UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from June 30, 2001 to December 31, 2001.
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) 91-1661954
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(I.R.S. Employer I.D. Number)
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
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
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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 if 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. [ ]
The aggregate market value of Common Stock held by non-affiliates of
registrant at March 21, 2002 was $61.61 million (based on $9.70 per share). The
number of shares of registrant's Common Stock outstanding at March 21, 2002 was
6,351,354.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the six months ended December
31, 2001, including the Selected Financial Data and the Management
Discussion and Analysis attached as Exhibit 13 (the "Annual Report") (Part
I, II & IV).
2. Portions of registrant's Definitive Proxy Statement for the December 31,
2001 Annual Meeting of Stockholders (the "Proxy Statement") (Part III).
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Cascade Financial Corporation (the "Corporation") is a bank holding company
incorporated in the state of Delaware in 1994. The consolidated entity includes
the Corporation and its wholly owned subsidiaries. At December 31, 2001, the
Corporation's wholly-owned subsidiaries were Cascade Bank ("Cascade" or the
"Bank") and Cascade Capital Trust I. The executive offices of the Corporation
are located at 2828 Colby Avenue, Everett, Washington 98201, and the telephone
number is (425) 339-5500.
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. The Corporation was organized on August 18, 1994 for
the purpose of becoming the holding company for Cascade Bank. 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. Subsequent to the acquisition of Cascade, the primary activity of
the Corporation has been 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.
In July of 2001, the Bank converted its charter from that of a federal stock
savings bank to a Washington state commercial bank, and the Corporation elected
to be treated as a financial holding company with the Federal Reserve Board.
Following this conversion, the Corporation changed its fiscal year end from June
30 to December 31 to align its reporting period with those of its commercial
bank peers.
The Corporation conducts its business from its main office in Everett,
Washington, and thirteen other full service offices in the greater Puget Sound
region. At December 31, 2001, the Corporation had total assets of $762.0
million, total deposits of $420.0 million and stockholders' equity of $47.7
million. The savings deposits of the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC"), up to the limits specified by law.
The Bank, a full service community bank, offers a wide range of products and
services. Cascade Investment Services, Inc., a subsidiary of Cascade Bank,
markets annuity products, mutual funds and insurance products to customers and
non-customers in the Bank's market areas. 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 Bank's other income.
FORWARD LOOKING STATEMENTS
In addition to historical information, this Form 10-K contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the
express purpose of availing Cascade Financial Corporation of the protections of
the safe harbor provisions of the PSLRA. The forward-looking statements
contained herein are subject to factors, risks, and uncertainties that may cause
actual results to differ materially from those projected. The following items
are among the factors that could cause actual results to differ materially from
the forward-looking statements: general economic conditions, including their
impact on capital expenditures; business conditions in the banking industry;
recent world events and their impact on interest rates, businesses and
customers; the regulatory environment; new legislation; vendor quality and
efficiency; employee retention factors; rapidly changing technology and evolving
banking industry standards; competitive standards; competitive factors,
including increased competition with community, regional, and national financial
institutions; fluctuating interest rate environments; and similar matters.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only at the date of the
statement. The Corporation undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date of this report. Readers should carefully review the risk factors
described in this and other documents the Corporation files from time to time
with the Securities and Exchange Commission. There can be no assurance that any
of the strategies described in this Form 10-K will be implemented, or if
implemented, achieve the amounts described or within the time periods currently
estimated. Sentences containing words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "should," "projected," or similar words may
constitute such forward looking statements.
-2-
Market Area
Headquartered in Everett, Washington, the Corporation serves its customers
from fourteen full service offices, ten in Snohomish County and four in King
County. Located in the center of the western Washington region, Snohomish and
King counties have experienced significant growth in recent years, although
currently the area is facing an economic slowdown.
Despite the relocation of its corporate headquarters, the Boeing Company is
the largest employer in the Puget Sound Area and in Snohomish County. The
transplantation of Boeing's headquarters will not have a material impact on the
local economy. However, the slowdown in air travel caused by a weakening economy
and the tragic events of September 11, 2001 have had a material impact on the
orders for the commercial jet airliners produced in our market area. Boeing
Company press releases showed a decrease of its commercial airplane deliveries
of approximately 2% in 2001 and an estimated decline between 25% and 27% in 2002
from deliveries forecasted prior to the terrorist attacks. Consequently Boeing
announced employment layoffs approximating 30,000 by mid-2002, starting in
December 2001. The full impact and timing of airline and aerospace industry job
reductions on the Puget Sound economy are not yet known; however, economic
activity in many areas served by the Company has weakened. The recently
announced layoffs by Boeing may create problems if there are outstanding loans
to employees who are laid-off and not hired by other companies, to
subcontractors that have had canceled or delayed orders from Boeing, or other
businesses impacted by the general slowing of economic activity. Significant
Boeing layoffs in past years have not affected our asset quality, however, there
is no assurance that any future Boeing layoffs will not adversely affect the
Corporation's loan portfolio.
Our market area in King County includes the growing cities east of Seattle
and Lake Washington. This area's economy has been dominated by Microsoft, with
other high technology companies playing an important role. Slowdowns and
retrenchment with a number of these firms has led to slower economic growth than
in the past with a potential impact on the financial services firms that serve
the area. The commercial real estate market in east King County has experienced
an increase in vacancy rates recently.
Over recent years, the economy in the Corporation's market area has become
more dependent upon the health care and biotechnology industries, two industries
which have been less affected by the recent economic slowdown. One of the
largest health care employers is Providence Everett Medical Center Group, which
is also an innovator in new diagnostic and treatment technologies. Snohomish
County and Northeast King County is home to numerous biotechnology companies,
including Advanced Technology Labs, a manufacturer of medical equipment.
As a gateway to Asia, the Bank's market area has also benefited from the
expansion of world trade. Economic weakness in either the United States or Asia
will reduce that trade. Such slowdowns in the international flow of goods and
services could prove detrimental to the economy of the market area and
potentially the quality of our loan portfolios.
Business Strategy
The Corporation is in the process of implementing its business plan to
increase the Bank's emphasis on commercial banking. The Corporation is
attempting to pursue the following strategies:
- - Increasing the percentage of its assets consisting of business,
construction, and commercial real estate loans with higher risk-adjusted
returns, shorter maturities and greater sensitivity to interest rate
fluctuations.
- - Increasing deposits by attracting lower cost transaction accounts (such as
checking, savings and money market accounts) through an enhanced branch
network and internet banking.
- - Diligently searching for sources of fee based revenue, e.g. credit life
insurance.
- - Maintaining cost-effective operations by efficiently offering products and
services.
- - Maintaining its capital position at or above the "well-capitalized" (as
defined for regulatory purposes) level.
The primary objectives of these strategies are to: enhance shareholder value
measured through increasing return on equity and/or increasing earnings per
share, and to increase the opportunity for quality earning asset growth, deposit
generation, and fee-based income activities. However, the shift in emphasis to
commercial banking does inherently contain additional risks (See "LOAN
PORTFOLIO" below).
-3-
Competition
The Bank competes for both loans and deposits. The Puget Sound metropolitan
area has a high density of financial institutions, including major national
banks, several local community banks, and credit unions.
The Bank's competition for loans comes principally from other commercial
banks, the larger of whom offer quick, low documentation credit approval and
attractive pricing. Conversely, many of the local community banks have
specialized in commercial real estate and business lending and therefore may
have a more established reputation in that market. Cascade competes for loans
principally through its ability to customize competitively priced financing to
the needs of its customers, and its local decision-making.
Geographic location is still the primary factor in choosing a bank for the
checking relationship. As a result, the Bank's competition for checking deposits
comes primarily from the large, national banks with a broad network of
locations. Online banking continues to be an important convenience service to
attract checking customers from larger banks. In addition, Cascade has recently
made an arrangement with US Bank to allow customers to use Washington State US
Bank ATMs without a surcharge. Community banks, savings institutions, as well as
other nonbanking financial institutions, provide the greatest competition for
the various savings vehicles such as money market deposit accounts and
certificates of deposit.
As with all banks, the Bank faces competition from non-banking sources, such
as mutual funds, other financial services companies and credit unions. Changes
in technology create challenges for the Bank.
The Corporation anticipates continuing opportunities to arise from the
effects of substantial consolidation among financial institutions in Washington
that has occurred to date. Federal law allows mergers or other combinations,
relocations of a bank's main office and branching across state lines. Several
other financial institutions, which have greater resources than the Bank,
compete for banking business in the Bank's market area. Among the advantages of
some of these institutions are their ability to make larger loans, finance
extensive advertising and promotion campaigns, access international money
markets and allocate their investment assets to regions of highest yield and
demand.
In addition to competition from other banking institutions, the Bank
continues to experience increased competition from non-banking companies such as
credit unions, financial services companies and brokerage houses. Recent
amendments to the federal banking laws to eliminate certain barriers between
banking and commercial firms are expected to result in even greater competition
in the future.
