Exhibit 13
CASCADE FINANCIAL CORPORATION
12/31/01 ANNUAL REPORT
Financial Highlights......................................1
Letter to Shareholders....................................2
Cascade Bank Management Team..............................14
Board of Directors........................................16
Common Stock Information..................................16
Independent Auditors' Report..............................17
FINANCIAL HIGHLIGHTS
Information other than amounts at December 31, 2001 is unaudited. Dollars in
thousands except for per share and financial ratios.
For the year
ended December 31 2001 2000 1999 1998 1997
--------- ------- ------- ------- -------
Net interest income $ 21,403 18,738 17,911 14,907 12,597.
Other income 3,322 2,399 2,711 2,630 2,033.
Net income 5,617 3,821 4,152 4,048 2,736*
Earnings per share (diluted) 0.87 0.59 0.65 0.63 0.43*
At December 31 2001 2000 1999 1998 1997
--------- ------- ------- ------- -------
Assets $ 762,013 716,129 616,958 489,807 422,530
Loans, net 576,226 548,722 511,735 413,698 359,068
Deposits 419,980 395,976 438,935 335,529 300,095
Stockholders' equity 47,677 41,240 35,371 33,612 29,304
Book value per share 7.70 6.70 5.91 5.64 5.02
Financial ratios 2001 2000 1999 1998 1997
--------- ------- ------- ------- -------
Return on assets 0.77% 0.57 0.75 0.82 0.64*
Return on average equity 12.63 10.16 12.04 12.87 9.85*
Net interest margin 3.01 2.86 3.32 3.47 3.10
% Nonperforming loans 0.34 0.42 0.10 0.27 0.24
Efficiency ratio 60.13 68.62 67.18 64.00 69.16
Amounts for 1997 have been restated to reflect the acquisition of AmFirst
Bancorporation.
*The 1997 SAIF special assessment of $1.2 million is excluded.
IN 2001, FOLLOWING CASCADE BANK'S CONVERSION FROM A THRIFT INSTITUTION TO A
COMMERCIAL BANK, CASCADE FINANCIAL CORPORATION ("CASCADE") CHANGED ITS FISCAL
YEAR-END FROM JUNE 30 TO DECEMBER 31 TO ALIGN ITS REPORTING PERIODS WITH THOSE
OF ITS COMMERCIAL BANK PEERS. CASCADE'S CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTH PERIOD ENDED DECEMBER 31, 2001, AND ITS FINANCIAL STATEMENTS FOR
THE THREE ANNUAL PERIODS ENDING JUNE 30, 2001, WERE AUDITED BY KPMG LLP.
CASCADE'S FINANCIAL INFORMATION, PREPARED BY MANAGEMENT FOR THE CALENDAR YEARS
ENDED DECEMBER 31, IS UNAUDITED.
DEAR SHAREHOLDERS, CUSTOMERS,
AND EMPLOYEES --
The calendar year 2001 was one of dynamic change and outstanding performance for
Cascade Financial Corporation. New leadership and the change to a commercial
bank charter served to accelerate our success. We are proud to report a
record-breaking year with profits up 47% over the previous year. Just six months
ago, in our last annual report, we set five year financial targets for
ourselves. Due to our employees' dedicated hard work, we have made excellent
progress toward these targets.
Disciplined focus on building the business, real estate construction, and
commercial real estate segments of our loan portfolio is the primary driver of
our increased profitability. Additionally, the declining interest rate
environment significantly reduced our cost of funds, as we continued to build
deposit relationships with our customers.
While celebrating our success, we also are conscious of the current
environment. The Puget Sound economy has been significantly affected by a wide
variety of factors. Operating efficiently while increasing market share in an
economy in recession requires both discipline and skill. It also means an
attentive relationship with our customers to help them weather a more difficult
time in the business cycle. At Cascade, we have bolstered our Credit
Administration resources to manage through this time.
Not everyone has been adversely affected by the economy. Many of our
customers are thriving. Helping business customers like Pacific Topsoils, Inc.,
profiled on page 7, is the primary way Cascade will continue to grow. Sandy and
Dave Forman's company is representative of the many diverse and healthy
businesses that make up this region's community. We are committed to meeting
their needs, with competitive products and, most importantly, with personal
service that exceeds their expectations.
IN CLOSING, WE WOULD LIKE TO EXPRESS OUR SINCERE APPRECIATION TO ALL THE
STAKEHOLDERS OF CASCADE'S SUCCESS. WE ARE GRATEFUL TO EVERY EMPLOYEE WHO MAKES
OUR VISION A REALITY. A SPECIAL THANKS IS ALSO DUE OUR CUSTOMERS AND
SHAREHOLDERS FOR CHOOSING CASCADE FROM AMONG THE MANY ALTERNATIVES AVAILABLE.
Carol K. Nelson
President and Chief Executive Officer
Cascade Bank
Frank M. McCord
Chairman and Chief Executive Officer
Cascade Financial Corporation
"WE WILL BE THE PREFERRED COMMUNITY BANK WHOSE EMPLOYEES BUILD RELATIONSHIPS TO
DELIVER FINANCIAL SOLUTIONS WITH EXCEPTIONAL SERVICE."
Financial targets 2005 Target 2001 Performance
(unaudited)
Return on average equity greater than 15% 12.6%
Annual growth in earnings per share 10 to 15% 45%
Ratio of nonperforming loans to total loans less than 1.00% 0.34%
EFFICIENCY RATIO less than 60% 60%
PERFORMANCE HIGHLIGHTS:
12 months ended December 31, 2001 versus 2000, unaudited
o Net income increased 47% to $5.6 million, or $0.87 per diluted share,
compared to $3.8 million, or $0.60 per diluted share.
o Net interest income increased 14% to $21.4 million, from $18.7 million.
o Net interest margin grew to 3.01% from 2.86%.
o Other income grew 38% to $3.3 million, compared to $2.4 million.
o Efficiency ratio improved to 60%, compared to 69%.
We realized a 12.63% return on average equity in calendar 2001 from 10.16%
in calendar 2000, and a 0.77% return on average assets in 2001 compared to 0.57%
the prior year.
POSITIONED TO FLOURISH IN CHALLENGING TIMES
Maintaining good credit quality is critical to the success of any financial
institution. The professional commercial lending experience Cascade Bank has
assembled is reflected in our continued healthy credit quality. Cascade's
nonperforming loans were just $2.0 million, or 0.34% of total loans at December
31, 2001. That ratio remains superior at September 2001 to that of commercial
banks with assets of $500 million to $1 billion throughout the United States.
Revenue (in millions of dollars, unaudited) Net interest income Other income Net
Income (in millions of dollars, unaudited)
Nonperforming Loans/Total Loans Comparison
Dec. 31, 2001 Sept. 30, 2001 Dec. 30, 2000
Cascade 0.34% 0.29 0.42
National Peers -- 0.96 0.77
Washington State Peers -- 0.91 0.74
Most recent peer data available is September 30, 2001. Source: www.fdic.gov
Also critical to our success is a strong capital base. Cascade's capital
ratios continue to be above the well-capitalized guidelines established by
regulatory agencies. The bank's Capital/Asset Ratio (including trust preferred
securities) at December 31, 2001 was 7.54% compared to 7.15% at December 31,
2000.
Record-breaking results notwithstanding, Cascade is well aware of the
possible impact the economic environment may have on our customers. Between the
contraction in the technology sector, Boeing layoffs, and the shaken travel
industry, the Puget Sound region has and will continue to feel the impact of the
recession.
Given this environment, Cascade has shifted additional resources to
managing credit quality -- and increased its reserve for loan loss by $1.0
million to 1.08% of total loans at December 31, 2001, as compared to December
31, 2000. Cascade's seasoned Business Bankers are working closely with business
customers to foster their financial well-being.
STRATEGIES TO BUILD PROFITABILITY
Serving local businesses and their owners, families, and employees well, remains
Cascade's primary goal. Through personalized, attentive service and a wide range
of products, we meet the diverse needs of our customers.
GROWING DEPOSITS ONE CUSTOMER AT A TIME
Developing deposit relationships with our business banking customers is a
fundamental part of our strategy. Cascade has achieved 6% growth in deposits in
the last year by offering competitive products delivered with exceptional
service.
Building these relationship accounts is key to lowering Cascade's funding
costs and improving profitability. Progress has been made over recent years to
shift the deposit mix to checking accounts versus certificates of deposit. At
December 31, 2001, checking accounts made up 11% of deposits as compared with 5%
at the end of 1997.
Deposits
While Cascade's deposits are still centered in time deposits, declining
interest rates over the last year have substantially reduced our cost of funds.
Checking Deposits (in millions of dollars, information other than 2001 is
unaudited.)
Checking account balances remained level at December 31, 2001, and remain a
significant challenge for Cascade Bank. With innovative services like online
banking and deposit courier service, we compete against the vast delivery
systems of larger banks for business transaction accounts such as checking and
money market accounts.
Cascade's 14 locations in Snohomish and East King Counties also focus on
building checking relationships in their local communities. Saturday banking at
our six grocery store locations, as well as online banking, meet the banking
needs of today's busy families, who, now more than ever, appreciate personal
service from a local bank.
FINANCING THE LOCAL BUSINESS COMMUNITY
Assets grew 6% to $762 million at December 31, 2001 from $716 million a year
ago. Cascade's net loans grew 5% to $576 million at December 31, 2001. Growth
was fueled by increases in business, real estate construction, and commercial
real estate loans. The exceptional growth in these business segments continues
to improve the diversification of our loan portfolio overall. At December 31,
2001, business, real estate construction, and commercial real estate loans made
up 45% of the loan portfolio, as compared with 24% in 1997.
PACIFIC TOPSOILS INC.
Dave and Sandy Forman have been in the business of delivering landscaping
materials since 1978. Starting out by delivering sod to contractors, they now
ship a variety of materials from nine sites located in Snohomish and King
Counties. Recently the Formans moved their corporate headquarters to South
Everett with help from Cascade Bank. At that location, they also have
maintenance facilities to keep the company's 160 pieces of heavy equipment in
good working order.
Cascade helps Pacific Topsoils, Inc. grow their business with equipment
financing, an operating line, as well as recently completing financing on their
new corporate headquarters in South Everett. "Bob Miller made a point of
understanding our business," said Dave. "He helped us figure out how to put
together the best financing for the situation, and, he did it quickly."
Sandy, who manages the administrative side of the business, also
appreciates Cascade's online banking. "We can keep track of our accounts
online." Staying on top of things is important when dispatching upwards of 250
loads of material on a busy day.
Pacific Topsoils, Inc. is just one of the many local businesses that keep
this community thriving. Cascade is proud to be their bank.
Total Loans
Business Loans (in millions of dollars, information other than 2001 is
unaudited)
Business loans increased 29% to $125.3 million from $97.0 million at December
31, 2000. Experienced Business Bankers, local decision-making, and exceptional
service make Cascade an ideal choice for small to mid-size businesses in the
Snohomish and east King County markets.
Real Estate Construction Loans (in millions of dollars, information other than
2001 is unaudited)
The real estate construction niche continues to be important to Cascade's
growth. Loans outstanding in this category increased 48% to $75.9 million from
December 31, 2000 to December 31, 2001. Cascade serves the needs of the region's
premier builders in both single and multifamily residential construction. Due to
low interest rates, the housing market has been one of the bright spots in the
current economy. Demand for moderately priced homes, the type that Cascade's
customers specialize in building, has not subsided and is expected to help
stabilize the Puget Sound economy until other sectors of the economy rebound.
CULTIVATING EFFECTIVENESS
A clear vision and focused goals, as outlined in the letter to shareholders, are
key to Cascade's effectiveness. But, this cannot be achieved without dedicated
employees. Our talented team continues to ensure the industry's best practices
are implemented for the maximum benefit of customers and the bank.
Cascade Bank provides financing for many of the top builders in the Puget Sound
region. Our competitive pricing, flexible product line, and responsive service
help our customers focus on building quality homes.
Our people are what set Cascade Bank apart. Our mission is to empower
well-trained, knowledgeable employees to deliver the best financial solutions
and exceed customer service expectations.
Efficiency Ratio (unaudited)
A standard measurement of a bank's performance today is its efficiency ratio.
The efficiency ratio is calculated by dividing non-interest expense by total
revenue, which indicates how much an institution spends to generate a dollar of
revenue. The ratio can be lowered (which is better) by reducing expenses and/or
increasing revenues. At Cascade we are not focusing on solely cutting expenses
because we believe that will result in a loss of customer relationships, which
will ultimately result in an erosion of revenues and profitability. Our plan is
to improve our efficiency ratio by both controlling expenses and improving
revenues.
Cascade's efficiency ratio improved significantly in calendar 2001, and we
are now nearing our stated target of less than 60%. We will strive to reach this
goal by continuing to control costs and improve revenues while maintaining high
standards of service.
EXCEPTIONAL SERVICE
Becoming the preferred community bank in our market requires a concerted effort
on the part of every Cascade team member. Toward that end, customer service
standards have been instituted across business lines to ensure we exceed our
customers' expectations. Additionally, customer service surveys collect customer
feedback to help improve Cascade's delivery.
Our ongoing commitment to the community has also shown record results this
year. Cascade employees increased pledges to United Way by 185% over the
previous year, winning the Silver Award among companies our size. We also
continue to maintain our Community Reinvestment Act rating of "Outstanding."
