UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1998
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 (I.R.S. Employer I.D. Number)
of incorporation or organization)
2828 Colby Avenue, Everett, Washington 98201
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 339-5500
--------------
Securities registered pursuant to Section 12(b) of the Act: None
---------------
Common Stock,
par value $0.01
Securities registered pursuant to Section 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 28, 1998, there were issued and outstanding 4,309,241 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 28, 1998, the aggregate value of the Common Stock outstanding held
by nonaffiliates of the registrant was $53.9 million (based on $12.50 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, 1998 (the "Annual Report")(Part II).
2. Portions of registrant's Definitive Proxy Statement for the 1998
Annual Meeting of Stockholders (Part III).
PART I
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
General
- -------
Cascade Bank ("Cascade" or the "Bank") has been serving the people of
Snohomish and King counties since 1916 when it was organized as a mutual
savings and loan association. On September 15, 1992, the Bank completed its
conversion from a federal mutual to a federal stock savings bank. Cascade
Financial Corporation ("Corporation"), a Delaware corporation, was organized
on August 18, 1994, for the purpose of becoming the holding company for Cascade.
On October 23, 1994, the stockholders of the Bank approved a plan to reorganize
the Bank into the holding company form of ownership. The reorganization was
completed on November 30, 1994, on which date the Bank became the wholly-owned
subsidiary of the Corporation, and the stockholders of the Bank became
stockholders of the Corporation. Prior to completion of the reorganization, the
Corporation had no material assets or liabilities and engaged in no business
activities. Subsequent to the acquisition of Cascade, the Corporation has
engaged in no significant activity other than holding the stock of the Bank.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the Bank. The executive
offices of the Corporation are located at 2828 Colby Avenue, Everett,
Washington, and the telephone number is (425) 339-5500.
As of June 30, 1998, the Corporation conducted its business from its main
office in Everett, Washington and ten other full service offices and one loan
origination office in the greater Puget Sound region. At June 30, 1998, the
Corporation had total assets of $444 million, total deposits of $313 million
and stockholders' equity of $31 million. The savings deposits of the Bank
are insured by the Federal Deposit Insurance Corporation ("FDIC") under the
Savings Association Insurance Fund ("SAIF") and to a lesser amount, the Bank
Insurance Fund ("BIF"), up to the limits specified by law.
Cascade is subject to extensive regulation, supervision and examination by
the Office of Thrift Supervision ("OTS"), as its chartering authority and
primary federal regulator, and by the FDIC, which insures its deposits up to
applicable limits. Cascade is a member of the Federal Home Loan Bank ("FHLB")
System and is subject to certain limited regulations promulgated by the Board
of Governors of the Federal Reserve System ("Federal Reserve"). As the holding
company of Cascade, the Corporation also is subject to regulation and oversight
by the OTS. Such regulation and supervision govern the activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities, which are intended to strengthen the financial condition of the
banking industry, including the imposition of restrictions on the operation
of an institution, the classification of assets by the institution and the
adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight, whether by the OTS, the FDIC or Congress could have
a material impact on the Corporation, Cascade and their respective operations.
See "Regulation."
Current Business Strategy
- -------------------------
This section contains forward-looking statements that have been prepared on
the basis on the Corporation's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the control of the Corporation. In addition, these
forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to changes. Accordingly,
there can be no assurance that many of these strategies will be implemented,
or if implemented, achieve the amounts described or within the time periods
currently estimated.
The Corporation's principal business activities are commercial banking,
mortgage lending, construction and income property lending and consumer
banking. The Corporation seeks to control its interest rate risk by generally
retaining in its portfolio adjustable rate and balloon loans that are funded
with a combination of FHLB-Seattle advances and deposits from the local market
area. The Corporation also sells a portion of the long-term fixed rate
residential loans it originates. The Corporation's strategy for the coming
years is to increase the business, consumer, and commercial real estate
portions of the Bank's portfolio relative to the residential mortgage
portfolio. Management is also reviewing plans for additional branches,
potential acquisitions, and other methods to increase customer convenience
and expand the Bank's market area.
2
<PAGE>
Market Area
- -----------
Headquartered in Everett, Washington, the Corporation serves its customers
from eleven full service offices, eight in Snohomish County, two in King County,
and one in Skagit County. The Corporation has a mortgage origination office in
Whatcom County. The Corporation serves the financial services need of the
diverse geographic communities in which it operates.
Located in the center of the western Washington region, Snohomish and King
counties have experienced significant growth in recent years. Much of this
growth can be attributed to the computer software and import/export businesses
in the region. Snohomish County is a fast growing county and the significant
migration of people to the area has supported growth in all types of businesses.
The Boeing Corporation employs approximately 80,000 people in the Puget Sound
region. Everett is a "home port" for a United States Navy Nuclear Carrier
battle group which has brought a significant number of new residents to the
surrounding market areas during the past two years, since its completed
construction.
Lending Activities
- ------------------
GENERAL. The Corporation originates business, consumer and real estate
loans primarily through its full service office staff and commissioned
business bankers and loan officers. Business bankers and loan officers
direct their efforts toward establishing and maintaining ongoing relationships
with local businesses and consumers. These customers are a valuable source
for new loan origination referrals. During the year just completed most
loans were for the purchase or refinance of one-to-four family, multi-family,
and commercial properties, for construction of one-to-four family homes and
home equity lending. As of June 30, 1998, $252 million or 62% of the
Corporation's total loans consisted of loans secured by one-to-four family
residential properties (permanent and construction), $32 million or 8% of
total loans consisted of commercial real estate and land loans, $63 million
or 15% consisted of multi-family loans, $41 million or 10% consisted of
commercial business loans and $20 million or 5% of installment loans.
To ensure that the yields on its loan portfolio and investments are interest
rate sensitive, the Corporation has implemented several measures, including (i)
adoption of a practice under which the Corporation generally originates long-
term, fixed-rate mortgage loans only when such loans are written to
specifications promulgated by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA"), or the Federal
Housing Administration and Veterans Administration (collectively "FHA/VA"),
and qualify for sale in the secondary market; (ii) when market conditions
permit, increased emphasis on the retention of adjustable rate or balloon
mortgages on residential properties; and (iii) origination of business and
consumer products with adjustable rates. These lending strategies were
adopted to shorten the term of the Corporation's assets and make the loan
portfolio less sensitive to interest rate volatility.
QUALITY CONTROL. The Corporation has implemented a quality control process
designed to ensure sound lending practices and compliance with the guidelines
established by FHLMC, FNMA, FHA and VA. An outside consultant conducts reviews
of completed transactions to ensure the Corporation's credit personnel adhere to
investors' underwriting criteria, regulatory conformance and internal policy
compliance. In addition, each operating department performs certain quality
control procedures.
ONE-TO-FOUR FAMILY RESIDENTIAL LOANS. The Corporation presently originates
both fixed rate and adjustable rate mortgage ("ARMs") loans secured by one-to-
four family properties with loan terms of up to 30 years. Newly originated ARMs
have interest rates that adjust based on the One Year United States Treasury
Constant Maturity Index or the Twelfth District Cost of Funds Index, a lagging
index. Borrower demand for ARMs versus fixed-rate mortgage loans is a function
of the level of interest rates, the expectations of changes in the level of
interest rates and the differences between the interest rates and loan fees
offered for fixed-rate mortgage loans and the rates and loan fees for ARMs.
The Corporation's lending policies generally limit the maximum loan-to-value
ratio on fixed-rate and adjustable-rate residential one-to-four family owner
occupied loans to 80% or less of the lesser of the appraised value or purchase
price of the underlying residential property. Non-owner occupied one-to-four
family residential loans are limited to 70% or less, of the lesser of the
appraised value or purchase price of the underlying residential property. The
loan-to-value ratio, maturity and other provisions of the loans made by the
Corporation are generally reflected in the policy of making less than the
maximum loan permissible under federal regulations, according to established
lending practices, market conditions and underwriting standards maintained by
the Corporation. Loans originated with a loan-to-value ratio above 80% have
typically required private mortgage insurance.
3
<PAGE>
RESIDENTIAL CONSTRUCTION LOANS. The Corporation originates construction
loans on one-to-four family homes either to individual borrowers as custom
construction loans or to builders as speculative construction loans.
Construction loans generally have terms of twelve months. The interest rates
charged by the Corporation on construction loans are indexed to the prime rate
and vary depending on the loan. The Corporation requires personal guaranties
of payment from the principals of the borrowing entities. All construction
loans require approval by various levels of corporate personnel, depending on
the size of the loan. At June 30, 1997 and June 30, 1998, the percent of the
Corporation's gross loan portfolio that consisted of one-to-four family
construction loans was 9% and 12%, respectively. Management has sought to
increase the residential construction loan portfolio because of its relatively
high margins, beneficial asset/liability characteristics, and the favorable
housing market in the Corporation's market area. The residential construction
portfolio is limited by Board of Director policy to 15% of assets.
Construction loans involve further credit risks because loan funds are
advanced upon the security of the project under construction that is of
uncertain value before completion. The Corporation's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of the construction. If the
estimate of construction costs proves to be inaccurate, the Corporation may be
required to advance additional funds to complete the development. If, upon
completion of the project the marketability of the property proves to be
inaccurate, the borrower may be unable to sell the completed project in a timely
manner or obtain adequate proceeds to repay the loan, and the loan may become
nonperforming. Delays may arise from labor problems, material shortages may be
experienced and other unpredictable contingencies may occur. Furthermore, if
the estimate of value proves to be inaccurate, the Corporation may be confronted
with at, or prior to the maturity of the loan, a project with a value that is
insufficient to assure full repayment.
HOME EQUITY/LINE OF CREDIT LENDING. Loans are made either independently
through the Corporation's retail offices or in connection with the closing of
a residential mortgage loan. Management views these loans as important in
building the Corporation's orientation toward a full service community bank.
The balance outstanding in this portfolio has increased to $28 million at June
30, 1998 as compared to $22 million in 1997. At June 30, 1997 and 1998, the
total amount of outstanding unused lines was $12.4 million and $21.8 million,
respectively.
MULTI-FAMILY LOANS. Multi-family loans totaled $63 million or 15% of total
loans at June 30, 1998. The multi-family portfolio is limited, by policy, to
20% of assets. New loan originations are all in the Puget Sound region with
adjustable rates. The multi-family portfolio is principally comprised of
small to medium-size apartment projects ($2.5 million in loan amount or less)
with loan-to-value ratios in the 70% to 80% range.
COMMERCIAL REAL ESTATE AND LAND LOANS. Commercial real estate and land
loans totaled 8% of the Corporation's total loans at June 30, 1998. All
commercial real estate and land loans are secured by properties in the
western Washington area, mainly in the Puget Sound region. Improved property
such as office buildings and small commercial business properties such as
strip shopping centers secure the Corporation's commercial real estate loans.
At June 30, 1998, the largest commercial real estate and land loan in the
Corporation's portfolio was $3.5 million, which was performing according to
its terms at that date.
Multi-family residential and commercial real estate lending affords the Bank
an opportunity to receive interest at rates higher than those generally
available from one-to-four family mortgage loans. However, loans secured by
such properties usually are greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one-to-four family
residential mortgage loans. Because payments on loans secured by multi-family
residential and commercial properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy.
INSTALLMENT LOANS/CONSUMER LOANS. During 1996, an installment loan program
was initiated and management anticipated, subject to market conditions, an
increase in installment lending on collateral such as boats, automobiles, and
recreational vehicles, as well as a limited amount of unsecured personal loans.
This portfolio increased $10 million to $20 million at June 30, 1998 as compared
to the $10 million outstanding at June 30, 1997. Most of this increase
relates to loans on boats. Management expects this portfolio will continue
to increase and diversify in future years as new consumer products are
introduced.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles or boats. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source or repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various Federal and state laws, including Federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
4
<PAGE>
BUSINESS LOANS. During 1997, a line of business banking products was
developed and is currently being marketed by the Bank. The merger with AmFirst
provided the Bank with a portfolio of business loans, as well. These loans are
typically for one-year terms, with adjustable rates indexed to the prime rate.
Included in these products are secured and unsecured loans and lines.
Commercial property, business inventories, commercial equipment and personal
property of the business owner serves as collateral for the secured business
loans. Commercial business loans increased from $25 million at June 30, 1997
to $41 million at June 30, 1998. Unsecured business loans totaled $2.4 million
at June 30, 1998.
Commercial business lending generally involves greater risk than residential
mortgage lending and involves risks that are different from those associated
with residential and commercial real estate lending. Although commercial
business loans are often collateralized by equipment, inventory, accounts
receivable or other business assets, the liquidation of collateral in the
event of a borrower default is often an insufficient source of repayment
because accounts receivable may be uncollectible and inventories and
equipment may be obsolete or of limited use. Accordingly, the repayment of a
commercial business loan depends primarily on the successful operation of the
borrower's business and creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source
of repayment.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------------------------
June 30,
-------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans at beginning of period $ 193,776 223,610 261,013 287,124 360,439
Loans originated
Real estate mortgage
One-to-four family residential 277,949 85,966 79,752 94,521 256,257
Multi-family residential and commercial 2,118 3,928 13,040 37,427 24,977
Single-family construction 22,601 22,828 31,719 28,592 57,089
Commercial 11,051 12,776 12,293 12,287 20,649
Installment 814 1,225 10,083 22,947 11,742
----------------------------------------------------
Total loans originated 314,533 126,723 146,887 195,774 370,714
Loans purchased 552 369 821 110 245
Whole loans sold 236,703 43,969 57,286 50,825 190,374
Loan principal repayments 47,840 43,305 61,921 71,203 132,402
Other (708) (2,415) (2,390) (541) (433)
----------------------------------------------------
Loan activity, net 29,834 37,403 26,111 73,315 47,750
----------------------------------------------------
Total gross loans at end of period 223,610 261,013 287,124 360,439 408,189
====================================================
Loans converted to mortgage-backed securities
Loans securitized 61,148 15,393 32,330 17,419 24,400
Mortgage-backed securities sold 45,049 10,623 32,330 17,419 24,385
</TABLE>
5
<PAGE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the Corporation's
loan portfolio by type of loan and by type of security as of the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------------- ---------------- ---------------- ---------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan
- -------------
Real estate mortgage
Residential (F1)(F2) $157,590 74.33% 192,482 77.22 208,979 76.69 262,605 76.96 260,491 67.71
FHA and VA 2,762 1.30 3,458 1.39 3,085 1.13 3,955 1.16 6,189 1.61
Commercial 18,850 8.89 16,770 6.73 14,739 5.41 25,250 7.40 31,746 8.25
Land loans 5,614 2.65 202 0.08 194 0.07 606 0.18 232 0.06
Real estate construction 18,351 8.66 23,436 9.40 31,125 11.42 33,361 9.78 47,861 12.44
Commercial 18,406 8.68 22,091 8.86 26,016 9.55 24,601 7.21 41,494 10.79
Installment 2,037 0.96 2,574 1.03 2,986 1.10 10,061 2.95 20,176 5.24
----------------------------------------------------------------------------------------
Total Loans 223,610 105.47 261,013 104.71 287,124 105.37 360,439 105.64 408,189 106.10
Less
Due to borrowers on construction loans 5,980 2.82 6,215 2.49 9,082 3.33 12,865 3.77 16,966 4.41
Unearned discounts 1,771 0.84 2,225 0.89 2,235 0.82 2,494 0.73 2,346 0.61
Allowance for possible loan losses 3,828 1.81 3,305 1.33 3,336 1.22 3,879 1.14 4,143 1.08
Valuation allowance on loans held for
sale -- -- 18 -- 7 -- -- -- -- --
----------------------------------------------------------------------------------------
Total loans, net 212,031 100.00 249,250 100.00 272,464 100.00 341,201 100.00 384,734 100.00
========================================================================================
Type of Security
- -----------------
Real estate mortgage
One-to-four family (F2) $154,277 72.77 192,080 77.06 205,525 75.43 241,050 70.65 251,805 65.45
Multi-family 24,426 11.52 27,296 10.95 37,664 13.82 58,662 17.19 62,736 16.31
Commercial 18,850 8.89 16,770 6.73 14,739 5.41 25,250 7.40 31,746 8.25
Land loans 5,614 2.65 202 0.08 194 0.07 606 0.18 232 0.06
Other 20,443 9.64 24,665 9.89 29,002 10.64 34,871 10.22 61,670 16.03
----------------------------------------------------------------------------------------
Total Loans 223,610 105.47 261,013 104.71 287,124 105.37 360,439 105.64 408,189 106.10
Less
Due to borrowers on construction loans 5,980 2.82 6,215 2.49 9,082 3.33 12,865 3.77 16,966 4.41
Unearned discounts 1,771 0.84 2,225 0.89 2,235 0.82 2,494 0.73 2,346 0.61
Allowance for possible loan losses 3,828 1.80 3,305 1.33 3,336 1.22 3,879 1.14 4,143 1.08
Valuation allowance on loans held for
sale -- -- 18 -- 7 -- -- -- -- --
----------------------------------------------------------------------------------------
Total loans, net 212,031 100.00 249,250 100.00 272,464 100.00 341,201 100.00 384,734 100.00
========================================================================================
_______________________________________
<FN>
<F1> Includes construction loans converted to permanent loans.
<F2> Includes home equity loans.
</FN>
</TABLE>
5
<PAGE>
The following table sets forth the estimated repricing or maturity of the
Corporation's loans and mortgage-backed securities for years ended June 30,
1996, 1997, and 1998 and the dollar amount of such securities and loans at the
date which are scheduled to mature after one year which have fixed or
adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdraft loans are reported as due in one
year or less. Mortgage-backed securities are reported without premiums or
discounts.
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Mortgage
Mortgage Commercial Installment Total Backed
Loans Loans Loans Loans Securities
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amount repricing or maturing
Within one year $ 136,020 21,539 2,651 160,210 7,837
After one year through three 98,160 5,830 1,710 105,700 3,322
After three years through five 59,823 8,884 15,815 84,522 801
After five years 52,516 5,241 -- 57,757 11,044
-----------------------------------------------------------
Total 346,519 41,494 20,176 408,189 23,004
===========================================================
Interest rate terms on amounts
due after one year
Fixed 77,146 13,529 2,025 92,700 15,167
Adjustable 187,588 9,390 17,103 214,081 5,390
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
Mortgage
Mortgage Commercial Installment Total Backed
Loans Loans Loans Loans Securities
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amount repricing or maturing
Within one year $ 135,496 15,065 782 151,343 6,100
After one year through three 63,685 5,249 113 69,047 5,014
After three years through five 93,696 3,671 8,069 105,436 4,743
After five years 32,900 616 1,097 34,613 14,091
-----------------------------------------------------------
Total 325,777 24,601 10,061 360,439 29,948
===========================================================
Interest rate terms on amounts
due after one year
Fixed 82,887 9,571 1,172 93,630 23,848
Adjustable 194,138 7,554 8,443 210,135 6,100
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
Mortgage
Mortgage Commercial Installment Total Backed
Loans Loans Loans Loans Securities
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amount repricing or maturing
Within one year $ 111,513 16,330 765 128,608 15,269
After one year through three 42,653 7,303 607 50,563 4,854
After three years through five 69,959 2,550 643 73,152 4,956
After five years 33,287 545 969 34,801 18,609
-----------------------------------------------------------
Total 257,412 26,728 2,984 287,124 43,688
===========================================================
Interest rate terms on amounts
due after one year
Fixed 90,525 10,533 527 101,585 28,419
Adjustable 119,090 8,545 1,525 129,160 13,085
</TABLE>
7
<PAGE>
Loan Maturity and Repricing
- ---------------------------
The following table sets forth information at June 30, 1998, regarding the
dollar amount of loans maturing in the Corporation's portfolio based on their
contractual terms to maturity, but does not include scheduled payments or
potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Mortgage loans that have adjustable rates and balloon repayment
dates are shown as maturing at their next repricing date. Loan balances do
not include unearned discounts, unearned income and allowance for loan losses.
