total capital to risk-weighted assets (1) 25,411 10.79 18,844 8.00 23,555 10.00
Tier I capital to risk-weighted assets 22,821 9.69 n/a n/a 14,133 6.00
Tier I leverage to average assets 22,821 6.50 n/a n/a 10,214 5.00
Core capital to total assets 22,821 6.19 11,053 3.00 n/a n/a
Tangible capital to total assets 22,821 6.19 5,526 1.50 n/a n/a
</TABLE>
(1) The OTS requires institutions to maintain Tier I capital of not less
than one-half of total capital.
SFAS No. 129, "DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE",
issued in February 1997 and effective January 1, 1998, summarizes
disclosure requirements pertaining to an entity's capital structure.
SFAS No. 129 is a compilation of several previously issued standards
and pronouncements, therefore, adoption of this standard is not
expected to have a material effect on the Corporation's financial
statements.
(Continued)
<PAGE>
16
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(11) MORTGAGE SERVICING RIGHTS
A summary of capitalized mortgage servicing rights at June 30, 1996
and 1997 follows:
June 30,
1996 1997
Mortgage Mortgage
servicing rights servicing rights
--------------------------------------
--------------------------------------
Balance at beginning of year $ 243 648
Additions 553 315
Amortization 148 202
Allowance for losses -- --
--------------------------------------
Balance at end of year 648 761
--------------------------------------
--------------------------------------
There was no activity in the allowance for loss for the years ended
June 30, 1995, 1996 and 1997.
(12) EMPLOYEE BENEFIT PLANS
(a) SAVINGS PLAN
The Corporation maintains a savings plan under section 401(k) of
the Internal Revenue Code, covering substantially all full-time
employees. Under the plan, employee contributions are matched by
the Corporation at a rate of 25% of the first five percent
contributed. Such matching becomes vested over a period of five
years of credited service. Employees may make investments in
various stock, fixed income or money market plans, or may
purchase stock in the Corporation. The Corporation contributed
$27, $24 and $25 to the plan for the years ended June 30, 1995,
1996 and 1997, respectively.
(b) EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation established an employee stock ownership plan
(ESOP) which became effective on July 1, 1992 for employees of
the Corporation, the Bank, and its subsidiary who have at least
one year of continuous service. The 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.
Allocations to individual participants accounts are based on
total compensation during the year. Forfeitures are reallocated
annually among remaining participating employees. For the years
ended June 30, 1995, 1996 and 1997, the Corporation contributed
$75, $91 and $65, respectively to the ESOP, which is invested in
Cascade Financial Corporation stock. Allocated and unallocated
shares at June 30, 1997, were 92,942 and 0, respectively. The
Corporation has the right of first refusal to purchase the
allocated shares of separated employees.
(c) EMPLOYEE STOCK PURCHASE PLAN
The Corporation maintains an employee stock purchase plan, under
the terms of which 97,656 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
(Continued)
<PAGE>
17
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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. At June 30, 1996 and 1997, 139,751 and 206,952
shares respectively, were fully exercisable.
In June 1997 the Corporation's stockholders approved the 1997
Stock Option Plan which authorized 143,750 shares. The terms and
conditions of the 1997 Plan are materially the same as described
above.
In October 1995, the FASB issued SFAS 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 provisions in the statement. SFAS 123
does not rescind or interpret the existing accounting rules for
employee stock-based arrangements. Companies may continue
following those rules to recognize and measure compensation as
outlined in Accounting Principles Board ("APB") Opinion 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" but they are now
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 provisions of SFAS
123. Effective January 1, 1996, the Corporation adopted the
disclosure requirements of SFAS 123, but has determined that it
will continue to measure its employee stock-based compensation
arrangements under the provisions of APB 25. Accordingly, no
compensation cost has been recognized for its stock option plan.
Had compensation cost for the Corporation's compensation plan
been determined consistent with SFAS 123, the Corporation's net
income and earnings per share would have been reduced to the pro
forma amounts indicated below:
(Continued)
<PAGE>
18
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Year Ended June 30,
-----------------------------------------
1995 1996 1997
---------- ---------- ----------
Net income
As reported $ 2,890 2,268 1,204
Pro forma 2,886 2,230 1,155
Net income per common share
Primary
As reported 1.03 0.80 0.42
Pro forma 1.02 0.80 0.41
The compensation expense included in the pro forma net income and earnings
per share is not likely to be representative of the effect on reported net
income for future years because options vest over several years and
additional awards may be made.
