US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM ________________ TO
_________________
Commission file number 0-25286
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CASCADE FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1661954
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 Colby Avenue
Everett, Washington 98201
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(Address of principal executive offices) (Zip Code)
(425) 339-5500
--------------
(Registrant's telephone number, including area code)
Indicate by a 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 periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of September 30, 1998
----- ------------------------------------
Common Stock ($.01 par value) 4,308,509
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CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended September 30, 1998
INDEX
PART I - Financial Information:
Item 1 - Financial Statements:
- Condensed Consolidated Balance Sheets . . . . . . . . . . . . . .3
- Condensed Consolidated Statements of Operations . . . . . . . . .4
- Condensed Consolidated Statements of Cash Flows . . . . . . . . .5
- Notes to Consolidated Financial Statements. . . . . . . . . . . .7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . .8
PART II - Other Information. . . . . . . . . . . . . . . . . . . . . . . .13
2
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PART I -- FINANCIAL INFORMATION
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, unaudited)
September 30, June 30,
------------- --------
1998 1998
ASSETS ------ ------
Cash on hand and in banks $ 9,527 10,642
Interest-earning deposits in other institutions 215 1,324
Securities available for sale 37,444 27,412
Loans available for sale, net 25,951 19,920
Mortgage-backed securities held to maturity
(market value of $3,635 and $4,654) 3,674 4,725
Loans, net 366,641 364,814
Premises and equipment, at cost, net 8,985 8,764
Accrued interest receivable and other assets 8,032 6,554
-------- --------
TOTAL ASSETS $ 460,469 444,155
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 318,654 312,518
Federal Home Loan Bank advances 95,426 73,436
Securities sold under agreements to repurchase 745 13,391
Advance payments by borrowers for taxes and
insurance 3,081 1,953
Accrued expenses and other liabilities 8,505 10,065
Deferred income tax 1,442 1,374
-------- --------
TOTAL LIABILITIES 427,853 412,737
Preferred stock, $.01 par value, 500,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value, 5,000,000
shares authorized; 4,308,509 and 4,265,624
shares issued and outstanding 43 43
Additional paid-in capital 4,614 4,433
Retained earnings, substantially restricted 27,929 27,046
Cumulative comprehensive income, net (note 4) 30 (104)
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TOTAL STOCKHOLDERS' EQUITY 32,616 31,418
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 460,469 444,155
======== ========
See notes to consolidated financial statements
3
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CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
September 30, September 30,
------------- -------------
1998 1997
------ ------
Interest income:
Loans $ 8,422 7,482
Mortgage-backed securities held-to-maturity 52 82
Securities available for sale 372 648
FHLB stock dividends 104 102
Interest-earning deposits 70 74
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Total interest income 9,020 8,388
Interest expense:
Deposits 4,023 3,953
Borrowings 1,222 1,246
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Total interest expense 5,245 5,199
Net interest income 3,775 3,189
Provision for loan losses 150 102
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Net interest income after provision for loan losses 3,625 3,087
Other income:
Gain (loss) on sale of loans 228 (41)
Service charges 255 347
Gain on sale of securities available for sale 4 82
Other 49 74
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Total other income 536 462
Other expenses:
Salaries and employee benefits 1,476 1,241
Occupancy 435 402
Federal deposit insurance premiums 46 42
Advertising 107 71
Data processing 143 39
Other 616 726
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Total other expenses 2,823 2,521
Income before income taxes 1,338 1,028
Federal income taxes 455 382
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Net income $ 883 646
======= =======
Earnings per share, basic $ 0.20 0.15
Earnings per share, diluted 0.19 0.14
Weighted average number of shares outstanding:
Basic 4,308,509 4,237,894
Diluted 4,753,041 4,669,407
See notes to consolidated financial statements
4
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CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Three Months Ended September 30,
