US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM ____________TO____________
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1661954
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 Colby Avenue
Everett, Washington 98201
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(425) 339-5500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2000
----- ------------------------------------
Common Stock ($.01 par value) 5,550,929
<PAGE>
CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended September 30, 2000
---------------
INDEX
PART I - Financial Information:
Item 1 - Financial Statements:
- Condensed Consolidated Balance Sheets 3
- Condensed Consolidated Statements of Operations 4
- Consolidated Statements of Comprehensive Income 5
- Condensed Consolidated Statements of Cash Flows 6
- Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 15
PART II - Other Information 16
<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 2000 2000
------ ------------ --------
(unaudited)
<S> <C> <C>
Cash on hand and in banks $ 14,809 13,277
Interest-earning deposits in other institutions 2,491 83
Securities available for sale 120,782 93,444
Loans available for sale, net 1,878 4,236
Securities held to maturity (market value of
$10,236 and $10,278) 10,655 10,851
Loans, net 543,897 535,736
Premises and equipment, at cost, net 8,895 9,132
Accrued interest receivable and other assets 9,018 8,940
Deferred Federal income taxes 172 477
---------- -------
TOTAL ASSETS $ 712,597 676,176
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 404,744 398,507
Federal Home Loan Bank advances 220,204 215,656
Securities sold under agreements to repurchase 31,060 5,787
Advance payments by borrowers for taxes and insurance 2,258 1,960
Accrued expenses and other liabilities 5,736 7,010
---------- -------
TOTAL LIABILITIES 664,002 628,920
Trust preferred securities 10,000 10,000
Preferred stock, $.01 par value, 500,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value, 8,000,000 shares authorized;
5,550,929 and 5,531,877 shares issued and outstanding 56 55
Additional paid-in capital 5,101 5,038
Treasury Stock, 491 shares at cost (343) -
Retained earnings, substantially restricted 35,888 34,862
Cumulative other comprehensive income, net (2,107) (2,699)
---------- -------
TOTAL STOCKHOLDERS' EQUITY 38,595 37,256
---------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 712,597 676,176
========== =======
</TABLE>
See notes to consolidated financial statements
<PAGE>
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Interest income:
Loans $ 11,822 9,828
Securities held-to-maturity 193 20
Securities available for sale 1,547 990
FHLB stock dividends 180 144
Interest-earning deposits 98 34
---------- ---------
Total interest income 13,840 11,016
Interest expense:
Deposits 5,196 4,210
Borrowings 3,702 2,129
Trust preferred securities 297 -
---------- ---------
Total interest expense 9,195 6,339
Net interest income 4,645 4,677
Provision for loan losses 210 210
---------- ---------
Net interest income after provision for loan losses 4,435 4,467
Other income:
Gain on sale of loans 54 123
Service charges 418 315
Other 44 48
---------- ---------
Total other income 516 486
Other expenses:
Salaries and employee benefits 1,794 1,909
Occupancy 737 696
Federal deposit insurance premiums 22 52
Marketing 119 117
Data processing 69 89
Other 652 613
---------- ---------
Total other expenses 3,393 3,476
Income before income taxes 1,558 1,477
Federal income taxes 530 501
---------- ---------
Net income $ 1,028 976
========== =========
Earnings per share, basic $ 0.19 0.18
Earnings per share, diluted 0.18 0.16
Weighted average number of shares outstanding:
Basic 5,538,817 5,469,671
Diluted 5,836,224 5,959,798
</TABLE>
See notes to consolidated financial statements
<PAGE>
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Sepember 30,
2000 1999
-------------------------------
<S> <C> <C>
Net Income $1,028 976
Increase (decrease) in unrealized
Gains (losses) on securities
available for sale, net of tax
of $(27) and $305. 592 (52)
------ ----
Comprehensive Income $1,620 924
------ ----
</TABLE>
<PAGE>
CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
-------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,028 976
---------- -------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization of premises
and equipment 347 337
Amortization of retained servicing rights 64 61
Provision for losses on loans 210 210
Additions to mortgage servicing rights (21) (56)
Deferred loan fees, net of amortization 157 175
Net change in loans available for sale 2,359 13,337
Federal Home Loan Bank stock dividend received (179) (144)
Net change in accrued interest receivable and
other assets over principal and interest payable
on loans serviced for others and accrued expenses
and other liabilities (1,268) (4,703)
---------- -------
Net cash provided by operating activities 2,697 10,193
Cash flows from investing activities:
Loans originated, net of principal repayments (8,764) (58,331)
Principal repayments on securities held-to maturity 196 292
Principal repayments on securities available-for-sale 1,132 1,905
Purchases of securities available for sale (27,284) (1,642)
Purchases of premises and equipment (110) (373)
---------- -------
Net cash used in investing activities (34,830) (58,149)
Subtotal, carried forward (32,133) (47,956)
---------- -------
</TABLE>
See notes to consolidated financial statements
<PAGE>
CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
------ ------
<S> <C> <C>
Subtotal, brought forward $ (32,133) (47,956)
--------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 60 40
Repurchase of common stock (343) -
Net increase (decrease) in deposits 6,237 (2,146)
Net increase in Federal Home Loan Bank advances 4,548 35,240
Net increase in securities sold under
agreements to repurchase 25,273 15,745
Net increase in advance payments by borrowers
for taxes and insurance 298 444
--------- -------
Net cash provided by financing activities 36,073 49,323
--------- -------
Net increase in cash and cash equivalents 3,940 1,367
Cash and cash equivalents at beginning of period 13,360 10,153
-------- -------
Cash and cash equivalents at end of period $ 17,300 11,520
========= =======
Supplemental disclosures of cash flow information-
cash paid during the period for:
Interest $ 8,716 6,156
Federal income taxes 450 500
--------- -------
Supplemental schedule of noncash investing activities:
Mortgage loans securitized into mortgage backed
securities and held-for-trading and sold - 1,407
Net mortgage loans transferred to real estate owned 236 -
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(unaudited)
1. PRESENTATION OF FINANCIAL INFORMATION
The accompanying financial information is unaudited and has been prepared
from the consolidated financial statements of the Corporation, its sub-
sidiaries, Cascade Bank (the "Bank") and Cascade Capital Trust I (the "Trust"),
and the Bank's subsidiary, Cascade Financial Investment Services, Inc. All
significant intercompany balances have been eliminated in the consolidation. In
the opinion of management, the financial information reflects all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the financial condition, results of operations, and cash flows of the
Corporation pursuant to the requirements of the SEC for interim reporting
Certain information and footnote disclosures included in the Corporation's
financial statements for the year ended June 30, 2000, have been condensed or
omitted from this report. Accordingly, these statements should be read with
the financial statements and notes thereto included in the Corporation's 2000
Annual Report on Form 10-K.
2. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various commitments to fund
mortgage loans. Management does not anticipate any material loss as a result of
these commitments.
Periodically there have been various claims and lawsuits against the
Corporation or the Bank, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incidental to the Corporation's and the Bank's business. In the opinion of
management no significant loss is expected from any of such pending lawsuits.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
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. In June 2000, the Financial
Accounting Standards Board issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", an amendment of FASB
Statement No. 133, which makes minor modifications to SFAS 133. SFAS No. 138
was adopted on July 1, 2000, and did not have a material effect on the financial
statements.
The SEC issued Staff Accounting Bulletin No. 101B (SAB 101B). SAB 101B
delays the effective date of Staff Accounting Bulletin No. 101 (SAB 101)
"Revenue Recognition in Financial Statements", to the fourth quarter for fiscal
years beginning between December 15, 1999 and March 16, 2000. SAB 101 provides
guidance for revenue recognition and SEC staff's views on the application of
<PAGE>
accounting principles to selected revenue recognition issues. The Corporation
anticipates that such adoptions will not have a material impact on the
Corporation's consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation." Interpretation No. 44 clarifies the application of Accounting
Principles Board Opinion No. 25 ("APB 25") and is effective July 1, 2000.
Interpretation No. 44 clarifies the definition of "employee" for purposes of
applying APB 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination
Interpretation No. 44 was adopted on July 1, 2000 and such did not have a
material impact on the Corporation's consolidated financial statements.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section contains forward-looking statements that have been prepared
on the basis 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.
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning
the Corporation for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
At or for the
three months ended
September 30,
2000 1999
------ -----
<S> <C> <C>
Return on average assets 0.60 % 0.71
Return on average stockholders' equity 11.09 11.29
Average stockholders' equity to assets 7.00 6.94
General and administrative expenses to average assets 1.99 2.55
Efficiency ratio 65.66 67.33
Average interest-bearing assets to average
interest-bearing liabilities 104.21 105.87
</TABLE>
<PAGE>
CHANGES IN FINANCIAL CONDITION
Total assets increased 5.4% to $712.6 million at September 30, 2000,
compared with $676.2 million at June 30, 2000. Loans, net increased 1.5% or by
$8.2 million to $543.9 million. Deposits increased by $6.2 million to $404.8
million. The bulk of the growth in assets was funded by an increase in
wholesale liabilities. FHLB-Seattle advances grew by $4.5 million and
securities sold under agreements to repurchase increased $25.3 million. Asset
growth was smaller than it has been in the recent past as the growth in our
loan portfolios has slowed.