The fair value of options granted under the Corporation's stock option plan
was $7.81, $7.53, and $6.60, respectively for the years ended June 30,
1995, 1996, and 1997. The fair value is estimated on the date of grant
with the following weighted average assumptions used for 1995, 1996, and
1997: risk-free interest rate of 7.068%, 6.195% and 6.510%, expected lives
of eight years, no expected cash dividends, and volatility factors of 24%.
(Continued)
<PAGE>
19
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Changes in total options outstanding during 1995, 1996 and 1997 are as
follows:
1995
-------------------------------------
Weighted Average
Shares Under Exercise Price of
Option Option Shares
- --------------------------------------------------------------------------------
Outstanding at beginning of year 228,195 5.59
Granted during year 4,270 15.99
Exercised during year (5,788) 6.83
Five-for-four stock split 52,698
Forfeited during year (17,636) 4.61
- --------------------------------------------------------------------------------
Outstanding at end of year 261,739 5.64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996
--------------------------------------
Weighted Average
Shares Under Exercise Price of
Option Option Shares
- --------------------------------------------------------------------------------
Outstanding at beginning of year 261,739 5.64
Granted during year 35,789 16.36
Exercised during year (16,617) 5.49
Five-for-four stock split 66,673
Forfeited during year (15,346) 7.84
- --------------------------------------------------------------------------------
Outstanding at end of year 332,238 3.86
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1997
-------------------------------------
Weighted Average
Shares Under Exercise Price of
Option Option Shares
- --------------------------------------------------------------------------------
Outstanding at beginning of year 332,238 3.86
Granted during year 13,458 14.03
Exercised during year (11,139) 6.39
Five-for-four stock split 83,303
Forfeited during year (3,029) 10.06
- --------------------------------------------------------------------------------
Outstanding at end of year 414,831 3.83
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
20
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Financial data pertaining to outstanding stock options were as follows:
<TABLE>
<CAPTION>
June 30, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Number of Weighted Average Average Number of Average
Option Remaining Exercise Exercisable Exercise Price
Ranges of Exercises Shares Contractual Life Price of Option of Exercisable
Prices Option Shares Option Shares
Shares
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.97 227,553 5.3 years $ 1.97 136,532 $ 1.97
3.80-4.75 126,965 5.7 3.92 66,904 3.80
8.70-12.00 60,313 8.7 10.64 3,516 8.70
----------------------------------------------------------------------------------------------------
414,831 5.9 years $ 3.83 206,952 $ 2.68
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
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 judgement 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:
<TABLE>
<CAPTION>
At June 30,1996 At June 30, 1997
----------------------------- -------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term securities $ 8,618 8,618 8,478 8,478
Securities available-for-sale 72,076 72,076 36,054 36,054
Mortgage-backed securities 9,941 9,437 6,777 6,637
Loans, net 238,716 240,205 311,126 315,773
Servicing rights 648 734 761 852
Financial liabilities:
Deposit accounts 218,063 218,238 244,795 245,150
Borrowings 88,992 88,921 93,467 93,404
Interest rate swaps/caps 5,000 5,000 18,500 18,338
</TABLE>
CASH AND SHORT-TERM SECURITIES
The carrying amount represents fair value.
(Continued)
<PAGE>
21
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
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, 1996 and 1997. These
amounts have not been updated since year-end; therefore, the valuations may
have changed significantly since that point in time.
(14) CONTINGENCIES
The Corporation is a defendant in various legal proceedings arising in
connection with its business. It is the opinion of management that the
financial position and the results of operations of the Corporation will
not be materially adversely affected by the final outcome of these legal
proceedings and that adequate provision has been made in the accompanying
consolidated financial statements.