--------------------------------
1998 1997
------ ------
Cash flows from operating activities:
Net income $ 883 646
--------- ---------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization of premises
and equipment 173 165
Amortization of retained servicing rights 107 70
Provision for losses on:
Loans 150 102
Mortgage servicing rights 94 --
Additions to mortgage servicing rights (187) (212)
Deferred loan fees, net of amortization (170) 98
Origination of loans held-for-sale and
mortgage-backed securities held for
trading (49,837) (33,088)
Proceeds from sale of loans held-for-
sale and mortgage-backed securities
held for trading 43,805 30,147
Net loss (gain) on sales of:
Securities available for sale (4) (82)
Premises and equipment (1) --
Real Estate Owned -- 6
Federal Home Loan Bank stock dividend
received (104) (102)
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 (2,688) 1,298
--------- ---------
Total adjustments (8,662) (1,598)
--------- ---------
Net cash used in operating activities (7,779) (952)
Cash flows from investing activities:
Loans originated, net of principal repayments (2,170) (10,859)
Principal repayments on securities held-to
maturity 1,051 434
Principal repayments on securities available-
for-sale 2,204 874
Purchases of securities available-for-sale (14,933) (39)
Proceeds from sales of securities available-
for-sale 3,007 17,918
Proceeds from sales of real estate owned -- 435
Purchases of premises and equipment (394) (384)
Proceeds from sales of premises and equipment,
and other assets 1 --
--------- ---------
Net cash (provided by) used in investing
activities (11,234) 8,379
Subtotal, carried forward (19,013) 7,427
--------- ---------
See notes to consolidated financial statements
5
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CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Three Months Ended September 30,
--------------------------------
1998 1997
------ ------
Subtotal, brought forward $ (19,013) 7,427
Cash flows from financing activities:
Proceeds from issuance of common stock 181 39
Net increase (decrease) in deposits 6,136 (947)
Proceeds from Federal Home Loan Bank advances 133,950 68,000
Repayment of Federal Home Loan Bank advances (111,960) (74,750)
Net decrease in securities sold under
agreements to repurchase (12,646) (3,128)
Net decrease in advance payments by borrowers
for taxes and insurance 1,127 1,219
--------- ---------
Net cash provided by (used in) financing
activities 16,788 (9,567)
--------- ---------
Net decrease in cash and cash equivalents (2,225) (2,140)
Cash and cash equivalents at beginning of
period 11,967 14,311
--------- ---------
Cash and cash equivalents at end of period $ 9,742 12,171
========= =========
Supplemental disclosures of cash flow
information-cash paid during the period for:
Interest $ 5,237 5,053
Federal income taxes 200 550
--------- ---------
Supplemental schedule of noncash investing
activities:
Mortgage loans securitized into mortgage
backed securities and held-for-trading
and sold 5,035 11,086
Net mortgage loans transferred to real
estate owned 363 226
See notes to consolidated financial statements.
6
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CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
1. Presentation of Financial Information
The accompanying financial information is unaudited and has been prepared
from the books and records of Cascade Financial Corporation, ("Cascade" or the
"Corporation"). The Corporation's sole subsidiary is Cascade Bank, (the
Bank"). In the opinion of management, the financial information reflects all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial condition, results of operations, and cash flows
of the Corporation pursuant to the requirements of the SEC for interim
reporting.
Certain information and footnote disclosures included in the Corporation's
financial statements for the year ended June 30, 1998, have been condensed or
omitted from this report. Accordingly, these statements should be read with
the financial statements and notes thereto included in the Corporation's 1998
Annual Report on Form 10-K.
2. Commitments and Contingencies
In the normal course of business there are various commitments to fund
mortgage loans. Management does not anticipate any material loss as a result
of these commitments.
Periodically there have been various claims and lawsuits against the
Corporation or the Bank, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incidental to the Corporation's and the Bank's business. In the opinion of
management no significant loss is expected from any of such pending lawsuits.
3. Financial Statement Reclassification
Certain amounts in the financial statements for fiscal 1998 have been
reclassified to conform with the financial statement classification for fiscal
1999.