ASSET QUALITY
Nonperforming loans totaled $1.4 million and $573,000 at September 30,
2000 and June 30, 2000, respectively. Of the 15 non-performing loans, six
were commercial representing $438,000; six were residential for $295,000; and
three were consumer for 424,000. During the September 30, 2000 quarter loan
charge-offs equaled $32,000, while recoveries were $11,000. Assets classified
as substandard totaled $5.9 million and $4.8 million respectively at September
30, 2000 and June 30, 2000. No loans were classified as "doubtful" in either
period.
<TABLE>
<CAPTION>
At September 30, At June 30,
2000 2000
---------------- -----------
<S> <C> <C>
Non-performing loans to total assets .20% .08
Non-performing loans to total loans outstanding .26 .11
Non-performing assets to total assets .29 .08
Allowance for loan losses to non-performing loans 371.43 454.50
Allowance for loan losses to total loans outstanding .94 .89
</TABLE>
RESULTS OF OPERATIONS
Comparison of the Three months Ended September 30, 2000 and 1999
GENERAL
Net income for the three months ended September 30, 2000 increased 5.3% to
$1,028,000, compared with $976,000 in 1999. The principal reason for the
increase in the three months earnings was an increase of $30,000 in non-
interest income and a decrease of $83,000 in non-interest expense which was
offset by a decrease of $32,000 in net interest income.
NET INTEREST INCOME
Net interest income was essentially unchanged at $4.65 million for the
three months ended September 30, 2000, compared to $4.68 million in the quarter
ended September 30, 1999. The Bank's net interest margin decreased 57 basis
points for quarter ended September 30, 2000, to 2.81%, as compared to 3.38% for
the quarter ended September 30, 1999. Average interest earning assets increased
$109.0 million to $663.6 million for the quarter ended September 30, 2000 as
compared to $554.6 to the quarter ended September 30, 1999. Average loans
outstanding increased 20% or $91.0 million from $452.4 million to $543.4
<PAGE>
million and average securities held increased $33.0 million from $76.1 million
to $109.1 million during the quarter ended September 30, 2000 as compared to
the quarter ended September 30, 1999. The yield on earning assets was 8.31% for
the quarter ended September 30, 2000, compared to 7.91% for the quarter ended
September 30, 1999. The cost of funds increased 95 basis points to 5.74% for
the quarter ended September 30, 2000. This increase in the cost of funds was
the primary factor leading to the decrease in net interest margin.
The Bank is focusing on adding commercial businesses, nonconforming one-to
-four family loans, home equity lines of credit, and one-to-four family
construction loans to its portfolio. Nonconforming loans generally include
loans where the borrower has a debt level or other financial considerations
that makes the loan unsaleable to government agencies such as FHLMC and FNMA.
Management believes these products provide the best returns for the Bank and
can be underwritten to ensure low losses, absent unforeseen changes in local or
national economic conditions. Additionally, these loan types typically have
less refinance activity than conforming loans, which should help to lower
the Bank's overall origination and servicing costs in the future. Commercial
business loans outstanding increased by $3.7 million since June 30, 2000.
These loans represented 15.7% of total outstanding loans at September 30, 2000,
compared to 15.3% at June 30, 2000.
<TABLE>
<CAPTION>
At or for the
three months ended
September 30,
2000 1999
-------- --------
(dollars in thousands)
<S> <C> <C>
Average interest earning assets $663,536 554,553
Average interest bearing liabilities 636,655 524,587
Yield on interest earning assets 8.31% 7.91%
Cost of interest bearing liabilities 5.74% 4.79%
Net interest spread 2.57% 3.12%
Net interest margin 2.81% 3.38%
</TABLE>
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses was unchanged at $210,000 for the
three months ended September 30, 2000 and 1999. At September 30, 2000 and June
30, 2000, the Bank's loan loss allowance totaled $5.2 million and $5.0 million,
respectively. The loan loss allowance as a percent of net loans outstanding was
0.94% and 0.92% respectively for those periods. Non-performing loans, (loans on
non-accrual and ninety days past due) increased to $1.4 million at September
30, 2000, as compared to $573,000 at June 30, 2000. Substandard loans were
$5.9 million and $4.8 million at September 30, 2000 and June 30, 2000,
respectively. The provision for loan losses was 371% of non-performing loans
as of September 30, 2000.