<TABLE>
<CAPTION>
Due After Due After Due After
3 Through 5 5 Through 10 Through Due After
Due During Years 10 Years 15 Years 15 Years
The Year Ending After After After After
June 30, June 30, June 30, June 30, June 30,
------------------------------------------------------------------------------------------
1999 2000 2001 1998 1998 1998 1998 Total
------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
Residential $ 85,558 33,595 51,484 44,670 15,369 2,237 33,767 266,680
Commercial 6,545 1,308 7,797 14,953 352 -- 791 31,746
Land 202 -- -- 30 -- -- -- 232
One-to-four family
construction 43,715 2,837 1,139 170 -- -- -- 47,861
Commercial 21,539 1,051 4,779 8,884 4,405 171 665 41,494
Installment 2,651 746 964 15,815 -- -- -- 20,176
------------------------------------------------------------------------------------------
Total loans 160,210 39,537 66,163 84,522 20,126 2,408 35,223 408,189
=========================================================================================
</TABLE>
The following table sets forth the dollar amount of all loans as of June 30,
1998 due after one year which have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
-----------------------------
(Dollars in thousands)
Real estate mortgage
Residential $ 81,715 184,965
Commercial 2,071 29,675
Land 30 202
One-to-four family construction 504 3,756
Commercial 14,609 6,427
Installment 1,940 18,151
------------------------
Total 100,869 243,176
========================
Asset Quality
- -------------
GENERAL. OTS regulations require that each insured institution review and
classify its assets regularly. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full, based on currently
existing facts, conditions and values, questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and
of such little value that its continuance as an asset of the institution is not
warranted. Assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset, or portion
thereof, is classified loss, the insured institution must either establish
specific allowances for loan losses in the amount of 100% of the portion of
the asset classified loss or charge off such amounts.
8
<PAGE>
Cascade has comprehensive monthly and quarterly review procedures for
reviewing, identifying and classifying assets for weaknesses. Reserves are
maintained for assets classified as substandard or doubtful. Any portion of
an asset classified as loss is immediately written off. The objective of
these review procedures is to identify any trends and determine the levels of
loss exposure to evaluate the need for an adjustment to the reserve accounts.
DELINQUENCIES. A report containing delinquencies of all loans is reviewed
monthly by the Management Committee and periodically by the Board of Directors.
Procedures taken with respect to delinquent loans differ depending on the
particular circumstances of the loan. The Corporation's general procedures
provide that when a loan becomes delinquent, the borrower is contacted,
usually by phone, within 15 to 30 days. When the loan is over 30 days
delinquent, the borrower is contacted in writing. Typically, the Corporation
will initiate foreclosure action against the borrower when principal and
interest become 90 days or more delinquent. In any event, interest income is
reduced by the full amount of accrued and uncollected interest on loans once
they become 90 days delinquent, go into foreclosure or are otherwise determined
to be uncollectible. Once interest has been paid to date or management
considers the loan fully collectable, it is returned to accrual status. An
allowance for loss is established when, in the opinion of management, the fair
value less sales costs of the property collateralizing the loan is less than
the outstanding principal and the collectibility of the loan's principal
becomes uncertain. It is intended that the Corporation's allowance for loan
losses be adequate to cover known potential and reasonably estimated unknown
losses. As of June 30, 1997 and 1998, the Corporation had $911,000 and $1.9
million, respectively, of loans accounted for on a nonaccrual basis (i.e.,
loans upon which management believes the future collectibility of interest
is uncertain).
The aggregate amounts of the Corporation's classified assets and of the
Corporation's general and specific loss allowances and charge-offs for the
period then ended were as follows.
At June 30,
---------------------------------------------
1994 1995 1996 1997 1998
---------------------------------------------
(Dollars in thousands)
Substandard $ 13,234 8,588 2,874 2,583 4,433
General loss allowances 3,528 3,005 3,036 3,579 3,776
Specific loss allowances 300 300 300 300 367
Charge-offs 100 213 30 272 45
Allowances for Loan Losses
- --------------------------
It is management's policy to maintain adequate allowances for estimated
losses on known and inherent risks in the loan portfolio. Generally, the
allowances are based on, among other things, the size and composition of the
loan portfolio, historical loan loss experience, evaluation of economic
conditions, and in various sectors of the Corporation's customer base, detailed
analysis of individual loans for which collectibility may not be assured and
determination of the existence and realizable value of the collateral and
guarantees securing the loan. Management has allocated the allowance to
various portfolio segments; however, the allowance is applicable to the loan
portfolio in its entirety.
While the Corporation believes that the established allowance for loan
losses is adequate at June 30, 1998, there can be no assurance that regulators,
when reviewing the Corporation's loan portfolio in the future, will not require
the Corporation to increase its allowance for loan losses, thereby adversely
affecting the Corporation's financial condition and net income.
The Corporation provided $61,000, $810,000 and $246,000 of loan loss
provisions for the three years ended June 30, 1996, 1997 and 1998. The merger
with AmFirst added a portfolio of approximately $25 million in commercial
business loans. While adequately reserved at the time of the merger, this
portfolio coupled with the Bank's intent to originate additional commercial
loans and other higher risk loan products will necessitate increasing the Bank's
allowance for loan losses in future years. Management expects to record
additional provisions for losses on loans in future years as portfolios
increase and diversify.
9
<PAGE>
The following table sets forth information with respect to the Corporation's
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
1994 1995 1996 1997 1998
-----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on nonaccrual basis
Real estate mortgage
Residential $ 357 617 373 759 971
Commercial 1,272 -- -- -- --
Land loans 5,082 -- -- -- --
Commercial 71 -- 225 152 199
Installment -- -- 2 -- 751
---------------------------------------------
Total 6,782 617 600 911 1,921
Accruing loans which are contractually
past due 90 days or more
Real estate mortgage
Residential -- -- -- 141 --
Commercial -- 1,219 -- -- --
Commercial -- -- 120 -- --
Installment -- -- -- 17 --
--------------------------------------------
Total of nonaccrual and 90 days past due loans 6,782 1,836 720 1,069 1,921
Real estate owned 150 1,643 747 750 74
--------------------------------------------
Total nonperforming assets 6,932 3,479 1,467 1,819 1,995
============================================
Total loans delinquent 90 days or more to
net loans 3.20 0.74 0.26 0.31 0.50
Total loans delinquent 90 days or more to
total assets 2.20 0.50 0.18 0.25 0.43
Total nonperforming assets to total assets 2.25 0.95 0.37 0.42 0.45
</TABLE>
Certain loans meet the criteria of troubled debt restructurings as defined
in Statement of Financial Accounting Standards ("SFAS") No. 114 and No. 118,
"Accounting by Creditors for Impairment of a Loan", and "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures", respectively.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1994 1995 1996 1997 1998
--------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <S> <S>
Restructured loans $ 4,186 4,168 4,150 -- --
Interest foregone on restructured loans 192 148 97 6 --
10
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category and the percentage by category as of the dates
indicated.
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
Residential $ -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
Commercial real estate 300 1.59 300 1.79 300 2.04 300 1.19 300 0.95
Land acquisition and development -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
Real estate -- construction -- 0.00 -- 0.00 -- 0.00 -- 0.00 67 0.14
Commercial -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
Installment -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
Unallocated 3,528 n/a 3,005 n/a 3,036 n/a 3,579 n/a 3,776 n/a
Total allowance for loan losses to net loans 3,828 1.77 3,305 1.31 3,336 1.20 3,879 1.12 4,143 1.07
</TABLE>
The following table sets forth an allocation of the unallocated allowance by
loan category as of the dates indicated. The unallocated allowance is however
applicable to the loan portfolio in its entirety.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------
1994 1995 1996 1997 1998
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage
Single-family residential $ 340 410 310 540 525
Multi-family 330 270 380 590 630
Commercial real estate 1,120 910 410 610 760
Land acquisition and development 900 -- -- 6 --
Real estate - construction 250 225 290 545 790
Commercial 185 225 260 500 625
Installment 20 30 30 310 400
Unallocated 383 935 1,356 478 46
---------------------------------------
Unallocated allowance for loan losses to net loans 3,528 3,005 3,036 3,579 3,776
=======================================
11
<PAGE>
The following table sets forth an analysis of the Corporation's allowance
for possible loan losses for the periods indicated.
</TABLE>
<TABLE>
<CAPTION>
For the Year
Ended June 30,
-------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $ 3,433 3,828 3,305 3,336 3,879
Provision for loan losses 495 (319) 61 810 246
Charge offs
Residential real estate -- -- -- 59 --
Commercial real estate 100 200 -- -- --
Real estate construction -- -- -- -- --
Commercial -- 11 20 178 29
Installment -- 5 10 35 16
Land -- -- -- -- --
------------------------------------------------
Total charge offs 100 216 30 272 45
------------------------------------------------
Recoveries -- 12 -- 5 63
Net charge offs and allowance
recovered 100 (523) 30 267 (18)
-------------------------------------------------
Balance at end of period 3,828 3,305 3,336 3,879 4,143
================================================
Ratio of allowance to net loans
outstanding at the end of the period 1.77 1.31 1.20 1.12 1.07
Ratio of net charge offs to average loans
outstanding during the period 0.04 0.23 0.01 0.09 (0.01)
Ratio of loan loss allowance to
nonperforming assets 55.22 95.00 227.40 213.25 207.67
Asset and Liability Management Activities
- -----------------------------------------
The Corporation uses interest rate exchange agreements ("swaps") and
interest rate caps and floors to control the amount of its interest rate risk
by more closely matching the repricing characteristics of its earning assets
and costing liabilities or to reduce the cost of longer liabilities. Swaps
are agreements in which the Corporation and another party, generally the FHLB-
Seattle, and primary dealers of United States government securities, agree to
exchange interest payments on a notional principal amount. Caps and floors
are agreements whereby for a fixed fee, the Corporation will receive cash
payments if a particular interest rate exceeds or falls below the predetermined
level. Caps, floors and swaps are one component of the Corporation's asset/
liability management program. Depending on customer preferences for loan and
deposit products, the Corporation may increase its use of interest rate swaps,
caps and floors. The Board of Directors reviews the outstanding hedging
transactions of the Corporation periodically. At June 30, 1997 and 1998, the
Corporation had $10 million and $5 million notional amount of caps outstanding.
There were $13 million of floors outstanding at June 30, 1998. These agreements
were designated against certain loans. See Note 8 of the Notes to the
Consolidated Financial Statements contained in the Annual Report for
additional information.
12
<PAGE>
AVERAGE BALANCE SHEETS. In addition to mortgage banking income, the Bank
depends on the spread between the yield on interest-earning assets (primarily
loans and investments) and the cost of interest-bearing liabilities (primarily
deposit accounts and borrowings), as well as the relative size of the Bank's
interest-earning assets and interest-bearing liability portfolios. The
following table sets forth, for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
ratio of interest-earning assets to interest-bearing liabilities and net
interest margin. Average balances for a period have been calculated using
the average of month-end balances during such period. Such average balances
are considered to be representative of the average daily balance for each
period presented.
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended June 30,
----------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------------------------------------------------------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividend Cost Balance Dividend Cost Balance Dividend Cost
----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets <F1>
Mortgage loans $ 242,438 21,134 8.72 276,596 23,238 8.40 292,919 24,618 8.40
Consumer loans 7,780 719 9.24 18,229 1,626 8.92 40,294 3,550 8.81
Commercial loans 14,924 1,618 10.84 12,477 1,299 10.41 29,629 2,941 9.93
------------------------------------------------------------------------------------------
Total loans 265,142 23,471 8.85 307,302 26,163 8.51 362,842 31,109 8.57
Mortgage-backed securities 56,670 3,616 6.38 39,435 2,240 5.68 26,864 1,592 5.93
Investment and trading securities 34,997 2,013 5.75 44,354 2,527 5.70 9,479 539 5.69
Daily interest-earning deposits
and FHLB Stock 8,559 594 6.94 10,216 638 6.25 6,353 676 10.64
------------------------------------------------------------------------------------------
Total interest-earning assets 365,368 29,694 8.13 401,307 31,568 7.87 405,538 33,916 8.36
Noninterest-earning assets
Office properties and equipment, net 7,439 7,237 7,902
Real estate, net 1,807 770 569
Other noninterest-earning assets 8,519 6,935 13,768
-------- ------- -------
Total assets 383,133 416,249 427,777
======== ======= =======
LIABILITIES AND EQUITY
Interest-bearing liabilities
Passbook accounts 15,406 518 3.36 15,946 523 3.28 14,529 456 3.14
Checking accounts 14,766 302 2.05 16,211 371 2.29 29,535 356 1.21
Money market accounts 25,741 1,063 4.13 43,071 2,003 4.65 51,750 2,371 4.58
Certificates of deposit 198,134 12,040 6.08 202,810 11,720 5.78 205,763 12,022 5.84
----------------------------------------------------------------------------------------------
Total deposits 254,047 13,923 5.48 278,038 14,617 5.26 301,577 15,205 5.04
Other interest-bearing liabilities
FHLB advances 64,380 3,937 6.12 72,071 4,183 5.80 69,078 4,015 5.81
Other interest-bearing liabilities 21,849 1,244 5.69 20,195 1,124 5.57 15,006 898 5.98
----------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 340,276 19,104 5.61 370,304 19,924 5.38 385,661 20,118 5.22
Other liabilities 18,550 19,938 12,860
Total liabilities 358,826 390,242 398,521
Retained earnings 24,307 26,007 29,256
Total liabilities and retained
earnings 383,133 416,249 427,777
Net interest income <F2> 10,590 11,644 13,798
Interest rate spread <F3> 2.52 2.49 3.14
Net interest margin <F4> 2.90 2.90 3.40
Average interest-earning assets to
average interest-bearing
liabilities 107.37 108.37 105.15
_____________________________
<FN>
<F1> Does not include interest on loans 90 days or more past due.
<F2> Interest and dividends on total interest-earning assets less interest on
total interest-bearing liabilities.
<F3> Total interest-earning assets yield less total interest-bearing
liabilities cost.
<F4> Net interest income as an annualized percentage of total interest-earning
assets.
</FN>
</TABLE>
13
<PAGE>
RATE/VOLUME ANALYSIS. The following table sets forth the effects of
changing rates and volumes on net interest income of the Bank. Information is
provided with respect to (i) effects on interest income attributable to changes
in volume (changes in volume multiplied by prior rate); (ii) effects on interest
income attributable to changes in rate (changes in rate multiplied by prior
volume); and (iii) changes in rate/volume (change in rate multiplied by
change in volume).
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------------------------------
1996 Compared to Year 1997 Compared to Year 1998 Compared to Year
Ended June 30, 1995 Ended June 30, 1996 Ended June 30, 1997
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------------------------------------------------------------------------------------------------
Rate/ Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net Rate Volume Volume Net
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Mortgage loans <F1> $ (1,310) 2,584 (169) 1,105 (766) 2,979 (109) 2,104 8 1,371 1 1,380
Consumer loans <F1> (13) 551 (34) 504 (26) 966 (33) 907 (20) 1,968 (24) 1,924
Commercial loans <F1> 7 272 2 281 (65) (265) 11 (319) (61) 1,786 (83) 1,642
Total loans (1,316) 3,407 (201) 1,890 (857) 3,680 (131) 2,692 (73) 5,125 (106) 4,946
------------------------------------------------------------------------------------------------------------
Mortgage-backed
securities 516 (1,234) (142) (860) (397) (1,100) 121 (1,376) 97 (714) (31) (648)
Securities 52 958 53 1,063 (19) 538 (5) 514 (5) (1,988) 5 (1,988)
Daily interest-earning
deposits 33 105 8 146 (59) 115 (12) 44 449 (241) (170) 38
------------------------------------------------------------------------------------------------------------
Total net change in
income on interest-
earning assets (715) 3,236 (282) 2,239 (1,332) 3,233 (27) 1,874 1,956 2,182 (1,790) 2,348
===========================================================================================================
Interest-bearing
liabilities
Interest-bearing
deposits 1,218 1,373 188 2,779 (568) 1,315 (53) 694 (598) 1,238 (52) 588
FHLB advances 188 524 31 743 (200) 471 (25) 246 6 (174) -- (168)
Other borrowings 3 (373) (1) (371) (28) (94) 2 (120) 84 (289) (21) (226)
-----------------------------------------------------------------------------------------------------------
Total net change in
expenses on interest-
bearing liabilities 1,409 1,524 218 3,151 (796) 1,692 (76) 820 (508) 775 (73) 194
===========================================================================================================
Net change in net
interest income (912) 1,054 2,154
====== ====== ======
__________________________
<FN>
<F1> Does not include interest on loans ninety days or more past due.
</FN>
</TABLE>
14
<PAGE>
Investment Activities
- ---------------------
Federally chartered savings institutions have authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies and of state and municipal governments, deposits at
the FHLB-Seattle, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, such savings institutions may also invest part of their assets
in commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. Savings institutions are also
required to maintain liquid assets at minimum levels that are set by the OTS.
See "REGULATION - Federal Home Loan Bank System." The Corporation may decide
to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans. For the month ended June 30, 1998, Cascade's regulatory
liquidity was 9.32%.
The Board of Directors sets the investment policy of the Corporation. This
policy dictates that investments will generally be made with the intent of
holding them available-for-sale and will be made based on the safety of the
principal amount, interest rate risk, liquidity requirements of the
Corporation and the return on the investments. The Corporation's policy does
not permit investment in noninvestment grade bonds and permits investment in
various types of liquid assets permissible under OTS regulation, which include
United States Treasury obligations, securities of various federal agencies,
mortgage-backed securities ("MBS"), Small Business Administration securities
("SBA"), collateralized mortgage obligations ("CMOs"), certain certificates
of deposits of insured banks, repurchase agreements and federal funds.
Investment decisions are made by the Asset Liability Committee, which meets
regularly and consists of three members of the Board of Directors, the Chief
Financial Officer and other members of senior management. The Management
Committee acts within policies established by the Board of Directors. At June
30, 1997 and 1998, the Corporation's securities portfolio totaled approximately
$65 million and $32 million, respectively. For further information concerning
the Corporation's securities portfolio, see Note 4 of the Notes to the
Consolidated Financial Statements contained in the Annual Report.
Subsidiary Activity
- -------------------
Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that at least one-half of any amounts in
excess of 1% are used primarily for community, inner city and community
development projects. Cascade's investment in its service corporations did
not exceed these limits at June 30, 1998. At June 30, 1998, Cascade's
investment in its subsidiaries was $323,000.
On October 1, 1992, the Corporation began marketing annuity products, mutual
funds and property and casualty insurance to customers and noncustomers in its
market areas through a subsidiary, Cascade Investment Services, Inc. During the
past year a reverse mortgage product was added to Cascade Investment Services
product lines and the subsidiary has been quite successful in marketing this
new product. Management believes offering these product lines increases
customer awareness, expands product lines and provides a valuable alternative to
the deposit products offered by the Bank. Revenues from the subsidiary increase
the Corporation's noninterest income.