4. New Accounting Pronouncements
Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income for the three months ended
September 30, 1998 and 1997 was $1,017 and $724, respectively. Total
comprehensive income for the three months ended September 30, 1998 and 1997
consisted of net income and the change in the unrealized gain on investments.
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. This statement was adopted
on July 1, 1998. Provisions of this statement require annual disclosure in the
year of adoption and interim reporting for periods thereafter.
7
<PAGE>
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.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", was issued in October 1998 and requires that entities securitizing
mortgage loans held for sale shall classify any retained mortgage-backed
securities in accordance with the provisions of Statement No. 115, which
requires the classification be based upon the enterprise's ability and intent
to sell or hold those investments. This statement is effective for the first
fiscal quarter beginning after December 15, 1998. Application of this
statement will not have a material effect on the results of operations or the
financial position of the Corporation.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
MERGER
On August 1, 1997, Cascade Financial 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.
8
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ASSET/LIABILITY MANAGEMENT
Cascade, like other financial institutions, is subject to fluctuations in
interest rates because its interest-bearing liabilities reprice on different
terms than its interest-earning assets. During periods of interest rate
declines this position has a generally favorable impact on net interest income,
while increases in interest rates have a generally adverse impact on net
interest income.
Cascade uses a simulation model to measure its interest rate risk and the
effects on net interest income resulting from changes in market interest rates.
Based on this model (which includes a number of significant assumptions and
estimates), a 200 basis point increase in general interest rates would reduce
Cascade's annual net interest income by 2% at June 30, 1998. Cascade manages
interest rate risk by retaining in its portfolio permanent and construction
adjustable rate loans with repricing periods that generally do not exceed seven
years. Principally all new fifteen and thirty year fixed rate loans are sold.
Cascade extends the maturity of its liabilities by offering deposit products to
long-term, less rate sensitive customers, and by periodically obtaining longer
term Federal Home Loan Bank-Seattle ("FHLB") advances. Cascade also uses
interest rate swap and interest rate cap agreements to effectively extend the
repricing of short-term deposit accounts.
Cascade uses mandatory and optional forward commitments from investment
banking firms to mitigate the interest rate risk from its mortgage banking
operation.
CHANGES IN FINANCIAL CONDITION
Total assets increased to $460.5 million at September 30, 1998, compared
with $444.2 million at June 30, 1998. Loans, net increased by $1.8 million and
securities available for sale increased $10 million. Increases in assets were
funded by a $6.1 million increase in deposits and a $9.3 million increase in
FHLB-Seattle advances.
Asset Quality
Nonperforming assets totaled $1.8 million and $2.0 million at September 30,
1998 and June 30, 1998, respectively. Assets classified as substandard totaled
$4.4 million at both September 30, 1998 and June 30, 1998.
RESULTS OF OPERATIONS
Comparison of the Three months Ended September 30, 1998 and 1997
General
Net income for the three months ended September 30, 1998 increased to
$883,000 compared with $646,000 in 1997. The principal reason for the increase
in the three months earnings was an increase in interest income of $632,000.
9
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Net Interest Income
Net interest income increased $586,000 to $3.8 million for the three months
ended September 30, 1998, compared to the quarter ended September 30, 1997.
The Bank's net interest margin increased 23 basis points for quarter ended
September 30, 1998, to 3.39%, as compared to the quarter ended September 30,
1997. Average interest earning assets increased $20.3 million to $426.8 million
for the quarter ended September 30, 1998. Average loans increased $44.4
million and average securities decreased $20.4 million during the quarter ended
September 30, 1998 as compared to the quarter ended September 30, 1997. The
increase in average loans, which provide a much higher yield than investments,
coupled with a decrease of 21 basis points in the Bank's cost of funds, which
decreased to 5.15% for the quarter ended September 30, 1998, were the primary
factors leading to the increase in net interest margin.
