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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1661954
- --------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
2828 Colby Avenue, Everett, Washington 98201
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (425) 339-5500
----------------------------------
Securities registered pursuant to
Section 12(b) of the Act: None
----------------------------------
Securities registered pursuant to Common Stock, par value
Section 12(g) of the Act: $0.01 per share
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark no disclosure of delinquent filers pursuant to Item
405 of Regulation K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
As of September 24, 1999, there were issued and outstanding 5,472,471
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 24, 1999, the aggregate value of the Common Stock
outstanding held by nonaffiliates of the registrant was $58.8 million (based on
$10.75 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, 1999 (the "Annual Report")(Part II).
2. Portions of registrant's Definitive Proxy Statement for the 1999
Annual Meeting of Stockholders (Part III).
<PAGE>
<PAGE>
PART I
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, 1999, 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, 1999, the
Corporation had total assets of $557.1 million, total deposits of $361.8
million and stockholders' equity of $34.2 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 System
("FHLB") 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
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<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, 1999, $261.8 million or 54.4% of the Corporation's
total loans consisted of loans secured by one-to-four family residential
properties (permanent and construction), $49.2 million or 10.2% of total loans
consisted of commercial real estate and land loans, $85.9 million or 17.8%
consisted of multi-family loans, $61.7 million or 12.8% consisted of commercial
business loans and $22.9 million or 4.8% consisted 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.
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
3
<PAGE>
the size of the loan. At June 30, 1998 and June 30, 1999, the percentage of
the Corporation's gross loan portfolio that consisted of one-to-four family
construction loans was 11.7% and 11.3%, 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 $29.3 million at
June 30, 1999 as compared to $28.3 million in 1998. At June 30, 1998 and 1999,
the total amount of outstanding unused lines of credit was $21.8 million and
$23.8 million, respectively.
Multi-family Loans. Multi-family loans totaled $85.9 million or 17.8% of
total loans at June 30, 1999. 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 $49.2 million or 10.2% of the Corporation's total loans at June
30, 1999. 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, 1999, the largest commercial real estate and land loan in
the Corporation's portfolio was $4.7 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. Consistent with the community banking
strategy, management has initiated a consumer loan program focusing on boats,
automobiles and recreational vehicles, as well as a limited amount of unsecured
personal loans. This portfolio increased $2.7 million to $22.9 million at June
30, 1999 as compared to the $20.2 million outstanding at June 30, 1998.
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 of 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.
Business Loans. During 1997, a line of business banking products was
developed and is currently being marketed by the Bank. The merger with AmFirst
Bancorporation ("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 of credit. Commercial property, business
inventories, commercial equipment and personal property of the business owner
serves as collateral for the secured business loans. Commercial business loans
4
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increased from $41.5 million at June 30, 1998 to $61.7 million at June 30,
1999. Unsecured business loans totaled $4.0 million at June 30, 1999.
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.
<PAGE>
<TABLE>
For the Year Ended
-----------------------------------------------------------
June 30,
-----------------------------------------------------------
1995 1996 1997 1998 1999
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans at beginning of period $ 223,610 261,013 287,124 360,439 408,189
Loans originated
Real estate mortgage
One-to-four family residential 85,966 79,752 94,521 256,257 291,174
Multi-family residential and commercial 3,928 13,040 37,427 24,977 57,149
Single-family construction 22,828 31,719 28,592 57,089 53,405
Commercial 12,776 12,293 12,287 20,649 20,181
Installment 1,225 10,083 22,947 11,742 11,427
-----------------------------------------------------------
Total loans originated 126,723 146,887 195,774 370,714 433,336
Loans purchased 369 821 110 245 685
Whole loans sold 43,969 57,286 50,825 190,374 229,910
Loan principal repayments 43,305 61,921 71,203 132,402 130,318
Other (2,415) (2,390) (541) (433) (534)
-----------------------------------------------------------
Loan activity, net 37,403 26,111 73,315 47,750 73,259
-----------------------------------------------------------
Total gross loans at end of period 261,013 287,124 360,439 408,189 481,448
===========================================================
Loans converted to mortgage-backed securities:
Loans securitized 15,393 32,330 17,419 24,400 20,137
Mortgage-backed securities sold 10,623 32,330 17,419 24,385 20,137
</TABLE>
5
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<TABLE>
Loan Portfolio Analysis. The following table sets forth the Corporation's loan portfolio by type of loan
and by type of security as of the dates indicated.
At June 30,
----------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------- --------------- --------------- --------------- --------------
(Dollars in thousands)
Type of Loan
- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
Residential (1)(2) $192,482 77.22 208,979 76.69 262,605 76.96 260,491 67.71 287,604 63.11
FHA and VA 3,458 1.39 3,085 1.13 3,955 1.16 6,189 1.61 5,611 1.23
Commercial 16,770 6.73 14,739 5.41 25,250 7.40 31,746 8.25 49,066 10.77
Land loans 202 0.08 194 0.07 606 0.18 232 0.06 106 0.02
Real estate
construction 23,436 9.40 31,125 11.42 33,361 9.78 47,861 12.44 54,500 11.96
Commercial 22,091 8.86 26,016 9.55 24,601 7.21 41,494 10.79 61,676 13.53
Installment 2,574 1.03 2,986 1.10 10,061 2.95 20,176 5.24 22,885 5.02
------------------------------------------------------------------------------------
Total Loans 261,013 104.71 287,124 105.37 360,439 105.64 408,189 106.10 481,448 105.64
Less:
Due to borrowers
on construction
loans 6,215 2.49 9,082 3.33 12,865 3.77 16,966 4.41 19,087 4.19
Unearned discounts 2,225 0.89 2,235 0.82 2,494 0.73 2,346 0.61 2,371 0.52
Allowance for
possible loan
losses 3,305 1.33 3,336 1.22 3,879 1.14 4,143 1.08 4,254 0.93
Valuation
allowance
on loans
held for sale 18 -- 7 -- -- -- -- -- -- --
------------------------------------------------------------------------------------
Total loans, net $249,250 100.00 272,464 100.00 341,201 100.00 384,734 100.00 455,736 100.00
====================================================================================
Type of Security
- ----------------
Real estate mortgage
One-to-four
family (2) $192,080 77.06 205,525 75.43 241,050 70.65 251,805 65.45 261,822 57.45
Multi-family 27,296 10.95 37,664 13.82 58,662 17.19 62,736 16.31 85,893 18.85
Commercial 16,770 6.73 14,739 5.41 25,250 7.40 31,746 8.25 49,066 10.77
Land loans 202 0.08 194 0.07 606 0.18 232 0.06 106 0.02
Other 24,665 9.89 29,002 10.64 34,871 10.22 61,670 16.03 84,561 18.55
------------------------------------------------------------------------------------
Total Loans 261,013 104.71 287,124 105.37 360,439 105.64 408,189 106.10 481,448 105.64
Less:
Due to
borrowers on
construction loans 6,215 2.49 9,082 3.33 12,865 3.77 16,966 4.41 19,087 4.19
Unearned discounts 2,225 0.89 2,235 0.82 2,494 0.73 2,346 0.61 2,371 0.52
Allowance for
possible loan losses 3,305 1.33 3,336 1.22 3,879 1.14 4,143 1.08 4,254 0.93
Valuation allowance
on loans held
for sale 18 -- 7 -- -- -- -- -- -- --
------------------------------------------------------------------------------------
Total loans, net $249,250 100.00 272,464 100.00 341,201 100.00 384,734 100.00 455,736 100.00
====================================================================================
- -------------------
(1) Includes construction loans converted to permanent loans.
(2) Includes home equity loans.
6
</TABLE>
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<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,
1997, 1998, and 1999, 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.
1999
----------------------------------------------------------
Mortgage Commercial Installment Total Mortgage Backed
Loans Loans Loans Loans Securities
----------------------------------------------------------
Amount repricing
or maturing
Within one year $142,318 28,669 3,395 174,382 4,394
After one year
through three 72,331 3,730 6,918 82,979 1,677
After three years
through five 69,144 15,452 10,724 95,320 43
After five years 113,094 13,825 1,848 128,767 24,753
--------------------------------------------------------
Total $396,887 61,676 22,885 481,448 30,867
========================================================
Interest rate terms
on amounts due
after one year
Fixed 76,923 31,609 3,718 112,250 22,360
Adjustable 265,715 9,526 17,983 293,224 4,113
1998
----------------------------------------------------------
Mortgage Commercial Installment Total Mortgage Backed
Loans Loans Loans Loans Securities
----------------------------------------------------------
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
1997
----------------------------------------------------------
Mortgage Commercial Installment Total Mortgage Backed
Loans Loans Loans Loans Securities
----------------------------------------------------------
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
7
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<PAGE>
Loan Maturity and Repricing
- ---------------------------
The following table sets forth information at June 30, 1999, 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.
<PAGE>
<TABLE>
Due after Due after Due after
Due during 3 through 5 5 through 10 through Due after
the year ending years 10 years 15 years 15 years
June 30, after after after after
---------------------------- June 30, June 30, June 30, June 30,
2000 2001 2002 1999 1999 1999 1999 Total
-------- ------ ------ ------ ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
Residential $ 78,895 42,367 21,069 57,620 50,096 6,481 36,687 293,215
Commercial 9,098 5,432 3,433 11,494 14,882 3,952 775 49,066
Land 76 -- -- 30 -- -- -- 106
One-to-four family
construction 54,249 -- 30 -- 221 -- -- 54,500
Commercial 28,669 1,998 1,732 15,453 13,510 200 114 61,676
Installment 3,395 529 6,389 10,724 706 1,142 -- 22,885
-----------------------------------------------------------------------------------
Total loans $174,382 50,326 32,653 95,321 79,415 11,775 37,576 481,448
===================================================================================
</TABLE>
The following table sets forth the dollar amount of all loans as of June
30, 1999, 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 $ 73,927 219,288
Commercial 2,936 46,130
Land 30 76
One-to-four family construction 30 221
Commercial 31,609 9,526
Installment 3,718 17,983
----------------------------
Total $ 112,250 293,224
============================
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.
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.
8
<PAGE>
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, 1998 and 1999, the Corporation had $1.9 million and $1.2 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,
------------------------------------------------------
1995 1996 1997 1998 1999
------------------------------------------------------
(Dollars in thousands)
Substandard $ 8,588 2,874 2,583 4,433 2,149
General loss allowances 3,005 3,036 3,579 3,776 4,254
Specific loss allowances 300 300 300 367 --
Charge-offs 213 30 272 45 323
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, 1999, 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 $810,000, $246,000 and $427,000 of loan loss
provisions for the three years ended June 30, 1997, 1998 and 1999,
respectively. 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>
<PAGE>
The following table sets forth information with respect to the Corporation's
nonperforming assets at the dates indicated.
At June 30,
-----------------------------------------
1995 1996 1997 1998 1999
-----------------------------------------
(Dollars in thousands)
Loans accounted for on
nonaccrual basis:
Real estate mortgage
Residential $ 617 373 759 971 618
Commercial -- -- -- -- --
Land loans -- -- -- -- --
Commercial -- 225 152 199 338
Installment -- 2 -- 751 245
------------------------------------------
Total 617 600 911 1,921 1,201
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 1,836 720 1,069 1,921 1,201
Real estate owned 1,643 747 750 74 --
------------------------------------------
Total nonperforming assets $ 3,479 1,467 1,819 1,995 1,201
==========================================
Total loans delinquent
90 days or more to
net loans 0.74 0.26 0.31 0.50 0.26
Total loans delinquent
90 days or more to
total assets 0.50 0.18 0.25 0.43 0.22
Total nonperforming assets
to total assets 0.95 0.37 0.42 0.45 0.22
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.
At June 30,
-----------------------------------------
1995 1996 1997 1998 1999
-----------------------------------------
(Dollars in thousands)
Restructured loans $ 4,168 4,150 -- -- --
Interest foregone on restructured loans 148 97 6 -- --
10
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category and the
percentage by category as of the dates indicated.
At June 30,
--------------------------------------------------------------------------
- --
1995 1996 1997 1998 1999
----------------------------------------------------------------------------
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 -- --
Commercial real
estate 300 1.79 300 2.04 300 1.19 300 0.95 -- --
Land acquisition
and development -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- --
Real estate ? construction -- 0.00 -- 0.00 -- 0.00 67 0.14 -- --
Commercial -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- --
Installment -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- --
Unallocated 3,005 n/a 3,036 n/a 3,579 n/a 3,776 n/a 4,254 n/a
----------------------------------------------------------------------------
Total allowance for
loan losses to
net loans 3,305 1.31 3,336 1.20 3,879 1.12 4,143 1.07 4,254 0.930
============================================================================
</TABLE>
<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.
At June 30,
------------------------------------------------------
1995 1996 1997 1998 1999
------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage:
Single-family residential $ 410 310 540 525 961
Multi-family 270 380 590 630 460
Commercial real estate 910 410 610 760 1,160
Land acquisition and development -- -- 6 -- 30
Real estate construction 225 290 545 790 420
Commercial 225 260 500 625 740
Installment 30 30 310 400 370
Unallocated 935 1,356 478 46 113
--------------------------------------------------------
Unallocated allowance for loan
losses to net loans $3,005 3,036 3,579 3,776 4,254
========================================================
</TABLE>
11
<PAGE>
The following table sets forth an analysis of the Corporation's allowance
for possible loan losses for the periods indicated.
For the Year
Ended June 30,
---------------------------------------------
1995 1996 1997 1998 1999
---------------------------------------------
(Dollars in thousands)
Allowance at beginning of period $ 3,828 3,305 3,336 3,879 4,143
Provision for loan losses (319) 61 810 246 427
Charge-offs
Residential real estate -- -- 59 -- 7
Commercial real estate 200 -- -- -- --
Real estate construction
Commercial 11 20 178 29 49
Installment 5 10 35 16 267
Land -- -- -- -- --
Total charge-offs 216 30 272 45 323
--------------------------------------------
Recoveries 12 -- 5 63 7
Net charge-offs and
allowance recovered (523) 30 267 (18) 316
--------------------------------------------
Balance at end of period $3,305 3,336 3,879 4,143 4,254
============================================
Ratio of allowance to net loans
outstanding at
the end of the period 1.31 1.20 1.12 1.07 0.93
Ratio of net charge offs
to average loans
outstanding during the period 0.23 0.01 0.09 (0.01) 0.08
Ratio of loan loss allowance to
nonperforming assets 95.00 227.40 213.25 207.67 354.21
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, 1998 and 1999, the
Corporation had $5.0 million and $0, respectively, of notional amount of caps
outstanding. There were $13.0 million of floors, $8.5 million and $6.5 million
of swaps outstanding at June 30, 1998 and 1999, respectively. These agreements
were designated against certain loans. See Note 7 of the Notes to the
Consolidated Financial Statements contained in the Annual Report for additional
information.
12
<PAGE>
<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.
