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, 2000
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
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(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
2828 Colby Avenue, Everett, Washington 98201
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(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 S-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, 2000, there were issued and outstanding 5,510,484
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, 2000 the aggregate value of the Common Stock
outstanding held by nonaffiliates of the registrant was $37.9 million (based
on $6.88 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, 2000 (the "Annual Report")(Part II).
2. Portions of registrant's Definitive Proxy Statement for the 2000
Annual Meeting of Stockholders (Part III).
<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, 2000, the Corporation conducted its business from its main
office in Everett, Washington, and 13 other full service offices in the
greater Puget Sound region. At June 30, 2000, the Corporation had total
assets of $676.2 million, total deposits of $398.5 million and stockholders'
equity of $37.3 million. The savings deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF"), 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 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 any of these strategies
will be implemented, or if implemented, achieve the amounts described or
within the time periods currently estimated.
Our goal is to build a community oriented commercial bank. Accordingly,
our strategies focus on expanding our commercial banking activities and our
net interest margin. In order to realize these objectives, we are pursuing
the following strategies:
* Reducing the percentage of our assets consisting of lower-yielding
single-family first mortgage loans and mortgage-backed securities and
increasing the percentage of our assets consisting of business,
residential construction, commercial real estate and consumer
installment loans with higher risk-adjusted returns, shorter
maturities and more sensitivity to interest rate fluctuations.
* Increasing deposits by attracting lower cost transaction accounts
(such as checking, savings and money market accounts).
* Maintaining our capital at or above the "well-capitalized" (as defined
for regulatory purposes) level.
* Deploying any excess capital into lending products intended to general
higher risk-adjusted returns than those typically provided by
single-family first mortgage loans and mortgage-backed securities.
2
<PAGE>
In addition, we periodically have discussions with and receive financial
information about other companies that may lead to our acquisition of all or
part of that company. However, we currently have no agreements or
understandings to acquire any other company.
In April 2000, the Corporation restructured its real estate lending
operations. The Residential Lending Division was consolidated with the Income
Property and Construction Lending Division to form the Real Estate Lending
Division. With this restructuring the Corporation dramatically reduced its
presence in mortgage banking.
Market Area
-----------
Headquartered in Everett, Washington, the Corporation serves its
customers from 14 full service offices, 10 in Snohomish County, 3 in King
County and one in Skagit County. The Corporation serves the financial services
needs 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 Company is the largest employer in the Puget Sound Area and in
Snohomish County. The Boeing Company has, in the past, had wide fluctuations
in its number of employees. Boeing layoffs may create problems for the
Corporation if there are outstanding loans to employees who are laid-off and
not hired by other companies, or to subcontractors that have canceled or
delayed orders from Boeing. Significant Boeing layoffs in recent years have
not affected our asset quality, however, there is no assurance that any future
Boeing layoffs will not adversely affect the Corporation's asset quality.
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 five 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 ended June 30, 2000, 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, 2000, $290.9 million or 51.5% of the
Corporation's total loans consisted of loans secured by one-to-four family
residential properties (permanent and construction), $54.3 million or 9.6% of
total loans consisted of commercial real estate and land loans, $112.7 million
or 20.0% consisted of multi-family loans, $86.3 million or 15.3% consisted of
commercial business loans and $20.6 million or 3.6% 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.
3
<PAGE>
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 Constant
Maturity Treasury. 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.
Residential Lending consists primarily of conforming and nonconforming
first mortgage loans secured by single-family residential properties located
principally in Snohomish, King, Thurston, Skagit, Whatcom and Kitsap counties.
Generally, the Corporation's conforming residential loans meet the Federal
National Mortgage Association or Federal Home Loan Mortgage Corporation's
underwriting standards with respect to credit, debt ratios and documentation.
The Corporation's nonconforming residential loans are those that generally do
not conform to agency underwriting guidelines, due to the size of the loan as
a result of credit histories, debt-to-income ratios, reliance on the
borrower's stated income with verification of employment, non-owner occupied
property, rural property, or a variety of other exceptions from agency
guidelines. The Corporation's nonconforming loans may be made to lower credit
grade borrowers. At June 30, 2000, $69.6 million or 12.3% of the Corporation's
total outstanding loan portfolio and 39.6% of the Corporation's one- to
four-family residential loan portfolio consisted of nonconforming one- to
four-family residential loans. In exchange for the additional lender risk
associated with nonconforming loans, borrowers generally are required to pay a
higher interest rate and a lower loan-to-value ratio may be required than for
a conforming loan borrower. Generally, all residential loans originated with a
loan-to-value ratio above 80% have private mortgage insurance in an amount
sufficient to reduce the Corporation's exposure to 75% or below. The
Corporation also offers a full line of home equity term loans and lines of
credit. Home equity loans are secured by a lien, generally junior in priority
to a senior lien on the borrower's home, and may have, when added to existing
senior lien balances, a post-funding combined loan-to-value ratio of up to 90%
of the value of the home securing the loan.
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 12 months. The interest rates
charged by the Corporation on construction loans are indexed to the prime rate
and vary depending on the loan. The Corporation requires personal guaranties
of payment from the principals of the borrowing entities. All construction
loans require approval by various levels of corporate personnel, depending on
the size of the loan. At June 30, 1999 and June 30, 2000 the percentage of
the Corporation's gross loan portfolio that consisted of one-to-four family
construction loans was 11.3% and 13.0%, 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, which represents 10.9% of assets, is limited by Board
of Director policy to 15% of assets.
The Corporation also originates land acquisition and development loans
where the source of repayment is either the sale of finished lots or the sale
of homes to be constructed on the finished lots. The Corporation has attempted
to increase its residential construction loan portfolio because these loans
have relatively high margins, floating interest rates and short-term
maturities and because of the current favorable housing market in Snohomish,
Skagit and Whatcom counties. Construction loans are generally made for terms
of up to 12 months while land acquisition loans are typically made for terms
of up to 18 months. At June 30, 2000, the Corporation's maximum outstanding
commitment to one builder totaled $8.3 million involving 4 different
construction projects of which are performing in accordance with their
repayment terms. At that date, the Corporation had residential construction
loans totaling $73.5 million representing 13.0% of the Corporation's total
outstanding loan portfolio. Of this amount, $48.3 million was to builders,
$12.8 million was to individuals for custom home construction and $12.4
million represented acquisition and development loans.
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 estimate of the marketability of the property is
inaccurate, the borrower may be unable to sell the completed project in a
timely manner or obtain adequate proceeds to repay the loan. Delays may arise
from labor problems, material shortages and other unpredictable contingencies
in completing the project.
4
<PAGE>
Furthermore, if the estimate of value of a completed project is inaccurate,
the Corporation may be confronted with a project with a value that is
insufficient to assure full repayment. As a result, these loans may involve
the disbursement of substantial funds with repayment dependent, in part, on
the success of the ultimate project rather than the ability of the borrower or
guarantor to repay principal and interest.
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 $41.5 million at
June 30, 2000 as compared to $29.3 million in 1999. At June 30, 2000 and
1999, the total amount of outstanding unused lines of credit was $27.4 million
and $23.8 million, respectively.
Multi-family Loans. Multi-family loans totaled $112.7 million or 20.0%
of total loans and 16.7% of total assets at June 30, 2000. 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 $54.3 million or 9.6% of the Corporation's total loans at June
30, 2000. 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, 2000, the largest commercial real estate and land loan in
the Corporation's portfolio was $4.1 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 and may 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 its 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 was $20.6 million at June 30, 2000
as compared to the $22.9 million outstanding at June 30, 1999. Management
expects this portfolio will increase and diversify in future years as new
consumer products are introduced. Although boat loans secure $16.5 million or
the Corporation's installment loans at June 30, 2000, the Corporation has
significantly decreased its origination of boat loans and expect this amount
to decline further in the future.
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
ability, 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.
Commercial Business Loans. Business Banking consists primarily of
commercial business loans to small to medium sized businesses operating in
Snohomish, King, Skagit and Whatcom counties. These loans are secured
primarily by receivables, equipment, other assets of the business and personal
property, and the personal guarantee, of the borrower. These loans typically
have adjustable-rate terms of one year and short-term fixed rates with terms
of up to five years. The Corporation also offers unsecured operating lines of
credit that require annual repayment. Commercial business loans are
underwritten by the Corporation on the basis of the borrower's cash flow and
ability to service debt from earnings, as well as the underlying collateral
value. The borrower is generally required to provide the Corporation with at
least two years of financial statements, tax returns, current financial
information on any and all guarantors, and other reports that show trends in
their current assets, and to update this information annually. Commercial
business loans also include owner
5
<PAGE>
occupied real estate loans with terms comparable to the Corporation's income
producing property loans except that the Corporation may require a higher debt
service coverage ratio and a higher interest rate than if the loans were
non-owner occupied. In addition, as the business banking activity increases,
the Corporation expects to expand its lower cost deposit franchise through the
growth of commercial checking as a source of funding. Commercial business
loans increased from $61.7 million at June 30, 1999 to $86.3 million at June
30, 2000. Unsecured business loans totaled $8.7 million at June 30, 2000.
Commercial business loans typically involve larger loan amounts than
traditional real estate secured loans and are subject to a greater extent to
adverse conditions in the economy. In the case of loans secured by accounts
receivable, the availability of funds for the repayment of such loans may be
substantially dependent on the ability of the borrower to collect amounts due
from its customers. The collateral securing other loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business. 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,
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1996 1997 1998 1999 2000
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(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans at beginning of period $ 261,013 287,124 360,439 408,189 481,448
Loans originated
Real estate mortgage
One-to-four family residential 79,752 94,521 256,257 291,174 183,842
Multi-family residential and commercial 13,040 37,427 24,977 57,149 12,563
Single-family construction 31,719 28,592 57,089 53,405 57,921
Commercial 12,293 12,287 20,649 20,181 24,622
Installment 10,083 22,947 11,742 11,427 3,345
----------------------------------------------------------
Total loans originated 146,887 195,774 370,714 433,336 282,293
Loans purchased 821 110 245 685 449
Whole loans sold 57,286 50,825 190,374 229,910 83,758
Loan principal repayments 61,921 71,203 132,402 130,318 114,413
Other (2,390) (541) (433) (534) (1,192)
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Loan activity, net 26,111 73,315 47,750 73,259 83,379
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Total gross loans at end of period $ 287,124 360,439 408,189 481,448 564,827
==========================================================
Loans converted to mortgage-backed securities:
Loans securitized $ 32,330 17,419 24,400 20,137 8,814
Mortgage-backed securities sold $ 32,330 17,419 24,385 20,137 8,814
</TABLE>
6
<PAGE>
<PAGE>
<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,
----------------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------------------------------------------------------------------------------
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) $208,979 76.70% 262,605 76.96 260,491 67.71 287,604 63.11 327,212 60.59
FHA and VA 3,085 1.13 3,955 1.16 6,189 1.61 5,611 1.23 2,878 0.53
Commercial 14,739 5.41 25,250 7.40 31,746 8.25 49,066 10.77 54,320 10.06
Land loans 194 0.07 606 0.18 232 0.06 106 0.02 29 0.01
Real estate
construction 31,125 11.42 33,361 9.78 47,861 12.44 54,500 11.96 73,488 13.61
Commercial 26,016 9.55 24,601 7.21 41,494 10.79 61,676 13.53 86,298 15.98
Installment 2,986 1.09 10,061 2.95 20,176 5.24 22,885 5.02 20,602 3.82
------------------------------------------------------------------------------------
Total Loans 287,124 105.37 360,439 105.64 408,189 106.10 481,448 105.64 564,827 104.60
Less:
Due to borrowers on
construction loans 9,082 3.33 12,865 3.77 16,966 4.41 19,087 4.19 17,132 3.17
Unearned discounts 2,235 0.82 2,494 0.73 2,346 0.61 2,371 0.52 2,719 0.50
Allowance for possible
loan losses 3,336 1.22 3,879 1.14 4,143 1.08 4,254 0.93 5,004 0.93
Valuation allowance on
loans held for sale 7 -- -- -- -- -- -- -- -- 0.00
------------------------------------------------------------------------------------
Total loans, net $272,464 100.00% 341,201 100.00 384,734 100.00 455,736 100.00 539,972 100.00
====================================================================================
Type of Security
----------------
Real estate mortgage
One-to-four
family (2) $205,525 75.43% 241,050 70.65 251,805 65.45 261,822 57.45 290,857 53.86
Multi-family 37,664 13.82 58,662 17.19 62,736 16.31 85,893 18.85 112,721 20.87
Commercial 14,739 5.41 25,250 7.40 31,746 8.25 49,066 10.77 54,320 10.06
Land loans 194 0.07 606 0.18 232 0.06 106 0.02 29 0.01
Other 29,002 10.64 34,871 10.22 61,670 16.03 84,561 18.55 106,900 19.80
------------------------------------------------------------------------------------
Total Loans 287,124 105.37 360,439 105.64 408,189 106.10 481,448 105.64 564,827 104.60
Less:
Due to borrowers on
construction loans 9,082 3.33 12,865 3.77 16,966 4.41 19,087 4.19 17,132 3.17
Unearned discounts 2,235 0.82 2,494 0.73 2,346 0.61 2,371 0.52 2,719 0.50
Allowance for possible
loan losses 3,336 1.22 3,879 1.14 4,143 1.08 4,254 0.93 5,004 0.93
Valuation allowance on
loans held for sale 7 -- -- -- -- -- -- -- -- 0.00
------------------------------------------------------------------------------------
Total loans, net $272,464 100.00% 341,201 100.00 384,734 100.00 455,736 100.00 539,972 100.00
====================================================================================
---------------------
(1) Includes construction loans converted to permanent loans.
(2) Includes home equity loans.
</TABLE>
7
<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,
1998, 1999 and 2000. Also shown is the dollar amount of such securities and
loans which are scheduled to mature after one year based on interest rate
terms. 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 or
market value adjustments.