Cascade is focusing on adding commercial businesses, nonconforming one-to-
four family loans, multi-family loans, home equity lines of credit, and one-to-
four family construction loans to its portfolio. Nonconforming loans generally
include loans where the borrower has a debt level or other financial
consideration that makes the loan unsaleable to government agencies such as
FHLMC and FNMA. Management believes these products provide the best returns
for Cascade and can be underwritten conservatively to ensure low delinquency,
absent unforeseen changes in local or national economic conditions.
Additionally, these loan types are typically not effected as much by refinance
activity as conforming loans. This should help to lower Cascade's overall
origination and servicing costs in the future.
Provision for Loan Losses
Cascade's provision for loan losses was $150,000 for the three months ended
September 30, 1998 compared with $102,000 in 1997. At September 30, 1998 and
June 30, 1998, the Bank's loan loss allowance totaled $4.3 million and $4.1
million, respectively and the loan loss allowance as a percent of net loans
outstanding was 1.1% for both periods. Nonperforming loans decreased $557,000
to $1.3 million at September 30, 1998 as compared to the period ending June 30,
1998. Substandard loans were unchanged during the same period. The provision
for loan losses reflects management's quarterly evaluation of the adequacy of
the allowance for losses on loans. In determining adequacy, management
considers changes in the size and composition of the loan portfolio, actual
loan loss experience, current and anticipated economic conditions and other
factors. Management intends to grow the commercial, nonconforming,
construction, and income property portfolios. These loans typically have a
higher credit risk which will require additions to the reserve in future
periods. Management monitors these loans at an increased level to maintain
credit quality and adequate reserve levels.
Other Income
Other income increased during the quarter ended September 30, 1998 to
$536,000 as compared with the $462,000 recorded in the three months ended
September 30, 1997. This increase was the result of an increase in gains from
the sales of loans of $269,000. The decrease in market interest rates caused a
significant increase in the production of loans available for sale, which
resulted in an increase in gains from sales. These gains were offset by
decreases in service charges of $92,000 and gains on sales of securities
available for sale of $78,000.
Other Expenses
Other expenses increased $302,000 to $2.8 million for the three months
ended September 30, 1998 compared with $2.5 million for the three months ended
September 30, 1997. This increase is due primarily to increases in salaries
and employee benefits of $235,000 and data processing of $104,000 resulting
from the Corporation's expansion of products and services.
10
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Liquidity and Sources of Funds
Cascade maintains liquidity balances in FHLB deposits and short-term
securities at levels in accordance with regulatory guidelines. The Bank held
average liquid assets of $31.6 million in September 1998, which was in excess
of the required liquidity level of $15.4 million.
Loan commitments outstanding at September 30, 1998, were $29.7 million and
will be funded through sales of loans, existing liquidity balances, FHLB-
Seattle advances, and other borrowings. Outstanding commitments to sell loans
totaled $14.2 million at September 30, 1998.
At September 30, 1998, the Bank had an unused line of credit from the FHLB-
Seattle of $34.6 million. The Bank's credit line with the FHLB-Seattle is 30%
of total assets or up to $130 million. The Bank also had $745,000 of reverse
repurchase agreements outstanding, a decrease of $12.6 million from June 30,
1998.
Capital Resources
Cascade Bank is in full compliance with all capital requirements
established by the OTS at September 30, 1998. Cascade's regulatory capital,
capital requirements, and related excess capital amounts as of September 30,
1998 are presented in the following table:
Core capital Amount Percentage
------------ ------ ----------
Tier 1 (Core) capital $ 32,053 6.96%
Less: Minimum requirement 18,412 4.00
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Excess $ 13,641 2.96%
======= =====
Risk-based capital Amount Percentage
------------------ ------ ----------
Risk-based capital $ 35,437 11.64%
Less: Minimum requirement(1) 24,345 8.00
------- -----
Excess $ 11,092 3.64%
======= =====
(1) Based on risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991. Among other things, the
FDICIA provides the OTS, effective December 19, 1992, with broad powers to take
"prompt corrective action" to resolve problems of insured depository
institutions. The actions the OTS can take depend upon whether the institution
in question is "well capitalized", "adequately capitalized", undercapitalized",
"significantly undercapitalized" or "critically undercapitalized". The OTS has
advised the Corporation that at September 30, 1998, Cascade Bank is a "well
capitalized" institution.