<PAGE>
<TABLE>
For the Year Ended June 30,
-----------------------------------------------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------
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 (1)
Mortgage loans $ 276,596 23,238 8.40 292,919 24,618 8.40 321,038 25,878 8.06
Consumer loans 18,229 1,626 8.92 40,294 3,550 8.81 48,755 4,273 8.76
Commercial loans 12,477 1,299 10.41 29,629 2,941 9.93 48,414 4,600 9.51
-----------------------------------------------------------------------------
Total loans 307,302 26,163 8.51 362,842 31,109 8.57 418,207 34,751 8.31
Mortgage-backed securities 39,435 2,240 5.68 26,864 1,592 5.93 30,805 1,835 5.96
Investment and trading
securities 44,354 2,527 5.70 9,479 539 5.69 14,482 904 6.24
Daily interest-earning
deposits and
FHLB stock 10,216 638 6.25 6,353 676 10.64 9,218 715 7.76
-----------------------------------------------------------------------------
Total interest
-earning assets 401,307 31,568 7.87 405,538 33,916 8.36 472,712 38,205 8.08
Noninterest-earning assets
Office properties and
equipment, net 7,237 7,902 9,225
Real estate, net 770 569 209
Other noninterest
-earning assets 6,935 13,768 13,947
--------- -------- --------
Total assets $ 416,249 427,777 496,093
========= ======== ========
LIABILITIES AND EQUITY
Interest-bearing
liabilities
Passbook accounts 15,946 523 3.28 14,529 456 3.14 12,781 391 3.06
Checking accounts 16,211 371 2.29 15,185 356 2.34 18,540 409 2.21
Money market accounts 43,071 2,003 4.65 51,750 2,371 4.58 69,426 3,233 4.66
Certificates of deposit 202,810 11,720 5.78 205,763 12,022 5.84 220,921 12,392 5.61
-----------------------------------------------------------------------------
Total interest-bearing
deposits 278,0381 4,617 5.26 287,277 15,205 5.29 321,668 16,425 5.11
Other interest-bearing
liabilities
FHLB advances 72,071 4,183 5.80 69,078 4,015 5.81 102,045 5,280 5.17
Other interest-bearing
liabilities 20,195 1,124 5.57 15,006 898 5.98 5,571 251 4.51
-----------------------------------------------------------------------------
Total interest-bearing
liabilities 370,304 19,924 5.38 371,361 20,118 5.42 429,284 21,956 5.12
Other liabilities 19,938 27,210 33,216
--------- -------- --------
Total liabilities 390,242 398,521 462,500
Retained earnings 26,007 29,256 33,593
--------- -------- --------
Total liabilities and
retained earnings $ 416,249 427,777 496,093
========= ======== ========
Net interest income (2) 11,644 13,798 16,249
====== ====== ======
Interest rate spread (3) 2.49 2.94 2.96
Net interest margin (4) 2.90 3.40 3.43
Average interest-earning
assets to average interest-
bearing liabilities 108.37 109.20 110.12
- --------------------
(1) Does not include interest on loans 90 days or more past due.
(2) Interest and dividends on total interest-earning assets less interest on total interest-bearing
liabilities.
(3) Total interest-earning assets yield less total interest-bearing liabilities cost.
(4) Net interest income as an annualized percentage of total interest-earning assets.
13
</TABLE>
<PAGE>
<PAGE>
<TABLE>
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).
Year Ended June 30,
---------------------------------------------------------------------------------------
1997 Compared to Year 1998 Compared to Year 1999 Compared to Year
Ended June 30, 1996 Ended June 30, 1997 Ended June 30, 1998
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 (1) $ (766) 2,979 (109) 2,104 8 1,371 1 1,380 (1,007) 2,362 (97) 1,258
Consumer
loans (1) (26) 966 (33) 907 (20) 1,968 (24) 1,924 (19) 745 (4) 722
Commercial
loans (1) (65) (265) 11 (319) (61) 1,786 (83) 1,642 (124) 1,865 (79) 1,662
---------------------------------------------------------------------------------------
Total loans (857) 3,680 (131) 2,692 (73) 5,125 (106) 4,946 (1,150) 4,972 (180) 3,642
Mortgage-backed
securities (397) (1,100) 121 (1,376) 97 (714) (31) (648) 13 234 2 249
Securities (19) 538 (5) 514 (5) (1,988) 5 (1,988) 52 284 28 364
Daily interest-
earning
deposits (59) 115 (12) 44 449 (241) (170) 38 (189) 308 (85) 34
---------------------------------------------------------------------------------------
Total net change
in income on
interest-
earning assets (1,332) 3,233 (27) 1,874 1,956 2,182 (1,790) 2,348 (1,274) 5,798 (235) 4,289
=======================================================================================
Interest-bearing
liabilities
Interest
-bearing
deposits (568) 1,315 (53) 694 83 486 19 588 (517) 1,819 (82) 1,220
FHLB advances (200) 471 (25) 246 6 (174) -- (168) (441) 1,916 (210) 1,265
Other borrowings (28) (94) 2 (120) 84 (289) (21) (226) (719) 358 (286) (647)
---------------------------------------------------------------------------------------
Total net change
in expenses on
interest- bearing
liabilities $(796) 1,692 (76) 820 173 23 (2) 194 (1,677) 4,093 (578) 1,838
=======================================================================================
Net change in
net interest
income 1,054 2,154 2,451
===== ===== =====
- -----------------
(1) Does not include interest on loans ninety days or more past due.
14
</TABLE>
<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, 1999, Cascade's regulatory
liquidity was 8.14%.
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 ("SBA") securities,
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 Committee
acts within policies established by the Board of Directors. At June 30, 1998
and 1999, the Corporation's securities portfolio totaled $32.1 million and
$74.5 million, respectively. For further information concerning the
Corporation's securities portfolio, see Note 3 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, 1999. At June 30, 1999, Cascade's investment in
its subsidiaries was $400,000.
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.
Real Estate Held for Development
- --------------------------------
Cascade owns a five acre parcel which is in the pre-development stage.
The approximate book balance is $425,000. Upon receiving final zoning and
other approvals, it is anticipated Cascade will begin development of the
property. It is currently anticipated the parcel will contain approximately 20
lots upon completion of the project. There are considerable uncertainties
about timing of receiving the necessary approvals and completion of the
development.
15
<PAGE>
<PAGE>
<TABLE>
The following table summarizes the carrying value and estimated market value of the Corporation's portfolio
of investment securities at the dates indicated.
At June 30,
----------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- ---------------- ---------------- ---------------- ----------------
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 $ 10,595 10,463 10,782 10,722 15,929 15,929 1,002 1,002 -- --
Municipals 2,529 2,639 5,480 5,480 4,938 4,938 -- -- -- --
US Government
Agency -- -- 13,721 13,721 5,871 5,871 2,177 2,177 37,298 37,298
MBS 69,896 69,360 43,213 42,709 29,657 29,517 23,004 22,933 29,604 29,565
CMO 499 481 481 481 493 493 468 468 209 209
Corporate
securities
and mutual
funds 4,507 4,507 21,069 21,069 2,971 2,971 -- -- -- --
----------------------------------------------------------------------------------------
Total
investment
securities $ 88,026 87,450 94,746 94,182 59,859 59,719 26,651 26,580 67,111 67,072
========================================================================================
Federal Reserve
stock $ 70 70 70 70 70 70 -- -- -- --
FHLB-Seattle
stock 3,959 3,959 4,702 4,702 5,074 5,074 5,486 5,486 7,346 7,346
----------------------------------------------------------------------------------------
$ 4,029 4,029 4,772 4,772 5,144 5,144 5,486 5,486 7,346 7,346
========================================================================================
</TABLE>
<TABLE>
The following table sets forth the Corporation's securities portfolio at carrying value at the dates
indicated.
At June 30,
----------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- ---------------- ---------------- ---------------- ----------------
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 $ 10,595 12.04% 10,782 11.38 15,929 26.61 1,002 3.76 -- --
Municipals 2,529 2.87 5,480 5.78 4,938 8.25 -- -- -- --
US Government
agency -- -- 13,721 14.48 5,871 9.81 2,177 8.17 37,298 55.58
MBS 69,896 79.40 43,213 45.61 29,657 49.55 23,004 86.31 29,604 44.11
CMO 499 0.57 481 0.51 493 0.82 468 1.76 209 0.31
Corporate
securities
and mutual
funds 4,507 5.12 21,069 22.24 2,971 4.96 -- -- -- --
----------------------------------------------------------------------------------------
Total $ 88,026 100.00 94,746 100.00 59,859 100.00 26,651 100.00 67,111 100.00
========================================================================================
16
</TABLE>
<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. 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, 1999. The indicated interest rates were those being
offered at June 30, 1999.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(In thousands)
1.90% None NOW accounts $ 100 16,782 4.6%
3.00 None Regular savings 100 12,301 3.4
4.65 None Money market accounts 2,500 87,835 24.3
0.00 None Noninterest checking 100 18,100 5.0
Certificates of Deposit
------------------------
4.00 0 - 3 mos. Fixed term, fixed r 1,000 487 0.1
4.76 4 - 6 mos. Fixed term, fixed rate 1,000 24,168 6.7
4.83 7 - 12 mos. Fixed term, fixed rate 1,000 97,253 26.9
4.66 13 - 24 mos. Fixed term, fixed rate 1,000 4,607 1.3
4.74 25 - 48 mos. Fixed term, fixed rate 1,000 3,034 0.8
4.96 49 - 120 mos. Fixed term, fixed rate 1,000 23,523 6.5
3.90 Various Variable rate 1,000 62 0.0
4.86 Various Jumbo certificates 100,000 73,634 20.4
------------------
$ 361,786 100.00
=================
17
<PAGE>
<PAGE>
The following table indicates the amount of the Corporation's jumbo
certificates of deposit by time remaining until maturity as of June 30, 1999.
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 $ 28,404
Over three through six months 27,446
Over six through twelve months 13,400
Over twelve months 4,384
-------------
Total $ 73,634
=============
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, 1998 and 1999, the Corporation had $73.0 million and
$142.0 million, respectively, in advances from the FHLB-Seattle. The
Corporation's current credit limit with the FHLB-Seattle is 35% 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, 1998 and 1999, the Corporation had $13.4 million and $6.0 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,
--------------------------------
1997 1998 1999
------ ------ ------
Weighted average rate paid on:
Securities sold under agreements to repurchase 5.63% 5.56 4.85
FHLB advances 5.88 5.67 5.01
For the Year
Ended June 30,
-------------------------------
1997 1998 1999
------ ------ ------
(Dollars in thousands)
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements to
repurchase $ 22,006 17,283 11,976
FHLB advances 80,109 76,439 141,996
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase 19,948 14,299 5,571
FHLB advances 70,498 67,782 102,045
Approximate weighted average rate paid on:
Securities sold under agreements
to repurchase 5.59 5.65 4.51
FHLB advances 5.80 5.92 5.17
Competition
- -----------
18
<PAGE>
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, 1999, the Corporation had 177 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
Federal Home Loan Bank Board. Among other functions, the OTS issues and
enforces regulations affecting federally-insured savings associations and
regularly examines these institutions. OTS regulations require the
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 established originally to insure
the deposits, up to prescribed statutory limits, of federally insured banks and
to preserve the safety and soundness of the banking industry. The FDIC
maintains two separate insurance funds, the BIF and the SAIF. Cascade's
deposit accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of Cascade's deposits, the FDIC has examination,
supervisory and enforcement authority over all savings associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period. The
capital categories are well-capitalized, adequately capitalized, or
undercapitalized. The FDIC also places an institution in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC
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determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depend
on the capital category and supervisory category to which it is assigned with
the most well-capitalized, healthy institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act was enacted, which,
among other things, imposed a special one-time assessment on SAIF member
institutions, including Cascade, to recapitalize the SAIF. As a result of the
Deposit Insurance Funds Act and the special one-time assessment, the FDIC
reduced the assessment schedule for SAIF members, effective January 1, 1997, to
a range of 0% to 0.27%, with most institutions, including Cascade, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged as assessment of 0.065% of SAIF-assessable deposits for the
purpose of paying interest on the obligation issued by the Financing
Corporation in the 1980's to help fund the thrift industry cleanup.
BIF-assessable deposits are charged an assessment to help pay interest on the
Financing Corporation bonds at a rate of approximately 0.013%. Full pro rata
sharing of the Financing Corporation payments between BIF and SAIF members will
occur until the earlier of December 31, 1999, or the date the BIF and SAIF are
merged.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If the FDIC takes such action,
it could have an adverse effect on the earnings of Cascade.
Under the FDIA, the FDIC may terminate insurance of deposits upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. Management of Cascade does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
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 $7.3 million at June 30, 1999. 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, 1999, Cascade had $142.0 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, 1999 was 8.14%.
Prompt Corrective Action
- ------------------------
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Under Section 38 of 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%.
Section 38 of the FDIA and the implementing regulations also provide that
a federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. (The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At June 30, 1999 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 Thrift 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.
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
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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, 1999, the qualified thrift investments
of Cascade were approximately 70.39% of the its portfolio assets.
Capital Requirements
- --------------------
Under OTS regulations a savings association must satisfy three minimum
capital requirements: core capital, tangible capital and risk-based capital.
Savings associations must meet all of the standards to comply with the capital
requirements.
OTS capital regulations establish a 3% core capital or leverage ratio,
which is defined as the ratio of core capital to adjusted total assets. Core
capital is defined to include common stockholders'equity, noncumulative
perpetual preferred stock and any related surplus, and minority interests in
equity accounts of consolidated subsidiaries, less any intangible assets,
except for certain qualifying intangible assets; certain mortgage servicing
rights; and equity and debt investments in subsidiaries that are "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 account appropriately for the investments in and assets of both
includable and nonincludable subsidiaries. Institutions that fail to meet the
core capital requirement would be required to file with the OTS a capital plan
that details the steps they will take to reach compliance. In addition, the
OTS prompt corrective action regulation provides that a savings institution
that has a core capital leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "- Prompt
Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that it will permit only those savings
associations rated as composite one, the highest rating, under the CAMELS
rating system for savings associations to operate at or near the regulatory
minimum leverage ratio of 3%. It will require all other savings association to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to Cascade.
Savings associations also must maintain "tangible capital" of not less
than 1.5% of adjusted total assets of Cascade. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage- servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes permanent capital instruments such as cumulative perpetual preferred
stock, perpetual subordinated debt and mandatory convertible subordinated debt,
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, and general
valuation loan and lease loss allowance 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 to 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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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 association'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 12 to the Consolidated
Financial Statements for the Corporation's capital position at June 30, 1999.
Limitations on Capital Distributions
- ------------------------------------
OTS regulations impose various restrictions on savings institutions with
respect to their ability to make distributions of capital, which include
dividends, stock redemption's or repurchases, cash-out mergers and other
transactions charged to the capital account.