LOAN PORTFOLIO
General. The Bank originates business, real estate and consumer loans. Total
loans equaled $613.3 million at December 31, 2001. The total loans were adjusted
by loans in process, deferred loan fees, and the allowance for loan losses for a
net loan balance of $576.2 million. At December 31, 2001, $125.3 million or
20.4% of loans consisted of business loans; $104.1 million or 17.0% were real
estate construction loans; $62.9 million or 10.3% of loans consisted of
commercial real estate; $58.4 million or 9.5% were consumer loans; $152.8
million or 24.9% of the Bank's loans consisted of loans secured by one-to-four
family residential properties; and $109.7 million or 17.9% consisted of
multi-family loans, which brings the total loans secured by first liens on
residential real estate to $262.4 million or 42.8% of loans.
-4-
Loan Portfolio Analysis. The following table sets forth the Corporation's
loan portfolio by type of loan and by type of security at the dates indicated.
At December 31, At June 30, At June 30,
2001 2001 2000
------------------------ ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
-------- ------- ------- ------- ------- -------
(Dollars in thousands)
Type of Loan
Real estate mortgage
Residential(1) $262,460 45.55 272,363 48.22 288,660 53.46
Commercial 62,938 10.92 56,913 10.08 54,320 10.06
Construction 104,131 18.07 103,206 18.27 73,488 13.61
Business 125,342 21.75 113,708 20.13 86,298 15.98
Consumer(2) 58,381 10.13 60,406 10.69 62,061 11.49
-------- ------ ------- ------ ------- ------
Total Loans 613,252 106.42 606,596 107.39 564,827 104.60
Less:
Loans in process 28,220 4.90 33,337 5.90 17,132 3.17
Deferred loan fees, net 2,502 0.43 2,703 0.48 2,719 0.50
Allowance for loan losses 6,304 1.09 5,687 1.01 5,004 0.93
-------- ------ ------- ------ ------- ------
Total loans, net $576,226 100.00% 564,869 100.00 539,972 100.00
======== ====== ======= ====== ======= ======
Type of Security
Real estate mortgage
One-to-four family(2) $295,941 51.36 307,049 54.35 290,857 53.86
Multi-family 109,734 19.04 107,360 19.01 112,721 20.87
Commercial 62,938 10.92 56,913 10.08 54,320 10.06
Land loans 2,546 0.44 3,269 0.58 29 0.01
-------- ------ ------- ------ ------- ------
Other 142,093 24.66 132,005 23.37 106,900 19.80
Total Loans 613,252 106.42 606,596 107.39 564,827 104.60
Less:
Loans in Process 28,220 4.90 33,337 5.90 17,132 3.17
Deferred loan fees, net 2,502 0.43 2,703 0.48 2,719 0.50
Allowance for loan losses 6,304 1.09 5,687 1.01 5,004 0.93
-------- ------ ------- ------ ------- ------
Total loans, net $576,226 100.00% 564,869 100.00 539,972 100.00
======== ====== ======= ====== ======= ======
At June 30, At June 30, At June 30,
1999 1998 1997
---------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Type of Loan
Real estate mortgage
Residential(1) 263,987 57.93 238,582 62.01 245,649 71.99
Commercial 49,066 10.77 31,746 8.25 25,250 7.40
Construction 54,500 11.96 47,861 12.44 33,361 9.78
Business 61,676 13.53 41,494 10.79 24,601 7.21
Consumer(2) 52,219 11.45 48,506 12.61 31,578 9.26
------- ----- ------- ----- ------- ------
Total Loans 481,448 105.64 408,189 106.10 360,439 105.64
Less:
Loans in process 19,087 4.19 16,966 4.41 12,865 3.77
Deferred loan fees, net 2,371 0.52 2,346 0.61 2,494 0.73
Allowance for loan losses 4,254 0.93 4,143 1.08 3,879 1.14
------- ----- ------- ----- ------- ------
Total loans, net 454,736 100.00 384,734 100.00 341,201 100.00
======= ====== ======= ====== ======= ======
Type of Security
Real estate mortgage
One-to-four family(2) 261,822 57.45 251,805 65.45 241,050 70.65
Multi-family 85,893 18.85 62,736 16.31 58,662 17.19
Commercial 49,066 10.77 31,746 8.25 25,250 7.40
Land loans 106 0.02 232 0.06 606 0.18
Other 84,561 18.55 61,670 16.03 34,871 10.22
------- ----- ------- ----- ------- ------
Total Loans 481,448 105.64 408,189 106.10 360,439 105.64
Less:
Loans in Process 19,087 4.19 16,966 4.41 12,865 3.77
Deferred loan fees, net 2,371 0.52 2,346 0.61 2,494 0.73
Allowance for loan losses 4,254 0.93 4,143 1.08 3,879 1.14
------- ----- ------- ----- ------- ------
Total loans, net 455,736 100.00 384,734 100.00 341,201 100.00
======= ====== ======= ====== ======= ======
- -------------
(1) Includes construction loans converted to permanent loans, multi-family and
land loans.
(2) Includes home equity loans and HELOCs.
-5-
At December 31, 2001, loans in process, attributed to construction loans,
totaled $28.2 million or 4.6% of total loans; deferred fees were $2.5 million or
.41%; and the allowance for loan losses was $6.3 million or 1.03% of loans.
Business Loans. Business loans increased from $113.7 million at June 30,
2001 to $125.3 million at December 31, 2001. Unsecured business loans totaled
$9.4 million at December 31, 2001. The Bank's business loan portfolio consists
primarily of commercial business loans to small and medium sized businesses
operating in Snohomish and King counties. These loans are secured primarily by
real estate, receivables, equipment, other assets of the business and personal
property, and the personal guarantee of the borrower. These loans typically have
variable-rate terms or fixed rates with maturities of up to five years. The Bank
also offers unsecured operating lines of credit. Business loans are underwritten
by the Bank 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 Bank with financial statements, tax returns,
current financial information on any and all guarantors, and other reports that
show trends in their financial condition; and to update this information
annually. Business loans also include owner occupied real estate loans with
terms comparable to the Bank's income producing property loans. In addition, as
the business banking activity increases, the Bank expects to expand its lower
cost deposit franchise through the growth of commercial checking as a source of
funding.
Business loans are inherently sensitive 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 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 robust growth of the Business loan portfolio in recent years means that
a portion of these loans are not well seasoned on Cascade's books. While most of
these borrowers are established businesses with successful track records, they
have not weathered an economic downturn as Cascade customers, and it is
uncertain how the current economic downturn will effect these loans.
Construction Loans. The Bank 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 12-18 months. The interest rates charged on construction loans are
indexed to the prime rate and vary depending on the characteristics of the loan,
particularly the credit risk inherent in the project. All construction loans
require approval by various levels of Bank personnel, depending on the size of
the loan. The Bank has attempted to increase its construction loan portfolio
because these loans have relatively high margins, floating interest rates and
short-term maturities and because of the historically favorable housing market
in the Puget Sound area. At June 30, 2001 and December 31, 2001, the
Corporation's construction loans were $103.2 million (including $33.3 million of
loans in process) and $104.1 million (including $28.2 million of loans in
process) or 17.0% of the gross loan portfolio for each period. Of this amount,
$73.3 million was to builders, $11.4 million was to individuals for custom home
construction and $19.4 million represented acquisition and development loans.
The Bank's maximum outstanding commitment to one builder totaled $6.8 million
involving one construction project which is performing in accordance with the
terms of the loan.
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 Bank'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 Bank 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.
Furthermore, if the estimate of value of a completed project is inaccurate, the
Bank 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.
-6-
Commercial Real Estate Loans. Commercial real estate loans totaled $62.9
million or 10.3% of the Bank's loans at December 31, 2001. All commercial real
estate loans are secured by properties in western Washington, mainly in the
Puget Sound region. Improved property such as office buildings and small
commercial business properties such as strip shopping centers secure the Bank's
commercial real estate loans. These loans are primarily fixed rate with a
maximum reset on the interest rate of five years. At December 31, 2001, the
largest commercial real estate and land loan in the Bank's portfolio was $4.0
million, which was performing according to its terms at that date.
Multi-family Loans. Multi-family loans totaled $109.7 million or 17.9% of
loans at December 31, 2001. The multi-family portfolio is principally comprised
of small to medium-size apartment projects (generally $2.5 million in loan
amount or less) with loan-to-value ratios in the 70% to 80% range. All new loan
originations are in the Puget Sound region with adjustable rates.
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.
One-to-Four Family Residential Loans. At December 31, 2001 residential loans
totaled $152.7 million or 24.9% of loans. The Bank presently originates both
fixed rate and adjustable rate mortgage ("ARMs") loans secured by one-to-four
family properties with maturities of up to 30 years. Newly originated ARMs have
interest rates that adjust based on the One Year Constant Maturity Treasury
Index. Borrower demand for ARMs versus fixed-rate mortgage loans is a function
of the level of interest rates, the shape of the yield curve, and the
differences between the interest rates and loan fees offered for fixed-rate
mortgage loans and the rates and loan fees for ARMs.
Fixed rate residential loans are generally sold and the servicing released
to one of the Bank's correspondents. The loans are sold on a "best efforts"
basis. The Bank no longer packages its loans to sell as mortgage backed
securities. The Bank had $1.2 million in loans held for sale at December 31,
2001 and $1.4 million in loans held for sale at June 30, 2001. The Corporation
has implemented measures, including 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. ARM loans
are generally held in the Bank's portfolio. The Bank has greatly reduced its
emphasis on mortgage banking and mortgage lending in the past two years. These
balances are not material and therefore the Bank does not include them as a
separate line item on the balance sheet.
