UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 91-1661954
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(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
2828 Colby Avenue, Everett, Washington 98201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 339-5500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock,
Par value $0.01
per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of Common Stock held by non-affiliates of
registrant at March 21, 2003 was $79.52 million (based on the last reported
sale on such date). The number of shares of registrant's Common Stock
outstanding at March 21, 2003 was 6,508,893.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the year ended December 31,
2002, including the Selected Financial Data and the Management Discussion and
Analysis attached as Exhibit 13 (the "Annual Report") (Part I, II & IV).
2. Portions of registrant's Definitive Proxy Statement for the Annual Meeting
of Stockholders (the "Proxy Statement") (Part III).
Cascade Financial Corporation
FORM 10-K
December 31, 2002
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 3
Loan Portfolio 5
Asset and Liability Management Activities 13
Investment Portfolio 15
Deposits 16
Return on Equity and Assets 17
Borrowings 17
Regulation 19
Taxation 24
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 26
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Controls and Procedures 28
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
Item 1. Description of Business
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General
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Cascade Financial Corporation (the "Corporation") is a bank holding company
incorporated in the state of Delaware in 1994. The consolidated entity
includes the Corporation and its wholly owned subsidiaries. At December 31,
2002, the Corporation's wholly-owned subsidiaries were Cascade Bank ("Cascade"
or the "Bank") and Cascade Capital Trust I. The executive offices of the
Corporation are located at 2828 Colby Avenue, Everett, Washington 98201. The
telephone number is (425) 339-5500 and the web site is www.CascadeBank.com.
The Bank has been serving the people of Snohomish and King Counties since
1916 when it was organized as a mutual savings and loan association. On
September 15, 1992, the Bank completed its conversion from a federal mutual to
a federal stock savings bank. The Corporation was organized on August 18, 1994
for the purpose of becoming the holding company for Cascade Bank. On October
23, 1994, the stockholders of the Bank approved a plan to reorganize the Bank
into the holding company form of ownership. The reorganization was completed
on November 30, 1994, on which date the Bank became the wholly-owned subsidiary
of the Corporation, and the stockholders of the Bank became stockholders of the
Corporation. Subsequent to the acquisition of Cascade, the primary activity of
the Corporation has been holding the stock of the Bank. Accordingly, the
information set forth in this report, including financial statements and
related data, relates primarily to the Bank.
In July of 2001, the Bank converted its charter from that of a federal stock
savings bank to a Washington state commercial bank, and the Corporation elected
to be treated as a financial holding company with the Federal Reserve Board.
Following this conversion, the Corporation changed its fiscal year end from June
30 to December 31 to align its reporting period with those of its commercial
bank peers.
The Corporation conducts its business from its main office in Everett,
Washington, and fourteen other full service offices in the greater Puget Sound
region. At December 31, 2002, the Corporation had total assets of $804.2
million, total deposits of $509.9 million and stockholders' equity of $56.6
million. The savings deposits of the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC"), up to the limits specified by law.
The Bank, a full-service community bank, offers a wide range of products and
services. Cascade Investment Services, Inc., a subsidiary of Cascade Bank,
markets annuity products, mutual funds and insurance products to customers and
non-customers in the Bank's market areas. Management believes offering these
product lines increases customer awareness, expands product lines and provides
a valuable alternative to the deposit products offered by the Bank. Revenues
from the subsidiary increase the Bank's other income.
FORWARD LOOKING STATEMENTS
In addition to historical information, this Form 10-K contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the
express purpose of availing Cascade Financial Corporation of the protections of
the safe harbor provisions of the PSLRA. The forward-looking statements
contained herein are subject to factors, risks, and uncertainties that may
cause actual results to differ materially from those projected. The following
items are among the factors that could cause actual results to differ
materially from the forward-looking statements: general economic conditions,
including their impact on capital expenditures; business conditions in the
banking industry; recent world events and their impact on interest rates,
businesses and customers; the regulatory environment; new legislation; vendor
quality and efficiency; employee retention factors; rapidly changing technology
and evolving banking industry standards; competitive standards; competitive
factors, including increased competition with community, regional, and national
financial institutions; fluctuating interest rate environments; and similar
matters. Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's analysis only at the date of the
statement. The Corporation undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances that
arise after the date of this report. Readers should carefully review the risk
factors described in this and other documents the Corporation files from time
to time with the Securities and Exchange Commission. There can be no assurance
that any of the strategies described in this Form 10-K will be implemented, or
if implemented, achieve the amounts described or within the time periods
currently estimated. Sentences containing words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," "should," "projected," or
similar words may constitute such forward looking statements.
Market Area
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Headquartered in Everett, Washington, the Corporation serves its customers
from fifteen full service offices, ten in Snohomish County and five in King
County. Located in the center of the western Washington region, Snohomish and
King counties have experienced significant growth in recent years, although
currently the area is facing an economic slowdown.
Despite the relocation of its corporate headquarters, the Boeing Company is
the largest employer in the Puget Sound Area and in Snohomish County. The
transplantation of Boeing's headquarters will not have a material impact on the
local economy. However, the slowdown in air travel caused by a weakening
economy and the tragic events of September 11, 2001 have had a material impact
on the orders for the commercial jet airliners produced in our market area.
Consequently, Boeing has reduced its workforce in our market area by
approximately 18,000 as of January 2003. The full impact and timing of airline
and aerospace industry job reductions on the Puget Sound economy are not yet
known; however, economic activity in many areas served by the Company has
weakened. The recently announced layoffs by Boeing may create problems if
there are outstanding loans to employees who are laid-off and not hired by
other companies, to subcontractors that have had canceled or delayed orders
from Boeing, or other businesses impacted by the general slowing of economic
activity. Significant Boeing layoffs in past years have not affected our asset
quality, however, there is no assurance that any future Boeing layoffs will not
adversely affect the Corporation's loan portfolio.
Our market area in King County includes the growing cities east of Seattle
and Lake Washington. This area's economy has been dominated by Microsoft, with
other high technology companies playing an important role. Slowdowns and
retrenchment with a number of these firms has led to slower economic growth
than in the past with a potential impact on the financial services firms that
serve the area. The commercial real estate market in east King County has
experienced an increase in vacancy rates recently.
On the plus side, Everett is the home port of the Navy's carrier battle
ship, the USS Abraham Lincoln. The contribution that the Navy makes to the
economy is not dependent on other trends. The economy in the Corporation's
market area has become more dependent upon the health care and biotechnology
industries, two industries which have been less affected by the recent economic
slowdown. One of the largest health care employers is Providence Everett
Medical Center Group, which is also an innovator in new diagnostic and treatment
technologies. Snohomish County and Northeast King County is home to numerous
biotechnology companies, including Advanced Technology Labs, a manufacturer of
medical equipment.
As a gateway to Asia, the Bank's market area has also benefited from the
expansion of world trade. Economic weakness in either the United States or
Asia will reduce that trade. Such slowdowns in the international flow of goods
and services could prove detrimental to the economy of the market area and
potentially the quality of our loan portfolios.
Business Strategy
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The Corporation is in the process of implementing its business plan to
increase the Bank's emphasis on commercial banking. The Corporation is
attempting to pursue the following strategies:
Increasing the percentage of its assets consisting of business,
construction, and commercial real estate loans with higher risk-adjusted
returns, shorter maturities and greater sensitivity to interest rate
fluctuations.
Increasing deposits by attracting lower cost transaction accounts (such as
checking, savings and money market accounts) through an enhanced branch
network, customer calling center and online banking.
Diligently searching for sources of fee based revenue.
Maintaining cost-effective operations by efficiently offering products and
services.
Maintaining its capital position at or above the "well-capitalized" (as
defined for regulatory purposes) level.
Exploring prudent means to grow the business internally and/or through
acquisitions.
The primary objectives of these strategies are to: enhance shareholder value
measured through increasing return on equity and/or increasing earnings per
share, and to increase the opportunity for quality earning asset growth,
deposit generation, and fee-based income activities. However, the shift in
emphasis to commercial banking does inherently contain additional risks (See
"LOAN PORTFOLIO" below).
Competition
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The Bank competes for both loans and deposits. The Puget Sound metropolitan
area has a high density of financial institutions, including major national
banks, several local community banks, and credit unions.
The Bank's competition for loans comes principally from other commercial
banks, the larger of whom offer quick, low documentation credit approval and
attractive pricing. Conversely, many of the local community banks have
specialized in commercial real estate and business lending and therefore may
have a more established reputation in that market. Cascade competes for loans
principally through its ability to customize competitively priced financing to
the needs of its customers, and its local decision-making.
Geographic location is still the primary factor in choosing a bank for the
checking account relationship. As a result, the Bank's competition for
checking deposits comes primarily from the large institutions with a broad
network of locations. Online banking continues to be an important convenience
service to attract checking customers from larger banks. In addition, Cascade
has recently made an arrangement with US Bank to allow customers to use US Bank
ATMs without a surcharge. Community banks, savings institutions, as well as
other nonbanking financial institutions, provide the greatest competition for
the various savings vehicles such as money market deposit accounts and
certificates of deposit.
In addition to competition from other banking institutions, the Bank
continues to experience increased competition from nonbanking companies such as
credit unions, financial services companies and brokerage houses. Recent
amendments to the federal banking laws to eliminate certain barriers between
banking and commercial firms are expected to result in even greater competition
in the future.
The Corporation anticipates continuing opportunities to arise from the
effects of substantial consolidation among financial institutions in Washington
that has occurred to date. Federal law allows mergers or other combinations,
relocations of a bank's main office and branching across state lines. Several
other financial institutions, which have greater resources than the Bank,
compete for banking business in the Bank's market area. Among the advantages
of some of these institutions are their ability to make larger loans, finance
extensive advertising and promotion campaigns, access international money
markets and allocate their investment assets to regions of highest yield and
demand.
In 2001, following Cascade Bank's conversion from a thrift to a commercial
bank, Cascade Financial Corporation changed its fiscal year-end from June 30 to
December 31 to align its reporting periods with those of its commercial bank
peers.
LOAN PORTFOLIO
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General. The Bank originates business, real estate and consumer loans.