Generally, savings institutions, such as Cascade that meet their capital
requirements, before and after the proposed distribution, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Cascade may pay dividends in accordance with this general authority.
Savings institution proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
institutions that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain
OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal, a savings institution may make
a capital distribution without notice to the OTS, unless it is a subsidiary of
a holding company, provided that it has a regulatory rating in the two top
categories, is not of supervisory concern, and would remain adequately
capitalized, as defined in the OTS prompt corrective action regulations,
following the proposed distribution. Savings institutions that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings institution may not make a capital distribution with
prior approval of the OTS and the FDIC if it is undercapitalized before, or
because of, such distribution. As under the current rule, the OTS may object
to a capital distribution if it would constitute an unsafe or unsound practice.
No assurance may be given as to whether or in what form the regulations may be
adopted.
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
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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, 1999, 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.
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.
Regulatory and Criminal Enforcement Provisions
- ----------------------------------------------
Under the FDIA, the OTS has primary enforcement responsibility over
savings institutions and has the authority to bring action against all
"institution-affiliated parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive, a cease
and desist order, or to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $27,500 per day, or $1.1 million per
day in especially egregious cases. Under the FDIA, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
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Regulation of the Corporation
- -----------------------------
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions. If
the Corporation acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof
which is not an insured association shall commence or continue for more than
two years after becoming a multiple savings and loan association holding
company or subsidiary thereof, any business activity other than: (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust,
(vi) those activities previously directly authorized by regulation as of March
5, 1987, to be engaged in by multiple holding companies or (vii) those
activities authorized by the Federal Reserve Board as permissible for bank
holding companies, unless the OTS by regulation, prohibits or limits such
activities for savings and loan holding companies. Those activities described
in (vii) above also must be approved by the OTS prior to being engaged in by a
multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "--Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
- ----------------
General. The Corporation and Cascade report their income on a fiscal year
basis using the accrual method of accounting and are 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.
25
<PAGE>
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.
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 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
0.12% 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 1.5% of gross receipts; however interest
received on loans secured by mortgages or deeds of trust on residential
properties and interest on obligations issued or guaranteed by the United
States are not presently subject to the tax. On August 15, 1994, the
Department of Revenue of the State of Washington began an audit of the
Corporation's records for compliance regarding the business and occupation tax.
The Corporation had not been audited for 17 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, 1999, including leasehold improvements, furniture and fixtures, of
$9.4 million. The Corporation leases approximately 20% of its main office and
approximately 50% of its Marysville office to non-affiliated parties. See Note
5 of the Notes to the Consolidated Financial Statements contained in the Annual
Report.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Corporation as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Corporation holds security interests,
claims involving
26
<PAGE>
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.
27
<PAGE>
<TABLE>
Item 6. Selected Financial Data
- --------------------------------
Five Year Financial Highlights
Dollars in thousands except financial ratios
For The Year Ended June 30, 1995 1996 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 27,460 29,694 31,568 33,916 38,205
Interest expense 15,693 19,104 19,924 20,118 21,956
Net interest income 11,767 10,590 11,644 13,798 16,249
Provision for (recovery of)
loan losses (319) 61 810 246 427
Net interest income after
provision for loan losses 12,086 10,529 10,834 13,552 15,822
Other income 2,833 2,780 1,942 2,458 2,837
Other expense 9,957 9,225 10,897 10,729 12,438
Income before Federal
income taxes 4,962 4,084 1,879 5,281 6,221
Net income 3,304 2,781 1,368 3,525 4,104
Net income per common
share, basic 0.63 0.53 0.26 0.66 0.76
Weighted average number
of shares outstanding, basic 5,214,739 5,257,058 5,266,298 5,312,305 5,420,286
Net income per common
share, diluted 0.57 0.48 0.23 0.60 0.69
Weighted average number of
shares outstanding, diluted 5,709,321 5,792,396 5,832,231 5,843,386 5,956,543
</TABLE>
<TABLE>
At Year End June 30, 1995 1996 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets $ 367,597 399,316 434,162 444,155 557,086
Loans 249,250 272,464 341,201 384,734 455,736
Cash and securities 105,426 114,702 79,313 44,103 84,611
Deposits 252,204 277,897 304,205 312,518 361,786
Stockholders' equity 23,505 25,532 27,543 31,418 34,239
Non-performing loans 617 600 911 1,921 1,201
</TABLE>
<TABLE>
Financial Ratios June 30, 1995 1996 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on assets 0.95% 0.73 0.33 0.82 0.83
Return on equity 14.96 11.44 5.26 12.05 12.21
Net interest margin 3.54 2.90 2.90 3.40 3.43
</TABLE>
<TABLE>
Results have been restated to reflect the 1997 merger with AmFirst Bancorporation.
Quarterly Results:
Quarter Ended Quarter Ended
-------------------------------------- ---------------------------------------
Sept 30, Dec 31, Mar 31, June 30, Sept 30, Dec 31, Mar 31, June 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------------------------------------- ---------------------------------------
(Dollars in thousands, except per share data, unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of operations
Interest income $ 8,388 8,366 8,373 8,789 $ 9,020 8,723 10,260
Interest expense 5,199 4,971 4,888 5,060 5,245 5,398 5,918
------------------------------------- ----------------------------------------
Net interest income 3,189 3,395 3,485 3,729 3,775 3,918 4,214 4,342
Provision for
loan losses 102 99 -- 45 150 150 127 --
Other income 462 510 735 751 536 607 1,148 546
Other expense 2,521 2,580 2,708 2,920 2,823 2,771 3,211 3,633
------------------------------------- ----------------------------------------
Income before
income taxes 1,028 1,226 1,512 1,515 1,338 1,604 2,024 1,255
Provision for income
taxes 382 453 406 515 455 545 691 426
--------------------------------------------------------------------------------
Net income 646 773 1,106 1,000 883 1,059 1,333 829
Earnings per share,
basic 0.12 0.14 0.21 0.19 0.16 0.20 0.25 0.15
Earnings per share,
diluted 0.11 0.14 0.18 0.17 0.15 0.18 0.22 0.14
28
</TABLE>
<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 Annual Report is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained under the section captioned "Disclosures about
Market Risk" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements contained in the Annual Report which are listed
under Item 14 herein are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
29
<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 1999 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 69 Chairman and Chief Executive Officer (b)
C. Fredrick Safstrom 45 President, Chief Operating Officer and
Director (b)
Robert G. Disotell 44 Executive Vice President, Branch Banking
(b)
Steven R. Erickson 43 Executive Vice President, Income Property
and Construction Lending
David R. Little 53 Executive Vice President, Business Banking
James J. Palm 46 Executive Vice President, Chief Lending
Officer
Russell E. Rosendal 40 Executive Vice President, Chief Financial
Officer and Secretary/Treasurer (b)
Stephen E. Smith 45 Senior Vice President, Bank Operations
Manager
Vera E. Wildauer 41 Senior Vice President, Marketing Director
- -------------------------
(a) As of June 30, 1999.
(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 and past Chairman
of the Everett Area Chamber of Commerce and is a Director of 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, Campaign Chairman of United Way of Snohomish County,
Trustee of Seattle University, a Fellow of Seattle Pacific University, Director
of the Everett Rotary Club, Treasurer of the Washington Society of Certified
Public Accountants, and a Director of the Seattle Chamber of Commerce.
C. FREDRICK SAFSTROM is the Bank's President and Chief Operating Officer.
He has served Cascade in a variety of managerial positions with increasing
responsibilities since 1976. Mr. Safstrom is a Trustee and Treasurer of
Seattle Pacific University, chairman-elect of the Snohomish County YMCA,
past-President and Director of the Everett Public Schools Foundation, Director
and Treasurer of Housing Hope, a Director of the Snohomish County Investment
Plan, and a member of the Everett Rotary.
ROBERT G. DISOTELL has been employed by Cascade Bank since 1977 and
currently serves as Executive Vice President of Retail Banking. He is
responsible for branch deposit and consumer loan production, as well as credit
administration. Mr. Disotell has managed a variety of business groups in his
tenure at Cascade, including Mortgage Banking,
30
<PAGE>
Loan Servicing, Secondary Marketing, and Community Reinvestment Act (CRA)
activities. Mr. Disotell is a resident of Arlington, Washington.
RUSSELL E. ROSENDAL is the Executive Vice President, Chief Financial
Officer and Secretary/Treasurer of the Bank and 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 served 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
following 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
Residential 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 24 years, in management and loan origination. Mr. Palm is
a resident of Woodinville, Washington.
STEPHEN E. SMITH is the Senior Vice President for the Operations Division
that includes the Information Services, Loan Servicing, Deposit Operations, and
Appraisal departments. Mr. Smith received his Masters degree in business
administration from Pacific Lutheran University and was inducted into the Betta
Gamma Sigma national business honor society. He has been with the Bank since
1998, and has over fifteen years of experience in information technology and
process innovation. Mr. Smith is a resident of Mukilteo, 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. Ms. Wildauer 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.
31
<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, 1998 and June 30,
1999
(b) Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1998 and 1999
(c) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended June 30, 1997,
1998 and 1999
(d) Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1998 and 1999
(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
Corporation2
3.2 Bylaws of Cascade Financial Corporation2
10.1 Cascade Financial Corporation 1994 Employee Stock
Purchase Plan3
10.2 Cascade Financial Corporation 1992 Stock Option and
Incentive Plan3
10.3 Cascade Financial Corporation Employee Stock Ownership
Plan3
10.4 Cascade Financial Corporation 1997 Stock Option Plan4
13 Cascade Financial Corporation 1999 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, 1999.
_________________
1 Incorporated by reference to the Corporation's Proxy statement on Form Def
14A File No. 000-25286.
2 Incorporated by reference to the Corporation's Registration Statement on
Form S-4 File No. 33-83200.
3 Incorporated by reference to the Corporation's Annual Report on Form 10-K
For June 30, 1998.
4 Incorporated by reference to Appendix E to the Prospectus included in the
Corporation's Registration Statement on Form S-4 (File No. 333-24203).
32
<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 21,1999 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 Date: September 21,1999
Accounting Officer)
Date: September 21,1999
By: /s/ C. F. Safstrom By: /s/ Ronald E Thompson
----------------------- ------------------------
C. F. Safstrom Ronald E. Thompson
President and Director Director
Date: September 21,1999 Date: September 21,1999
By: /s/ G. Brandt Westover By: /s/ David W. Duce
----------------------- ------------------------
G. Brandt Westover David W. Duce
Director Director
Date: September 21,1999 Date: September 21,1999
By: /s/ Paull Shin By: /s/ Gary Meisner
----------------------- ------------------------
Paull Shin Gary Meisner
Director Director
Date: September 21,1999 Date: September 21,1999
By: /s/ Dwayne Lane By: /s/ David O'Connor
----------------------- ------------------------
Dwayne Lane David O'Connor
Director Director
Date: September 21,1999 Date: September 21,1999
By: /s/ Henry Robinett By: /s/ Janice Halladay
----------------------- ------------------------
Henry Robinett Janice Halladay
Director Director
Date: September 21,1999 Date: September 21,1999
33
<PAGE>
Exhibit 13
1999 Annual Report to Stockholders
<PAGE>
[Pictures appear in background]
"SOLUTIONS"
1999 Annual Report
Cascade [LOGO]
Financial
Corporation
<PAGE>
TABLE OF CONTENTS
Financial
Highlights..................... 2-3
Business Groups................ 4-9
Technology..................... 10
Delivery....................... 11
Community...................... 12
Management's
Discussion &
Analysis....................... 13-18
Auditors'
Report......................... 19-43
Common Stock
information.................... 44
Management..................... 45
[Language appears in background]
real
solutions
<PAGE>
- -------------------------------------------------------------------------------
TO OUR STOCKHOLDERS, EMPLOYEES AND CUSTOMERS: Cascade [LOGO]
Financial
Corporation
This was a year of great accomplishments by the employees of Cascade Financial
Corporation. Financially, the Corporation had record earnings and passed the
$500 million mark in assets. This important milestone means Cascade has the
resources to deliver greater service to its customers.
Many accomplishments took place behind the scenes, including a number of
important initiatives to increase customer service. In October, Cascade moved
the bank's data processing system in-house. In June, item processing was also
moved in-house. Customers now receive their statements faster and the ability
to add new products and services is completely in our control.
Cascade Bank was the first community bank in the area to offer online banking
via the Internet. Response has been very positive among both consumers and
business owners. Customers like the added convenience-and they know they can
still count on their local branch for truly personalized service.
COMPARATIVE RETURN
TO STOCKHOLDERS
PERFORMANCE INDEX
Cascade Financial Corporation NASDAQ (US Stock) Index
1992 - 100 1992 - 100
1993 - 200 1993 - 150
1994 - 400 1994 - 150
1995 - 550 1995 - 175
1996 - 620 1996 - 200
1997 - 650 1997 - 210
1998 - 950 1998 - 220
1999 - 1100 1999 - 420
Cascade rewarded shareholders with a seventh 25 percent stock dividend. An
initial investment of $1,000 in Cascade Financial stock has grown to $9,537.
That's an increase of over 850 percent. In the coming year, Cascade will focus
on expanding its branch network in Snohomish and east King Counties and will
open three new full service offices, all located inside grocery stores.
Designed to meet both consumer and business customers' needs, these branches
dramatically improve Cascade's convenience for customers.
Preparing for the Year 2000 has done much to improve processes and customer
service. We will continue to build on that effort to give our customers better
banking solutions at every opportunity.
/s/Frank M. McCord /s/ Fred Safstrom
Frank M. McCord, Chairman [Picture of Frank Fred Safstrom, President
and Chief Executive Officer McCord and Fred and Chief Operating Officer
Safstrom appears
here]
real
solutions
1
<PAGE>
Cascade saw another record year for earnings in fiscal year 1999. This
performance was substantially fueled by remarkable growth in the Business
Banking group. Unlike many community banks, Cascade's diverse business lines
protect the Corporation from economic and competitive uncertanties. Despite
industry-wide pressure on net interest margins, Cascade increased net interest
income by $2.45 million.
Additionally, efforts continue to improve efficiency and productivity, while
sales and revenue continue to grow.
Lower interest rates
caused tremendous
refinancing activity
In fiscal 1999.