Residential lending consists primarily of conforming and nonconforming first
mortgage loans secured by single-family residential properties located
principally in Snohomish and King counties. The Bank's conforming residential
loans meet the Federal Home Loan Mortgage Corporation's underwriting standards
with respect to credit, debt ratios and documentation. The Bank's nonconforming
residential loans are those that 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, non-owner
occupied property, rural property, or other exceptions from agency guidelines.
The Bank's non-conforming loans may be made to lower credit grade borrowers. At
December 31, 2001, $39.2 million or 6.4% of the Bank's total outstanding loan
portfolio and 25.7% of the Bank's one-to-four family residential loan portfolio
consisted of nonconforming one-to-four family residential loans. In exchange for
the additional risk associated with nonconforming loans, borrowers generally are
required to pay a higher interest rate and receive a lower maximum loan-to-value
ratio than for a conforming loan borrower.
The Bank'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 generally limited to 75% 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 Bank
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
-7-
underwriting standards maintained by the Bank. 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. At
December 31, 2001, residential loans on non-accrual equaled $762,000, which
represents eight single family residential loans.
Consumer Loans. The Bank's consumer loan activities take two forms: home
equity loans or lines of credit; and installment loans. Home equity loans are
secured by a junior lien in priority on the borrower's home. Such loans may have
a combined loan-to-value ratio of up to 90% of the value of the home securing
the loan. Home equity loans are fixed amount loans which may have fixed or
floating interest rates. Home equity lines of credit can be drawn upon at any
time by the customer up to a specific amount. All these loans are at a floating
rate. The balance outstanding for both types of home equity loans decreased
slightly to $41.6 million at December 31, 2001 as compared to $42.1 million at
June 31, 2001. At December 31, 2001 and June 31, 2001, the total amount of
unused lines of credit were $40.2 million and $24.4 million, respectively. The
second type of consumer loans are installment loans in which boats, automobiles,
and recreational vehicles serve as collateral.
This portfolio was $16.8 million at December 31, 2001 as compared to $18.3
million outstanding at June 30, 2001. Although boat loans total $12.3 million of
the Corporation's installment loans at December 31, 2001, the Corporation has
significantly decreased its origination of boat loans and expects this amount to
decline further in the future. Installment loans are secured by depreciating
assets such as automobiles or boats. Therefore, any repossessed collateral for a
defaulted installment 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.
Loan Maturity and Repricing
The following table sets forth information at December 31, 2001, regarding
the dollar amount of Business and Construction 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. Loan balances do not include deferred
loan fees. Construction loans are net of loans in process.
With With
variable fixed rate
rate (for rate (for
maturities maturities
Due in one Due in one Due after of more of more
year or to five five than one than one
less years years Total year) year)
---------- ---------- --------- -------- ---------- ----------
(Dollars in thousands)
Construction Loans $61,568 $14,364 -- $75,932 $13,772 $592
Business Loans $44,660 $64,571 $16,111 $125,342 $22,042 $58,640
Asset Quality
Banking regulations require that each insured institution review and
classify its assets regularly. In addition, in connection with examinations of
insured institutions, bank 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 payment 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
-8-
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 established the Credit Administration Division in 2001 to assure
that the Bank maintains the quality of its loan portfolio. Management has
comprehensive monthly and quarterly review procedures for identifying and
classifying assets for weaknesses. Reserves are maintained for assets classified
as substandard or doubtful. 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.
Delinquencies. A report containing delinquencies of all loans is reviewed
monthly by the Asset Review 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 Bank'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 Bank 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 Bank's allowance for loan losses be adequate to cover known potential
and reasonably estimated unknown losses. At December 31, 2001 and June 30, 2001,
the Bank had $2.0 million and $1.3 million, respectively, of loans accounted for
on a nonaccrual basis (i.e., loans upon which management believes the future
collectibility of interest is uncertain).
Allowance for Loan Losses/Non-Performing Assets
Management provides for possible loan losses by maintaining an allowance.
The level of the allowance is determined based upon judgments regarding the size
and nature of the loan portfolio, historical loss experience, the financial
condition of borrowers, the level of nonperforming loans, and anticipated
general economic conditions. Additions to the allowance are charged to expense.
Loans are charged against the allowance when management believes the collection
of principal is unlikely.
During 2001, the economy in the Corporation's market area began to
experience its first recession in a decade. The recession's impact on the
Corporation's loan portfolio is less than certain in that this is the first
economic downturn the Corporation has faced when a significant portion of its
loans were made to small businesses. As Cascade Bank has evolved from a thrift
into a commercial bank, the inherent risk in its loan portfolio has increased,
resulting in the trend of increasing the allowance for loan losses. Also
impacting the allowance for loan losses has been the slowing of the economy in
the Corporation's market area.
The allowance for loan losses reflects management's best estimate of
probable losses that have been incurred at the balance sheet date. The allowance
for loan losses is maintained at a level considered adequate by management to
provide for loan losses inherent in the loan portfolio based on management's
assessment of various factors affecting the loan portfolio, including local
economic conditions and growth of the loan portfolio and its composition. Net
charge-offs during these periods have been less than experienced by peer banks.
Increases in the allowance for loan losses made through provisions were
primarily a result of business loan growth, an increase in non-performing
commercial loans, awareness of the greater risk inherent in business lending and
the impact of the deteriorating economic climate on the loan portfolio.
Management determines the amount of the allowance for loan losses by
utilizing a loan grading system to determine risk in the loan portfolio and by
considering the results of credit reviews. The loan portfolio is separated by
quality and then by loan type. Loans of acceptable quality are evaluated as a
group, by loan type, with a loss rate assigned to the total loans in each type,
but unallocated to any individual loan. Conversely, each adversely classified
loan is individually analyzed, to determine an estimated loss amount. A
valuation allowance is also assigned to these adversely classified loans, but at
a higher loss rate due to the greater risk of loss. Past due and impaired loans
are actively managed to minimize the potential loss of principal.
-9-
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component in most years. The unallocated portion includes
management's judgmental determination of the amounts necessary for qualitative
factors such as the consideration of new products and policies, economic
conditions, concentrations of credit risk, and the experience and abilities of
lending personnel. Loan concentrations, quality, terms, and basic underlying
assumptions remained substantially unchanged during the period.
The following table presents information with respect to the Corporation's
non-performing assets and restructured loans at the dates indicated.
12/31/2001 6/30/2001 6/30/2000 6/30/1999 6/30/1998 6/30/1997
---------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Non-performing loans:
Commercial loans:
Commercial $1,038 166 226 338 199 152
Commercial real estate -- -- -- -- -- --
------ ------ ------ ------ ------ ------
1,038 166 226 338 199 152
Residential 762 1,112 221 618 971 759
Real estate construction and Land -- -- -- -- -- --
Consumer loans 198 37 126 245 751 --
------ ------ ------ ------ ------ ------
Total non-performing loans 1,998 1,315 573 1,201 1,921 911
Other real estate 430 787 528 -- 74 750
------ ------ ------ ------ ------ ------
Total non-performing assets $2,428 2,102 1,101 1,201 1,995 1,661
====== ===== ===== ===== ===== =====
Restructured loans -- -- -- -- -- --
Total non-performing loans to net loans .35% .23 .11 .26 .50 .27
Total non-performing loans to total assets .26 .18 .08 .22 .43 .21
Total non-performing assets to total assets .32 .29 .16 .22 .45 .38
The Corporation's non-performing assets at December 31, 2001, consisting of
non-performing loans and other real estate, totaled $2.4 million or .32 percent
of total assets. This is an increase from $2.1 million or .29 percent of total
assets at June 30, 2001, and an increase from $1.1 million or .16 percent of
total assets at June 30, 2000.
Loans are generally placed on non-accrual when they become past due over 90
days, or 120 days if they are single-family mortgage loans, or when the
collection of interest or principal is considered unlikely. Loans past due over
90 or 120 days that are not on non-accrual status must be well secured by
tangible collateral and in the process of collection. The Bank does not return a
loan to accrual status until it is brought current with respect to both
principal and interest and future principal and interest payments are no longer
in doubt.
Non-performing loans increased to $2.0 million at December 31, 2001 compared
to $1.3 million at June 30, 2001, and $573,000 at June 30, 2000. The increase in
non-performing loans from June 30, 2001 to December 31, 2001 is due to an
increase in non-performing commercial loans which increased from $166,000 to
$1,038,000 during that six-month period. The increase in non-performing loans
from June 30, 2000 to June 30, 2001 was due primarily to an increase in
residential non-performing loans. Management believes that the allowance for
losses on loans is adequate to provide for losses that may be incurred on
non-performing loans.
Other real estate owned includes property acquired by the Bank through
foreclosure and real estate held for development. Other real estate is carried
at the lower of the estimated fair value or the principal balance of the
foreclosed loans. The real estate held for development portfolio primarily
consists of one land development project. Non-performing other real estate was
$430,000 at December 31, 2001, a decrease from $787,000 at June 30, 2001, and a
decrease from $528,000 at June 30, 2000.