This is the highest possible rating and recognizes our involvement in the
community combined with progressive lending practices that reach out to low and
moderate income home buyers.
FORWARD LOOKING STATEMENTS
This document contains forward looking statements that have been prepared on the
basis of Cascade's
best judgments and currently available information. These forward looking
statements are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
control of Cascade. In addition, these forward looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to changes. Factors that could affect actual results include interest
rate trends, the general economic climate in Cascade's market area and the
country as a whole, the ability of Cascade to control costs and expenses,
competitive products and pricing, loan delinquency rates and changes in federal
and state regulation. Accordingly, there can be no assurance that these
strategies will be implemented, or if implemented, will achieve the results
described or within the time periods currently estimated.
CASCADE BANK MANAGEMENT TEAM
1. Carol K. Nelson
President and CEO
2. Robert Disotell
EVP, Chief Credit Officer
3. Steven R. Erickson
EVP, Real Estate Lending
4. LeAnne Frank
EVP, Quality of Service and Technology
5. Lars Johnson
EVP, Chief Financial Officer
6. David R. Little
EVP, Business Banking
7. Debbie McLeod
EVP, Retail Banking
8. Vera E. Wildauer
EVP, Marketing
BOARD OF DIRECTORS
Frank M. McCord
Chairman of
the Board (1)
David W. Duce
Vice Chairman
Attorney
Duce, Bastian,
Peterson and Zielke (3)
Janice Halladay
Retired
Bank Executive (3)
Dwayne Lane
President
Dwayne Lane
Auto Centers (3)
Dennis R. Murphy, Ph.D.
Vice Chairman
Dean, College of Business
and Economics
Professor of Economics
Western Washington University (2)
Carol K. Nelson
President and CEO
Cascade Bank (1)
David R. O'Connor
Co-Owner
Mobile Country Club (1, 3)
Henry M. Robinett
General Partner
Boyden, Robinett &
Associates L.P. (1, 2)
Craig Skotdal
President
Skotdal Real Estate
(2)
Ronald E. Thompson
President
Windermere Commercial
and Property Management
of Snohomish County (1, 2)
G. Brandt Westover
Vice President
Paine Webber, Inc. (1, 3)
1. Executive Committee
2. Audit and Finance Committee
3. Compensation and Personnel Commit
The common stock of Cascade Financial Corporation is traded on the NASDAQ
SmallCap Market under the symbol CASB. As of December 31, 2001, there were
approximately 2,500 stockholders of record. The following table sets forth
market price information for the Corporation's common stock.
2000 High Low
3/31/00 $ 10.91 6.08
6/30/00 7.73 5.51
9/30/00 6.59 5.45
12/31/00 7.73 6.25
2001 High Low
3/31/01 $ 7.62 6.65
6/30/01 8.18 6.39
9/30/01 9.09 7.04
12/31/01 9.09 7.60
Independent Auditor's Report
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheets of Cascade
Financial Corporation and subsidiaries (Corporation) as of December 31, 2001 and
June 30, 2001, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for the six month
period ended December 31, 2001, and for each of the years in the three-year
period ended June 30, 2001. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cascade
Financial Corporation and subsidiaries as of December 31, 2001 and June 30,
2001, and the results of their operations and their cash flows for the six month
period ended December 31, 2001, and for each of the years in the three-year
period ended June 30, 2001 in conformity with accounting principles generally
accepted in the United States of America.
KPMG
Seattle, Washington
March 1, 2002
CONSOLIDATED BALANCE SHEETS
Dollars in thousands December 31, 2001 June 30, 2001
ASSETS: ----------------- -------------
Cash on hand and in banks $ 8,535 8,025
Interest-bearing deposits in other
financial institutions 3,087 5,855
Securities available-for-sale 150,338 129,213
Securities held-to-maturity 5,989 6,592
Loans 582,530 570,556
Allowance for loan losses (6,304) (5,687)
--------------------------------
Loans, net 576,226 564,869
Premises and equipment, net 8,620 8,977
Accrued interest receivable and
other assets 9,218 9,536
--------------------------------
Total assets $ 762,013 733,067
================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 419,980 401,915
Federal Home Loan Bank (FHLB)
advances 226,500 232,124
Securities sold under agreements
to repurchase 49,792 36,920
Advance payments by borrowers for
taxes and insurance 1,574 1,739
Accrued interest payable, expenses
and other liabilities 5,213 4,295
Deferred Federal income taxes 1,277 1,477
--------------------------------
Total liabilities 704,336 678,470
--------------------------------
Trust preferred securities 10,000 10,000
Stockholders' equity:
Preferred stock, $.01 par value.
Authorized 500,000 shares; no shares
issued or outstanding -- --
Common stock, $.01 par value.
Authorized 8,000,000 shares; issued
and outstanding 6,333,007 shares at
December 31, 2001 and 5,694,195
shares at June 30, 2001 63 57
Additional paid-in capital 10,421 5,484
Treasury stock, 132,092 shares at
December 31, 2001 and 100,935
shares at June 30, 2001, at cost (972) (723)
Retained earnings, substantially restricted 38,012 39,426
Accumulated other comprehensive
Income 153 353
---------------------------------
Total stockholders' equity 47,677 44,597
---------------------------------
Total liabilities and stockholders' equity $ 762,013 733,067
=================================
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENT OF OPERATIONS
Dollars in thousands, except share amounts
Six months ended
December 31, Years ended June 30,
-------------------------- -------------------------------------
2001 2000 2001 2000 1999
-------------------------- -------------------------------------
INTEREST INCOME: (unaudited)
Loans $ 23,209 23,706 47,897 43,155 34,751
Securities held-to-maturity 187 382 421 306 141
Securities available-for-sale 3,474 3,617 7,288 4,306 2,598
FHLB stock dividends 451 373 787 622 445
Interest-bearing deposits 153 201 296 193 270
-----------------------------------------------------------------------------
Total interest income 27,474 28,279 56,689 48,582 38,205
-----------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 8,035 10,501 20,105 19,801 16,425
FHLB advances 7,047 6,800 13,843 9,093 5,280
Securities sold under
agreements to repurchase 609 1,025 2,014 565 251
Trust preferred securities 581 593 1,166 388 --
-----------------------------------------------------------------------------
Total interest expense 16,272 18,919 37,128 29,847 21,956
-----------------------------------------------------------------------------
Net interest income 11,202 9,360 19,561 18,735 16,249
PROVISION FOR LOAN LOSSES 810 420 980 770 427
-----------------------------------------------------------------------------
Net interest income after
provision for loan losses 10,392 8,940 18,581 17,965 15,822
-----------------------------------------------------------------------------
OTHER INCOME:
Gain on sale of loans
held-for-sale 335 107 336 427 623
Gain on sale of mortgage-
backed securities -- -- -- -- 37
Gain on sale of servicing 22 -- -- -- 633
Gain on sale of securities
available-for-sale, net 294 76 212 -- 17
Service charges 908 854 1,839 1,591 1,244
Other 258 101 256 258 283
-----------------------------------------------------------------------------
Total other income 1,817 1,138 2,643 2,276 2,837
-----------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 3,847 3,623 7,702 7,914 6,541
Occupancy 1,216 1,453 2,719 2,889 2,211
Data processing 133 146 249 234 370
Marketing 187 273 454 509 510
Other 2,078 1,402 3,177 3,071 2,806
-----------------------------------------------------------------------------
Total other expenses 7,461 6,897 14,301 14,617 12,438
-----------------------------------------------------------------------------
INCOME BEFORE FEDERAL
INCOME TAXES 4,748 3,181 6,923 5,624 6,221
Federal income taxes 1,598 1,082 2,357 1,912 2,117
-----------------------------------------------------------------------------
Net income $ 3,150 2,099 4,566 3,712 4,104
=============================================================================
Net income per common share, basic $ 0.51 0.35 0.75 0.61 0.69
Weighted average number of shares
outstanding, basic 6,172,489 6,065,332 6,081,969 6,042,084 5,962,315
Net income per diluted share $ 0.49 0.33 0.71 0.57 0.63
Weighted average number of shares
outstanding, diluted 6,465,467 6,411,499 6,427,574 6,523,426 6,552,197
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Dollars in thousands, except share amounts
Accumulated Total
Additional other stock-
Common paid-in Treasury Retained comprehensive holders'
Shares stock capital stock earnings income (loss) equity
Balances at
June 30, 1998 5,356,153 $ 54 4,418 -- 27,044 (104) 31,412
Options exercised 98,149 1 374 -- -- -- 375
Net income -- -- -- -- 4,104 -- 4,104
Other comprehensive l
Loss net of tax
benefit of $(814) -- -- -- -- -- (1,652) (1,652)
--------------------------------------------------------------------------------------------
Balances at
June 30, 1999 5,454,302 55 4,792 -- 31,148 (1,756) 34,239
Options exercised 77,575 -- 248 -- -- -- 248
Net income -- -- -- -- 3,712 -- 3,712
Other comprehensive
loss, net of tax
benefit of $(486) -- -- -- -- -- (943) (943)
--------------------------------------------------------------------------------------------
Balances at
June 30, 2000 5,531,877 55 5,040 -- 34,860 (2,699) 37,256
Options exercised 162,318 2 444 -- -- -- 446
Net income -- -- -- -- 4,566 -- 4,566
Shares repurchased (100,935) -- -- (723) -- -- (723)
Other comprehensive
income, net of tax
benefit of $1,466 -- -- -- -- -- 3,052 3,052
--------------------------------------------------------------------------------------------
Balances at
June 30, 2001 5,593,260 57 5,484 (723) 39,426 353 44,597
Stock dividends 572,989 6 4,651 (93) (4,564) -- --
Options exercised 54,429 -- 286 -- -- -- 286
Net income -- -- -- -- 3,150 -- 3,150
Shares repurchased (19,763) -- -- (156) -- -- (156)
Other comprehensive
loss, net of tax
benefit of $(103) -- -- -- -- -- (200) (200)
--------------------------------------------------------------------------------------------
Balances at
December 31, 2001 6,200,915 $ 63 10,421 (972) 38,012 153 47,677
============================================================================================
COMPREHENSIVE INCOME
Six months ended December 31, Years ended June 30,
---------------------------- --------------------------------------
2001 2000 2001 2000 1999
---------------------------- --------------------------------------
(unaudited)
Net Income $ 3,150 2,099 4,566 3,712 4,104
Increase in unrealized
gains (losses) on securities
available-for-sale, net of tax expense
(benefit) of $(3), 1,084, 1,538,
(486), and (808). (6) 2,312 3,192 (943) (1,641)
Less reclassification adjustment for
gains included in net income, net of
tax (benefit) of $(100), (26), (72), 0,
and (6). (194) (50) (140) -- (11)
------------------------------------------------------------------------
Comprehensive Income $ 2,950 4,361 7,618 2,769 2,452
========================================================================
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
Six months ended Years ended
December 31, June 30,
--------------------- -----------------------------------
2001 2000 2001 2000 1999
--------------------- -----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
Net income $ 3,150 2,099 4,566 3,712 4,104
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 655 698 1,302 1,405 938
Amortization of retained servicing rights 135 130 268 257 384
Provision (recovery) for losses on:
Loans 810 420 980 770 427
Mortgage servicing rights 30 -- -- (137) 187
Deferred Federal income taxes (98) 49 469 (486) (136)
Additions to mortgage servicing rights (4) (24) (27) (204) (1,042)
Deferred loan fees, net of amortization (201) 215 (16) 348 25
Net gain on sales of securities
available-for-sale (294) (76) (212) -- (17)
Gain on sales of mortgage loan
servicing rights (22) -- -- -- (633)
Gain on sales of REO (18) -- -- -- --
Gain on sales of premises and
equipment (170) -- -- -- --
FHLB stock dividend (451) (373) (787) (622) (445)
Net change in accrued interest
receivable and other assets over
accrued interest payable, expenses
and other liabilities 1,320 (1,004) (2,386) (3,581) (91)
--------------------------------------------------------------------
Net cash provided by
operating activities 4,842 2,134 4,157 1,462 3,701
--------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated, net of
principal repayments (12,177) (9,619) (27,007) (86,546) (71,987)
Purchases of securities held-to-maturity -- -- -- (9,820) (291)
Principal repayments on securities
held-to-maturity 603 652 1,259 707 3,278
Principal repayments on securities
available-for-sale 15,412 3,091 22,652 4,435 7,994
Purchases of securities available-for-sale (96,593) (45,631) (131,635) (25,968) (62,252)
Proceeds from sales of securities
available-for-sale 60,498 21,052 81,730 -- 7,016
Purchases of premises and equipment (348) (433) (1,147) (1,104) (1,608)
Proceeds from sales of premises
and equipment 227 -- -- -- --
Proceeds from sales of mortgage
servicing rights -- -- -- -- 1,579
--------------------------------------------------------------------
Net cash used in investing activities (32,378) (30,888) (54,148) (118,296) (116,271)
--------------------------------------------------------------------
Subtotal, carried forward $(27,536) (28,754) (49,991) (116,834) (112,570)
--------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Dollars in thousands
Six months ended Years ended
December 31, June 30,
-------------------------- ------------------------------------
2001 2000 2001 2000 1999
-------------------------- ------------------------------------
(unaudited)
Subtotal, brought forward $ (27,536) (28,754) (49,991) (116,834) (112,570)
-------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of
stock options 286 210 446 248 375
Repurchase of common stock (156) (584) (723) -- --
Net (decrease) increase in deposits 18,065 (2,531) 3,408 36,721 49,268
Net increase (decrease) in FHLB advances (5,624) 7,321 16,468 73,660 68,560
Proceeds from trust preferred offering,
net of issuance costs -- -- -- 9,234 --
Net increase (decrease) in securities
sold under agreements to repurchase 12,872 31,478 31,133 164 (7,440)
Net increase (decrease) in advance
payments by borrowers for taxes
and insurance (165) (240) (221) 13 (6)
---------------------------------------------------------------------
Net cash provided by
financing activities 25,278 35,654 50,511 120,040 110,757
--------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents (2,258) 6,900 520 3,206 (1,813)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 13,880 13,360 13,360 10,154 11,967
--------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 11,622 20,260 13,880 13,360 10,154
====================================================================
Supplemental disclosures of
cash flow information
Cash paid during the year for:
Interest $ 15,655 17,674 35,309 28,709 21,848
Federal income taxes 1,100 825 2,075 1,809 2,438
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Mortgage loans securitized into
FHLMC participation certificates,
held-for-trading and sold $ -- -- -- 8,814 20,137
Net mortgage loans transferred
to real estate owned 211 234 1,147 1,192 534
See accompanying notes to consolidated financial statements
Dollars in thousands, except share amounts
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of Cascade Financial Corporation
and subsidiaries (the "Corporation") conform to accounting principles generally
accepted in the United States of America and to general practice within the
financial institutions industry, where applicable. In preparing the consolidated
financial statements, management makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of income and expense. Actual results could differ from those estimates.