The provision for loan losses reflects management's quarterly evaluation
of the adequacy of the allowance for losses on loans. In determining adequacy,
management considers changes in the size and composition of the loan portfolio,
actual loan loss experience, current and anticipated economic conditions and
other factors. Management intends to grow the commercial, nonconforming
<PAGE>
residential mortgage, construction and income property portfolios. These loans
typically have a higher credit risk that may require additions to the reserve
in future periods. Management monitors these loans carefully to maintain
credit quality and adequate reserve levels.
NON-INTEREST INCOME
Other income increased 6% or $30,000 during the quarter ended September
30, 2000 to $516,000. This increase was the result of an increase in service
fees of $103,000 which was partially offset by a decrease in gains from the
sales of loans of $69,000. The gain on the sale of loans decreased since the
Corporation reduced its involvement in mortgage banking when it restructured
its real estate lending operations in May 2000.
NON-INTEREST EXPENSE
Other expenses decreased by 2.4% or $83,000 to $3.4 million for the three
months ended September 30, 2000. This decrease is due primarily to decrease in
salaries and employee benefits of $115,000. The majority of those savings
comes from the restructuring of real estate lending. Management is reviewing
all business units to reduce expenses during the next several quarters.
SEGMENT RESULTS
<TABLE>
<CAPTION>
For the three months ended
September 30, 2000
Income Administration/
Business Residential Construction Property Consumer Treasury Total
---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed Income Statement
Net Interest after
Provision for loan losses $1,082 1,104 546 978 442 283 4,435
Other Income 9 119 - - 321 67 516
Direct Expense 256 402 48 19 597 113 1,435
Allocated Overhead 224 545 179 530 201 279 1,958
---------------------------------------------------------------------------------------
Income before Income Tax 611 276 319 429 (35) (42) 1,558
Federal Income Taxes 208 94 108 146 (12) (14) 530
---------------------------------------------------------------------------------------
Net Income 403 182 211 283 (23) (28) 1,028
---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the three months ended
September 30, 1999
Income Administration/
Business Residential Construction Property Consumer Treasury Total
---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed Income Statement
Net Interest after
Provision for loan losses $ 908 1,327 375 1,109 480 268 4,467
Other Income 8 111 28 22 234 83 486
Direct Expense 223 807 40 120 471 78 1,739
Allocated Overhead 178 605 158 388 141 267 1,737
---------------------------------------------------------------------------------------
Income before Income Tax 515 26 205 623 102 6 1,477
Federal Income Taxes 175 9 70 212 35 1 501
---------------------------------------------------------------------------------------
Net Income 340 17 135 411 67 5 976
---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LIQUIDITY AND SOURCES OF FUNDS
The Bank maintains liquidity balances in FHLB deposits and short-term
securities at levels in accordance with regulatory guidelines. The Bank held
average (unpledged) liquid assets of $79.0 million in September 2000, which was
in excess of the required liquidity level of $56.5 million.
Loan commitments outstanding at September 30, 2000, were $21.7 million and
will be funded through sales of loans, existing liquidity balances, FHLB-
Seattle advances, and other borrowings. Outstanding commitments to sell loans
totaled $2.2 million at September 30, 2000.
At September 30, 2000, the Bank had an unused line of credit from the
FHLB-Seattle of $29.2 million. The Bank's credit line with the FHLB-Seattle is
35% of total assets or up to $249.4 million. The Bank also had $31.1 million
of reverse repurchase agreements outstanding, an increase of $25.3 million from
June 30, 2000.
CAPITAL RESOURCES
March 1, 2000 Cascade Capital Trust I issued ten million par value Trust
Preferred Securities. These securities are considered core capital for the
purposes of regulatory capital requirements. Cascade Capital Trust I, a wholly
owned subsidiary of the Corporation, is a statutory business trust created for
the exclusive purposes of issuing and selling capital securities and utilizing
sale proceeds to acquire junior subordinated debt issued by the Corporation.
