US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM TO
------- ---------
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 91-1661954
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 Colby Avenue
Everett, Washington 98201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 339-5500
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of December 31, 1999
----- -----------------------------------
Common Stock ($.01 par value) 5,489,879
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CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended December 31, 1999
----------------
INDEX
PART I - Financial Information:
Item 1 - Financial Statements:
- Condensed Consolidated Balance Sheets. . . . . . . . . 3
- Condensed Consolidated Statements of Operations. . . . 4
- Consolidated Statements of Comprehensive Income. . . . 5
- Condensed Consolidated Statements of Cash Flows. . . . 6
- Notes to Consolidated Financial Statements . . . . . . 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 9
PART II - Other Information. . . . . . . . . . . . . . . . . . . .16
2
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PART I --- FINANCIAL INFORMATION
--------------------------------
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, unaudited)
December 31, June 30,
------------ --------
ASSETS 1999 1999
- ------ ---- ----
Cash on hand and in banks $ 8,904 9,804
Interest-earning deposits in other institutions 3 350
Securities available for sale 70,915 72,719
Loans available for sale 6,756 22,428
Mortgage-backed securities held to maturity
(market value of $7,555 and $1,699) 8,140 1,738
Loans, net 504,979 433,308
Premises and equipment, at cost, net 9,411 9,433
Accrued interest receivable and other assets 7,850 7,306
---------------------
TOTAL ASSETS $ 616,958 557,086
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 438,935 361,786
Federal Home Loan Bank advances 130,609 141,996
Securities sold under agreements to repurchase 6,184 5,951
Advance payments by borrowers for taxes and
insurance 1,062 1,947
Accrued expenses and other liabilities 3,874 10,743
Deferred income tax 563 424
---------------------
TOTAL LIABILITIES 581,227 522,847
Preferred stock, $.01 par value, 500,000 shares
authorized; no shares issued or outstanding --- ---
Common stock, $.01 par value,
8,000,000 shares authorized;
5,489,879 and 5,408,188 shares issued and
outstanding 55 55
Additional paid-in capital 4,868 4,790
Retained earnings, substantially restricted 33,140 31,150
Cumulative comprehensive income, net (2,332) (1,756)
---------------------
TOTAL STOCKHOLDERS' EQUITY 35,731 34,239
---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 616,958 557,086
=====================
See notes to consolidated financial statements
3
<PAGE>
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
1999 1998 1999 1998
Interest income: ---- ---- ---- ----
Loans $ 10,803 8,590 20,631 17,012
Mortgage-backed securities
held-to-maturity 19 39 39 90
Securities available for sale 1,019 516 2,010 889
FHLB stock dividends 166 110 310 214
Interest-earning deposits 46 58 80 128
---------------------------------------
Total interest income 12,053 9,313 23,070 18,333
Interest expense:
Deposits 5,087 4,034 9,297 8,057
Borrowings 2,288 1,361 4,417 2,582
---------------------------------------
Total interest expense 7,375 5,395 13,714 10,639
Net interest income 4,678 3,918 9,356 7,694
Provision for loan losses 140 150 350 300
---------------------------------------
Net interest income after provision
for loan losses 4,538 3,768 9,006 7,394
Other income:
Gain on sale of loans 150 231 272 459
Service charges 325 247 640 501
Gain on sale of securities
available-for-sale 0 12 0 17
Gain on sale of real estate owned 0 55 0 55
Other 56 62 104 111
---------------------------------------
Total other income 531 607 1,016 1,143
Other expenses:
Salaries and employee benefits 1,922 1,340 3,831 2,816
Occupancy 729 492 1,425 926
Advertising 120 111 237 218
Data processing 61 134 150 276
Other 701 694 1,366 1,358
---------------------------------------
Total other expenses 3,533 2,771 7,009 5,594
Income before income taxes 1,536 1,604 3,013 2,943
Federal income taxes 522 545 1,023 1,000
---------------------------------------
Net income $ 1,014 1,059 1,990 1,943
=======================================
Earnings per share, basic $ 0.19 0.20 0.36 0.36
Earnings per share, diluted 0.17 0.18 0.33 0.33
Weighted average number of shares
outstanding:
Basic 5,479,406 5,403,366 5,472,582 5,382,561
Diluted 5,952,367 5,898,795 5,953,597 5,905,857
See notes to consolidated financial statements
4
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CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
1999 1998 1999 1998
---------------- ---------------
Net Income $ 1,014 $ 1,059 $ 1,990 $ 1,943
Increase (decrease) in unrealized
Gains (losses) on securities
available for sale, net of tax
of $(270) and $(71) for the
three months ended December 31,
and $(297) and $(1) for the six
months ended December 31. (524) (138) (576) (3)
---------------------------------------
Comprehensive Income $ 490 921 $ 1,414 $ 1,940
=======================================
5
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CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Six Months Ended December 31,