The following is a description of the more significant policies, which the
Corporation follows in preparing and presenting its consolidated financial
statements.
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation, its subsidiaries, Cascade Bank (the "Bank"), Cascade Capital
Trust I (the "Trust"), and the Bank's subsidiary, Cascade Investment
Services, Inc. All significant intercompany balances and transactions have
been eliminated in the consolidation.
On November 27, 2001, the Corporation's Board of Directors voted to
change the Corporation's fiscal year ending June 30 to a calendar year
beginning January 1st and ending December 31st.
(b) CASH EQUIVALENTS
The Corporation considers all interest-bearing deposits and short-term
highly liquid investment securities with an original maturity of three
months or less to be cash equivalents.
(c) LOANS
All of the Corporation's loans are located in the Puget Sound region. At
December 31, 2001, the Corporation's loans are principally secured by
one-to-four-family residences (26%), multifamily residences (19%), real
estate construction (13%), business (21%), consumer assets (10%) and
commercial real estate properties (11%). Accordingly, the ultimate
collectibility of the Corporation's loan portfolio is susceptible to
changes in the economic and real estate market conditions in the Puget
Sound region.
Most of the commercial loans are secured, and the security includes
commercial property, business inventories, commercial equipment and
personal property of the borrowers and/or guarantors. At December 31, 2001,
$9.4 million in commercial loans were unsecured. Home equity loans and
lines of credit account for the majority of the installment loan portfolio.
Real estate loans originated by the Corporation are generally secured
by no less than 80% of the lesser of the appraised value or purchase price
of the underlying property. The Corporation currently requires first
mortgage, residential customers to obtain private mortgage insurance on all
loans above an 80% loan-to-value ratio.
Interest Income
Loans are stated at principal amounts outstanding, net of deferred loan
fees and costs. Interest is accrued only if deemed collectible. Accrual of
interest income is generally discontinued when a loan becomes 90 days past
due and accrued interest amounts are reversed. Once interest has been paid
to date or management considers the loan to be fully collectible, it is
returned to accrual status.
Loan origination fees and certain direct origination costs are
deferred and amortized as an adjustment of the loans' yields over their
contractual lives using the effective interest method. In the event loans
are sold, the remaining net deferred loan origination fees or costs are
recognized as a component of the gains or losses on the sales of loans.
When portfolio loans pay off before their contractual maturity, the
remaining deferred fees or costs are recognized as interest income or
expense.
Loan commitment fees are deferred until loans are funded, at which
time they are amortized into interest income using the effective interest
method. If the commitment period expires, the fees are recognized as
service charges.
Impairment of Loans and Allowance for Loan Losses
An allowance for loan losses is maintained at a level sufficient to provide
for losses based on management's evaluation of known and inherent risks in
the loan portfolio. This evaluation includes analyses of the fair value of
the financial condition of the borrower, collateral securing selected
loans, consideration of historical loss experience and management's
projection of trends affecting credit quality. Interest income is normally
recognized on the accrual basis; however, if a loan is impaired then
interest income is recorded upon the receipt of cash. The difference
between interest income recognized on the accrual basis and cash basis is
not significant.
The Corporation reviews all single family loans, all consumer loans
and multifamily and commercial real estate loans with outstanding principal
balances under $1.0 million for impairment as smaller balance homogeneous
loan groups. The Corporation considers a loan to be impaired when it
becomes
nonaccrual; if it is a multifamily or commercial real estate loan less than
90 days delinquent and management believes that the borrower may be
experiencing financial difficulty based on indicators such as an
inconsistent payment pattern, low debt coverage ratio, high loan-to-value
ratio; or if it is a restructured debt. The Corporation bases the
measurement of loan impairment for all loans on the fair value of the
loan's underlying collateral. If the recorded investment in a loan exceeds
the measure of impairment, the Corporation recognizes the impairment by
creating a valuation allowance with a corresponding charge to the provision
for loan losses.
Management believes the allowances for losses on loans and real estate
owned are adequate. While management uses available information to
recognize losses on these assets, future additions to the allowances may be
necessary based on changes in economic conditions, particularly in the
western Washington region. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Corporation's allowances for losses on loans. Such agencies may require the
Corporation to recognize additions to the allowances, or change valuations,
based on their judgments about information available to them at the time of
their examinations.
(d) SALES OF LOANS
Loans Held-for-Sale
Any loan that management determines will not be held-to-maturity is
classified as held-for-sale at the time of origination. Loans held-for-sale
are carried at lower of cost or market value, determined on an aggregate
basis. Unrealized losses on such loans are included in gain on sale for
loans held-for-sale. All loans are sold without recourse.
Mortgage Loan Servicing Rights
The Corporation acquires mortgage servicing rights (MSR) through the
origination of mortgage loans and the sale of those loans with servicing
rights retained. The total cost of the mortgage loans sold is allocated to
the MSR and the loans based on their relative fair values. The Corporation
assesses its MSR for impairment based on the fair value of those rights.
The carrying value of the MSR is evaluated on a quarterly basis and any
impairment is recognized through a valuation allowance for each impaired
stratum. For purposes of measuring impairment, the Corporation stratifies
its MSR by various risk characteristics such as loan type, investor type,
interest rate and origination date with appropriate prepayment assumptions
for the various MSR pools. Reversal of the allowance is based upon the
recovery of the fair market value of the amortized asset. The MSR are
included in other assets and are amortized as an offset to service charges
in proportion to, and over, the period of estimated net servicing income.
Loan servicing generally consists of collecting mortgage payments and
certain charges from borrowers, such as late payment fees, maintaining
escrow accounts, and disbursing payments to investors. Loan servicing
income is recognized when earned and is recorded to service charges. Loan
servicing costs are charged to expense as incurred.
The Corporation sells loan servicing rights. Gains and losses from
sales of loan servicing rights are calculated using the specific
identification of the related carrying value.
(e) SECURITIES
Debt and equity securities, including mortgage-backed securities (MBS), are
classified as either trading, available-for-sale, or held-to-maturity.
Securities classified as trading are carried at fair value with unrealized
gains and losses reported in earnings. Securities available-for-sale are
carried at fair value, with unrealized gains and losses reported as a
component of other comprehensive income. Realized gains and losses on sales
are computed using the specific identification methods. Investment
securities held-to-maturity are carried at amortized cost or principal
balance, adjusted for amortization of premiums and accretion of discounts.
Amortization of premiums and accretion of discounts are calculated using a
method that approximates the level yield method. The Corporation has the
ability, and it is management's intention, to hold such securities until
maturity.
(f) REAL ESTATE OWNED
Real estate owned includes real estate acquired in settlement of loans.
Real estate owned is recorded at the lower of cost or fair value, based
upon the most recent appraisal, less estimated costs to sell. Any loss
recorded at the time a foreclosure occurs is classified as a charge-off
against the allowance for loan losses. Losses that result from the ongoing
periodic valuation of these properties are charged to operations in the
period in which they are identified. Real estate owned at December 31, 2001
and June 30, 2001 was $430 and $787, respectively, which is included in
other assets.
(g) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Straight-line depreciation is provided over the estimated useful lives of
the respective assets. Leasehold improvements are amortized over the
estimated useful lives of the improvements, or terms of the related leases,
whichever is shorter.
(h) FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on the deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(i) STOCK-BASED COMPENSATION
The Corporation measures its employee stock-based compensation arrangements
using the provisions outlined in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees", which is an intrinsic
value-based method of recognizing compensation costs. The Corporation has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compansation". As none of the Corporation's stock options have
an intrinsic value at grant date, no compensation cost has been recognized
for its stock option plans.
(j) RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 141, "Business Combinations", was issued in June 2001. SFAS No.
141 requires that all business combinations after June 30, 2001 be
accounted for using the purchase method. It also defines certain criteria
for intangible assets that are acquired in a business combination, in order
to be recognized and reported separately from goodwill. SFAS No. 141
supersedes Accounting Principles Board Opinion No. 16 (APB 16), "Business
Combinations" and Financial Accounting Standards Board Statement No. 38
(SFAS 38), "Accounting for Preacquisition Contingencies of Purchased
Enterprises".
SFAS No. 142, "Goodwill and Other Intangible Assets", was issued in
June 2001. SFAS No. 142 establishes accounting and reporting standards for
intangible assets. It requires that goodwill and intangible assets with
indefinite useful lives be tested for impairment annually rather than
amortized. SFAS No. 142 supersedes Accounting Principles Bulletin No. 17
(APB 17), "Intangible Assets".
The Corporation does not expect the application of these statements
will have any material effect on the consolidated financial statements.
(k) RECLASSIFICATIONS
Certain June 30, 2000 balances have been reclassfied to conform to the 2001
presentation.
(2) SECURITIES
A summary of securities at December 31, 2001 and June 30, 2001 follows:
December 31, 2001 June 30, 2001
----------------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amor- unreal- unreal- Amor- unreal- unreal-
tized ized ized Fair tized ized ized Fair
cost gain loss value cost gain loss value
----------------------------------------------- ----------------------------------------
Securities
available-for-sale:
Agency MBS $ 56,696 -- 185 56,511 76,492 340 -- 76,832
Agency notes 76,266 433 -- 76,699 35,315 177 -- 35,492
FHLB stock 13,119 -- -- 13,119 12,668 -- -- 12,668
Other 4,025 -- 16 4,009 4,203 18 -- 4,221
----------------------------------------------------------------------------------------------
$ 150,106 433 201 150,338 128,678 535 -- 129,213
==============================================================================================
Securities
held-to-maturity:
Agency MBS $ 5,989 -- 106 5,883 6,592 -- 136 6,456
----------------------------------------------------------------------------------------------
$ 5,989 -- 106 5,883 6,592 -- 136 6,456
==============================================================================================
As of December 31, 2001 and June 30, 2001, the Corporation was required to
maintain 113,250 and 116,062 shares, respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits was
$1,710 and $1,130 at December 31, 2001 and June 30, 2001, respectively.
Proceeds from the sale of securities available-for-sale and gross realized
gains and losses are summarized as follows for the six months ended December 31,
2001 and for the years ended June 30, 2001 and June 30, 1999. There were no
sales of securities available-for-sale for the year ended June 30, 2000. During
the year ended June 30, 2001, a $3.0 million security previously classified as
held-to-maturity was reclassified to available-for-sale as provided in FAS 115
due to the deterioration of the issuer's creditworthiness. A $30 gain was
recognized when the security was sold.
Six months ended December 31, 2001
-----------------------------------
Proceeds Gain Loss
-------- ---- ----
Agency MBS $ 40,998 266 1
Agency notes 19,500 29 --
-------- --- ---
Total $ 60,498 295 1
======== === ===
Six months ended December 31, 2000
(unaudited)
-----------------------------------
Proceeds Gain Loss
-------- ---- ----
Agency MBS $ 21,052 76 --
-------- --- ---
Total $ 21,052 76 --
======== === ===
Year ended June 30, 2001
-----------------------------------
Proceeds Gain Loss
-------- ---- ----
Agency MBS $ 36,798 107 86
Agency notes 25,194 12 25
Other 19,738 204 --
-------- --- ---
Total $ 81,730 323 111
======== === ===
Year ended June 30, 1999
-----------------------------------
Proceeds Gain Loss
-------- ---- ----
Agency notes $ 7,016 17 --
-------- --- ---
Total $ 7,016 17 --
======== === ===
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at December 31, 2001:
Within one over one to over five to over ten
Year five years ten years years total
---------- ----------- ------------ --------- ----------
Amortized Cost
Agency MBS $ -- -- 1,743 54,953 56,696
Agency notes 80 -- 43,736 32,450 76,266
FHLB stock 13,119 -- -- -- 13,119
Other -- -- -- 4,025 4,025
---------- --------- -------- --------- ----------
Total amortized cost $ 13,119 -- 45,479 91,428 150,106
========== ========= ========= ========= ==========
Fair Value
Agency MBS $ -- -- 1,796 54,715 56,511
Agency notes 80 -- 44,121 32,498 76,699
FHLB stock 13,119 -- -- -- 13,119
Other -- -- -- 4,009 4,009
---------- --------- -------- --------- ----------
Total fair value $ 13,199 -- 45,917 91,222 150,338
========== ========= ========= ========= ==========
The contractual maturities of the Corporations' securities held-to-maturity at
December 31, 2001 were all greater than five years.