-10-
At December 31, 2001, in addition to the loans categorized as non-performing
and listed above, the Bank had $6.7 million in potential problem loans,
representing 1.1% of total loans. These loans have potential weaknesses which
may result in deterioration of the repayment prospects at some future date.
These loans are subject to constant management attention.
The level of non-performing loans relative to net loans has increased since
the year ended June 30, 2000. This trend may continue as the Corporation expands
its commercial lending activities. Interest income that would have been
recognized for the six month period ending December 31, 2001, and for the fiscal
years ended June 30, 2001, 2000 and 1999, had non-accrual loans been current in
accordance with their contractual terms amounted to $87,000, $74,000, $32,000
and $86,000, respectively.
The following tables set forth information regarding changes in the
Corporation's allowance for loan losses for the most recent five years (dollars
in thousands).
SIX MONTHS ENDED
----------------------
12/31/01 12/31/00
-------- --------
(Unaudited)
Balance at beginning of period $ 5,687 5,004
Charge-offs:
Business 138 48
Commercial Real Estate -- --
Single-Family Residence 42 5
Multi-Family -- --
Real Estate Construction -- --
Consumer and other 26 48
Recoveries: 13 19
Net charge-offs: 193 82
Provision for loan losses 810 420
-------- -----
Balance at end of period 6,304 5,342
Average loans outstanding $580,221 552,512
Ratio of net charge-offs during the
period to average loans outstanding .03 .015
Ratio of allowance for loan losses to
average loans outstanding 1.09 .97
YEAR ENDED
---------------------------------------------------------
6/30/01 6/30/00 6/30/99 6/30/98 6/30/97
-------- ------- ------- ------- -------
Balance at beginning of period $ 5,004 4,254 4,143 3,879 3,336
Charge-offs:
Business 46 53 49 29 178
Commercial Real Estate 2 -- -- -- --
Single-Family Residence 166 16 7 -- 59
Multi-Family -- -- -- -- --
Real Estate Construction -- -- -- -- --
Consumer and other 115 77 267 16 35
Recoveries: 32 126 7 63 5
Net charge-offs (recoveries): 297 20 316 (18) 267
Provision for loan losses 980 770 427 246 810
-------- ------- ------- ------- -------
Balance at end of period 5,687 5,004 4,254 4,143 3,879
======== ======= ======= ======= =======
Average loans outstanding $560,013 517,405 418,207 362,842 307,302
Ratio of net charge-offs during the
period to average loans outstanding .05 -- .08 .01 .09
Ratio of allowance for loan losses to
average loans outstanding 1.02 .97 1.02 1.14 1.26
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries), and established through a
provision for credit losses charged to expense. Loans are charged against the
allowance for credit losses when management believes that the collectibility of
the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb losses inherent in existing loans, commitments to
extend credit and standby letters of credit based on evaluations of
collectibility, and prior loss experience of loans. The evaluations take into
consideration such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, loan concentrations,
-11-
specific problem loans, commitments, standby letters of credit, and current
economic conditions that may affect the borrowers' ability to pay.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
Certain loans meet the criteria of troubled debt restructuring 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. The
Bank has had no restructured loans during the last five year period.
The following tables set forth information concerning the Company's
allocation of the allowance for loan losses and the percentage of loans by
category at the dates indicated (dollars in thousands).
DECEMBER 31,
-------------------
2001
-------------------
Amount %*
------ -----
Balance at beginning of period
Business $2,927 21.4
Commercial Real Estate 220 10.7
Single-Family
Residential 861 26.1
Multi-Family 442 18.8
Real Estate
Construction 887 13.0
Consumer and Other 356 10.0
Unallocated 611 --
------ -----
Total allowance for loan losses $6,304 100.0%
======
6/30/01 6/30/00 6/30/99 6/30/98 6/30/97
---------------- ---------------- --------------- --------------- ---------------
Amount %* Amount %* Amount %* Amount %* Amount %*
------ ---- ------ ---- ------ ---- ------ ---- ------ ---
Balance at beginning of period
Business $2,203 19.9 1,886 15.8 740 13.3 625 10.6 500 7.1
Commercial Real Estate 569 9.9 544 9.9 1,160 10.6 1,060 8.1 910 7.2
Single-Family Residential 1,097 28.8 1,019 32.1 961 38.5 525 45.0 540 53.8
Multi-Family 672 18.7 619 20.6 460 18.6 630 16.0 590 16.9
Real Estate Construction 771 12.2 569 10.3 450 7.7 857 7.9 551 5.9
Consumer and Other 295 10.5 367 11.3 370 11.3 400 12.4 310 9.1
Unallocated 80 -- -- -- 113 -- 46 -- 478 --
------ ---- ----- ---- ----- ---- ----- ---- ----- ---
Total allowance for loan losses $5,687 5,004 4,254 4,143 3,879
====== ===== ===== ===== =====
* Percent of loans in each category to total loans.
Provisions for loan losses in the fiscal years ended June 30, 2001, 2000 and
1999 were $980,000, $770,000, and $427,000 respectively. The provision for loan
losses was $810,000 for the six month period ended December 31, 2001, and
$420,000 for the six months ended December 31, 2000. The increase in the
provision for loan losses for the six month period ended December 31, 2001 was
due to the increase in adversely classified loans (which includes the
substandard and doubtful categories) under the Bank's loan classification
system. In conjunction with the newly established Credit Administration Division
which resulted in a refined approach to loan grading, adversely classified loans
increased to $16.6 million at December 31, 2001 from $5.7 million at June 30,
2001. Further, the deterioration in the credit quality of loans to three of the
Bank's borrowers - two are business loans and one is real estate related-
impacted the provision for loan losses. The Bank has established $455,000 of
specific reserves against a total indebtedness of $1.495 million, $547,000 of
which is guaranteed by the Small Business Administration, leaving a $948,000
exposure on which the Bank is reliant on the value of the collateral.
-12-
ASSET AND LIABILITY MANAGEMENT ACTIVITIES
The Bank uses a variety of tools to measure, monitor, and manage interest
rate risk. The Board of Directors reviews the interest rate risk management
activities of the Bank on a regular basis and has established policies on the
amount of risk deemed appropriate. The Bank's primary rate risk management tool
is a simulation model. The Bank's net interest income and the value of its
capital are measured under different interest rate scenarios. To limit its
interest rate risk, the Bank has focused on originating more interest rate
sensitive assets, such as prime based loans, while reducing its long-term, fixed
rate assets through selling long term residential mortgages in the secondary
market. The vast majority of the loans that the Bank keeps in its portfolio have
repricing periods of five years or less. The Bank often uses FHLB advances to
fund its intermediate term assets. Cascade uses reverse repurchase agreements to
provide inexpensive short term funding. These agreements are generally for three
months or less and provide the Bank with liabilities that reprice relatively
quickly, which helps match the repricing characteristics of our prime based
loans.
While the Bank does not have any outstanding interest rate exchange
agreements or other derivatives, it has used interest rate swaps, caps and
floors in the past to control the amount of its interest rate risk. At December
31, 2001 and June 30, 2001, the Corporation had no caps, floors or swaps
outstanding.
The balance sheets and the section of Management's Discussion and Analysis
titled "Average Balances and an Analysis of Average Rates Earned and Paid"
contained in the Annual Report are incorporated herein by reference.
-13-
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).
Six Months Ended
-------------------------------------------
December 31, 2001 Compared to
Six months ended December 31, 2000
(unaudited)
Increase (Decrease) Due to
-------------------------------------------
Rate/
Rate Volume Volume Net
------- ------ ------ ------
(Dollars in thousands)
Interest-earning assets
Mortgage loans(1) $(1,335) 267 528 (540)
Consumer loans(1) (428) (347) 401 (374)
Business loans(1) (1,443) 2,725 (865) 417
------- ----- ---- ----
Total loans (3,206) 2,645 64 (497)
Mortgage-backed securities (66) (823) 458 (431)
Securities (1,128) 1,612 (391) 93
Daily interest-earning
deposits/FHLB Stock (196) 319 (93) 30
Total net change in income on
Interest-earning assets (4,596) 3,753 38 (805)
======= ===== ==== ====
Interest-bearing liabilities
Interest-bearing deposits (5,172) 320 2,386 (2,466)
FHLB advances (446) 973 (280) 247
Other borrowings (1,143) 442 273 (428)
------- ----- ---- ----
Total net change in expenses on
interest-bearing liabilities $(6,761) 1,735 2,379 (2,647)
======= ===== ==== ====
Net increase in net interest
income $ 1,842
====
Year Ended June 30,
-----------------------------------------------------------------------------------------
2001 Compared to Year 2000 Compared to Year
Ended June 30, 2000 Ended June 30, 1999
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ----------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
----- ----- ------ ----- ---- ------- ------ -----
(Dollars in thousands)
Interest-earning assets
Mortgage loans(1) 755 1,247 31 2,033 301 5,042 59 5,402
Consumer loans(1) 243 488 25 756 (229) 735 (39) 467
Business loans(1) (32) 1,994 (9) 1,953 (95) 2,685 (55) 2,535
----- ----- ---- ----- ---- ------ --- -----
Total loans 966 3,729 47 4,742 (23) 8,462 (35) 8,404
Mortgage-backed securities 45 (104) (2) (61) 99 (2) -- 97
Securities 90 2,889 179 3,158 64 1,597 115 1,776
Daily interest-earning
deposits/FHLB Stock (140) 593 (185) 268 47 50 3 100
Total net change in income on
Interest-earning assets 961 7,107 39 8,107 187 10,107 83 10,377
===== ===== ==== ===== ==== ====== === ======
Interest-bearing liabilities
Interest-bearing deposits 822 (497) (21) 304 257 3,071 48 3,376
FHLB advances 923 3,475 352 4,750 513 3,008 292 3,813
Other borrowings (71) 2,482 (184) 2,227 173 313 216 702
----- ----- ---- ----- ---- ------ --- -----
Total net change in expenses on
interest-bearing liabilities 1,674 5,460 147 7,281 943 6,392 556 7,891
===== ===== ==== ===== ==== ====== === ======
Net increase in net interest
income 826 2,486
===== ======
(1) Does not include interest on loans 90 days or more past due.