15
<PAGE>
The following table summarizes the carrying value and estimated market value
of the Corporation's portfolio of investment securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------------------------------------------------------------------------------------
Carrying Market Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value Value Value
-------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
US Treasury $ 11,401 11,085 10,595 10,463 10,782 10,722 15,929 15,929 1,002 1,002
Municipals 1,493 1,602 2,529 2,639 5,480 5,480 4,938 4,938 -- --
SBA -- -- -- -- 13,721 13,721 5,871 5,871 2,177 2,177
MBS 48,946 46,929 69,896 69,360 43,213 42,709 29,657 29,517 23,004 22,933
CMO 455 455 499 481 481 481 493 493 468 468
Corporate securities and mutual funds 11,315 11,315 4,507 4,507 21,069 21,069 2,971 2,971 -- --
------------------------------------------------------------------------------------------
Total investment securities 73,610 71,386 88,026 87,450 94,746 94,182 59,859 59,719 26,651 26,580
==========================================================================================
Federal Reserve stock $ 70 70 70 70 70 70 70 70 -- --
FHLB-Seattle stock 2,935 2,935 3,959 3,959 4,702 4,702 5,074 5,074 5,486 5,486
------------------------------------------------------------------------------------------
3,005 3,005 4,029 4,029 4,772 4,772 5,144 5,144 5,486 5,486
==========================================================================================
</TABLE>
The following table sets forth the Corporation's securities portfolio at
carrying value at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Carrying of Carrying of Carrying of Carrying of Carrying of
Value Portfolio Value Portfolio Value Portfolio Value Portfolio Value Portfolio
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
US Treasury $ 11,401 15.49% 10,595 12.04 10,782 11.38 15,929 26.61 1,002 3.76
Municipals 1,493 2.03 2,529 2.87 5,480 5.78 4,938 8.25 -- --
SBA -- 0.00 -- 0.00 13,721 14.48 5,871 9.81 2,177 8.17
MBS 48,946 66.49 69,896 79.40 43,213 45.61 29,657 49.55 23,004 86.31
CMO 455 0.62 499 0.57 481 0.51 493 0.82 468 1.76
Corporate securities
and mutual funds 11,315 15.37 4,507 5.12 21,069 22.24 2,971 4.96 -- --
----------------------------------------------------------------------------------------------------
Total 73,610 100.00 88,026 100.00 94,746 100.00 59,859 100.00 26,651 100.00
===================================================================================================
</TABLE>
16
<PAGE>
Deposit Activities and Other Sources of Funds
- ---------------------------------------------
GENERAL. The Corporation's primary sources of funds are deposits, proceeds
from principal and interest payments on loans and mortgage-backed securities,
proceeds from loan sales, FHLB-Seattle advances and reverse repurchase
agreements. Deposits and loan repayments are the major source of Cascade's
funds for lending and other investment purposes. Loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and
loan prepayments are significantly influenced by general interest rates and
money market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources,
or on a longer term basis for general business purposes.
DEPOSIT ACCOUNTS. The Corporation offers a variety of deposit accounts
having a range of interest rates and terms. The Corporation's deposits
consist of passbook, negotiable order of withdrawal ("NOW"), money market, and
certificate accounts. The flow of deposits is influenced significantly by
general economic conditions, changes in the money market and prevailing
interest rates. In addition, there is strong competition for customer dollars
from credit unions, mutual funds and nonbank corporations such as securities
brokerage companies and other diversified companies. The Corporation's
deposits are obtained primarily from the areas in which its branches are
located. The Corporation relies primarily on customer service and
longstanding relationships with customers to attract and retain these
deposits. Individual certificate accounts in excess of $100,000 are not
actively solicited by the Corporation but are accepted at rates at or below
other funding sources. The Corporation does not accept accounts by any agent
or broker acting on behalf of the Corporation. In the coming year the Bank
will focus deposit gathering activities on its new line of business deposit
products and management expects a large portion of the year's deposit growth
will occur in these products.
In the unlikely event Cascade is liquidated, certain depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the shareholders. Substantially all of Cascade's depositors are
residents of the State of Washington.
The following table sets forth information concerning the Corporation's
deposits at June 30, 1998. The indicated interest rates were those being
offered at June 11, 1998.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -----------------------------------------------------------------------------
(In thousands)
1.90% None NOW accounts $ 100 17,923 5.74
3.00 None Regular savings 100 13,218 4.23
3.70 None Money market accounts 2,500 54,697 17.50
0.00 None Noninterest checking 100 15,347 4.91
Certificates of Deposit
-----------------------
4.40 0 - 3 mos. Fixed term, fixed rate 1,000 480 0.16
5.05 4 - 6 mos. Fixed term, fixed rate 1,000 3,882 1.24
5.45 7 - 12 mos. Fixed term, fixed rate 1,000 101,523 32.49
5.30 13 - 24 mos. Fixed term, fixed rate 1,000 7,495 2.39
5.15 25 - 48 mos. Fixed term, fixed rate 1,000 4,498 1.44
5.25 49 - 120 mos. Fixed term, fixed rate 1,000 28,827 9.22
4.64 Various Variable rate 1,000 56 0.02
5.30 Various Jumbo certificates 100,000 64,572 20.66
---------------
312,518 100.00
===============
17
<PAGE>
The following table indicates the amount of the Corporation's jumbo
certificates of deposit by time remaining until maturity as of June 30, 1998.
Jumbo certificates of deposit require minimum deposits of $100,000 and rates
paid on such accounts are negotiable.
Jumbo
Certificates
Maturity Period of Deposits
- ---------------------------------------
(In thousands)
Three months or less $ 16,969
Three through six months 16,784
Six through twelve months 20,977
Over twelve months 9,842
--------
Total 64,572
========
BORROWINGS. Savings deposits are the primary source of funds for Cascade's
lending and investment activities and for its general business purposes. The
Corporation has in the past, however, relied upon advances from the FHLB-Seattle
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB-Seattle are typically secured by the
Corporation's first mortgage loans, and stock issued by the FHLB-Seattle. At
June 30, 1997 and 1998, the Corporation had $75 million and $73 million,
respectively, in advances from the FHLB-Seattle. The Corporation's current
credit limit with the FHLB-Seattle is 30% of total assets.
The Corporation enters into reverse repurchase agreements with nationally
recognized primary securities dealers. Reverse repurchase agreements are
accounted for as borrowings by the Corporation and are secured by designated
investments, and mortgage-backed securities. The proceeds of these transactions
are used to meet the cash flow needs of the Corporation. At June 30, 1997 and
1998, the Corporation had $19 million and $13 million, respectively, in
outstanding reverse repurchase agreements.
The Corporation has an unused commitment of $2 million from a regional
commercial bank to purchase Fed funds on an unsecured basis.
The following table sets forth certain information regarding borrowings by
the Corporation at the end of, and during, the periods indicated.
At June 30,
--------------------
1996 1997 1998
--------------------
Weighted average rate paid on
Securities sold under agreements to repurchase 5.44% 5.63 5.56
FHLB advances 5.86 5.88 5.67
<TABLE>
<CAPTION>
For the Year
Ended June 30,
--------------------------
1996 1997 1998
--------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding at any month end
Securities sold under agreements to repurchase $ 24,261 22,006 17,283
FHLB advances 78,792 80,109 76,439
Approximate average short-term borrowings outstanding
with respect to
Securities sold under agreements to repurchase 21,432 19,948 14,299
FHLB advances 64,104 70,498 67,782
Approximate weighted average rate paid on
Securities sold under agreements to repurchase 5.76 5.59 5.65
FHLB advances 6.14 5.80 5.92
18
<PAGE>
Competition
- -----------
The Corporation competes for both loans and deposits. The Puget Sound
metropolitan area has a high density of financial institutions, some of which
are larger and have greater financial resources than the Corporation, and all
of which are competitors of the Corporation to varying degrees. The
Corporation's competition for loans comes principally from savings and loan
associations, corporations, mortgage banking companies, insurance companies
and commercial banks. Its most direct competition for deposits has historically
come from savings and loan associations, corporations, commercial banks and
credit unions. The Corporation faces additional competition for deposits
from short-term money market funds and other corporate and government
securities.
Personnel
- ---------
As of June 30, 1998, the Corporation had 144 full-time equivalent employees.
The Corporation believes that employees play a vital role in the success of a
service company and that the Corporation's relationship with its employees is
good. The employees are not represented by a collective bargaining unit.
REGULATION
General
- -------
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act (the "HOLA"), as amended and, in certain respects, the Federal Deposit
Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature
and extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in
such matters as the ownership of deposit accounts and the form and content of
the Bank's mortgage documents. The Bank must file reports with the OTS and
the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other financial institutions.
There are periodic examinations by the OTS and the FDIC to review the Bank's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Corporation, the Bank and their operations.
The Corporation, as a savings and loan holding company, is also required to file
certain reports with, and otherwise comply with the rules and regulations of,
the OTS.
FEDERAL REGULATION OF SAVINGS BANKS
Office of Thrift Supervision
- ----------------------------
The OTS is an office in the Department of the Treasury subject to the
general oversight of the Secretary of the Treasury. The OTS possesses the
supervisory and regulatory duties and responsibilities formerly vested in
the FHLBB. Among other functions, the OTS issues and enforces regulations
affecting federally-insured savings associations and regularly examines
these institutions. OTS regulations require Cascade Financial Corporation,
as a savings and loan holding company, to file periodic reports with the OTS.
In addition, it must observe such record keeping requirements as the OTS may
prescribe and is subject to holding company examination by the OTS. The OTS
may take enforcement action if the activities of a savings and loan holding
company constitute a serious risk to the financial safety, soundness or
stability of a subsidiary savings association.
Federal Deposit Insurance Corporation
- -------------------------------------
The FDIC is an independent federal agency that insures the deposits, up to
prescribed statutory limits, of depository institutions. The FDIC currently
maintains two separate insurance funds: the BIF and the SAIF. As insurer of
the Bank's deposits, the FDIC has examination, supervisory and enforcement
authority over the Bank.
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Cascade's accounts are insured by the SAIF and accounts from AmFirst are
insured by BIF. The FDIC insures deposits at Cascade to the maximum extent
permitted by law. Cascade currently pays deposit insurance premiums to the
FDIC based on a risk-based assessment system established by the FDIC for all
SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups which are based solely on the level
of an institution's capital -- "well capitalized," "adequately capitalized,"
and "undercapitalized" -- which are defined in the same manner as the
regulations establishing the prompt corrective action system, as discussed
below. These three groups are then divided into three subgroups based on
reviews by the institution's primary federal or state regulator, statistical
analyses of financial statements, and other information relevant to gauging
the risk posed by the institution. Based on its capital and supervisory
subgroups, each institution is assigned an annual FDIC assessment rate.
Cascade's assessments expensed for the year ended June 30, 1998, totaled
$175,000.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of Cascade.
Federal Home Loan Bank System
- -----------------------------
The FHLB System, consisting of 12 FHLBs, now is under the jurisdiction of
the Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB
are to: supervise the FHLBs; ensure that the FHLBs carry out their housing
finance mission; ensure that the FHLBs remain adequately capitalized and able
to raise funds in the capital market; and ensure that the FHLBs operate in a
safe and sound manner. Cascade, as a member of the FHLB-Seattle, is required
to acquire and hold shares of capital stock in the FHLB-Seattle equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Seattle.
Cascade complied with this requirement with an investment in FHLB-Seattle stock
of $5 million at June 30, 1998. Among other benefits, the FHLB provides a
central credit facility primarily for member institutions. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the FHLB-
Seattle. At June 30, 1998, Cascade had $73 million in advances from the FHLB-
Seattle.
Community Reinvestment Act
- --------------------------
The Community Reinvestment Act ("CRA") requires financial institutions
regulated by the federal financial supervisory agencies to ascertain and help
meet the credit needs of their delineated communities, including low-income
and moderate-income neighborhoods within those communities, while maintaining
safe and sound banking practices. The regulatory agency assigns one of four
possible ratings to an institution's CRA performance and is required to make
public an institution's rating and written evaluation. The four possible
ratings of meeting community credit needs are outstanding, satisfactory,
needs to improve and substantial noncompliance.
Cascade has received an "outstanding" CRA rating from the OTS reflecting
the Bank's commitment to meeting the credit needs of the communities it serves.
Liquidity
- ---------
Under OTS regulations, each savings institution is required to maintain an
average daily balance of liquid assets (cash, certain time deposits and savings
accounts, bankers' acceptances, and specified U.S. government, state or federal
agency obligations and certain other investments) equal to a monthly average of
not less than a specified percentage (currently 4%) of its net withdrawable
accounts plus short-term borrowings. Monetary penalties may be imposed for
failure to meet liquidity requirements. The liquidity ratio of Cascade for
the month ended June 30, 1998 was 9.32%.
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Prompt Corrective Action
- ------------------------
Under the FDIA, each federal banking agency is required to implement a
system of prompt corrective action for institutions that it regulates. The
federal banking agencies have promulgated substantially similar regulations
intended to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-
based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and
is not subject to specified requirements to meet and maintain a specific capital
level for any capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage ratio that is less than 4.0% (3.0% under certain circumstances);
(iv) "significantly undercapitalized" if it has a total risk-based capital
ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less
than 3.0% or a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that
is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or
has received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. (The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.)
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed
to have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At June 30, 1998, Cascade was a "well capitalized" institution under the
prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
(v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation,
fees and benefits ("Guidelines"). The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the OTS determines that Cascade fails to meet any standard
prescribed by the Guidelines, the agency may require Cascade to submit to the
agency an acceptable plan to achieve compliance with the standard. The final
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
Qualified Thrift Lender Test
- ----------------------------
All savings associations are required to meet a Qualified Thrifty Lender
("QTL") test set forth in the HOLA and regulations of the OTS thereunder to
avoid certain restrictions on their operations. A savings institution that
fails to become or remain a QTL shall either become a national bank or be
subject to the following restrictions on its operations: (1) the
association may not make any new investment or engage in activities that
would not be permissible for national banks; (2) the association may not
establish any new branch office where a national bank located in the savings
institution's home state would not be able to establish a branch office; (3)
the association shall not be eligible to obtain new advances from any FHLB;
and (4) the payment of dividends by the association shall be subject to the
rules regarding the statutory and regulatory dividend restrictions applicable
to national banks. Also, beginning three years after the date on which the
savings institution ceases to be a qualified thrift lender, the savings
institution would be prohibited from retaining any investment or engaging in
any activity not permissible for a national bank and would be required to
repay any outstanding advances to any FHLB. In addition, within one year of
the date on which a savings association controlled by a company ceases to be
a QTL, the company must register as a bank holding company and becomes subject
to the rules applicable to such companies. A savings institution may requalify
as a qualified thrift lender if it thereafter complies with the QTL test.
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<PAGE>
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of
the 65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; and direct or
indirect obligations of the FDIC; and loans for educational purposes, loans
to small businesses and loans made through credit cards. In addition, the
following assets, among others, may be included in meeting the test subject to
an overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of origination;
100% of consumer; and stock issued by the FHLMC or the FNMA. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At June
30, 1998, the qualified thrift investments of Cascade were approximately 94% of
the its portfolio assets.
Capital Requirements
- --------------------
Under OTS regulations a savings association must satisfy three minimum
capital requirements: core capital, tangible capital and risk-based capital.
Savings associations must meet all of the standards to comply with the capital
requirements.
The OTS requires savings associations, such as Cascade, to meet each of
three separate capital adequacy standards: a core capital leverage requirement,
a tangible capital requirement and a risk-based capital requirement. OTS
regulations require savings associations to maintain core capital of at least
3.0% of assets and tangible capital of at least 1.5% of assets. At June 30,
1998, Cascade's core capital and tangible capital ratios were both 7%. Core
capital is defined to include common stockholders' equity, noncumulative
perpetual preferred stock and any related surplus, and minority interests in
equity accounts of consolidated subsidiaries, less (i) any intangible assets,
except for certain qualifying intangible assets; (ii) certain mortgage
servicing rights; and (iii) equity and debt investments in subsidiaries that
are not "includable subsidiaries," which is defined as subsidiaries engaged
solely in activities not impermissible for a national bank, engaged in
activities impermissible for a national bank but only as an agent for its
customers, or engaged solely in mortgage-banking activities. In calculating
adjusted total assets, adjustments are made to total assets to give effect to
the exclusion of certain assets from capital and to appropriately account for
the investments in and assets of both includable and nonincludable subsidiaries.
"Tangible capital" is defined, generally, as core capital minus any "intangible
assets," other than purchased mortgage servicing rights.
Institutions that fail to meet the core capital requirement would be
required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS prompt corrective action
regulation provides that a savings institution that has a core capital
leverage ratio of less than 4% (3% for institutions receiving the highest
CAMEL examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions. See "- Prompt Corrective Action."
OTS regulations incorporate a risk-based capital requirement that is
designed to be no less stringent than the capital standard applicable to
national banks. These regulations require a core risk-based capital ratio of
at least 4.0% of total risk-weighted assets and a total risk-based capital
ratio of at least 8.0% of total risk-weighted assets. At June 30, 1998, the
bank had core risk-based and total risk-based capital ratios of 10.3% and
11.4% respectively. Total capital consists of the sum of core and
supplementary capital, provided that supplementary capital cannot exceed core
capital, as previously defined. Supplementary capital includes (i) permanent
capital instruments such as cumulative perpetual preferred stock, perpetual
subordinated debt, and mandatory convertible subordinated debt, (ii) maturing
capital instruments such as subordinated debt, intermediate-term preferred
stock and mandatory convertible subordinated debt, and (iii) general valuation
loan and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by a
savings institution to one of four risk categories based on the amount of credit
risk associated with that particular class of assets. Assets not included for
purposes of calculating capital are not included in calculating risk-weighted
assets. The categories range from 0% for cash and securities that are backed
by the full faith and credit of the U.S. Government to 100% for repossessed
assets or assets more than 90 days past due. Qualifying residential mortgage
loans (including multi-family mortgage loans) are assigned a 50% risk weight.
Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do
not exceed an 80% loan-to-value ratio. The book value of assets in each
category is multiplied by the weighing factor (from 0% to 100%) assigned of
that category. These products are then totaled to arrive at total risk-weighted
assets. Off-balance sheet items are included in risk-weighted assets by
converting them to an approximate balance sheet "credit equivalent amount"
based on a conversion schedule. These credit equivalent amounts are then
assigned to risk categories in the same manner as balance sheet assets and
included risk-weighted assets.
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<PAGE>
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. Under the rule, savings associations with "above normal" interest
rate risk exposure would be subject to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set forth
by the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component
is an amount equal to one-half of the difference between the institution's
measured interest rate risk and 2%, multiplied by the estimated economic
value of the association's assets. That dollar amount is deducted from an
association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two-quarter lag between the
reporting date of an institution's financial data and the effective date for
the new capital requirement based on that data. The rule also provides that
the Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. Under certain circumstances, a savings
association may request an adjustment to its interest rate risk component if
it believes that the OTS-calculated interest rate risk component overstates its
interest rate risk exposure. In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate risk
model to calculate their interest rate risk component in lieu of the OTS-
calculated amount. The OTS has postponed the date that the component will
first be deducted from an institution's total capital. See Note 13 to the
Consolidated Financial Statements for the Corporation's capital position at
June 30, 1998.
Limitations on Capital Distributions
- ------------------------------------
OTS regulations impose uniform limitations on the ability of all savings
associations to engage in various distributions of capital such as dividends,
stock repurchases and cash-out mergers. In addition, OTS regulations require
Cascade to give the OTS 30 days' advance notice of any proposed declaration of
dividends, and the OTS has the authority under its supervisory powers to
prohibit the payment of dividends. The regulation utilizes a three-tiered
approach, which permits various levels of distributions based primarily upon
a savings association's capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting its
fully phased-in capital requirement. Capital distributions exceeding this
amount require prior OTS approval. Tier 3 associations are savings associations
with capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
Cascade is currently meeting the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to,
and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the beginning
of the calendar year less any distributions previously paid during the year.