U.S. Government agency securities are classified based upon contractual
maturity dates. Actual maturities may differ from contractual maturities because
the borrowers have the right to prepay their obligations. Available-for-sale
securities pledged as collateral to secure public deposits were $1,356 at
December 31, 2001 and $1,476 at June 30, 2001.
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans at December 31, 2001 and June 30, 2001 follows:
December 31, June 30,
2001 2001
------------ ---------
Residential real estate $ 152,727 165,003
Multifamily real estate 109,733 107,360
Commercial real estate 62,938 56,913
Real estate construction 104,131 103,206
Business 125,342 113,708
Consumer 58,381 60,406
--------- ---------
Total loans 613,252 606,596
Loans in process (28,220) (33,337)
Deferred loan fees, net (2,502) (2,703)
--------- ---------
Loans $ 582,530 570,556
========= =========
Loans serviced for others $ 78,114 92,510
Accrued interest on loans was $3,267 and $3,502 at December 31, 2001 and June
30, 2001, respectively.
At December 31, 2001, the composition of the loan portfolio including loans in
process was as follows:
Adjustable
Fixed rate rate
---------- ----------
Term to maturity
Less than one year $ 25,321 233,681
1-3 years 33,092 111,231
3-5 years 26,663 107,132
5-10 years 21,475 17,416
10-20 years 7,204 70
Over 20 years 1,747 --
---------- --------
Total $ 115,502 469,530
========== ========
Non-accrual loans totaled $1,999 and $1,315, respectively, at December 31, 2001
and June 30, 2001. If interest on these loans had been recognized, such income
would have been $87 and $74 respectively, for the periods ended December 31,
2001 and June 30, 2001. At December 31, 2001 and June 30, 2001 and 2000, loans
totaling $16,669, $5,625 and $4,174, were impaired, of which $1,512, $574 and
$194 had allocated allowances of $480, $105 and $28, respectively. The remaining
$15,157, $5,051 and $3,980 had no allowances allocated to them because the value
of the underlying collateral of the impaired loans was equal to or exceeded the
recorded investment. Of the $16,669, $5,625 and $4,174 of impaired loans,
$1,401, $1,121 and $572 were under foreclosure. The average balance of impaired
loans during the six months ended December 31, 2001 and the years ended June 30,
2001 and 2000, respectively, was $8,853, $6,065 and $3,243 and the Corporation
recognized $944, $746 and $406 of related interest income on such loans during
the time such loans were impaired.
At December 31, 2001, the Corporation had outstanding commitments of $6,828
to fund loans with fixed interest rates and $3,848 for loans with adjustable
rates.
The Corporation had forward commitments totaling $6,602 and $3,032 to sell
loans into the secondary market at December 31, 2001 and June 30, 2001,
respectively.
A summary of the activity in the allowance for losses on loans follows:
Six months ended
December 31, years ended june 30,
--------------------- -----------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
Balances at beginning
of year $ 5,687 5,004 5,004 4,254 4,143
Provision for losses 810 420 980 770 427
Recoveries 13 19 32 126 7
Charge-offs (206) (101) (329) (146) (323)
------- ------- ------- ------- -------
Balances at end of year $ 6,304 5,342 5,687 5,004 4,254
======= ======= ======= ======= =======
(4) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
Estimated December 31, June 30,
useful lives 2001 2001
------------ ------------ ----------
Land $ 1,239 1,239
Buildings 40 years 7,660 7,619
Leasehold improvements Lease term 1,435 1,544
Furniture and equipment 2-10 years 8,973 8,797
----------- ----------
19,307 19,199
Accumulated depreciation and amortization (10,687) (10,222)
----------- ----------
$ 8,620 8,977
=========== ==========
(5) DEPOSITS
Deposits are summarized as follows:
December 31, June 30,
2001 2000
------------ --------
Non-interest bearing checking accounts $ 23,028 22,072
Interest bearing checking accounts 22,538 24,428
Money market deposit accounts 96,909 88,717
Savings accounts 12,043 11,209
Certificates of deposit 265,462 255,489
----------- -------
$ 419,980 401,915
=========== =======
Time deposit accounts in amounts of $100 thousand or more totaled $129.5 million
and $93.1 million at December 31, 2001 and June 30, 2001, respectively.
Weighted Deposit
average accounts with Accrued
interest balances in interest
rate on excess of payable on
deposits $100,000 deposits
--------- ------------- ----------
December 31, 2001 3.12% $ 183,578 712
June 30, 2001 4.60% 160,888 518
A summary of interest expense on deposits follows:
Six months ended Years ended
December 31, June 30,
-------------------- ---------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
Checking and money market accounts $ 1,540 2,752 4,724 6,359 3,642
Savings accounts and time deposits 6,495 7,749 15,381 13,442 12,783
------- ------- ------- ------- -------
$ 8,035 10,501 20,105 19,801 16,425
======= ======= ======= ======= =======
Maturities of time deposits at December 31, 2001 are as follows:
Year ended December 31,
-----------------------
2002 $ 241,327
2003 11,176
2004 3,898
2005 4,049
2006 4,985
Thereafter 27
-----------
$ 265,462
===========
(6) TRUST PREFERRED SECURITIES
On March 1, 2000, $10 million of 11% Capital Securities due March 1, 2030 were
issued by a business Trust whose common equity is 100% owned by Cascade
Financial Corporation. Interest on the Trust Preferred Securities is paid
semi-annually on March and September 1. The Corporation is using the proceeds
for general corporate purposes including stock repurchases and investment in its
subsidiary bank. The Trust preferred securities are included as a separate line
item in the consolidated balance sheet and distributions payable are treated as
interest expense in the consolidated statements of operations. The Trust
preferred securities qualify as Tier I capital under regulatory capital
guidelines.
(7) FHLB ADVANCES
FHLB advances are summarized as follows:
December 31, 2001 June 30, 2001
---------------------------- ---------------------------
Weighted Weighted
Date of average interest average interest
maturity Amount Rate Amount Rate
---------- -------- ---------------- ------- ----------------
2002 $ 24,000 3.73% 82,009 5.58%
2003 42,500 6.28 33,958 6.15
2004 25,000 6.45 40,500 6.63
2005 45,000 6.27 20,000 6.50
2006 21,000 4.77 15,000 6.67
2007 20,000 6.37 20,000 6.37
Thereafter 49,000 5.80 20,657 5.64
-------- ---- ------- ----
$226,500 5.79% 232,124 6.07%
======== ==== ======= ====
Six months ended Year ended
December 31, June 30,
2001 2001
---------------- ----------
Maximum amount of outstanding FHLB advances at any month-end $ 235,322 236,712
Average amount of outstanding FHLB advances during the year 229,314 221,075
FHLB advances are collateralized by otherwise unencumbered permanent residential
mortgages and investment grade securities.
The Corporation has $125 million in fixed rate advances as of December 31,
2001 where the FHLB has the option to convert these advances to variable rate
advances after a specified period.
At December 31, 2001, the Bank had an unused line of credit from the
FHLB-Seattle of $40.2 million. The Bank's credit line with the FHLB-Seattle is
35% of total assets or up to approximately $267 million.
(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND LINES OF CREDIT
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) that are treated as financing arrangements.
Accordingly, the obligations to repurchase securities sold are reflected as a
liability in the consolidated balance sheets, and the securities underlying the
agreements remain in the asset accounts. The securities underlying the
agreements are under the Corporation's control and are held by nationally known
government security dealers who are recognized as primary dealers by the Federal
Reserve Board, or other investment banking firms approved by the Corporation's
Board of Directors. Such agreements typically have maturities ranging from 30 to
89 days.
Securities sold under agreements to repurchase the same securities consist of
agency notes and/or mortgage-backed securities summarized as follows:
Underlying securities
-------------------------
Weighted Book value,
average including
Balance interest accrued Market
outstanding rate interest value
------------ -------- ----------- -------
December 31, 2001 $ 49,792 2.16 50,625 49,723
June 30, 2001 36,920 4.02 40,308 39,728
Financial data pertaining to reverse repurchase agreements follows:
Six months ended Year ended
December 31, June 30,
2001 2001
---------------- ----------
Maximum amount of outstanding agreements at any month-end $ 49,792 54,237
Average amount of outstanding agreements during the year 38,264 34,231
The Corporation has Fed Funds borrowing lines with two of its correspondent
banks. During the fiscal year neither of these lines were used.
(9) FEDERAL INCOME TAXES
Federal income tax expense includes the following components:
Six months ended Years ended
December 31, June 30,
------------------------ ----------------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
Current $ 1,696 1,033 1,888 2,398 2,253
Deferred (98) 49 469 (486) (136)
------- ------- ------- ------- -------
$ 1,598 1082 2,357 1,912 2,117
======= ======= ======= ======= =======
The provision for Federal income tax expense approximates the amount computed
by applying the "expected" Federal income tax rate of 34% to income before
Federal income taxes as there are no significant reconciling items.
The Bank has qualified under provisions of the Internal Revenue Code to
compute federal income taxes after deductions of additions to the bad debt
reserves. At December 31, 2001, the Company had a taxable temporary difference
of approximately $1.3 million that arose before 1988 (base-year amount). In
accordance with Statement of Financial Accounting Standards No. 109, a deferred
tax liability has not been recognized for the temporary difference. Management
does not expect this temporary difference to reverse in the foreseeable future.
The following table presents major components of the net deferred tax
liability resulting from differences between financial reporting and tax bases
at December 31, 2001 and June 30, 2001:
December 31, June 30,
2001 2001
------------ --------
Deferred tax assets:
Loans $ 1,679 1,455
------- -------
Gross deferred tax assets $ 1,679 1,455
Deferred tax liabilities:
Deferred loan fees (882) (843)
Securities available-for-sale (79) (182)
Premises and equipment (236) (271)
FHLB stock (1,720) (1,566)
Other (39) (70)
------- -------
Gross deferred tax liabilities (2,956) (2,932)
------- -------
Net deferred tax asset (liability) $(1,277) (1,477)
======= =======
A valuation allowance for deferred tax assets was not considered necessary at
December 31, 2001 or June 30, 2001. Management believes the Corporation will
fully realize its total deferred income tax assets as of December 31, 2001 and
June 30, 2001, based upon its total deferred income tax liabilities, previous
taxes paid, and its current and expected future levels of taxable income.
(10) EARNINGS PER SHARE
The following table presents EPS information:
Six months ended December 31, Years ended June 30,
---------------------------- ------------------------------------------
2001 2000 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(unaudited)
Net income $ 3,150 2,099 4,566 3,712 4,104
Common shares
outstanding (basic) 6,172,489 6,065,332 6,081,969 6,042,084 5,962,315
Effect of dilutive
stock options 292,978 346,167 345,605 481,342 589,882
---------- ---------- ---------- ---------- ----------
Common shares
outstanding (diluted) 6,465,467 6,411,499 6,427,574 6,523,426 6,552,197
========== ========== ========== ========== ==========
EPS, basic 0.51 0.35 0.75 0.61 0.69
EPS, diluted 0.49 0.33 0.71 0.57 0.63
For purposes of calculating basic and diluted earnings per share, the
numerator of net income is the
same. There were 138,124, 301,729, 207,567, 98,494, and 32,312 outstanding
options to purchase common stock at December 31, 2001, December 31, 2000, June
30, 2001, 2000 and 1999, respectively, that are considered antidilutive and have
been excluded from the above calculation. Antidilutive options have an exercise
price which is greater than the current market price of the stock.
(11) STOCKHOLDERS' EQUITY
(a) Restrictions on Dividends
Current regulations allow the Bank to pay dividends on its stock if its
regulatory capital would not thereby be reduced below the amount required for
the statutory capital requirements set by the (FDIC) Federal Deposit
Insurance Corporation.
(b) Regulatory Capital
At December 31, 2001, banking regulations required institutions to have a
minimum regulatory tangible and core (or leverage) capital equal to 1.5% and
3%, respectively, of adjusted total assets, and Tier I and total risk-based
capital (RBC) equal to 4% and 8%, respectively, of risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
instituted a risk-based assessment system that defined five capital tiers:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Under these regulations, a
well-capitalized institution must have a Tier I RBC ratio of at least 6%, a
total capital ratio of at least 10% and a leverage ratio of at least 5% and
not be subject to a capital directive order. At December 31, 2001, the Bank
was in compliance with the regulatory requirements for well-capitalized
institutions. As of November 30, 2001, the most recent notification from the
FDIC categorized the Bank as well-capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
Minimum
requirements
for capital Well-capitalized
Actual adequacy requirements
----------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2001:
Total risk-based capital to
risk-weighted assets (1) $62,426 11.98 41,702 8.00 52,128 10.00
Tier I (core) capital to
risk-weighted assets 56,122 10.77 20,851 4.00 31,277 6.00
Tier I (core) capital to
adjusted total assets 56,122 7.54 29,763 4.00 37,204 5.00
June 30, 2001:
Total risk-based capital to
risk-weighted assets (1) $58,039 11.34 40,951 8.00 51,188 10.00
Tier I (core) capital to
risk-weighted assets 53,019 10.36 20,475 4.00 30,713 6.00
Tier I (core) capital to adjusted
total assets 53,019 7.25 29,246 4.00 36,558 5.00
(1) The FDIC requires institutions to maintain Tier I capital of not less
than one-half of total capital.