-----------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 1,990 1,943
Adjustments to reconcile net income to ----------------------
net cash provided by (used in) operating
activities:
Depreciation and amortization of premises
and equipment 698 352
Amortization of retained servicing rights 126 231
Provision for losses on:
Loans 350 300
Mortgage servicing rights (33) 154
Additions to mortgage servicing rights (165) (505)
Deferred loan fees, net of amortization 274 (208)
Net change in loans available for sale 15,672 (20,634)
Net loss (gain) on sales of:
Securities available for sale 0 (16)
Federal Home Loan Bank stock dividend
received (310) (214)
Net change in accrued interest receivable
and other assets over accrued expenses and
other liabilities (6,476) (1,217)
----------------------
Net cash provided by (used in)
operating activities 12,126 (19,814)
Cash flows from investing activities:
Loans originated, net of principal repayments (72,726) (8,784)
Purchases of mortgage-backed securities held-
to-maturity (6,820) (128)
Principal repayments on securities held-to-
maturity 418 1,991
Principal repayments on securities available-
for-sale 2,884 3,665
Purchases of securities available for sale (1,642) (24,054)
Proceeds from sales of securities available
for sale 0 6,016
Purchases of premises and equipment (675) (935)
----------------------
Net cash used in investing activities (78,561) (22,229)
Subtotal, carried forward (66,435) (42,043)
----------------------
See notes to consolidated financial statements
6
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CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Six Months Ended December 31,
-----------------------------
1999 1998
---- ----
Subtotal, brought forward $ (66,435) (42,043)
----------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 78 256
Net increase in deposits 77,149 23,011
Net increase (decrease) in Federal Home
Loan Bank advances (11,387) 33,480
Net increase (decrease) in securities sold
under agreements to repurchase 233 (11,747)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (885) 239
----------------------
Net cash provided by financing activities 65,188 45,239
----------------------
Net increase (decrease) in cash and cash
equivalents (1,247) 3,196
Cash and cash equivalents at beginning of period 10,154 11,967
----------------------
Cash and cash equivalents at end of period $ 8,907 15,163
======================
Supplemental disclosures of cash flow
information - cash paid during the period for:
Interest $ 13,772 10,752
Federal income taxes 600 1,361
----------------------
Supplemental schedule of noncash investing
activities:
Mortgage loans securitized into mortgage
backed securities and held-for-trading
and sold 1,407 13,072
Net mortgage loans transferred to real
estate owned 431 363
7
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CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(unaudited)
1. Presentation of Financial Information
The accompanying financial information is unaudited and has been
prepared from the books and records of Cascade Financial Corporation, (the
"Corporation"). The Corporation's sole subsidiary is Cascade Bank, ("Cascade"
or the "Bank"). In the opinion of management, the financial information
reflects all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the financial condition, results of operations, and
cash flows in conformity with generally accepted accounting principles.
Certain information and footnote disclosures included in the
Corporation's financial statements for the year ended June 30, 1999, have been
condensed or omitted from this report. Accordingly, these statements should
be read with the financial statements and notes thereto included in the
Corporation's Annual Report, incorporated by reference, on Form 10-K.
2. Commitments and Contingencies
In the normal course of business there are various commitments to
fund mortgage loans. Management does not anticipate any material loss as a
result of these commitments.
Periodically, there have been various claims and lawsuits against the
Corporation or the Bank, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incidental to the Corporation's and the Bank's business. In the opinion of
management, no significant loss is expected from any such pending lawsuits.
3. Financial Statement Reclassification
Certain amounts in the financial statements for fiscal 1999 have been
reclassified to conform with the financial statement classification for fiscal
2000.
4. New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS No. 133 is effective for all quarters of fiscal
years beginning after June 15, 2000. Management is reviewing this statement
and does not expect that application of this statement will have a material
effect on the results of operations or the financial position of the
Corporation.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", was issued in October 1998. SFAS No. 134 requires that the
security be classified either trading, available for sale or held to maturity
according to the Corporation's intent, unless the Corporation has already
committed to sell the security before or during the securitization process.