2000
----------------------------------------------------------
Mortgage Commercial Installment Total Mortgage-Backed
Loans Loans Loans Loans Securities
----------------------------------------------------------
Amount repricing or (In thousands)
maturing
Within one year $184,201 28,580 2,989 215,770 3,987
After one year
through three 76,487 8,097 12,109 96,693 399
After three years
through five 83,211 29,089 3,637 115,937 42
After five years 114,028 20,532 1,867 136,427 28,686
-----------------------------------------------------
Total $457,927 86,298 20,602 564,827 33,114
=====================================================
Interest rate terms
on amounts due
after one year
Fixed $ 82,710 50,229 3,901 136,840 29,127
Adjustable $305,450 10,260 16,469 332,179 --
1999
----------------------------------------------------------
Mortgage Commercial Installment Total Mortgage-Backed
Loans Loans Loans Loans Securities
----------------------------------------------------------
Amount repricing or (In thousands)
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 (In thousands)
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
8
<PAGE>
Loan Maturity and Repricing
---------------------------
The following table sets forth information at June 30, 2000, 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,
2001 2002 2003 2000 2000 2000 2000 Total
-------- ------ ------ ------ ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage
Residential $110,206 23,140 31,815 77,490 61,800 4,087 21,552 330,090
Commercial 8,759 4,865 8,518 5,590 21,937 3,893 758 54,320
Land -- 29 -- -- -- -- -- 29
One-to-four family
construction 65,237 8,120 -- 131 -- -- -- 73,488
Commercial 28,580 2,315 5,782 29,089 19,866 339 327 86,298
Installment 2,988 5,210 6,900 3,637 617 1,250 -- 20,602
-----------------------------------------------------------------------------------
Total loans $215,770 43,679 53,015 115,937 104,220 9,569 22,637 564,827
===================================================================================
</TABLE>
The following table sets forth the dollar amount of all loans as of June
30, 2000, due after one year which have fixed or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
-------------------------
(In thousands)
Real estate mortgage
Residential $ 79,565 246,000
Commercial 3,086 51,229
Land 29
One-to-four family construction 30 8,221
Commercial 50,229 10,260
Installment 3,901 16,469
--------------------
Total $136,840 332,179
====================
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.
9
<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, 1999 and 2000, the Corporation had
$1.2 million and $573,000, 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,
---------------------------------------------
1996 1997 1998 1999 2000
---------------------------------------------
(In thousands)
Substandard $2,874 2,583 4,433 2,149 4,784
General loss allowances 3,036 3,579 3,776 4,254 4,976
Specific loss allowances 300 300 367 -- 28
Charge-offs 30 272 45 323 146
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, 2000, 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 $246,000, $427,000, and $770,000 of loan loss
provisions for the three years ended June 30, 1998, 1999 and 2000,
respectively. While adequately reserved at this time, the Bank's intent to
originate additional commercial loans and other higher risk loan products may
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.
10
<PAGE>
The following table sets forth information with respect to the
Corporation's non-performing assets at the dates indicated.
At June 30,
-----------------------------------------
1996 1997 1998 1999 2000
-----------------------------------------
(Dollars in thousands)
Loans accounted for on
nonaccrual basis:
Real estate mortgage
Residential $ 373 759 971 618 221
Commercial -- -- -- -- --
Land loans -- -- -- -- --
Commercial 225 152 199 338 226
Installment 2 -- 751 245 126
--------------------------------------------
Total 600 911 1,921 1,201 573
Accruing loans which are
contractually past due 90
days or more:
Real estate mortgage
Residential -- 141 -- -- --
Commercial -- -- -- -- --
Commercial 120 -- -- -- --
Installment -- 17 -- -- --
--------------------------------------------
Total of non-accrual and 90 days
past due loans 720 1,069 1,921 1,201 573
Real estate owned 747 750 74 -- 528
--------------------------------------------
Total non-performing
assets $1,467 1,819 1,995 1,201 1,101
============================================
Total loans delinquent 90 days
or more to net loans 0.26% 0.31 0.50 0.26 0.11
Total loans delinquent 90 days
or more to total assets 0.18% 0.25 0.43 0.22 0.08
Total non-performing assets to
total assets 0.37% 0.42 0.45 0.22 0.16
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,
-----------------------------------------
1996 1997 1998 1999 2000
-----------------------------------------
(In thousands)
Restructured loans $ 4,150 -- -- -- --
Interest foregone on
restructured loans 97 6 -- -- --
11
<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,
----------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
------ ---- ----- ---- ----- ---- ----- ---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential $ -- -- -- -- -- -- -- -- 5 --
Commercial real estate 300 2.04 300 1.19 300 0.95 -- -- -- --
Land acquisition and
development -- -- -- -- -- -- -- -- -- --
Real estate construction -- -- -- -- 67 0.14 -- -- -- --
Commercial -- -- -- -- -- -- -- -- 5 .01
Installment -- -- -- -- -- -- -- -- 18 .09
Unallocated 3,036 N/A 3,579 N/A 3,776 N/A 4,254 N/A 4,976 N/A
------------------------------------------------------------------------------
Total allowance for loan losses
to net loans $ 3,336 1.22% 3,879 1.14 4,143 1.07 4,254 0.93 5,004 0.93
==============================================================================
</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,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
-----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage:
Single-family residential $ 310 540 525 961 1,014
Multi-family 380 590 630 460 619
Commercial real estate 410 610 760 1,160 544
Land acquisition and development -- 6 -- 30 --
Real estate construction 290 545 790 420 569
Commercial 260 500 625 740 1,881
Installment 30 310 400 370 349
Unallocated 1,356 478 46 113 --
----------------------------------------------------------------
Unallocated allowance for loan
losses to net loans $3,036 3,579 3,776 4,254 4,976
================================================================
</TABLE>
12
<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,
---------------------------------------------
1996 1997 1998 1999 2000
---------------------------------------------
(Dollars in thousands)
Allowance at beginning
of period $ 3,305 3,336 3,879 4,143 4,254
Provision for loan losses 61 810 246 427 770
Charge-offs
Residential real estate -- 59 -- 7 16
Commercial real estate -- -- -- -- --
Real estate construction -- -- -- -- --
Commercial 20 178 29 49 53
Installment 10 35 16 267 77
Land -- -- -- -- --
-----------------------------------------------
Total charge-offs 30 272 45 323 146
-----------------------------------------------
Recoveries -- 5 63 7 126
Net charge-offs and
allowance recovered 30 267 (18) 316 20
-----------------------------------------------
Balance at end of period $ 3,336 3,879 4,143 4,254 5,004
===============================================
Ratio of allowance to net
loans outstanding at
the end of the period 1.22% 1.14 1.08 0.93 0.93
Ratio of net charge offs to
average loans outstanding
during the period 0.01% 0.09 (0.01) 0.08 0.00
Ratio of loan loss allowance
to nonperforming assets 227.40% 213.25 207.67 354.20 454.50
Asset and Liability Management Activities
-----------------------------------------
The Corporation uses a variety of tools to measure, monitor, and manage
interest rate risk. Primary among the rate risk management strategies is the
Corporation's strategy of originating more interest rate sensitive assets,
such as prime based loans, while reducing its long-term, fixed rate assets
through selling long term mortgages in the secondary market. The Corporation
uses FHLB advances to fund its intermediate term assets.
The Corporation has used 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 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.
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 interest rate risk management activities and
outstanding hedging transactions of the Corporation. At June 30, 1999 and
2000, the Corporation had no caps outstanding. There were $13.0 million of
floors and $6.5 million swaps outstanding at June 30, 1999. There were no
floors or swaps outstanding on June 30, 2000. These agreements were
designated against certain loans. See Note 8 of the Notes to the Consolidated
Financial Statements contained in the Annual Report for additional
information.
13
<PAGE>
Average Balance Sheets. The Bank primarily 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 amount 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 each period has 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,
-----------------------------------------------------------------------------
1998 1999 2000
-----------------------------------------------------------------------------
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 $292,919 24,618 8.40 321,038 25,878 8.06 383,595 31,280 8.15
Consumer loans 40,294 3,550 8.81 48,755 4,273 8.76 57,138 4,740 8.30
Commercial loans 29,629 2,941 9.93 48,414 4,600 9.50 76,672 7,135 9.31
-----------------------------------------------------------------------------
Total loans 362,842 31,109 8.57 418,207 34,751 8.31 517,405 43,155 8.34
Mortgage-backed securities 26,864 1,592 5.93 30,805 1,835 5.96 30,779 1,932 6.28
Investment and trading
securities 9,479 539 5.69 14,482 904 6.24 40,081 2,680 6.69
Daily interest-earning
deposits and FHLB stock 6,353 676 10.64 9,218 715 7.76 9,858 815 8.27
-----------------------------------------------------------------------------
Total interest-earning
assets 405,538 33,916 8.36 472,712 38,205 8.08 598,123 48,582 8.12
Noninterest-earning assets
Office properties and
equipment, net 7,902 9,225 9,281
Real estate, net 569 209 491
Other noninterest-earning
assets 13,768 13,947 11,559
-------- ------- -------
Total assets $427,777 496,093 619,454
======== ======= =======
LIABILITIES AND EQUITY
Interest-bearing liabilities
Passbook accounts $ 14,529 456 3.14 12,781 391 3.06 11,446 351 3.07
Checking accounts 15,185 356 2.34 18,540 409 2.21 18,408 389 2.11
Money market accounts 51,750 2,371 4.58 69,426 3,233 4.66 119,219 5,963 5.00
Certificates of deposit 205,763 12,022 5.84 220,921 12,392 5.61 232,192 13,098 5.64
-----------------------------------------------------------------------------
Total interest-bearing
deposits 287,227 15,205 5.29 321,668 16,425 5.11 381,265 19,801 5.19
Other interest-bearing
liabilities
FHLB advances 69,078 4,015 5.81 102,045 5,280 5.17 160,182 9,093 5.68
Other interest-bearing
liabilities 15,006 898 5.98 5,571 251 4.50 12,519 953 7.61
-----------------------------------------------------------------------------
Total interest-bearing
liabilities 371,311 20,118 5.42 429,284 21,956 5.11 553,966 29,847 5.39
Other liabilities 27,210 33,216 29,710
-------- ------- -------
Total liabilities 398,521 462,500 583,676
Retained earnings 29,256 33,593 35,778
-------- ------- -------
Total liabilities and
retained earnings $427,777 496,093 619,454
======== ======= =======
Net interest income (2) $13,798 16,249 18,735
======= ====== ======
Interest rate spread (3) 2.94 2.97 2.73
Net interest margin (4) 3.40 3.44 3.13
Average interest-earning
assets to average interest-
bearing liabilities 109.22 110.12 107.97
---------------
(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.
</TABLE>
14
<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,
---------------------------------------------------------------------------------------
1998 Compared to Year 1999 Compared to Year 2000 Compared to Year
Ended June 30, 1997 Ended June 30, 1998 Ended June 30, 1999
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) $ 8 1,371 1 1,380 (1,007) 2,362 (97) 1,258 301 5,042 59 5,402
Consumer loans (1) (20) 1,968 (24) 1,924 (19) 745 (4) 722 (229) 735 (39) 467
Commercial loans (1) (61) 1,786 (83) 1,642 (126) 1,865 (80) 1,659 (95) 2,685 (55) 2,535
---------------------------------------------------------------------------------------
Total loans (73) 5,125 (106) 4,946 (1,152) 4,972 (181) 3,639 (23) 8,462 (35) 8,404
Mortgage-backed
securities 97 (714) (31) (648) 8 234 1 243 99 (2) 0 97
Securities (5) (1,988) 5 (1,988) 52 284 28 364 64 1,597 115 1,776
Daily interest-
earning deposits 449 (241) (170) 38 (183) 308 (83) 42 47 50 3 100
---------------------------------------------------------------------------------------
Total net change in
income on interest-
earning assets $ 468 2,182 (302) 2,348 (1,275) 5,798 (235) 4,288 187 10,107 83 10,377
=======================================================================================
Interest-bearing
liabilities
Interest-bearing
deposits $ 97 483 3 583 (517) 1,819 (82) 1,220 257 3,071 48 3,376
FHLB advances 6 (174) -- (168) (441) 1,916 (210) 1,265 513 3,008 292 3,813
Other borrowings 84 (289) (21) (226) (223) (565) 140 (648) 173 313 216 702
---------------------------------------------------------------------------------------
Total net change in
expenses on interest-
bearing liabilities $ 187 20 (18) 189 (1,181) 3,170 (152) 1,837 943 6,392 556 7,891
=======================================================================================
Net change in net
interest income $2,159 2,451 2,486
====== ===== =====
----------------
(1) Does not include interest on loans 90 days or more past due.
</TABLE>
15
<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, 2000, Cascade's regulatory
liquidity was 5.34%.
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 the Chief Financial Officer, other members of
senior management and the Controller. The Committee acts within policies
established by the Board of Directors. At June 30, 1999 and 2000, the
Corporation's securities portfolio totaled $74.5 million and $104.3 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, 2000. At June 30, 2000, Cascade's
investment in its subsidiaries was $567,900.
The Corporation has two subsidiaries: Cascade Bank and Cascade Capital
Trust I, a Delaware corporation.
Cascade Capital Trust I was formed for the exclusive purpose of issuing
capital securities and common securities and using the proceeds to acquire
junior subordinated debentures issued by the Corporation. On March 1, 2000,
Cascade Capital Trust I issued $10.0 million aggregate liquidation amount of
its 11.0% capital securities, due March 1, 2030 Series A, which were exchanged
on August 30, 2000 for its 11.0% capital securities due March 1, 2030 Series B
("Capital Securities"). The Corporation has fully and unconditionally
guaranteed all obligations of Cascade Capital Trust I in connection with the
issuance of the Capital Securities. The junior subordinated debentures total
$10.3 million, have an interest rate of 11.00%, mature on March 1, 2030 and
are the sole assets of Cascade Capital Trust I. The junior subordinated
debentures are redeemable, in whole or in part, at the Corporation's option on
or after March 1, 2010 at declining premiums to maturity. Proceeds totaling
approximately $9.4 million from the issuance of the junior subordinated
debentures were used to increase the capital level of Cascade Bank and the
remaining proceeds were used primarily for the general corporate purposes.