(c) Stock Repurchase Plan
On June 5, 2000, the Corporation commenced a stock repurchase program. The
Board of Directors authorized the repurchase of up to 300,000 shares of the
company's stock, which is approximately 5% of the outstanding common shares.
To date the Corporation has repurchased 132,092 shares for $972, which
represents 2% of the common stock.
(12) MORTGAGE SERVICING RIGHTS
A summary of capitalized mortgage servicing rights, included in other assets, at
December 31, 2001 and June 30, 2001 follows:
December 31, 2001 June 30, 2001
----------------- -------------
Balance at beginning of period $ 658 899
Additions 4. 27.
Amortization (135) (268)
Allowance for losses (30) --
----- -----
Balance at end of period $ 497 658.
(13) EMPLOYEE BENEFIT PLANS
(a) Savings Plan
The Corporation maintains a savings plan under section 401(k) of the
Internal Revenue Code, covering substantially all full-time employees. Under
the plan, employee contributions are matched by the Corporation at a rate of
50% of the first five percent contributed. Such matching becomes vested over
a period of five years of credited service. Employees may make investments
in various stock, fixed income or money market plans, or may purchase stock
in the Corporation. The Corporation contributed $64, $106, $75 and $82 to
the plan for the six months ended December 31, 2001 and the years ended June
30, 2001, 2000, and 1999, respectively.
(b) Employee Stock Ownership Plan
The Corporation established an employee stock ownership plan (ESOP) which
became effective on July 1, 1992 for employees of the Corporation, the Bank,
and its subsidiary who have at least one year of continuous service. The
Corporation pays all ESOP expenses. Shares purchased by the ESOP are held in
a suspense account for allocation among the participants. Benefits become 20%
vested after the third year of service with an additional 20% vesting each
year thereafter until 100% vesting after seven years. Allocations to
individual participant's accounts are based on total compensation during the
year. Forfeitures are reallocated annually among remaining participating
employees. For the six months ended December 31, 2001, and the years ended
June 30, 2001, 2000, and 1999 the Corporation contributed $55, $108, $175,
and $240 respectively, to the ESOP, which is invested in Cascade Financial
Corporation stock. Allocated and unallocated shares at December 31, 2001,
were 173,586 and 0, respectively. The Corporation has the right of first
refusal to purchase the allocated shares of separated employees.
(c) Employee Stock Purchase Plan
The Corporation maintains an employee stock purchase plan, under the terms of
which 167,847 shares of common stock have been authorized for issuance. The
plan allows employees of the Corporation with three months of service the
opportunity to purchase common stock through accumulated salary deductions
during each offering period. On the first day of each six month offering
period (January 1 and July 1 of each year), eligible employees who elect to
participate are granted options to purchase a limited number of shares and
unless the participant withdraws from the plan, the option is automatically
exercised on the last day of each offering period. The aggregate number of
shares to be purchased in any given offering is determined by dividing the
accumulated salary deduction for the period by the lower of 85% of the market
price of a common share at the beginning or end of an offering period.
(d) Stock Options
The Corporation maintains stock option plans pursuant to which shares of
Common Stock have been authorized for issuance to certain key employees and
directors of the Corporation and its subsidiaries upon exercise of stock
options. The options granted under these plans are, in general, exercisable
under a vesting schedule whereby all options become exercisable over seven
years, and expire not more than ten years after the date of grant.
All options granted have limited rights that enable a holder upon a change
in control of the Corporation, to elect to receive cash equal to the
difference between the exercise price of the option and the fair market value
of the common stock on the date of exercise. At December 31, 2001 and June
30, 2001, 484,800 and 471,653 shares, respectively, were fully exercisable.
The Corporation applies Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees" in accounting for its stock option
plans. Had compensation cost on the fair value at the grant dates for the
Corporation's stock option plan been determined consistent with SFAS 123, the
Corporation's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
Six months ended December 31, Years ended June 30,
----------------------------- ---------------------------------------
2001 2000 2001 2000 1999
--------- ----- ----- ----- -----
(unaudited)
Net income
As reported $ 3,150 2,099 4,566 3,712 4,104
Pro forma 3,087 2,046 4,439 3,532 3,956
Net income per common share
Basic
As reported 0.51 0.35 0.75 0.61 0.69
Pro forma 0.50 0.34 0.73 0.58 0.66
Diluted
As reported 0.49 0.33 0.71 0.57 0.63
Pro forma 0.48 0.32 0.69 0.54 0.60
The fair value of options granted under the Corporation's stock option
plan was $3.45, $3.57, $2.40 and $7.25 respectively for the six months ended
December 31, 2001, and the years ended June 30, 2001, 2000, and 1999. The
fair value is estimated on the date of grant with the following weighted
average assumptions used for December 31, 2001, and June 30, 2001, 2000, and
1999: risk-free interest rate of 1.75%, 4.75%, 6.50%, and 5.24%, an expected
life of eight years, no expected cash dividends, and a volatility factor of
24%.
Changes in total options outstanding for the period ended December 31,
2001, and the years ended June 30, 2001, 2000, 1999 were as follows:
Shares Weighted average
under exercise price of
option option shares
------- -----------------
Six months ended December 31, 2001
----------------------------------
Outstanding at beginning of period 834,672 $ 5.85
Granted during period 13,445 8.11
Exercised during period (54,429) 3.33
10% stock dividend 73,987 --
Forfeited during period (12,459) 8.19
-------
Outstanding at end of period 855,216 $ 5.49
=======
Year ended June 30, 2001
----------------------------------
Outstanding at beginning of year 864,272 $ 5.02
Granted during year 210,080 7.49
Exercised during year (162,318) 2.01
Forfeited during year (77,362) 9.07
-------
Outstanding at end of year 834,672 5.85
=======
Year ended June 30, 2000
----------------------------------
Outstanding at beginning of year 848,345 $ 4.28
Granted during year 122,442 9.49
Exercised during year (77,575) 2.19
Forfeited during year (28,940) 9.86
-------
Outstanding at end of year 864,272 5.02
=======
Year ended June 30, 1999
----------------------------------
Outstanding at beginning of year 684,656 $ 3.87
Granted during year 132,949 10.73
Exercised during year (98,149) 2.85
Five-for-four stock split 151,905 --
Forfeited during year (23,016) 7.30
-------
Outstanding at end of year 848,345 4.28
=======
Financial data pertaining to outstanding stock options were as follows:
At December 31, 2001
------------------------------ Weighted
Weighted average
Weighted average exercise
average exercise Number of price of
Ranges of Number of remaining price of exercisable exercisable
exercise option contractual option option option
prices shares life shares shares shares
----------- -------- ----------- -------- ----------- -----------
$ 1.15-2.35 203,738 1.06 $ 1.40 203,738 $ 1.40
2.76-6.33 248,401 3.69 4.67 213,493 4.45
6.48-7.05 191,331 8.60 6.91 14,793 7.54
7.27-8.35 81,177 8.20 7.64 8,509 7.77
9.00-10.82 130,569 7.01 10.03 41,712 9.86
------- ------ ------ ------- ------
855,216 5.10 $ 5.49 482,245 $ 3.78
======= ====== ====== ======= ======
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates presented below are subjective in nature, involve
uncertainties and matters of significant judgment and, therefore, are not
necessarily indicative of the amounts the Corporation could realize in a current
market exchange. The Corporation has not included certain material items in its
disclosure, such as the value of the long-term relationships with the
Corporation's lending and deposit customers since this is an intangible and not
a financial instrument. Additionally, the estimates do not include any tax
ramifications. There may be inherent weaknesses in any calculation technique,
and changes in the underlying assumptions used, including discount rates and
estimates of future cash flows that could materially affect the results. For all
of these reasons, the aggregation of the fair value calculations presented
herein do not represent, and should not be construed to represent, the
underlying value of the Corporation.
The following table presents a summary of the fair value of the Corporation's
financial instruments:
December 31, June 30,
2001 2001
------------------------ ----------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
-------- ---------- ------- ----------
Financial assets:
Cash and cash equivalents $ 11,622 11,622 13,880 13,880
Securities available-for-sale 150,338 150,338 129,213 129,213
Securities held-to-maturity 5,989 5,883 6,592 6,456
Loans, net 576,226 589,675 564,869 565,467
Servicing rights 497 551 658 823
Financial liabilities:
Deposit accounts 419,980 419,824 401,915 397,936
Borrowings 276,292 289,156 269,044 274,800
Trust preferred securities 10,000 10,000 10,000 10,000
Cash and Cash Equivalents
The carrying amount represents fair value.
Securities including mortgage backed securities
Fair values are based on quoted market prices or dealer quotations.
Loans
Fair values are estimated using current market interest rates to discount future
cash flows for each of fifteen different loan segments. Interest rates used to
discount the cash flows are based on U.S. Treasury yields or other market
interest rates with appropriate spreads for each segment. The spread over the
treasury yields or other market rates is used to account for liquidity, credit
quality and higher servicing costs. Prepayment rates are based on expected
future prepayment rates or where appropriate and available, market prepayment
rates.
Servicing Rights
Fair values for mortgage servicing rights are based on quoted market prices
discounted for costs to sell.
Deposit Accounts
The fair value of deposits with no stated maturity, such as checking accounts,
money market deposit accounts and savings accounts, equals the amount payable on
demand. The fair value of certificates of deposits is calculated based on the
discounted value of contractual cash flows. The discount rate is equal to the
rate currently offered on similar products.
Borrowings
The fair value is calculated based on the discounted cash flow method, adjusted
for market interest rates and terms to maturity.
Trust Preferred Securities
The fair value is based on the discounted cash flow method, adjusted for market
interest rates and terms to maturity. Commitments to Extend Credit and Standby
Letters of Credit The fair value of commitments to extend credit can be
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. It is not practicable to estimate fair
value on these instruments.
(15) CONTINGENCIES
The Corporation is a defendant in various legal proceedings arising in
connection with its business. It is the opinion of management that the financial
position and the results of operations of the Corporation will not be materially
adversely affected by the final outcome of these legal proceedings and that
adequate provision has been made in the accompanying consolidated financial
statements.
At periodic intervals, the Washington State Department of Financial
Institutions and the Federal Deposit Insurance Corporation routinely examine the
Corporation's financial statements as part of their legally prescribed oversight
of the thrift industry. Based on these examinations, the regulators can direct
that the Corporation's financial statements be adjusted in accordance with their
findings.
(16) CONDENSED FINANCIAL INFORMATION OF CASCADE FINANCIAL CORPORATION
Following are the condensed financial statements of Cascade Financial
Corporation (parent only) for the period indicated:
Balance sheet
---------------------------------
December 31, 2001 June 30, 2001
----------------- -------------
Assets:
Cash $ 518 679
Investment in subsidiary 56,123 53,083
Other assets 1,166 871
------- -------
$57,807 54,633
======= =======
Liabilities and stockholders' equity:
Other liabilities $ 283 389
Trust preferred securities 10,000 10,000
Stockholders' equity 47,524 44,244
------- -------
$57,807 54,633
======= =======
Statement of operations
---------------------------------------------------------------
Six months ended Years ended
December 31, June 30,
--------------------- -----------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
Equity in undistributed net
income of the subsidiary $ 3,740 2,548 5,462 4,124 4,217
Interest income -- Trust
preferred securities 17 -- 42 -- --
Operating expenses (330) (88) (234) (240) (171)
Interest expense-- Trust
preferred securities (581) (593) (1,166) (388) --
------- ------- ------- ------- -------
Income before Federal
income taxes 2,846 1,867 4,104 3,496 4,046
Income tax benefit 304 232 462 216 58
------- ------- ------- ------- -------
Net income $ 3,150 2,099 4,566 3,712 4,104
======= ======= ======= ======= =======
Statement of cash flows
---------------------------------------------------------------
Six months ended Year ended
December 31, June 30,
--------------------- -----------------------------------
2001 2000 2001 2000 1999
------- ------- ------- ------- -------
(unaudited)
Cash flows from operating activities:
Net income $ 3,150 2,099 4,566 3,712 4,104
Adjustments to reconcile net income to
net cash (used in) operating activities:
Equity in net income of subsidiaries (3,740) (2,548) (5,462) (4,124) (4,217)
(Increase) decrease in other assets (295) 62 85 (913) (41)
(Decrease) increase in other liabilities (106) 46 9 380 (18)
------- ------- ------- ------- -------
Net cash used in operating activities (991) (341) (802) (945) (172)
Cash flows from investing activities:
Dividends received from subsidiaries 700 800 1,700 -- --
Investment in subsidiary -- -- -- (9,709) --
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities 700 800 1,700 (9,709) --
Cash flows from financing activities:
Repurchase of common stock (156) (584) (723) -- --
Proceeds from exercise of stock options 286 210 446 248 375
Proceeds from trust preferred offering -- -- -- 10,000 --
------- ------- ------- ------- -------
Net cash provided by financing activities 130 (374) (277) 10,248 375
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents (161.) 85 621 (406.) 203
------- ------- ------- ------- -------
Cash and cash equivalents:
Beginning of year 679 58 58 464 261
------- ------- ------- ------- -------
End of year $ 518 143 679 58 464
======= ======= ======= ======= =======
(17) LINES OF BUSINESS
The Corporation's sole operating subsidiary is Cascade Bank, which is managed
along five major lines of business: business banking, retail banking,
construction lending, income property lending and residential lending. The
administrative group, although not considered a line of business, is responsible
for the management of investments, interest rate risk, marketing, data
processing and regulatory and stockholder reporting. The financial performance
of these business lines is measured by the Corporation's profitability reporting
processes, which utilize various management accounting techniques to ensure that
each business line's financial results reflect the underlying performance of
that business.