[Picture appears here]
- ---------------------------------------------------------
FIVE-YEAR FINANCIAL HIGHLIGHTS
Dollars in thousands except financial ratios (unaudited)
For The Year Ended June 30, 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
Net income $3,304 2,781 1,368 3,525 4,104
Net interest income 11,767 10,590 11,644 13,798 16,249
Earnings per share (diluted) 0.63 0.48 0.23 0.60 0.69
At June 30, 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
Assets $367,597 399,316 434,162 444,155 557,086
Loans 249,250 272,464 341,201 384,734 455,736
Deposits 252,204 277,897 304,205 312,518 361,786
Stockholders' equity 23,499 25,526 27,537 31,412 34,239
Non-performing loans 617 600 911 1,921 1,201
Financial Ratios 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
Return on assets 0.95% 0.73 0.33 0.82 0.83
Return on equity 14.96 11.44 5.26 12.05 12.21
Net interest margin 3.54 2.90 2.90 3.40 3.43
Net interest spread 3.20 2.52 2.49 3.14 3.12
Amounts for 1995, 1996 and 1997 have been restated to reflect the acquisition
of AmFirst Bancorporation in 1997.
real
results
2
<PAGE>
ASSETS LOANS
(in millions) (in millions)
1995 - $380 1995 - $250
1996 - $400 1996 - $260
1997 - $420 1997 - $330
1998 - $430 1998 - $380
1999 - $550 1999 - $450
DEPOSITS STOCKHOLDERS'
(in millions) EQUITY
(in millions)
1995 - $250
1996 - $275 1995 - $21
1997 - $300 1996 - $25
1998 - $305 1997 - $27
1999 - $350 1998 - $30
1999 - $33
NET INCOME NET
(in millions) INTEREST
INCOME
1995 - $3.3 (in millions)
1996 - $2.8
1997 - $1.2 1995 - $12.0
1998 - $3.6 1996 - $10.1
1999 - $4.0 1997 - $11.0
1998 - $13.0
1999 - $15.1
Net Income for fiscal 1997 was significantly reduced by after-tax charges
totaling $1.2 million for recapitalization of the Savings Association Insurance
Fund (FDIC) and additional provisions for losses on loans related the
acquisition of AmFirst Bancorporation. Net Income and Net Interest Income for
fiscal 1995 include a pre-tax recovery of $2.1 million of delinquent interest.
real
results
3
<PAGE>
[Pictures appear here] The low interest rate
environment helped
Cascade to lend over
$297 million to home
Buyers in fiscal year
1999.
Being new in the Northwest, the Stewart family was intent on finding a quality
community bank for their financial needs. "I asked around for a good bank and
'Cascade' was the resounding reply," said Brent Stewart, President of United
Way of Snohomish County. Cascade financed the home where he and Monica, along
with their sons Brent, Jr. and Desmond, live in Everett, Washington.
With Cascade's team approach, customers of the Residential Lending group are
routinely referred to a Financial Services Officer for additional banking
services. A key to our success is in taking the time to understand our
customers' needs and financial goals, and then providing a full range of
services to meet those objectives.
RESIDENTIAL LOANS
- -------------------------------------------------------------------------
'95 - $160 RESIDENTIAL LENDING
'96 - $165 Many banking relationships start with Cascade's
'97 - $200 Residential Lending group. Over 80 years of experience
'98 - $185 and over 30 loan programs made Cascade Bank the right
'99 - $190 solution for 2,167 customers this year.
family
solutions
4
<PAGE>
[Picture appears here] A special promotional
Money Market
Account brought in
$17.5 million in new
consumer deposits -
and 265 new
accounts.
[Picture appears here]
Craig at the Colby office made me feel welcome and let me know he wanted my
business," Brent added. "The staff seems to want to know their customers and
satisfy their needs."
The Stewart family also opened a checking account and uses Cascade's new online
banking service with electronic bill payment.
- -------------------------------------------------------------------------
CONSUMER LOANS PERSONAL BANKING
(in millions)
'95 - $ 2.0 As a full-service community bank, Cascade offers a wide
'96 - $ 1.5 range of products to meet consumer needs. Cascade
'97 - $10.0 provides financing for cars and boats. Home equity
'98 - $18.0 lines of credit offer customers a way to finance home
'99 - $20.0 improvements or consolidate debt. Decentralized credit
reporting and lending authority provide quick response
time.
Cascade also offers numerous deposit and transaction account options
to satisfy basic banking and saving needs.
family
solutions
5
<PAGE>
[Pictures appear here]
"My two most important objectives are to increase my company's profitability
and to be a socially responsible business." As owner of a small but growing
business in the bead industry, Duangporn Dunning of Hands of the Hills, Inc.
always wanted to expand her company's scope beyond the sale of loose beads.
She wanted to develop a product line of pre-packaged kits for retailers.
Cascade Bank was able to explore the financing options available when other
banks weren't willing to take the time. Through a Small Business
Administration loan, what literally started in the Dunning garage is now a $2
million dollar company. Hands of the Hills now supplies retailers worldwide and
offers job opportunities to many Southeast Asian refugees.
Cascade's Business Banking
group made over $20 million
in loans to local
businesses-that's a 49
percent increase over last
year.
[Picture appears here]
- ---------------------------------------------------------------
COMMERCIAL LOANS BUSINESS BANKING
(in millions) Cascade Business Bankers are focused on
building long-term relationships with
'95 - $20.1 business owners throughout the Puget
'96 - $24 Sound region. With an average of 22 years
'97 - $22 of experience, each Business Banker is
'98 - $41 able to serve as a partner and trusted
'99 - $60 advisor to help our customers succeed.
With a full range of business banking products, Cascade can serve a variety of
needs. Services such as Deposit Courier Pickup and Cascade Bank Online offer
business customers a high level of convenience.
business
solutions
6
<PAGE>
The Reykdals have been building quality homes in the Puget Sound area for 30
years. Both father and son like the fact that Cascade is large enough to meet
their complex borrowing needs, but small enough to make decisions quickly. "One
of the reasons I chose Cascade Bank," comments Gordon P. Reykdal, "is that I
know I can touch base with a decision-maker at any time."
"When it comes to closing loans," adds his son, Gordon K. Reykdal, "it happens
right on schedule-an important factor when building 40-50 homes a year."
[Pictures appear here] Cascade's construction
portfolio grew 14
percent over last year,
by providing innovative
products tailored to
reach builders' needs.
[Picture appears here]
- ----------------------------------------------------------------
CONSTRUCTION LOANS CONSTRUCTION LENDING
(in millions)
Cascade financed over $53 million
'95 - $230 in new construction Lending-an
'96 - $250 important part of Cascade's portfolio.
'97 - $320 Our focus is on experience builders
'98 - $380 offering a quality product for the
'99 - $400 middle market consumer. For those
builders, Cascade develops customized
products that respond to changing needs.
business
solutions
7
<PAGE>
[Pictures appear here]
Loveless Brook, Inc. owns and manages commercial properties throughout King
County. Many of these are financed by Cascade Bank. "Sure, the cost of the loan
is important. And Cascade's rates are very competitive," comments Melvin
Brook. "But the professional service of the people we work with at Cascade
keeps us coming back. We know they're dedicated to finding the best financing
solution for each piece of real estate."
Business Banking customers are finding Cascade an important resource for
financing their buildings. Because Cascade has their up-to-date financial
information, applying for a commercial real estate loan is considerably easier
and faster.
Cascade streamlined the
application process for
smaller buildings-6 to 12
unit multi-family projects.
This allows loan officers
to complete these loans
more quickly and at a lower
cost.
[Picture appears here]
- ------------------------------------------------------
INCOME PROPERTY INCOME PROPERTY LENDING
LOANS
(in millions) Cascade Bank's many years of real
estate lending provides the experience
'95 - $ 48 to help finance multi-family and commercial
'96 - $ 50 properties held for investments. Competitive
'97 - $ 70 pricing and the specialized expertise of
'98 - $ 90 residential lenders contributed to the
'99 - $120 significant growth in these portfolio loans.
Income property lending should continue to
contribute a significant share of Cascade's
revenue in the coming years-especially in the
commercial real estate segment.
investment
solutions
8
<PAGE>
[Pictures appear here] Cascade Investment
Services, Inc. continues
to grow rapidly. Fiscal
1999 saw $6 million
invested, which
contributed $77,000 in
income to Cascade
Financial.
"Not everyone is ready for online trading on their own," says Frank Getty,
customer of Cascade Investment Services, Inc. "I like to sit down with someone
I trust to discuss my plans." Frank and Laura Getty are just two of almost
1,000 customers who prefer to make investment decisions with a little extra
guidance. "Jerry Dawson and I reviewed all my current investments and my risk
profile. Then, together, we settled on an approach I was comfortable with."
Services like financial check-ups and estate planning help Cascade customers
make the right decisions for their future with a bank they can trust.
- -------------------------------------------------------------------------------
CASCADE INVESTMENT SERVICES
The majority of Cascade Investment Services' customers already have accounts at
Cascade Bank. And they receive the same level of personalized service, without
sacrificing any of the investment choices. Cascade Investment Services offers
hundreds of mutual funds, variable and fixed annuities, and individual stocks
and bonds. Cascade also offers Reverse Mortgages, allowing customers over 62 to
increase their monthly income while remaining in their homes.
- -------------------------------------------------------------------------------
Securities are offered through FiServ Investor Services, Inc., Member NASD/
SIPC, not an affiliate of Cascade Bank. These products are not insured by the
Federal Deposit Insurance Corporation or any other government agency. They are
not deposits or other obligations of, or guaranteed by Cascade Bank and are
subject to investment risk, including possible loss of principal.
[Picture appears here]
investment
solutions
9
<PAGE>
[Picture appears here] The banking industry has
been rated number one in
preparedness by the U.S.
General Accounting Office
in Year 2000 readiness.
[Picture appears here]
Cascade is ready for "Y2K." "The Year 2000 issue was definitely an important
reason for us to move our computer processing in-house," says Steve Smith,
Manager of Bank Operations. "We wanted to have more control over the entire
process."
All testing and computer upgrades are complete and Cascade is ready for the
Year 2000. Cascade will spend the rest of this calendar year informing
customers that the millenium will change over without a hitch. "The Y2K team is
also putting the finishing touches on contingency plans," adds Smith. "That
plan includes a New Year's Party for employees and their families. After all,
many of us will be here that night to watch over things."
[Picture appears here]
- -------------------------------------------------------------------------------
INTERNAL PROCESSING
The Year 2000 issue also created a number of benefits. Bringing the computer
system and item processing in-house affords Cascade the ability to better serve
customers. Cascade can be more responsive to market changes and develop new
products, as well as generate monthly statements more quickly. Additionally,
as Cascade grows, it is considerably more cost-effective to house data
processing internally rather than paying to outsource those services.
technology
solutions
10
<PAGE>
Cascade Bank was the first local bank to offer Internet banking in February
1999 and continues to be a leader in the marketplace.
Fiscal 1999 saw two other delivery initiatives aimed at better serving the
consumer market: The installation of cash machines at every branch location,
and the upgrade of TellerPhone, the automated telephone service whereby
customers can access their account information over the phone.
[Picture appears here] Statistics show that
today's consumers are
choosing to use all
types of delivery
channels. The key is
for these channels to
be integrated, so the
customer's experience
is consistent whether
they're on the phone,
with a teller, or online
at midnight.
[Picture appears here]
- -------------------------------------------------------------------------------
DELIVERY STRATEGIES
While Cascade Bank Online is important to our customers, Cascade is also
expanding by adding convenient branch locations. A new full service office is
slated to open in the Woodinville TOP Food & Drug in September, 1999. With
over 800 square feet, the office provides space for business bankers,
investment representatives, and residential loan officers to meet with their
Woodinville clients in a comfortable and private setting.
Two additional branch offices are scheduled to open in Haggen Food and Pharmacy
stores currently under construction in Lake Stevens and Marysville. Haggen,
Inc. owns TOP Food & Drug.
[Picture appears here]
delivery
solutions
11
<PAGE>
[Picture appears here] Seventy-two percent
of Cascade Bank
employees participate
in the United Way of
Snohomish County
campaign.
They contribute an
average of $453 per
employee, much
higher than average.
[Picture appears here]
Cascade is committed to improving the communities it serves. For example,
President Fred Safstrom serves as Chair-Elect of the Board of Trustees of the
YMCA of Snohomish County. Jerry Beavers, YMCA President and CEO, said
"Community support is crucial to the success of our endeavors, and Fred
Safstrom's dedication exemplifies the kind of support needed. His creativity,
leadership and willingness to put in the hours needed have helped us raise
funds to build three brand-new facilities in the county."
The YMCA is Snohomish County's largest provider of childcare. Funds raised
ensure all parents can afford quality, safe care with excellent programming for
their children.
- -------------------------------------------------------------------------------
CORPORATE AND EMPLOYEE GIVING
Cascade is committed to supporting a variety of programs in the communities we
serve. In addition to cash donations, employees give a great deal of their
personal time to support local charities.
We also support the lighter side of life. Cascade sponsors the Everett AquaSox,
as well as numerous neighborhood festivals like Issaquah's Salmon Days.
community
solutions
12
<PAGE>
This section contains forward-looking statements concerning Cascade Financial
Corporation (Cascade or the Corporation) 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. 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.
REVIEW OF FINANCIAL CONDITION
Total assets for the Corporation increased to $557.1 million at June 30, 1999,
compared with $444.2 million at June 30, 1998. Total loans increased $71.0
million to $455.7 million at June 30, 1999 compared with $384.7 million at June
30, 1998. Most of this increase in business and real estate secured income
property loans. During 1999, the Corporation faced the challenge of deploying
growing excess capital. In order to utilize this capital, the Corporation
adopted alternative strategies including the purchase of investment grade
securities. Cash and securities therefore increased to $84.6 million in 1999
compared with $44.1 million in 1998, resulting in assets with generally lower
rates of return than loans originated and retained in portfolio. Management's
long term strategy is to continue to increase the Corporation's assets by
further expanding the business, income property and consumer banking product
lines and communities served.
Funding the earning asset growth was a $49.3 million increase in deposits to
$361.8 million at June 30, 1999. Borrowings, principally FHLB-Seattle advances,
increased to $147.9 million at June 30, 1999 compared with $86.8 million at
June 30, 1998. Management has sought to fund asset growth through increasing
business accounts and retail deposits from local communities and the lowest
cost long-term borrowing sources.
At June 30, 1999, nonperforming loans totaled $1.2 million compared with $1.9
million at June 30, 1998. The Corporation's nonaccrual coverage ratio (the
allowance for losses to nonaccrual loans) improved to 355% at June 30, 1999
compared with 216% at June 30, 1998.
Net income for the
year ended June 30,
1999 was $4.1 million,
an increase of 16%
from the previous
year.
COMPARISON OF OPERATING RESULTS
Net Income
Net income for the year ended June 30, 1999 was $4.1 million, an increase of
16% from the previous year. Earnings per share for fiscal 1999 was $0.76
(basic) and $0.69 (diluted) compared with $0.66 (basic) and $0.60 (diluted) for
fiscal 1998. Return on equity was 12.21% for fiscal 1999 compared with 12.05%
for fiscal 1998. Higher net interest income and gains from the sale of mortgage
servicing rights offset increased operating expenses leading to improved
results in 1999. Net income for the year ended June 30, 1997 was $1.4 million
or $0.26 per share (basic) and $0.23 (diluted). Return on equity was 5.26% for
fiscal 1997. The results for fiscal 1997 include a $1.2 million pre-tax expense
for a one-time, industry-wide assessment to recapitalize the Savings
Association Insurance Fund.