Accordingly, the junior subordinated debentures are the sole assets of the
Trust, and payments under the junior subordinated debentures will be the sole
revenues of the Trust. All of the common securities of the Trust are owned by
the Corporation
The Bank is in full compliance with all capital requirements established
by the OTS at September 30, 2000. Cascade's regulatory capital, capital
requirements, and related excess capital amounts as of September 30, 2000 are
presented in the following table:
<TABLE>
<CAPTION>
Core capital Amount Percentage
------------ -------- ----------
(In thousands)
<S> <C> <C>
Tier 1 (Core) capital $49,686 6.97%
Less: Minimum requirement 28,421 4.00
------- -----
Excess $21,265 2.97%
======= =====
</TABLE>
<TABLE>
<CAPTION>
Risk-based capital Amount Percentage
------------------ -------- ----------
(In thousands)
<S> <C> <C>
Risk-based capital $54,345 11.41%
Less: Minimum requirement(1) 38,359 8.00
------- ------
Excess $15,986 3.41%
======= ======
(1) Based on risk-weighted assets.
</TABLE>
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991. Among other things, the
FDICIA provides the OTS, effective December 19, 1992, with broad powers to take
"prompt corrective action" to resolve problems of insured depository
institutions. The actions the OTS can take depend upon whether the institution
in question is "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized". The OTS has advised the Corporation that at September 30,
2000, Cascade Bank is a "well capitalized" institution.
On November 2, 1999, the Federal Deposit Insurance Corporation (FDIC)
published a notice indicating it is recommending higher capital requirements
for insured banks and savings associations engaged in subprime lending. In the
release, the FDIC does not define subprime loans as all loans underwritten
using non-conventional credit standards. Loans with a community development
purpose are not considered subprime loans. Affordable housing loans, for
example, often are underwritten using non-conventional underwriting standards,
but are done in a safe and sound manner. Subprime loans are, in contrast, often
made without regard to the underlying credit risk of the borrower, but are made
based on the underlying collateral only. At this time it is impossible to
assess the impact of this proposal in its current form.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT
Cascade, like other financial institutions, is subject to fluctuations in
interest rates because its interest-bearing liabilities reprice on different
terms than its interest-earning assets. During periods of interest rate
declines this position has a generally favorable impact on net interest income,
while increases in interest rates have a generally adverse impact on net
interest income. The recent increase in short term rates has exerted downward
pressure on our net interest margin.
To reduce its interest rate exposure, Cascade has sought to migrate its
loan mix toward prime based business and construction loans. Cascade sells the
vast majority of all new 15 and 30 year fixed rate loans. Cascade's
residential portfolio primarily consists of mortgages with initial fixed rate
periods of three or five years that then convert to one year adjustable rate
mortgages. The growth in Cascade's investment portfolio has been generally
limited to adjustable rate asset backed securities; collateralized mortgage
obligations (CMOs) that float with 1 month LIBOR; CMOs that have short expected
lives; and longer dated trust preferred securities to offset the interest risk
associated with Cascade's issuance of trust securities.
Cascade extends the maturity of its liabilities by offering deposit
products to long-term, less rate sensitive customers, and by periodically
obtaining longer term FHLB-Seattle advances. During the quarter, Cascade
extended the maturity of its advances portfolio by converting approximately
$45 million in short term advances into fixed rate advances with effective
maturities ranging from two to five years. Cascade has used interest rate swap
and interest rate cap agreements to effectively extend the repricing of short-
term deposit accounts.
Cascade uses a simulation model to measure its interest rate risk and the
effects on net interest income resulting from changes in market interest rates.
Cascade uses mark to market reports provided by the OTS and others to measure
the impact of changes in rates on the fair value of its balance sheet in rate
shock scenarios. In management's opinion there has been no material change in
the interest rate exposure since the most recent year end at June 30, 2000.
<PAGE>
PART II-OTHER INFORMATION
-------------------------
Item 1. Legal Proceedings.
---------------------------
The Corporation and the Bank have certain litigation and negotiations in
progress resulting from activities arising from normal operations. In the
opinion of management, none of these matters is likely to have a materially
adverse effect on the Corporation's financial position.
Item 2. Changes in Securities.
-------------------------------
Not applicable
Item 3. Defaults upon Senior Securities.
-----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
Not applicable
Item 5. Other information.
---------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
------------------------------------------
Not applicable
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASCADE FINANCIAL CORPORATION
November 14, 2000 /s/ Lars H. Johnson
------------------------------
By: Lars H. Johnson,
Executive Vice President
(Chief Financial Officer)