Each line of business segment is managed by a senior executive. Back office
support is provided to each segment through executives responsible for
information systems, finance and administration.
The principal activities conducted by Business Banking are the origination
and servicing of commercial business loans and associated merchant services.
Retail Banking includes all deposit products, with their related fee income, and
all consumer loan products such as home equity and installment loans and credit
card products. The Construction unit provides financing to builders and
developers for residential construction and land acquisition and development.
The Income Property unit originates loans secured by multifamily properties and
commercial real estate. The Residential unit's activities are the origination of
single family loans and the associated loan servicing activities.
The Bank's reportable business segments are the strategic lines of business
noted above, which are managed by the Management Committee, under the direction
of the President and Chief Executive Officer. The Management Committee, which is
the senior decision making group of the Bank, is comprised of eight members
including the President and Chief Executive Officer. To better assess the
contribution of its various business lines, the Bank generates segment results
that include balances directly attributable to business line activities.
Expenses or activities not directly controlled by business unit managers are
allocated to the Administrative unit. In this way, management can assess the
performance of a particular business. The bank is constantly analyzing its line
of business performance and developing better ways to measure profitability.
The accounting policies of the segments are the same as those described in
"Note 1: Summary of Significant Accounting Policies." Direct revenues and
expenses are allocated to business segments in determining their net income.
Corporate overhead, centralized support costs and other costs are assigned to
the Administration unit. The Corporation evaluates performance based on net
income of the respective business segments. Depreciation is allocated to the
segments based upon the utilization of the assets by
the segments. All depreciating assets are included in Administration's total
assets.
The organizational structure of the Bank and the allocated methodologies it
employs result in business line financial results that are not necessarily
comparable across companies. As such, the Bank's business line performance may
not be directly comparable with similar information from other financial
institutions.
Following are the condensed financial statements for the Corporation's lines
of business for the periods indicated:
Six months ended December 31, 2001
------------------------------------------------------------------------------------------
Resi- Con- Income Admin-
Business dential struction property Retail istration Total
--------- ------- --------- -------- ------ --------- ------
Condensed income
statement
Net interest income
after provision
for loan losses $ 2,085 1,244 1,968 1,650 746 2,699 10,392
Other income 21 410 -- 6 656 724 1,817
Other expense 975 948 495 800 820 3,423 7,461
--------- ------- ----- ----- ----- ----- ------
Income before
income taxes 1,131 706 1,473 856 582 -- 4,748
Federal income taxes 380 238 496 288 196 -- 1,598
--------- ------- ----- ----- ----- ----- ------
Net income $ 751 468 977 568 386 -- 3,150
========= ======= ====== ===== ===== ===== =====
At December 31, 2001
Total Assets $ 125,342 152,727 75,911 172,671 58,381 176,981 762,013
Year ended June 30, 2001
------------------------------------------------------------------------------------------
Resi- Con- Income Admin-
Business dential struction property Retail istration Total
--------- ------- --------- -------- ------ --------- ------
Condensed income
statement
Net interest income
after provision
for loan losses $ 3,573 2,713 3,824 2,687 1,331 4,453 18,581
Other income 73 533 -- 5 1,212 820 2,643
Other expense 1,992 2,647 809 1,724 1,856 5,273 14,301
--------- ------- ----- ----- ----- ----- ------
Income before
income taxes 1,654 599 3,015 968 687 -- 6,923
Federal income taxes 562 204 1,025 329 237 -- 2,357
--------- ------- ----- ----- ----- ----- ------
Net income $ 1,092 395 1,990 639 450 -- 4,566
========= ======= ====== ===== ===== ===== =====
At June 30, 2001
Total Assets $ 113,707 161,729 58,796 164,274 60,406 174,155 733,067
Year ended June 30, 2000
------------------------------------------------------------------------------------------
Resi- Con- Income Admin-
Business dential struction property Retail istration Total
--------- ------- --------- -------- ------ --------- ------
Condensed income
statement
Net interest income
after provision
for loan losses $ 3,330 3,811 2,934 3,678 1,253 2,959 17,965
Other income 43 706 -- 8 1,135 384 2,276
Other expense 1,800 5,022 746 1,837 1,869 3,343 14,617
--------- ------- ----- ----- ----- ----- ------
Income (loss) before
income taxes 1,573 (505) 2,188 1,849 519 -- 5,624
Federal income taxes 535 (172) 744 629 176 -- 1,912
--------- ------- ----- ----- ----- ----- ------
Net income (loss) $ 1,038 (333) 1,444 1,220 343 -- 3,712
========= ======= ====== ===== ===== ===== =====
At June 30, 2000
Total Assets $ 86,298 175,911 56,385 167,041 62,060 128,481 676,176
(18) SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Quarter ended
-----------------------------
Sept 30 Dec 31
2001 2001
----------- --------
Interest income $ 13,937 13,537
Interest expense 8,614 7,658
----------- --------
Net interest income 5,323 5,879
Provision for loan losses 270 540
Other income 896 921
Other expense 3,708 3,753
----------- --------
Income before Federal income taxes 2,241 2,507
Federal income taxes 745 853
----------- --------
Net income $ 1,496 1,654
=========== ========
Earnings per share, basic $ 0.24 0.27
Earnings per share, diluted 0.23 0.26
Quarter ended
----------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
2000 2000 2001 2001
----------- -------- ------- -------
Interest income $ 13,840 14,439 14,318 14,092
Interest expense 9,195 9,725 9,277 8,931
----------- -------- ------- -------
Net interest income 4,645 4,714 5,041 5,161
Provision for loan losses 210 210 290 270
Other income 516 623 793 711
Other expense 3,393 3,505 3,722 3,681
----------- -------- ------- -------
Income before Federal income taxes 1,558 1,622 1,822 1,921
Federal income taxes 530 551 623 653
----------- -------- ------- -------
Net income $ 1,028 1,071 1,199 1,268
=========== ======== ======= =======
Earnings per share, basic $ 0.17 0.18 0.20 0.21
Earnings per share, diluted 0.16 0.17 0.18 0.20
Quarter ended
----------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
1999 1999 2000 2000
----------- -------- ------- -------
Interest income $ 11,016 12,053 12,386 13,126
Interest expense 6,339 7,375 7,719 8,414
----------- -------- ------- -------
Net interest income 4,677 4,678 4,667 4,712
Provision for loan losses 210 140 210 210
Other income 486 531 596 664
Other expense 3,476 3,533 3,775 3,833
----------- -------- ------- -------
Income before Federal income taxes 1,477 1,536 1,278 1,333
Federal income taxes 501 522 433 456
----------- -------- ------- -------
Net income $ 976 1,014 845 877
=========== ======== ======= =======
Earnings per share, basic $ 0.16 0.17 0.14 0.14
Earnings per share, diluted 0.15 0.15 0.13 0.14
Quarter ended
----------------------------------------------------------------
Sept 30 Dec 31 Mar 31 June 30
1998 1998 1999 1999
----------- -------- ------- -------
Interest income $ 9,020 9,313 9,612 10,260
Interest expense 5,245 5,395 5,398 5,918
----------- -------- ------- -------
Net interest income 3,775 3,918 4,214 4,342
Provision for loan losses 150 150 127 --
Other income 536 607 1,148 546
Other expense 2,823 2,771 3,211 3,633
----------- -------- ------- -------
Income before Federal income taxes 1,338 1,604 2,024 1,255
Federal income taxes 455 545 691 426
----------- -------- ------- -------
Net income $ 883 1,059 1,333 829
=========== ======== ======= =======
Earnings per share, basic $ 0.15 0.18 0.22 0.14
Earnings per share, diluted 0.14 0.16 0.20 0.13
ANNUAL STOCKHOLDERS' MEETING
The Annual Stockholders' meeting will be held at the Everett Golf & Country
Club, 1500 52nd Street SE, Everett, WA, on Wednesday May 8th, 2002 at 6:30 p.m.
Pacific Time.
CORPORATE INFORMATION:
www.cascadebank.com
Main office
2828 Colby Avenue
Everett, Washington
(425) 339-5500
Bellevue
200 108th Avenue NE
Bellevue, Washington
(425) 455-2300
Clearview
17512 SR 9 SE
Snohomish, Washington
(360) 668-1243
Crossroads
15751 NE 15th Street
Bellevue, Washington
(425) 643-6200
Everett/Broadway
2602 Broadway
Everett, Washington
(425) 259-1243
Everett/Evergreen Way
6920 Evergreen Way
Everett, Washington
(425) 353-1243__
Harbour Pointe
11700 Mukilteo Speedway
Mukilteo, Washington
(425) 290-7767
Issaquah
305 Front Street N
Issaquah, Washington
(425) 391-5500
Lake Stevens
8915 Market Place
Everett, Washington
(425) 334-8880
Lynnwood
19419 Highway 99
Lynnwood, Washington
(425) 775-6666
Marysville
815 State Avenue
Marysville, Washington
(360) 659-7614
North Marysville
3711 88th Street NE
Marysville, Washington
(360) 651-9200
Smokey Point
3532 172nd Street NE
Arlington, Washington
(360) 653-1900
Woodinville
17641 Garden Way NE
Woodinville, Washington
(425) 481-0820
All Shareholders are encouraged to read Cascade's Form 10-K for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission (the
"SEC"). The Form 10-K includes the significant risk factors that could affect
Cascade's projections and future operating performance. This document is
qualified in its entirety by the information contained in the Form 10-K.
The Form 10-K, together with all other information filed by Cascade with the
SEC, is available on the Internet at the SEC's web site at http://www.sec.gov.
The Form 10-K will be furnished by Cascade, upon receipt of written request
addressed to Cascade Financial Corporation, 2828 Colby Avenue, Everett, WA
98201.
Stock Transfer Agent
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606
(800) 356-2017
(800) 231-5469 TDD for Hearing Impaired
(201) 329-8660 Foreign Shareholders
(201) 329-8354 TDD Foreign Shareholders
www.melloninvestor.com
Auditors
KPMG LLP
3100 Two Union Square
601 Union Street
Seattle, Washington 98101
Legal Counsel
Keller Rohrback, LLP
1201 Third Avenue, Suite 3200
Seattle, WA 98101-3052
Special Counsel
Anderson Hunter, PS
2707 Colby Avenue, Suite 1001
Everett, Washington 98201
Selected Financial Data
And
Management Discussion and Analysis
December 31, 2001
[CASCADE FINANCIAL CORPORATION LOGO]
CASCADE FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
For the six month period For the year
ended December 31, ended June 30,
2001 2000 2001 2000 1999 1998 1997(1)
------------------------ -------------------------------------------------------
(unaudited)
Interest income $27,474 28,279 56,689 48,582 38,205 33,916 31,568
Interest expense 16,272 18,919 37,128 29,847 21,956 20,118 19,924
Net interest income 11,202 9,360 19,561 18,735 16,249 13,798 11,644
Provision for loan losses 810 420 980 770 427 246 810
Net interest income after
provision for loan
losses 10,392 8,940 18,581 17,965 15,822 13,552 10,834
Other income 1,817 1,138 2,643 2,276 2,837 2,458 1,942
Other expense 7,461 6,897 14,301 14,617 12,438 10,729 10,897
Income before Federal
income taxes 4,748 3,181 6,923 5,624 6,221 5,281 1,879
Net income 3,150 2,099 4,566 3,712 4,104 3,525 2,176
Net income per common
share, basic(2) 0.51 0.35 0.75 0.61 0.69 0.60 0.38
Net income per common
share, diluted(2) 0.49 0.33 0.71 0.57 0.63 0.55 0.34
Book value per share(2) 7.70 6.70 7.25 6.12 5.71 5.33 4.75
At December 31, At June 30,
2001 2000 2001 2000 1999 1998 1997(1)
----------------------- ---------------------------------------------------------
(unaudited)
Assets $762,013 716,129 733,067 676,176 557,086 444,155 434,162
Loans, net 576,226 548,722 564,869 539,972 455,736 384,734 341,201
Cash and securities 167,949 138,062 149,685 117,655 84,611 44,103 79,313
Deposits 419,980 395,976 401,915 398,507 361,786 312,518 304,205
Borrowings 59,792 47,265 46,920 15,787 5,951 13,391 19,483
FHLB Advances 226,500 222,977 232,124 215,656 141,996 73,436 74,659
Shareholders' equity 47,667 41,240 44,597 37,256 34,239 31,418 27,543
Non-performing loans 1,999 2,300 1,315 573 1,201 1,921 1,069
Financial Ratios Financial Ratios
For the six month period For the year
ended December 31, ended June 30,
2001 2000 2001 2000 1999 1998 1997(1)
------------------------ --------------------------------------------------------
(unaudited)
Return on assets 0.85% 0.60% 0.64% 0.60% 0.83% 0.82% 0.33%
Return on equity 13.63% 10.91% 11.26% 10.37% 12.21% 12.05% 5.26%
Net interest margin 3.10% 2.75% 2.84% 3.13% 3.44% 3.40% 2.90%
Efficiency ratio 57.31% 65.70% 64.41% 69.57% 65.17% 65.99% 80.21%
Average shareholders'
equity to average
assets 6.25% 5.45% 5.71% 5.78% 6.77% 6.89% 6.25%
Total risk based capital
to risk weighted assets 11.98% 11.48% 11.34% 11.69% 10.17% 11.35% 11.4%
Tier 1 capital to
adjusted total assets 7.54% 7.14% 7.35% 7.38% 6.36% 7.02% 6.33%
(1) Amounts for 1997 have been restated to reflect the acquisition of AmFirst
Bancorporation. The 1997 SAIF special assessment of $1.2 million is
excluded.