Loans-to-One Borrower
- ---------------------
Under the HOLA, savings institutions are generally subject to the national
bank limit on loans to one borrower. Generally, this limit is 15% of Cascade's
unimpaired capital and surplus, plus an additional 10% of unimpaired capital and
surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. The OTS by
regulation has amended the loans-to-one-borrower rule to permit savings
associations meeting certain requirements, including capital requirements, to
extend loans to one borrower in additional amounts under circumstances limited
essentially to loans to develop or complete residential housing units.
At June 30, 1998, the Corporation had no borrowers with balances in excess
of current loans-to-one-borrower limits.
Activities of Savings Associations and Their Subsidiaries
- ---------------------------------------------------------
When a savings association establishes or acquires a subsidiary or elects to
conduct any new activity through a subsidiary that the association controls, the
savings association shall notify the FDIC and the OTS 30 days in advance and
provide the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.
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<PAGE>
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates
- ----------------------------
Savings associations must comply with Sections 23A and 23B of the Federal
Reserve Act ("Sections 23A and 23B") relative to transactions with affiliates
in the same manner and to the same extent as if the savings association were a
Federal Reserve member bank. A savings and loan holding company, its
subsidiaries and any other company under common control are considered
affiliates of the subsidiary savings association under the HOLA. Generally,
Sections 23A and 23B: (i) limit the extent to which the insured association
or its subsidiaries may engage in certain covered transactions with an
affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable
to the institution or subsidiary, as those provided to a non-affiliate. The
term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guaranty and similar other types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies; (ii) a savings association may not purchase or invest
in securities issued by an affiliate (other than securities of a subsidiary);
and (iii) the OTS may, for reasons of safety and soundness, impose more
stringent restrictions on savings associations but may not exempt transactions
from or otherwise abridge Section 23A or 23B. Exemptions from Section 23A or
23B may be granted only by the Federal Reserve Board, as is currently the case
with respect to all FDIC-insured banks. Cascade has not been significantly
affected by the rules regarding transactions with affiliates and is in
compliance with such requirements.
Cascade's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation
O thereunder. Among other things, these regulations require that such loans be
made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
Cascade may make to such persons based, in part, on Cascade's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Regulation of the Corporation
- -----------------------------
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
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<PAGE>
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding company,
the Corporation generally is not subject to activity restrictions. If the
Corporation acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding
company than on those of a unitary savings and loan holding company. The
HOLA provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple
savings and loan association holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management
services for a subsidiary insured institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary insured institution, (iv) holding or
managing properties used or occupied by a subsidiary insured institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the OTS by
regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple holding company.
QUALIFIED THRIFT LENDER TEST. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
- ----------------
GENERAL. The Corporation and Cascade report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly Cascade's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to
Cascade or the Corporation.
TAX BAD DEBT RESERVES. For taxable years beginning prior to January 1,
1996, savings institutions such as Cascade which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts") were permitted to establish a reserve for bad debts
and to make annual additions thereto, which additions may, within specified
formula limits, have been deducted in arriving at their taxable income.
Cascade's deduction with respect to "qualifying loans," which are generally
loans secured by certain interests in real property, may have been computed
using an amount based on Cascade's actual loss experience, or a percentage
equal to 8% of Cascade's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the nonqualifying
reserve. Cascade's deduction with respect to nonqualifying loans was computed
under the experience method, which essentially allows a deduction based on
Cascade's actual loss experience over a period of several years. Each year
Cascade selected the most favorable way to calculate the deduction attributable
to an addition to the tax bad debt reserve. Cascade used the percentage method
bad debt deduction for the taxable years ended June 30, 1994, 1995 and 1996.
Recently enacted legislation repealed the reserve method of accounting for
bad debt reserves for tax years beginning after December 31, 1995. As result,
Cascade is no longer able to calculate its deduction for bad debts using the
percentage-of-taxable-income method. Instead, Cascade is required to compute
its deduction based on specific charge-offs during the taxable year (Cascade
anticipates that this will result in a higher effective tax rate). This
legislation also requires savings associations to recapture into income over
a six-year period their post-1987 additions to their bad debt tax reserves,
thereby generating additional tax liability. The Corporation qualified, under
the provisions of this tax legislation, for a two-year deferral of its bad debt
recapture which amount is approximately $2.7 million.
Under prior law, if Cascade failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions
to its bad debt reserve. Instead, Cascade would be required to deduct bad
debts as they occur and would additionally be required to recapture its bad
debt reserve deductions ratably over a multi-year period. 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. Among other things, the qualifying
thrift definitional tests required Cascade to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations
of the United States or any agency or instrumentality thereof, certain
obligations of a state or political subdivision thereof, loans secured by
interests in improved residential real property or by savings accounts,
student loans and property used by Cascade in the conduct of its banking
business. Under current law, a savings association will not be required to
recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying
thrift definitional tests.
25
<PAGE>
DISTRIBUTIONS. To the extent that Cascade makes "nondividend distributions"
to the Corporation that are considered as made (i) from the reserve for losses
on qualifying real property loans, to the extent the reserve for such losses
exceeds the amount that would have been allowed under the experience method or
(ii) from the supplemental reserve for losses on loans ("Excess Distributions"),
then an amount based on the amount distributed will be included in Cascade's
taxable income. Nondividend distributions include distributions in excess of
Cascade's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of Cascade's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from Cascade's bad debt reserve. Thus, any
dividends to the Corporation that would reduce amounts appropriated to Cascade's
bad debt reserve and deducted for federal income tax purposes would create a tax
liability for Cascade. The amount of additional taxable income attributable to
an Excess Distribution is an amount that, when reduced by the tax attributable
to the income, is equal to the amount of the distribution. Thus, if, after the
Conversion, Cascade makes a "nondividend distribution," then approximately one
and one-half times the amount so used would be includable in gross income for
federal income tax purposes.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by
an amount equal to 75% of the amount by which Cascade's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including Cascade, whether or not an Alternative
Minimum Tax ("AMT") is paid.
DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS. The Corporation may exclude
from its income 100% of dividends received from Cascade as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Corporation and Cascade will not file a consolidated tax return,
except that if the Corporation or Cascade owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
The Bank is subject to a business and occupation tax which is imposed under
Washington law at the rate of 1.60% of gross receipts; however interest received
on loans secured by mortgages or deeds of trust on residential properties and
interest on obligations issued or guaranteed by the United States are not
presently subject to the tax. On August 15, 1994, the Department of Revenue
of the State of Washington began an audit of the Corporation's records for
compliance regarding the business and occupation tax. The Corporation had
not been audited for seventeen years. The Department of Revenue has issued a
tax billing for approximately $270,000 of which the Corporation has set aside
reserves of $120,000. The Corporation has filed an appeal with the Department
of Revenue. A determination has been issued reversing two of the three billing
issues in the audit. The Corporation has filed another appeal regarding the
final issue.
ITEM 2. DESCRIPTION OF PROPERTIES
- ----------------------------------
The Corporation owns six full service branch locations and leases five full
service locations along with one loan origination office. Owned offices range
in size from 3,500 to 52,000 square feet and have a total net book value at June
30, 1998, including leasehold improvements, furniture and fixtures, of $8
million. The Corporation leases approximately 20% of its main office and
approximately 50% of its Marysville office to non-affiliated parties. See
Note 6 of the Notes to the Consolidated Financial Statements contained in the
Annual Report.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Corporation as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Corporation holds security interests,
claims involving the making and servicing of real property loans and other
issues incident to the Corporation's business. In the opinion of management
and the Corporation's legal counsel, no significant loss is expected from any
of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The information contained under the caption "Common Stock Information" in
the Annual Report is incorporated herein by reference.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
FIVE YEAR FINANCIAL HIGHLIGHTS
Dollars in thousands except financial ratios
</TABLE>
<TABLE>
<CAPTION>
For The Year Ended June 30, 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 19,991 27,460 29,694 31,568 33,916
Interest expense 10,670 15,693 19,104 19,924 20,118
Net interest income 9,321 11,767 10,590 11,644 13,798
Provision for (recovery of) loan losses 515 (319) 61 810 246
Net interest income after provision for
loan losses 8,806 12,086 10,529 10,834 13,552
Other income 5,538 2,833 2,780 1,942 2,458
Other expense 10,815 9,957 9,225 10,897 10,729
Income before Federal income taxes 3,529 4,962 4,084 1,879 5,281
Net income 2,366 3,304 2,781 1,368 3,525
Net income per common share, basic 0.56 0.79 0.66 0.32 0.83
Weighted average number of shares
outstanding, basic 4,159,022 4,171,791 4,205,646 4,213,038 4,249,844
Net income per common share, diluted 0.51 0.71 0.60 0.29 0.75
Weighted average number of shares
outstanding, diluted 4,606,043 4,632,257 4,633,917 4,667,385 4,691,275
</TABLE>
<TABLE>
<CAPTION>
At Year End June 30, 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $ 307,708 367,597 399,316 434,162 444,155
Loans 212,031 249,250 272,464 341,201 384,734
Cash and securities 85,513 105,426 114,702 79,313 44,103
Deposits 226,986 252,204 277,897 304,205 312,518
Stockholders' equity 19,891 23,505 25,532 27,543 31,418
Non-performing loans 6,782 617 600 911 1,921
</TABLE>
<TABLE>
<CAPTION>
Financial Ratios June 30, 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on assets 0.84% 0.95 0.73 0.33 0.82
Return on equity 12.67 14.96 11.44 5.26 12.05
Net interest margin 3.51 3.54 2.90 2.90 3.40
Net interest spread 3.23 3.20 2.52 2.49 3.14
</TABLE>
Results have been restated to reflect the 1997 merger with AmFirst
Bancorporation.
QUARTERLY RESULTS
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
--------------------------------- ---------------------------------
Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30,
1996 1996 1997 1997 1997 1997 1998 1998
--------------------------------- ---------------------------------
(Dollars in thousands, except per share data, unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Results of operations
Interest income $ 7,565 7,909 7,992 8,102 $ 8,388 8,366 8,373 8,789
Interest expense 4,858 4,985 4,988 5,093 5,199 4,971 4,888 5,060
------------------------------ ------------------------------
Net interest income 2,707 2,924 3,004 3,009 3,189 3,395 3,485 3,729
Provision for loan losses 266 163 188 193 102 99 -- 45
Other income 449 431 508 554 462 510 735 751
Other expense 3,511 2,368 2,479 2,539 2,521 2,580 2,708 2,920
------------------------------ ------------------------------
Income before income
taxes (621) 824 845 831 1,028 1,226 1,512 1,515
Provision for income taxes (166) 318 193 166 382 453 406 515
------------------------------ ------------------------------
Net income (455) 506 652 665 646 773 1,106 1,000
Earnings per share,
basic (0.10) 0.12 0.15 0.15 0.15 0.18 0.26 0.24
Earnings per share,
diluted (0.11) 0.11 0.13 0.16 0.14 0.17 0.23 0.21
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information contained under the section captioned "Management's
Discussion and Analysis" in the 1998 Annual Report to Stockholders in
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The information contained under the section captioned "Management's
Discussion and Analysis" in the 1998 Annual Report to Stockholders in
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report which are listed
under Item 14 herein are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" contained in the Corporation's Definitive Proxy
Statement for the Corporation's 1998 Annual Meeting of Stockholders (the
"Proxy Statement"), is incorporated herein by reference. Reference is made
to the cover page of this report for information regarding compliance with
Section 16(a) of the Exchange Act.
The following table sets forth information with respect to the executive
officers of the Corporation and the Bank.
Name Age (a) Position
- -------------------------------------------------------------------------------------------
Frank M. McCord 68 Chairman and Chief Executive Officer (b)
C. Fredrick Safstrom 44 President, Chief Operating Officer and
Director (b)
Robert G. Disotell 43 Executive Vice President, Retail Lending
Manager and Director (b)
Steven R. Erickson 42 Executive Vice President, Income Property and
Construction Lending
David R. Little 52 Executive Vice President, Business Banking
Manager
James J. Palm 45 Executive Vice President, Wholesale Lending
Manager
Russell E. Rosendal 39 Executive Vice President, Chief Financial
Officer and Secretary/Treasurer (b)
J. Wesley Cochran 44 Executive Vice President, Branch Banking
Manager
Vera E. Wildauer 40 Senior Vice President, Marketing Director
________________________
(a) As of June 30, 1998.
(b) Officer of the Corporation and Bank
The principal occupation of each executive officer of the Corporation and
Bank is set forth below. All of the officers listed above have held positions
with or been employed by the Corporation or Bank for a minimum of five years
unless otherwise stated. All executive officers reside in Everett, Washington,
unless otherwise stated. There are no family relationships among or between the
executive officers listed above.
FRANK M. McCORD, CPA became Chairman of the Board of Directors, President
and Chief Executive Officer of the Bank in 1990 and subsequently the
Corporation. Mr. McCord was the Managing Partner of KPMG Peat Marwick,
Seattle, Washington office until his retirement in 1986. In addition to his
responsibilities to the Corporation, Mr. McCord is a director of the Everett
Area Chamber of Commerce and the Everett Performing Arts Association. Mr.
McCord has previously served as President of the Evergreen Area Council of
Boy Scouts of America, Treasurer of the United Way of King County, Director
of the Everett Rotary Club, Trustee of Seattle University, a Fellow of Seattle
Pacific University, Treasurer of the Washington Society of Certified Public
Accountants, and a Director of the Seattle Chamber of Commerce.
C. FREDRICK SAFSTROM joined Cascade in 1976, was elected to the Board of
Directors in June 1990 and was named President and Chief Operating Officer
in December 1991. He is a life-long Everett resident and holds a B.A. in
Business Administration from Seattle University. Mr. Safstrom is a Trustee
and Chairman of the Finance and Facilities committee at Seattle Pacific
University. He is Co-Chairman of the Board at the YMCA of Snohomish County,
Director and Treasurer at Housing Hope, and a Director of the Snohomish County
Investment Plan. He is also President of the Everett Public Schools Foundation,
a member of the Everett Rotary, and is active in various housing related boards
and committees.
29
<PAGE>
ROBERT G. DISOTELL has been employed by Cascade for approximately twenty
years and currently serves as a Director and an Executive Vice President. He
is responsible for all retail loan production, including residential mortgages,
installment and consumer lending. Mr. Disotell is a resident of Arlington,
Washington.
RUSSELL E. ROSENDAL is the Executive Vice President, Chief Financial Officer
and Secretary/Treasurer of the Corporation. Mr. Rosendal joined Cascade in
September 1983 and was elected Corporate Secretary/Treasurer in December 1991.
He has served as President of the Puget Sound chapter of the Financial Managers
Society and serves on their Asset/Liability Committee. Mr. Rosendal is a
resident of Mukilteo, Washington.
STEVEN R. ERICKSON is the Executive Vice President of the Bank responsible
for managing residential construction and income property lending and serves as
the Assistant Secretary for the Corporation. Mr. Erickson joined Cascade in
1978. He is a member of the Board of Directors of the Boys and Girls Club of
Snohomish County. He is a resident of Marysville, Washington.
DAVID R. LITTLE is the Executive Vice President responsible for the business
banking activities of the Bank. Mr. Little joined Cascade in 1997 from the
merger with American First National Bank. He is a founding member of the
Everett-Port Gardner Rotary club and is a resident of Everett.
JAMES J. PALM is the Executive Vice President of the Bank responsible for
wholesale lending. Mr. Palm has been with the Bank since 1996, after previously
being with Cascade in the late 1970s. He has been in mortgage banking for the
past 23 years in management and loan origination. Mr. Palm is a resident of
Woodinville, Washington.
J. WESLEY COCHRAN joined Cascade in 1992 as Chief Savings Officer and
Manager of the Everett Main Office Branch. As Chief Branch Banking Division
Manager, he is responsible for management of the bank's full service offices.
In August 1997 he was elected to Executive Vice President. Mr. Cochran has a
20-year background in mortgage banking and branch management. Mr. Cochran is
Board Chairman of the Everett Salvation Army and is a member of the Redmond
Rousers Rotary Club. He is a resident of Redmond, Washington.
VERA E. WILDAUER joined Cascade in 1997 as Senior Vice President, Marketing
Director. Ms. Wildauer has over 15 years experience in a full range of bank
marketing disciplines among major Washington State financial institutions.
As Marketing Director, she is responsible for market research, advertising,
public relations, product development, and delivery strategy for the bank.
She is a resident of Bothell, Washington.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" of the Proxy Statement
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge
by any person of securities of the Corporation, the operation of which
may at a subsequent date result in a change in control of the
Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this Item is incorporated herein by reference to
the section captioned "Proposal I - Election of Directors -- Certain
Transactions with the Corporation" of the Proxy Statement.
30
<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, 1997 and June 30,
1998.
(b) Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1997 and 1998.
(c) Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1996, 1997 and 1998.
(d) Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1997 and 1998.
(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****
10.5 Employment agreement for David Little
13 Cascade Financial Corporation 1998 Annual Report to Stockholders
21 Subsidiaries
23 Consent of Independent Auditors
(b) Reports on Form 8-K
No Forms 8-K were filed during the quarter ended June 30, 1998.
_________________
* Incorporated by reference to the Corporations' Proxy statement on Form
Def 14A File No. 000-25286.
** 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-K
For June 30, 1998.
**** Incorporated by reference to Appendix E to the Prospectus included in the
Corporation's Registration Statement on Form S-4 (File No. 333-24203)
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CASCADE FINANCIAL CORPORATION
Date: September 23, 1998 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: September 23, 1998
Officer)
Date: September 23, 1998
By: /s/ C. F. Safstrom By: /s/ Ronald E Thompson
--------------------------- ------------------------
C. F. Safstrom Ronald E. Thompson
President and Director Director
Date: September 23, 1998 Date: September 23, 1998
By: /s/ Robert Disotell By: /s/ G. Brandt Westover
---------------------------- ------------------------
Robert Disotell G. Brandt Westover
Executive Vice President/Director Director
Date: September 23, 1998 Date: September 23, 1998
By: /s/ David W. Duce By: /s/ Paull Shin
---------------------------- ------------------------
David W. Duce Paull Shin
Director Director
Date: September 23, 1998 Date: September 23, 1998
By: /s/ Gary Meisner By: /s/Joan M. Earl
---------------------------- ------------------------
Gary Meisner Joan M. Earl
Director Director
Date: September 23, 1998 Date: September 23, 1998
By: /s/ Dwayne Lane By: /s/ David O'Connor
---------------------------- ------------------------
Dwayne Lane David O'Connor
Director Director
Date: September 23, 1998 Date: September 23, 1998
By: /s/ Henry Robinett
----------------------------
Henry Robinett
Director
Date: September 23, 1998
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Cascade Financial Corporation
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
Cascade Bank 100% United States
Cascade Investment Services, Inc. (b) 100% Washington
_____________________________
(a) The operation of the Corporation's wholly owned subsidiaries are included
in the Corporation's Financial Statements contained in the Annual Report
attached hereto as Exhibit 13.