Total loans equaled $576.4 million at December 31, 2002. Total loans were
adjusted by loans in process, deferred loan fees, and the allowance for loan
losses for a net loan balance of $546.7 million. At December 31, 2002, $142.3
million or 24.7% of loans consisted of business loans; $104.8 million or 18.2%
were real estate construction loans; $63.1 million or 10.9% of loans consisted
of commercial real estate; $49.3 million or 8.6% were consumer loans; $122.7
million or 21.3% of the Bank's loans consisted of loans secured by one-to-four
family residential properties; and $94.2 million or 16.3% consisted of
multi-family loans, which brings the total loans secured by first liens on
residential real estate to $216.9 million or 37.6% of loans. The corporation
sells all its 30 year fixed-rate loans and the vast majority of its 15 year
fixed-rate loans in the secondary mortgage market. The Corporation had forward
commitments totaling $8,083 and $6,602 to sell loans into the secondary market
at December 31, 2002, and December 31, 2001.
Loan Portfolio Analysis. The following table sets forth the Corporation's loan
portfolio by type of loan and by type of security at the dates indicated.
At December 31, At June 30,
2002 2001 2001 2000 1999 1998
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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Type of Loan (Dollars in thousands)
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Real estate mortgage
Residential(1) $216,914 39.68 262,460 45.55 272,363 48.22 288,660 53.46 263,987 57.93 238,582 62.01
Commercial 63,108 11.54 62,938 10.92 56,913 10.08 54,320 10.06 49,066 10.77 31,746 8.25
Construction 104,790 19.17 104,131 18.07 103,206 18.27 73,488 13.61 54,500 11.96 47,861 12.44
Business 142,273 26.03 125,342 21.75 113,708 20.13 86,298 15.98 61,676 13.53 41,494 10.79
Consumer (2) 49,331 9.02 58,381 10.13 60,406 10.69 62,061 11.49 52,219 11.45 48,506 12.61
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Total loans 576,416 105.44 613,252 106.42 606,596 107.39 564,827 104.60 481,448 105.64 408,189 106.10
Less:
Loans in process 20,669 3.78 28,220 4.90 33,337 5.90 17,132 3.17 19,087 4.19 16,966 4.41
Deferred loan fees, net 2,198 .40 2,502 0.43 2,703 0.48 2,719 0.50 2,371 0.52 2,346 0.61
Allowance for loan
losses 6,872 1.26 6,304 1.09 5,687 1.01 5,004 0.93 4,254 0.93 4,143 1.08
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Total loans, net $546,677 100.00% 576,226 100.00 564,869 100.00 539,972 100.00 454,736 100.00 384,734 100.00
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Type of Security
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Real estate mortgage
One-to-four family(2) 262,474 48.01 295,941 51.36 307,049 54.35 290,857 53.86 261,822 57.45 251,805 65.45
Multi-family 94,245 17.24 109,734 19.04 107,360 19.01 112,721 20.87 85,893 18.85 62,736 16.31
Commercial 63,108 11.54 62,938 10.92 56,913 10.08 54,320 10.06 49,066 10.77 31,746 8.25
Land loans 1,720 0.32 2,546 0.44 3,269 0.58 29 0.01 106 0.02 232 0.06
Other 154,869 28.33 142,093 24.66 132,005 23.37 106,900 19.80 84,561 18.55 61,670 16.03
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Total loans 576,416 105.44 613,252 106.42 606,596 107.39 564,827 104.60 481,448 105.64 408,189 106.10
Less:
Loans in process 20,669 3.78 28,220 4.90 33,337 5.90 17,132 3.17 19,087 4.19 16,966 4.41
Deferred loan fees, net 2,198 .40 2,502 0.43 2,703 0.48 2,719 0.50 2,371 0.52 2,346 0.61
Allowance for loan
losses 6,872 1.26 6,304 1.09 5,687 1.01 5,004 0.93 4,254 0.93 4,143 1.08
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Total loans, net $546,677 100.00% 576,226 100.00 564,869 100.00 539,972 100.00 455,736 100.00 384,734 100.00
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(1) Includes construction loans converted to permanent loans, multi-family and
land loans.
(2) Includes home equity loans and HELOCs
At December 31, 2002, loans in process attributed to construction loans,
totaled $20.7 million or 3.78% of total loans net, deferred fees were $2.2
million or .40%, and the allowance for loan losses was $6.9 million or 1.26% of
total loans, net.
Business Loans. Business loans increased from $125.3 million at December
31, 2001 to $142.3 million at December 31, 2002. Unsecured business loans
totaled $6.8 million at December 31, 2002. The Bank's business loan portfolio
consists primarily of commercial business loans to small and medium sized
businesses operating in Snohomish and King counties. These loans are secured
primarily by real estate, receivables, equipment, other assets of the business
and personal property, and the personal guarantee of the borrower. These loans
typically have variable-rate terms or fixed rates with maturities of up to five
years. The Bank also offers secured and unsecured operating lines of credit.
Business loans are underwritten by the Bank on the basis of the borrower's cash
flow and ability to service debt from earnings, as well as the underlying
collateral value. The borrower is generally required to provide the Bank with
financial statements, tax returns, current financial information on any and all
guarantors, and other reports that show trends in their financial condition;
and to update this information annually. Business loans also include owner
occupied real estate loans with terms comparable to the Bank's income property
loans. In addition, as the business banking activity increases, the Bank expects
to expand its lower cost deposit franchise through the growth of commercial
checking as a source of funding.
Business loans are inherently sensitive to adverse conditions in the
economy. In the case of loans secured by accounts receivable, the availability
of funds for the repayment of such loans may be substantially dependent on the
ability of the borrower to collect amounts due from its customers. The
collateral securing other loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business.
Accordingly, the repayment of a business loan depends primarily on the
successful operation of the borrower's business and creditworthiness of the
borrower (and any guarantors), while liquidation of collateral is a secondary
and often insufficient source of repayment.
While most of the business borrowers are established businesses with
successful track records, it is uncertain how the continuing economic downturn
will affect these loans.
Construction Loans. The Bank originates construction loans on one-to-four
family homes either to individual borrowers as custom construction loans or to
builders as speculative construction loans. Construction loans generally have
terms of 12-18 months. The interest rates charged on construction loans are
indexed to the prime rate and vary depending on the characteristics of the
loan, particularly the credit risk inherent in the project. All construction
loans require approval by various levels of Bank personnel, depending on the
size of the loan. The Bank has attempted to increase its construction loan
portfolio because these loans have relatively high margins, floating interest
rates and short-term maturities and because of the historically favorable
housing market in the Puget Sound area. At December 31, 2002 and December 31,
2001, the Corporation's construction loans were $104.8 million (including $20.7
million of loans in process) or 18.2% of the gross loan portfolio and $104.1
million (including $28.2 million of loans in process) or 17.0% of the gross
loan portfolio, respectively. Of this amount, $93.2 million was to builders,
including $15.1 million for land acquisition and development, and $11.6 million
was to individuals for custom home construction. The Bank's maximum outstanding
commitment to one builder at December 31, 2002 totaled $6.8 million involving
one construction project which is performing in accordance with the terms of
the loan.
Construction loans involve further credit risks because loan funds are
advanced upon the security of the project under construction that is of
uncertain value before completion. The Bank's risk of loss on a construction
loan is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction or development and the estimated
cost (including interest) of the construction. If the estimate of construction
costs proves to be inaccurate, the Bank may be required to advance additional
funds to complete the development. If upon completion of the project, the
estimate of the marketability of the property is inaccurate, the borrower may
be unable to sell the completed project in a timely manner or obtain adequate
proceeds to repay the loan. Delays may arise from labor problems, material
shortages and other unpredictable contingencies in completing the project.
Furthermore, if the estimate of value of a completed project is inaccurate, the
Bank may be confronted with a project with a value that is insufficient to
assure full repayment. As a result, these loans may involve the disbursement of
substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of the borrower or guarantor to repay
principal and interest.
Commercial Real Estate Loans. Commercial real estate loans totaled $63.1
million or 10.9% of the Bank's loans at December 31, 2002. All commercial real
estate loans are secured by properties in western Washington, mainly in the
Puget Sound region. Improved property such as office buildings and small
commercial business properties such as strip shopping centers secure the Bank's
commercial real estate loans. These loans are primarily fixed rate with a
maximum reset on the interest rate of five years. At December 31, 2002, the
largest commercial real estate and land loan in the Bank's portfolio was $4.0
million, which was performing according to its terms at that date.
Multi-family Loans. Multi-family loans totaled $94.2 million or 16.3% of
loans at December 31, 2002. The multi-family portfolio is principally comprised
of small to medium-size apartment projects (generally $2.5 million in loan
amount or less) with loan-to-value ratios in the 70% to 80% range. All new loan
originations are in the Puget Sound region with adjustable rates.
Multi-family residential and commercial real estate lending affords the Bank
an opportunity to receive interest at rates higher than those generally
available from one-to-four family mortgage loans. However, loans secured by
such properties usually are greater in amount and may involve a greater degree
of risk than one-to-four family residential mortgage loans. Because payments on
loans secured by multi-family residential and commercial properties are often
dependent on the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real estate
market or the economy.
One-to-Four Family Residential Loans. At December 31, 2002, residential
loans totaled $122.7 million or 21.3% of loans. Residential lending consists
primarily of first mortgage loans secured by single family residential
properties located principally in Snohomish and King Counties. The Bank
originates both fixed rate and adjustable rate mortgages ("ARMs") with
maturities up to 30 years. ARM loans are generally held in the Bank's
portfolio. Newly originated ARMs have interest rates that adjust based on the
One Year Constant Maturity Treasury Index. Borrower demand for ARMs versus
fixed-rate mortgage loans is a function of the level of interest rates, the
shape of the yield curve, and the differences between the interest rates and
loan fees offered for fixed-rate mortgage loans and the rates and loan fees for
ARMs.
Fixed rate residential loans are generally sold and the servicing released
to one of the Bank's correspondents. The loans are sold on a "best efforts"
basis. The Bank no longer packages its loans to sell as mortgage backed
securities. The Bank had $3.4 million in loans held for sale at December 31,
2002 and $1.2 million in loans held for sale at December 31, 2001. Loans held
for sale are not material and therefore the Bank does not include them as a
separate line item on the balance sheet. The Bank has greatly reduced its
emphasis on mortgage banking and mortgage lending in the past three years.