Net Interest Income
Net interest income for the year ended June 30, 1999 increased to $16.2 million
compared with $13.8 million in 1998 and $11.6 million in 1997. The increase
resulted from both growth in earning assets and an increase in the net interest
margin. Average interest-earning asset balances increased to $472.7 million in
1999 compared to $405.5 million in 1998 and $401.3 million in 1997. Most
importantly average loans outstanding increased to $413.9 million in 1999,
compared with $362.8 million in 1998 and $307.3 million in 1997. The yield on
loans decreased to 8.40% in 1999 from 8.57% in 1998 and from 8.51% in 1997.
Interest on securities and interest-bearing deposits increased to $3.5 million
in fiscal 1999 from $2.8 million in 1998, but de-
management's discussion
& analysis
13
<PAGE>
creased from $5.4 million in 1997. Management increased securities holdings in
1999 to offset high prepayments in the loan portfolio and increase earning
assets. In fiscal 1998 securities balances were reduced to fund growth in
loans.
The net interest margin has remained stable over the last three years at 3.43%
in 1999, 3.40% in 1998 and 2.90% in 1997. Accelerated prepayments of high rate
loans in 1999 offset the decreased market interest rates to which the
Corporation's deposits and borrowings are linked. Additionally, competitive
pressures for deposits have tended to keep those rates from falling as much as
market interest rates. The increase in the margin from 1997 was the result of
consistently adding higher yielding commercial business and commercial real
estate loans and reducing balances of lower yielding residential mortgage loans
during the past two years.
The Corporation's net interest income and margin include the recognition of
hedging with off-balance sheet financial instruments. Hedging activities
decreased net interest income by $56,000 in 1999, $38,000 in 1998 and $36,000
for the year ended June 30, 1997.
Provisions for Loan Losses
Provisions for loan losses for 1999, 1998 and 1997 were $427,000, $246,500 and
$810,000, respectively. At June 30, 1999 and 1998, the Corporation's loan loss
allowance totaled $4.3 million and $4.1 million, respectively.
The Corporation monitors its allowance for loan losses as economic conditions
dictate. Although the Corporation maintains its allowance at levels that it
considers to be adequate for potential losses, there can be no assurance that
such losses will not exceed the estimated amounts. Due to favorable economic
conditions in the Puget Sound region, Management expects continued good credit
performance and low charge-offs. Based on these factors, allowances to total
loans decreased to 0.93% at June 30, 1999 compared with 1.08% at June 30, 1998.
The provision rate maintained the loan loss allowance at levels consistent with
the Corporation's internal analysis. However, no assurance can be given that
the Corporation will not sustain loan losses that are sizable in relation to
the amount reserved, or that subsequent evaluation of the loan portfolio, in
light of the factors then prevailing, will not require significant increases to
the allowance.
The Corporation's strategic plan is to originate additional commercial loans
and other higher risk loan products that will necessitate increasing the
Corporation'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.
Other Income
Other income increased to $2.8 million in 1999 compared with $2.5 million in
1998 and $1.9 million in 1997. The principal reason for the increase in 1999 as
compared to 1998 was a $633,000 gain from the sale of mortgage loan servicing
rights. Most of these servicing rights were from loans originated by the
Corporation's residential lending division during 1999. Management anticipates
selling most of the servicing acquired in the future since, at this time,
market prices exceed internal valuations. The increase in noninterest income in
1998 as compared to 1997 resulted from increased mortgage-banking activity.
Other Expenses
Other expenses increased to $12.4 million in 1999 from $10.7 million in 1998,
and $10.9 million in 1997. Salaries and employee benefits increased $962,000 in
1999 to $6.5 million. Most of this increase was for incentive compensation for
mortgage personnel and for additions to branch and operational staff.
Additionally, the Corporation brought its entire computer processing systems
in-house in 1999, which increased staffing and related depreciation and
maintenance expenses. Management will be opening additional branches in the
coming year which will also increase salary and benefit costs. Expense
increases for marketing, technology and product delivery systems, focusing on
productivity and revenue enhancement, should be anticipated as the Corporation
further develops delivery systems for new products and services introduced in
2000 and beyond.
YEAR 2000 PROJECT
This section contains forward-looking statements that have been prepared on the
basis of management's best judgments and currently available information and
constitutes a Year 2000 Readiness Disclosure within the meaning of the Year
2000 Readiness Disclosure Act of 1998. These forward-looking statements are
inherently subject to significant business, third-party and regulatory
uncertainties and contingencies, many of which are beyond the Corporation's
control. In addition, these forward-looking statements are based on current
assessments and remediation plans, which are based on certain representations
of third-party service providers and are subject to change. Accordingly, there
can be no assurance
management's discussion
& analysis
14
<PAGE>
that the Corporation's results of operations will not be adversely affected by
difficulties or delays in the Corporation's or in third parties' Year 2000
readiness efforts.
State of Readiness
Cascade Bank (the "Bank") is committed to providing continuous, secure, quality
banking operations and services as it transitions to the twenty-first century.
Cascade has established a Year 2000 team (the "Team") that is comprised of
employees from all significant operational areas of the Bank. This Team is
managed by a senior officer and provides regular status reports to executive
management and the Board of Directors. Examiners from the OTS have also
reviewed the Bank's Year 2000 progress and project plans.
The Year 2000 problem impacts both information technology ("IT") and non-IT. IT
includes computer hardware and software, whereas non-IT typically includes
embedded technology, such as microcontrollers, automated teller machines
("ATMs") and elevators. With this in mind, the Team performed an assessment of
its Year 2000 exposure and created a business readiness report in terms of the
Bank's critical business processes (both IT and non-IT), hardware and software
inventories, significant borrowers, funding sources and significant business
partners. This assessment was followed by a technical review of the automated
systems of the Bank. The report provides a Year 2000 project plan with testing
schedules, budget estimates and contingency plans. The Team identified certain
systems as "mission critical" and the project plan called for all mission
critical Year 2000 testing be completed by December 31, 1998. Testing for
non-mission critical systems is on-going and testing for these systems
continues into 1999.
The majority of 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 the Bank with
Year 2000 compliant systems.
Mission critical software testing was substantially completed in 1998. Hardware
testing for mission critical systems was completed in February 1999. Testing of
the software and hardware for ATM and debit card systems was completed in April
1999. On May 7, 1999, the Bank was notified its ATM and debit card third-party
processor had not completed all Year 2000 testing as proscribed by the Federal
Banking Regulators. This processor handles many other financial institutions as
well as the Bank. The processor had until June 30, 1999 to meet its testing
requirements. On June 30, 1999, the processor certified its compliance.
Management is reviewing the certification material and is in consultation with
the Federal Banking Regulators on this issue. The Corporation continues to
assess the readiness of all its third-party service providers, though it is
currently unable to predict their final readiness. The Corporation has
established contingency plans for the service providers it deems most critical
and will continue monitoring to determine whether to implement specific
contingency plans.
Costs to address Year 2000 issues
The Team anticipated the Bank would need to spend approximately $250,000 to
upgrade computer equipment, test software, purchase software upgrades, and hire
additional temporary staff for Year 2000 issues. As of June 30, 1999, the Bank
has expensed approximately $230,000 of the budgeted amount. The Bank added one
additional employee to work on Year 2000 projects and does not anticipate
adding additional employees. These expenses have been funded through normal
cash flows from operations. There may be costs associated with resolving the
ATM-debit card processor issue. These costs, if incurred, would not be material
in any single reporting period.
Risks associated with the Year 2000
The nature of the Year 2000 problem makes it difficult, if not impossible, to
determine what the exact risks will be to the Bank. There are numerous issues
beyond the Bank's control, such as electric power and telephone communications.
The Bank interacts with many customers, vendors and third party service
providers, who in turn interact with many of the same. Due to the
interdependence of computer systems today, it is simply impossible for any one
party to eliminate the risk related to the Year 2000 problem. If the computer
systems of a third party on which Cascade Bank relies are not compliant by the
Year 2000, there may be significant costs incurred by the Bank. The Bank has
been in contact with its large loan customers to ensure they are aware of the
Year 2000 problem and are in the process of addressing the issues. In the
management's discussion
& analysis
15
<PAGE>
event that these loan customers are unable to operate due to a Year 2000
problem, there may be a loss of revenue for Cascade Bank.
Contingency Plans
As the nature of the problems that may result from the Year 2000 issues are
extremely varied and vague, it has proven to be quite challenging to create one
contingency plan. However, the Team has created a worst case scenario
contingency plan for each of its mission critical systems. The Team is
currently in the stage of implementing this plan and testing will occur in
September and throughout the balance of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
ratio is currently 4.0%. The Corporation exceeded the requirement in each of
the last three years.
The Corporation's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on the Corporation's operating, financing and
investing activities during any given period. At June 30, 1999 and 1998, cash
and cash equivalents totaled $10.2 million and $12.0 million, respectively. The
Corporation's principal sources of funds, exclusive of operating activities,
include proceeds from principal payments on loans and mortgage-backed
securities and proceeds from the sale of loans.
The Corporation has other significant sources of liquidity including
FHLB-Seattle advances, reverse repurchase agreements, and loan sales. If
needed, the Corporation has additional borrowing ability with the FHLB-Seattle
of $54.1 million at June 30, 1999, as well as abilities to borrow from primary
dealers of United States government securities through reverse repurchase
agreements. Under these agreements, the Corporation collateralizes the
borrowings, generally with mortgage-backed securities or other investment
securities. These borrowings are for short time periods, generally no more than
sixty days. The Corporation will utilize a particular source of funds based on
comparative total costs and availability. The Bank also has $2.0 million in
commitments to borrow on an unsecured basis from a local commercial bank.
At June 30, 1999 the
Corporation had
outstanding
commitments to
originate loans of
$17.8 million.
At June 30, 1999 the Corporation had outstanding commitments to originate loans
of $17.8 million. The Corporation anticipates that it will have sufficient
funds available to meet its current commitments principally through sales in
the secondary market. At that same date, certificates of deposit that are
scheduled to mature in one year or less totaled $209.7 million. Management
believes that a significant portion of such deposits will remain with the
Corporation.
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.
Management actively manages asset maturities by holding adjustable rate and
balloon loans and selling fixed rate loans. By adjusting the pricing on
consumer deposits, differing deposit maturities can be obtained to lengthen (or
shorten) the repricing time on liabilities. 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
that rising rates could have on net interest income, or to lower the cost of
long-term liabilities. Management, in conjunction with the Corporation's Board
of Directors, has established strict policies and guidelines for the use of
these off-balance sheet tools.
The Corporation monitors its interest rate risk principally through financial
modeling. The principal measure of interest rate risk the Corporation uses is
changes in projected 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, 1999 a
200 basis point increase in rates would reduce forecasted net interest income
over a twelve-month period by approximately four percent. The Board of
Directors set
management's discussion
& analysis
16
<PAGE>
tolerable allowances for changes in net interest income. At June 30, 1999 the
allowance for changes in net interest income with a 200 basis point increase in
rates was a decrease of up to 5%.
Expected interest rate sensitivity of individual categories of assets and
liabilities as of June 30, 1999 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.
The weighted average interest rates presented are at June 30, 1999. Please
refer to Note 7 of the Notes to the Consolidated Financial Statements for
information regarding fair value.
Within
one Over one to Over five
year five years years Total Fair Value
Dollars in thousands
Interest-Sensitive Assets
- -------------------------------------------------------------------------------
Loans $193,126 196,891 72,344 462,361 460,389
Rate 8.12 8.10 7.80 8.06
Cash, investments and
other interest-
earning assets 14,996 23,917 38,447 77,360 74,768
Rate 5.33 6.14 6.36 6.26
Interest-Sensitive Liabilities
- -------------------------------------------------------------------------------
Noninterest-bearing
deposits 1,907 4,767 11,426 18,100 18,100
Interest-bearing checking
accounts 3,524 7,172 6,086 16,782 16,782
Rate 2.03 2.03 2.03 2.03
Money market accounts 13,175 26,351 48,309 87,835 87,835
Rate 4.54 4.54 4.54 4.54
Savings accounts 3,690 3,690 4,921 12,301 12,301
Rate 3.00 3.00 3.00 3.00
Certificates of deposit 209,746 17,010 12 226,768 226,860
Rate 5.24 5.49 5.00 5.26
Borrowings 74,051 52,159 21,737 147,947 147,769
Rate 5.13 4.78 5.15 5.01
Off-Balance Sheet Items
- -------------------------------------------------------------------------------
Commitments to extend
credit 17,801 17,801 17,801
Rate 7.82 -- -- 7.82
Unused lines of credit 22,678 22,678 22,678
Rate 8.03 -- -- 8.03
Commitments to sell loans (21,436) (21,436) (21,436)
Rate 7.25 -- -- 7.25
Interest rate swaps (6,500) (6,500) 6,480
Rate 6.30 -- -- 6.30
Interest rate floor 13,000 13,000 12,760
Rate 5.00 -- -- 5.00
management's discussion
& analysis
17
<PAGE>
...the Corporation has
become less interest
rate sensitive over the
past several years due
to the emphasis on
commercial banking
activities.