Cascade Bank, a full service community bank, offers a wide range of
products and services. Cascade Investment Services, a subsidiary of Cascade
Bank, markets annuity products, mutual funds and property and casualty
insurance to customers and non-customers in the Bank's market areas. 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 non-interest income.
16
<PAGE>
Real Estate Development
-----------------------
Cascade owns a five acre parcel which is in the pre-development stage.
The approximate book balance is $482,000. 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. Management cannot predict when it
will receive the necessary approvals for the development of this parcel and
when the project will be completed.
<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,
----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---------------- ---------------- ---------------- ---------------- ----------------
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 -- --
Investment
securities
US Treasury $ 10,782 10,722 15,929 15,929 1,002 1,002 -- -- -- --
Municipals 5,480 5,480 4,938 4,938 -- -- -- -- -- --
Agency Notes 13,721 13,721 5,871 5,871 2,177 2,1773 7,298 37,298 34,940 34,940
Agency MBS 43,213 42,709 29,657 29,517 23,004 22,933 29,604 29,565 32,718 32,173
CMO 481 481 493 493 468 468 209 209 20,515 20,515
Corporate
securities and
mutual funds 21,069 21,069 2,971 2,971 -- -- -- -- 5,117 5,149
----------------------------------------------------------------------------------------
Total invest-
ment
securities $ 94,746 94,182 59,859 59,719 26,651 26,580 67,111 67,072 93,290 92,777
========================================================================================
Federal Reserve
stock $ 70 70 70 70 -- -- -- -- -- --
FHLB-Seattle stock 4,702 4,702 5,074 5,074 5,486 5,486 7,346 7,346 10,945 10,945
----------------------------------------------------------------------------------------
$ 4,772 4,772 5,144 5,144 5,486 5,486 7,346 7,346 10,945 10,945
========================================================================================
</TABLE>
<TABLE>
The following table sets forth the Corporation's securities portfolio at carrying value at the dates
indicated.
At June 30,
----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000
---------------- ---------------- ---------------- ---------------- ----------------
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 -- --
US Treasury $ 10,782 11.38 15,929 26.61 1,002 3.76 -- -- -- --
Municipals 5,480 5.78 4,938 8.25 -- -- -- -- -- --
Agency Notes 13,721 14.48 5,871 9.81 2,177 8.17 37,298 55.58 34,940 37.45
Agency MBS 43,213 45.61 29,657 49.55 23,004 86.31 29,604 44.11 32,718 35.07
CMO 481 0.51 493 0.82 468 1.76 209 0.31 20,515 21.99
Corporate
securities and
mutual funds 21,069 22.24 2,971 4.96 -- -- -- -- 5,117 5.49
--------------------------------------------------------------------------------------
Total $ 94,746 100.00 59,859 100.00 26,651 100.00 67,111 100.00 93,290 100.00
======================================================================================
</TABLE>
18
<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, FHLB advances, and loan repayments are the
major source of Cascade's funds for lending and other investment purposes.
Loan repayments and FHLB advances are relatively stable sources of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and money market conditions.
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, checking, 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 other financial institutions,
mutual funds and non-bank 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 its
deposit growth for fiscal 2001 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, 2000. The indicated interest rates were those being
offered at June 30, 2000.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ---- -------- ------ ------- --------
(In thousands)
1.90% None Checking $ 100 $ 20,209 5.07%
3.00 None Regular savings 100 10,926 2.74
4.65 None Money market accounts 2,500 102,628 25.75
0.00 None Noninterest checking 100 22,089 5.54
Certificates of Deposit
-----------------------
4.00 0 - 3 mos. Fixed term, fixed rate 1,000 5,680 1.43
4.76 4 - 6 mos. Fixed term, fixed rate 1,000 8,804 2.21
4.83 7 - 12 mos. Fixed term, fixed rate 1,000 111,649 28.02
4.66 13 - 24 mos. Fixed term, fixed rate 1,000 17,553 4.41
4.74 25 - 48 mos. Fixed term, fixed rate 1,000 2,874 0.72
4.96 49 - 120 mos. Fixed term, fixed rate 1,000 10,818 2.71
3.90 Various Variable rate 1,000
4.86 Various Jumbo certificates 100,000 85,277 21.40
-------------------
$398,507 100.00%
===================
19
<PAGE>
The following table indicates the amount of the Corporation's jumbo
certificates of deposit by time remaining until maturity as of June 30, 2000.
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 $ 35,294
Over three through six months 33,250
Over six through twelve months 13,180
Over twelve months 3,553
-----------
Total $ 85,277
===========
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 eligible securities. At
June 30, 1999 and 2000, the Corporation had $142.0 million and $215.7 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, 1999 and 2000, the Corporation had $6.0 million and $5.8 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,
-----------------------
1998 1999 2000
-----------------------
Weighted average rate paid on:
Securities sold under agreements to repurchase 5.56% 4.85 6.46
FHLB advances 5.67% 5.01 6.21
For the Year
Ended June 30,
-----------------------
1998 1999 2000
-----------------------
(Dollars in thousands)
Maximum amount of borrowings outstanding at
any month end:
Securities sold under agreements to repurchase $17,283 11,976 21,696
FHLB advances 76,439 141,996 215,656
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements to repurchase 14,299 5,571 9,082
FHLB advances 67,782 102,045 165,524
Approximate weighted average rate paid on:
Other interest-bearing liabilities 5.65% 4.51 7.60
FHLB advances 5.92% 5.17 5.68
Trust Preferred Securities. On March 1, 2000 Cascade Capital Trust I
issued ten million par value Trust Preferred Securities. These securities are
considered core capital of the Bank for the purposes of OTS regulatory capital
requirements. Cascade Capital Trust I, a new wholly owned subsidiary, 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
Corporation is using the proceeds for general corporate purposes including
stock repurchases and investment in its subsidiary bank. The Trust preferred
securities are included with borrowings as a separate line item in the
consolidated balance sheet and distributions payable are treated as interest
expense in the consolidated statements of operations.
Competition
-----------
The Corporation competes for both loans and deposits. The Puget Sound
metropolitan area has a high density of financial institutions, some of which
are larger and have greater financial resources than the Corporation, and all
of which are competitors of the Corporation to varying degrees. The
Corporation's competition for loans comes principally from other financial
institutions, mortgage banking companies, insurance companies, and commercial
banks. Its most direct competition for deposits has historically come from
other financial institutions. The Corporation faces additional competition
for deposits from short-term money market funds and other corporate and
government securities.
Personnel
---------
As of June 30, 2000, the Corporation had 160 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 has extensive
authority over the operations of savings associations. Among its functions,
the OTS issues and enforces regulations affecting federally-insured savings
associations and regularly examines these institutions. All savings
associations are required to pay assessments to the OTS to fund the agency's
operations. The general assessments, paid on a semi-annual basis, are
determined based on the savings association's total assets, including
consolidated subsidiaries. The Bank's OTS assessment for the fiscal year
ended June 30, 2000 was $111,200.
Federal Deposit Insurance Corporation
-------------------------------------
The FDIC is an independent federal agency that insures deposits, up to
prescribed statutory limits, of depository institutions. The FDIC maintains
two separate insurance funds, the Bank Insurance Fund ("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.
21
<PAGE>
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 determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s. This amount is currently equal to about
2.1 basis points for each $100 in domestic deposits for both BIF and SAIF
members. These assessments, which are revised quarterly based upon the level
of BIF and SAIF deposits, will continue until the bonds mature in the year
2015.
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.
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. Cascade has maintained
liquidity levels during the year ended June 30, 2000 in excess of requlatory
requirements.
22
<PAGE>
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, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of
its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the savings association may maintain 60% of its
assets in those assets specified in Section 7701(a)(19) of the Internal
Revenue Code ("Code"). Under either test, such assets primarily consist of
residential housing related loans and investments. At June 30, 2000, the Bank
met the test and its QTL percentage was 82.2%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is subject to national bank limits for payment of dividends. If
such association has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. If any association that fails
the QTL test is controlled by a holding company, then within one year after
the failure, the holding company must register as a bank holding company and
become subject to all restrictions on bank holding companies. See "Savings
and Loan Holding Company Regulations."
Capital Requirements
--------------------
Federally insured savings associations, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable
to such savings associations.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At June 30, 2000, the Bank
had tangible capital of $49.2 million, or 7.28% of adjusted total assets,
which is approximately $39.1 million above the minimum requirement of 1.5% of
adjusted total assets in effect on that date. At June 30, 2000, the Bank did
not have any intangible assets.
The capital standards also require core capital equal to at least 3% to
4% of adjusted total assets, depending on an institution's supervisory rating.
Core capital generally consists of tangible capital. At June 30, 2000, the
Bank had core capital equal to $49.2 million, or 7.28% of adjusted total
assets, which is $22.2 million above the minimum leverage ratio requirement of
3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.
On June 30, 2000, the Bank had total risk-based capital of approximately
$53.7 million, including $49.2 million in core capital and $4.5 million in
qualifying supplementary capital, and risk-weighted assets of $451.5 million,
or total capital of 11.69% of risk-weighted assets. This amount was $16.9
million above the 8% requirement in effect on that date.
23
<PAGE>
The OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. The OTS and the
FDIC are authorized and, under certain circumstances required, to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS
may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Corporation or the Bank may have a substantial adverse effect on their
operations and profitability.
Prompt Corrective Action
------------------------
The OTS is required to take certain supervisory actions against
undercapitalized savings associations, the severity of which depends upon the
institution's degree of undercapitalization. Generally, an institution that
has a ratio of total capital to risk-weighted assets of less than 8%, a ratio
of Tier I (core) capital to risk-weighted assets of less than 4%, or a ratio
of core capital to total assets of less than 4% (3% or less for institutions
with the highest examination rating) is considered to be "undercapitalized."
An institution that has a total risk-based capital ratio less than 6%, a Tier
I capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and an institution that has
a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the OTS is
required to appoint a receiver or conservator for a savings institution that
is "critically undercapitalized." OTS regulations also require that a capital
restoration plan be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company in an amount of up to the
lesser of 5% of the institution's assets or the amount which would bring the
institution into compliance with all capital standards. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS also could take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At June 30, 2000 Cascade was a "well capitalized" institution under the
prompt corrective action regulations of the OTS.
Limitations on Capital Distributions
------------------------------------
The OTS imposes various restrictions on savings associations with respect
to their ability to make distributions of capital, which include dividends,
stock redemptions or repurchases, cash-out mergers and other transactions
charged to the capital account. The OTS also prohibits a savings association
from declaring or paying any dividends or from repurchasing any of its stock
if, as a result of such action, the regulatory capital of the association
would be reduced below the amount required to be maintained for the
liquidation account established in connection with the association's mutual to
stock conversion.
The Bank may make a capital distribution without OTS approval provided
that the Bank notify the OTS 30 days before it declares the capital
distribution and that the following requirements are met: (i) the Bank has a
regulatory rating in one of the two top examination categories, (ii) the Bank
is not of supervisory concern, and will remain adequately or well capitalized,
as defined in the OTS prompt corrective action regulations, following the
proposed distribution, and (iii) the distribution does not exceed the Bank's
net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If the Bank
does not meet these stated requirements, it must obtain the prior approval of
the OTS before declaring any proposed distributions.
In the event the Bank's capital falls below its regulatory requirements
or the OTS notifies it that it is in need of more than normal supervision, the
Bank's ability to make capital distributions will be restricted. In addition,
no distribution will be made if the Bank is notified by the OTS that a
proposed capital distribution would constitute an unsafe and unsound practice,
which would otherwise be permitted by the regulation.
24
<PAGE>
Cascade is currently meeting the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans-to-One Borrower
---------------------
Under the HOLA, savings institutions are generally subject to the
national bank limit on loans to one borrower. Generally, this limit is 15% of
Cascade's unimpaired capital and surplus, plus an additional 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain financial instruments and bullion. The
OTS by regulation has amended the loans-to-one-borrower rule to permit savings
associations meeting certain requirements, including capital requirements, to
extend loans to one borrower in additional amounts under circumstances limited
essentially to loans to develop or complete residential housing units.
At June 30, 2000, 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 association 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.
25
<PAGE>
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.
Regulation of the Corporation
-----------------------------
The Corporation is a unitary savings and loan holding company subject to
regulatory oversight of the OTS. Accordingly, the Corporation is required to
file periodic reports with the OTS. In addition, the Corporation 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 thrift holding company constitute a serious risk to the
financial safety, soundness or stability of a subsidiary of the Corporation.
Acquisitions. Federal Law 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.
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. Federal Law 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. If the Bank fails the QTL test, as
explained under "--Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," the Corporation must, within one year after the date on
which the Bank 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
26
<PAGE>
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.
The reserve method of accounting for bad debt reserves was repealed 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). The repeal of the reserve method
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.
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 "non-dividend
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. Non-dividend 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 "non-dividend
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).
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 $148,000 of which the
Corporation has set aside reserves of $80,000. 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.
27
<PAGE>
Item 2. Description of Properties
----------------------------------
The Corporation owns six full service branch locations and leases eight
full service locations. Owned offices range in size from 3,500 to 52,000
square feet and have a total net book value at June 30, 2000, including
leasehold improvements, furniture and fixtures, of $9.1 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 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
28
<PAGE>
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.