The Bank will originate both conforming and nonconforming mortgages. The
Bank's conforming residential loans meet the Federal Home Loan Mortgage
Corporation's underwriting standards with respect to credit, debt ratios and
documentation. The Bank's nonconforming residential loans are those that do not
conform to agency underwriting guidelines, due to the size of the loan, as a
result of credit histories, debt-to-income ratios, reliance on the borrower's
stated income, non-owner occupied property, rural property, or other exceptions
from agency guidelines. The Bank's non-conforming loans may be made to lower
credit grade borrowers. At December 31, 2002, $22.9 million or 4.0% of the
Bank's total outstanding loan portfolio and 18.7% of the Bank's one-to-four
family residential loan portfolio consisted of nonconforming one-to-four family
residential loans. In exchange for the additional risk associated with
nonconforming loans, borrowers generally are required to pay a higher interest
rate and receive a lower maximum loan-to-value ratio than for a conforming loan
borrower.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on residential one-to-four family owner occupied loans to 80% or less, of the
lesser of the appraised value or purchase price of the underlying residential
property. Non-owner occupied one-to-four family residential loans are generally
limited to 75% or less, of the lesser of the appraised value or purchase price
of the underlying residential property. The loan-to-value ratio, maturity and
other provisions of the loans made by the Bank are generally reflected in the
policy of making less than the maximum loan permissible under federal
regulations, according to established lending practices, market conditions and
underwriting standards maintained by the Bank. Generally, all residential loans
originated with a loan-to-value ratio above 80% have private mortgage insurance
in an amount sufficient to reduce the Corporation's exposure to 75% or below.
At December 31, 2002, six residential loans on non-accrual totaled $742,000.
Consumer Loans. The Bank's consumer loan activities take two forms: home
equity loans or lines of credit; and installment loans. Home equity loans are
secured by a junior lien in priority on the borrower's home. Such loans may
have a combined loan-to-value ratio of up to 90% of the value of the home
securing the loan. Home equity loans are fixed amount loans which may have
fixed or floating interest rates. Home equity lines of credit can be drawn upon
at any time by the customer up to a specific amount. All these loans are at a
floating rate. The balance outstanding for both types of home equity loans
decreased to $36.7 million at December 31, 2002 as compared to $41.6 million at
December 31, 2001. At December 31, 2002 and December 31, 2001, the total
amount of unused lines of credit were $38.3 million and $28.6 million,
respectively. The second type of consumer loans are installment loans in which
boats, automobiles, and recreational vehicles serve as collateral. This
portfolio was $12.6 million at December 31, 2002 as compared to $16.8 million
outstanding at December 31, 2001. Although boat loans total $8.4 million of the
Corporation's installment loans at December 31, 2002, the Corporation has
significantly decreased its origination of boat loans and expects this amount
to decline further in the future. Installment loans are secured by
depreciating assets such as automobiles or boats. Therefore, any repossessed
collateral for a defaulted installment loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often
does not warrant further substantial collection efforts against the borrower
beyond obtaining a deficiency judgment. In addition, consumer loan collections
are dependent on the borrower's continuing financial ability, and thus, are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various Federal and state laws,
including Federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans.
Loan Maturity and Repricing
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The following table sets forth information at December 31, 2002, regarding
the dollar amount of Business and Construction loans maturing in the
Corporation's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Loan balances do not include deferred
loan fees. Construction loans are net of loans in process.
With variable With fixed
rate (for rate (for
Due in Due in one maturities maturities
one year to five Due after of more than of more than
or less years five years Total one year) one year)
---------------------------------------------------------------------------------
(Dollars in thousands)
Construction Loans $56,635 27,486 - 84,121 26,067 1,419
Business Loans $38,738 54,260 49,275 142,273 45,753 57,782
Asset Quality
- -------------
Banking regulations require that each insured institution review and
classify its assets regularly. In addition, in connection with examinations of
insured institutions, bank examiners have authority to identify problem assets
and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets must have one or more defined weaknesses and are characterized by the
distinct possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or payment in full, based on currently existing facts, conditions and
values, questionable, and there is a high possibility of loss. An asset
classified loss is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset, or portion thereof, is classified
loss, the insured institution must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset classified loss
or charge off such amounts.
Cascade established the Credit Administration Division in 2001 to assure
that the Bank maintains the quality of its loan portfolio. Management has
comprehensive monthly and annual review procedures for identifying and
classifying assets for weaknesses. Reserves are maintained for assets
classified as substandard or doubtful. The objective of these review procedures
is to identify any trends and determine the levels of loss exposure to evaluate
the need for an adjustment to the reserve accounts.
Delinquencies. A report containing delinquencies of all loans is reviewed
monthly by the Asset Review Committee and periodically by the Board of
Directors. Procedures taken with respect to delinquent loans differ depending
on the particular circumstances of the loan. The Bank's general procedures
provide that when a loan becomes delinquent, the borrower is contacted, usually
by phone, within 15 to 30 days. When the loan is over 30 days delinquent, the
borrower is contacted in writing. Typically, the Bank will initiate
foreclosure action against the borrower when principal and interest become 90
days or more delinquent. In any event, interest income is reduced by the full
amount of accrued and uncollected interest on loans once they become 90 days
delinquent, go into foreclosure or are otherwise determined to be
uncollectible. Once interest has been paid to date or management considers the
loan fully collectable, it is returned to accrual status. An allowance for
loss is established when, in the opinion of management, the fair value less
sales costs of the property collateralizing the loan is less than the
outstanding principal and the collectibility of the loan's principal becomes
uncertain. It is intended that the Bank's allowance for loan losses be adequate
to cover known potential and reasonably estimated unknown losses. At December
31, 2002 and December 31, 2001, the Bank had $1.0 million and $2.0 million,
respectively, of loans accounted for on a non-accrual basis.
Allowance for Loan Losses/Non-Performing Assets
- -----------------------------------------------
Management provides for possible loan losses by maintaining an allowance.
The level of the allowance is determined based upon judgments regarding the
size and nature of the loan portfolio, historical loss experience, the
financial condition of borrowers, the level of non-performing loans, and
anticipated general economic conditions. Additions to the allowance are charged
to expense. Loans are charged against the allowance when management believes
the collection of principal is unlikely.
The economic recession's impact on the Corporation's loan portfolio is less
than certain in that this is the first economic downturn the Corporation has
faced when a significant portion of its loans were made to small businesses.
As Cascade Bank has evolved from a thrift into a commercial bank, the inherent
risk in its loan portfolio has increased, resulting in the trend of increasing
the allowance for loan losses. Also impacting the allowance for loan losses
has been the slowing of the economy in the Corporation's market area.
The allowance for loan losses reflects management's best estimate of
probable losses that have been incurred at the balance sheet date. The
allowance for loan losses is maintained at a level considered adequate by
management to provide for loan losses inherent in the loan portfolio based on
management's assessment of various factors affecting the loan portfolio,
including local economic conditions and growth of the loan portfolio and its
composition. Net charge-offs during these periods have been less than
experienced by peer banks. Increases in the allowance for loan losses made
through provisions were primarily a result of business loan growth, an increase
in net charge-offs, awareness of the greater risk inherent in business lending
and the impact of the deteriorating economic climate on the loan portfolio.
Management measures the reasonableness of the allowance for loan losses by
utilizing a loan grading system to determine risk in the loan portfolio and by
considering the results of credit reviews. The loan portfolio is separated by
quality and then by loan type. Loans of acceptable quality are evaluated as a
group, by loan type, with a loss rate assigned to the total loans in each type,
but unallocated to any individual loan. Conversely, each adversely classified
loan is individually analyzed, to determine an estimated loss amount. A loss
rate is also assigned to these adversely classified loans, but at a higher rate
due to the greater risk of loss. Past due and impaired loans are actively
managed to minimize the potential loss of principal.
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component in most years. The unallocated portion includes
management's judgmental determination of the amounts necessary for qualitative
factors such as the consideration of new products and policies, economic
conditions, concentrations of credit risk, and the experience and abilities of
lending personnel. Loan concentrations, quality, terms, and basic underlying
assumptions remained substantially unchanged during the period.
The following table presents information with respect to the Corporation's
non-performing assets and restructured loans at the dates indicated.
12/31/2002 12/31/2001 6/30/2001 6/30/2000 6/30/1999 6/30/1998
----------------------------------------------------------------------------
(Dollars in thousands)
Non-performing loans:
Commercial loans:
Commercial $ 132 1,038 166 226 338 199
Commercial real estate - - - - - -
----------------------------------------------------------------------
132 1,038 166 226 338 199
Residential 742 762 1,112 221 618 971
Real estate construction and Land - - - - - -
Consumer loans 82 198 37 126 245 751
----------------------------------------------------------------------
Total non-performing loans 956 1,998 1,315 573 1,201 1,921
Other real estate 461 430 787 528 - 74
----------------------------------------------------------------------
Total non-performing assets $1,417 2,428 2,102 1,101 1,201 1,995
======================================================================
Restructured loans - - - - - -
Total non-performing loans to net loans .17% .35 .23 .11 .26 .50
Total non-performing loans to total assets .12 .26 .18 .08 .22 .43
Total non-performing assets to total assets .18 .32 .29 .16 .22 .45
The Corporation's non-performing assets at December 31, 2002, consisting of
non-performing loans and other real estate, totaled $1.4 million or .18 percent
of total assets. This is a decrease from $2.4 million or .32 percent of total
assets at December 31, 2001, which increased from $2.1 million or .29 percent
of total assets at June 30, 2001.
Loans are generally placed on non-accrual when they become past due over 90
days, or 120 days if they are single-family mortgage loans, or when the
collection of interest or principal is considered unlikely. Loans past due
over 90 or 120 days that are not on non-accrual status must be well secured by
tangible collateral and in the process of collection. The Bank does not return
a loan to accrual status until it is brought current with respect to both
principal and interest and future principal and interest payments are no longer
in doubt.
Non-performing loans decreased to $1.0 million at December 31, 2002 compared
to $2.0 million at December 31, 2001, and $1.3 million at June 30, 2001. The
decrease in non-performing loans from December 31, 2001 to December 31, 2002 is
due to a decrease in non-performing commercial loans, which resulted from loans
that were brought current and thus returned to an accrual status. Management
believes that the allowance for losses on loans is adequate to provide for
losses that may be incurred on non-performing loans.