The
8
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Corporation has adopted this statement and it has not had a material effect on
the results of operations or financial condition.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section contains forward-looking statements that have been
prepared on the basis on the Corporation's best judgments and currently
available information. These forward-looking statements are inherently
subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond the control of the Corporation. In
addition, these forward-looking statements are subject to assumptions with
respect to future business strategies and decisions that are subject to
changes. Accordingly, there can be no assurance that many of these strategies
will be implemented, or if implemented, achieve the amounts described or
within the time periods currently estimated.
Selected Financial Data
The following table sets forth certain selected financial data
concerning the Corporation for the periods indicated (dollars in thousands):
At or for the At or for the
three months ended six months ended
December 31, December 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Return on average assets 0.66% 0.88 0.67 0.82
Return on average stockholders' equity 11.41 12.71 11.37 11.92
Average stockholders' equity to assets 5.77 6.89 5.88 6.92
General and administrative expenses
to average assets 2.29 2.29 2.35 2.37
Efficiency ratio 67.82 61.24 67.58 69.30
Net interest spread 2.80 3.04 2.95 3.01
Net interest margin 3.14 3.43 3.27 3.46
Average interest-bearing assets to
average interest-bearing liabilities 107.77 109.06 107.42 110.28
Earnings to fixed charges ratios
Including interest on deposits 1.47x 1.30x 1.22x 1.28x
Excluding interest on deposits 2.52x 2.18x 1.69x 2.14x
CHANGES IN FINANCIAL CONDITION
Total assets increased to $617.0 million at December 31, 1999,
compared with $557.1 million at June 30, 1999. Loans, net (held to maturity)
increased 16.5% or $ 71.7 million to $505.0 million and securities held to
maturity increased to $8.1 million from $1.7 million for the same periods.
Funding this growth was a 21.3% or $77.1 million increase in deposits, a
decrease in loans available for sale, net of $15.7 million, and a decrease in
cash and securities available for sale of $3.1 million.
Asset Quality
Nonperforming assets totaled $1.4 million and $1.2 million at
December 31, 1999 and June 30, 1999, respectively. Assets classified as
substandard totaled $2.6 million at December 31, 1999, and $2.1 million at
June 30, 1999. The increases in nonperforming and substandard assets resulted
from several
9
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small foreclosures and downgrades. The following table provides summary
information concerning asset quality, (dollars in thousands).
At December 31, At December 31,
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Non-performing loans to total assets 0.08% 0.19 0.08 0.19
Non-performing loans to total loans
outstanding 0.10 0.23 0.10 0.23
Non-performing assets to total assets 0.22 0.20 0.22 0.20
Allowance for loan losses to non-
performing loans 951.93 444.69 951.93 444.69
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended December 31, 1999 and 1998
General
Net income for the three months ended December 31, 1999, was $1.0
million compared with $1.1 million in 1998. Diluted net income per share was
$0.17 for the quarter ended December 31, 1999 compared with $0.18 for the
quarter ended December 31, 1998. The principal reasons for the decrease in
the recent three months were a decrease in gains on the sale of residential
mortgage loans and an increase in non-interest expense offset by an increase
in net interest income. Net income for the six months ended December 31, 1999,
was $2.0 million compared with $1.9 million in 1998. Diluted net income per
share was $0.33 for the each of the six months ended December 31, 1999 and
1998. The principal reasons for the increase in the six months income were an
increase in net interest income offset by an increase in non-interest expense
and a decrease in gains from the sale of residential mortgage loans.
Net Interest Income
Net interest income increased 19.4% or $760,000 to $4.7 million for
the three months ended December 31, 1999 compared to the $3.9 million for the
three months ended December 31, 1998. Net interest income increased 21.6% or
$1.7 million to $9.4 million for the six months ended December 31, 1999
compared with the $7.7 million for the six months ended December 31, 1998. The
principal reason for the increase in net interest income was an increase in
average interest earning assets of 30.4% or $138.8 million to $595.6 for the
quarter ended December 31, 1999 and 25.8% or $117.6 million for the six months
ended December 31, 1999 as compared to the same periods in 1998. Average
total loans (including loans held for sale) increased 24.8% or $102.6
million and average securities increased 79.4% or $34.2 million during the
most recent quarter as compared with the same quarter in 1998. Average total
loans increased 22.4% or $90.6 million and average securities increased 87.4%
or $36.0 million during the six months ended December 31, 1999 compared to the
six months ended December 31, 1998.