Item 6. Selected Financial Data
--------------------------------
Five Year Financial Highlights
Dollars in thousands except financial ratios
For The Year Ended June 30, 1996 1997 1998 1999 2000
------------------------------------------------------------------------------
Interest income $ 29,694 31,568 33,916 38,205 48,582
Interest expense 19,104 19,924 20,118 21,956 29,847
Net interest income 10,590 11,644 13,798 16,249 18,735
Provision for (recovery of)
loan losses 61 810 246 427 770
Net interest income after
provision for loan losses 10,529 10,834 13,552 15,822 17,965
Other income 2,780 1,942 2,458 2,837 2,276
Other expense 9,225 10,897 10,729 12,438 14,617
Income before Federal
income taxes 4,084 1,879 5,281 6,221 5,624
Net income 2,781 1,368 3,525 4,104 3,712
Net income per common share,
basic 0.53 0.26 0.66 0.76 0.68
Weighted average number of
shares outstanding, basic 5,257,058 5,266,298 5,312,305 5,420,286 5,492,804
Net income per common share,
diluted 0.48 0.23 0.60 0.69 0.63
Weighted average number of
shares outstanding,
diluted 5,792,396 5,832,231 5,843,386 5,956,543 5,930,387
At Year End 1996 1997 1998 1999 2000
------------------------------------------------------------------------------
Assets $399,316 434,162 444,155 557,086 676,176
Loans 272,464 341,201 384,734 455,736 539,972
Cash and securities 114,702 79,313 44,103 84,611 117,655
Deposits 277,897 304,205 312,518 361,786 398,507
Stockholders' equity 25,532 27,543 31,418 34,239 37,256
Non-performing loans 600 911 1,921 1,201 573
Financial Ratios for
the Year Ended June 30, 1996 1997 1998 1999 2000
------------------------------------------------------------------------------
Return on assets 0.73 0.33 0.82 0.83 0.60
Return on equity 11.44 5.26 12.05 12.21 10.37
Net interest margin 2.90 2.90 3.40 3.43 3.13
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.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The financial statements contained in the Annual Report which are listed
under Item 14 of this Form 10-K are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
------------------------------------------------------------------------
Not applicable.
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 2000 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 70 Chairman and Chief Executive Officer (b)
C. Fredrick Safstrom 46 President, Chief Operating Officer and
Director (b)
Robert G. Disotell 45 Executive Vice President, Branch Banking (b)
Steven R. Erickson 44 Executive Vice President, Real Estate Lending
Lars H. Johnson 46 Executive Vice President, Chief Financial
Officer and Secretary/Treasurer (b)
David R. Little 54 Executive Vice President, Business Banking
Vera E. Wildauer 42 Executive Vice President, Marketing and
Operations Director
---------------
(a) As of June 30, 2000.
(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 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, Loan Servicing, Secondary
Marketing, and Community Reinvestment Act (CRA) activities. Mr. Disotell is a
resident of Arlington, Washington.
STEVEN R. ERICKSON is the Executive Vice President of the Bank
responsible for managing residential and income property lending and serves as
the Assistant Secretary for the Corporation. Mr. Erickson joined Cascade in
1978. He is a
31
<PAGE>
member of the Board of Directors of the Boys and Girls Club of Snohomish
County. He is a resident of Marysville, Washington.
LARS H. JOHNSON is the Executive Vice President, Chief Financial Officer
and Secretary/Treasurer of the Bank and Corporation. Mr. Johnson joined
Cascade in April 2000. Mr. Johnson has 25 years of financial management
experience, including the most recent 16 years with the Federal Home Loan Bank
of Seattle. Mr. Johnson is a resident of Edmonds, 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.
VERA E. WILDAUER joined Cascade in 1997 as Senior Vice President,
Marketing Director. In 2000, she was elected Executive Vice President,
Marketing and Operations Director. Ms. Wildauer has over 15 years experience
in a full range of bank marketing disciplines among major Washington State
financial institutions. As Marketing and Operations Director, she is
responsible for all aspects of marketing as well as information technology,
loan servicing, and processing operations. 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.
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, 1999 and June
30, 2000
(b) Consolidated Statements of Operations for the Years Ended
June 30, 1998, 1999 and 2000
(c) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended June 30, 1998,
1999 and 2000
(d) Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1999 and 2000
(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.
32
<PAGE>
(3) Exhibits
3.1 Certificate of Incorporation of Cascade Financial
Corporation 2
3.2 Bylaws of Cascade Financial Corporation 2
10.1 Cascade Financial Corporation 1994 Employee Stock
Purchase Plan 3
10.2 Cascade Financial Corporation 1992 Stock Option and
Incentive Plan 3
10.3 Cascade Financial Corporation Employee Stock Ownership
Plan 3
10.4 Cascade Financial Corporation 1997 Stock Option Plan 4
13 Cascade Financial Corporation 2000 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, 2000.
------------------
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)
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 26,2000 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/ Lars H. Johnson By: /s/ D. R. Murphy
----------------------- ------------------------
Lars H. Johnson D. R. Murphy
Executive Vice President Director
(Chief Financial and Date: September 26,2000
Accounting Officer)
Date: September 26,2000
By: /s/ C. F. Safstrom By: /s/ Ronald E Thompson
----------------------- ------------------------
C. F. Safstrom Ronald E. Thompson
President and Director Director
Date: September 26,2000 Date: September 26,2000
By: /s/ Janice Halladay By: /s/ G. Brandt Westover
----------------------- ------------------------
Janice Halladay G. Brandt Westover
Director Director
Date: September 26,2000 Date: September 26,2000
By: /s/ David W. Duce By: /s/Paull Shin
----------------------- ------------------------
David W. Duce Paull Shin
Director Director
Date: September 26,2000 Date: September 26,2000
By: /s/ Gary Meisner By: /s/Dwayne Lane
----------------------- ------------------------
Gary Meisner Dwayne Lane
Director Director
Date: September 26,2000 Date: September 26,2000
By: /s/ David O'Connor By: /s/Henry Robinett
----------------------- ------------------------
David O'Connor Henry Robinett
Director Director
Date: September 26,2000 Date: September 26,2000
34
<PAGE>
Exhibit 13
2000 Annual Report to Stockholders
<PAGE>
Transformation
Cascade Financial [Logo]
Corporation
2000 Annual Report
Five-year financial highlights
Dollars in thousands except for per share and financial ratios (unaudited)
--------------------------------------------------------------------------
At June 30, 1996 1997 1998 1999 2000
--------------------------------------------------------------------------
Assets $399,316 434,162 444,155 557,086 676,176
Loans 272,464 341,201 384,734 455,736 539,972
Deposits 277,897 304,205 312,518 361,786 398,507
Stockholders' equity 25,526 27,537 31,412 34,239 37,256
Non-performing loans 600 911 1,921 1,201 573
--------------------------------------------------------------------------
For The Year Ended June 30, 1996 1997 1998 1999 2000
--------------------------------------------------------------------------
Net interest income $10,590 11,644 13,798 16,249 18,735
Net income 2,781 2,176* 3,525 4,104 3,712
Earnings per share
(diluted) 0.48 0.37* 0.60 0.69 0.63
--------------------------------------------------------------------------
Financial Ratios 1996 1997 1998 1999 2000
--------------------------------------------------------------------------
Return on assets 0.73% 0.52* 0.82 0.83 0.60
Return on equity 11.44 8.37* 12.05 12.21 10.37
Net interest margin 2.90 2.90 3.40 3.43 3.13
Net interest spread 2.52 2.49 3.14 3.12 2.89
Amounts for 1996 and 1997 have been restated to reflect the acquisition of
AmFirst Bancorporation in 1997.
*The 1997 SAIF special assessment of $1.2 million is excluded.
Cascade employees are committed to helping you find the best solution for your
business or family's financial needs. -Our Value Statement
Index
Letter to Shareholders....................2-5
Management's Discussion and Analysis......6-9
Independent Auditors' Report...........10-37
Common Stock Information...................38
transformation
<PAGE>
Cascade Financial Corporation 2000 Annual Report
transformation
To our stockholders, customers and employees: The dictionary defines
transformation as "continuing change in potential or type; in composition or
structure." As Cascade continues its transformation to a high-performance,
full-service community bank, we've realized many accomplishments, some
challenges and continuous movement toward our goal.
Record Setting
We set records this year in loans, deposits and net interest income. Our total
assets grew by $119 million-a remarkable 21% - to $676 million.
[] Business loans grew by 40 percent, and construction loans grew 59 percent.
These two now represent 26 percent of our total portfolio. Solid credit
underwriting and a strong local economy combined to maintain the excellent
quality of the portfolio.
Photo: Fred Safstrom, President and Chief Operating Officer, Frank M. McCord,
Chairman and Chief Executive Officer
[] Personal and business checking accounts grew by 21.3 percent to $42.3
million this year. Once again, a leading consumer magazine designated Cascade
Bank's checking as one of the best values in free checking. We continue to
grow our transaction accounts in a market where many financial institutions
are losing ground.
[] Our growth and improved mix of earning assets helped propel us to a record
year in terms of net interest income, despite declining margins.
Real Solutions for Real People
Cascade Bank Employees
Our dedicated, long-term employees, together with our new talent, provide the
best service possible in terms of technology, business banking advice, lending
and day-to-day banking. Our employees continue to emphasize customer service
while improving operational efficiency in business banking, consumer banking
and real estate lending.
Consumer Banking
In consumer banking, Cascade Bank made banking easier for our customers by
expanding our branch network. We opened new branches in Haggen food stores in
Woodinville, Lake Stevens and Marysville. These offices are ahead of
projections for deposit generation. This confirms the Bank's strategy of
"bringing the bank to the people" by offering full-service, consultative
offices in convenient locations.
Online Banking
Technology continues to transform banking. Over 30 percent of Cascade Bank's
checking customers now "connect with their bank" online. This is more than
double the number expected when the online banking project was launched in
1998. As the first community bank in our market area to offer online banking,
Cascade is well positioned in terms of both size and technical resources to
own the online niche among community banks.
We also recently became the first local community bank to offer e-commerce
Letter
2
<PAGE>
solutions for business customers, thanks to a partnership with a Seattle-based
Internet service provider. This allows small business owners to develop a
presence on the Internet, along with the ability to sell their products on the
web via a secure "shopping cart." Unlike some other larger banks and
e-commerce hosts, we are committed to personalizing services for small
businesses.
Major Challenges
The financial services industry remains very competitive. New congressional
legislation officially sanctioned eroding the lines that had traditionally
separated banking from securities and other financial services. In this
environment, we face exceptional competition from a variety of businesses for
good loans and attractively priced deposits. This increased competition places
downward pressure on margins as well.
Sidebar: "Our size and full service offerings set us apart from other
community banks in our area. We're committed to the promises we've made to our
customers in our advertising by training our staff to be knowledgeable,
flexible and empowered to help today's customers find the best solutions for
their needs." -Vera Wildauer, EVP Marketing/Operations
External conditions such as the hostile interest rate environment posed a
major challenge to the Bank. The Federal Reserve increased interest rates by
175 basis points during the year. This increase in rates greatly reduced our
income from mortgage banking activities and put pressure on our net interest
margin. As a result, net income dropped 9.6 percent to $3.7 million.
Our current stock price, like that of most financial institutions, is
disappointing. Because of the low stock price, our Board of Directors decided
it would not be in the best interest of shareholders to declare a stock
dividend. However, we continue to look for ways to enhance shareholder value.
To that end, the Board approved a stock buyback program that allows Cascade
Financial to purchase up to five percent of CASB shares in the open market.
When our stock price is at or near book value, we believe stock repurchases
offer an attractive opportunity for increasing shareholder value.
Sidebar: "Our business bankers actually become partners with their clients and
help them find creative solutions to their financial needs. We're expecting to
see continued fast growth in the Business Banking arena, with further
development of business relationships and products, as well as a branch staff
that is more expert in delivering the business services our customers need."
-Dave Little, EVP Business Banking (business loans chart (in thousands of
dollars): 1996 - $28,783, 1997 - $25,824, 1998 - $41,494, 1999 - $61,676, and
2000 - $85,298)
Evolving Toward the Future
Managing Capital
To improve growth and earnings, Cascade Financial Corporation issued $10
million of Trust preferred securities in March. These securities are treated
as equity for the purpose of regulatory capital and allow us to grow without
issuing additional stock.
Enhancing Revenue
As part of our strategic plan, and to increase our net interest margin,
Cascade Bank's priority is to increase prime-based lending activities, such as
business loans, commercial real estate loans and construction lending. In
addition, more
Letter
3
<PAGE>
Sidebar: "Cascade Bank's local underwriting, loan expertise and excellent
reputation in our market area continue to serve us well in our transition to a
community bank. We offer a wide range of real estate lending solutions for
builders and developers, business owners looking to finance their buildings
and those customers who invest in real estate. Plus, we can help families who
are buying a home-whether they're first-time home buyers or moving up to their
dream house." -Steve Erickson, EVP Real Estate Lending
low cost transaction accounts-both consumer and business accounts-are critical
in our efforts to lower the cost of funds. The Bank is also looking to
substantially increase additional sources of fee income, especially since
mortgage banking revenue is no longer contributing at the rate of previous
years.
Improving Efficiencies
To successfully compete in today's environment, we are committed to
continually improving our operational efficiency. To improve profitability,
the Bank consolidated all real estate lending in March. This restructuring
led us to close our Bellingham loan production office, exit loan brokerage as
a distinct line of business and reduce back office staff.
Several technological initiatives are already underway that specifically focus
on increasing efficiency and reducing costs.
Sidebar: "Cascade's newest branches in Haggen, Inc.'s Top Food & Drug in
Woodinville, and Haggen Food & Pharmacy in Lake Stevens and Marysville are all
ahead of our initial projections. This proves 'bringing the bank to the
people' works. Our goal is to make banking with Cascade easier so that
consumers and business owners see us as an excellent choice for their primary
banking relationship." -Rob Disotell, EVP Consumer Banking (transaction
account balances chart (in thousands of dollars): 1997 - $26,159, 1998 -
$32,640, 1999 - $34,882, 2000 - $42,298)
Change. Fine-tune. Evolve. Shift. Turn. Adapt. Improve.