Other real estate owned includes property acquired by the Bank through
foreclosure and real estate held for development. Other real estate is carried
at the lower of the estimated fair value or the principal balance of the
foreclosed loans. Non-performing other real estate was $461,000 at December
31, 2002, an increase from $430,000 at December 31, 2001, and a decrease from
$787,000 at June 30, 2001.
Interest income that would have been recognized for the year ended December
31, 2002, the six month period ended December 31, 2001, and for the fiscal
years ended June 30, 2001, 2000 and 1999, had non-accrual loans been current in
accordance with their contractual terms amounted to $32,000, $87,000, $74,000,
$32,000 and $86,000, respectively.
The following tables set forth information regarding changes in the
Corporation's allowance for loan losses for the most recent five years (dollars
in thousands).
Year Ended Six Months Ended Year Ended
12/31/02 12/31/01 12/31/01 12/31/00 6/30/01 6/30/00 6/30/99 6/30/98
-----------------------------------------------------------------------------
Balance at beginning of period $ 6,304 5,342 5,687 5,004 5,004 4,254 4,143 3,879
Charge Offs:
Business 1,028 148 138 48 46 53 49 29
Commercial Real Estate - - - - 2 - - -
Single-Family Residence 249 193 42 5 166 16 7 -
Multi-Family - - - - - - - -
Real Estate Construction - - - - - - - -
Consumer and other 164 93 26 48 115 77 267 16
Recoveries: (114) (26) (13) (19) (32) (126) (7) (63)
Net charge-offs (recoveries): 1,327 408 193 82 297 20 316 (18)
Provision for loan losses 1,895 1,370 810 420 980 770 427 246
Balance at end of period 6,872 6,304 6,304 5,342 5,687 5,004 4,254 4,143
Average loans outstanding $566,302 573,867 580,221 552,512 560,013 517,405 418,207 362,842
Ratio of net charge-offs
during the period to average
loans outstanding .23 .07 .03 .02 .05 - .08 .01
Ratio of allowance for loan
losses to average loans
outstanding 1.21 1.10 1.09 .97 1.02 .97 1.02 1.14
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
Certain loans may meet the criteria of troubled debt restructuring as
defined in Statement of Financial Accounting Standards ("SFAS") No. 114 and No.
118, "Accounting by Creditors for Impairment of a Loan," and "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures,"
respectively. The Bank has had no restructured loans during the last five year
period.
The following tables set forth information concerning the Company's
allocation of the allowance for loan losses and the percentage of loans by
category at the dates indicated (dollars in thousands).
12/31/02 12/31/01 6/30/01 6/30/00 6/30/99 6/30/98
Amount %* Amount %* Amount %* Amount %* Amount %* Amount %*
------------- ------------- ------------- ------------ ------------- -------------
Business $2,918 25.6 2,927 21.4 2,203 19.9 1,886 15.8 740 13.3 625 10.6
Commercial Real Estate 274 11.4 220 10.7 569 9.9 544 9.9 1,160 10.6 1,060 8.1
Single-Family Residential 745 22.0 861 26.1 1,097 28.8 1,019 32.1 961 38.5 525 45.0
Multi-Family 366 17.0 442 18.8 672 18.7 619 20.6 460 18.6 630 16.0
Real Estate Construction 1,887 15.1 887 13.0 771 12.2 569 10.3 450 7.7 857 7.9
Consumer and Other 252 8.9 356 10.0 295 10.5 367 11.3 370 11.3 400 12.4
Unallocated 430 - 611 - 80 - - - 113 - 46 -
----------------------------------------------------------------------------------------------
Total allowance for
loan losses $6,872 100.0% 6,304 100.0 5,687 100.0 5,004 100.0 4,254 100.0 4,143 100.0
* Percent of loans in each category to total loans.
The provision for loan losses for the year ended December 31, 2002 totaled
$1,895,000 compared to $1,370,000 for the year ended December 31, 2001.
Provisions for the fiscal years ended June 30, 2001, 2000 and 1999 were
$980,000, $770,000, and $427,000 respectively. The provision for loan losses
was $810,000 for the six month period ended December 31, 2001, and $420,000 for
the six months ended December 31, 2000. The increase in the provision for loan
losses for the twelve month period ended December 31, 2002 was due to the
increase in adversely classified loans (which includes the substandard and
doubtful categories) under the Bank's loan classification system. Adversely
classified loans increased to $24.5 million at December 31, 2002 from $16.6
million at December 31, 2001.
ASSET AND LIABILITY MANAGEMENT ACTIVITIES
- -----------------------------------------
The Bank uses a variety of tools to measure, monitor, and manage interest
rate risk. The Board of Directors reviews the interest rate risk management
activities of the Bank on a regular basis and has established policies on the
amount of risk deemed appropriate. The Bank's primary rate risk management tool
is a financial simulation model. The Bank's net interest income and the value
of its capital are measured under different interest rate scenarios. To limit
its interest rate risk, the Bank has focused on originating more interest rate
sensitive assets, such as prime based loans, while reducing its long-term,
fixed rate assets through selling long term residential mortgages in the
secondary market. The vast majority of the loans that the Bank keeps in its
portfolio have repricing periods of five years or less. The Bank often uses FHLB
advances to fund its intermediate term assets. Cascade uses reverse repurchase
agreements to provide inexpensive short term funding. These agreements are
generally for three months or less and provide the Bank with liabilities that
reprice relatively quickly, which helps match the repricing characteristics of
our prime based loans.
While the Bank does not have any outstanding interest rate exchange
agreements, it has used interest rate swaps, caps and floors in the past to
control the amount of its interest rate risk. At December 31, 2002 and December
31, 2001, the Corporation had no caps, floors or swaps outstanding.
The balance sheets and the section of Management's Discussion and Analysis
titled "Average Balances and an Analysis of Average Rates Earned and Paid"
contained in the Annual Report are incorporated herein by reference.
Rate/Volume Analysis. The following table sets forth the effects of
changing rates and volumes on net interest income of the Bank. Information is
provided with respect to (i) effects on interest income attributable to changes
in volume (changes in volume multiplied by prior rate); (ii) effects on
interest income attributable to changes in rate (changes in rate multiplied by
prior volume); and (iii) changes in rate/volume (change in rate multiplied by
change in volume).
Year Ended December 31, Six Months Ended
---------------------------------- -----------------------------------
2002 Compared to Year Ended December 31, 2001 Compared to
December 31, 2001 Six months ended December 31, 2000
(unaudited) (unaudited)
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------- -----------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(Dollars in thousands)
Interest-earning assets
- -----------------------
Mortgage loans (1) $(2,927) (1,621) 145 (4,403) $(1,335) 267 528 (540)
Consumer loans (1) (654) (421) 54 (1,021) (428) (347) 401 (374)
Business loans (1) (1,360) 1,461 (209) (108) (1,443) 2,725 (865) 417
---------------------------------- ---------------------------------
Total loans (4,941) (581) (10) (5,532) (3,206) 2,645 64 (497)
Securities held-to-maturity 13 907 30 950 (147) (301) 253 (195)
Securities available-for-sale (464) 1608 (94) 1,050 (1,231) 1,302 (136) (65)
Daily interest-earning deposits (88) 359 (153) 118 (76) (25) 53 (48)
---------------------------------- ---------------------------------
Total net change in income on
interest-earning assets (5,480) 2,293 (227) (3,414) (4,660) 3,621 234 (805)
================================== =================================
Interest-bearing liabilities
- ----------------------------
Interest-bearing deposits (6,871) 2,887 (1,125) (5,109) (5,172) 320 2,386 (2,466)
FHLB advances (395) (1,598) 45 (1,948) (446) 973 (280) 247
Other borrowing (833) (208) 63 (978) (1,143) 442 273 (428)
---------------------------------- ---------------------------------
Total net change in expenses on
interest-bearing liabilities (8,099) 1,081 (1,017) (8,035) $(6,761) 1,735 2,379 (2,647)
================================== =================================
Net increase in net interest income $4,621 $1,842
====== ======
(1) Does not include interest on loans 90 days or more past due.
Year Ended June 30,
---------------------------------- -----------------------------------
2001 Compared to Year Ended Compared to Year Ended
June 30, 2000 June 30, 1999
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------- -----------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(Dollars in thousands)
Interest-earning assets
- -----------------------
Mortgage loans (1) 755 1,248 30 2,033 301 5,042 59 5,402
Consumer loans (1) 243 488 25 756 (229) 735 (39) 467
Business loans (1) (32) 1,994 (9) 1,953 (95) 2,685 (55) 2,535
---------------------------------- ---------------------------------
Total loans 966 3,730 46 4,742 (23) 8,462 (35) 8,404
Securities held-to-maturity 62 44 9 115 34 105 26 165
Securities available-for-sale 41 3,081 25 3,147 215 1,555 109 1,879
Daily interest-earning deposits (38) 175 (34) 103 (27) (49) 5 (71)
---------------------------------- ---------------------------------
Total net change in income on
interest-earning assets 1,031 7,030 46 8,107 199 10,073 105 10,377
================================== =================================
Interest-bearing liabilities
Interest-bearing deposits 822 (497) (21) 304 257 3,071 48 3,376
FHLB advances 923 3,475 352 4,750 513 3,008 292 3,813
Other borrowings (71) 2,482 (184) 2,227 173 313 216 702
---------------------------------- ---------------------------------
Total net change in expenses on
interest-bearing liabilities 1,674 5,460 147 7,281 943 6,392 556 7,891
================================== =================================
Net increase in net interest income 826 2,486
====== ======
(1) Does not include interest on loans 90 days or more past due.
INVESTMENT PORTFOLIO
- --------------------
The Board of Directors sets the investment policy of the Bank. This policy
dictates that investments will be made based on the safety of the principal
amount, interest rate risk, liquidity requirements of the Bank as well as the
return on the investment. The Bank's policy does not permit the purchase of
non-investment grade bonds. The policy permits the investment in various types
of assets permissible under FDIC regulation including: United States Treasury
obligations; securities of certain government sponsored enterprises,
mortgage-backed securities ("MBS"), collateralized mortgage obligations
("CMOs"), state and municipal government bonds, deposits at the FHLB-Seattle,
certificates of deposit of federally insured institutions, investment grade
corporate bonds, certain bankers' acceptances and Federal funds. Subject to
various restrictions, the Bank may also invest part of its assets in commercial
paper, corporate debt securities and mutual funds, if those assets conform to
FDIC regulations.