(2) Per common share data is retroactively adjusted to reflect all stock splits
and stock dividends.
- 1 -
MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion is provided for the consolidated financial
statements of Cascade Financial Corporation (the "Company") at December 31,
2001. The purpose of this discussion is to focus on significant factors
concerning the Company's financial condition and results of operations, and to
provide a more comprehensive review of the Company's operating results and
financial condition than can be obtained from reading the consolidated financial
statements alone. This discussion should be read with the consolidated financial
statements and the notes thereto.
In addition to historical information, this report 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 as of the date of the
statement. Cascade Financial 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 Company files
from time to time with the Securities and Exchange Commission.
FINANCIAL CONDITION
Earnings
Cascade Financial Corporation earned net income for the six month period
ended December 31, 2001 of $3.2 million or $0.49 per fully diluted share, an
increase of 52% over the $2.1 million or $0.33 per fully diluted share for the
same period of 2000. Higher net interest income due to increased earning assets
and an increase in net interest margin contributed to the improved results. The
Company earned net income of $4.6 million or $0.71 per fully diluted share, $3.7
million or $0.57 per fully diluted share, and $4.1 million or $0.63 per fully
diluted share for the fiscal years ended June 30, 2001, 2000, and 1999,
respectively.
Total Assets
The Company's total assets at December 31, 2001 were $762.0 million,
compared to $733.1 million at June 30, 2001, an increase of 4%, due to the
increase in net loans and securities available for sale. The Company's total
assets at June 30, 2001, 2000, and 1999 were $733.1 million, $676.2 million, and
$557.1 million, respectively.
Net Loans
Net loans were $576.2 million at December 31, 2001, a 2% increase over the
$564.9 million at June 30 2001. This increase was due primarily to an increase
in total business loans which increased from $113.7 million at June 30, 2001 to
$125.3 million at December 31, 2001. For the same periods, total single-family
residential loans decreased from $165.0 million at June 30, 2001 to $152.7
million at December 31, 2001. Management anticipates this trend of increasing
business loans and decreasing single-family residential loans will continue as
the conversion from a thrift institution to a commercial bank continues.
Deposit Accounts
Deposit accounts totaled $420.0 million at December 31, 2001, a 4.5%
increase over the $401.9 million at June 30, 2001. The bank historically had
paid interest rates on deposits at the higher end of the
- 2 -
competitive range of financial institutions in its market area, but in an
attempt to lower the absolute and relative cost of funds, the bank has recently
modified its deposit pricing strategy by pricing its deposits in the middle of
that range. In addition, as its business banking activity increases, the bank
expects to increase its non-interest bearing accounts through the growth of
commercial checking accounts.
Return on Average Equity
Return on average equity for the six month period ended December 31, 2001
was 13.63% compared to 10.91% for the same period of 2000. Return on average
equity for the fiscal years ended June 30, 2001, 2000, and 1999 were 11.26%,
10.37%, and 12.21%, respectively.
RESULTS OF OPERATIONS
Net Interest Income
The largest component of the Company's earnings is net interest income. Net
interest income is the difference between interest earned on earning assets
(primarily loans, interest bearing deposits with banks, and investment
securities) and the interest expense associated with interest bearing
liabilities (deposits and borrowings). The volume of and yields earned on
earning assets and the volume of and the rates paid on interest bearing
liabilities determine net interest income. Interest earned and interest paid is
also affected by general economic conditions, including the demand for loans,
availability of deposits, market rates of interest, government policies, and the
action of regulatory authorities. The Company's operations are sensitive to
changes in interest rates and the resulting impact on net interest income.
Interest rates decreased in 2001 and generally resulted in a greater reduction
in funding costs.
Net interest income for the six months ended December 31, 2001 increased by
19%, or $1.8 million, to $11.2 million from $9.4 million for the six month
period ended December 31, 2000. The improvement in net interest income from the
six month period in 2000 was primarily due to increased earning assets and an
increase in net interest margin. Net interest margin is net interest income
expressed as a percent of average earning assets, and represents the difference
between the yield on earning assets and the composite interest rate paid on all
sources of funds.
Net interest income for the fiscal year ended June 30, 2001 increased by
4.4% or $826,000 to $19.6 million from $18.7 million for the same period in 2000
and $16.2 million for the same period 1999. These increases resulted from growth
in earning assets and an increase in the average asset yield, which offset the
contraction in the net interest margin. For the fiscal year ended June 30, 2001,
the increase in net interest income was constrained by the escalation of market
interest rates during the first half of the fiscal year that was not fully
offset by the decrease in rates in the second half of the year. Also, net
interest income was adversely impacted by increased interest expense associated
with a full year's interest on the trust preferred securities. The improvement
in net interest income from June 30, 2000 over 1999 was primarily due to growth
in earning assets.
Average earning assets increased 6.1% to $722.6 million for the six months
ended December 31, 2001 from $681.2 million for the six months ended December
31, 2000. Average earning assets increased to $689.5 million for the fiscal year
ended June 30, 2001, from $598.1 million for the same period in 2000 and $472.7
million for the same period in 1999. Average earning assets increased 15.3% and
average loans increased 8.2% in fiscal 2001 compared to fiscal 2000.
The net interest margin for the six months ended December 31, 2001 was
3.10%, compared to 2.75% for the six months ended December 31, 2000. The
improvement in the margin for these six month periods is primarily attributed to
a larger decline in the cost of funds than the decline in asset yield. The net
interest margin for fiscal years ended June 30, 2001, 2000, and 1999 was 2.84%,
3.13%, and 3.44%, respectively. The volatile nature of interest rates and
intense competition for deposits and loans negatively impacted the net interest
margin from June 30, 1999 through June 30, 2001. In particular, during the first
half of fiscal 2001, the increase in rates decreased the net interest margin as
liabilities repriced more quickly than assets. The 275 basis point drop in the
target federal funds rate from January to June 2001 resulted in a corresponding
drop in Cascade Bank's prime lending rate. The result was the yield on prime
rate based loans repriced downward more quickly than the liabilities funding
those loans.
- 3 -
For the six months ended December 31, 2001, the yield on earning assets was
7.60% compared to 8.30% for the six month period ended December 31, 2000. This
yield reduction was more than offset by the decrease in the cost of interest
bearing liabilities, which declined from 5.98% for the six month period ended
December 31, 2000 to 4.93% for the six months ended December 31, 2001. For the
fiscal years ended June 30, 2001, 2000, and 1999, the yield on earning assets
was 8.22%, 8.12%, and 8.08%, respectively. For the fiscal years ended June 30,
2001, 2000, and 1999, the cost of interest bearing liabilities was 5.82%, 5.39%,
and 5.11%, respectively.
Average Balances and an Analysis of Average Rates Earned and Paid
The following tables show average balances and interest income or interest
expense, with the resulting average yield or rate by category.
For the six months ended December 31,
2001 2000
-----------------------------------------------------------------
(unaudited)
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividend Cost Balance Dividend Cost
-----------------------------------------------------------------
(Dollars in thousands)
ASSETS
Interest-earning assets (1)
Mortgage loans $ 400,515 15,986 7.98 397,309 16,526 8.32
Consumer loans 59,809 2,426 8.11 63,756 2,800 8.78
Business loans 119,897 4,797 8.00 91,447 4,380 9.58
-----------------------------------------------------------------
Total loans 580,221 23,209 8.00 552,512 23,706 8.58
Mortgage-backed securities 19,083 596 6.24 31,845 1,027 6.45
Investment securities 104,314 3,065 5.92 82,214 2,972 7.29
Daily interest-earning deposits and
FHLB stock 18,946 604 6.12 14,668 574 7.46
-----------------------------------------------------------------
Total interest-earning assets 722,564 27,474 7.60 681,239 28,279 8.30
Noninterest-earning assets
Office properties and equipment, net 8,753 8,904
Real estate, net 386 606
Other noninterest-earning assets 8,134 12,975
----------- -------
Total assets $ 739,837 703,724
=========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Passbook accounts $ 11,073 109 1.96 11,032 172 3.12
Checking accounts 22,051 136 1.23 21,214 216 2.04
Money market accounts 94,384 1,405 2.98 104,262 2,535 4.86
Certificates of deposit 254,836 6,386 5.01 240,092 7,577 6.31
-----------------------------------------------------------------
Total interest-bearing deposits 382,344 8,035 4.20 376,600 10,501 5.58
Other interest-bearing liabilities
FHLB advances 229,451 7,047 6.14 214,128 6,800 6.35
Other interest-bearing liabilities 48,264 1,190 4.93 42,469 1,618 7.62
-----------------------------------------------------------------
Total interest-bearing liabilities 660,059 16,272 4.93 633,197 18,919 5.98
Other liabilities 33,549 32,176
----------- -------
Total liabilities 693,608 665,373
Stockholders' equity 46,229 38,351
----------- -------
Total liabilities and stockholders'
equity $ 739,837 703,724
=========== =======
Net interest income (2) $11,202 9,360
------- -----
Interest rate spread (3) 2.67 2.33
Net interest margin (4) 3.10 2.75
Average interest-earning assets to average
interest-bearing liabilities 109.47 107.59
- ----------
(Footnotes appear on following page.)
- 4 -
For the Year Ended June 30,
----------------------------------------------------------------
2001 2000
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividend Cost Balance Dividend Cost
----------------------------------------------------------------
(Dollars in thousands)
ASSETS
Interest-earning assets (1)
Mortgage loans $ 398,893 33,313 8.35 383,595 31,280 8.15
Consumer loans 63,020 5,496 8.72 57,138 4,740 8.30
Business loans 98,100 9,088 9.26 76,672 7,135 9.31
----------------------------------------------------------------
Total loans 560,013 47,897 8.55 517,405 43,155 8.34
Mortgage-backed securities 29,123 1,871 6.42 30,779 1,932 6.28
Investment securities 83,285 5,755 6.91 40,081 2,680 6.69
Daily interest-earning deposits and
FHLB stock 17,030 1,166 6.85 9,858 815 8.27
----------------------------------------------------------------
Total interest-earning assets 689,451 56,689 8.22 598,123 48,582 8.12
Noninterest-earning assets
Office properties and equipment, net 8,941 9,281
Real estate, net 630 491
Other noninterest-earning assets 11,311 11,559
---------- -------
Total assets $ 710,333 619,454
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Passbook accounts $ 10,915 309 2.83 11,446 351 3.07
Checking accounts 21,783 395 1.81 18,408 389 2.11
Money market accounts 96,491 4,328 4.49 119,219 5,963 5.00
Certificates of deposit 242,501 15,073 6.22 232,192 13,098 5.64
----------------------------------------------------------------
Total interest-bearing deposits 371,690 20,105 5.41 381,265 19,801 5.19
Other interest-bearing liabilities
FHLB advances 221,397 13,843 6.25 160,182 9,093 5.68
Other interest-bearing
liabilities 45,127 3,180 7.05 12,519 953 7.61
----------------------------------------------------------------
Total interest-bearing
liabilities 638,214 37,128 5.82 553,966 29,847 5.39
Other liabilities 31,562 29,710
------ ------
Total liabilities 669,776 583,676
Stockholders' equity 40,557 +35,778
--------- -------
Total liabilities and
stockholders' equity $ 710,333 619,454
========= =======
Net interest income (2) $ 19,561 18,735
========= =======
Interest rate spread (3) 2.40 2.73
Net interest margin (4) 2.84 3.13
Average interest-earning assets to average
interest-bearing liabilities 108.03 107.97
For the Year Ended June 30,
---------------------------
1999
Interest
Average and Yield/
Balance Dividend Cost
---------------------------
ASSETS
Interest-earning assets (1)
Mortgage loans 321,038 25,878 8.06
Consumer loans 48,755 4,273 8.76
Business loans 48,414 4,600 9.50
---------------------------
Total loans 418,207 34,751 8.31
Mortgage-backed securities 30,805 1,835 5.96
Investment securities 14,482 904 6.24
Daily interest-earning deposits and
FHLB stock 9,218 715 7.76
---------------------------
Total interest-earning assets 472,712 38,205 8.08
Noninterest-earning assets
Office properties and equipment, net 9,225
Real estate, net 209
Other noninterest-earning assets 13,947
-------
Total assets 496,093
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Passbook accounts 12,781 391 3.06
Checking accounts 18,540 409 2.21
Money market accounts 69,426 3,233 4.66
Certificates of deposit 220,921 12,392 5.61
---------------------------
Total interest-bearing deposits 321,668 16,425 5.11
Other interest-bearing liabilities
FHLB advances 102,045 5,280 5.17
Other interest-bearing
liabilities 5,571 251 4.50
---------------------------
Total interest-bearing
liabilities 429,284 21,956 5.11
Other liabilities 33,216
-------
Total liabilities 462,500
Stockholders' equity 33,593
------
Total liabilities and
stockholders' equity 496,093
=======
Net interest income (2) 16,249
=======
Interest rate spread (3) 2.97
Net interest margin (4) 3.44
Average interest-earning assets to average
interest-bearing liabilities 110.12
(1) Does not include interest on loans 90 days or more past due.