In its transformation from a traditional thrift to a full-service community
bank, all of these words describe Cascade Bank's commitment to be adaptable in
today's marketplace, while continuing to provide excellent service to its
customers and solid returns to its shareholders. Our Board of Directors,
employees and customers deserve the highest accolades for freely giving their
ideas, solutions, support and hard work to this ongoing transformation
process. We look forward to the new challenges and opportunities the coming
year will bring.
/s/Frank M. McCord /s/Fred Safstrom
Frank M. McCord, Chairman Fred Safstrom, President
and Chief Executive Officer and Chief Operating Officer
Letter
4
<PAGE>
Transformation is an ambitious endeavor-and a necessary one in today's
competitive marketplace. By streamlining real estate lending operations and
investing in three new in-store branch locations, the Bank is well-positioned
to enhance its service to the business and consumer markets.
ASSETS LOANS
(in thousands of dollars) (in thousands of dollars)
1996 - $399,316 1996 - $272,464
1997 - $434,162 1997 - $341,201
1998 - $444,155 1998 - $384,734
1999 - $557,086 1999 - $455,736
2000 - $676,176 2000 - $539,972
DEPOSITS STOCKHOLDERS' EQUITY
(in thousands of dollars) (in thousands of dollars)
1996 - $277,897 1996 - $25,526
1997 - $304,205 1997 - $27,537
1998 - $312,518 1998 - $31,412
1999 - $361,786 1999 - $34,239
2000 - $398,507 2000 - $37,256
NET INCOME NET INTEREST INCOME
(in thousands of dollars) (in thousands of dollars)
1996 - $10,590 1996 - $2,781
1997 - $11,644 1997*- $2,176
1998 - $13,798 1998 - $3,525
1999 - $16,249 1999 - $4,104
2000 - $18,735 2000 - $3,712
*Excludes SAIF assessment of
$1.2 million
Sidebar: "Despite declining margins, our growth and mix of assets helped
propel Cascade to a record year in terms of net interest income. We've taken
steps to operate more efficiently and increase profitability in many areas.
While Cascade, like other financial institutions, was disappointed in this
year's stock prices, we continue to look for ways to enhance shareholder
value." -Lars Johnson, Chief Financial Officer
transformation
Letter
5
<PAGE>
transformation
Management's Discussion and Analysis
------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes presented elsewhere in this
report.
Forward Looking Statements
This section contains forward-looking statements that have been prepared on
the basis of the Corporation's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the control of the Corporation.
In addition, these forward-looking statements are subject to assumptions with
respect to future business strategies and decisions that are subject to
changes. Factors that could affect actual results include interest rate
trends, the general economic climate in the Corporation's market area and the
country as a whole, the ability of the Corporation to control costs and
expenses, competitive products and pricing, loan delinquency rates and changes
in federal and state regulation. Accordingly there can be no assurance that
these strategies will be implemented, or if implemented, will achieve the
results described or within the time periods currently estimated.
Review of Financial Position
Total assets increased to $676 million at June 30, 2000, compared with $557
million at June 30, 1999. Total loans increased by $84 million or 18.5% to
$540 million at June 30, 2000 compared with $456 million at June 30, 1999.
Most of this increase resulted from new business and income property loans.
Cash and securities increased to $118 million in 2000 from $85 million in
1999. The investment portfolio is used to enhance earnings, while providing
liquidity. Management's long term strategy is to continue to increase assets
with an emphasis on expanding the commercial loan portfolio.
Deposits increased to $399 million at June 30, 2000 from $362 million at June
30, 1999. The market for retail deposits remains fiercely competitive.
While our deposits grew 10%, deposits for financial institutions in general
have declined nationwide. The success in growing our deposit base was not
enough to keep pace with our asset growth. Borrowings, primarily Federal Home
Loan Bank advances, were $221 million at June 30, 2000 compared to $148
million at June 30, 1999. While we strive to grow our deposit base,
especially our transaction accounts, wholesale funding will continue to play a
major role in our liability strategies.
At June 30, 2000, nonperforming loans totaled $573,000 compared to $1.2
million at June 30, 1999. This decrease in nonperforming loans occurred in our
consumer and business loan portfolios. The nonaccrual coverage ratio (the
allowance for losses to nonaccrual loans) was 873% at June 30, 2000, compared
with 355% at June 30, 1999.
MD&A
6
<PAGE>
Comparison of Operating Results
Net Income
Net income for the year ended June 30, 2000 was $3.7 million, a decrease of
9.6% from fiscal 1999. Earnings per share for fiscal 2000 were $0.68 (basic)
and $0.63 (diluted) compared with $0.76 (basic) and $0.69 (diluted) for fiscal
1999. Return on average equity was 10.37% for fiscal 2000 compared with 12.21%
for fiscal 1999. Higher net interest income was not sufficient to offset the
loss of revenue from mortgage-banking and increase in non-interest expense.
Net Interest Income
Net interest income for the year ended June 30, 2000 increased by 15.3% or
$2.5 million to $18.7 million from $16.2 million in 1999. This increase
resulted from growth in earning assets. Average interest earning assets
increased to $599 million in 2000 from $473 million in 1999. Average loans
outstanding increased to $506 million in 2000 from $414 million in 1999.
Net interest margin decreased thirty basis points in 2000 to 3.13% from 3.43%
the prior year. The decrease resulted from the increase in interest rates, the
intense competition for deposits and loans, and the greater use of wholesale
borrowings.
The net interest income and margins include the results from hedging with off-
balance sheet financial instruments.
Provision for Loan Losses
Provision for loan losses in 2000 and 1999 were $770,000 and $427,000,
respectively. At June 30, 2000 and 1999, the loan loss allowance totaled $5.0
million and $4.3 million. The allowance was .92% and .93% of loans for 2000
and 1999, respectively. The provision rate maintained levels consistent with
the Corporation's internal analysis of its loan portfolio.
The Corporation monitors its allowance for loan losses as conditions dictate.
Although the allowance is considered adequate to provide for potential losses,
there can be no assurance that such losses will not exceed the estimated
amounts. Due to a strong economy in our market area and conservative
underwriting, Cascade has experienced a history of good credit performance and
low charge-offs.
While management believes this experience can be maintained, it is the
Corporation's intent to originate additional commercial loans and other higher
risk loan products that may necessitate increasing the allowance for loan
losses in future years.
Other Income
Other income decreased $561,000 to $2.3 million in 2000. The principal reason
for this decrease was the reduction in mortgage banking income. Lower volumes
reduced gain on sale of loans to $427,000 in Fiscal 2000 from $623,000 in
1999. Gain on sale of mortgage servicing rights decreased $598,000 in Fiscal
2000. Partially offsetting this decline, service charges and fees increased
$346,000 to $1.6 million in Fiscal 2000.
Other Expenses
Other expenses increased $2.2 million to $14.6 million in 2000 from $12.4
million in 1999. Increased expenses resulted from opening three new branches
in Fiscal 2000, as well as a full year of costs
MANAGEMENT'S DISCUSSION AND ANALYSIS
MD&A
7
<PAGE>
associated with bringing data processing in house. Also, with the drop in
loan production, less current expense was deferred as required by FAS 91. To
more effectively control expenses, Residential Lending was merged with Income
Property to form the Real Estate Group. The Bank discontinued its wholesale
residential lending function and closed its Bellingham loan production office
in April 2000, which will result in reduced non-interest expenses.
Year 2000 Issues
The Year 2000 Readiness Project was a success. There were no problems
interfacing with customers or vendors. Management had estimated that Y2K
expenditures would be approximately $250,000. Actual costs were less than
this initial estimate.
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as defined by
regulatory requirements. The required ratio is currently 4.0%. This
requirement has been consistently exceeded. Liquid assets are cash and cash
equivalents, which include highly liquid, short-term investments. At June 30,
2000 and 1999, cash and cash equivalents totaled $13.4 million and $10.2
million, respectively. Securities available-for-sale totaled $93.4 million
and $72.7 million at those same dates.
Other significant sources of liquidity are Federal Home Loan Bank of Seattle
(FHLB-Seattle) advances, reverse repurchase agreements, and loan sales. If
needed, $20.9 million of additional borrowings were available from the FHLB-
Seattle at June 30, 2000 under the Bank's existing credit line. The Bank has
the ability to borrow from primary dealers of United States government
securities through reverse repurchase agreements. Under these agreements,
borrowings are collateralized with mortgage-backed securities or other
investment securities.
At June 30, 2000, there were outstanding commitments to originate loans of
$15.6 million. Funds to meet these commitments will be generated through loan
sales in the secondary market. At June 30, 2000, certificates of deposit
scheduled to mature in one year or less totaled $171.9 million. Management
believes that a significant portion of such deposits will remain with the
Corporation. In addition, management believes it can adjust the offering
rates of certificates of deposit to retain deposits in changing interest rate
environments.
On March 1, 2000 the Corporation issued $10 million in Trust preferred
securities. Considered primary capital by the Office of Thrift Supervision,
these securities increased Cascade's primary capital by 27%. The proceeds
from the sale were invested in Cascade Bank. The Bank will use this capital
infusion to finance its asset growth and general operations.
Disclosures about Market Risk
The Corporation's principal financial objective is to achieve a high level of
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.
The Bank actively manages asset and liability maturities by holding adjustable
rate and balloon loans and selling most fixed rate loans that it originates.
By adjusting the pricing on consumer deposits, differing deposit maturities
can
MD&A
8
<PAGE>
be obtained to lengthen (or shorten) the repricing time of liabilities. The
Bank can also borrow funds from the FHLB-Seattle for periods of up to thirty
years. At various times management uses instruments such as interest rate
swaps, interest rate cap and floor agreements, and forward sale commitments to
reduce the negative effect rising rates could have on net interest income.
Management, in conjunction with the Bank's Board of Directors, has established
policies and guidelines for the use of these off-balance sheet tools.
Interest rate risk is monitored using several methodologies, principally
financial modeling. The 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, 2000, a 200 basis point
increase in rates would reduce forecasted net interest income over a twelve
month period. The Board of Directors sets targets for allowable changes in net
interest income.
Interest Rate Sensitivity
Expected interest rate sensitivity of individual categories of assets and
liabilities as of June 30, 2000 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 Bank 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 Bank enters into off-balance sheet transactions to reduce 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
Bank's mortgage-banking activities. As the volume of loan originations
fluctuate, the volume of commitments to sell loans also fluctuate. The Bank
has taken steps to reduce its sensitivity to changes in interest rates by
altering its asset mix.
Within one One to Five to Over ten Total
Dollars in thousands year five years ten years years
------------------------------------------------------------------------------
Interest-Sensitive Assets
Loans $222,742 233,035 71,262 12,933 539,972
Investment securities 17,856 16,776 31,844 37,819 104,295
Interest-Sensitive Liabilities
Interest bearing checking --- 15,157 5,052 -- 20,209
Money market accounts 51,314 51,314 -- -- 102,628
Savings accounts -- 2,732 8,194 -- 10,926
Certificates of deposit 171,930 70,713 12 -- 242,655
Borrowings 191,433 10,000 20,000 -- 221,443
Trust preferred securities -- -- -- 10,000 10,000
MANAGEMENT'S DISCUSSION AND ANALYSIS
MD&A
9
<PAGE>
Independent Auditors' Report
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheets of Cascade
Financial Corporation and subsidiaries (Corporation) as of June 30, 1999 and
2000, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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 subsidiaries as of June 30, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/S/KPMG LLP
Seattle, Washington
August 4, 2000
10
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and 2000
(Dollars in thousands)
------------------------------------------------------------------------------
1999 2000
------------------------------------------------------------------------------
ASSETS
------
Cash on hand and in banks $ 9,804 13,277
Interest-bearing deposits in other financial
institutions 350 83
Securities available-for-sale 72,719 93,444
Loans held-for-sale 22,428 4,236
Securities held-to-maturity 1,738 10,851
Loans 437,562 540,740
Allowance for loan losses (4,254) (5,004)
---------------------
Loans, net 433,308 535,736
Premises and equipment, net 9,433 9,132
Accrued interest receivable and other assets 7,306 8,940
Deferred Federal income taxes -- 477
---------------------
Total assets $ 557,086 676,176
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 361,786 398,507
Federal Home Loan Bank advances 141,996 215,656
Securities sold under agreements to repurchase 5,951 5,787
Advance payments by borrowers for taxes and insurance 1,947 1,960
Accrued interest payable, expenses and other
liabilities 10,743 7,010
Deferred Federal income taxes 424 --
---------------------
Total liabilities 522,847 628,920
---------------------
Trust preferred securities -- 10,000
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 5,454,302 shares
in 1999 and 5,531,877 shares in 2000 55 55
Additional paid-in capital 4,790 5,038
Retained earnings, substantially restricted 31,150 34,862
Accumulated other comprehensive loss, net (1,756) (2,699)
---------------------
Total stockholders' equity 34,239 37,256
---------------------
$ 557,086 676,176
=====================
See accompanying notes to consolidated financial statements
11
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 1998, 1999 and 2000
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
1998 1999 2000
------------------------------------------------------------------------------
Interest income:
Loans $ 31,109 34,751 43,155
Securities held-to-maturity 306 141 306
Securities available-for-sale 1,825 2,598 4,306
FHLB stock dividends 412 445 622
Interest-bearing deposits 264 270 193
---------------------------------
Total interest income 33,916 38,205 48,582
---------------------------------
Interest expense:
Deposits 15,205 16,425 19,801
FHLB advances 4,015 5,280 9,093
Securities sold under agreements
to repurchase 898 251 565
Trust preferred securities -- -- 388
---------------------------------
Total interest expense 20,118 21,956 29,847
---------------------------------
Net interest income 13,798 16,249 18,735
Provision for loan losses 247 427 770
---------------------------------
Net interest income after provision
for loan losses 13,551 15,822 17,965
---------------------------------
Other income:
Gain on sale of loans held-for-sale 606 623 427
Gain on sale of mortgage-backed securities
held-for-trading 45 37 --
Gain on sale of servicing -- 633 --
Gain on sale of securities available-
for-sale 93 17 --
Service charges 1,316 1,244 1,591
Other 398 283 258
---------------------------------
Total other income 2,458 2,837 2,276
---------------------------------
Other expenses:
Salaries and employee benefits 5,579 6,541 7,914
Occupancy 1,695 2,211 2,889
Data processing 360 370 234
Marketing 443 510 509
Other 2,651 2,806 3,071
---------------------------------
Total other expenses 10,728 12,438 14,617
---------------------------------
Income before Federal income taxes 5,281 6,221 5,624
Federal income taxes 1,756 2,117 1,912
---------------------------------
Net income $ 3,525 4,104 3,712
=================================
Net income per common share, basic $ 0.66 0.76 0.68
Weighted average number of shares
outstanding, basic 5,312,305 5,420,286 5,492,804
Net income per diluted share 0.60 0.69 0.63
Weighted average number of shares
outstanding, diluted 5,843,386 5,956,543 5,930,387
=================================
See accompanying notes to consolidated financial statements.