INVESTMENT PORTFOLIO
The Board of Directors sets the investment policy of the Bank. 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 Bank as well as the return on
the investment. The Bank's policy does not permit the purchase of non-investment
grade bonds. The policy permits the investment in various types of assets
permissible under FDIC regulation including: United States Treasury obligations;
securities of certain government sponsored enterprises, mortgage-backed
securities ("MBS"), collateralized mortgage obligations ("CMOs"), state and
municipal government bonds, deposits at the FHLB-Seattle, certificates of
deposit of federally insured institutions, certain bankers' acceptances and
Federal funds. Subject to various restrictions, the Bank may also invest part of
its assets in commercial paper, corporate debt securities and mutual funds, if
those assets conform to FDIC regulations.
Investment securities increased to $156.3 million at December 31, 2001 from
$135.8 million at June 30, 2001, a 15% increase, and from $104.3 million at June
30, 2000. The investment portfolio represented 21% of total assets at December
31, 2001 compared to 19% at June 30, 2001. All investment securities, except
other securities, are AAA rated. Agency MBS (including CMOs) held for investment
decreased from $76.8 million to $56.5 million for the six months ended December
31, 2001. However, agency notes increased from $35.5 million to $76.7 million
for the same period.
Investment securities increased to $156.3 million at December 31, 2001 from
$128.9 million at December 31, 2000, a 21% increase. During the year, an
increased emphasis was placed on Agency Notes as the Corporation sought
-14-
to capture additional income by obtaining a higher coupon in return for giving
the issuer the option to call the security before its stated maturity.
The following tables set forth the Bank's securities available for sale at
the dates indicated.
December 31, 2001 June 30, 2001 June 30, 2000 June 30, 1999
--------------------- --------------------- ------------------------- --------------------------
Estimated Estimated Estimated Estimated
Fair Percent of Fair Percent of Fair Percent of Fair Percent of
(Dollars in thousands) Value Portfolio Value Portfolio Value Portfolio Value Portfolio
-------- --------- --------- ---------- --------- ---------- --------- ----------
Agency MBS .............. $ 56,511 37.6% 76,832 59.4 45,442 48.6 29,677 40.8
Agency Notes ............ 76,699 51.0 35,492 27.5 34,940 37.4 35,696 49.1
FHLB stock .............. 13,119 8.7 12,668 9.8 10,945 11.7 7,346 10.1
Other securities ........ 4,009 2.7 4,221 3.3 2,117 2.3 --
-------- ------- ------ ------
Total ................... $150,338 129,213 93,444 72,719
======== ======= ====== ======
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities available for sale at December
31, 2001. Securities with no stated maturity dates are reported as due within
one year.
One to Five Five to Ten
Less Than Year Years Years Over Ten Years
---------------- ------------- --------------------- ------------------------
Estimated Estimated Estimated Estimated
Fair Fair Fair Fair
(Dollars in thousands) Value Yield Value Yield Value Yield Value Yield
--------- ----- ------- ----- --------- -------- ------ ----
Agency MBS ..... $ -- --% -- -- 1,796 7.00 54,715 6.36
Agency Notes ... 80 3.0 -- -- 44,121 6.26 32,498 6.44
FHLB stock ..... 13,119 7.0 -- -- -- -- -- --
Other securities -- -- -- -- -- -- 4,009 9.44
------- -- ------ ------
Total .......... $13,199 -- 45,917 91,222
======= ====== ======
The following table sets forth amortized cost and estimated fair values for
Cascade's securities held to maturity at the dates indicated.
December 31, 2001 June 30, 2001
-------------------------------- -------------------------------
Amortized Fair Percent of Amortized Fair Percent of
(Dollars in thousands) Cost Value Portfolio Cost Value Portfolio
--------- ----- ---------- ---------- ----- ---------
Agency MBS $ 5,989 5,883 100% 6,592 6,456 100%
======= ====== ===== =====
June 30, 2000 June 30, 1999
-------------------------------- -------------------------------
Amortized Fair Percent of Amortized Fair Percent of
(Dollars in thousands) Cost Value Portfolio Cost Value Portfolio
--------- ----- ---------- ---------- ----- ---------
Agency MBS $ 7,851 7,246 71% 1,738 1,699 100
Other...................... 3,000 3,032 29 -- -- --
------- -------- -------- --------
Total...................... $10,851 10,278 1,738 1,699
======= ====== ===== =====
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities held to maturity at December 31,
2001. Securities with no stated maturity dates are reported as due within one
year.
One to Five Five to Ten
Less Than Year Years Years Over Ten Years
---------------- ------------- --------------------- ------------------------
Estimated Estimated Estimated Estimated
Fair Fair Fair Fair
(Dollars in thousands) Value Yield Value Yield Value Yield Value Yield
--------- ----- ------- ----- --------- -------- ------ ----
Agency MBS........... $ -- --% -- -- -- -- 5,883 6.01
For further information concerning the Corporation's securities portfolio,
see Note 2 of the Notes to the Consolidated Financial Statements contained in
the Annual Report listed in Item 14.
-15-
DEPOSITS
The Bank's primary source of funds is customer deposits. In addition to
checking accounts, the Bank offers a variety of interest-bearing accounts
designed to attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank management
based on competitive market factors and the Bank's need for funds. The Bank
traditionally has not purchased brokered deposits and does not intend to do so
in the future.
Deposits increased to $420.0 million at December 31, 2001 from $401.9
million at June 30, 2001, an increase of 5% during this period. Deposits at June
30, 2000 were $398.5 million. The market for retail deposits remains fiercely
competitive. Previously, the Bank paid rates at the higher end of the
competitive range of financial institutions in its market area. In an attempt to
lower the absolute and relative cost of funds, the Bank modified its deposit
pricing strategy by pricing its deposits in the middle of that range.
The following table sets forth the average balances for each major category
of deposit and the weighted average interest rate paid for deposits during the
six months ended December 31, 2001 and for each of the five years ended, June
30, 2001, June 30, 2000, June 30, 1999, June 30, 1998 and June 30, 1997 (dollars
in thousands).
AVERAGE DEPOSITS BY TYPE
12/31/01 6/30/01 6/30/00 6/30/99 6/30/98 6/30/97
--------------- -----------------------------------------------------------------------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
Non-interest-bearing
demand deposits $ 23,028 -- 22,072 -- 22,089 -- 18,100 -- 15,347 -- 12,466 --
Interest-bearing
demand deposits 22,051 1.23% 21,783 1.81 18,408 2.11 18,540 2.21 15,185 2.34 16,211 2.29
Money market deposits 94,384 2.98 96,491 4.49 119,219 5.00 69,426 4.66 51,750 4.58 43,071 4.65
Savings 11,073 1.96 10,915 2.83 11,446 3.07 12,781 3.06 14,529 3.14 15,946 3.28
Time certificates 254,836 5.01 242,501 6.22 232,192 5.64 220,921 5.61 205,763 5.84 202,810 5.78
-------- ------- ------- ------- ------- -------
$405,372 393,762 403,354 339,768 302,574 290,504
======== ======= ======= ======= ======= =======
The following table indicates the amount of the Bank's jumbo certificates of
deposit by time remaining until maturity at December 31, 2001. Jumbo
certificates of deposit require minimum deposits of $100,000 and other time
deposits and rates paid on such accounts are negotiable.
Jumbo Certificates of Deposit
Maturity Period and Other Time Deposits
-------------------------------- -----------------------------
(Dollars in thousands)
Three months or less $ 35,523
Over three through six months 51,551
Over six through twelve months 32,775
Over twelve months 9,662
--------
Total $129,511
========
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 Bank's deposits are
obtained primarily from the areas in which its branches are located. The Bank
relies primarily on customer service and longstanding relationships with
customers to attract and retain these deposits. In the coming year, the Bank
will focus on its deposit gathering activities, and management expects a
significant portion of its deposit growth for fiscal 2002 will occur in its
business deposit products. In the event the Bank were liquidated, certain
depositors would be entitled to full payment of their deposit accounts prior to
any payment being made to the shareholders.
RETURN ON EQUITY AND ASSETS
The section entitled "Selected Financial Data" of the Annual Report listed
in Item 14 is incorporated herein by reference.