(2) Interest and dividends on total interest-earning assets less interest on
total interest-bearing liabilities. (3) Total interest-earning assets yield
less total interest-bearing liabilities cost. (4) Net interest income as an
annualized percentage of total interest-earning assets.
- 5 -
Provision for Loan Losses
The provision for loan losses for the six month period ended December 31,
2001 was $810,000, compared to $420,000 for the six month period ended December
31, 2000. For the fiscal years ended June 30, 2001, 2000, and 1999, the
provisions for loan losses were $980,000, $770,000, and $422,000, respectively.
Increases in the loan loss provisions were primarily a result of loan growth,
awareness of the greater risk inherent in business lending, and the impact of
the deteriorating economic climate on the loan portfolio.
At December 31, 2001, the allowance for loan losses was $6.3 million (1.09%
of average loans outstanding) compared to $5.7 million (1.02% of average loans
outstanding) at June 30, 2001, $5.0 million (0.97% of average loans outstanding)
at June 30, 2000, and $4.3 million at June 30, 1999 (1.02% of average loans
outstanding). The coverage ratio (the allowance for loan losses to nonperforming
loans) was 315% at December 31, 2001 compared with 432% at June 30, 2001, 873%
at June 30, 2000, and 354% at June 30, 1999.
Net loan charge-offs for the six month period ended December 31, 2001 were
$193,000 (0.03% of average loans outstanding), compared to $297,000 (0.05% of
average loans outstanding) for the fiscal year ended June 30, 2001, $20,000
(0.00% of average loans outstanding) for the fiscal year ended June 30, 2000,
and $316,000 (0.08% of average loans outstanding) for the fiscal year ended June
30, 1999.
Other income
Other income is income derived from sources other than interest and fees on
earning assets. The Company's primary sources of other income are service charge
fees on deposit accounts, mortgage banking services, and gains on the sale of
loans. As part of Cascade Bank's transition to a commercial bank, management
changed its strategy on the origination and retention of single-family
residential mortgage loans. As a result, more of Cascade Bank's single-family
mortgage loan production is now channeled directly to the secondary market.
Other income for the six month period ended December 31, 2001 was $1.8
million, compared to $1.1 million for the same period in 2000. This increase was
attributable primarily to a $228,000 increase in gain on sale of loans, a
$218,000 increase in gain on sale of securities, an increase in service charges,
and a gain on the sale of a building adjacent to the Company's Main Office in
Everett. The higher gain on sale of loans reflects an increase in residential
mortgage activity, especially refinancings. The gain on sale of securities
resulted primarily from steps taken to reposition the investment portfolio to
take advantage of declining interest rates and a steep yield curve.
Other income for the fiscal years ended June 30, 2001, 2000, and 1999 was
$2.6 million, $2.3 million, and $2.8 million, respectively. The increase for the
period ended June 30, 2001 was attributable to $248,000 in growth of fee income
and a $212,000 increase in gain on sale of securities that more than compensated
for the $91,000 decrease in gain on sale of loans. The growth in fee income was
attributable to an increase in transaction fees. The gain on sale of securities
resulted primarily from steps taken to reposition the investment portfolio. The
lower gain on sale of loans, despite an increase in residential mortgage
refinancings, reflects the Company's strategic shift away from mortgage banking.
Other income was $2.8 million in 1999 when the Company's mortgage banking
operations were much larger. Also, the Company realized a $600,000 gain on the
sale of mortgage servicing rights in the fiscal year ended June 30, 1999.
Other expense
Other expense represents all expenses other than costs associated with
deposits and other interest bearing liabilities. It includes expenses associated
with personnel, premises and equipment, data processing, and other operations.
Other expense increased by $564,000 to $7.5 million for the six month
period ended December 31, 2001 from $6.9 million for the same period in 2000.
The increase in expenses was partially the result of the payment of prepayment
fees to the Federal Home Loan Bank of Seattle in the amount of $225,000 to
retire high coupon advances.
- 6 -
Other expense for the fiscal years ended June 30, 2001, 2000, and 1999 was
$14.2 million, $14.6 million, and $12.4 million, respectively. For the fiscal
year ended June 30, 2001, lower expenses were partially the result of the
reduction in mortgage banking operations, offset in part by $300,000 in
management transition expenses, including employee severance, recruitment fees,
and executive signing bonuses. The increase in other expense between the fiscal
year ended June 30, 1999 and 2000 was primarily the result of opening three new
branches and bringing data processing operations fully in-house.
A standard measurement used to measure overhead costs of financial
institutions is the efficiency ratio. The efficiency ratio is calculated by
dividing other expense by total revenue, which generally indicates how much an
institution spends to generate a dollar of revenue. The lower the efficiency
ratio, the more efficient the institution. For the six month periods ended
December 31, 2001, and 2000, the Company's efficiency ratio was 57.31%, and
65.70%, respectively. Management continues to look for ways in which to improve
its efficiency ratio by increasing other income and net interest margin and
diligently controlling costs while maintaining high standards of service. For
the fiscal years ended June 30, 2001, 2000, and 1999, the Company's efficiency
ratio was 64.41%, 69.57%, and 65.17%, respectively.
Loan Portfolio
Net loans increased to $576.2 million at December 31, 2001 compared to
$564.9 million at June 30, 2001. At June 30, 2001, 2000, and 1999, net loans
were $564.9 million, $540 million, and $455.7 million, respectively.
Changes in the composition of the loan portfolio from June 30, 2001 to
December 31, 2001 evidence the continuing transformation of Cascade Bank from a
thrift into a commercial bank. Business loans increased from $113.7 million at
June 30, 2001 to $125.3 million at December 31, 2001, an increase of 10%.
Construction loans, increased from $103.2 million at June 30, 2001 to $104.1
million at December 31, 2001. Commercial real estate loans increased from $56.9
million at June 30, 2001 to $62.9 million at December 31, 2001, an increase of
11%.
At the same time, the Company's single family residential mortgage loan
portfolio declined by $12.3 million from $165.0 million at June 30, 2001 to
$152.7 million at December 31, 2001. Robust mortgage refinancing activity was
primarily responsible for the decline in balances during this time. Low mortgage
rates prompted many customers to elect to purchase long term fixed rate
mortgages. Since Cascade Bank sells virtually all its fixed rate residential
mortgages with maturities in excess of five years to the secondary market,
Cascade Bank sold a large percentage of its originations.
- 7 -
The chart below indicates the mix of the loan portfolio as of the dates
indicated:
December 31, 2001 June 30, 2001
Dollars in thousands Amount Percent Amount Percent
----------------------------------------------------------------------------------------
Business loans: $125,342 20.4 % $113,708 18.7 %
Business
Commercial real estate 62,938 10.3 56,913 9.4
------------------------------------------------
Total business loans 188,280 30.7 170,621 28.1
Single-family residential 152,727 24.9 165,003 27.2
Real estate construction 104,131 17.0 103,206 17.0
Consumer 58,381 9.5 60,406 10.0
Multi-family loans 109,733 17.9 107,360 17.7
------------------------------------------------
Total gross loans 613,252 606,596
Loans in process (28,220) (33,337)
Allowance for losses on loans (6,304) (5,687)
Deferred loan fees and discounts (2,502) (2,703)
-------- --------
Net loans receivable $576,226 $564,869
======== ========
Capital
Capital is the shareholders' investment in the Company. Its formation
allows the Company to grow assets and provides flexibility in times of
adversity. Capital grows primarily through the retention of earnings. The
company has never paid a cash dividend to shareholders.
Banking regulations require the Company to maintain minimum levels of
capital. The Company manages its capital to maintain a "well capitalized"
designation (the FDIC's highest rating). As of December 31, 2001, Cascade Bank
remained a "well capitalized" institution, under regulatory guidelines, with a
core capital to asset ratio of 7.54% and a risk based capital to asset ratio of
11.98%. See Note 11 of the Consolidated Financial Statements in the Annual
Report for a detail of the Company's regulatory capital ratios.
At December 31, 2001, the Company's total risk based capital to risk
weighted assets was 11.98%, compared to 11.34% at June 30, 2001, 11.69% at June
30, 2000, and 10.17% at June 30, 1999. The Company projects that earnings
retention and existing capital will be sufficient to fund anticipated asset
growth and the stock repurchase plan, while maintaining a well-capitalized
designation from the FDIC.
The Company is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors. The
Company manages various capital levels at both the holding company and
subsidiary bank level to maintain adequate capital ratios and levels in
accordance with external regulations and capital guidelines established by the
Board of Directors of each institution.
In May of 2000 the Board of Directors authorized the purchase of up to 5%
of the Company's outstanding shares of common stock, but only at prices that
generally would not dilute earnings or impair its capital position. During the
six months ended December 31, 2001, the Company repurchased its stock on the
open market in the amount of $156,000 under this program.
Liquidity
Liquidity is the term used to define the Company's ability to meet its
financial commitments. The Company is required by prudent business practice and
its regulators to maintain adequate levels of liquidity. The main liquidity
requirements are funding customer loan requests and deposit outflows of Cascade
Bank. Primary sources of liquidity are cash and cash equivalents, which include
highly liquid, short-term investments. At December 31, 2001, June 30,
- 8 -
2001, June 30, 2000, and June 30, 1999 cash and cash equivalents totaled $11.6
million, $13.9 million, $13.4 million, and $10.2 million, respectively. The
Company's entire investment portfolio consists of investment grade securities.
The preponderance of these securities are of the highest credit quality, with
moderate interest rate risk.
Other significant sources of liquidity are Federal Home Loan Bank of
Seattle (FHLB-Seattle) advances, reverse repurchase agreements, and loan sales.
As December 31, 2001, $40.2 million of additional borrowing capacity remained
under Cascade Bank's existing credit line from the FHLB-Seattle. The use of this
line of credit is subject to the availability of eligible collateral, which
includes residential mortgages, investment grade securities, and a limited
amount of other real estate related mortgages. In addition, Cascade Bank has the
ability to borrow from primary dealers of United States government securities
through reverse repurchase agreements. Under these agreements, borrowings are
collateralized with mortgage-backed securities or other investment securities.
Cascade Bank has also established Fed funds borrowing lines with two of its
larger correspondent banks. During the six months ended 2001, neither line was
used.
Liquidity management is of critical importance to Cascade Bank in that it
significantly relies upon wholesale sources of funds (e.g. FHLB-Seattle
advances). While these sources have proven to be stable and reliable, an
interruption in the availability of these sources could have an adverse impact
on the operations of the Company.
Market Risk
The Company's results of operations are largely dependent upon its ability
to manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on the Company's
financial condition and results of operations.
The Company has taken steps to balance its sensitivity to changes in
interest rates by altering the interest rate sensitivity asset and liability
mix. The origination of floating rate loans such as business, construction and
other prime based loans is emphasized. The vast majority of fixed rate loans
have repricing periods with a maximum of five years. The mix of floating and
fixed rates assets is designed to mitigate the impact of rate changes on the
Company's net interest income. Virtually all fixed rate residential loans with
maturities greater than five years are sold into the secondary market. Since
most of Cascade Bank's fixed rate loans do not have provisions for prepayment
fees, a drop in rates can precipitate a refinancing of Cascade Bank's assets.
Interest rate risk is monitored using several methodologies, principally
financial modeling. Through financial modeling, rate risk is measured based on
the change in market value of the Company's assets and liabilities under
different interest rate scenarios. Also, the near term earnings exposure to
interest rate changes is evaluated in the context of certain upward and downward
interest rate changes occurring instantaneously. At December 31, 2001, a 200
basis point increase in rates would reduce forecasted net interest income over a
twelve month period by approximately 2%.
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The individual categories of assets and liabilities that are subject to
interest rate sensitivity as of December 31, 2001 are shown in the following
table.
(less
than) Fair
1 year 1-3 years 3-5 years 5-10 years 10 years Total Value
-----------------------------------------------------------------------------
(Dollars in thousands)
Interest-Sensitive Assets
Loans 259,002 144,323 133,795 38,891 9,021 585,032 598,481
Investments and other
Interest earning assets 86,477 11,100 1,027 7,393 53,417 159,414 159,308
Interest-Sensitive Liabilities
Checking accounts 22,783 22,783 45,566 44,994
Money market accounts 48,455 48,454 96,909 96,895
Savings accounts 6,021 6,022 12,043 11,909
Certificates of deposits 241,327 15,074 9,034 27 - 265,462 266,026
Borrowings 73,792 67,500 66,000 69,000 - 276,292 289,156
Trust preferred securities 10,000 10,000 10,000
FORM 10-K
A copy of the Company's annual report on Form 10-K which is filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 is
available to shareholders, at no charge, upon written request to the Secretary
of Cascade Financial Corporation at 2828 Colby Avenue, Everett, Washington
98201.
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