At or for the At or for the
three months ended six months ended
December 31, December 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Average interest earning assets $ 595,558 456,804 572,869 455,291
Average interest bearing liabilities 552,621 418,862 533,290 403,796
Yield on interest earning assets 8.10% 8.16% 8.06% 8.23%
Cost of interest bearing liabilities 5.30% 5.12% 5.11% 5.22%
Net interest spread 2.80% 3.04% 2.95% 3.01%
Net interest margin 3.14% 3.43% 3.27% 3.46%
10
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The net interest margin decreased 29 basis points to 3.14% for the
most recent quarter and 19 basis points to 3.27% for the six months ended
December 31, 1999. This decrease was principally the result of a decrease in
the yield on earning assets of six basis points in the recent three month
period and a 17 basis point decrease in the six month period. Additionally,
the cost of interest bearing liabilities increased 18 basis points for the
three months ended December 31, 1999 compared with the same period ended
December 31, 1998. The decreased margin has resulted from continuing
competition in the local market for both loans and deposits, and generally
higher market interest rates.
Cascade is focusing on adding commercial businesses, nonconforming
one-to-four family loans, multi-family loans, home equity lines of credit, and
one-to-four family construction loans to its portfolio. Nonconforming loans
generally include loans where the borrower has a debt level or other financial
consideration that makes the loan unsaleable to government agencies such as
FHLMC and FNMA. Management believes these products provide the best returns
for Cascade and can be underwritten conservatively to ensure low delinquency,
absent unforeseen changes in local or national economic conditions.
Additionally, these loan types are typically variable rate loans and are not
effected as much by refinance activity as conforming fixed rate loans. This
should help to lower Cascade's overall origination and servicing costs in the
future. Commercial business, income property, and construction loans
outstanding increased by $63.8 million since June 30, 1999. These loans
represented 56.9% of total outstanding loans at December 31, 1999, compared to
50.1% at June 30, 1999, and 42.6% at December 31, 1998.
Provision for Loan Losses
Cascade's provision for loan losses was $140,000 for the three months
ended December 31, 1999, as compared with $150,000 for the 1998 period.
Provisions were $350,000 and $300,000 for the respective six months. At
December 31, 1999, and June 30, 1999, the Bank's loan loss allowance totaled
$4.7 million and $4.3 million, respectively, and the loan loss allowance as a
percent of total loans outstanding was 0.91% and 0.93%, respectively.
Nonperforming loans, (loans on nonaccrual and ninety days past due) decreased
to $493,000 at December 31, 1999, as compared to $1.2 million at June 30,
1999. Substandard loans were $2.1 million and $2.1 million at December 31,
1999 and June 30, 1999, respectively.
The provision for loan losses reflects management's quarterly
evaluation of the adequacy of the allowance for losses on loans. In
determining adequacy, management considers changes in the size and composition
of the loan portfolio, actual loan loss experience, current and anticipated
economic conditions and other factors. Management intends to grow the
commercial, nonconforming, construction and income property portfolios. These
loans typically have a higher credit risk that will require additions to the
reserve in future periods. Management monitors these loans at an increased
level to maintain credit quality and adequate reserve levels.
Non-interest Income
Non-interest income decreased $76,000 or 12.5% to $531,000 for the
three months ended December 31, 1999 as compared to the three months ended
December 31, 1998. For the six months ended December 31, 1999, non-interest
income decreased $127,000 or 11.1% to $1.0 million as compared with the six
months ended December 31, 1998. These decreases were principally the result
of decreased gains on sale of loans of $81,000 and $187,000 for the three and
six month periods, respectively. With increasing interest rates, residential
mortgage origination and sale activity, especially refinancings have
significantly decreased. These decreases were offset by increases in service
charges of $78,000 and $139,000 for the same periods. Service charge income
has increased due to higher levels of consumer transaction deposits and
additional fee income from automated teller machine fees.
11
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Non-interest Expense
Non-interest expense increased 27% to $3.5 million for the three
months ended December 31, 1999 compared with $2.7 million for the three months
ended December 31, 1998. This increase is due primarily to increases in
salaries and benefits of $582,000 and occupancy of $237,000. For the six month
period ended December 31, 1999 non-interest expense totaled $7.0 million, a
25.3% or $1.4 million increase from the December 31, 1998 period. For the six
month period, salaries and benefits increased $1.0 million, and occupancy
increased $499,000. For both the three and six month periods the
establishment of two additional branches, maintenance of our mortgage-banking
operation, and additional support staff for our increased product and service
offerings were responsible for the increased expenses described above.