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BORROWINGS
The Bank relies upon advances from the FHLB-Seattle to supplement its supply
of funds and to meet deposit withdrawal requirements. Advances from the
FHLB-Seattle are typically secured by the Bank's first mortgage residential
loans and eligible investment securities. FHLB advances were $226.5 million at
December 31, 2001, compared to $232.1 million at June 30, 2001, a 2% decrease.
FHLB advances were $215.7 million at June 30, 2000.
The FHLB provides credit for member financial institutions. As members,
financial institutions are required to own capital stock in the FHLB, and are
authorized to apply for advances on the security of such stock, certain home
mortgages, and government and agency securities (typically securities that are
obligations of, or guaranteed by, the United States). Advances are made to
member financial institutions pursuant to several different programs. These
programs are generally designed to meet the financial institution's needs while
still reflecting market terms and conditions. The Bank uses advances from the
FHLB to supplement funds available to lend and to meet liquidity guidelines.
Interest rates on these advances vary in response to capital market conditions.
The Bank enters into reverse repurchase agreements with nationally
recognized banks. Reverse repurchase agreements are accounted for as borrowings
by the Bank and are secured by designated investments, primarily the notes of
federal agencies and mortgage-backed securities guaranteed by those agencies.
The proceeds of these transactions are used to meet the cash flow and interest
rate risk management needs of the Bank.
Repurchase agreements increased to $49.8 million at December 31, 2001 from
$36.9 million at June 30, 2001. Repurchase agreements, with notes of Government
Sponsored Enterprises and/or mortgage-backed securities pledged as collateral,
are employed as short term funding vehicles that provide liabilities with
interest rate sensitivity more closely aligned to prime based loans than the
Bank's deposit base.
Cascade Bank has established Fed funds borrowing lines with two of its
correspondent banks. During the six month period ending December 31, 2001,
neither line was used.
The following table sets forth certain information regarding borrowings by
the Corporation at the end of, and during, the periods indicated.
At or for the six
months ended At or for the year ended June 30,
December 31, -----------------------------------
2001 2001 2000 1999
----------- ------- ------- -------
(Dollars in thousands)
Weighted average rate paid on:
Securities sold under agreements to repurchase 2.16% 4.02 6.46 4.85
FHLB advances 5.79 6.07 6.21 5.01
Maximum amount of borrowings outstanding at
any month end:
Securities sold under agreements to repurchase $ 49,792 54,237 21,696 11,976
FHLB advances 235,322 236,712 215,656 141,996
Approximate average borrowings outstanding
with respect to:
Securities sold under agreements to repurchase $ 38,264 34,231 9,082 5,571
FHLB advances 229,314 221,075 165,524 102,045
Approximate weighted average rate paid on:
Other interest-bearing liabilities* 4.93% 7.05 7.60 4.51
FHLB advances 6.14 6.25 5.68 5.17
* including Trust Preferred Securities
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Trust Preferred Securities. On March 1, 2000 Cascade Capital Trust I issued
$10 million par value Trust Preferred Securities. These securities are
considered Tier I capital for the purposes of regulatory capital requirements.
Cascade Capital Trust I, a wholly owned subsidiary of the Corporation, is a
statutory business trust created for the exclusive purposes of issuing and
selling capital securities and utilizing sale proceeds to acquire junior
subordinated debt issued by Cascade Financial 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 Cascade Financial
Corporation. The Corporation is using the proceeds for general corporate
purposes including stock repurchases and investment in its subsidiary bank. The
Corporation has fully and unconditionally guaranteed the Capital Securities
along with all obligations of Cascade Capital Trust I under the trust
agreements. 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 statement of operations.
Subsidiary Activity
The Corporation has two subsidiaries: Cascade Bank and Cascade Capital
Trust. The activities of the Corporation are primarily conducted through the
Bank. Accordingly, this Form 10-K principally discusses the Bank's operations.
Cascade Capital Trust I was formed for the exclusive purpose of issuing
Trust Preferred Securities and common securities and using the proceeds to
acquire junior subordinated debentures issued by the Corporation. 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 prepayable, in whole or in part, at the
Corporation's option on or after March 1, 2010 at declining premiums to
maturity. Proceeds totaling approximately $9.23 million from the issuance of the
junior subordinated debentures were used to increase the capital level of the
Bank.
Real Estate Development
At December 31, 2001, the Bank owned a five-acre parcel which had the
potential of being developed into twenty lots. The property, which was sold in
the first quarter of 2002, was carried at $572,000.
Personnel
At December 31, 2001, the Corporation had 147 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
Introduction/General
The following generally refers to certain statutes and regulations affecting
the Corporation and the Bank. This provides only a brief summary of the
regulations impacting the Corporation and is not complete. This discussion is
qualified in its entirety by the statutes and regulations. In addition, some
statutes and regulations exist which impact the Corporation which are not
referenced below.
The Corporation is subject to extensive regulation, supervision and
examination. Such regulation and supervision govern the activities in which the
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 could have an adverse material impact on the Corporation, Cascade and
their respective operations.
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The Corporation
The Corporation is a bank holding company that has elected to be treated as
a financial holding company with the Board of Governors of the Federal Reserve
Board (the "FRB"). The Bank Holding Company Act of 1956, as amended ("BHCA")
subjects the Corporation and its subsidiaries to supervision and examination by
the FRB. The Corporation files annual reports of operations with the FRB.
Bank Holding Company Regulation. In general, the BHCA limits bank holding
company business to owning or controlling banks and engaging in other
banking-related activities. Bank holding companies must obtain the FRB's
approval before they: (1) acquire direct or indirect ownership or control of any
voting shares of any bank that results in total ownership or control, directly
or indirectly, of more than 5 percent of the voting shares of such bank; (2)
merge or consolidate with another bank holding company; or (3) acquire
substantially all of the assets of any additional banks. Subject to certain
state laws, such as age and contingency restrictions, a bank holding company
that is adequately capitalized and adequately managed may acquire the assets of
both in-state and out-of-state banks. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company that is not a bank or a bank holding
company unless the FRB determines that the activities of such company are
incidental or closely related to the business of banking. If a bank holding
company is well-capitalized and meets certain criteria specified by the FRB, it
may engage de novo in certain permissible nonbanking activities without prior
FRB approval.
The Change in Bank Control Act of 1978, as amended, requires a person (or
group of persons acting in concert) acquiring "control" of a bank holding
company to provide the FRB with 60 days' prior written notice of the proposed
acquisition. Following receipt of this notice, the FRB has 60 days within which
to issue a notice disapproving the proposed acquisition, but the FRB may extend
this time period for up to another 30 days. An acquisition may be completed
before expiration of the disapproval period if the FRB issues written notice of
its intent not to disapprove the transaction. In addition, any "company" must
obtain the FRB's approval before acquiring 25% (5% if the "company" is a bank
holding company) or more of the outstanding shares or otherwise obtaining
control over the Corporation.
Financial Holding Company Election/Affiliations. In 2001, the Corporation
elected to be treated as a financial holding company with the FRB, as permitted
under the Gramm-Leach-Bliley Financial Services Modernization Act (the "GLB").
This election allows the Corporation to conduct activities that previously were
unavailable to bank holding companies, provided that notice requirements are
generally required before engaging in any such activities.
The primary purpose of the GLB is to establish a framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the legislation (i) repeals the
historical restrictions on preventing banks from affiliating with securities
firms, (ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (iii) broadens the activities that may
be conducted by national banks and banking subsidiaries of bank holding
companies, (iv) provides an enhanced framework for protecting the privacy of
consumers' information and (v) addresses a variety of other legal and regulatory
issues affecting both day-to-day operations and long-term activities of
financial institutions. The GLB permits bank holding companies to engage in a
wider variety of financial activities than permitted under previous law,
particularly with respect to insurance and securities activities. In addition,
in a change from previous law, bank holding companies are in a position to be
owned, controlled or acquired by any company engaged in financially related
activities, so long as such company meets certain regulatory requirements. To
the extent the legislation permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This consolidation could result in a growing number of larger
financial institutions that offer a wider variety of financial services than the
Corporation currently offers and that can aggressively compete in the markets
currently served by the Corporation.
Transactions with Affiliates. The Corporation and its subsidiaries are deemed
affiliates within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Accordingly, the
Corporation and its subsidiaries must comply with Sections 23A and 23B of the
Federal Reserve Act. Generally, Sections 23A and 23B (1) limit the extent to
which a financial institution or its subsidiaries may engage in "covered
transactions" with an affiliate, as defined, to an amount equal to 10% of such
institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or
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subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.
Tie-In Arrangements. The Corporation and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example, with
certain exceptions, neither The Corporation nor its subsidiaries may condition
an extension of credit on either a requirement that the customer obtain
additional services provided by it or an agreement by the customer to refrain
from obtaining other services from a competitor.
State Law Restrictions. As a Delaware corporation, the Corporation is
subject to certain limitations and restrictions as provided under applicable
Delaware corporate laws.