(b) Wholly-owned subsidiary of Cascade Bank.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 10642
<INT-BEARING-DEPOSITS> 1324
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27412
<INVESTMENTS-CARRYING> 4725
<INVESTMENTS-MARKET> 4654
<LOANS> 388877
<ALLOWANCE> 4143
<TOTAL-ASSETS> 444155
<DEPOSITS> 312518
<SHORT-TERM> 74891
<LIABILITIES-OTHER> 13392
<LONG-TERM> 11936
0
0
<COMMON> 43
<OTHER-SE> 31375
<TOTAL-LIABILITIES-AND-EQUITY> 444155
<INTEREST-LOAN> 31109
<INTEREST-INVEST> 2543
<INTEREST-OTHER> 264
<INTEREST-TOTAL> 33916
<INTEREST-DEPOSIT> 15205
<INTEREST-EXPENSE> 20118
<INTEREST-INCOME-NET> 13798
<LOAN-LOSSES> 246
<SECURITIES-GAINS> 93
<EXPENSE-OTHER> 10729
<INCOME-PRETAX> 5281
<INCOME-PRE-EXTRAORDINARY> 5281
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3525
<EPS-PRIMARY> .83
<EPS-DILUTED> .75
<YIELD-ACTUAL> 8.29
<LOANS-NON> 1921
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2439
<ALLOWANCE-OPEN> 3879
<CHARGE-OFFS> 45
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 4143
<ALLOWANCE-DOMESTIC> 4143
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3775
</TABLE>
[FRONT COVER OF ANNUAL REPORT]
Real people. Real solutions.SM
[Cascade Financial Corporation logo] [Picture of employee]
[Picture of employee]
[Picture of employee]
[Picture of employee]
1998
[Picture of employee] Annual
Report
<PAGE>
[INSIDE FRONT COVER OF ANNUAL REPORT]
Real people. Real solutions.SM [Cascade Financial Corporation Logo]
OUR VALUE STATEMENT
"Cascade employees are
committed to helping you
find the best solution to
your family's or business'
financial needs."
[Picture of employee]
[Picture of employee]
[Picture of employee]
[Picture of employee]
[Picture of employee]
TABLE OF CONTENTS
Overview-------------------------------1
Financial Highlights-------------------2
Business Unit Reports------------------4
Delivery and Technology----------------7
Community Service----------------------8
Directors and Executives---------------9
Management's Discussion & Analysis----10
Independent Auditors' Reports---------14
Stock Information---------------------37
<PAGE>
Over the last six years, an initial investment of $1,000
in Cascade Financial stock has grown to $9,220. That's
an increase of over 800 percent.
- ---------------------------------------------------------
[Picture of
Frank McCord]
"Long-term stock app-
reciation is our primary
goal - and Cascade
Financial Corporation
has shown consistently
outstanding perfor-
mance in that regard."
Frank M. McCord,
Chairman and
Chief Executive Officer
STOCK PERFORMANCE
AT CASCADE, WE ARE COMMITTED to growing the value
of our stockholders' investments - rapidly and consistently. Re-
warding our stockholders with a 25 percent stock dividend six
years in a row reflects the strength of this commitment.
[Chart "Comparative Return to Stockholders"]
OVERVIEW
[Picture of
Fred Safstrom]
"We're taking advantage
of the opportunities
presented by mergers
and other rapid changes
in the financial services
industry."
Fred Safstrom, President and
Chief Operating Officer
MANY CUSTOMERS are moving to smaller community banks as a
result of big bank mergers. To meet their needs, we are expanding our
products and services. We're moving our computer operations in-
house, which will give us more control, as well as more flexibility to
respond to changing market opportunities.
We're increasing the expertise of our employees through training and
individualized staff development. And, we're constantly streamlining
our operations to better serve our customers.
All in all, Cascade Bank is taking advantage of our strong local
economy and the new opportunities in the financial services industry.
- ---------------------------------------------------------------------
In the fall of 1998, Cascade will offer online banking services for
businesses, and later for all customers. We will continue
to focus on personalized service. But we'll also offer our customers
the benefit of the latest technological advances.
1
<PAGE>
Cascade's 1998 net income of $3.5 million is a 158 per-
cent increase over 1997.
- -------------------------------------------------------
FINANCIAL RESULTS
[Picture of
Russ Rosendal]
"By any measure, Cascade
has delivered an excellent
return for our
shareholders."
Russ Rosendal,
Chief Financial Officer
CASCADE'S 1998 NET INCOME was the highest ever,
even after substantial investments in two start-up units -
Business Banking and Wholesale Lending. And growing these
investments promises an even stronger future for Cascade.
Keys to our ongoing profitability include maintaining high
credit quality and controlling expenses, while continuing
to invest for the future.
FIVE YEAR FINANCIAL HIGHLIGHTS
Dollars in thousands except financial ratios (unaudited)
For The Year Ended June 30, 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------
Net income $2,366 3,304 2,781 1,368 3,525
Net interest income 9,321 11,767 10,590 11,644 13,798
Earnings per share (diluted) 0.51 0.79 0.60 0.29 0.75
At Year End June 30, 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------
Assets $307,708 367,597 399,316 434,162 444,155
Loans 212,031 249,250 272,464 341,201 384,734
Deposits 226,986 252,204 277,897 304,205 312,518
Stockholders' equity 19,891 23,505 25,532 27,543 31,418
Non-performing loans 6,782 617 600 911 1,921
Financial Ratios June 30, 1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------
Return on assets 0.84% 0.95 0.73 0.33 0.82
Return on equity 12.67 14.96 11.44 5.26 12.05
Net interest margin 3.51 3.54 2.90 3.44 3.40
Net interest spread 3.23 3.20 2.52 2.49 3.14
Results have been restated to reflect the 1997 merger with AmFirst
Bancorporation.
2
<PAGE>
[Chart of Assets]
[Chart of Loans]
[Chart of Deposits]
[Chart of Stockholders' Equity]
[Chart of Net income]
[Chart of Net Interest Income]
3
<PAGE>
Z-Sport came to Cascade for a business line of credit.
By listening closely and understanding their business
needs, Cascade is now also financing the purchase of
Z-Sport's own building.
- --------------------------------------------------------
[Picture of
Dave Little]
"Were both small enough
to truly know our
customers, and big
enough to have the
resources to meet all of
their needs."
Dave Little, Business
Banking Manager
BUSINESS BANKING
CASCADE PROVIDES small to mid-sized businesses with a
wide range of financial solutions. The merger with American
First National Bank greatly increased our resources and busi-
ness banking experience. Our business customers are already
benefiting from these rapidly expanding banking services.
In the last year, eight additional Business Banking experts were
hired to expand these services even more. And, the results are
already coming in. By the end of fiscal 1998, Cascade had over
$41 million in outstanding loans to businesses in our community.
INCOME PROPERTY
[Picture of
Steve Erickson]
"No doubt, it's a hot
housing market, but it's
also a very competitive
lending market. Our
personalized service has
made our success."
Steve Erickson, Construction/
Income Property Lending Manager
CASCADE'S $50 MILLION in construction lending in fiscal 1998 is
due to our high level of personalized service and the relationships
developed with top builders in the community. We're providing financing
to experienced developers who are here for the long term and have the
resources to withstand speed bumps in the economy.
OVER THE YEARS Cascade has developed a keen sense of the in-
come property investment market. Today's booming economy has
brought a whole new group of smaller investors to this arena. Cascade
Bank is helping these people realize their investment dreams. Fiscal
1998 showed an increase of 13 percent in income property loans over
the previous year. And we expect that trend to continue throughout the
four counties we serve.
- ----------------------------------------------------------
Real Estate investments are an important part of our cust-
omers' wealth, and Cascade is a leader in financing these
investments.
4
<PAGE>
The new Loan Prospector -registered trademark- system allows us to
automatically approve most residential loans in hours.
- -------------------------------------------------------------------
[Picture of
Rob Disotell]
"The current economy
and low interest rates
have made for an
incredible year."
Rob Disotell, Retail
Lending Manager
RESIDENTIAL LENDING
WITH OVER $150 MILLION in new home loans, Cascade
Bank's Residential Lending group enjoyed a very busy year.
Cascade is committed to using technology to improve cus-
tomer service and lower costs. A new loan processing system
with Loan Prospector -registered trademark- automates the underwriting
for borrowers with good credit histories. That means quicker answers
for most of our borrowers. And it allows our mortgage experts
more time to find solutions for customers with complex credit
applications. Overall, Loan Prospector -registered trademark- will have
a revolutionary impact on mortgage lending, making us more responsive
than ever.
Cascade continued to receive an "Outstanding" Community
Reinvestment Act rating due to lending to low- and moderate-
income borrowers and their communities.
WHOLESALE LENDING
[Picture of
Jim Palm]
"Quick, personalized
service is the key
difference at Cascade - it
brings mortgage
brokers back again and
again."
Jim Palm, Wholesale Lending
Manager
THE WHOLESALE LENDING GROUP'S COMMITMENT to
service generated $109 million dollars in loan production and
provided a substantial contribution to Cascade's income. We expect
that production to grow substantially over the coming years -
especially with the streamlined approval process and an expanded
product line of additional programs from national investors.
These loans not only provide a strong source of fee income, but
some are held as income-producing assets for Cascade. Most
importantly, they bring new customers whose satisfied experiences
result in expanded relationships with Cascade through deposits,
investments and other loans.
- ------------------------------------------------------
We have access to hundreds of loan programs from
throughout the country, allowing Cascade to meet the
diverse borrowing needs of our community.
5
<PAGE>
Our staff is trained to understand customers' needs
and recommend appropriate solutions.
- -----------------------------------------------------
[Picture of
Wes Cochran]
"We have much more
to offer now - VISA
-registered trademark-
cards, consumer loans,
lines of credit and
debit cards, along with
our traditional
product line."
Wes Cochran, Branch
Banking Manager
BRANCH BANKING
OUTSTANDING CUSTOMER SERVICE is a hallmark for
Cascade as it was for American First National Bank. The merger
brought together a variety of new products and experienced
employees with different skills.
Throughout fiscal 1998, we've focused on staff development
with a new sales and service training program. Every employee
completed a full day of sales and service training. Sales Training
Consultant Lynn Guiliani continues to coach all front-line staff
on a regular basis. We've also created new Financial Services
Officer positions to focus on better serving our customers'
personal financial needs.
[picture of
Jerry Dawson]
"We can offer anything
the national brokerage
houses can. And we're
right in your
neighborhood."
Jerry Dawson, Cascade Investment
Services, Inc. Manager
CASCADE INVESTMENT SERVICES, INC.
CUSTOMERS ARE LOOKING FOR WAYS to maximize returns
on their investments. Many of our customers need more than high-
rate CDs to diversify their investment portfolios. Fiscal 1998 was a
record year in sales for Cascade's investment subsidiary. We sold
over $5 million in mutual funds, stocks, bonds and annuities.
Building more awareness of our investment services will continue to
increase production in this important fee-generating business.
Cascade is also proud to be one of only a few financial institutions
locally offering reverse mortgages to senior citizens who need addi-
tional income to stay in their own homes.
- ------------------------------------------------------------
Cascade's Reverse Mortgages freed up approximately $2.4
million for 30 senior citizens to live with more indepen-
dence in their own homes.
6
<PAGE>
The personal attention from our business banker appealed
to Wilson Medical Specialists, but our deposit courier ser-
vice convinced them to transfer their relationship.
- -------------------------------------------------------------
[Picture of
Vera Wildauer]
"Using technology, a
community bank can
match big bank
convenience. And do it
with a greater level of
personal service."
Vera Wildauer,
Marketing Director
DELIVERY AND PRODUCTS
CASCADE'S CUSTOMERS WANT ACCESS to their bank
through a variety of ways. The need for "convenience" can no
longer be satisfied with just branch locations. Cascade's ap-
proach is to offer an integrated set of delivery channels. In
addition to nine full service, stand alone offices, Cascade offers
two supermarket branches, 24-hour automated telephone
banking, remote ATMs, a deposit courier service for businesses
and online banking beginning in the fall of 1998.
Cascade also offers innovative financial solutions like the new
Equity Advantage VISA -registered trademark- card launched in 1998.
Already offering a wide range of traditional bank services, we're
committed to continually expanding our product line to meet the needs
of our customers.
[Picture of
Steve Smith]
Steve Smith, Information Services Manager
TECHNOLOGY
TECHNOLOGICAL ADVANCES
Improving customer service is the primary reason for
moving our data processing systems in-house. State-
ments will be produced more quickly, information will
be distributed more easily, and Cascade will be more
responsive to changes in customers' needs.
YEAR 2000 READINESS
Cascade is scheduled to have its core processing
system upgraded to Year 2000 Compliance by Decem-
ber 31, 1998. Other systems needing improvement
will be upgraded or replaced before the end of 1999.
A Year 2000 team, consisting of key personnel from
throughout the Bank, is managing this process .
- -----------------------------------------------------------------------------
By the end of 1998, all Cascade employees will have access to a company-wide
Intranet site. This will substantially improve communication and coordination
throughout the Bank and keep our staff up-to-date with the ever-changing
banking environment.
7
<PAGE>
In 1998, Cascade Bank contributed
over $35,000 and countless hours
to community organizations.
- -----------------------------------------
[picture of Fred Safstrom and
a mother and her child]
Fred Safstrom Visits with a Housing Hope Family
"Being a community
bank means being
involved in all sorts of
ways - large and small."
- Fred Safstrom
COMMUNITY SERVICE
CASCADE BANK'S EMPLOYEES
support their community agencies. For
example, over 90 percent of the bank's
employees donated to their local United
Way. Frank McCord served as co-chairman of
United Way's Snohomish County campaign
that raised a record $11 million.
[picture of employees]
When the Red Cross was
looking for someone to
help sort and count all the
coins from a recent drive,
Steve Sprinkle and Larry
Jacobson jumped at the
opportunity. They and
other employees transported and sorted over
400,000 coins.
Gwen Van Wyck heard
about Debbie Hill's trip
to Russia to deliver
supplies to orphanages
and hospitals, and
knitted 30 warm hats
with yarn scraps donated by Mardell Cox.
[Picture of employees]
[Picture of employee]
Jody Serl manages a
busy Cascade branch but
found time to teach high
school students the
basics of having a check-
ing account.
Cascade employees support a variety of
community events. Branch Manager Toni
Mathews organized this year's Trike Race at
the Marysville Strawberry Festival. Emily
Fisher, Branch Manager in Issaquah, opened
her office during Salmon Days for visitors to
take a break. Julie Arnold, Suzanne Poe, Trudy
Santeford and LaVonne Sewell all helped staff
the Everett Salty Sea Days ticket booth.
- ------------------------------------------------
Cascade's Management Contributes Their
Time and Leadership to Many Organizations:
Frank McCord Bethany Foundation
Everett Area Chamber of Commerce
Everett Performing Arts
Everett Rotary Club
Mt. Baker Council of Boy Scouts of America
United Way of Snohomish County
Fred Safstrom Everett Public Schools Foundation
Housing Hope
Seattle Pacific University
YMCA of Snohomish County
Steve Erickson Boys and Girls Club of Snohomish County
Wes Cochran Salvation Army
Rob Disotell Arlington Boys and Girls Club
Everett YMCA
8
<PAGE>
EXECUTIVE OFFICERS
[picture of executive officers]
STANDING LEFT TO RIGHT:
ROBERT G. DISOTELL
Executive Vice President, Retail Lending
STEVEN R. ERICKSON
Executive Vice President,
Income Property and Construction Lending
FRANK M. McCORD
Chairman, Chief Executive Officer
J. WESLEY COCHRAN
Executive Vice President, Branch Banking
SEATED LEFT TO RIGHT:
JAMES J. PALM
Executive Vice President,
Wholesale Lending
DAVID R. LITTLE
Executive Vice President, Business Banking
C. FREDRICK SAFSTROM
President, Chief Operating Officer
VERA E. WILDAUER
Senior Vice President,
Marketing Director
RUSSELL E. ROSENDAL
Executive Vice President,
Chief Financial Officer
BOARD OF DIRECTORS
[picture of Frank McCord] [picture of David O'Connor]
FRANK M. McCORD(1) DAVID R. O'CONNOR (1)
CHAIRMAN OF THE BOARD Co-Owner
Chief Executive Officer Mobile Country Club
Cascade Bank
[picture of Rob Disotell] [picture of Henry Robinett]
ROBERT G. DISOTELL HENRY M. ROBINETT (1)(3)
Executive Vice President General Partner
Retail Lending Boyden, Robinett & Assoc. L.P.
Cascade Bank
[picture of David Duce] [picture of Fred Safstrom]
DAVID W. DUCE (2) C. FREDRICK SAFSTROM (1)
VICE CHAIRMAN President
Attorney Chief Operating Officer
Duce, Bastian, Peterson, and Zielke Cascade Bank
[picture of Joan Earl] [picture of Paull Shin]
JOAN M. EARL (2) PAULL H. SHIN, PH.D. (2)
Deputy County Executive Retired Professor of History
Snohomish County Shoreline Community College
[picture of Dwayne Lane] [picture of Ron Thompson]
DWAYNE LANE (2) RONALD E THOMPSON (1)(3)
President President
Dwayne Lane Auto Centers WRE Commercial & Property
Management
[picture of Gary Meisner] [picture of Brandt Westover]
GARY L. MEISNER (3) G. BRANDT WESTOVER (1)
President Vice President
Clearview Management, Inc. Paine Webber, Inc.
[picture of Dennis Murphy]
DENNIS R. MURPHY, PH.D. (3)
VICE CHAIRMAN
Dean and Professor of Economics
Western Washington University
(1) Member of the Executive Committee.
(2) Member of the Audit and Finance Committee.
(3) Member of the Compensation and Personnel
Committee.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto presented elsewhere in this
report.
FORWARD LOOKING STATEMENTS
This section contains forward-looking statements that have been prepared on the
basis of the Corporation's best judgments and currently available information.
These forward-looking statements are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which are
beyond the control of the Corporation. In addition, these forward-looking
statements are subject to assumptions with respect to future business
strategies and decisions that are subject to changes. Factors that could
affect actual results include interest rate trends, the general economic
climate in the Corporation's market area and the country as a whole, the
ability of the Corporation to control costs and expenses, competitive products
and pricing, loan delinquency rates and changes in federal and state regulation.
Accordingly, there can be no assurance that these strategies will be
implemented, or if implemented, will achieve the results described or within
the time periods currently estimated.
REVIEW OF FINANCIAL POSITION
- ----------------------------
On August 1, 1997, Cascade Financial Corporation ("cascade" or the
"Corporation") completed a merger with AmFirst Bancorporation ("AmFirst").
This merger added three new full-service offices to Cascade's branch network
and immediately established Cascade's commercial banking presence in Snohomish
County. Acquired assets were $67.3 million, including $36.0 million, primarily
in commercial loans. Cascade also acquired deposits of $60.7 million in the
merger. The merger was accounted for as a pooling-of-interests. Accordingly,
the assets and liabilities of AmFirst were added to those of Cascade at their
recorded book values, and the financial statements of Cascade were restated as
if the merger had taken place at the beginning of the periods covered.
Total assets increased to $444.2 million at June 30, 1998, compared with $434.2
million at June 30, 1997. Total loans increased by $43.5 million or 12.7% to
$384.7 million at June 30, 1998, compared with $341.2 million at June 30, 1997.
Most of this increase resulted from new business, construction and installment
loans. Cash and securities decreased to $44.1 million in 1998 from $79.3 million
in 1997. Proceeds from the decrease in cash and securities were used to fund
the increase in loans. Management's long term strategy is to continue to
increase assets by expanding commercial and consumer loans.
Deposits increased to $312.5 million at June 30, 1998, from $304.2 million at
June 30, 1997. Borrowings were $86.8 million at June 30, 1998, compared to
$94.1 million at June 30, 1997. Asset growth was funded by reduced securities
balances and increased business and retail deposits.