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 fluctuate, the volume of commitments to sell loans also
fluctuate. As for balance sheet management, the Corporation has become less
interest rate sensitive over the past several years due to the emphasis on
commercial banking activities. Management has appropriately adjusted its use of
off-balance sheet transactions as this risk has declined. In fiscal 1999, to
mitigate the prepayment risk of decreasing long-term interest rates on a
portion of the portfolio of income property loans, the Corporation acquired
$13.0 million of interest rate floor agreements tied to yields on 10-year
constant maturity Treasury notes. 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 7 to the Consolidated Financial Statements.
management's discussion
& analysis
18
<PAGE>
[KPMG LLP Letterhead]
Independent Auditors' Report
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheets of Cascade
Financial Corporation and subsidiary (Corporation) as of June 30, 1998 and
1999, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended June 30, 1999. 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, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Seattle, Washington
August 2, 1999
financials
19
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and 1999
(Dollars in thousands)
===============================================================================
1998 1999
- -------------------------------------------------------------------------------
ASSETS
------
Cash on hand and in banks $ 10,642 9,804
Interest-bearing deposits in other financial institutions 1,324 350
Securities available-for-sale 27,412 72,719
Loans held-for-sale 19,920 22,428
Securities held-to-maturity 4,725 1,738
Loans 368,957 437,562
Allowance for loan losses (4,143) (4,254)
-------------------
Loans, net 364,814 433,308
Premises and equipment, net 8,764 9,433
Accrued interest receivable and other assets 6,554 7,306
-------------------
$ 444,155 557,086
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 312,518 361,786
Federal Home Loan Bank advances 73,436 141,996
Securities sold under agreements to repurchase 13,391 5,951
Advance payments by borrowers for taxes and insurance 1,953 1,947
Accrued interest payable, expenses and other liabilities 10,071 10,743
Deferred Federal income taxes 1,374 424
-------------------
Total liabilities 412,743 522,847
-------------------
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 5,356,153 shares in
1998 and 5,454,302 shares in 1999 54 55
Additional paid-in capital 4,416 4,790
Retained earnings, substantially restricted 27,046 31,150
Accumulated other comprehensive income, net (104) (1,756)
-------------------
Total stockholders' equity 31,412 34,239
-------------------
$ 444,155 557,086
===================
See accompanying notes to consolidated financial statements
20
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended June 30, 1997, 1998 and 1999
(Dollars in thousands, except share amounts)
===============================================================================
1997 1998 1999
- -------------------------------------------------------------------------------
Interest income:
Loans $ 26,163 31,109 34,751
Securities held-to-maturity 441 306 141
Securities available-for-sale 4,449 1,825 2,598
FHLB stock dividends 372 412 445
Interest-bearing deposits 143 264 270
-----------------------------
Total interest income 31,568 33,916 38,205
-----------------------------
Interest expense:
Deposits 14,617 15,205 16,425
FHLB advances 4,192 4,015 5,280
Securities sold under agreements to repurchase 1,115 898 251
-----------------------------
Total interest expense 19,924 20,118 21,956
-----------------------------
Net interest income 11,644 13,798 16,249
Provision for loan losses 810 247 427
-----------------------------
Net interest income after provision for loan
losses 10,834 13,551 15,822
-----------------------------
Other income:
Gain on sale of loans held-for-sale 283 606 623
Gain (loss) on sale of mortgage-backed
securities held-for-trading (8) 45 37
Gain on sale of servicing -- -- 633
Service charges 1,205 1,316 1,244
Gain on sale of securities available-for-sale 14 93 17
Other 448 398 283
-----------------------------
Total other income 1,942 2,458 2,837
-----------------------------
Other expenses:
Salaries and employee benefits 5,018 5,579 6,541
Occupancy 1,674 1,695 2,211
Data processing 338 360 370
Marketing 325 443 510
SAIF special assessment 1,224 -- --
Other 2,318 2,651 2,806
-----------------------------
Total other expenses 10,897 10,728 12,438
-----------------------------
Income before Federal income taxes 1,879 5,281 6,221
Federal income taxes 511 1,756 2,117
-----------------------------
Net income 1,368 3,525 4,104
=============================
Net income per common share, basic $ 0.26 0.66 0.76
Weighted average number of shares
outstanding, basic 5,266,298 5,312,305 5,420,286
Net income per diluted share 0.23 0.60 0.69
Weighted average number of shares, diluted 5,832,231 5,843,386 5,956,543
=============================
See accompanying notes to consolidated financial statements.
21
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended June 30, 1997, 1998 and 1999
(Dollars in thousands, except share amounts)
===============================================================================
Accumu-
lated
other
Addi- Compre- Total
tional hensive stock-
Common paid-in Retained income, holders'
Shares stock capital earnings net equity
- ------------------------------------------------------------------------------
Balances at June 30,
1996 5,303,961 $54 4,198 22,153 (879) 25,526
Options exercised 11,139 -- 78 -- -- 78
Net income -- -- -- 1,368 -- 1,368
Other comprehensive
income, net of tax
of $284 -- -- -- -- 565 565
-------------------------------------------------------
Balances at June 30,
1997 5,315,100 54 4,276 23,521 (314) 27,537
Options exercised 41,053 -- 140 -- -- 140
Net income -- -- -- 3,525 -- 3,525
Other comprehensive
income, net of tax
of $104 -- -- -- -- 210 210
-------------------------------------------------------
Balances at June 30,
1998 5,356,153 54 4,416 27,046 (104) 31,412
Options exercised 98,149 1 374 375
Net income 4,104 4,104
Other comprehensive
income, net of tax
of $(814) (1,652) (1,652)
-------------------------------------------------------
Balances at June 30,
1999 5,454,302 $55 4,790 31,150 (1,756) 34,239
=======================================================
Comprehensive Income
Years ended June 30,
---------------------------
1997 1998 1999
---------------------------
Net Income $ 1,368 3,525 4,104
Increase(decrease) in unrealized
Gains (losses) on securities
available for sale, net of tax
of $284, $108, and $(814). 565 210 (1,652)
---------------------------
Comprehensive Income $ 1,933 3,735 2,452
===========================
See accompanying notes to consolidated financial statements.
22
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1998 and 1999
(Dollars in thousands)
===============================================================================
1997 1998 1999
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,368 3,525 4,104
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises
and equipment 669 665 938
Amortization of retained servicing rights 202 322 384
Provision for losses on:
Loans 810 246 427
Mortgage servicing rights -- 57 187
Deferred Federal income taxes (550) (94) (136)
Additions to mortgage servicing rights (315) (908) (1,042)
Deferred loan fees, net of amortization 257 (149) 25
Net change in loans available for sale (6,500) (8,793) (2,508)
Net gains on sales of:
Securities available-for-sale (14) (93) (17)
Mortgage loan servicing rights -- -- (633)
Federal Home Loan Bank stock dividend
received (372) (412) (445)
Net change in accrued interest receivable and
other assets over accrued interest payable,
expenses and other liabilities 374 6,005 (91)
----------------------------
Net cash provided by (used in) operating
activities (4,071) 371 1,193
----------------------------
Cash flows from investing activities:
Loans originated, net of principal repayments (63,937) (35,159) (69,479)
Purchases of securities held-to-maturity -- -- (291)
Principal repayments on mortgage-backed
securities held-to-maturity 3,164 2,053 3,278
Principal repayments on securities available-
for-sale 12,710 9,900 7,994
Purchases of securities available-for-sale (20,971) (64) (62,252)
Proceeds from sales of securities available-
for-sale 41,080 20,962 7,016
Purchases of premises and equipment (655) (2,023) (1,608)
Proceeds from sales of mortgage servicing rights -- -- 1,579
----------------------------
Net cash used in investing activities (28,609) (4,331) (113,763)
----------------------------
Subtotal, carried forward (32,680) (3,960) (112,570)
----------------------------
23
<PAGE>
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
===============================================================================
1997 1998 1999
Subtotal, brought forward $(32,680) (3,960) (112,570)
-----------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 78 140 375
Net increase in deposits 26,308 8,313 49,268
Net increase (decrease) in Federal Home
Loan Bank advances 6,117 (1,223) 68,560
Net decrease in securities sold under
agreements to repurchase (966) (6,092) (7,440)
Net increase in advance payments by
borrowers for taxes and insurance 270 477 (6)
-----------------------------
Net cash provided by financing activities 31,807 1,615 110,757
Net decrease in cash and cash -----------------------------
equivalents (873) (2,345) (1,813)
Cash and cash equivalents at beginning of
year 15,184 14,311 11,967
-----------------------------
Cash and cash equivalents at end of year 14,311 11,966 10,154
Supplemental disclosures of cash flow
information cash paid during the year for:
Interest 19,957 19,914 21,848
Federal income taxes 1,235 1,630 2,438
Supplemental schedule of noncash investing
activities:
Mortgage loans securitized into FHLMC
participation certificates and held-for-
trading and sold 17,419 24,400 20,137
Mortgage loans securitized into FHLMC
participation certificates and held-for-
investment 52 15 --
Premises and equipment, net transferred to
Investment property -- 453 --
Net mortgage loans transferred to real estate
owned 321 301 534
===============================================================================
- -------------------------------------------------------------------------------
24
<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, 1999, the Corporation's loans are principally secured by one-to-four-family
residences (54%), multifamily residences (18%), commercial, industrial and
personal assets (13%) and commercial real estate properties (10%).
Accordingly, the ultimate collectibility of the Corporation's loan portfolio is
susceptible to changes in the economic and real estate market conditions in the
Puget Sound region.
Most of the commercial loans are secured, and the security includes commercial
property, business inventories, commercial equipment and personal property of
the customers. At June 30, 1999, $4.0 million in commercial loans were
unsecured. Loans secured by boats account for the majority of the installment
loan portfolio.
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.
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 Loan Losses
The allowance for loan losses is maintained at a level sufficient to provide
for losses based on management's evaluation of known and inherent risks in the
loan portfolio. This evaluation includes analyses of the fair value of
collateral securing selected loans, consideration of historical loss experience
and management's projection of trends affecting credit quality. Interest
income is normally recognized on the accrual basis; however, if a loan is
impaired then interest income is recorded upon the receipt of cash. The
difference between interest income recognized on the accrual basis and cash
basis is not significant.
The Corporation reviews all single family loans, all consumer loans 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
25
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
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.
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 as accumulated other comprehensive income, net, in
stockholders' equity. Investment 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
26
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
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.
(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 $74 and $0 June 30, 1998 and 1999, 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.
(j) Stock-Based Compensation
The Corporation follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. This statement permits a corporation to choose
either a new fair-value method or the Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, intrinsic-value based method
of accounting for stock-based compensation arrangements. SFAS No. 123
requires pro forma disclosure of net income (loss) and earnings (loss) per
share computed as if the fair-value based method had been applied in financial
statements of corporations that continue to account for such arrangements under
APB Opinion No. 25. The Corporation has elected to continue to record
stock-based compensation using the APB Opinion No. 25 intrinsic-value based
method and, therefore, the adoption of SFAS No. 123 has not impacted the
Corporation's financial positions, results of operations, or liquidity.
(k) Reclassifications
Certain 1997 and 1998 balances have been reclassified to conform to the 1999
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) Recently Issued Accounting Standards
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 was adopted on July 1, 1998.
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 was adopted on
July 1, 1998.
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. In May 1999, the Financial Accounting Standards Board delayed the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000,
with interim reporting required. Management is reviewing this statement and
27
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
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. SFAS No. 134 requires that the
security be classified either trading, available for sale or held to maturity
according to the Corporation's intent, unless the Corporation has already
committed to sell the security before or during the securitization process.
The statement is effective for all fiscal years beginning after December 15,
1998. This statement is not expected to have a material impact on the results
of operations or financial condition of the Corporation.
28
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
(2) 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.
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 year ended June 30, 1997 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
(3) Securities
A summary of securities at June 30 follows:
1998 1999
-------------------------------------------------------
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
---------------------------------------------------------
Securities available-
for-sale:
US Treasury $ 997 5 -- 1,002 -- -- -- --
US Government
agency 21,087 40 203 20,924 67,926 -- 2,553 65,373
FHLB stock 5,486 -- -- 5,486 7,346 -- -- 7,346
--------------------------------------------------------
27,570 45 203 27,412 75,272 0 2,553 72,719
Securities held-to-
maturity:
US Government
agency $ 4,725 -- 71 4,654 1,738 1 40 1,699
--------------------------------------------------------
4,725 -- 71 4,654 1,738 1 40 1,699
As of June 30, 1998 and 1999, the Corporation was required to maintain 36,720
and 71,000 shares, respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits was
$223 and $892 at June 30, 1998 and 1999, respectively.
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, 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
=======================
29
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
Proceeds Gains Losses
Year ended June 30, 1999: -----------------------
US Treasury $ -- -- --
Municipals -- -- --
US Government agency 7,016 17 --
-----------------------
Total 7,016 17 --
=======================
The following table shows the contractual maturities of the Corporation's
securities held-to-maturity at June 30, 1999:
Within one Over one to Over five
year five years years Total
Amortized Cost ------------------------------------------
US Government agency $ 834 629 275 1,738
------------------------------------------
Total amortized cost 834 629 275 1,738
==========================================
Fair Value
US Government agency $ 822 618 259 1,699
------------------------------------------
Total fair value 822 618 259 1,699
==========================================
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at June 30, 1999:
Over
Within one Over one to five to Over Ten
year five years ten years years Total
Amortized Cost -----------------------------------------------------
US Government agency $ -- 10,519 31,367 26,040 67,926
FHLB Stock 7,346 -- -- -- 7,346
-----------------------------------------------------
Total amortized cost 7,346 10,519 31,367 26,040 75,272
=====================================================
Fair Value
US Government agency $ -- 10,355 30,223 24,795 65,373
FHLB Stock 7,346 -- -- -- 7,346
-----------------------------------------------------
Total fair value 7,346 10,355 30,223 24,795 72,719
=====================================================
U.S. Government agency 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 $1,286 in 1998
and $1,718 in 1999. 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 8.22% and 8.14% at June 30,
1998 and 1999, respectively.
30
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
(4) Loans and Allowance for Loan Losses
A summary of loans and loans held for sale at June 30 follows:
1998 1999
Real estate mortgage: ---------------------
One-to-four family $ 175,614 177,988
Multifamily 62,736 85,893
Commercial 31,746 49,066
Home equity 28,330 29,334
Land loans 232 106
Real estate construction:
One-to-four family 47,861 54,500
Commercial 41,494 61,676
Installment 20,176 22,885
---------------------
Total loans 408,189 481,448
Loans in process (16,966) (19,087)
Deferred loan fees, net (2,346) (2,371)
---------------------
388,877 459,990
Loans held for sale (19,920) (22,428)
---------------------
Loans 368,957 437,562
=====================
Loans serviced for others $ 156,043 90,666
Accrued interest on loans was $2,356 and $2,657 at June 30, 1998 and 1999,
respectively.
At June 30, 1999, the composition of the loan portfolio was as follows:
Fixed Rate Adjustable Rate
Term to maturity ----------------------------
Less than one year $ 11,529 152,424
1-3 years 22,742 62,661
3-5 years 17,613 79,747
5-10 years 20,101 68,859
10-20 years 9,849 --
Over 20 years 35,923 --
Nonaccrual loans totaled $911, $1,921 and $1,201, respectively, at June 30,
1997, 1998 and 1999. If interest on these loans had been recognized, such
income would have been $59, $106 and $86, respectively, for 1997, 1998 and 1999
At June 30, 1997, 1998 and 1999, loans totaling $2,109, $3,221 and $2,149, were
impaired, of which $1,198, $67 and $0 had allocated reserves of $300, $67 and
$0, respectively. The remaining $911, $3,154 and $2,149 had no reserves
allocated to them since the value of the underlying collateral of the impaired
loans was equal to or exceeded the recorded investment. Of the $2,109, $3,221
and $2,149 of impaired loans, $911, $1,652 and $1,201 were on nonaccrual
status, $112, $269 and $674 were under foreclosure and $1,198, $1,300 and $948
were performing but judged to be impaired. The average balance of impaired
loans during the years ended June 30, 1997, 1998 and 1999, respectively, was
$2,199, $1,450 and $3,180 and the Corporation recognized $140, $86 and $224 of
related interest income on such loans during the time such loans were impaired.
At June 30, 1999, the Corporation had outstanding commitments to fund loans
with fixed interest rates totaling $12,782, and loans with adjustable rates
totaling $5,019.