12
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended June 30, 1998, 1999 and 2000
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
Accumulated
other Total
Additional compre- stock-
Common paid-in Retained hensive holders'
Shares stock capital earnings loss, net equity
------------------------------------------------------------------------------
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 $108 -- -- -- -- 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
(loss), net of tax
benefit of $(814) (1,652) (1,652)
-------------------------------------------------------
Balances at
June 30, 1999 5,454,302 55 4,790 31,150 (1,756) 34,239
Options exercised 77,575 -- 248 -- -- 248
Net income -- -- -- 3,712 -- 3,712
Other comprehensive
(loss), net of tax
benefit of $(486) -- -- -- -- (943) (943)
-------------------------------------------------------
Balances at
June 30, 2000 5,531,877 $ 55 5,038 34,862 (2,699) 37,256
=======================================================
Comprehensive Income
Years ended June 30,
--------------------
1998 1999 2000
---------------------
Net Income $ 3,525 4,104 3,712
Increase (decrease) in unrealized
gains (losses) on securities
available for sale, net of tax expense
(benefit) of $108, $(814), and $(486). 210 (1,652) (943)
-------------------------
Comprehensive Income $ 3,735 2,452 2,769
=========================
See accompanying notes to consolidated financial statements.
13
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1999 and 2000
(Dollars in thousands)
------------------------------------------------------------------------------
1998 1999 2000
------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,525 4,104 3,712
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of premises
and equipment 665 938 1,405
Amortization of retained servicing rights 322 384 257
Provision (recovery) for losses on:
Loans 246 427 770
Mortgage servicing rights 57 187 (137)
Deferred Federal income taxes (94) (136) (486)
Additions to mortgage servicing rights (908) (1,042) (204)
Deferred loan fees, net of amortization (149) 25 348
Net change in loans available for sale (8,793) (2,508) 18,192
Net gains on sales of securities
available-for-sale (93) (17) --
Gain on sales of mortgage loan servicing
rights -- (633) --
Federal Home Loan Bank stock dividend received (412) (445) (622)
Net change in accrued interest receivable
and other assets over accrued interest
payable, expenses and other liabilities 6,005 (91) (3,581)
--------------------------------
Net cash provided by operating activities 371 1,193 19,654
--------------------------------
Cash flows from investing activities:
Loans originated, net of principal repayments (35,159) (69,479) (104,738)
Purchases of securities held-to-maturity -- (291) (9,820)
Principal repayments on mortgage-backed
securities held-to-maturity 2,053 3,278 707
Principal repayments on securities
available-for-sale 9,900 7,994 4,435
Purchases of securities available-for-sale (64) (62,252) (25,968)
Proceeds from sales of securities
available-for-sale 20,962 7,016 --
Purchases of premises and equipment (2,023) (1,608) (1,104)
Proceeds from sales of mortgage
servicing rights -- 1,579 --
--------------------------------
Net cash used in investing activities (4,331) (113,763) (136,488)
--------------------------------
Subtotal, carried forward $ (3,960) (112,570) (116,834)
--------------------------------
14
<PAGE>
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
------------------------------------------------------------------------------
1998 1999 2000
------------------------------------------------------------------------------
Subtotal, brought forward $ (3,960) (112,570) (116,834)
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 140 375 248
Net increase in deposits 8,313 49,268 36,721
Net increase (decrease) in Federal Home
Loan Bank advances (1,223) 68,560 73,660
Proceeds from Trust preferred offering,
net of issuance costs -- -- 9,234
Net decrease in securities sold under
agreements to repurchase (6,092) (7,440) 164
Net increase (decrease) in advance payments
by borrowers for taxes and insurance 477 (6) 13
--------------------------------
Net cash provided by financing activities 1,615 110,757 120,040
--------------------------------
Net increase (decrease) in cash and
cash equivalents (2,345) (1,813) 3,206
Cash and cash equivalents at beginning of year 14,312 11,967 10,154
--------------------------------
Cash and cash equivalents at end of year $ 11,967 10,154 13,360
================================
Supplemental disclosures of cash flow
information -- cash paid during the year for:
Interest $ 19,914 21,848 28,709
Federal income taxes 1,630 2,438 1,809
Supplemental schedule of noncash investing
activities:
Mortgage loans securitized into FHLMC
participation certificates and held-for-
trading and sold 24,400 20,137 8,814
Mortgage loans securitized into FHLMC
participation certificates and held-for-
investment 15 -- --
Premises and equipment, net transferred to
Investment property 453 -- --
Net mortgage loans transferred to real
estate owned $ 301 534 1,192
------------------------------------------------------------------------------
15
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
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 subsidiaries (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 subsidiaries, Cascade Bank (the "Bank") and Cascade
Capital Trust I (the "Trust"), 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, 2000, the Corporation's loans are principally secured by
one-to-four-family residences (40%), multifamily residences (19%),
commercial, industrial and personal assets (13%) and commercial real
estate properties (11%). 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 borrowers and or guarantors. At June 30, 2000,
$8.7 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.
16
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
The Corporation reviews all single family loans, all consumer loans and
multi-family and commercial real estate loans with outstanding principal
balances under $1.0 million for impairment as smaller balance homogeneous
loan groups. The Corporation considers a loan to be impaired when it
becomes nonaccrual, if it is a multi-family or commercial real estate loan
less than 90 days delinquent and management believes that the borrower may
be experiencing financial difficulty based on indicators such as an
inconsistent payment pattern, low debt coverage ratio, high loan-to-value
ratio, or if it is a restructured debt. The Corporation bases the
measurement of loan impairment for all loans on the fair value of the
loan's underlying collateral. If the recorded investment of a loan
exceeds the measure of impairment, the Corporation recognizes the
impairment by creating a valuation allowance with a corresponding charge
to the provision for loan losses.
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 the
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. Reversal of
the allowance is based upon the recovery of the fair market value of the
amortized asset. 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 from borrowers, such as late payment fees, maintaining
escrow accounts, and disbursing payments to investors. Loan servicing
income is recognized 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.
17
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(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 a component of other
comprehensive income. 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 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, based
upon the most recent appraisal, 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. There was no real estate owned at June 30, 1999 and $528
at June 30, 2000, which 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 measures its employee stock-based compensation
arrangements using the provisions outlined in Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, which is
an intrinsic value-based method of recognizing compensation costs. As
none of the Corporation's stock options have an intrinsic value at grant
date, no compensation cost has been recognized for its stock option plans.
18
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(k) Recently Issued Accounting Standards
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. SFAS No. 134 was adopted on July 1, 1999.
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. Management is reviewing
these statements and does not expect that application of these statements
will have a material effect on the results of operations or the financial
position of the Corporation.
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 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. The Corporation does not
expect the adoption of Interpretation No. 44 to have a material impact
on its consolidated financial statements.
(l) Reclassifications
Certain 1999 balances have been reclassfied to conform to the 2000
presentation.
(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.
19
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(3) Securities
A summary of securities at June 30 follows:
1999 2000
-------------------------------------------------------
Gross Gross Gross Gross
un- un- un- un-
Amor- real- real- Amor- real- real-
tized ized ized Fair tized ized ized Fair
cost gain losses value cost gain losses value
-------------------------------------------------------
Securities available-
for-sale:
Agency MBS $30,926 -- 1,249 29,677 47,305 -- 1,863 45,442
Agency Notes 37,000 -- 1,304 35,696 37,000 -- 2,060 34,940
FHLB stock 7,346 -- -- 7,346 10,945 -- -- 10,945
Other -- -- -- -- 2,177 -- 60 2,117
--------------------------------------------------------
$75,272 -- 2,553 72,719 97,427 -- 3,983 93,444
========================================================
Securities held-to-
maturity:
Agency MBS $ 1,738 1 40 1,699 7,851 -- 605 7,246
Other -- -- -- -- 3,000 32 -- 3,032
--------------------------------------------------------
$ 1,738 1 40 1,699 10,851 32 605 10,278
========================================================
As of June 30, 1999 and 2000, the Corporation was required to maintain 71,000
and 104,728 shares, respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits was
$892 and $1,153 at June 30, 1999 and 2000, respectively.
Proceeds from the sale of securities available-for-sale and gross realized
gains and losses are summarized as follows for the year ended June 30, 1998
and 1999. There were no sales of securities available for sale for the year
ended June 30, 2000.
Proceeds Gains Losses
---------------------------
Year ended June 30, 1998
US Treasury $ 11,123 21 4
Municipals 4,869 64 1
US Government agency 1,938 -- 12
Mutual Funds 3,032 25 --
---------------------------
Total $ 20,962 110 17
===========================
Proceeds Gains Losses
---------------------------
Year ended June 30, 1998
US Government agency $ 7,016 17 --
---------------------------
Total $ 7,016 17 --
===========================
20
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at June 30, 2000:
Within Over one Over five Over
one to five to ten ten
year years years years Total
----------------------------------------------
Amortized Cost
Agency MBS $ -- 441 3,007 43,857 47,305
Agency Notes -- 10,000 27,000 -- 37,000
FHLB Stock 10,945 -- -- -- 10,945
Other 77 -- -- 2,100 2,177
-----------------------------------------------
Total amortized cost $ 11,022 10,441 30,007 45,957 97,427
===============================================
Fair Value
Agency MBS $ -- 432 2,898 42,112 45,442
Agency Notes -- 9,648 25,292 -- 34,940
FHLB Stock 10,945 -- -- -- 10,945
Other 77 -- -- 2,040 2,117
-----------------------------------------------
Total fair value $ 11,022 10,080 28,190 44,152 93,444
===============================================
The following table shows the contractual maturities of the Corporation's
securities held-to-maturity at June 30, 2000:
Within one Over one to Over five
year five years years Total
------------------------------------------
Amortized Cost
Agency MBS $ -- -- 3,000 3,000
Other 849 -- 7,002 7,851
--------------------------------------------
Total amortized cost $ 849 -- 10,002 10,851
============================================
Fair Value
Agency MBS $ -- -- 3,032 3,032
Other 828 -- 6,418 7,246
--------------------------------------------
Total fair value $ 828 -- 9,450 10,278
============================================
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 $1,718 in 1999 and $1,353 in 2000. 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 8.14% and 5.34% at June 30, 1999 and 2000, respectively.
21
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
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:
1999 2000
--------------------
Real estate mortgage:
One-to-four family $ 177,988 175,910
Multifamily 85,893 112,721
Commercial 49,066 54,320
Home equity 29,334 41,459
Land loans 106 29
Real estate construction 54,500 73,488
Commercial 61,676 86,298
Installment 22,885 20,602
--------------------
Total loans 481,448 564,827
Loans in process (19,087) (17,132)
Deferred loan fees, net (2,371) (2,719)
--------------------
459,990 544,976
Loans held for sale (22,428) (4,236)
--------------------
Loans $ 437,562 540,740
====================
Loans serviced for others $ 90,666 106,225
Accrued interest on loans was $2,657 and $3,429 at June 30, 1999 and 2000,
respectively.
At June 30, 2000, the composition of the loan portfolio was as follows:
Fixed Rate Adjustable Rate
---------------------------
Term to maturity
Less than one year $ 19,401 181,009
1-3 years 10,268 83,918
3-5 years 27,585 88,352
5-10 years 24,996 82,868
10-20 years 7,592 --
Over 20 years 21,706 --
----------------------
Total $111,548 436,147
======================
Non-accrual loans totaled $1,921, $1,201 and $573, respectively, at June 30,
1998, 1999 and 2000. If interest on these loans had been recognized, such
income would have been $106, $86 and $37, respectively, for 1998, 1999 and
2000. At June 30, 1998, 1999 and 2000, loans totaling $3,221, $2,149 and
$4,784, were impaired, of which $67, $0 and $194 had allocated reserves of
$67, $0 and $28, respectively. The remaining $3,154, $2,149 and $4,756 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
$3,221, $2,149 and $4,784 of impaired loans, $1,652, $1,201 and $573 were on
nonaccrual status, $269, $674 and $572 were under foreclosure and $1,300, $948
and $3,553 were performing but judged to be impaired. The average balance of
impaired loans during the years ended June 30, 1998, 1999 and 2000,
respectively, was $1,450, $3,180 and $3,243 and the Corporation recognized
$86, $224 and $406 of related interest income on such loans during the time
such loans were impaired.
22
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
At June 30, 2000, the Corporation had outstanding commitments to fund loans
with fixed interest rates totaling $3,682 and loans with adjustable rates
totaling $11,955.
The Corporation had forward commitments to sell loans into the secondary
market totaling $21,436, and $5,727, respectively, at June 30, 1999 and 2000.