The OTS issued a final rule on August 31, 1993 that incorporates an
interest rate risk component into the OTS's risk-based capital rule. The rule
requires that an institution with an "above normal" level of interest rate risk
hold additional capital against interest rate risk exposure. This additional
capital for interest rate risk exposure would be in excess of the 8% risk-based
capital requirement. Only institutions whose measured interest rate risk
exceeds the above normal level, has risk-based capital below 12%, and assets
exceed $300 million will be required to maintain an interest rate risk
component. The interest rate risk component will be computed quarterly. The
OTS has postponed the date the component will first be deducted from an
institution's total capital until an appeal process is developed for the
measurement of an institution's interest rate risk.
11
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Management currently does not believe the final rule will materially
adversely increase Cascade's regulatory capital requirement nor materially
adversely effect the current business strategy when, or if it is implemented.
YEAR 2000 DISCLOSURE
Cascade Bank is committed to providing continuous, secure, quality banking
operations and services as we transition to the twenty-first century. Cascade
Bank has performed an assessment of its year 2000 exposure, and is in the
process of resolving all year 2000 incompatibilities with its current systems
and operations. Most of the software systems used by Cascade Bank are standard
vendor-supplied solutions under maintenance contracts. These solutions have
either been certified by the vendors as year 2000 compliant, are being modified
for year 2000 compliance by the vendor, or are being replaced by Cascade Bank
with year 2000 compliant systems.
Cascade Bank has established a year 2000 project that is being managed at
the executive vice president level, with regular status reports provided to
senior management and the board of directors. The project encompasses all
activities associated with achieving year 2000 compliance and minimizing year
2000 risk at Cascade Bank. Examiners from the Office of Thrift Supervision
(OTS), the Bank's regulators, have also reviewed the Bank's year 2000 progress
and project plans.
The assessment phase of the year 2000 project has been completed, and a
report was provided to the Board of Directors, and the OTS. The report
analyzes readiness from two perspectives. In the first stage a business
readiness assessment was provided in terms of the Bank's critical business
processes, significant borrowers, and significant business partners. This was
followed with a technical review of the Bank's automated systems. The report
provides a year 2000 project plan with schedules, budget estimates, and
contingency plans based on the business and technical analysis, hardware and
software inventories, vendor-provided year 2000 product information, software
conversion estimates, equipment and software upgrades, and contingency plans.
The project calls for all year 2000 testing to be completed by December 31,
1998.
As of September 30, 1998, the Bank has spent $54,000 of its $250,000 budget
to upgrade computer equipment and purchase software upgrades for year 2000.
The Bank has not added additional staff due to the year 2000 project, and does
not anticipate adding any in the future.
Mission critical computer functions are either in the process of being
tested or have been tested. The Year 2000 Committee is currently preparing
detailed contingency plans for all mission critical computer functions. The
Bank is anticipating a December 31, 1998, completion date for testing and the
contingency plan.
12
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
- ---------------------------
The Corporation and the Bank have certain litigation and negotiations in
progress resulting from activities arising from normal operations. In the
opinion of management, none of these matters is likely to have a materially
adverse effect on the Corporation's financial position.
Item 2. Changes in Securities.
- -------------------------------
Not applicable
Item 3. Defaults upon Senior Securities.
- -----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable
Item 5. Other information.
- ---------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
Not applicable
Signatures
- ----------
Pursuant to the requirements 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
/S/ Russell E. Rosendal
November 13, 1998 -----------------------------
By: Russell E. Rosendal
Executive Vice President
(Chief Financial Officer)