Investment securities increased to $208.9 million at December 31, 2002 from
$156.3 million at December 31, 2001, a 34% increase. The investment portfolio
represented 26.0% of total assets at December 31, 2002 compared to 21% at
December 31, 2001. All investment securities, except other securities, are AAA
rated. MBS (including CMOs) available for sale increased from $56.5 million to
$90.1 million as of December 31, 2002. However, agency notes available for sale
decreased from $76.7 million to $55.8 million. Agency notes held to maturity
increased to $44.9 million for the year ended December 31, 2002, as the
Corporation sought to capture additional income by obtaining a higher coupon in
return for giving the issuer the option to call the security before its stated
maturity.
The following tables set forth the Bank's securities available for sale at
the dates indicated.
Estimated Percent of Estimated Percent of Estimated Percent of Estimated Percent of
(Dollars in thousands) Fair Value Portfolio Fair Value Portfolio Fair Value Portfolio Fair Value Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
MBS $ 90,073 56.3% 56,511 37.6 76,832 59.4 45,442 48.6
Agency Notes 55,874 35.0 76,699 51.0 35,492 27.5 34,940 37.4
FHLB stock 13,950 8.7 13,119 8.7 12,668 9.8 10,945 11.7
Other securities - 4,009 2.7 4,221 3.3 2,117 2.3
------- ------- ------- ------
Total $159,897 150,338 129,213 93,444
======= ======= ======= ======
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities available for sale at December
31, 2002. Securities with no stated maturity dates are reported as due within
one year.
Less Than One Year One to Five Years Five to Ten Years Over Ten Years
Estimated Estimated Estimated Estimated
(Dollars in thousands) Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield
- --------------------------------------------------------------------------------------------------------------------------------
MBS - - - - 1,413 7.01 88,660 5.66
Agency Notes 83 2.00 - - 32,788 5.01 23,003 5.93
FHLB stock 13,950 6.19 - - - - - -
------ ------ ------ -------
Total $14,033 - 34,201 111,663
====== = ====== =======
The following table sets forth amortized cost and estimated fair values for
Cascade's securities held to maturity at the dates indicated.
December 31, 2002 December 31, 2001
Amortized Percent of Amortized Percent of
(Dollars in thousands) Cost Fair Value Portfolio Cost Fair Value Portfolio
- --------------------------------------------------------------------------------------------------------
MBS $ 4,212 4,378 8.8 5,989 5,883 100%
Agency Notes 44,866 45,261 91.2 - -
------------------- ------------------
Total $49,078 49,639 5,989 5,883
=================== ==================
June 30, 2001 June 30, 2000
Amortized Percent of Amortized Percent of
(Dollars in thousands) Cost Fair Value Portfolio Cost Fair Value Portfolio
- --------------------------------------------------------------------------------------------------------
MBS $ 6,592 6,456 100% 7,851 7,246 71%
Other - - 3,000 3,032 29
------------------- -------------------
Total $ 6,592 6,456 10,851 10,278
=================== ===================
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities held to maturity at December 31,
2002. Securities with no stated maturity dates are reported as due within one
year.
Less Than One Year One to Five Years Five to Ten Years Over Ten Years
Estimated Estimated Estimated Estimated
(Dollars in thousands) Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield
- --------------------------------------------------------------------------------------------------------------------------------
MBS $ - - - - - - 4,378 5.92
Agency Notes - - - - 13,090 5.19 32,171 5.88
------ -------
Total 13,090 36,549
====== =======
For further information concerning the Corporation's securities portfolio,
see Note 2 of the Notes to the Consolidated Financial Statements contained in
the Annual Report listed in Item 15.
DEPOSITS
- --------
The Bank's primary source of funds is customer deposits. In addition to
checking accounts, the Bank offers a variety of interest-bearing accounts
designed to attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank management
based on competitive market factors and the Bank's need for funds. The Bank
traditionally has not purchased brokered deposits and does not intend to do so
in the future.
Deposits increased to $509.9 million at December 31, 2002 from $420.0
million at December 31, 2001, an increase of 21.4% during this period. Deposits
at June 30, 2001 were $401.9 million. The market for retail deposits remains
fiercely competitive. Previously, the Bank paid rates at the higher end of the
competitive range of financial institutions in its market area. In an attempt
to lower the absolute and relative cost of funds, the Bank modified its deposit
pricing strategy by pricing its deposits in the middle of that range.
The following table sets forth the average balances for each major category
of deposit and the weighted average interest rate paid for deposits during the
years ended December 31, 2002 and, December 31, 2001, and for each of the four
years ended, June 30, 2001, June 30, 2000, June 30, 1999, and June 30, 1998
(dollars in thousands).
Average Deposits by Type
12/31/02 12/31/01 6/30/01 6/30/00 6/30/99 6/30/98
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------------
Non-interest-bearing
demand deposits 29,122 - 23,028 - 22,072 - 22,089 - 18,100 - 15,347 -
Interest-bearing
demand deposits 22,641 1.04% 22,051 1.23 21,783 1.81 18,408 2.11 18,540 2.21 15,185 2.34
Money market deposit 107,363 2.14 94,384 2.98 96,491 4.49 119,219 5.00 69,426 4.66 51,750 4.58
Savings 11,324 1.15 11,073 1.96 10,915 2.83 11,446 3.07 12,781 3.06 14,529 3.14
Time certificates 294,554 3.35 254,836 5.01 242,501 6.22 232,192 5.64 220,921 5.61 205,763 5.84
$465,004 405,372 393,762 403,354 339,768 302,574
The following table indicates the amount of the Bank's jumbo certificates of
deposit by time remaining until maturity at December 31, 2002. Jumbo
certificates of deposit require minimum deposits of $100,000 and rates paid on
such accounts are negotiable.
Maturity Period Jumbo Certificates of Deposit
-----------------------------------------------------------
(Dollars in thousands)
Three months or less $ 40,798
Over three through six months 42,136
Over six through twelve months 83,879
Over twelve months 33,936
Total $200,749
The flow of deposits is influenced significantly by general economic
conditions, changes in the money market and prevailing interest rates. In
addition, there is strong competition for customer dollars from other financial
institutions, mutual funds and non-bank corporations, such as securities
brokerage companies and other diversified companies. The Bank's deposits are
obtained primarily from the areas in which its branches are located. The Bank
relies primarily on customer service and longstanding relationships with
customers to attract and retain these deposits. In the coming year, the Bank
will focus on its deposit gathering activities, and management expects a
significant portion of its deposit growth in 2003 will occur in its business
deposit products. In the event the Bank were liquidated, certain depositors
would be entitled to full payment of their deposit accounts prior to any
payment being made to the shareholders.
RETURN ON EQUITY AND ASSETS
- ---------------------------
The section entitled "Selected Financial Data" of the Annual Report listed
in Item 15 is incorporated herein by reference.
BORROWINGS
- ----------
The Bank relies on advances from the FHLB-Seattle to supplement its supply
of funds and to meet deposit withdrawal requirements. Advances from the
FHLB-Seattle are typically secured by the Bank's first mortgage residential
loans and eligible investment securities. FHLB advances were $197.5 million
at December 31, 2002, compared to $226.5 million at December 31, 2001, a 12.8%
decrease. FHLB advances were $232.1 million at June 30, 2001.
The FHLB provides credit for member financial institutions. As members,
financial institutions are required to own capital stock in the FHLB, and are
authorized to apply for advances on the security of such stock, certain home
mortgages, and government and agency securities (typically securities that are
obligations of, or guaranteed by, the United States). Advances are made to
member financial institutions pursuant to several different programs. These
programs are generally designed to meet the financial institution's needs while
still reflecting market terms and conditions. The Bank uses advances from the
FHLB to supplement funds available to lend and to meet liquidity guidelines.
Interest rates on these advances vary in response to capital market conditions.
The Bank enters into reverse repurchase agreements with nationally
recognized banks. Reverse repurchase agreements are accounted for as borrowings
by the Bank and are secured by designated investments, primarily the notes of
federal agencies and mortgage-backed securities guaranteed by those agencies.
The proceeds of these transactions are used to meet the cash flow and interest
rate risk management needs of the Bank.
Repurchase agreements decreased to $20.6 million at December 31, 2002 from
$49.8 million at December 31, 2001. Repurchase agreements, with notes of
Government Sponsored Enterprises and/or mortgage-backed securities pledged as
collateral, are employed as short term funding vehicles that provide
liabilities with interest rate sensitivity more closely aligned to prime based
loans than the Bank's deposit base.
Cascade Bank has established Fed funds borrowing lines with two of its
correspondent banks. Neither line was used during the year ended December 31,
2002.
The following table sets forth certain information regarding borrowings by
the Corporation at the end of, and during, the periods indicated.
At or for
At or for the six
the year months
ended ended At or for six months
December 31 December 31 June 30
2002 2001 2001 2000 1999
-----------------------------------------------------
(Dollars in thousands)
Weighted average rate on:
Securities sold under agreements to repurchase 1.49% 2.16 4.02 6.46 4.85
FHLB advances 5.78 5.79 6.07 6.21 5.01
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase $ 49,666 49,792 54,237 21,696 11,976
FHLB advances 226,500 235,322 236,712 215,656 141,996
Approximate average borrowings outstanding with respect to:
Securities sold under agreements to repurchase $ 34,415 38,264 34,231 9,082 5,571
FHLB advances 203,022 229,314 221,075 165,524 102,045
Approximate weighted average rate paid on:
Other interest-bearing liabilities* 4.00% 4.93 7.05 7.60 4.51
FHLB advances 5.98 6.14 6.25 5.68 5.17
* Including Trust Preferred Securities.
Trust Preferred Securities. On March 1, 2000 Cascade Capital Trust I issued
$10 million par value Trust Preferred Securities. These securities are
considered Tier I capital for the purposes of regulatory capital requirements.
Cascade Capital Trust I, a wholly owned subsidiary of the Corporation, is a
statutory business trust created for the exclusive purposes of issuing and
selling capital securities and utilizing sale proceeds to acquire junior
subordinated debt issued by Cascade Financial Corporation. Accordingly, the
junior subordinated debentures are the sole assets of the Trust, and payments
under the junior subordinated debentures will be the sole revenues of the
Trust. All of the common securities of the Trust are owned by Cascade
Financial Corporation. The Corporation used the proceeds for general corporate
purposes including stock repurchases and investment in its subsidiary bank. The
Corporation has fully and unconditionally guaranteed the Capital Securities
along with all obligations of Cascade Capital Trust I under the trust
agreements. The Trust preferred securities are included with borrowings as a
separate line item in the consolidated balance sheet and distributions payable
are treated as interest expense in the consolidated statement of operations.