A summary of the allowance for losses on loans follows:
Year ended June 30,
-------------------------
1998 1999 2000
-------------------------
Balances at beginning of year $ 3,879 4,143 4,254
Provision for loss 247 427 770
Recoveries 62 7 126
Charge-offs (45) (323) (146)
-------------------------
Balances at end of year $ 4,143 4,254 5,004
=========================
(5) Premises and Equipment
A summary of premises and equipment follows:
June 30,
Estimated ----------------
Useful lives 1999 2000
----------------------------------
Land $ 1,239 1,239
Buildings 40 years 7,526 7,571
Leasehold improvements Lease term 890 1,213
Furniture and equipment 2-10 years 7,276 7,980
Automobiles 4 years $ 56 56
-----------------
16,987 18,059
Accumulated depreciation and amortization (7,554) (8,927)
-----------------
$ 9,433 9,132
=================
6) Deposits
Deposits at June 30 are summarized as follows:
1999 2000
----------------
Non-interest bearing checking accounts $ 18,100 22,089
Interest bearing checking accounts 16,782 20,209
Money market deposit accounts 87,835 102,628
Savings accounts 12,301 10,926
Certificates of deposit 226,768 242,655
------------------
$361,786 398,507
==================
23
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
Time deposit accounts in amounts of $100,000 or more totaled $72.7 million and
$93.1 million at June 30, 1999 and 2000, respectively.
Deposit
Weighted accounts with Accrued
average interest balances in interest
rate on excess of payable on
deposits $100,000 deposits
----------------------------------------
June 30, 1999 4.7% $ 116,717 502
June 30, 2000 4.9% 140,565 660
A summary of interest expense on deposits follows:
Year ended June 30,
----------------------------
1998 1999 2000
----------------------------
Checking and money market accounts $ 2,738 3,642 6,359
Savings accounts and time deposits 12,467 12,783 13,442
----------------------------
$15,205 16,425 19,801
============================
Maturities of time deposits at June 30, 2000 are as follows:
Years ending June 30,
2001 $171,930
2002 61,875
2003 3,076
2004 1,571
2005 2,654
Thereafter 1,549
--------
$242,655
========
(7) Trust Preferred Securities
On March 1, 2000, $10,000,000 of 11 percent Capital Securities were issued by
a business Trust whose common equity is 100% owned by Cascade Financial
Corporation. The Corporation is using the proceeds for general corporate
purposes including stock repurchases and investment in its subsidiary bank.
The Trust preferred securities are included with borrowings as a separate line
item in the consolidated balance sheet and distributions payable are treated
as interest expense in the consolidated statements of operations. The Trust
preferred securities qualify as Tier I capital under the capital guidelines of
the Office of Thrift Supervision.
24
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(8) Interest Rate Risk Management Activities
The Corporation enters into interest rate swap, cap, and floor agreements with
primary dealers, the Federal Home Loan Bank of Seattle ("FHLB") and other
correspondent banks to manage interest rate risk. Swap, cap, and floor
agreements expose the Corporation to credit risk in the event of
nonperformance by counterparties to such agreements. This risk consists
primarily of the termination value of agreements where the Corporation is in a
favorable position. The Corporation controls the credit risk associated with
its swap and cap agreements through counterparty credit review and monitoring
procedures. None of the Corporation's derivative instruments are what are
termed leveraged derivative instruments.
The Corporation did not enter into any new interest rate swap, cap or floor
agreements during the year ended June 30, 2000. The net differences between
the interest paid and received on the interest rate swaps, caps and floors are
$38, $56 and $16, respectively for the years ended June 30, 1998, 1999 and
2000; which are recorded as an increase to interest expense on deposits.
Interest rate swap, and floor agreements at June 30, 1999 are summarized as
follows:
Swap Floor
-----------------------
1999
-----------------------
Notional amount $ 6,500 $ 13,000
Weighted average maturity 5 months 6 months
Strike rate N/A 5.00%
Fixed payable rate 6.30% N/A
Three month LIBOR 5.18% N/A
10 year CMT N/A 5.14%
Payment terms Quarterly Quarterly
There were no interest rate swaps or floors outstanding as of June 30, 2000.
(9) FHLB Advances
FHLB advances are summarized as follows:
June 30,
------------------------------------
1999 2000
------------------------------------
Weighted Weighted
average average
interest interest
Maturity date Amount rate Amount rate
----------------------------------------------------------
Year ended June 30,
2000 $ 68,100 5.16% -- --%
2001 19,000 4.88 125,175 6.54
2002 159 7.67 5,159 6.20
2003 15,000 4.62 9,625 6.26
2004 20,000 4.81 5,000 4.62
2005 -- -- 30,000 5.72
Thereafter 19,737 5.12 40,697 5.74
-----------------------------------
$141,996 5.01 215,656 6.21%
===================================
Year ended June 30,
-------------------
1999 2000
-------------------
Maximum amount of outstanding FHLB
advances at any month-end $141,996 215,656
Average amount of outstanding FHLB
advances during the year 102,045 165,524
25
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
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.
The Corporation has $75 million in fixed rate advances as of June 30, 2000
where the FHLB has the option to convert these advances to variable rate
advances after a specified period.
At June 30, 2000, the Bank had an unused line of credit from the FHLB-Seattle
of $20.9 million. The Bank's credit line with the FHLB-Seattle is 35% of
total assets or up to approximately $236.7 million.
(10) Securities Sold Under Agreements to Repurchase and Lines of Credit
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) that 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 30 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, 1999 $ 5,951 4.85 6,569 6,379
June 30, 2000 5,787 6.46 6,163 5,880
Financial data pertaining to reverse repurchase agreements follows:
Year ended June 30,
-------------------
1999 2000
-------------------
Maximum amount of outstanding agreements
at any month-end $ 11,976 21,696
Average amount of outstanding agreements
during the year 5,571 9,082
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.
26
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(11) Federal Income Taxes
Federal income tax expense includes the following components:
Year ended June 30,
-----------------------------
1998 1999 2000
-----------------------------
Current $ 1,850 2,253 2,398
Deferred (94) (136) (486)
-----------------------------
$ 1,756 2,117 1,912
=============================
The 1998 provision for Federal income tax expense differs from the amount
computed by applying the "expected" Federal income tax rate of 34% to income
before Federal income taxes due to tax exempt income received on municipal
investment securities and other differences as noted below.
1998 1999 2000
-----------------------------
Expected tax $ 1,796 2,117 1,912
Tax exempt municipal
income (3) -- --
Other (37) -- --
-----------------------------
Tax expense $ 1,756 2,117 1,912
=============================
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:
1999 2000
-----------------
Deferred tax assets:
Securities available-for-sale $ 868 1,283
Loans 678 1,058
Other 119 96
-----------------
Gross deferred tax assets 1,665 2,437
Deferred tax liabilities:
Deferred loan fees (570) (333)
Premises and equipment (432) (328)
FHLB stock (1,087) (1,299)
-----------------
Gross deferred tax liabilities (2,089) (1,960)
-----------------
Net deferred tax (liability) asset $ (424) 477
=================
A valuation allowance for deferred tax assets was not considered necessary at
June 30, 1999 or 2000. Management believes the Corporation will fully realize
its total deferred income tax assets as of June 30, 2000, based upon its total
deferred income tax liabilities, and its current and expected future levels of
taxable income.
27
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(12) Earnings Per Share
The following table presents EPS information:
Year ended June 30,
--------------------------------
1998 1999 2000
--------------------------------
Net income $ 3,525 4,104 3,712
Common shares outstanding (basic) 5,312,305 5,420,286 5,492,804
Effect of dilutive stock options 531,081 536,257 437,583
--------------------------------
Common shares outstanding (diluted) 5,843,386 5,956,543 5,930,387
================================
EPS, basic 0.66 0.76 0.68
EPS, diluted 0.60 0.69 0.63
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, 1998, 1999, and 23,067 shares
were antidilutive at June 30, 2000.
(13)Stockholders' Equity
(a) Restrictions on Dividends
Current regulations allow the Bank to pay dividends on its stock if its
regulatory capital would not thereby be reduced below the amount required
for the statutory capital requirements set by the Office of Thrift
Supervision ("OTS").
(b) Regulatory Capital
At June 30, 2000, 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, when implemented, will
materially affect the Corporation's current business strategy.
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, 2000, 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.
28
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
Minimum
requirements Well-
for capital capitalized
Actual adequacy requirements
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------
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
June 30, 2000:
Total risk-based capital
to risk-weighted assets(1) $ 53,726 11.69 36,756 8.00 45,945 10.00
Tier I (core) capital to
risk-weighted assets 49,231 10.72 18,378 4.00 27,567 6.00
Tier I (core) capital to
adjusted total assets 49,231 7.28 27,049 4.00 33,811 5.00
Tangible capital to tangible
assets 49,231 7.28 10,143 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.
(c) Stock Repurchase Plan
On June 5, 2000, the Corporation commenced a stock repurchase program.
The Board of Directors authorized the repurchase of up to 275,000 shares
of the company's stock, which is approximately 5% of the outstanding
common shares.
(14)Mortgage Servicing Rights
A summary of capitalized mortgage servicing rights at June 30, 1999 and 2000
follows:
1999 2000
-----------------
Balance at beginning of year $ 1,290 815
Additions 1,042 204
Amortization (384) (257)
Allowance for losses (187) 137
Sales of mortgage servicing rights (136) --
-----------------
Balance at end of year $ 815 899
=================
(15)Employee Benefit Plans
(a) Savings Plan
The Corporation maintains a savings plan under section 401(k) of the
Internal Revenue Code, covering substantially all full-time employees.
Under the plan, employee contributions are matched by the Corporation at
a rate of 50% of the first five percent contributed. Such matching
becomes vested over a period of five years of credited service. Employees
may make investments in various stock, fixed income or money market plans,
or may purchase stock in the Corporation. The Corporation contributed
$58, $82 and $75 to the plan for the years ended June 30, 1998, 1999 and
2000, respectively.
29
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(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, 1998, 1999 and
2000, the Corporation contributed $104, $240, and $175, respectively, to
the ESOP, which is invested in Cascade Financial Corporation stock.
Allocated and unallocated shares at June 30, 2000, were 163,711 and 0,
respectively. The Corporation has the right of first refusal to purchase
the allocated shares of separated employees.
(c) Employee Stock Purchase Plan
The Corporation maintains an employee stock purchase plan, under the terms
of which 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, 1999
and 2000, 612,583 and 582,300 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:
30
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
Year Ended June 30,
---------------------------
1998 1999 2000
---------------------------
Net income
As reported $ 3,525 4,104 3,712
Pro forma 3,457 3,956 3,532
Net income per common share
Basic
As reported 0.66 0.76 0.68
Pro forma 0.65 0.73 0.64
Diluted
As reported 0.60 0.69 0.63
Pro forma 0.59 0.66 0.60
The fair value of options granted under the Corporation's stock option plan
was $6.23, $7.25, and $2.40 respectively for the years ended June 30, 1998,
1999, and 2000. The fair value is estimated on the date of grant with the
following weighted average assumptions used for 1998, 1999, and 2000:
risk-free interest rate of 5.83%, 4.75%, and 6.50%, expected lives of eight
years, no expected cash dividends, and volatility factors of 24%.
Changes in total options outstanding for the years ended June 30 are as
follows:
Shares Weighted average
under exercise price of
option option shares
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
========================
2000
------------------------
Outstanding at beginning of year 848,345 $ 4.58
Granted during year 122,442 9.49
Exercised during year (77,575) 2.19
Forfeited during year (28,940) 9.86
------------------------
Outstanding at end of year 864,272 $ 5.31
========================
31
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
Financial data pertaining to outstanding stock options were as follows:
June 30, 1999
------------------------------------------------------------------------------
Weighted
Weighted average
average exercise
Weighted exercise Number of price of
Number of average price of exercisable exercisable
Ranges of exercise option remaining option option option
prices shares contractual life shares shares shares
------------------------------------------------------------------------------
$ 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 5.4 $ 4.58 612,583 $ 2.82
========================================================
June 30, 2000
------------------------------------------------------------------------------
Weighted
Weighted average
average exercise
Weighted exercise Number of price of
Number of average price of exercisable exercisable
Ranges of exercise option remaining option option option
prices shares contractual life shares shares shares
------------------------------------------------------------------------------
$ 1.26 - 2.20 320,037 2.4 $ 1.45 320,037 $ 1.45
3.04 - 6.96 256,832 4.7 4.92 243,550 4.84
7.13 - 7.68 53,019 7.5 7.54 12,345 7.65
8.19 - 8.48 60,938 9.3 8.23 2,188 8.43
9.90 - 11.90 173,446 8.5 10.90 4,180 10.54
--------------------------------------------------------
864,272 5.0 $ 4.82 582,300 $ 3.09
========================================================
(16) Fair Value of Financial Instruments
The fair value estimates presented below are subjective in nature, involve
uncertainties and matters of significant judgement and, therefore, are not
necessarily indicative of the amounts the Corporation could realize in a
current market exchange. The Corporation has not included certain material
items in its disclosure, such as the value of the long-term relationships with
the Corporation's lending and deposit customers since this is an intangible
and not a financial instrument. Additionally, the estimates do not include
any tax ramifications. There may be inherent weaknesses in any calculation
technique, and changes in the underlying assumptions used, including discount
rates and estimates of future cash flows that 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.
32
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
The following table presents a summary of the fair value of the Corporation's
financial instruments:
At June 30,
---------------------------------------------
1999 2000
---------------------------------------------
Carrying Estimated Carrying Estimated
Value fair value value fair value
---------------------------------------------
Financial assets:
Cash and cash equivalents $ 10,154 10,154 13,360 13,360
Securities available-for-
sale 72,719 72,719 93,444 93,444
Securities held-to-maturity 1,738 1,699 10,851 10,278
Loans 462,361 460,389 544,976 538,991
Servicing rights 815 848 899 995
Financial liabilities:
Deposit accounts 361,786 361,878 398,507 399,211
Borrowings 147,947 147,769 221,443 220,290
Trust preferred securities -- -- 10,000 10,000
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.
Trust Preferred Securities
The fair value is calculated based on the discounted cash flow method,
adjusted for market interest rates and terms to maturity.
(17) Contingencies
The Corporation is a defendant in a legal proceeding 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.