Securities Registration and Reporting. The Corporation common stock is
registered as a class with the SEC under the Securities Exchange Act of 1934 and
thus the Corporation is subject to the periodic reporting and proxy solicitation
requirements and the insider-trading restrictions of that Act. The periodic
reports, proxy statements, and other information filed by the Corporation under
that Act can be inspected and copied at or obtained from the Washington, D.C.
office of the SEC. In addition, the securities issued by the Corporation are
subject to the registration requirements of the Securities Act of 1933 and
applicable state securities laws unless exemptions are available.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the
Corporation's net income for the past year is sufficient to cover both the cash
dividend and a rate of retention consistent with the Corporation's capital
needs. The FRB also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow to pay dividends.
Capital Requirements. The FRB has established capital adequacy guidelines
for bank holding companies that generally parallel the capital requirements the
FDIC has for the Bank. The FRB regulations provided that capital standards will
be applied on a consolidated basis in the case of a bank holding company with
more than $150 million in total consolidated assets. The Corporation's total
risk based capital must equal 8% of risk weighted assets and 4% must consist of
Tier 1 capital.
Stock Repurchases. Bank holding companies, except for certain "well
capitalized" and highly rated companies, are required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption is equal to
or greater than 10% of consolidated net worth during the preceding twelve
months. The FRB may disapprove any such purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice.
Cascade Bank
General. Applicable federal and state statutes and regulations governing a
bank's operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, certain
interest rates payable, mergers and consolidations, borrowings, issuance of
securities, payment of dividends, establishment of branches, and dealings with
affiliated persons. The Federal Deposit Insurance Corporation ("FDIC") has
authority to prohibit banks under their supervision from engaging in what they
consider to be unsafe or unsound practices in conducting their business. Cascade
Bank is a state-charted commercial bank subject to extensive regulation and
supervision by both the Washington Department of Financial Institutions ("DFI")
and the FDIC. The federal laws that apply to Cascade Bank regulate, among other
things, the scope of its business, its investments, its reserves against
deposits, the timing of the availability of deposited funds and the nature and
amount of and collateral for loans. The laws and regulations governing Cascade
Bank generally have been promulgated to protect depositors and not to protect
shareholders of such institutions or their holding companies.
CRA. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the FRB or the
FDIC evaluates the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility.
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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, reflecting the Bank's
commitment to meeting the credit needs of the communities it serves.
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 a federal
banking agency determines that a financial institution 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.
Management is not aware of any conditions relating to these safety and soundness
standards which would require the submission of a plan of compliance.
Insider Credit Transactions. Cascade Bank is also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Cascade Bank is also subject to certain
lending limits and restrictions on overdrafts to such persons. A violation of
these restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of Cascade Bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 (the "FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its authority.
These standards cover internal controls, information systems, and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, such other operational and managerial
standards as the agency determines to be appropriate, and standards for asset
quality, earnings and stock valuation. An institution that fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that the institution will take to meet the standards. Failure to submit or
implement such a plan may subject the institution to regulatory sanctions.
Management of the Corporation believes that Cascade Bank meets all such
standards, and therefore, does not believe that these regulatory standards
materially affect the Corporation's business operations currently.
Loans to One Borrower. Cascade Bank is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans to one borrower
to 20 percent of unimpaired capital and surplus. At December 31, 2001, the Bank
had no borrowers with balances in excess of the new loans-to-one-borrower limit.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching under certain circumstances. This legislation
generally authorizes interstate branching and relaxes federal law restrictions
on interstate banking. Currently, bank holding companies may purchase banks in
any state, and states may not prohibit such purchases. Additionally, banks are
permitted to merge with banks in other states as long as the home state of
neither merging bank has "opted out." The Interstate Act requires regulators to
consult with community organizations before permitting an interstate institution
to close a branch in a low-income area. With regard to interstate bank mergers,
Washington has "opted in" to the Interstate Act and allows in-state banks to
merge with out-of-state banks subject to certain aging requirements. Washington
law generally authorizes the acquisition of an in-state bank by an out-of-state
bank or bank holding company through the acquisition of or a merger with a
financial institution that has been in existence for at least 5 years prior to
the acquisition.
Deposit Insurance. The deposits of Cascade Bank are currently insured to a
maximum of $100,000 per depositor through the Savings Association Insurance Fund
(the "SAIF") administered by the FDIC. All insured banks are required to
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pay semi-annual deposit insurance premium assessments to the FDIC. The FDICIA
included provisions to reform the Federal Deposit Insurance System, including
the implementation of risk-based deposit insurance premiums. The FDICIA also
permits the FDIC to make special assessments on insured depository institutions
in amounts determined by the FDIC to be necessary to give it adequate assessment
income to repay amounts borrowed from the U.S. Treasury and other sources, or
for any other purpose the FDIC deems necessary. The FDIC has implemented a
risk-based insurance premium system under which banks are assessed insurance
premiums based on how much risk they present to the SAIF. Banks with higher
levels of capital and a low degree of supervisory concern are assessed lower
premiums than banks with lower levels of capital or a higher degree of
supervisory concern.
Dividends. The principal source of the Corporation's revenue is dividends
received from Cascade Bank. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends that would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that payment
could reduce the amount of its capital below that necessary to meet minimum
applicable regulatory capital requirements. Other than the laws and regulations
noted above, which apply to all banks and bank holding companies, neither the
Corporation nor Cascade Bank is currently subject to any regulatory restrictions
on its dividends.
Capital Adequacy. Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and
banks. If capital falls below minimum guideline levels, the holding company or
bank may be denied approval to acquire or establish additional banks or nonbank
businesses or to open new facilities. The FDIC and FRB use risk-based capital
guidelines for banks and bank holding companies. These are designed to make such
capital requirements more sensitive to differences in risk profiles among banks
and bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the FRB has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8 percent, of which at least 4
percent must be Tier I capital. Tier I capital for bank holding companies
includes common shareholders' equity, certain qualifying perpetual preferred
stock and minority interests in equity accounts of consolidated subsidiaries,
less intangibles except as described above. At December 31, 2001, the Bank had
Tier 1 capital equal to $56.1 million or 7.54% of adjusted total assets, which
is $26.3 million above the minimum leverage requirement of 4% as in effect on
that date.
The FDIC also employs a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The FDIC requires a minimum leverage ratio of 3 percent.
However, for all but the most highly rated bank holding companies and for bank
holding companies seeking to expand, the FDIC expects an additional cushion of
at least 1 percent to 2 percent.
FDICIA created a statutory framework of supervisory actions indexed to the
capital level of the individual institution. Under regulations adopted by the
FDIC, an institution is assigned to one of five capital categories depending on
its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. The
Corporation does not believe that these regulations have any material effect on
its operations currently.
Reference is made to Note 11 of the Notes to the Consolidated Financial
Statements in the Annual Report, which is listed as an exhibit under Item 14,
for additional information concerning regulatory capital.
The capital regulations also require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At December 31, 2001, the Bank
had tangible capital of $56.1 million, or 7.54% of adjusted total assets, which
is approximately $26.4 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.
The FDIC risk-based requirement requires financial institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
Tier I capital and supplementary capital. Supplementary capital consists of
certain permanent
-22-
and maturing capital instruments that do not qualify as Tier I 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 Tier I 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,
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, have been assigned a risk weight of 50%.
On December 31, 2001, the Bank had total risk-based capital of approximately
$62.4 million, including $56.1 million in Tier I capital and $6.3 million in
qualifying supplementary capital, and risk-weighted assets of $521.3 million, or
total capital of 11.98% of risk-weighted assets. This amount was $20.7 million
above the 8% requirement in effect on that date.
FDIC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound. The FDIC
regulations state that if the FDIC determines that conditions so warrant, it may
impose a greater capital standard on a particular institution.
Management believes that the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, if circumstances were to
materially and adversely impact the future earnings of the Bank, the ability of
the Bank to meet its capital requirements could be impaired.
Prompt Corrective Action. Federal statutes establish a supervisory framework
based on five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8%, a Tier 1 risk-based capital of not less than 4%, and a leverage
ratio of not less than 4%. Any institution which fails to meet these levels will
be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions, which become more
extensive as an institution becomes more severely undercapitalized. Failure by
an institution to comply with applicable capital requirements will result in
restrictions on their activities and lead to enforcement actions, including the
issuance of a capital directive to ensure the maintenance of adequate capital
levels. Banking regulators will take prompt corrective action with respect to
depository institutions that do not meet minimum capital requirements.
At December 31, 2001, Cascade was a "well capitalized" institution under the
prompt corrective action regulations of the FDIC.
Effects of Monetary Policy. The earnings and growth of the Corporation and
its subsidiaries are affected not only by general economic conditions, but also
by the fiscal and monetary policies of the federal government, particularly the
FRB. The FRB can and does implement national monetary policy for such purposes
as curbing inflation and combating recession, but its open market operations in
U.S. government securities, control of the discount rate applicable to
borrowings from the FRB, and establishment of reserve requirements against
certain deposits, influence the growth of bank loans, investments and deposits,
and also affect interest rates charged on loans or paid on deposits. The nature
and impact of future changes in monetary policy and their impact on the
Corporation and its subsidiaries cannot be predicted with certainty.
Prior Regulation. Prior to converting to a commercial bank, the Bank was
subject to supervision by the Office of Thrift Supervision ("OTS"). 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, 2001 was $111,200. No assessment
for the six months ended December 31, 2001 was issued.