The Corporation has forward commitments to sell loans into the secondary market
totaling $20,076, and $21,436, respectively, at June 30, 1998 and 1999.
31
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
A summary of the allowance for losses on loans follows:
Year ended June 30,
---------------------------
1997 1998 1999
---------------------------
Balances at beginning of year $ 3,336 3,879 4,143
Provision for loss 810 247 427
Recoveries 5 62 7
Charge-offs (272) (45) (323)
---------------------------
Balances at end of year 3,879 4,143 4,254
===========================
(5) Premises and Equipment
A summary of premises and equipment follows:
June 30,
Estimated --------------------
useful lives 1998 1999
--------------------------------------------------------------------------
Land $ 1,239 1,239
Buildings 40 years 8,596 7,526
Leasehold improvements Lease term 888 890
Furniture and equipment 2-10 years 5,337 7,276
Automobiles 4 years 56 56
--------------------
16,116 16,987
Accumulated depreciation and amortization (7,352) (7,554)
--------------------
8,764 9,433
====================
(6) Deposits
Deposits at June 30 are summarized as follows:
1998 1999
------------------
Noninterest bearing checking accounts $ 15,347 18,100
Interest bearing checking accounts 17,923 16,782
Money market deposit accounts 54,697 87,835
Savings accounts 13,218 12,301
Certificates of deposit 211,333 226,768
------------------
312,518 361,786
==================
Time deposit accounts in amounts of $100,000 or more totaled $64.6 million and
$72.7 million at June 30, 1998 and 1999, respectively.
Weighted Deposit
Average accounts with Accrued
interest balances in interest
rate on excess of payable on
deposits $100,000 deposits
---------------------------------------
June 30, 1998 4.9% $ 87,636 $499
June 30, 1999 4.7% 116,717 502
A summary of interest expense on deposits follows:
Year ended June 30,
----------------------------
1997 1998 1999
----------------------------
Checking and money market accounts $ 2,383 2,738 3,642
Savings accounts and time deposits 12,234 12,467 12,783
----------------------------
14,617 15,205 16,425
============================
32
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
Maturities of time deposits at June 30, 1999 are as follows:
Years ending June 30,
1999 $
2000 209,746
2001 9,706
2002 2,519
2003 1,854
2004 2,931
Thereafter 12
--------
226,768
========
(7) 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.
The Corporation did not enter into any new interest rate swaps during the year
ended June 30, 1999. During 1998 and 1999, the Corporation entered into
interest rate cap and floor agreements with notional values totaling $13
million and $0, 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. The net difference between the interest received and paid on the
interest rate swaps, caps and floors of $(36), $(38) and $(56), respectively
for the years ended June 30, 1997, 1998 and 1999, is recorded as an increase to
interest expense on deposits or a decrease to interest income on loans, as
appropriate.
Interest rate cap, swap, and floor agreements at June 30, 1998 and 1999, are
summarized as follows:
Swap Cap Floor
------------------- --------------- ------------------
1998 1999 1998 1999 1998 1999
------------------- --------------- ------------------
Notional amount $8,500 $6,500 $5,000 - 13,000 $13,000
Weighted average
maturity 14 months 5 months 1 month N/A 18 months 6 months
Strike rate N/A N/A 6.00% N/A 5.00% 5.00%
Fixed payable rate 6.23% 6.30% N/A N/A N/A N/A
Three month LIBOR 5.69% 5.18% 5.72% N/A N/A N/A
10 year CMT N/A N/A N/A N/A 5.44% 5.14%
Payment terms Quar- Quar- Quar- Quar- Quar- Quar-
terly terly terly terly terly terly
33
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
(8) FHLB Advances
FHLB advances are summarized as follows:
June 30,
------------------------------------------
1998 1999
-------------------- --------------------
Weighted Weighted
average average
interest interest
Maturity date Amount rate Amount rate
----------------------------------------------------------------
Year ended June 30,
1999 61,500 5.66 -- --%
2000 6,000 6.04 68,100 5.16
2001 -- -- 19,000 4.88
2002 159 7.67 159 7.67
2003 5,000 5.17 15,000 4.62
2004 777 6.38 20,000 4.81
Thereafter -- -- 19,737 5.12
-------------------------------------------
73,436 5.67 141,996 5.01
===========================================
Year ended June 30,
---------------------
1998 1999
Maximum amount of outstanding FHLB advances at ---------------------
any month-end $ 76,439 141,996
Average amount of outstanding FHLB advances
during the year 67,782 102,045
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.
At June 30, 1999, the Bank had an unused line of credit from the FHLB-Seattle
of $53.0 million. The Bank's credit line with the FHLB-Seattle is 35% of total
assets or up to approximately $195.0 million.
(9) Securities Sold Under Agreements to Repurchase and Lines of Credit
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) which are treated as financing arrangements.
Accordingly, the obligations to repurchase securities sold are reflected as a
liability in the consolidated balance sheets, and the securities underlying the
agreements remain in the asset accounts. The securities underlying the
agreements are under the Corporation's control and are held by the Federal Home
Loan Mortgage Corporation, nationally known government security dealers who are
recognized as primary dealers by the Federal Reserve Board, or other investment
banking firms approved by the Corporation's Board of Directors. Such
agreements typically have maturities ranging from thirty to 89 days.
Securities sold under agreements to repurchase the same securities consist of
mortgage-backed securities summarized as follows:
Underlying securities
---------------------
Weighted- Book Value,
average including
Balance interest accrued Market
outstanding rate interest value
---------------------------------------------
June 30, 1998 $ 13,391 5.56 14,748 14,535
June 30, 1999 5,951 4.85 6,569 6,379
34
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
Financial data pertaining to reverse repurchase agreements follows:
Year ended June 30,
-------------------
1998 1999
-------------------
Maximum amount of outstanding agreements at any
month-end $17,283 11,976
Average amount of outstanding agreements during
the year 14,299 5,571
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.
(10) Federal Income Taxes
Federal income tax expense includes the following components:
Year ended June 30,
--------------------------
1997 1998 1999
--------------------------
Current $ 1,061 1,850 2,253
Deferred (550) ( 94) (136)
--------------------------
511 1,756 2,117
==========================
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 for 1997 and 1998, due to tax exempt income received on
municipal investment securities and other differences as noted below.
1997 1998 1999
------------------------
Expected tax $ 639 1,796 2,117
Tax exempt municipal
income (95) (3) --
Other ( 33) (37) --
------------------------
Tax expense 511 1,756 2,117
========================
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:
1998 1999
Deferred tax assets: ------------------
Securities available-for-sale $ 54 868
Loans 517 678
Other 101 119
------------------
Gross deferred tax assets 672 1,665
Deferred tax liabilities:
Deferred loan fees (677) (570)
Premises and equipment (433) (432)
FHLB stock (936) (1,087)
------------------
Gross deferred tax liabilities (2,046) (2,089)
------------------
Net deferred tax liability (1,374) (424)
==================
35
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
A valuation allowance for deferred tax assets was not considered necessary at
June 30, 1998 or 1999. Management believes the Corporation will fully realize
its total deferred income tax assets as of June 30, 1999, based upon its total
deferred income tax liabilities and its current and expected future levels of
taxable income.
(11) Earnings Per Share
The following table presents EPS information:
Year ended June 30,
----------------------------------
1997 1998 1999
----------------------------------
Net income $ 1,368 3,525 4,104
Common shares outstanding (basic) 5,266,298 5,312,305 5,420,286
Effect of dilutive stock options 565,933 531,081 536,257
----------------------------------
Common shares outstanding (diluted) 5,832,231 5,843,386 5,956,543
==================================
EPS, basic 0.26 0.66 0.76
EPS, diluted 0.23 0.60 0.69
Earnings per share figures have been restated to take into effect the five for
four stock split effected on June 25, 1999.
For purposes of calculating basic and diluted earnings per share, the numerator
of net income is the same. There were no antidilutive outstanding options to
purchase common stock at June 30, 1997, 1998, and 1999.
(12) 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, 1999, 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, 1999, the Bank was in
compliance with the regulatory requirements for well-capitalized institutions.
As of May 13, 1999, 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.
36
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
Minimum
requirements
for capital Well-capitalized
Actual adequacy requirements
------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------
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
June 30, 1999:
Total risk-based capital to
risk-weighted assets (1) $39,230 10.17 30,864 8.00 38,580 10.00
Tier I (core) capital to
risk-weighted assets 35,403 9.18 15,432 4.00 23,148 6.00
Tier I (core) capital to
adjusted total assets 35,403 6.36 22,266 4.00 27,833 5.00
Tangible capital to
tangible assets 35,403 6.36 8,350 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.
(13) Mortgage Servicing Rights
A summary of capitalized mortgage servicing rights at June 30, 1998 and 1999
follows:
June 30,
--------------------------
1997 1998 1999
--------------------------
Fair value at beginning of year $ 648 761 1,290
Additions 315 908 1,042
Amortization (202) (322) (384)
Allowance for losses -- (57) (187)
Sales of mortgage servicing rights -- -- (946)
--------------------------
Fair value at end of year 761 1,290 815
==========================
(14) 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 $25, $58 and $82 to the plan for the
years ended June 30, 1997, 1998 and 1999, 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, 1997, 1998 and
1999, the Corporation contributed $65, $104 and $240, respectively, to the
ESOP, which is invested in Cascade Financial Corporation stock. Allocated and
unallocated shares at June 30, 1999, were 161,644 and 0, respectively. The
Corporation has the right of first refusal to purchase the allocated shares of
separated employees.
37
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
(c) Employee Stock Purchase Plan
The Corporation maintains an employee stock purchase plan, under the terms of
which 152,587 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, 1998 and 1999, 589,660 and
612,583 shares, respectively, were fully exercisable.
In June 1997, the Corporation's stockholders approved the 1997 Stock Option
Plan which authorized 179,688 shares. The terms and conditions of the 1997
Plan are materially the same as described above.
The Corporation applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees" in accounting for its stock option
plans. Had compensation cost on the fair value at the grant dates for the
Corporation's stock option plan been determined consistent with 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,
---------------------------
1997 1998 1999
Net income ---------------------------
As reported $ 1,368 3,525 4,104
Pro forma 1,328 3,457 3,956
Net income per common share
Basic
As reported 0.26 0.66 0.76
Pro forma 0.25 0.65 0.73
Diluted
As reported 0.23 0.60 0.69
Pro forma 0.23 0.59 0.66
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
$6.60, $6.23 and $7.25, respectively for the years ended June 30, 1997, 1998,
and 1999. The fair value is estimated on the date of grant with the following
weighted average assumptions used for 1997, 1998, and 1999: risk-free interest
rate of 6.51%, 5.83% and 4.75%, expected lives of eight years, no expected cash
dividends, and volatility factors of 24%.
38
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
Changes in total options outstanding for the years ended June 30 are as
follows:
Shares Weighted average
under exercise price of
option option shares
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
----------------------------------------------------------------------------
1999
----------------------------------
Outstanding at beginning of year 684,656 $ 4.34
Granted during year 132,949 10.73
Exercised during year (98,149) 2.85
Five-for-four stock split 151,905
Forfeited during year (23,016) 7.30
----------------------------------------------------------------------------
Outstanding at end of year 848,345 4.58
----------------------------------------------------------------------------
Financial data pertaining to outstanding stock options were as follows:
June 30, 1999
-------------------------------------------------------------------
Weighted
average
Weighted Weighted Number exercise
average average of price of
Number remaining exercise exer- exer-
Range of of contrac- price of cisable cisable
exercise option tual option option option
prices shares life shares shares shares
-------------------------------------------------------------------
$1.26-2.20 366,614 3.4 $1.45 366,614 $1.45
3.96-6.72 277,532 5.6 4.84 240,598 4.77
7.79-8.41 59,375 7.9 7.84 3,906 7.63
9.90-11.90 144,824 9.2 10.66 1,465 10.80
------------------------------------------------------
848,345 5.0 4.58 612,583 2.82
======================================================
39
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
(15) 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,
---------------------------------------------
1998 1999
---------------------------------------------
Carrying Estimated Carrying Estimated
Value fair value value fair value
Financial assets: ---------------------------------------------
Cash and cash equivalents $ 11,966 11,966 10,154 10,154
Securities available-for-sale 27,412 27,412 72,719 72,719
Securities held-to-maturity 4,725 4,654 1,738 1,699
Loans 391,223 399,910 462,361 460,389
Servicing rights 1,290 1,387 815 848
Financial liabilities:
Deposit accounts 312,518 313,079 361,786 361,878
Borrowings 86,827 86,840 147,947 147,769
Cash and cash equivalents
The carrying amount represents fair value.
Securities including mortgage backed securities
Fair values are based on quoted market prices or dealer 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
There are no material differences between the carrying value and estimated fair
value of off-balance sheet financial instruments including interest rate floors
and interest rate swaps.
40
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
(16) 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.
(17) 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,
- -------------------------------------------------------------------------------
1998 1999
- -------------------------------------------------------------------------------
Assets:
Cash $ 261 464
Investment in subsidiary 31,167 35,488
Other assets 2 43
--------------------------
31,430 35,995
==========================
Liabilities and Stockholders' Equity:
Other Liabilities 18 --
Stockholders' equity 31,412 35,995
--------------------------
31,430 35,995
==========================
Statement of Operations
For the years ended June 30,
- -------------------------------------------------------------------------------
1997 1998 1999
- -------------------------------------------------------------------------------
Equity in undistributed net income of the
subsidiary $ 1,464 3,786 4,217
Operating expenses (145) (392) (171)
------------------------------
Income before Federal income taxes 1,319 3,394 4,046
Income tax benefit 49 131 58
------------------------------
Net income 1,368 3,525 4,104
==============================
41
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
For the years ended June 30,
- -------------------------------------------------------------------------------
1997 1998 1999
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,368 3,525 4,104
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Equity in net income of subsidiary (1,464) (3,786) (4,217)
Increase (decrease) in other assets 16 44 (41)
Decrease in other liabilities -- -- (18)
--------------------------------
Net cash used in operating activities (80) (217) (172)
Cash flows from investing activities:
Dividends received from subsidiary -- 300 --
--------------------------------
Net cash provided by investing activities -- 300 --
Cash flows from financing activities:
Proceeds from issuance of common stock 78 140 375
--------------------------------
Net cash provided by financing activities 78 140 375
--------------------------------
Net increase (decrease) in cash and cash
equivalents (2) 223 203
Cash and cash equivalents: ================================
Beginning of year 40 38 261
--------------------------------
End of year 38 261 464
================================
(18) Lines of Business
The Corporation is managed along five major lines of business: business
banking, consumer banking, construction lending, income property lending and
residential lending. The administrative group, although not considered a line
of business, is responsible for the management of investments, interest rate
risk, marketing, data processing and regulatory and stockholder reporting. The
financial performance of these business lines is measured by the Corporation's
profitability reporting processes, which utilize various management accounting
techniques to ensure that each business line's financial results reflect the
underlying performance of that business.