33
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(18) Condensed Financial Information of Cascade Financial Corporation
Following are the condensed financial statements of Cascade Financial
Corporation (Parent only) for the period indicated:
Balance Sheet
June 30,
------------------------------------------------------------------------
1999 2000
------------------------------------------------------------------------
Assets:
Cash $ 464 58
Investment in subsidiary 35,488 49,321
Other assets 43 956
------------------
35,995 50,335
==================
Liabilities and Stockholders' Equity:
Other liabilities -- 380
Trust preferred securities -- 10,000
Stockholders' equity 35,995 39,955
------------------
$35,995 50,335
==================
Statement of Operations
For the years ended June 30,
------------------------------------------------------------------------
1998 1999 2000
------------------------------------------------------------------------
Equity in undistributed net income
of the subsidiary $ 3,786 4,217 4,124
Operating expenses (392) (171) (240)
------------------------------
Interest expense - Trust preferred
securities -- -- (388)
Income before Federal income taxes 3,394 4,046 3,496
Income tax benefit 131 58 216
------------------------------
Net income $ 3,525 4,104 3,712
==============================
Statement of Cash Flows
For the years ended June 30,
-------------------------------------------------------------------------
1998 1999 2000
-------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,525 4,104 3,712
Adjustments to reconcile net
income to net cash (used in)
operating activities:
Equity in net income of
subsidiaries (3,786) (4,217) (4,124)
(Increase) decrease in other assets 44 (41) (913)
(Decrease) increase in other
liabilities -- (18) 380
------------------------------
Net cash used in operating
activities (217) (172) (945)
Cash flows from investing activities:
Dividends received from subsidiaries 300 -- --
Investment in subsidiary -- -- (9,709)
------------------------------
Net cash provided (used) by
investing activities 300 -- (9,709)
Cash flows from financing activities:
Proceeds from issuance of common stock 140 375 248
Proceeds from Trust preferred offering -- -- 10,000
------------------------------
Net cash provided by financing
activities 140 375 10,248
------------------------------
Net increase (decrease) in cash and
cash equivalents 223 203 (406)
------------------------------
Cash and cash equivalents:
Beginning of year 38 261 464
------------------------------
End of year $ 261 464 58
==============================
34
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
(19) 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.
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 organizational 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.
35
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
<PAGE>
<TABLE>
Year Ended June 30, 1999
------------------------
Business Residential Con- Income Consumer Admin- Total
-------- ----------- ---- ------ -------- ------ -----
struction Property istration
--------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed Income Statement
Net interest income 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 1,476 4,682 529 1,458 3,707 586 12,438
-------------------------------------------------------------------------
Income before income tax 1,368 2,390 899 2,102 (1,157) 619 6,221
Federal income taxes 465 813 306 716 (393) 210 2,117
-------------------------------------------------------------------------
Net income (loss) $ 903 1,577 593 1,386 (764) 409 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>
<TABLE>
Year Ended June 30, 2000
------------------------
Business Residential Con- Income Consumer Admin- Total
-------- ----------- ---- ------ -------- ------ -----
struction Property istration
--------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Condensed Income Statement
Net interest income after
provision for loan losses $ 3,984 4,620 2,030 4,592 1,627 1,111 17,964
Other income 43 706 -- 8 1,135 385 2,277
Other expense 1,902 5,524 741 2,228 3,026 1,196 14,617
-------------------------------------------------------------------------
Income before income tax 2,125 (198) 1,289 2,372 (264) 300 5,624
Federal income taxes 723 (67) 438 806 (90) 102 1,912
--------------------------------------------------------------------------
Net income (loss) $ 1,402 (131) 851 1,566 (174) 198 3,712
==========================================================================
</TABLE>
<TABLE>
At June 30, 2000
----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Assets $ 86,298 175,911 56,385 167,041 62,060 128,481 676,176
</TABLE>
(20) Selected Quarterly Financial Data (Unaudited)
Quarter Ended
-------------------------------------------
Sept 30, Dec 31, Mar 31, June 30,
1997 1997 1998 1998
-------------------------------------------
Results of operations
Interest income $ 8,388 8,366 8,373 8,789
Interest expense 5,199 4,971 4,888 5,060
-------------------------------------------
Net interest income 3,189 3,395 3,485 3,729
Provision for loan losses 102 99 -- 45
Other income 462 510 735 751
Other expense 2,521 2,580 2,708 2,920
-------------------------------------------
Income before income
taxes 1,028 1,226 1,512 1,515
Provision for income taxes 382 453 406 515
-------------------------------------------
Net income $ 646 773 1,106 1,000
===========================================
Earnings per share, basic $ 0.12 0.14 0.21 0.19
Earnings per share, diluted 0.11 0.14 0.18 0.17
36
<PAGE>
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
------------------------------------------------------------------------------
Quarter Ended
-------------------------------------------
Sept 30, Dec 31, Mar 31, June 30,
1998 1998 1999 1999
-------------------------------------------
Results of operations
Interest income $ 9,020 9,313 9,612 10,260
Interest expense 5,245 5,395 5,398 5,918
Net interest income 3,775 3,918 4,214 4,342
Provision for loan losses 150 150 127 --
Other income 536 607 1,148 546
Other expense 2,823 2,771 3,211 3,633
-------------------------------------------
Income before income
taxes 1,338 1,604 2,024 1,255
Provision for income taxes 455 545 691 426
-------------------------------------------
Net income $ 883 1,059 1,333 829
===========================================
Earnings per share, basic $ 0.16 0.20 0.25 0.15
Earnings per share, diluted 0.15 0.18 0.22 0.14
Quarter Ended
-------------------------------------------
Sept 30, Dec 31, Mar 31, June 30,
1999 1999 2000 2000
-------------------------------------------
Results of operations
Interest income $ 8,388 8,366 8,373 8,789
Results of operations
Interest income $11,016 12,053 12,386 13,127
Interest expense 6,339 7,375 7,719 8,414
-------------------------------------------
Net interest income 4,677 4,678 4,667 4,713
Provision for loan losses 210 140 210 210
Other income 486 531 596 663
Other expense 3,476 3,533 3,775 3,833
Income before income
taxes 1,477 1,536 1,278 1,333
Provision for income taxes 501 522 433 456
-------------------------------------------
Net income $ 976 1,014 845 877
===========================================
Earnings per share, basic $ 0.18 0.19 0.15 0.16
Earnings per share, diluted 0.16 0.17 0.14 0.15
37
<PAGE>
Common Stock Information
The common stock of Cascade Financial Corporation is traded on the Nasdaq
Stock Market under the symbol "CASB". As of June 30, 2000, there were
approximately 1,035 stockholders of record. The following table sets forth
market price information for the Corporation's common stock. Prices have been
adjusted for stock dividends.
Fiscal 2000 High Low Fiscal 1999 High Low
First Quarter $16.000 9.000 First Quarter $12.250 10.750
Second Quarter 13.250 10.000 Second Quarter 12.250 8.375
Third Quarter 12.000 6.687 Third Quarter 13.500 11.125
Fourth Quarter 8.500 6.062 Fourth Quarter 14.500 13.000
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.
Management Committee
------------------------------------------------------------------------------
Frank M. McCord
Chairman, Chief Executive Officer
C. Fredrick Safstrom
President, Chief Operating Officer
Robert G. Disotell
EVP, Consumer Banking
Steven R. Erickson
EVP, Real Estate Lending
Lars Johnson
EVP, Chief Financial Officer
David R. Little
EVP, Business Banking
Vera E. Wildauer
EVP, Marketing and Operations
Board of Directors [Pictured]
------------------------------------------------------------------------------
Frank M. McCord(1)
Chairman of the Board
Chief Executive Officer
Cascade Bank
David W. Duce(3)
Vice Chairman
Attorney
Duce, Bastian, Peterson, and Zielke
Janice Halladay(3)
Retired
Bank Executive
Dwayne Lane(3)
President
Dwayne Lane Auto Centers
Gary L. Meisner(2)
President
Clearview Management, Inc.
Dennis R. Murphy, Ph.D.(2)
Vice Chairman
Dean-College of Business and Economics
and Professor of Economics
Western Washington University
David R. O'Connor(1)
Co-Owner, Mobile Country Club
Henry M. Robinett(1)(2)
General Partner
Boyden, Robinett & Assoc. L.P.
C. Fredrick Safstrom(1)
President
Chief Operating Officer
Cascade Bank
Paull H. Shin, Ph.D.(3)
Washington State Senator
Retired Professor of History
Ronald E.Thompson(1)(2)
President
Windermere Commercial and Property Management
G. Brandt Westover(1)
Vice President
Paine Webber, Inc.
(1) Member of the Executive Committee
(2) Member of the Audit and Finance Committee
(3) Member of the Compensation and Personnel Committee
Info
38
<PAGE>
The annual Stockholders' Meeting of Cascade Financial Corporation will be at
10:00 a.m., Saturday, October 21, 2000 at Cascade Bank, 2828 Colby Avenue,
Everett, Washington.
Stockholders interested in receiving quarterly earnings releases should call
our shareholder services office at (425) 339-5500 or (800) 326-8787.
A copy of the Form 10-K filed with the Securities and Exchange Commission will
be furnished to stockholders upon written request to the Secretary, Cascade
Financial Corporation, 2828 Colby Avenue, Everett WA 98201. You may also
contact us through our web site: www.cascadebank.com. Form 10-K information is
also available through the Securities and Exchange Commission's web site:
www.sec.gov/edaux/searches.htm.
Stock Transfer Agent
Chase Mellon
Shareholder Services
50 California Street, 10th Floor
San Francisco, California 94111
Auditors
KPMG LLP
3100 Two Union Square
601 Union Street
Seattle, Washington 98101-2327
Legal Counsel
Anderson Hunter, PS
2707 Colby Avenue, Suite 1001
Everett, Washington 98201
Special Counsel
Breyer & Associates PC
1100 New York Ave NW #700
Washington, D.C. 20005
Everett/Main Office
2828 Colby Avenue
Everett, Washington
(425) 339-5500
Everett/Broadway Office
2602 Broadway
Everett, Washington
(425) 259-1243
Everett/Evergreen Way Office
6920 Evergreen Way
Everett, Washington
(425) 353-1243
Bellevue Office
200 108th NE, Bellevue
Washington
(425) 455-2300
Clearview Office
17512 SR 9 SE
Snohomish, Washington
(360) 668-1243
Harbour Pointe in QFC
11700 Mukilteo Speedway
Mukilteo, Washington
(425) 290-7767
Issaquah Office
305 Front Street N
Issaquah, Washington
(425) 391-5500
Lake Stevens in Haggen Food & Pharmacy
8915 Market Place
Everett, Washington
(425) 334-0507
Lynnwood Office
19419 Highway 99
Lynnwood, Washington
(425) 775-6666
Marysville Office
815 State Avenue
Marysville, Washington
(360) 659-7614
Marysville in Haggen Food & Pharmacy
3711 88th Street NE
Marysville, Washington
(360) 659-7619
Mount Vernon Office
1725 Continental Place, Suite C
Mount Vernon, Washington
(360) 424-4655
Smokey Point in Safeway
3532 172nd Street NE
Arlington, Washington
(360) 653-1900
Woodinville in TOP Food & Drug
17641 Garden Way NE
Woodinville, Washington
(425) 481-0820
Cascade Financial [Logo]
Corporation
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
------
Cascade Financial Corporation
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
---------------- ------------ ----------------------
Cascade Bank 100% United States
Cascade Capital Trust I 100% Delaware
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 subsidiaries:
We consent to incorporation by reference in the registration statements No.
33-94456 and 333-32272 on Form S-8 of Cascade Financial Corporation of our
report dated August 4, 2000 relating to the consolidated balance sheets of
Cascade Financial Corporation and subsidiaries as of June 30, 1999 and 2000,
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, 2000, which report is incorporated by reference
into Cascade Financial Corporation's 2000 Annual Report on Form 10-K from
Cascade Financial Corporation's 2000 Annual Report to Stockholders.
/s/KPMG LLP
Seattle, Washington
September 26, 2000
<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, 2000 and is qualified in its entirety by reference to such
financial statements.
Financial Data
As of or for
year ended
Item Number June 30, 2000 Item Description
----------- ------------- ----------------
($ in thousands)
9-03 (1) 13,277 Cash and due from Banks
9-03 (2) 83 Interest-bearing deposits
9-03 (3) ___ Federal funds sold - purchased securities for
resale
9-03 (4) ___ Trading account assets
9-03 (6) 93,444 Investment and mortgage backed securities held
for sale
9-03 (6) 10,851 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) 539,972 Loans, net
9-03 (7)(2) 5,004 Allowance for losses
9-03 (11) 676,176 Total assets
9-03 (12) 398,507 Deposits
9-03 (13) 74,051 Short-term borrowings
9-03 (15) 8,970 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) 37,201 Other stockholders' equity
9-03 (23) 676,176 Total liabilities and stockholders' equity
9-04 (1) 43,155 Interest and fees on loans
9-04 (2) 5,234 Interest and dividends on investments
9-04 (4) 193 Other interest income
9-04 (5) 48,582 Total interest income
9-04 (6) 19,801 Interest on deposits
9-04 (9) 29,847 Total interest expense
9-04 (10) 18,735 Net interest income
9-04 (11) 770 Provision for loan losses
9-04 (13)(h) ___ Investment securities gains/(losses)
9-04 (14) 14,617 Other expenses
9-04 (15) 5,624 Income/loss before income tax
9-04 (17) 3,712 Income/loss before extraordinary items
9-04 (18) ___ Exraordinary items, less tax
9-04 (19) ___ Cumulative change in accounting principles
9-04 (20) 3,712 Net income or loss
9-04 (21) 0.68 Earnings per share - primary
9-04 (21) 0.63 Earnings per share - fully diluted
I.B. 5 7.83 Net yield - interest earning assets - actual
III.C.1. (a) 573 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 4,784 Potential problem loans
IV.A.1 4,254 Allowance for loan loss - beginning of period
IV.A.2 146 Total chargeoffs
IV.A.3 126 Total recoveries
IV.A.4 5,004 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 5,004 Loan loss allowance - unallocated
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