At June 30, 1998, nonperforming loans totaled $1.9 million compared to $911,000
at June 30, 1997. This increase in nonperforming loans was in the consumer
installment and business loan portfolios. The nonaccrual coverage ratio (the
allowance for losses to nonaccrual loans) was 215% at June 30, 1998, compared
with 426% at June 30, 1997.
10
<PAGE>
COMPARISON OF OPERATING RESULTS
- -------------------------------
NET INCOME
Net income for the year ended June 30, 1998 was $3.5 million, an increase of
158% from fiscal 1997. Earnings per share for fiscal 1998 were $0.83 (basic)
and $0.75 (diluted) compared with $0.32 (basic) and $0.29 (diluted) for fiscal
1997. Return on equity was 12.05% for fiscal 1998 compared with 5.26% for
fiscal 1997. Higher net interest income and higher income from mortgage-banking
contributed to improved results in 1998. The results for fiscal 1997 include
the payment of $1.2 million as part of a one-time, industry-wide assessment to
recapitalize the Savings Association Insurance Fund. Net income for the year
ended June 30, 1996 was $2.8 million, or $0.66 per share (basic) and $0.60 per
share (diluted). Return on equity for fiscal 1996 was 11.44%.
NET INTEREST INCOME
Net interest income for the year ended June 30, 1998 increased by $2.2 million
to $13.8 million from $11.6 million in 1997 and $10.6 million in 1996. This
resulted from growth in earning assets and changes in the net interest margin.
Average interest-earning assets increased to $405.5 million in 1998 from $401.3
million in 1997 and $365.4 million in 1996. While average earning asset growth
was modest, the average loan balances increased to $362.8 million in 1998, from
$307.3 million in 1997 and $265.1 million in 1996. A significant portion of
earning assets was moved from securities into higher yielding loans.
The net interest margin decreased four basis points in 1998 to 3.40% but has
increased substantially from 2.90% in 1996. The 1998 decrease resulted from
lower average balances in noninterest-bearing checking accounts. While the
average balance in these accounts was lower for 1998, recent growth in
commercial business activities has increased the June 30, 1998 noninterest-
bearing checking balances $2.9 million above the level one year ago. The
increase in the margin from 1996 was the result of adding higher yielding
business and commercial real estate loans and a reduced emphasis on lower
yielding residential mortgage loans and securities.
The net interest income and margins include the results from hedging with off-
balance sheet financial instruments. Hedging decreased net interest income by
$38,000 in 1998 and $36,000 in 1997 and increased net interest income by
$49,000 in 1996.
PROVISIONS FOR LOAN LOSSES
Provisions for loan losses in 1998, 1997 and 1996 were $246,000, $810,000 and
$61,000, respectively. The 1997 provision included $650,000 to conform
Cascade's and AmFirst's reserving methodologies. At June 30, 1998 and 1997,
the loan loss allowance totaled $4.1 million and $3.9 million. The allowance
was 1.1% and 1.2% of loans for 1998 and 1997, respectively.
Determining the allowance for loan losses considers changing economic conditions
and other factors. Although the allowance is maintained at levels considered
adequate to provide for potential losses, there can be no assurance that such
losses will not exceed the estimated amounts. The merger with AmFirst added a
portfolio of approximately $25 million in business loans. While adequately
reserved at the time of the merger, this portfolio, coupled with the intent
to originate additional commercial loans and other higher risk loan products
will necessitate increasing the allowance for loan losses in future years.
Management expects to record additional provisions for losses on loans in
future years as portfolios increase and diversify.
OTHER INCOME
Other income increased $516,000 to $2.5 million in 1998 from $1.9 million 1997.
The principal reasons for this increase in 1998 were increases in gains-on-sale
of loans held-for-sale and mortgage-backed securities held-for-trading of
$376,000, and an increase in service charges of $111,000. Higher volumes in
mortgage-banking accounted for the increases in gains-on-sale. Service charge
increases were principally due to higher balances in business and consumer loans
and checking accounts. The decrease in other income in 1998 as compared to 1996
resulted from a $624,000 restitution recovery in 1996.
11
<PAGE>
OTHER EXPENSES
Other expenses decreased $168,000 to $10.7 million in 1998 from $10.9 million
in 1997 and $9.2 million in 1996. Increased salaries and employee benefits of
$561,000 in 1998 partially offset the SAIF special assessment of $1.2 million
in 1997. Salaries and employee benefits, marketing and other expenses increased
as anticipated in 1998 due to higher staffing levels and the introduction of new
product lines and services. Increasing expenses for marketing and technology,
focusing on productivity and revenue enhancement, should be anticipated as
Cascade further develops its delivery systems for new products and services.
YEAR 2000 ISSUES
- ----------------
Expenditures are being made to prepare Cascade's computer systems for the year
2000. This issue affects computer systems that have time-sensitive programs
that may not properly recognize the year 2000. Based on an ongoing assessment
process, it has been determined some of the hardware and portions of internally
supported and vendor supported software will need to be modified. The
Corporation presently believes that with modifications to existing software
and conversion to new software, the year 2000 issue will not pose significant
operational problems. Data processing is currently provided by a service
bureau. This operation is being brought in-house during fiscal 1999.
Management anticipates completing the bulk of the mission critical year 2000
project not later than December 31, 1998. The costs for addressing the year
2000 issue are anticipated to be approximately $250,000 along with internal
staff time to test and resolve issues. These costs however are not expected
to materially impact the Corporation's results of operation in any one reporting
period. Additionally, formal communications are underway with all significant
suppliers and large customers to determine the extent to which interface systems
are vulnerable to those third parties' failure to correct their own systems and
impacts from the Corporation's customers. There can be no guarantee the
systems of other companies will be converted in a timely manner. If they are
not, it may have an adverse effect on the Corporation's systems. Therefore,
contingency plans for mission critical failures brought about by unforeseen
year 2000 problems are being prepared.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquid assets are cash and cash equivalents, which include highly liquid, short-
term investments. At June 30, 1998 and 1997, cash and cash equivalents totaled
$12.0 million and $14.3 million. Available-for-sale securities totaled $27.4
million and $58.2 million at those same dates. Cascade Bank is required to
maintain minimum levels of liquid assets as defined by regulatory requirements.
The required ratio is currently 4.0%. This requirement was exceeded in each of
the last three years.
Other significant sources of liquidity are Federal Home Loan Bank of Seattle
(FHLB-Seattle) advances, reverse repurchase agreements, and loan sales. If
needed, $58.6 million of additional borrowings are available from the FHLB-
Seattle at June 30, 1998, as well as abilities to borrow from primary dealers
of United States government securities through reverse repurchase agreements.
Under these agreements, borrowings are collateralized with mortgage-backed
securities or other investment securities.
At June 30, 1998, there were outstanding commitments to originate loans of $42.1
million. Funds to meet these commitments will principally be generated through
loan sales in the secondary market. At June 30, 1998, certificates of deposit
scheduled to mature in one year or less totaled $173.9 million. Management
believes that a significant portion of such deposits will remain with the
Corporation. In addition, management believes that it can adjust the offering
rates of certificates of deposit to retain deposits in changing interest rate
environments.
12
<PAGE>
DISCLOSURES ABOUT MARKET RISK
- -----------------------------
The Corporation's principal financial objective is to achieve long-term
profitability while limiting exposure to fluctuations in interest rates.
Management intends to reduce risk where appropriate but accept a degree of
risk when warranted by economic circumstances and internal risk tolerance.
Actual asset and liability maturities are actively managed by holding
adjustable rate and balloon loans and selling fixed rate loans that are
originated. By adjusting the pricing on consumer deposits, differing deposit
maturities can be obtained to lengthen or shorten the repricing time on
liabilities. The Corporation also can borrow funds from the FHLB-Seattle for
periods of up to twenty years. At various times management uses instruments
such as interest rate swaps, interest rate cap and floor agreements, and forward
sale commitments to reduce the negative effect rising rates could have on net
interest income. Management, in conjunction with the Corporation's Board of
Directors, has established policies and guidelines for the use of these off-
balance sheet tools.
Interest rate risk is monitored using several methodologies, principally
financial modeling. The principal measure of interest rate risk is changes in
net interest income. The near term earnings exposure to interest rate changes
is evaluated in the context of certain upward and downward interest rate
changes occurring instantaneously. At June 30, 1998, a 200 basis point
increase in rates would reduce forecasted net interest income over a twelve
month period by approximately 2%. The Board of Directors sets targets for
allowable changes in net interest income. At June 30, 1998 the allowable
target for changes in net interest income with a 200 basis point increase in
rates was a decrease of up to 10%.
Expected interest rate sensitivity of individual categories of assets and
liabilities as of June 30, 1998 is shown in the following table. There are
numerous estimates and assumptions that significantly influence this
presentation such as prepayment rates. In addition to changes in the level of
interest rates, the Corporation is subject to changes in the yield curve (the
relationship between short and long term rates), changes in consumer
preferences for various loan and deposit products, and general economic
conditions. As with any method of modeling and measuring interest rate risk,
certain shortcomings are inherent. Therefore, the data presented in the table
should not be relied upon as necessarily indicative of actual future results.
<TABLE>
<CAPTION>
Within Over one Over five Over
one to five to ten ten Fair
Dollars in thousands year years years years Total Value
INTEREST-SENSITIVE ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $143,244 190,222 20,126 37,631 391,223 399,910
Investments and other
interest earning assets 7,933 5,126 518 18,560 32,137 32,066
INTEREST-SENSITIVE LIABILITIES
- ----------------------------------------------------------------------------------------------
Interest-bearing checking accounts -- 13,442 4,481 -- 17,923 17,923
Money market accounts 18,050 36,647 -- -- 54,697 54,697
Savings accounts -- 3,305 9,913 -- 13,218 13,218
Certificates of deposit 173,898 31,828 5,607 -- 211,333 211,894
Borrowings 74,891 11,936 -- -- 86,827 86,840
OFF-BALANCE SHEET ITEMS
- ----------------------------------------------------------------------------------------------
Commitments to extend credit 42,108 -- -- -- 42,108 42,108
Unused lines of credit 16,966 -- -- -- 16,966 16,966
Commitments to sell loans (20,076) -- -- -- (20,076) (20,076)
Interest rate caps (5,000) -- -- -- (5,000) (4,800)
Interest rate floor -- 13,000 -- -- 13,000 12,830
</TABLE>
The Corporation enters into off-balance sheet transactions to reduce natural
interest rate risk embedded in its assets, liabilities, and operating
activities. Forward commitments to sell loans are used to hedge the risk of
price change in the Corporation's mortgage-banking activities. As the volume
of loan originations fluctuates, the volume of commitments to sell loans also
fluctuates. As for balance sheet management, the Corporation has become less
interest rate sensitive over the past several years, especially with the
merger of AmFirst. Management has appropriately adjusted its use of off-
balance sheet transactions as this risk has declined. In 1998, to mitigate
the prepayment risk of decreasing long-term interest rates on a portion of
the portfolio of income property loans, $13 million of interest rate floor
agreements tied to yields on 10-year constant maturity Treasury notes were
acquired. These instruments are structured to gain value as interest rates
decrease. Conversely, the value of these instruments will decrease as
interest rates increase. Additional information on interest rate risk
management activities and interest rate contracts is contained in Note 8 to
the Consolidated Financial Statements.
13
<PAGE>
KPMG Peat Marwick LLP
3100 Two Union Square Telephone 206 292 1500 Telefax 206 292 4233
601 Union Street
Seattle, WA 98101-2327
Independent Auditors' Report
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheets of Cascade
Financial Corporation and subsidiary (Corporation) as of June 30, 1997 and
1998, 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, 1998. 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, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
August 4, 1998
Member Firm of KPMG International
14
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1998
(Dollars in thousands)
- -------------------------------------------------------------------------------
1997 1998
- -------------------------------------------------------------------------------
Assets
------
Cash on hand and in banks $ 8,577 10,642
Interest-bearing deposits in other financial institutions 5,734 1,324
Securities available-for-sale 58,225 27,412
Loans held-for-sale 11,133 19,920
Securities held-to-maturity (fair value of $6,637 and $4,654) 6,777 4,725
Loans 333,947 368,957
Allowance for loan losses (3,879) (4,143)
------- -------
Loans, net 330,068 364,814
Premises and equipment, net 7,859 8,764
Accrued interest receivable and other assets 5,789 6,554
------- -------
$ 434,162 444,155
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 304,205 312,518
Federal Home Loan Bank advances 74,659 73,436
Securities sold under agreements to repurchase 19,483 13,391
Advance payments by borrowers for taxes and insurance 1,476 1,953
Accrued interest payable, expenses and other liabilities 5,436 10,065
Deferred Federal income taxes 1,360 1,374
------- -------
Total liabilities 406,619 412,737
------- -------
Stockholders' equity :
Preferred stock, $.01 par value. Authorized
500,000 shares; no shares issued or outstanding -- --
Common stock, $.01 par value. Authorized 8,000,000
shares; issued and outstanding 4,224,571 shares in
1997 and 4,265,624 shares in 1998 43 43
Additional paid-in capital 4,293 4,433
Retained earnings, substantially restricted 23,521 27,046
Unrealized loss on securities available-for-sale,
net of deferred taxes (314) (104)
------- -------
Total stockholders' equity 27,543 31,418
- ------------------------------------------------------------------------------
$ 434,162 444,155
==============================================================================
See accompanying notes to consolidated financial statements.
15
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1996, 1997 and 1998
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1996 1997 1998
- --------------------------------------------------------------------------------
Interest income:
Loans $ 23,471 26,163 31,109
Securities held-to-maturity 2,322 441 306
Securities available-for-sale 3,291 4,449 1,825
FHLB stock dividends 312 372 412
Interest-bearing deposits 298 143 264
------------------------------
Total interest income 29,694 31,568 33,916
------------------------------
Interest expense:
Deposits 13,923 14,617 15,205
FHLB advances 3,937 4,192 4,015
Securities sold under agreements to
repurchase 1,244 1,115 898
------------------------------
Total interest expense 19,104 19,924 20,118
------------------------------
Net interest income 10,590 11,644 13,798
Provision for loan losses 61 810 246
------------------------------
Net interest income after provision
for loan losses 10,529 10,834 13,552
------------------------------
Other income:
Gain on sale of loans held-for-sale 506 283 606
Gain (loss) on sale of mortgage-backed
securities held-for-trading 519 (8) 45
Service charges 831 1,205 1,316
Gain on sale of securities available-for-
sale 338 14 93
Other 586 448 398
------------------------------
Total other income 2,780 1,942 2,458
------------------------------
Other expenses:
Salaries and employee benefits 4,824 5,018 5,579
Occupancy 1,641 1,674 1,695
Federal deposit insurance premiums 545 297 175
Data processing 306 338 360
Marketing 222 325 443
SAIF special assessment -- 1,224 --
Other 1,687 2,021 2,477
------------------------------
Total other expenses 9,225 10,897 10,729
------------------------------
Income before Federal income taxes 4,084 1,879 5,281
Federal income taxes 1,303 511 1,756
------------------------------
Net income 2,781 1,368 3,525
==============================
Net income per common share, basic $ 0.66 0.32 0.83
Weighted average number of shares
outstanding, basic 4,205,646 4,213,038 4,249,844
Net income per diluted share 0.60 0.29 0.75
Weighted average number of shares,
diluted 4,633,917 4,667,385 4,691,275
===============================
See accompanying notes to consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1997 and 1998
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------------------
Unrealized
loss on
securities
available-
for-sale, Total
Additional net of stock-
Common paid-in Retained deferred holders'
Shares stock capital earnings taxes equity
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1995 4,196,815 $ 43 4,108 19,372 (18) 23,505
Options exercised 16,617 -- 107 -- -- 107
Net income for the year ended
June 30, 1996 -- -- -- 2,781 -- 2,781
Adjustment on available-for-sale
securities -- -- -- -- (861) (861)
----------------------------------------------------------
Balances at June 30, 1996 4,213,432 43 4,215 22,153 (879) 25,532
Options exercised 11,139 -- 78 -- -- 78
Net income for the year ended
June 30, 1997 -- -- -- 1,368 -- 1,368
Adjustment on available-for-sale
securities -- -- -- -- 565 565
----------------------------------------------------------
Balances at June 30, 1997 4,224,571 43 4,293 23,521 (314) 27,543
Options exercised 41,053 -- 140 -- -- 140
Net income for the year ended
June 30, 1998 -- -- -- 3,525 -- 3,525
Adjustment on available-for-sale
securities -- -- -- -- 210 210
----------------------------------------------------------
Balances at June 30, 1998 4,265,624 $ 43 4,433 27,046 (104) 31,418
==============================================================================================
See accompanying notes to consolidated financial statements.
17
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1997 and 1998
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------
1996 1997 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,781 1,368 3,525
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of premises and equipment 712 671 665
Other (11) (7) --
Amortization of retained servicing rights 148 202 322
Provision for losses on:
Loans 61 810 246
Real estate 25 59 --
Retained servicing rights -- -- 57
Deferred Federal income taxes 379 (550) (94)
Additions to mortgage servicing rights (553) (315) (908)
Deferred loan fees, net of amortization 13 257 (149)
Origination of loans held-for-sale (55,921) (57,273) (199,161)
Proceeds from sale of loans held-for-sale 25,462 33,689 166,579
Proceeds from sale of mortgage-backed securities held-
for-trading 32,849 17,359 24,439
Net loss (gain) on sales of:
Loans held-for-sale (506) (283) (605)
Mortgage-backed securities held-for-trading (519) 8 (45)
Securities available-for-sale (338) (12) (93)
Premises and equipment (6) -- --
Federal Home Loan Bank stock dividend received (312) (372) (412)
Net change in accrued interest receivable and other assets
over principal and interest payable on loans serviced for
others and accrued expenses and other liabilities 820 313 6,005
-----------------------------
Net cash provided by (used in) operating activities 5,084 (4,076) 371
-----------------------------
Cash flows from investing activities:
Loans originated, net of principal repayments (25,452) (63,937) (35,159)
Principal repayments on mortgage-backed securities held-
to-maturity 9,452 3,164 2,053
Principal repayments on securities available-for-sale 4,873 12,710 9,900
Purchases of securities available-for-sale (59,980) (20,971) (64)
Proceeds from sales of securities available-for-sale 37,454 41,080 20,962
Purchases of premises and equipment (304) (655) (2,023)
Proceeds from sales of premises and equipment, and other assets 6 5 --
-----------------------------
Net cash used in investing activities (33,951) (28,604) (4,331)
-----------------------------
Subtotal, carried forward (28,867) (32,680) (3,960)
-----------------------------
18
<PAGE>
Cash flows from financing activities:
Proceeds from issuance of common stock 107 78 140
Net increase in deposits 25,693 26,308 8,313
Proceeds from Federal Home Loan Bank advances 83,133 144,400 292,400
Repayment of Federal Home Loan Bank advances (75,750) (138,283) (293,623)
Net decrease in securities sold under agreements to repurchase (2,835) (966) (6,092)
Net increase in advance payments by borrowers for taxes and
insurance 332 270 477
-----------------------------
Net cash provided by financing activities 30,680 31,807 1,615
-----------------------------
Net increase (decrease) in cash and cash equivalents 1,813 (873) (2,345)
Cash and cash equivalents at beginning of year 13,371 15,184 14,311
-----------------------------
Cash and cash equivalents at end of year 15,184 14,311 11,966
=============================
Supplemental disclosures of cash flow information --
cash paid during the year for:
Interest 19,117 19,957 19,914
Federal income taxes 999 1,235 1,630
Supplemental schedule of noncash investing activities:
Mortgage loans securitized into FHLMC participation
certificates and held-for-trading and sold 32,330 17,419 24,400
Mortgage loans securitized into FHLMC participation
certificates and held-for-investment -- 52 15
Securities reclassified from held-to-maturity to available-
for-sale 50,503 -- --
Premises and equipment, net transferred to Investment property -- -- 453
Real estate owned transferred to Investment property 421 -- --
Net mortgage loans transferred to real estate owned 740 321 301
See accompanying notes to consolidated financial statements.