At periodic intervals, the 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
(Continued)
<PAGE>
22
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
(15) 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,
- --------------------------------------------------------------------------------
1996 1997
- --------------------------------------------------------------------------------
Assets:
Cash 40 38
Investment in subsidiary $20,714 22,481
Other Assets 63 46
- --------------------------------------------------------------------------------
20,817 22,565
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Other Liabilities 7 7
Stockholders' equity 20,810 22,558
- --------------------------------------------------------------------------------
20,817 22,565
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Continued)
<PAGE>
23
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,
July 1, 1995 to June 30, 1996 and
July 1, 1996 to June 30, 1997
- --------------------------------------------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
Equity in undistributed net income of the subsidiary $ 1,088 2,356 1,300
Operating Expenses -- (135) (145)
- --------------------------------------------------------------------------------
Income before Federal income taxes 1,088 2,221 1,155
Income tax benefit -- 47 49
- --------------------------------------------------------------------------------
Net income 1,088 2,268 1,204
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
For the periods
November 30, 1994 to June 30, 1995,
July 1, 1995 to June 30, 1996 and
July 1, 1996 to June 30, 1997
- --------------------------------------------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,088 2,268 1,204
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (1,088) (2,356) (1,300)
Increase in other assets -- (63) (46)
Increase in other liabilities -- 2 7
- --------------------------------------------------------------------------------
Net cash used by operating activities -- (149) (135)
Cash flows from investing activities:
Dividends received from subsidiary -- 50 --
- --------------------------------------------------------------------------------
Net cash provided by investing activities -- 50 --
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 139 133
- --------------------------------------------------------------------------------
Net cash provided by financing activities -- 139 133
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents -- 40 (2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cash and cash equivalents:
Beginning of year -- -- 40
- --------------------------------------------------------------------------------
End of year -- 40 38
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(17) SUBSEQUENT EVENT
On February 6, 1997, the Corporation and the Bank entered into a merger
agreement with AmFirst Bancorporation whereby AmFirst and its wholly-owned
subsidiary, American First National Bank, would be merged into the
Corporation and Bank, respectively. The Corporation will exchange
approximately two shares for each of AmFirst's on the effective date. This
transaction will be accounted for as a pooling-of-interests and
accordingly, the Corporation's historical consolidated financial statements
presented in future reports will be restated to include the accounts and
results of operations of AmFirst. The transaction has received all
regulatory and stockholder approvals and is anticipated to close in early
August 1997. The Corporation anticipates recording a one-time pre-tax
charge for legal, professional and filing fees of approximately $275,000 in
the quarter the transaction closes.
(Continued)
<PAGE>
ANNUAL MEETING
The annual meeting of the stockholders of Cascade Financial Corporation will be
Saturday, October 25, 1997 at 10:00 a.m. at Cascade Bank, 2828 Colby Avenue,
Everett, Washington.
ADDITIONAL FINANCIAL INFORMATION
Stockholders interested in receiving quarterly earnings releases should call our
main office at (425) 339-5500.
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. You may also
contact us through our Web site: www.cascadebank.com. Form 10-K information is
also available through the Securities and Exchange Commission's Web site:
www.sec.gov/edaux/searches.htm.
STOCK TRANSFER AGENT LEGAL COUNSEL
Chemical Mellon Anderson Hunter, PS
Shareholder Services P.O. Box 5397
50 California Street, 10th Floor Everett, Washington 98606
San Francisco, California 94111
AUDITORS SPECIAL COUNSEL
KPMG Peat Marwick LLP Breyer & Aguggia
3100 Two Union Square 601 13th Street, N.W.
601 Union Street Suite 1120 South
Seattle, Washington 98101-2327 Washington, D.C. 20005
LOCATIONS
MAIN OFFICE BELLEVUE OFFICE
2828 Colby Avenue 200 108th NE
Everett, Washington Bellevue, Washington
(425) 339-5500 (425) 455-2300
CLEARVIEW OFFICE EVERETT/BROADWAY OFFICE
17512 SR 9 SE 2602 Broadway
Snohomish, Washington Everett, Washington
(360) 668-1243 (425) 259-1243
EVERETT/EVERGREEN WAY OFFICE HARBOUR POINTE OFFICE
6920 Evergreen Way 11700 Mukilteo Speedway
Everett, Washington Mukilteo, Washington
(425) 353-1243 (425) 290-7769
ISSAQUAH OFFICE LYNNWOOD OFFICE
305 Front Street N 19419 Highway 99
Issaquah, Washington Lynnwood, Washington
(425) 391-5500 (425) 775-6666
MARYSVILLE OFFICE MOUNT VERNON OFFICE
815 State Avenue 1725 Continental Place,
Marysville, Washington Suite C
(360) 659-7614 Mount Vernon, Washington
(360) 424-4655
SMOKEY POINT OFFICE
3532 172nd St NE
Arlington, Washington
(360) 653-1900
BELLINGHAM HOME LOAN CENTER
909 Lakeway Drive, Suite 200
Bellingham, Washington
(360) 676-5200
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