Subsidiary Activity
- -------------------
The Corporation has two subsidiaries: Cascade Bank and Cascade Capital
Trust. The activities of the Corporation are primarily conducted through the
Bank. Accordingly, this Form 10-K principally discusses the Bank's operations.
Cascade Capital Trust I was formed for the exclusive purpose of issuing
Trust Preferred Securities and common securities and using the proceeds to
acquire junior subordinated debentures issued by the Corporation. The junior
subordinated debentures total $10.3 million, have an interest rate of 11.00%,
mature on March 1, 2030 and are the sole assets of Cascade Capital Trust I. The
junior subordinated debentures are prepayable, in whole or in part, at the
Corporation's option on or after March 1, 2010 at declining premiums to
maturity. Proceeds totaling approximately $9.23 million from the issuance of
the junior subordinated debentures were used to increase the capital level of
the Bank.
Personnel
- ---------
At December 31, 2002, the Corporation had 166 full-time equivalent
employees. The Corporation believes that employees play a vital role in the
success of a service company and that the Corporation's relationship with its
employees is good. The employees are not represented by a collective
bargaining unit.
REGULATION
Introduction/General
- --------------------
The following generally refers to certain statutes and regulations affecting
the Corporation and the Bank. This provides only a brief summary of the
regulations impacting the Corporation and is not complete. This discussion is
qualified in its entirety by the statutes and regulations. In addition, some
statutes and regulations exist which impact the Corporation which are not
referenced below.
The Corporation is subject to extensive regulation, supervision and
examination. Such regulation and supervision govern the activities in which the
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities, which are intended to strengthen the financial condition of the
banking industry, including the imposition of restrictions on the operation of
an institution, the classification of assets by the institution and the
adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight could have an adverse material impact on the
Corporation, Cascade and their respective operations.
The Corporation
- ---------------
The Corporation is a bank holding company that has elected to be treated
as a financial holding company with the Board of Governors of the Federal
Reserve Board (the "FRB"). The Bank Holding Company Act of 1956, as amended
("BHCA") subjects the Corporation and its subsidiaries to supervision and
examination by the FRB. The Corporation files annual reports of operations
with the FRB.
Bank Holding Company Regulation. In general, the BHCA limits bank holding
company business to owning or controlling banks and engaging in other
banking-related activities. Bank holding companies must obtain the FRB's
approval before they: (1) acquire direct or indirect ownership or control of
any voting shares of any bank that results in total ownership or control,
directly or indirectly, of more than 5 percent of the voting shares of such
bank; (2) merge or consolidate with another bank holding company; or (3) acquire
substantially all of the assets of any additional banks. Subject to certain
state laws, such as age and contingency restrictions, a bank holding company
that is adequately capitalized and adequately managed may acquire the assets of
both in-state and out-of-state banks. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company that is not a bank or a bank holding
company unless the FRB determines that the activities of such company are
incidental or closely related to the business of banking. If a bank holding
company is well-capitalized and meets certain criteria specified by the FRB, it
may engage de novo in certain permissible nonbanking activities without prior
FRB approval.
The Change in Bank Control Act of 1978, as amended, requires a person (or
group of persons acting in concert) acquiring "control" of a bank holding
company to provide the FRB with 60 days' prior written notice of the proposed
acquisition. Following receipt of this notice, the FRB has 60 days within which
to issue a notice disapproving the proposed acquisition, but the FRB may extend
this time period for up to another 30 days. An acquisition may be completed
before expiration of the disapproval period if the FRB issues written notice of
its intent not to disapprove the transaction. In addition, any "company" must
obtain the FRB's approval before acquiring 25% (5% if the "company" is a bank
holding company) or more of the outstanding shares or otherwise obtaining
control over the Corporation.
Financial Holding Company Election/Affiliations. In 2001, the Corporation
elected to be treated as a financial holding company with the FRB, as permitted
under the Gramm-Leach-Bliley Financial Services Modernization Act (the "GLB").
This election allows the Corporation to conduct activities that previously were
unavailable to bank holding companies, provided that notice requirements are
generally required before engaging in any such activities.
The primary purpose of the GLB is to establish a framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the legislation (i) repeals the
historical restrictions on preventing banks from affiliating with securities
firms, (ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (iii) broadens the activities that
may be conducted by national banks and banking subsidiaries of bank holding
companies, (iv) provides an enhanced framework for protecting the privacy of
consumers' information and (v) addresses a variety of other legal and
regulatory issues affecting both day-to-day operations and long-term activities
of financial institutions. The GLB permits bank holding companies to engage in
a wider variety of financial activities than permitted under previous law,
particularly with respect to insurance and securities activities. In addition,
in a change from previous law, bank holding companies are in a position to be
owned, controlled or acquired by any company engaged in financially related
activities, so long as such company meets certain regulatory requirements. To
the extent the legislation permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This consolidation could result in a growing number of larger
financial institutions that offer a wider variety of financial services than
the Corporation currently offers and that can aggressively compete in the
markets currently served by the Corporation.
Transactions with Affiliates. The Corporation and its subsidiaries are
deemed affiliates within the meaning of the Federal Reserve Act, and
transactions between affiliates are subject to certain restrictions.
Accordingly, the Corporation and its subsidiaries must comply with Sections 23A
and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B (1) limit
the extent to which a financial institution or its subsidiaries may engage in
"covered transactions" with an affiliate, as defined, to an amount equal to 10%
of such institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
Tie-In Arrangements. The Corporation and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of credit, sale or lease of property or furnishing of services. For example,
with certain exceptions, neither the Corporation nor its subsidiaries may
condition an extension of credit on either a requirement that the customer
obtain additional services provided by it or an agreement by the customer to
refrain from obtaining other services from a competitor.
State Law Restrictions. As a Delaware corporation, the Corporation is
subject to certain limitations and restrictions as provided under applicable
Delaware corporate laws.
Securities Registration and Reporting. The Corporation's common stock is
registered as a class with the SEC under the Securities Exchange Act of 1934
and thus the Corporation is subject to the periodic reporting and proxy
solicitation requirements and the insider-trading restrictions of that Act. The
periodic reports, proxy statements, and other information filed by the
Corporation under that Act can be inspected and copied at or obtained from the
Washington, D.C. office of the SEC. In addition, the securities issued by the
Corporation are subject to the registration requirements of the Securities Act
of 1933 and applicable state securities laws unless exemptions are available.
Disclosure Controls and Procedures. The Sarbanes-Oxley Act of 2002 and
related rulemaking by the SEC, which effect sweeping corporate disclosure and
financial reporting reform, generally require public companies to focus on
their disclosure controls and procedures. As a result, public companies such
as the Corporation now must have disclosure controls and procedures in place
and make certain disclosures about them in their periodic SEC reports (i.e.,
Forms 10-K and 10-Q) and their chief executive and chief financial officers
must certify in these filings that they are responsible for developing and
evaluating disclosure controls and procedures and disclose the results of an
evaluation conducted by them within the 90-day period preceding the filing of
the relevant report, among other things.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the
Corporation's net income for the past year is sufficient to cover both the cash
dividend and a rate of retention consistent with the Corporation's capital
needs. The FRB also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow to pay dividends.
Capital Requirements. The FRB has established capital adequacy guidelines
for bank holding companies that generally parallel the capital requirements the
FDIC has for the Bank. The FRB regulations provided that capital standards will
be applied on a consolidated basis in the case of a bank holding company with
more than $150 million in total consolidated assets. The Corporation's total
risk based capital must equal 8% of risk weighted assets and 4% must consist of
Tier 1 capital.
Stock Repurchases. Bank holding companies, except for certain "well
capitalized" and highly rated companies, are required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption is equal
to or greater than 10% of consolidated net worth during the preceding twelve
months. The FRB may disapprove any such purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice.
Cascade Bank
- ------------
General. Applicable federal and state statutes and regulations governing a
bank's operations relate, among other matters, to capital requirements,
required reserves against deposits, investments, loans, legal lending limits,
certain interest rates payable, mergers and consolidations, borrowings,
issuance of securities, payment of dividends, establishment of branches, and
dealings with affiliated persons. The Federal Deposit Insurance Corporation
("FDIC") has authority to prohibit banks under their supervision from engaging
in what they consider to be unsafe or unsound practices in conducting their
business. Cascade Bank is a state-charted commercial bank subject to extensive
regulation and supervision by both the Washington Department of Financial
Institutions ("DFI") and the FDIC. The federal laws that apply to Cascade Bank
regulate, among other things, the scope of its business, its investments, its
reserves against deposits, the timing of the availability of deposited fund
and the nature and amount of and collateral for loans. The laws and
regulations governing Cascade Bank generally have been promulgated to protect
depositors and not to protect shareholders of such institutions or their
holding companies.
CRA. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the FRB or
the FDIC evaluates the record of the financial institutions in meeting the
credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. The four possible ratings of meeting
community credit needs are outstanding, satisfactory, needs to improve and
substantial noncompliance.
Cascade has received an "outstanding" CRA rating, reflecting the Bank's
commitment to meeting the credit needs of the communities it serves.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees
and benefits ("Guidelines"). The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
If a federal banking agency determines that a financial institution fails to
meet any standard prescribed by the Guidelines, the agency may require the bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. Management is not aware of any conditions relating to these safety
and soundness standards which would require the submission of a plan of
compliance.
Insider Credit Transactions. Cascade Bank is also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the
same terms, including interest rates and collateral, and follow credit
underwriting procedures that are not less stringent than those prevailing at
the time for comparable transactions with persons not covered above and who are
not employees; and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features. Cascade Bank is also subject to certain
lending limits and restrictions on overdrafts to such persons. A violation of
these restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of Cascade Bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 (the "FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its
authority. These standards cover internal controls, information systems, and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, such other operational
and managerial standards as the agency determines to be appropriate, and
standards for asset quality, earnings and stock valuation. An institution that
fails to meet these standards must develop a plan acceptable to the agency,
specifying the steps that the institution will take to meet the standards.
Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Management of the Corporation believes that Cascade Bank
meets all such standards, and therefore, does not believe that these regulatory
standards materially affect the Corporation's business operations currently.
Loans to One Borrower. Cascade Bank is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans to one borrower
to 20 percent of unimpaired capital and surplus. At December 31, 2002, the Bank
had no borrowers with balances in excess of the new loans-to-one-borrower
limit.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching under certain circumstances. This legislation
generally authorizes interstate branching and relaxes federal law restrictions
on interstate banking. Currently, bank holding companies may purchase banks in
any state, and states may not prohibit such purchases. Additionally, banks are
permitted to merge with banks in other states as long as the home state of
neither merging bank has "opted out." The Interstate Act requires regulators to
consult with community organizations before permitting an interstate
institution to close a branch in a low-income area. With regard to interstate
bank mergers, Washington has "opted in" to the Interstate Act and allows
in-state banks to merge with out-of-state banks subject to certain aging
requirements. Washington law generally authorizes the acquisition of an
in-state bank by an out-of-state bank or bank holding company through the
acquisition of or a merger with a financial institution that has been in
existence for at least 5 years prior to the acquisition.
Deposit Insurance. The deposits of Cascade Bank are currently insured to a
maximum of $100,000 per depositor through the Savings Association Insurance
Fund (the "SAIF") administered by the FDIC. All insured banks are required to
pay semi-annual deposit insurance premium assessments to the FDIC. The FDICIA
included provisions to reform the Federal Deposit Insurance System, including
the implementation of risk-based deposit insurance premiums. The FDICIA also
permits the FDIC to make special assessments on insured depository institutions
in amounts determined by the FDIC to be necessary to give it adequate
assessment income to repay amounts borrowed from the U.S. Treasury and other
sources, or for any other purpose the FDIC deems necessary. The FDIC has
implemented a risk-based insurance premium system under which banks are
assessed insurance premiums based on how much risk they present to the SAIF.
Banks with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern.
Dividends. The principal source of the Corporation's revenue is dividends
received from Cascade Bank. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends that would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that
payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Other than the laws and
regulations noted above, which apply to all banks and bank holding companies,
neither the Corporation nor Cascade Bank is currently subject to any regulatory
restrictions on its dividends.
Capital Adequacy. Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and
banks. If capital falls below minimum guideline levels, the holding company or
bank may be denied approval to acquire or establish additional banks or
non-bank businesses or to open new facilities. The FDIC and FRB use risk-based
capital guidelines for banks and bank holding companies. These are designed to
make such capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the FRB has noted that bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of the
minimum. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8 percent, of which at least 4 percent must be Tier I capital. Tier I
capital for bank holding companies includes common shareholders' equity,
certain qualifying perpetual preferred stock and minority interests in equity
accounts of consolidated subsidiaries, less intangibles except as described
above. At December 31, 2002, the Bank had Tier 1 capital equal to $64.5 million
or 8.07% of adjusted total assets, which is $32.5 million above the minimum
leverage requirement of 4% as in effect on that date.
The FDIC also employs a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The FDIC requires a minimum leverage ratio of 3 percent.
However, for all but the most highly rated bank holding companies and for bank
holding companies seeking to expand, the FDIC expects an additional cushion of
at least 1 percent to 2 percent.
FDICIA created a statutory framework of supervisory actions indexed to the
capital level of the individual institution. Under regulations adopted by the
FDIC, an institution is assigned to one of five capital categories depending on
its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which
are deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. The
Corporation does not believe that these regulations have any material effect on
its operations currently.
Reference is made to Note 11 of the Notes to the Consolidated Financial
Statements in the Annual Report, which is listed as an exhibit under Item 15,
for additional information concerning regulatory capital.
The FDIC risk-based requirement requires financial institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of Tier I capital and supplementary capital. Supplementary capital consists
of certain permanent and maturing capital instruments that do not qualify as
Tier I capital and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to
satisfy the risk-based requirement only to the extent of Tier I capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example,
prudently underwritten permanent one-to-four family first lien mortgage loans
not more than 90 days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
FNMA or FHLMC, have been assigned a risk weight of 50%.
On December 31, 2002, the Bank had total risk-based capital of approximately
$71.3 million, including $64.5 million in Tier I capital and $6.8 million in
qualifying supplementary capital, and risk-weighted assets of $544.0 million,
or total capital of 13.11% of risk-weighted assets. This amount was $27.8
million above the 8% requirement in effect on that date.
FDIC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound. The FDIC
regulations state that if the FDIC determines that conditions so warrant, it
may impose a greater capital standard on a particular institution.
Management believes that the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, if circumstances were to
materially and adversely impact the future earnings of the Bank, the ability of
the Bank to meet its capital requirements could be impaired.
Prompt Corrective Action. Federal statutes establish a supervisory framework
based on five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8%, a Tier 1 risk-based capital of not less than 4%, and a leverage
ratio of not less than 4%. Any institution which fails to meet these levels
will be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions, which become more
extensive as an institution becomes more severely undercapitalized. Failure by
an institution to comply with applicable capital requirements will result in
restrictions on their activities and lead to enforcement actions, including the
issuance of a capital directive to ensure the maintenance of adequate capital
levels. Banking regulators will take prompt corrective action with respect to
depository institutions that do not meet minimum capital requirements.
At December 31, 2002, Cascade was a "well capitalized" institution under the
prompt corrective action regulations of the FDIC.
Prior Regulation. Prior to converting to a commercial bank, the Bank was
subject to supervision by the Office of Thrift Supervision ("OTS"). The OTS is
an office in the Department of the Treasury subject to the general oversight of
the Secretary of the Treasury. The OTS has extensive authority over the
operations of savings associations. Among its functions, the OTS issues and
enforces regulations affecting federally-insured savings associations and
regularly examines these institutions. All savings associations are required to
pay assessments to the OTS to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are determined based on the savings
association's total assets, including consolidated subsidiaries.
TAXATION
Federal Taxation
- ----------------
The Corporation reports its income on a fiscal year basis using the accrual
method of accounting and is subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly
Cascade's reserve for bad debts discussed below. In 2001, the Corporation's
fiscal year was changed to the calendar year. The following discussion of tax
matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Bank or the
Corporation.
Tax Bad Debt Reserves
- ---------------------
The reserve method of accounting for bad debt reserves was repealed for tax
years beginning after December 31, 1995. As a result, the Bank is no longer
able to calculate its deduction for bad debts using the
percentage-of-taxable-income method. Instead, Cascade is required to compute
its deduction based on specific charge-offs during the taxable year.
Distributions
- -------------
To the extent that the Bank makes "non-dividend distributions" to the
Corporation that are considered as made (i) from the reserve for losses as of
June 30, 1988 or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will
be included in Cascade's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of Cascade's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. Thus, any dividends to the Corporation that would reduce
amounts appropriated to the Bank's bad debt reserve and deducted for federal
income tax purposes would create a tax liability for Cascade. The amount of
additional taxable income attributable to an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if Cascade makes a "non-dividend
distribution," then approximately one and one-half times the amount so used
would be included in gross income for federal income tax purposes.
Dividends-Received Deduction and Other Matters
- ----------------------------------------------
The Corporation may exclude from its income 100% of dividends received from
the Bank as a member of the same affiliated group of corporations. The
corporate dividends-received deduction is generally 70% in the case of
dividends received from unaffiliated corporations with which the Corporation
and the Bank will not file a consolidated tax return, except that if the
Corporation or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
Washington Tax
- --------------
The Bank is subject to a business and occupation tax which is imposed under
Washington law at the rate of 1.5% of gross receipts; however interest received
on loans secured by mortgages or deeds of trust on residential properties and
interest on obligations issued or guaranteed by the United States are not
presently subject to the tax. On August 15, 1994, the Department of Revenue of
the State of Washington began an audit of the Corporation's records for
compliance regarding the business and occupation tax. The Corporation had not
been audited for 18 years. The Department of Revenue has issued a tax billing
for approximately $148,000 of which the Corporation has accrued $104,000 and
paid $16,000. The Corporation has filed an appeal with the Department of
Revenue. A determination has been issued reversing two of the three billing
issues in the audit. The Corporation has filed another appeal regarding the
final issue.
Availability of Filings
- -----------------------
You may access, free of charge, copies of the following reports of the
Corporation on the SEC's website at www.sec.gov:
1) Annual Reports on Form 10-K; and
2) Quarterly Reports on Form 10-Q.
These documents are posted on the SEC's website, generally within twenty-
four hours after the Corporation files these documents electronically with the
Securities and Exchange Commission. As these reports are currently available
from the SEC's website, the Corporation does not currently post its reports on
its website, but is willing to provide electronic or paper copies of its
filings (subject to actual copying costs) upon reasonable request.
Item 2. Properties
- -------------------
The Corporation owns six full service branch locations and leases nine full
service locations. Owned offices range in size from 3,500 to 52,000 square
feet and have a total net book value at December 31, 2002, including leasehold
improvements, furniture and fixtures, of $9.3 million. The Corporation leases
approximately 10% of its main office and approximately 25% of its Marysville
office to non-affiliated parties. See Note 4 of the Notes to the Consolidated
Financial Statements contained in the Annual Report which is listed in Item 15.
Item 3. Legal Proceedings
- --------------------------
The Corporation is not engaged in any legal proceedings of a material nature
at the present time. Periodically, there have been various claims and lawsuits
involving the Corporation and the Bank, principally as a defendant, such as
claims to enforce liens, condemnation proceedings on properties in which the
Bank holds security interests, claims involving the making and servicing of
real property loans and other issues incident to the Corporation's business.
In the opinion of management and the Corporation's legal counsel, no
significant loss is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The information contained on back inside cover of the Annual Report listed in
Item 15 is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section entitled "Selected Financial Data"
of the Annual Report listed in Item 15 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
The information contained in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Annual
Report listed in Item 15 is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained under the section captioned "Market Risk" in the
Management's Discussion and Analysis section of the Annual Report listed in
Item 15 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements and supplementary data in the Annual Report listed
in Item 15 is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I-Election
of Directors" contained in the Corporation's Definitive Proxy Statement for the
Corporation's December 31, 2002 Annual Meeting of Stockholders (the "Proxy
Statement"), is incorporated herein by reference. Reference is made to the
cover page of this report for information regarding compliance with Section
16(a) of the Exchange Act.