</TABLE>
19
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of Cascade Financial Corporation
and 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. Actual
results could differ from those estimates.
The following is a description of the more significant policies, which the
Corporation follows in preparing and presenting its consolidated financial
statements.
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Corporation,
its subsidiary, Cascade Bank (the Bank), and the Bank's subsidiary, Cascade
Investment Services, Inc. All significant intercompany balances and
transactions have been eliminated in the consolidation.
(b) CASH EQUIVALENTS
The Corporation considers all interest-bearing deposits and short-term highly
liquid investment securities with an original maturity of three months or less
to be cash equivalents.
(c) LOANS
All of the Corporation's loans are located in the Puget Sound region. At June
30, 1998, the Corporation's loans are principally secured by one-to-four-
family residences (62%), multifamily residences (15%), commercial and
industrial loans (10%) 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.
Real estate loans originated by the Corporation are secured by generally no
less than 80% of the lesser of the appraised value or purchase price of the
underlying property. The Corporation currently requires first mortgage,
residential customers to obtain private mortgage insurance on all loans
above an 80% loan-to-value ratio.
The Corporation has added commercial and installment loan portfolios during
the year ended June 30, 1998. Most of the commercial loans are secured, and
the security includes commercial property, business inventories, commercial
equipment and personal property of the customers. $2.4 million in commercial
loans were unsecured. Loans secured by boats account for the majority of
the installment loan portfolio.
Interest Income
Loans are stated at principal amounts outstanding, net of deferred loan fees
and costs. Interest is accrued only if deemed collectible Accrual of interest
income is generally discontinued when a loan becomes 90 days past due and
accrued interest amounts are reversed. Once interest has been paid to date
or management considers the loan to be fully collectible, it is returned to
accrual status.
Loan origination fees and certain direct origination costs are deferred and
amortized as an adjustment of the loans yields over their contractual lives
using the interest method. In the event loans are sold, the remaining net
deferred loan origination fees or costs are recognized as a component of
the gains or losses on the sales of loans. When portfolio loans pay off
before their contractual maturity, the remaining deferred fees or costs are
recognized as interest income or expense.
Loan commitment fees are deferred until loans are funded, at which time they
are amortized into interest income using the interest method. If the
commitment period expires, the fees are recognized as service charges.
Impairment of Loans and Allowance For Loans
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 a
loan is impaired then interest income is recorded upon the receipt of cash.
The difference between interest income recognized on the accrual basis and
cash basis is not significant.
The Corporation reviews all single family loans, all consumer loans and 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 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, low debt coverage ratio, high loan-to-value ratio, or if it is a
restructured debt. The Corporation bases the measurement of loan impairment
for all loans on the fair value of the loan's underlying collateral. If the
recorded investment 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.
20
<PAGE>
Management believes the allowances for losses on loans and real estate owned
are adequate. While management uses available information to recognize losses
on these assets, future additions to the allowances may be necessary based on
changes in economic conditions, particularly in the western Washington region.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowances for
losses on loans. Such agencies may require the Corporation to recognize
additions to the allowances, or change valuations, based on their judgments
about information available to them at the time of their examination.
(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. Unrealized losses on such loans are included in gain on
sale for loans held-for-sale. All loans are sold without recourse.
Mortgage-Backed Securities Held-For-Trading
As part of its mortgage-banking activity the Corporation securitizes certain
loans originated for sale. Mortgage-backed securities ("MBS") that the
Corporation holds for sale 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.
Mortgage Loan Servicing Rights
The Corporation acquires mortgage servicing rights ("MSR") through either the
purchase or origination of mortgage loans and the sale of those loans with
servicing rights retained. The total cost of the mortgage loans sold is
allocated to the MSR and the loans based on their relative fair values.
The Corporation assesses its MSR for impairment based on the fair value of
those rights. The carrying value of the MSR is evaluated on a quarterly
basis and any impairment is recognized through a valuation allowance for
each impaired stratum. For purposes of measuring impairment, the
Corporation stratifies its MSR by various risk characteristics such as
loan type, investor type, interest rate and origination date with appropriate
prepayment assumptions for the various MSR pools. The MSR are included in
other assets and are amortized as an offset to service charges in proportion
to, and over, the period of estimated net servicing income.
Loan servicing generally consists of collecting mortgage payments and certain
charges 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, 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.
(f) INTEREST RATE RISK MANAGEMENT ACTIVITIES
The Corporation uses off-balance sheet instruments, including interest rate
exchange agreements ("swaps"), interest rate cap and floor agreements and
forward sales to manage interest rate exposures. Swap, cap and floor
agreements are designated either against specific loan portfolios or
against short-term deposits. The fair value of the swap, cap and floor
agreements are not reported on the balance sheet. The interest differential
paid or received is recorded as an adjustment to interest income or interest
expense of the related asset or liability. Premiums paid for interest rate
caps and floors 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 and loans held-for-sale, as appropriate.
21
<PAGE>
(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. Real estate owned was $750 and $74 at June
30, 1997 and 1998, and is included in other assets.
(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.
(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.
(k) RECLASSIFICATIONS
Certain 1996 and 1997 balances have been reclassified to conform to the 1998
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.
(m) ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") adopted Statement of
Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information
about Capital Structure", was issued in February 1997 and 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.
SFAS No. 130, "Reporting Comprehensive Income", was issued in June 1997 and
requires businesses to disclose comprehensive income and its components in
their financial statements. This statement will not affect the results of
operations or financial position of the Corporation. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and is
applicable to interim periods.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", was issued in June 1997 and redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. SFAS No. 131 is effective
for the corporation beginning July 1, 1998. The statement will not affect
the results of operations or financial position of the Corporation.
Management has not yet completed its analysis of which operating segments
it will report on.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all quarters of fiscal years
beginning after June 15, 1999. Management is reviewing this statement and
does not expect that application of this statement will have a material
effect on the results of operations or the financial position of the
Corporation.
(2) LINES OF BUSINESS
The Corporation provides a broad range of financial services to consumers and
small businesses in Western Washington through its subsidiary operations.
Financial services of the Bank include consumer banking, mortgage banking,
income property and construction lending, commercial banking and securities
activities through a subsidiary of the Bank.
(3) BUSINESS COMBINATION
On August 1, 1997, the Corporation completed a business combination with AmFirst
Bancorporation ("AmFirst"). On that date, AmFirst had assets of $67.3 million,
deposits of $60.7 million and stockholders' equity of $4.7 million. The
Corporation issued 803,300 shares of common stock to complete the AmFirst
merger. AmFirst was an Everett, Washington based bank specializing in local
market commercial banking products. The financial statements reflect the
accounting for the merger as a pooling-of-interests and are presented as if
the companies were merged as of the earliest period shown.
22
<PAGE>
Reconciliations of revenue and net income previously presented by the
Corporation with the combined amounts presented in the accompanying
consolidated statements of income for the years ended June 30, 1997 and 1996
are as follows:
Year ended June 30, 1997
--------------------------------
Corporation AmFirst Combined
----------- ------- --------
Total revenue $ 27,724 5,786 33,510
Net Income 1,204 164 1,368
Year ended June 30, 1996
--------------------------------
Corporation AmFirst Combined
----------- ------- --------
Total revenue $ 27,001 5,473 32,474
Net Income 2,268 513 2,781
(4) SECURITIES
A summary of securities at June 30 follows:
<TABLE>
<CAPTION>
1997 1998
---------------------------------------------------------------
Gross Gross Gross Gross
Amor- unreal- unreal- Amor- unreal- unreal-
tized ized ized Fair tized ized ized Fair
cost gain losses value cost gain losses value
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
US Treasury $ 15,926 3 -- 15,929 997 5 -- 1,002
Municipals 4,805 133 -- 4,938 --- -- -- --
US Government agency 29,882 -- 639 29,243 21,087 40 203 20,924
Mutual funds 2,943 28 -- 2,971 -- -- -- --
FHLB stock 5,074 -- -- 5,074 5,486 -- -- 5,486
Federal Reserve Stock 70 -- -- 70 -- -- -- --
---------------------------------------------------------------
58,700 164 639 58,225 27,570 45 203 27,412
Securities held-to-maturity:
Mortgage-backed securities
US Government agency $ 6,777 -- 140 6,637 4,725 -- 71 4,654
---------------------------------------------------------------
6,777 -- 140 6,637 4,725 -- 71 4,654
</TABLE>
As of June 30, 1997 and 1998, the Corporation was required to maintain 37,330
and 36,720 shares, respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits was $288
and $73 at June 30, 1997 and 1998, respectively. Accrued interest receivable
on mortgage-backed securities was $189 and $150 for the same periods.
23
<PAGE>
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
-----------------------------
Year ended June 30, 1997
Mutual Funds $ 22,000 64 4
US Government agency 19,080 9 57
-----------------------------
Total 41,080 73 61
=============================
Proceeds Gains Losses
Year ended June 30, 1998
US Treasury $ 11,975 21 4
Municipals 4,869 64 1
US Government agency 1,938 -- 12
Mutual Funds 3,032 25 --
-----------------------------
Total 21,814 110 17
=============================
The following table shows the contractual maturities of the Corporation's
securities held-to-maturity at June 30, 1998:
Within one Over one to
year five years Total
Amortized Cost
US Government agency $ 1,883 2,842 4,725
-------------------------------
Total amortized cost 1,883 2,842 4,725
===============================
Fair Value
US Government agency $ 1,864 2,790 4,654
-------------------------------
Total fair value 1,864 2,790 4,654
===============================
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at June 30, 1998:
Within one Over one to Over five to Over ten
year five years ten years years Total
-------------------------------------------------------
Amortized Cost
US Treasury $ -- 997 -- -- 997
US Government agency 568 1,292 518 18,709 21,087
FHLB Stock 5,486 -- -- -- 5,486
-------------------------------------------------------
Total amortized cost 6,054 2,289 518 18,709 27,570
=======================================================
Fair Value
US Treasury $ -- 1,002 -- -- 1,002
US Government agency 564 1,282 518 18,560 20,924
FHLB Stock 5,486 -- -- -- 5,486
-------------------------------------------------------
Total fair value 6,050 2,284 518 18,560 27,412
=======================================================
24
<PAGE>
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 $1,541 in 1997 and $1,286
in 1998. The Bank is required to hold securities to meet liquidity requirements
as determined by federal banking regulations. The required ratio is currently
4.00%. The Bank's liquidity ratio was 5.01% and 8.22% at June 30, 1997 and
1998, respectively.
(5) LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans and loans held for sale at June 30 follows:
1997 1998
----------------------
Real estate mortgage:
One-to-four family $ 186,381 175,614
Multifamily 58,662 62,736
Commercial 25,250 31,746
Home equity 21,517 28,330
Land loans 606 232
Real estate construction:
One-to-four family 33,361 47,861
Commercial 24,601 41,494
Installment 10,061 20,176
----------------------
Total loans 360,439 408,189
Loans in process (12,865) (16,966)
Deferred loan fees, net (2,494) (2,346)
----------------------
345,080 388,877
Loans held for sale (11,133) (19,920)
----------------------
Loans 333,947 368,957
======================
Loans serviced for others $ 98,516 156,043
Accrued interest on loans was $2,093 and $2,356 at June 30, 1997 and 1998,
respectively.
At June 30, 1998, the composition of the loan portfolio was as follows:
Fixed Rate Adjustable Rate
-----------------------------
Term to maturity
Less than one year $ 10,210 150,000
1-3 years 36,640 69,060
3-5 years 12,994 71,528
5-10 years 9,412 10,714
10-20 years 6,163 --
Over 20 years 31,468 --
Nonaccrual loans totaled $600, $911 and $1,921, respectively, at June 30, 1996,
1997 and 1998. If interest on these loans had been recognized, such income would
have been $16, $59 and $106, respectively, for 1996, 1997 and 1998. At June 30,
1996, 1997 and 1998, loans totaling $1,946, $2,109 and $3,221, were impaired of
which $1,226, $1,198 and $67 had allocated reserves of $300, $300 and $67,
respectively. The remaining $720, $911 and $3,154 had no reserves allocated
to them since the value of the impaired loans was equal to or exceeded the
recorded investment. Of the $1,946, $2,109 and $3,221 of impaired loans,
$600, $911 and $1,652 were on nonaccrual status, $0, $112 and $269 were under
foreclosure and $1,346, $1,198 and $1,300 were performing but judged to be
impaired. The average balance of impaired loans during the years ended June
30, 1996, 1997 and 1998, respectively, was $1,680, $2,199 and $1,450 and the
Corporation recognized $156, $140 and $86 of related interest income on such
loans during the time such loans were impaired.
At June 30, 1997 and 1998, the Corporation had outstanding commitments to fund
loans with fixed interest rates totaling $12,128 and $28,134, respectively, and
loans with adjustable rates totaling $15,305 and $13,974, respectively.
The Corporation has forward commitments to sell loans into the secondary market
totaling $19,296, and $20,076, respectively, at June 30, 1997 and 1998.
25
<PAGE>
A summary of the allowance for losses on loans follows:
Year ended June 30,
-------------------------
1996 1997 1998
-------------------------
Balances at beginning of year $ 3,305 3,336 3,879
Provision for loss 61 810 246
Recoveries -- 5 63
Charge-offs (30) (272) (45)
-------------------------
Balances at end of year 3,336 3,879 4,143
=========================
(6) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
June 30,
Estimated ----------------
useful lives 1997 1998
------------------------------
Land $ 1,571 1,239
Buildings 40 years 7,008 8,596
Leasehold improvements Lease term 1,149 888
Furniture and equipment 2-10 years 4,917 5,337
Automobiles 4 years 33 56
----------------
14,678 16,116
Accumulated depreciation and amortization (6,819) (7,352)
7,859 8,764
================
(7) DEPOSITS
Deposits at June 30 are summarized as follows:
1997 1998
---------------------
Noninterest bearing checking accounts $ 12,466 15,347
Interest bearing checking accounts 13,693 17,923
Money market deposit accounts 53,048 54,697
Savings accounts 15,720 13,218
Certificates of deposit 209,278 211,333
---------------------
304,205 312,518
=====================
Time deposit accounts in amounts of $100,000 or more totaled $60.2 million and
$64.6 million at June 30, 1997 and 1998, respectively.
Deposit
Weighted accounts with Accrued
average interest balances in interest
rate on excess of payable on
deposits $100,000 deposits
--------------------------------------------
June 30, 1997 5.2% 78,044 670
June 30, 1998 4.9% 87,636 499
26
<PAGE>
A summary of interest expense on deposits follows:
Year ended June 30,
-------------------------------
1996 1997 1998
-------------------------------
Checking and money market accounts $ 1,318 2,383 2,738
Savings accounts and time deposits 12,605 12,234 12,467
-------------------------------
13,923 14,617 15,205
===============================
Maturities of time deposits at June 30, 1998 are as follows:
Years ending June 30,
1998 $ --
1999 173,898
2000 24,298
2001 7,530
2002 2,600
2003 1,897
Thereafter 1,110
----------
211,333
==========
(8) INTEREST RATE RISK MANAGEMENT ACTIVITIES
The Corporation enters into interest rate swap, cap, and floor agreements with
primary dealers, the Federal Home Loan Bank of Seattle ("FHLB") and other
correspondent banks to manage interest rate risk. Swap, cap, and floor
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 year ended June 30, 1997, the Corporation entered into interest rate
swaps with notional values totaling $8.5 million. The net difference between
the interest received and paid on the interest rate swaps of $49, $(36) and
$(38), respectively for the years ended June 30, 1996, 1997 and 1998, is
recorded as a decrease (increase) to interest expense on deposits or interest
income on loans, as appropriate.
During 1997 and 1998, the Corporation entered into interest rate cap and floor
agreements with notional values totaling $5 million and $13 million,
respectively. These agreements were designated against certain loans. If the
three month LIBOR exceeds 6%, the net interest received on the interest rate
caps would be recorded as an increase to interest income on loans. If the ten
year CMT falls below 5%, the net interest received on the interest rate floors
would be recorded as an increase to interest income on loans.
Interest rate cap and floor agreements at June 30, 1997 and 1998, are summarized
as follows:
Cap Floor
----------------------- ----------
1997 1998 1998
----------------------- ----------
Notional amount $10,000 $5,000 $13,000
Weighted average maturity 12 months 1 month 18 months
Strike rate 6.00% 6.00% 5.00%
Three month LIBOR 5.75% 5.72% N/A
10 year CMT N/A N/A 5.44%
Payment terms Quarterly Quarterly Quarterly
27
<PAGE>
(9) FHLB ADVANCES
FHLB advances are summarized as follows:
June 30,
---------------------------------------------------
1997 1998
---------------------------------------------------
Weighted Weighted
average interest average interest
Maturity date Amount rate Amount rate
- -------------------------------------------------------------------------
Year ended June 30,
1998 $ 60,500 5.86% -- --
1999 14,000 5.94 61,500 5.66
2000 -- -- 6,000 6.04
Thereafter 159 7.67 5,936 5.40
---------------------------------------------------
74,659 5.88 73,436 5.67
===================================================
Year ended June 30,
---------------------
1997 1998
---------------------
Maximum amount of outstanding FHLB advances at
any month-end $ 80,109 76,439
Average amount of outstanding FHLB advances during
the year 70,498 67,782
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.
(10) 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:
Underlying securities
---------------------
Book value,
Weighted- including
Balance average interest accrued Market
outstanding rate interest value
-----------------------------------------------------
June 30, 1997 $ 19,483 5.63% 21,097 20,454
June 30, 1998 13,391 5.56 14,748 14,535
Financial data pertaining to reverse repurchase agreements follows:
Year ended June 30,
--------------------
1997 1998
--------------------
Maximum amount of outstanding agreements at
any month-end $ 22,006 17,283
Average amount of outstanding agreements during
the year 19,948 14,299
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.
28
<PAGE>
(11) FEDERAL INCOME TAXES
Federal income tax expense includes the following components:
Year ended June 30,
------------------------------
1996 1997 1998
------------------------------
Current $ 924 1,061 1,850
Deferred 379 (550) (94)
------------------------------
1,303 511 1,756
==============================
The provision for Federal income tax expense differs from the amount computed by
applying the "expected" Federal income tax rate of 34% to income before Federal
income taxes, due to tax exempt income received on municipal investment
securities and other differences as noted below.
1996 1997 1998
--------------------------
Expected tax $ 1,389 639 1,796
Tax exempt municipal income (96) (95) (3)
Other 10 (33) (37)
--------------------------
Tax expense 1,303 511 1,756
==========================
Under provision of the Internal Revenue Code, the Corporation was allowed a
statutory bad debt deduction (based upon a percentage of taxable income before
such deduction) for additions to tax bad debt reserves established for the
purpose of absorbing losses on loans or property acquired through foreclosure.