The principal activities conducted by Business Banking are the origination and
servicing of commercial business loans and associated merchant services.
Consumer Banking includes all deposit products, with their related fee income,
and all consumer loan products such as home equity and installment loans and
credit card products. The Construction unit provides financing to builders and
developers for residential construction and land acquisition and development.
The Income Property unit originates loans secured by multi-family properties
and nonresidential real estate. The Residential unit's activities are the
origination of single family loans and the associated loan servicing
activities.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", was issued effective for fiscal years ending after
December 15, 1998. This standard requires the Corporation to provide
information on the performance of its reportable business segments, noted
above, which are strategic lines of business managed by the Management
Committee, under the direction of the Chief Executive Officer. The Management
Committee, which is the senior decision making group of the Corporation, is
comprised of seven members including the Chairman and Chief Executive Officer
and the President.
During 1999, the Corporation developed a management reporting system that
enables management to monitor the Corporation's performance on a line of
business basis. To better assess the contribution of its various business
lines, the Corporation generates segment results that include balances directly
attributable to business line activities. Expenses or activities not directly
controlled by business unit managers are allocated to the Administrative unit.
In this way, management can assess the performance of a particular business.
The Corporation is constantly analyzing its line of business performance and
developing better ways to measure profitability.
42
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, except share amounts)
===============================================================================
Each segment is managed by a senior executive. Back office support is provided
to each segment through executives responsible for information systems, finance
and administration.
The accounting policies of the segments are the same as those described in
"Note 1: Summary of Significant Accounting Policies." Direct revenues and
expenses are allocated to business segments in determining their net income.
Corporate overhead, centralized support costs and other costs are assigned to
the Administration Unit. The Corporation evaluates performance based on net
income of the respective business segments. Depreciation is allocated to the
segments based upon the utilization of the assets by the segments. All
depreciating assets are included in Administration's total assets.
Since SFAS No. 131 requires no segmentation or methodology standardization, the
organization structure of the Corporation and the allocated methodologies it
employs result in business line financial results that are not necessarily
comparable across companies. As such, the Corporation's business line
performance may not be directly comparable with similar information from other
financial institutions.
<TABLE>
Year Ended June 30, 1999
Income Adminis-
Business Residential Construction Property Consumer tration
Total
-------- ----------- ------------ -------- -------- --------- ----
- --
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed Income Statement
Net interest after
provision for
loan losses $ 2,813 5,339 1,428 3,554 1,863 825
15,822
Other income 31 1,733 -- 6 687 380
2,837
Other expense 881 3,015 182 142 3,252 4,966
12,438
-------------------------------------------------------------------------------
- --
Income before income tax 1,963 4,057 1,246 3,418 (702) (3,761)
6,221
Federal income taxes 667 1,380 424 1,163 (239) (1,278)
2,117
-------------------------------------------------------------------------------
- --
Net income 1,296 2,677 822 2,255 (463) (2,483)
4,104
=================================================================================
</TABLE>
<TABLE>
At June 30, 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Total Assets 61,676 177,988 35,519 134,959 52,219 94,725
557,086
</TABLE>
Given the nature and magnitude of data required to report on business line
profitability, the Corporation has determined that it is not possible to gather
the information and data necessary to restate prior year segment results.
43
<PAGE>
Stockholders interested in receiving quarterly earnings releases should call
our main office at (425) 339-5500 or 1-800-326-8787 or contact us by email at
[email protected].
A copy of the Form 10-K as filed with the Securities and Exchange Commission
will be furnished to stockholders upon written request to the Secretary,
Cascade Financial Corporation, 2828 Colby Avenue, Everett, WA 98201. You may
also contact us through our Web site: www.cascadebank.com. Form 10-K
information is also available through the Securities and Exchange Commission's
Web site: www.sec.gov/edaux/searches.htm
Stockholders'
Meeting:
The annual meeting of
Cascade Financial
Corporation will be at
10:00 a.m., Saturday,
October 23, 1999 at
Cascade Bank, 2828
Colby Avenue, Everett,
Washington.
- -------------------------------------------------------------------------------
COMMON STOCK INFORMATION
The common stock of Cascade Financial Corporation is traded on the NASDAQ Stock
Market under the symbol "CASB". As of August 27, 1999 there were
approximately 1,250 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 1999 High Low Fiscal 1998 High Low
First Quarter $12.250 10.750 First Quarter $11.750 7.750
Second Quarter 12.250 8.375 Second Quarter 12.125 8.375
Third Quarter 13.500 11.125 Third Quarter 9.625 7.750
Fourth Quarter 14.500 13.000 Fourth Quarter 12.625 9.375
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 is 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.
Stock Transfer Legal Counsel
Agent
Anderson Hunter Law Firm, PS
Chase Mellon 2707 Colby Avenue
Shareholder Services Suite 10o1
50 California Street, 10th Floor Everett, Washington 98201
San Francisco, California 94111
Auditors Special Counsel
KPMG LLP Breyer & Associates PC
3100 Two Union Square 1100 New York Avenue, N.W.
601 Union Street Suite 700 Wast
Seattle, Washington 98101-2327 Washington, D.C. 20005
Cascade [Logo]
Financial
Corporation
44
<PAGE>
- -------------------------------------------------------------------------------
MANAGEMENT COMMITTEE
[Picture appears here] [Picture appears here]
TO LEFT:
David R. Little
EVP, Business Banking
Russell E. Rosendal
EVP, Chief Financial Officer
James J. Palm
EVP, Residential Lending
Robert G. Disotell
EVP, Consumer Banking
Steve Smith
SVP, Operations
TO RIGHT:
Steven R. Erickson
EVP, Income Property/
Construction Lending
Frank M. McCord
Chairman, Chief Executive Officer
C. Fredrick Safstrom
President, Chief Operating Officer
Vera E. Wildauer
SVP, Marketing Director
- -------------------------------------------------------------------------------
BOARD OF DIRECTORS
Frank M. McCord
Chairman of the
Board
Chief Executive Officer
Cascade Bank
a
[Picture appears here]
David W. Duce
Vice Chairman
Attorney
Duce, Bastian, Peterson, and
Zielke
c
[Picture appears here]
Janice Halladay
Office Manager
Moss Adams, LLP
c
[Picture appears here]
Dwayne Lane
President
Dwayne Lane Auto Centers
c
[Picture appears here]
Gary L. Meisner
President
Clearview Management, Inc.
b
[Picture appears here]
Dennis R. Murphy, Ph.D.
Vice Chairman
Dean
College of Business and Economics
and Professor of Economics
Western Washington University
b
[Picture appears here]
David R. O'Connor
Co-Owner
Mobile Country Club
a
[Picture appears here]
Henry M. Robinett
General Partner
Boyden, Robinett & Assoc. L.P.
a, b
[Picture appears here]
C. Fredrick Safstrom
President
Chief Operating Officer
Cascade Bank
a
[Picture appears here]
Paull H. Shin, Ph.D.
Washington State Senator
Retired Professor of History
c
[Picture appears here]
Ronald E.Thompson
President
WRE Commercial & Property
Management
a, b
[Picture appears here]
G. Brandt Westover
Vice President
Paine Webber, Inc.
a
[Picture appears here]
a Member of the Executive Committee
b Member of the Audit and Finance Committee
c Member of the Compensation and Personnel Committee
corporate
solutions
45
<PAGE>
[Back Cover Page]
Special Thanks
To all the "Real people"-customers and employees-who donated their time to be
photographed for this report:
Front Cover: Michele Sabol; Duane Edwards with Steve Ahmann; Dale Schroeder;
Tracy and Daniella Zajac; Judy, Tucker, Hannah, Tyler and Steve Smith
Pg 4-5: Monica, Brent Jr, Desmond and Brent Stewart; Craig Holman
Pg 6-7: Phon Thi Thach with Doeung Nga, Duangporn Dunning with Joan Bear;
Gordon P. Reykdal and Gordon K. Reykdal with Steve Erickson
Pg 8-9: Mark Sanelli with Melvin Brook; Patti Hopper with Cora Davies, Jerry
Dawson with Laura and Frank Getty
Pg. 10-11: Russ Rosendal, Rob Disotell, John Feathers, April Selanders, Fred
Safstrom, Steve Smith, Vera Wildauer, Robert Gamboa, Carmen Cortines, Morris
VanHorne, Karen Donnellan; Tim Lawrence; Laura Jarrell with Carly; Mike Curley
Pg. 12: Background photo courtesy of YMCA of Snohomish County; Jerry Beavers
with Fred Safstrom
- ---------------------------------------------------------
Cascade Bank Locations
Everett Main Office Marysville Office
2828 Colby Avenue 815 State Avenue
Everett, Washington Marysville, Washington
(425) 339-5500 (360) 659-7614
Everett Mount Vernon Office
Broadway Office 1725 Continental Place,
2602 Broadway Suite C
Everett, Washington Mount Vernon, Washington
(425) 259-1243 (360) 424-4655
Everett Smokey Point in Safeway
Evergreen Way Office 3532 172nd Street NE
6920 Evergreen Way Arlington, Washington
Everett, Washington (360) 653-1900
(425) 353-1243
Woodinville in TOP Food &
Bellevue Office Drug
200 108th NE 17641 Garden Way NE
Bellevue, Washington Woodinville, Washington
(425) 455-2300 (425) 481-0820
Clearview Office Bellingham
17512 SR 9 SE Home Loan Center
Snohomish, Washington 909 Lakeway Drive, Suite 200
(360) 668-1243 Bellingham, Washington
(360) 676-5200
Harbour Pointe in QFC
11700 Mukilteo Speedway Coming Soon:
Mukilteo, Washington Marysville in Haggen Food
(425) 290-7767 & Pharmacy
3711 88th Street NE
Issaquah Office Marysville, Washington
305 Front Street N
Issaquah, Washington Lake Stevens in Haggen
(425) 391-5500 Food & Pharmacy
Meridian Street Plaza
Lynnwood Office 8915 Market Place
19419 Highway 99 Everett, Washington
Lynnwood, Washington
(425) 775-6666
S O L U T I O N S
1999 Annual Report Cascade [Logo]
Financial
Corporation
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
Cascade Financial Corporation
Jurisdiction or
Percentage State of
Subsidiaries (a) of Ownership 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.
<PAGE>
Exhibit 23
Consent of Independent Auditors
<PAGE>
[Letterhead of KPMG LLP]
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
2, 1999 relating to consolidated balance sheets of Cascade Financial
Corporation and subsidiary as of June 30, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
June 30, 1999, which report is incorporated by reference into Cascade Financial
Corporation's 1999 Annual Report on Form 10-K from Cascade Financial
Corporation's 1999 Annual Report to Stockholders.
/s/KPMG LLP
Seattle, Washington
September 27, 1999
<PAGE>
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the consolidated
financial statements of Cascade Financial Corporation for the year ended June
30, 1999 and is qualified in its entirety by reference to such financial
statements.
Financial Data
As of or for the year
Item Number ended June 30, 1999 Item Description
- ----------- ------------------- ----------------
($ in thousands)
9-03 (1) 9,804 Cash and due from Banks
9-03 (2) 350 Interest-bearing deposits
9-03 (3) -- Federal funds sold - purchased
securities for resale
9-03 (4) -- Trading account assets
9-03 (6) 72,719 Investment and mortgage backed
securities held for sale
9-03 (6) 1,738 Investment and mortgage backed
securities held to maturity -
carrying value
9-03 (6) 1,699 Investment and mortgage backed
securities held to maturity - market
value
9-03 (7) 455,736 Loans, net
9-03 (7)(2) 4,254 Allowance for losses
9-03 (11) 557,086 Total assets
9-03 (12) 361,786 Deposits
9-03 (13) 74,051 Short-term borrowings
9-03 (15) 13,114 Other liabilities
9-03 (16) 73,896 Long-term debt
9-03 (19) -- Preferred stock - mandatory redemption
9-03 (20) -- Preferred stock - no mandatory
redemption
9-03 (21) 55 Common stocks
9-03 (22) 34,184 Other stockholders' equity
<PAGE>
9-03 (23) 557,086 Total liabilities and stockholders'
equity
9-04 (1) 34,751 Interest and fees on loans
9-04 (2) 3,184 Interest and dividends on investments
9-04 (4) 270 Other interest income
9-04 (5) 38,205 Total interest income
9-04 (6) 16,425 Interest on deposits
9-04 (9) 21,956 Total interest expense
9-04 (10) 16,249 Net interest income
9-04 (11) 427 Provision for loan losses
9-04 (13)(h) 17 Investment securities gains/(losses)
9-04 (14) 12,438 Other expenses
9-04 (15) 6,221 Income/loss before income tax
9-04 (17) 6,221 Income/loss before extraordinary items
9-04 (18) -- Extraordinary items, less tax
9-04 (19) -- Cumulative change in accounting
principles
9-04 (20) 4,104 Net income or loss
9-04 (21) 0.76 Earnings per share - book
9-04 (21) 0.69 Earnings per share - diluted
I.B. 5 7.83 Net yield - interest earning assets -
actual
III.C.1. (a) 1,201 Loans on non-accrual
III.C.1. (b) -- Accruing loans past due 90 days or more
III.C.2. (c) -- Troubled debt restructuring
III.C.2 2,149 Potential problem loans
IV.A.1 4,143 Allowance for loan loss - beginning of
period
IV.A.2 323 Total chargeoffs
IV.A.3 7 Total recoveries
IV.A.4 4,254 Allowance for loan loss - end of period
IV.B.1 -- Loan loss allowance allocated to
domestic loans
IV.B.2 -- Loan loss allowance allocated to
foreign loans
IV.B.3 4,254 Loan loss allowance - unallocated
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 9804
<INT-BEARING-DEPOSITS> 350
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72719
<INVESTMENTS-CARRYING> 1738
<INVESTMENTS-MARKET> 1699
<LOANS> 455736
<ALLOWANCE> 4254
<TOTAL-ASSETS> 557086
<DEPOSITS> 361786
<SHORT-TERM> 74051
<LIABILITIES-OTHER> 13114
<LONG-TERM> 73896
0
0
<COMMON> 55
<OTHER-SE> 34184
<TOTAL-LIABILITIES-AND-EQUITY> 557086
<INTEREST-LOAN> 34751
<INTEREST-INVEST> 3184
<INTEREST-OTHER> 270
<INTEREST-TOTAL> 38205
<INTEREST-DEPOSIT> 16425
<INTEREST-EXPENSE> 21956
<INTEREST-INCOME-NET> 16249
<LOAN-LOSSES> 427
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 12438
<INCOME-PRETAX> 6221
<INCOME-PRE-EXTRAORDINARY> 6221
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4104
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 7.83
<LOANS-NON> 1201
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2149
<ALLOWANCE-OPEN> 4143
<CHARGE-OFFS> 323
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 4254
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4254
</TABLE>