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TAXATION
Federal Taxation
The Corporation reports its 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. In 2001, the Corporation's
fiscal year was changed to the calendar year. 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 the Bank or the Corporation.
Tax Bad Debt Reserves
The reserve method of accounting for bad debt reserves was repealed for tax
years beginning after December 31, 1995. As a result, the Bank 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.
Distributions
To the extent that the Bank makes "non-dividend distributions" to the
Corporation that are considered as made (i) from the reserve for losses as of
June 30, 1988 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 the Bank'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 the Bank's bad debt reserve. Thus, any
dividends to the Corporation that would reduce amounts appropriated to the
Bank'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 included in gross income for federal
income tax purposes.
Dividends-Received Deduction and Other Matters
The Corporation may exclude from its income 100% of dividends received from
the Bank 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 the Bank will not
file a consolidated tax return, except that if the Corporation or the Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80% of
any dividends received may be deducted.
Washington Tax
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 18 years. The Department of Revenue has issued a tax billing
for approximately $148,000 of which the Corporation has accrued $104,000 and
paid $16,000. The Corporation has filed an appeal with the Department of
Revenue. A determination has been issued reversing two of the three billing
issues in the audit. The Corporation has filed another appeal regarding the
final issue.
ITEM 2. 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 December 31, 2001, including leasehold
improvements, furniture and fixtures, of $8.6 million. The Corporation leases
approximately 15% of its main office and
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approximately 30% of its Marysville office to non-affiliated parties. See Note 4
of the Notes to the Consolidated Financial Statements contained in the Annual
Report which is listed in Item 14.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is not engaged in any legal proceedings of a material nature
at the present time. Periodically, there have been various claims and lawsuits
involving the Corporation and the Bank, principally as a defendant, 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 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained on page 16 of the Annual Report listed in Item 14
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the section entitled "Selected Financial Data"
of the Annual Report listed in Item 14 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Annual
Report listed in Item 14 is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the section captioned "Market Risk" in the
Management's Discussion and Analysis section of the Annual Report listed in Item
14 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data in the Annual Report listed
in Item 14 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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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 December 31, 2001 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(b)(c) 71 Chairman and Chief Executive Officer, Cascade
Financial Corp. Chairman, Cascade Bank
Carol K. Nelson(b)(c) 45 President, Chief Executive Officer and Director
Cascade Bank President, Chief Operating
fficer and Director Cascade Financial Corporation
Robert G. Disotell 47 Executive Vice President, Chief Credit Officer
Steven R. Erickson 46 Executive Vice President, Real Estate Lending
Lars H. Johnson 48 Executive Vice President, Chief Financial Officer(b)
LeAnne M. Frank 32 Executive Vice President, Quality of Service and Technology
David R. Little 55 Executive Vice President, Business Banking
Vera E. Wildauer 43 Executive Vice President, Marketing Director
Debbie E. McLeod 36 Executive Vice President, Retail Banking
- ------------
(a) At December 31, 2001.
(b) Officer of the Corporation and Bank.
(c) At May 1, 2002, Ms. Nelson will replace Mr. McCord, who is retiring on such
date, as the CEO of the Corporation.
The principal occupation of each executive officer of the Corporation and
Bank is set forth in the Proxy Statement or below. There are no family
relationships among or between the executive officers listed above.
ROBERT G. DISOTELL has been employed by Cascade Bank since 1977 and
currently serves as Executive Vice President of Credit Administration. He is
responsible for overseeing the credit quality of the Bank's loan portfolios. Mr.
Disotell has managed a variety of business groups in his tenure at Cascade,
including Mortgage Banking, Loan Servicing, Secondary Marketing, Retail Banking,
and Community Reinvestment Act (CRA) activities. Mr. Disotell is a resident of
Arlington, Washington.
STEVEN R. ERICKSON is the Executive Vice President of Real Estate Lending
for 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 member of the Board of Directors of the Boys and Girls
Club of Snohomish County. He is a resident of Marysville, Washington.
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LEANNE M. FRANK is the Executive Vice President of Quality of Service and
Technology for the Bank. She has 14 years of consumer banking experience
starting with Rainier Bank and most recently Bank of America, where she served
as Vice President and Region Service Manager. She is currently involved with
Leadership Snohomish County. Ms. Frank 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, where he served for fourteen years.
Mr. Little has thirty years of banking experience. He is a founding member of
the Everett--Port Gardner Rotary club and is a resident of Everett, Washington.
DEBBIE E. McLEOD is Executive Vice President of Retail Banking for the Bank.
Ms. McLeod joined Cascade Bank in February 2001. She has over 14 years of
commercial banking experience and was previously Vice President and Northern
Region Sales Manager for Bank of America. She is Immediate Past President for
United Way of Skagit County. Ms. McLeod resides in Burlington, Washington.
VERA E. WILDAUER joined Cascade in 1997 as Senior Vice President, Marketing
Director. In 2000, she was elected Executive Vice President, Marketing. Ms.
Wildauer has over 15 years experience in a full range of bank marketing
disciplines among major Washington State financial institutions. In addition to
directing all aspects of marketing, she is also responsible for on-line banking,
loan servicing, and real estate loan operations. She is a member of the Board of
Directors of Bridgeways. 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 "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" 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 "Transactions with Management and Others" of the Proxy
Statement.
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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 at December 31, 2001 and June 30,
2001
(b) Consolidated Statements of Operations for the six months ended
December 31, 2001 and 2000, and the years ended June 30, 2001,
2000 and 1999
(c) Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the six months ended December 31, 2001 and 2000, and
the years ended June 30, 2001, 2000 and 1999
(d) Consolidated Statements of Cash Flows for the six months ended
December 31, 2001 and 2000, and the years ended June 30, 2001,
2000 and 1999
(e) Notes to Consolidated Financial Statements
All schedules have been omitted, as the required information is either
inapplicable or contained in the Consolidated Financial Statements or related
Notes contained in the Annual Report.
(3) Exhibits
3.1 Certificate of Incorporation of Cascade Financial Corporation
(Incorporated by reference to the Corporation's Proxy statement on Form S-4
(File No. 33-83200)).
3.2 Bylaws of Cascade Financial Corporation (Incorporated by reference
to the Corporation's Registration Statement on Form S-4 (File No. 33-83200)).
10.1 Cascade Financial Corporation 1994 Employee Stock Purchase Plan
(Incorporated by reference to the Corporation's Registration Statement on Form
S-4 (File No. 33-83200)).
10.2 Cascade Financial Corporation 1992 Stock Option for June 30, 1995
and Incentive Plan (Incorporated by reference to the Corporation's Form 10-KSB
for June 30, 1995).
10.3 Cascade Financial Corporation Employee Stock Ownership Plan
(Incorporated by reference to the Corporation's Annual Report on Form 10-KSB for
June 30, 1995).
10.4 Cascade Financial Corporation 1997 Stock Option Plan (Incorporated
by reference to Appendix E to the Prospectus included in the Corporation's
Registration Statement on Form S-4 (File No. 333-24203)).
10.5 Employment Agreement entered into between the Bank and Carol K.
Nelson dated November 27, 2001.
10.6 Form of Change of Control Agreement entered into between the Bank
and its executive officers.
10.7 Cascade Financial Corporation 1997 Elective Equity Plan.
13 Cascade Financial Corporation December 31, 2001 Annual Report to
Stockholders, including the Selected Financial Data and Management Discussion
and Analysis.
21 Subsidiaries
23 Consent of Independent Auditors
(b) Reports on Form 8-K
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On May 22, 2001, Cascade Financial Corporation filed Form 8-K announcing the
reorganization of the Corporation into a bank holding company with a financial
holding company election. In connection with the reorganization, the
Corporation's subsidiary, Cascade Bank, converted from a federally chartered
stock savings bank to a Washington chartered commercial bank.
On July 27, 2001, Cascade Financial Corporation filed Form 8-K announcing
the completion of the reorganization of the Corporation into a bank holding
company with a financial holding company election, and the completion of the
conversion from a federally chartered stock savings bank to a Washington
chartered commercial bank.
On December 17, 2001, Cascade Financial Corporation filed Form 8-K
announcing the change in its fiscal year-end from June 30 to December 31.
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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: March 26, 2002 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 Officer) Date: March 26, 2002
Date: March 26, 2002
By: /s/ Carol K. Nelson By: /s/ Ronald E. Thompson
----------------------------- -----------------------------------
Carol K. Nelson Ronald E. Thompson
President and Chief Director
Operating Officer
Date: March 26, 2002 Date: March 26, 2002
By: /s/ Janice Halladay By: /s/ G. Brandt Westover
----------------------------- -----------------------------------
Janice Halladay G. Brandt Westover
Director Director
Date: March 26, 2002 Date: March 26, 2002
By: /s/ David W. Duce By: /s/ Craig Skotdal
----------------------------- -----------------------------------
David W. Duce Craig Skotdal
Director Director
Date: March 26, 2002 Date: March 26, 2002
By: /s/ David O'Connor By: /s/ Dwayne Lane
----------------------------- -----------------------------------
David O'Connor Dwayne Lane
Director Director
Date: March 26, 2002 Date: March 26, 2002
By: /s/ Henry Robinett
-----------------------------
Henry Robinett
Director
Date: March 26, 2002
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