Segment Results
The following is a summary of selected operating segment information
for the three and six months ended December 31, 1999 and 1998. The
Corporation manages its operations and prepares management reports with a
primary focus on its various business units. The accounting policies of the
individual units are the same as those of the Corporation. The Corporation
allocates centrally provided services to the business units based upon
estimated usage of those services. All amounts are in thousands.
For the three months ended December 31, 1999
Admin-
istra-
Con- Income tive
Busi- Residen- struc- Prop- Con- Trea-
ness tial tion erty sumer sury Total
-----------------------------------------------------
Condensed Income
Statement
Net Interest after
provision for loan
losses $976 1,056 549 1,314 453 190 4,538
Other Income 10 165 0 0 208 148 531
Direct Expense 241 803 43 12 488 50 1,637
Allocated Overhead 259 600 95 580 189 173 1,896
-----------------------------------------------------
Income before Income
Tax 486 (182) 411 722 (16) 115 1,536
Federal Income Taxes 165 (62) 140 245 (5) 39 522
-----------------------------------------------------
Net Income 321 (120) 271 477 (11) 76 1,014
-----------------------------------------------------
For the three months ended December 31, 1998
Admin-
istra-
Con- Income tive
Busi- Residen- struc- Prop- Con- Trea-
ness tial tion erty sumer sury Total
-----------------------------------------------------
Condensed Income
Statement
Net Interest after
provision for loan
losses $752 1,185 385 857 327 262 3,768
Other Income 35 389 0 6 131 46 607
Direct Expense 218 1,014 6 0 160 45 1,443
Allocated Overhead 108 582 134 219 118 167 1,328
-----------------------------------------------------
Income before Income
Tax 461 (22) 245 644 180 96 1,604
Federal Income Taxes 157 (7) 83 219 61 32 545
-----------------------------------------------------
Net Income 304 (15) 162 425 119 64 1,059
-----------------------------------------------------
12
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For the six months ended December 31, 1999
Admin-
istra-
Con- Income tive
Busi- Residen- struc- Prop- Con- Trea-
ness tial tion erty sumer sury Total
------------------------------------------------------
Condensed Income
Statement
Net Interest after
provision for loan
losses $1,884 $2,383 924 2,423 933 459 9,006
Other Income 18 329 0 4 435 230 1,016
Direct Expense 448 1,594 43 75 941 129 3,230
Allocated Overhead 453 1,271 265 1,003 347 440 3,779
------------------------------------------------------
Income before Income
Tax 1,001 (153) 616 1,349 80 120 3,013
Federal Income Taxes 340 (52) 209 459 27 40 1,023
------------------------------------------------------
Net Income 661 (101) 407 890 53 80 1,990
------------------------------------------------------
For the six months ended December 31, 1998
Admin-
istra-
Con- Income tive
Busi- Residen- struc- Prop- Con- Trea-
ness tial tion erty sumer sury Total
------------------------------------------------------
Condensed Income
Statement
Net Interest after
provision for loan
losses $1,381 $2,366 713 1,591 973 370 7,394
Other Income 57 618 0 9 362 97 1,143
Direct Expense 438 1,340 6 34 633 51 2,502
Allocated Overhead 252 1,339 306 561 277 357 3,092
------------------------------------------------------
Income before Income
Tax 748 305 401 1,005 425 59 2,943
Federal Income Taxes 254 104 136 342 145 19 1,000
------------------------------------------------------
Net Income 494 201 265 663 280 40 1,943
------------------------------------------------------
Liquidity and Sources of Funds
Cascade maintains liquidity balances in FHLB deposits and short-term
securities at levels in accordance with regulatory guidelines. The Bank held
average liquid assets of $23.8 million in December 1999, which were in excess
of the required liquidity level of $17.2 million.
Loan commitments outstanding at December 31, 1999 were $9.2 million
and will be funded through sales of loans, existing liquidity balances,
FHLB-Seattle advances, and other borrowings. Outstanding commitments to sell
loans totaled $6.7 million at December 31, 1999.
At December 31, 1999, the Bank had an unused line of credit from the
FHLB-Seattle of approximately $85 million. The Bank's credit line with the
FHLB-Seattle is 35% of total assets or up to approximately $216 million. The
Bank also had $6.2 million of reverse repurchase agreements outstanding.
The Corporation is considering several alternative public and private
fundings that would provide the Bank with a significant increase in liquidity
and Tier 1 capital to permit additional growth.