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 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:
1997 1998
--------------------
Deferred tax assets:
Securities available-for-sale $ 162 54
Loans 421 517
Other 83 101
--------------------
Gross deferred tax assets 666 672
Deferred tax liabilities:
Deferred loan fees (796) (677)
Premises and equipment (434) (433)
FHLB stock (796) (936)
--------------------
Gross deferred tax liabilities (2,026) (2,046)
--------------------
Net deferred tax liability (1,360) (1,374)
====================
A valuation allowance for deferred tax assets was not considered necessary at
June 30, 1997 or 1998. Management believes the Corporation will fully realize
its total deferred income tax assets as of June 30, 1998, based upon its total
deferred income tax liabilities and its current and expected future levels of
taxable income.
(12) EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which
standardizes the calculation for earnings per share and required companies
with complex capital structures that have publicly 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 became effective for
periods ending after December 15, 1997. Earnings per share figures have been
restated to take into effect the stock split effected on June 22, 1998.
29
<PAGE>
The following table presents EPS information:
Year ended June 30,
--------------------------------------------
1996 1997 1998
--------------------------------------------
Net income $ 2,781 1,368 3,525
Common shares outstanding (basic) 4,205,646 4,213,038 4,249,844
Effect of dilutive stock options 428,271 454,347 441,431
--------------------------------------------
Common shares outstanding (diluted) 4,633,917 4,667,385 4,691,275
============================================
EPS, basic 0.66 0.33 0.83
EPS, diluted 0.60 0.29 0.75
(13) STOCKHOLDERS' EQUITY
(a) RESTRICTIONS ON DIVIDENDS
Current regulations allow the Bank to pay dividends on its stock if its
regulatory capital would not thereby be reduced below the amount required
for the statutory capital requirements set by the Office of Thrift Supervision
("OTS").
(b) REGULATORY CAPITAL
At June 30, 1998, 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 I 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.
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 I RBC ratio of at least 6%,
a total capital ratio of at least 10% and a leverage ratio of at least 5%
and not be subject to a capital directive order. At June 30, 1998, the
Bank was in compliance with the regulatory requirements for well-capitalized
institutions. As of May 19, 1998, the most recent notification from the OTS
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
<TABLE>
<CAPTION>
Minimum
requirements
for capital Well-capitalized
Actual adequacy requirements
----------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997:
Total risk-based capital to risk-
weighted assets (1) $ 30,874 11.40% 21,658 8.00 27,073 10.00
Tier I (core) capital to risk-
weighted assets 27,493 10.16 10,829 4.00 16,244 6.00
Tier I (core) capital to adjusted
total assets 27,493 6.33 17,375 4.00 21,719 5.00
Tangible capital to tangible assets 27,493 6.33 6,516 1.50 n/a n/a
June 30, 1998:
Total risk-based capital to risk-
weighted assets (1) $ 34,517 11.35 24,319 8.00 30,398 10.00
Tier I (core) capital to risk-
weighted assets 31,163 10.25 12,160 4.00 18,239 6.00
Tier I (core) capital to adjusted
total assets 31,163 7.02 17,767 4.00 22,209 5.00
Tangible capital to tangible assets 31,163 7.02 6,663 1.50 n/a n/a
______________________
(1) The OTS requires institutions to maintain Tier I capital of not less than
one-half of total capital.
</TABLE>
30
<PAGE>
(14) MORTGAGE SERVICING RIGHTS
A summary of capitalized mortgage servicing rights at June 30, 1997 and 1998
follows:
June 30,
---------------------------
1996 1997 1998
---------------------------
Fair value at beginning of year $ 243 648 761
Additions 553 315 908
Amortization (148) (202) (322)
Allowance for losses -- -- (57)
---------------------------
Fair value at end of year 648 761 1,290
===========================
(15) EMPLOYEE BENEFIT PLANS
(a) SAVINGS PLAN
The Corporation maintains a savings plan under section 401(k) of the Internal
Revenue Code, covering substantially all full-time employees. Under the plan,
employee contributions are matched by the Corporation at a rate of 50% of the
first 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 $24, $25 and $58 to the plan for
the years ended June 30, 1996, 1997 and 1998, 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, 1996, 1997 and 1998, the Corporation contributed $91, $65 and $104,
respectively, to the ESOP, which is invested in Cascade Financial
Corporation stock. Allocated and unallocated shares at June 30, 1998, were
123,440 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 122,070 shares of common stock have been authorized for issuance. The
plan allows employees of the Corporation with three months of service the
opportunity to purchase common stock through accumulated salary deductions
during each offering period. On the first day of each six month offering
period (January 1 and July 1 of each year), eligible employees who elect to
participate are granted options to purchase a limited number of shares and
unless the participant withdraws from the plan, the option is automatically
exercised on the last day of each offering period. The aggregate number of
shares to be purchased in any given offering is determined by dividing the
accumulated salary deduction for the period by the lower of 85% of the
market price of a common share at the beginning or end of an offering period.
(d) STOCK OPTIONS
The Corporation maintains stock option plans pursuant to which an aggregate
of shares of Common Stock have been authorized for issuance to certain key
employees and directors of the Corporation and its subsidiaries upon
exercise of stock options. The options granted under these plans are, in
general, exercisable under a vesting schedule whereby all options become
exercisable over seven years, and expire not more than ten years after the
date of grant. All options granted have limited rights, that enable a holder,
upon a change in control of the Corporation, to elect to receive cash equal to
the difference between the exercise price of the option and the fair market
value of the common stock on the date of exercise. At June 30, 1997 and 1998,
339,308 and 471,728 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.
31
<PAGE>
The Corporation applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees" in accounting for its stock
option plans and accordingly, no compensation cost has been recognized in
the accompanying financial statements. 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:
Year Ended June 30,
-------------------------------
1996 1997 1998
-------------------------------
Net income
As reported $ 2,781 1,368 3,525
Pro forma 2,750 1,328 3,457
Net income per common share
Basic
As reported 0.66 0.32 0.83
Pro forma 0.66 0.32 0.81
Diluted
As reported 0.60 0.29 0.75
Pro forma 0.59 0.28 0.73
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 $7.53, $6.60 and $6.23, respectively for the years ended June 30, 1996,
1997, and 1998. The fair value is estimated on the date of grant with the
following weighted average assumptions used for 1996, 1997, and 1998: risk-
free interest rate of 6.195%, 6.510% and 5.83%, expected lives of eight years,
no expected cash dividends, and volatility factors of 24%.
32
<PAGE>
Changes in total options outstanding during 1996, 1997 and 1998 are as follows:
1996
-------------------------------
Weighted Average
Shares Under Exercise Price of
Option Option Shares
-------------------------------
Outstanding at beginning of year 393,434 4.51
Granted during year 35,789 13.09
Exercised during year (16,617) 4.39
Five-for-four stock split 66,673
Forfeited during year (15,346) 6.27
-------------------------------
Outstanding at end of year 463,933 3.77
1997
-------------------------------
Outstanding at beginning of year 463,933 3.77
Granted during year 13,458 11.22
Exercised during year (11,139) 5.11
Five-for-four stock split 83,303
Forfeited during year (3,029) 8.05
-------------------------------
Outstanding at end of year 546,526 3.77
1998
-------------------------------
Outstanding at beginning of year 546,526 3.77
Granted during year 41,500 12.95
Exercised during year (41,053) 3.76
Five-for-four stock split 139,334
Forfeited during year (1,651) 8.98
-------------------------------
Outstanding at end of year 684,656 4.34
===============================
Financial data pertaining to outstanding stock options were as follows:
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------------------------------------------
Weighted
Weighted Average
Average Exercise
Weighted Exercise Number of Price of
Number of Average Price of Exercisable Exercisable
Ranges of Exercise Option Remaining Option Option Option
Prices Shares Contractual Life Shares Shares Shares
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.57-$6.00 421,791 4.3 years $3.23 367,879 $3.46
2.75-3.80 137,160 4.0 3.14 100,333 3.07
6.96-9.60 73,828 8.5 8.51 3,516 8.12
9.28-12.40 51,875 9.8 10.44 0 0.00
-----------------------------------------------------------------------
684,654 7.0 years 4.34 471,728 3.43
=======================================================================
</TABLE>
33
<PAGE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates presented below 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 fair value of the Corporation's financial instruments:
At June 30, 1997 At June 30, 1998
-----------------------------------------------
Carrying Estimated Carrying Estimated
Value fair value value fair value
-----------------------------------------------
Financial assets:
Cash and cash equivalents $ 14,311 14,311 11,966 11,966
Securities available-for-sale 58,225 58,225 27,412 27,412
Securities held-to-maturity 6,777 6,637 4,725 4,654
Loans 347,574 352,765 391,223 399,910
Servicing rights 761 852 1,290 1,387
Financial liabilities:
Deposit accounts 304,205 304,646 312,518 313,079
Borrowings 94,142 94,079 86,827 86,840
Interest rate swaps/caps/floors 18,500 18,338 18,000 17,630
Cash and cash equivalents
The carrying amount represents fair value.
Securities
Fair values are based on quoted market prices or dealer quotes.
Mortgage-backed securities
Fair values are based on quoted market prices or dealer quotes.
Loans
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
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, floor and swap agreements. Commitments to originate portfolio loans are
valued consistent with the method described above for loans.
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, 1997 and 1998. These amounts have not been updated
since year-end; therefore, the valuations may have changed significantly
since that point in time.
34
<PAGE>
(17) 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
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.
(18) CONDENSED FINANCIAL INFORMATION OF CASCADE FINANCIAL CORPORATION
Following are the condensed financial statements of Cascade Financial
Corporation (Parent only) for the period indicated:
Balance Sheet
June 30,
- -----------------------------------------------------------------------------
1997 1998
- -----------------------------------------------------------------------------
Assets:
Cash $ 38 261
Investment in subsidiary 27,470 31,167
Other assets 46 2
------------------------
27,554 31,430
========================
Liabilities and Stockholders' Equity:
Other Liabilities 11 12
Stockholders' equity 27,543 31,418
------------------------
27,554 31,430
========================
Statement of Operations
For the years ended June 30, 1996, 1997 and 1998
- -------------------------------------------------------------------------------
1996 1997 1998
- --------------------------------------------------------------------------------
Equity in undistributed net
income of the subsidiary $ 2,869 1,464 3,786
Operating expenses (135) (145) (392)
---------------------------------------
Income before Federal income taxes 2,734 1,319 3,394
Income tax benefit 47 49 131
---------------------------------------
Net income 2,781 1,368 3,525
=======================================
35
<PAGE>
Statement of Cash Flows
For the years ended June 30, 1996, 1997 and 1998
- ------------------------------------------------------------------------------
1996 1997 1998
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,781 1,368 3,525
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiary (2,869) (1,464) (3,786)
Increase (decrease) in other assets (63) 16 44
Increase in other liabilities 2 -- --
-----------------------------
Net cash used in operating activities (149) (80) (217)
Cash flows from investing activities:
Dividends received from subsidiary 50 -- 300
-----------------------------
Net cash provided by investing activities 50 -- 300
Cash flows from financing activities:
Proceeds from issuance of common stock 107 78 140
----------------------------
Net cash provided by financing activities 107 78 140
-----------------------------
Net increase (decrease) in cash and cash
equivalents 8 (2) 223
============================
Cash and cash equivalents:
Beginning of year 32 40 38
-----------------------------
End of year 40 38 261
============================
36
<PAGE>
Stockholders' Meeting: The annual meeting of Cascade
Financial Corporation will be at 10:00 a.m., Saturday,
October 17, 1998 at Cascade Bank, 2828 Colby Avenue,
Everett, Washington.
ADDITIONAL INFORMATION
STOCKHOLDERS INTERESTED in receiving quarterly earnings
releases should call our main office at (425) 339-5500 or 1-800-
326-8787.
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 informa-
tion is also available through the Securities and Exchange
Commission's Web site: www.sec.gov/edaux/searches.htm.
STOCK TRANSFER AGENT
Chase Mellon
Shareholder Services
50 California Street, 10th Floor
San Francisco, California 94111
AUDITORS
KPMG Peat Marwick LLP
3100 Two Union Square
601 Union Street
Seattle, Washington 98101-2327
LEGAL COUNSEL
Anderson Hunter, PS
2707 Colby Avenue, Suite 1001
Everett, Washington 98201
SPECIAL COUNSEL
Breyer & Aguggia LLP
1300 I Street N.W.
Suite 470 East
Washington, D.C. 20005
COMMON STOCK INFORMATION
THE COMMON STOCK OF CASCADE FINANCIAL CORPORATION is traded on the Nasdaq Stock
Market under the symbol "CASB". As of August 26, 1998 there were approximately
1,100 stockholders of record.
The following table sets forth market price and dividend information for the
Corporation's common stock. Prices have been adjusted for stock dividends.
FISCAL 1998 High Low FISCAL 1997 High Low
First Quarter $14.750 9.750 First Quarter $11.250 9.000
Second Quarter 15.125 10.500 Second Quarter 11.250 8.375
Third Quarter 12.000 9.750 Third Quarter 11.250 10.000
Fourth Quarter 15.750 11.750 Fourth Quarter 13.500 9.250
In order to retain capital for operations and expansion, the Corporation does
not expect to declare cash dividends 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. Current
regulations allow the Bank to pay dividends on its stock if regulatory capital
would not thereby be reduced below the amount required for the statutory
capital requirements set by the Office of Thrift Supervision.
37
<PAGE>
[BACK COVER OF ANNUAL REPORT]
Real People. Real Solutions.SM
[Picture of employee] [Cascade Financial Corporation logo]
[Picture of employee]
[Picture of employee]
[Picture of employee]
[Picture of employee]
CASCADE BANK LOCATIONS
EVERETT MAIN OFFICE ISSAQUAH OFFICE
2828 Colby Avenue 305 Front Street N
Everett, Washington Issaquah, Washington
(425) 339-5500 (425) 391-5500
EVERETT LYNNWOOD OFFICE
BROADWAY OFFICE 19419 Highway 99
2602 Broadway Lynnwood, Washington
Everett, Washington (425) 775-6666
(425) 259-1243
MARYSVILLE OFFICE
EVERETT 815 State Avenue
EVERGREEN WAY OFFICE Marysville, Washington
6920 Evergreen Way (360) 659-7614
Everett, Washington
(425) 353-1243 MOUNT VERNON OFFICE
1725 Continental Place,
BELLEVUE OFFICE Suite C
200 108th NE Mount Vernon, Washington
Bellevue, Washington (360) 424-4655
(425) 455-2300
SMOKEY POINT IN SAFEWAY
CLEARVIEW OFFICE 3532 172nd St NE
17512 SR 9 SE Arlington, Washington
Snohomish, Washington (360) 653-1900
(360) 668-1243
BELLINGHAM
HARBOUR POINTE IN QFC HOME LOAN CENTER
11700 Mukilteo Speedway 909 Lakeway Drive, Suite 200
Mukilteo, Washington Bellingham, Washington
(425) 290-7767 (360) 676-5200
www.cascadebank.com
1998
Annual
Report
EX-10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of August 1, 1997, by and between
CASCADE BANK (the "Bank"), Everett, Washington; and David Little (the
"Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties
hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve
as Executive Vice-President of the Bank. During the term of this Agreement,
Executive shall have responsibility for Business Banking and shall report to
the President
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of twenty-four
(24) full calendar months thereafter.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the
approval of the Board of Directors of the Bank (the "Board"), as evidenced by a
resolution of such Board, from time to time, Executive may serve, or continue
to serve, on the boards of directors of, and hold any other offices or
positions in, companies or organizations, which, in such Board's judgment, will
not present any conflict of interest with the Bank, or materially affect the
performance of Executive's duties pursuant to this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The
Bank shall pay Executive as compensation a salary of $71,800 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the Bank. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement.
Such review shall be conducted by a Committee designated by the Board, and the
Board may increase Executive's Base Salary. In addition to the Base Salary
provided in this Section 3(a), the Bank shall make available to Executive all
such other benefits as are provided uniformly to permanent full-time employees
of the Bank.
(b) Executive will be entitled to incentive compensation and bonuses as
provided in any plan, or pursuant to any arrangement, of the Bank, in which
Executive is eligible to participate. Nothing paid to Executive under any such
plan or arrangement will be deemed to be in lieu of other compensation to which
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean the termination by the Bank of Executive's full-time employment
hereunder for any reason, other than Termination for Cause, as defined in
Section 6 hereof.
(b) Upon the occurrence of an Event of Termination, the Bank shall pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to the amount of Base Salary
(determined as of the Date of Termination) otherwise payable to Executive over
the remaining term of the Agreement; provided, however, that if the Bank is not
in compliance with its minimum capital requirements or if such payments would
cause the Bank's capital to be reduced below its minimum capital requirements,
such payments shall be deferred until such time as the Bank is in capital
compliance. All payments made pursuant to this Section 4(b) shall be paid in
substantially equal monthly installments over the remaining term of this
Agreement following Executive's termination.
5. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION
Termination by the Bank of Executive based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with Executive's consent with respect to
him. Upon termination of Executive upon Retirement, Executive shall be
entitled to all benefits under any retirement plan of the Bank and other plans
to which Executive is a party. Upon the death of Executive during the term of
this Agreement, the Bank shall pay to Executive's estate the compensation due
to Executive through the last day of the calendar month in which his death
occurred. Upon the voluntary resignation of Executive during the term of this
Agreement, the Bank shall pay to Executive the compensation due to Executive
through his Date of Termination.
6. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach of any provision of this Agreement. For
purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of the Bank or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the reasons thereof. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause. Any
stock options granted to Executive under any stock option plan or any unvested
awards granted under any other stock benefit plan of the Bank, the Company, or
any subsidiary or affiliate thereof, shall become null and void effective upon
Executive's receipt of Notice of Termination for Cause pursuant to Section 7
hereof, and shall not be exercisable by Executive at any time subsequent to
such Termination for Cause.
7. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision
so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, the Date of Termination shall be the
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal there from having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
8. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank.
9. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
10. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank, the Company and their respective successors and assigns.
11. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
12. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
13. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
14. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Washington,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or
state law or regulation, the provisions of such law or regulation shall
prevail.
15. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within one
hundred (100) miles from the location of the Bank, in accordance with the rules
of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
16. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, if Executive is successful pursuant to a legal
judgment, arbitration or settlement.
17. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would
be required to perform if no such succession or assignment had taken place.
18. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits
for any period after Termination for Cause as defined in Section 6 herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay Executive all or part of the compensation withheld while
its contract obligations were suspended and (ii) reinstate (in whole or in
part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Bank): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee at the time the Federal
Deposit Insurance Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA or (ii) by the Director, or his or her designee at the time the Director
or such designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in
an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
IN WITNESS WHEREOF, the Bank hereto has caused this Agreement to be
executed and its seal to be affixed hereunto by a duly authorized officer, and
Executive has signed this Agreement, all on the 24th day of July, 1997.
ATTEST: CASCADE BANK
BY: /s/ Russell E. Rosendal
- ---------------------------------- ----------------------------
[SEAL]
WITNESS:
/s/ Russell E. Rosendal /s/ David Little
- ---------------------------------- -----------------------------
Executive
KPMG PEAT MARWICK LLP
3100 Two Union Square
601 Union Street
Seattle, WA 98101-2327
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cascade Financial Corporation and subsidiary:
We consent to incorporation by reference in the registration statement on
Form S-8 (No. 33-94456) of Cascade Financial Corporation of our report dated
August 4, 1998 relating to the consolidated balance sheets of Cascade Financial
Corporation and subsidary as of June 30, 1997 and 1998, 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, 1998, which report
is incorporated by reference into Cascade Financial Corporation's 1998 Annual
Report on Form 10-K from Cascade Financial Corporation's 1998 Annual Report
to Stockholders.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Seattle, Washington
September 29, 1998