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Capital Resources
Cascade Bank is in full compliance with all capital requirements
established by the Office of Thrift Supervision ("OTS") at December 31, 1999.
Cascade's regulatory capital requirements and related excess capital amounts
as of December 31, 1999 are presented in the following table:
Core capital Amount Percentage
------------ ------ ----------
Tier 1 (Core) capital $ 37,889 6.13%
Less: Minimum requirement 24,721 4.00
--------- -------
Excess $ 13,168 2.13%
========= =======
Tier 1 Risk-Based capital Amount Percentage
------------------------- ------ ----------
Tier 1 capital $ 37,889 9.07
Less: Minimum requirement 16,706 4.00
--------- -------
Excess $ 21,183 5.07%
========= =======
Risk-based capital Amount Percentage
------------------ ------ ----------
Risk-based capital $ 42,141 10.09%
Less: Minimum requirement(1) 33,411 8.00
--------- -------
Excess $ 8,730 2.09%
========= =======
(1) Based on risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991. Among other things, the
FDICIA provides the OTS, effective December 19, 1992, with broad powers to
take "prompt corrective action" to resolve problems of insured depository
institutions. The actions the OTS can take depend upon whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." The OTS has advised the Corporation that at December 31,
1999, Cascade Bank is a "well capitalized" institution.
The OTS issued a final rule on December 1, 1998, that provides
comprehensive guidance to management and examiners covering among other
things, interest rate risk, investment securities, and the use of financial
derivatives. The guidance provides guidelines for examiners to use in
evaluating the effectiveness of a financial institution's risk management
practices and identifies a set of "sound practices" management should consider
to improve their own risk management practices. The rule describes the
qualitative and quantitative guidelines examiners will use to rate an
institution's exposure to interest rate risk. Management does not believe the
rule will materially adversely the current business strategy.
On November 2, 1999, the Federal Deposit Insurance Corporation (FDIC)
published a notice indicating it is recommending higher capital requirements
for insured banks and savings associations engaged in subprime lending. In
the release, the FDIC does not define subprime loans as all loans underwritten
using nonconventional credit standards. Loans with a community development
purpose are not considered subprime loans. Affordable housing loans, for
example, often are underwritten using nonconventional underwriting standards,
but are done in a safe and sound manner. Subprime loans are in contrast often
made without regard to the underlying credit risk of the borrower, but are
made based on the underlying collateral only. At this time it is impossible
to assess the impact of this proposal in its current form.
14
<PAGE>
Item 3 Quantitative and Qualitative Disclosures about Market Risk
ASSET/LIABILITY MANAGEMENT
Cascade, like other financial institutions, is subject to
fluctuations in interest rates because its interest-bearing liabilities
reprice on different terms than its interest-earning assets. During periods
of interest rate declines this position has a generally favorable impact on
net interest income, while increases in interest rates have a generally
adverse impact on net interest income.
Cascade uses a simulation model to measure its interest rate risk and
the effects on net interest income resulting from changes in market interest
rates. Based on this model (which includes a number of significant
assumptions and estimates), a 200-basis point increase in general interest
rates would reduce Cascade's annual net interest income by approximately five
percent at September 30, 1999. Cascade manages interest rate risk by
retaining in its portfolio permanent and construction adjustable rate loans
with repricing periods that generally do not exceed seven years. Principally
all new fifteen and thirty year fixed rate loans are sold. Cascade extends
the maturity of its liabilities by offering deposit products to long-term,
less rate sensitive customers, and by periodically obtaining longer term
Federal Home Loan Bank-Seattle ("FHLB") advances. Cascade has also used
interest rate swap and interest rate cap and floor agreements for interest
rate risk management purposes.
Cascade uses mandatory and optional forward commitments from
investment banking firms to mitigate the interest rate risk from its mortgage
banking operation.
15
<PAGE>
PART II-OTHER INFORMATION
-------------------------
Item 1. Legal Proceedings.
- ---------------------------
The Corporation and the Bank have certain litigation and negotiations
in progress resulting from activities arising from normal operations. In the
opinion of management, none of these matters is likely to have a materially
adverse effect on the Corporation's financial position.
Item 2. Changes in Securities.
- -------------------------------
Not applicable
Item 3. Defaults upon Senior Securities.
- -----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable
Item 5. Other information.
- ---------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
Not applicable
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASCADE FINANCIAL CORPORATION
February 14, 2000 /s/ Russell E. Rosendal
--------------------------------------
By: Russell E. Rosendal
Executive Vice President
(Chief Financial Officer)
16
<PAGE>
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