The following table sets forth information with respect to the executive
officers of the Corporation and the Bank.
Name Age (a) Position
Frank M. McCord (b) 72 Chairman, Cascade Financial Corp.
Chairman, Cascade Bank
Carol K. Nelson (b) 46 President, Chief Executive Officer and
Director of Cascade Bank and Cascade
Financial Corporation
Robert G. Disotell 48 Executive Vice President,
Chief Credit Officer
Steven R. Erickson 47 Executive Vice President,
Real Estate Lending
Lars H. Johnson (b) 49 Executive Vice President,
Chief Financial Officer
LeAnne M. Frank 33 Executive Vice President,
Quality of Service and Technology
Wayne M. Fjelstad 44 Executive Vice President,
Business Banking
Vera E. Wildauer 44 Executive Vice President,
Marketing Director
Debbie E. McLeod 37 Executive Vice President, Retail Banking
- -----------------------------
(a) At December 31, 2002.
(b) Officer of the Corporation and Bank.
The principal occupation of each executive officer of the Corporation and
Bank is set forth in the Proxy Statement or below. There are no family
relationships among or between the executive officers listed above.
ROBERT G. DISOTELL has been employed by Cascade Bank since 1977 and
currently serves as Executive Vice President of Credit Administration. He is
responsible for overseeing the credit quality of the Bank's loan portfolios.
Mr. Disotell has managed a variety of business groups in his tenure at Cascade,
including Mortgage Banking, Loan Servicing, Secondary Marketing, Retail
Banking, and Community Reinvestment Act (CRA) activities. Mr. Disotell is a
resident of Arlington, Washington.
STEVEN R. ERICKSON is the Executive Vice President of Real Estate Lending
for the Bank, responsible for managing residential and income property lending
and serves as the Assistant Secretary for the Corporation. Mr. Erickson joined
Cascade in 1978. He is a member of the Board for Big Brothers and Big Sisters
of Snohomish County and Trustee of the Boys and Girls Club of Snohomish County.
He is a resident of Marysville, Washington.
LEANNE M. FRANK is the Executive Vice President of Quality of Service and
Technology for the Bank. She has 16 years of consumer banking experience
starting Rainier Bank and most recently Bank of America, where she served as
Vice President and Region Service Manager. She is Vice President of the
Everett Theatre Society Board. Ms. Frank is a resident of Everett, Washington.
LARS H. JOHNSON is the Executive Vice President, Chief Financial Officer of
the Bank and Corporation. Mr. Johnson joined Cascade in April 2000. Mr.
Johnson has 28 years of financial management experience, including 16 years
with the Federal Home Loan Bank of Seattle. Mr. Johnson is a resident of
Edmonds, Washington.
WAYNE M. FJELSTAD is the Executive Vice President of Business Banking for
the Bank, responsible for managing business loans, lines of credit,
owner-occupied commercial real estate, and other business services. Mr.
Fjelstad joined Cascade Bank in 2002. He has 22 years of banking experience,
previously working for Bank of America Small Business Banking, and also as a
commercial lender for Frontier Bank. He is involved in a number of community
events, volunteer coaches, and teaches classes in local elementary schools.
DEBBIE E. McLEOD is Executive Vice President of Retail Banking for the Bank.
Ms. McLeod joined Cascade Bank in February 2001. She has over 14 years of
commercial banking experience and was previously Vice President and Northern
Region Sales Manager for Bank of America. Ms. McLeod resides in Burlington,
Washington.
VERA E. WILDAUER joined Cascade in 1997 as Senior Vice President, Marketing
Director. In 2000, she was elected Executive Vice President, Marketing. Ms.
Wildauer has 22 years experience in a full range of bank marketing disciplines
among major Washington State financial institutions. In addition to directing
all aspects of marketing, she is also responsible for loan servicing, the
commercial loan documentation department, and real estate loan operations. She
is a member of the Board of Directors of Bridgeways. Ms. Wildauer is a
resident of Bothell, Washington.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge
by any person of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated herein by reference to
the section captioned "Transactions with Management and Others" of the Proxy
Statement.
Item 14. Controls and Procedures
- ---------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Corporation's disclosure controls and procedures (as defined in section
13(a) - 14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried
out under the supervision and with the participation of the Corporation's Chief
Executive Officer, Chief Financial Officer and several other members of the
Corporation's senior management with the 90-day period preceding the filing
date of this annual report. The Corporation's Chief Executive Officer and
Chief Financial Officer concluded that the Corporation's disclosure controls
and procedures as currently in effect are effective in ensuring that the
information required to be disclosed by the Corporation in the reports it files
or submits under the Act is (i) accumulated and communicated to the
Corporation's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended December 31, 2002,
the Corporation did not make any significant changes in, nor take any
corrective actions regarding, its internal controls or other factors that could
significantly affect these controls.
Disclosure Controls and Internal Controls. Disclosure controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in the Corporation's reports filed under the
Securities Exchange Act of 1934 (Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's (SEC) rules and forms. Disclosure controls are also
designed with the objective of ensuring that such information is accumulated
and communicated to our management, as appropriate to allow timely decisions
regarding required disclosure. Internal Controls are procedures which are
designed with the objective of providing reasonable assurance that (1)
transactions are properly authorized; (2) assets are safeguarded against
unauthorized or improper use; and (3) transactions are properly recorded and
reported, all to permit the preparation of financial statements in conformity
with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The Corporation's management
does not expect that our disclosure controls or our internal controls will
prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Corporation have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1)(2) Independent Auditors' Report
Consolidated Financial Statements
(a)Consolidated Balance Sheets at December 31, 2002 and December
31, 2001.
(b)Consolidated Statements of Operations for the year ended
December 31, 2002 and 2001, for the six months ended December 31, 2001 and
2000, and the years ended June 30, 2001and 2000.
(c)Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the year ended December 31, 2002 and 2001, for the six
months ended December 31, 2001 and 2000, and the years ended June 30, 2001 and
2000.
(d)Consolidated Statements of Cash Flows for the year ended
December 31, 2002 and 2001, for the six months ended December 31, 2001 and
2000, and the years ended June 30, 2001and 2000.
(e)Notes to Consolidated Financial Statements
All schedules have been omitted, as the required information is either
inapplicable or contained in the Consolidated Financial Statements or related
Notes contained in the Annual Report.
(3) Exhibits
3.1 Certificate of Incorporation of Cascade Financial Corporation
(Incorporated by reference to the Corporation's Proxy statement on Form S-4
(File No. 33-83200)).
3.2 Bylaws of Cascade Financial Corporation (Incorporated by reference to
the Corporation's Registration Statement on Form S-4 (File No. 33-83200)).
10.1Cascade Financial Corporation 1994 Employee Stock Purchase Plan
(Incorporated by reference to the Corporation's Registration Statement on Form
S-4 (File No. 33-83200)).
10.2 Cascade Financial Corporation 1992 Stock Option and Incentive Plan
(Incorporated by reference to the Corporation's Form 10-KSB for the period
ending June 30, 1995).
10.3 Cascade Financial Corporation Employee Stock Ownership Plan
(Incorporated by reference to the Corporation's Annual Report on Form 10-KSB
for the period ending June 30, 1995).
10.4 Cascade Financial Corporation 1997 Stock Option Plan (Incorporated
by reference to Appendix E to the Prospectus included in the Corporation's
Registration Statement on Form S-4 (File No. 333-24203)).
10.5 Employment Agreement entered into between the Bank and Carol K.
Nelson dated November 27, 2001. (Incorporated by reference to Exhibit 10.5 of
the Corporation's Form 10-K for the period ending December 31, 2001).
10.6 Form of Change of Control Agreement entered into between the Bank
and its executive officers. (Incorporated by reference to Exhibit 10.6 of the
Corporation's Form 10-K for the period ending December 31, 2001).
10.7 Cascade Financial Corporation 1997 Elective Equity Plan.
(Incorporated by reference to Exhibit 10.7 of the Corporation's Form 10-K for
the period ending December 31, 2001).
13 Cascade Financial Corporation December 31, 2002 Annual Report to
Stockholders, including the Selected Financial Data and Management Discussion
and Analysis.
21 Subsidiaries
23 Consent of Independent Auditors
99 Certification of Annual Report on Form 10-K pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On March 8, 2002, Cascade Financial Corporation filed a Form 8-K to announce
that Carol K. Nelson was appointed as Chief Executive Officer of the
Corporation effective May 1, 2002. Frank M. McCord announced his retirement as
Chief Executive Officer as of that date. Mr. McCord will continue as Chairman
of the Board of Directors of the Corporation and Cascade Bank.
On September 25, 2002, Cascade Financial Corporation filed a Form 8-K
announcing a $0.05 cash dividend. The dividend was payable on October 30, 2002
to shareholders of record on October 9, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CASCADE FINANCIAL CORPORATION
Date: March 26, 2003 By:/s/ Carol K Nelson
Carol K. Nelson
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By:/s/ Lars H. Johnson By:/s/ D. R. Murphy
Lars H. Johnson D. R. Murphy
Executive Vice President Director
(Chief Financial Officer) Date: March 26, 2003
Date: March 26, 2003
By:/s/ Frank M. McCord By:/s/ Ronald E Thompson
Frank M. McCord Ronald E. Thompson
Chairman Director
Date: March 26, 2003 Date: March 26, 2003
By:/s/ Janice Halladay By:/s/ G. Brandt Westover
Janice Halladay G. Brandt Westover
Director Director
Date: March 26, 2003 Date: March 26, 2003
By:/s/ David W. Duce By:/s/ Craig Skotdal
David W. Duce Craig Skotdal
Director Director
Date: March 26, 2003 Date: March 26, 2003
By:/s/ David O'Connor By:/s/ Dwayne Lane
David O'Connor Dwayne Lane
Director Director
Date: March 26, 2003 Date: March 26, 2003
By:/s/ Henry Robinett
Henry Robinett
Director
Date:March 26, 2003
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Cascade Financial Corporation
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ------------ ------------ ----------------------
Cascade Bank 100% Washington
Cascade Capital Trust I 100% Delaware
Cascade Investment Services, Inc. (b) 100% Washington
- --------------------------
(a) The operation of the Corporation's wholly owned subsidiaries are included
in the Corporation's Financial Statements contained in the Annual Report
attached hereto as Exhibit 15.
(b) Wholly-owned subsidiary of Cascade Bank.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carol K. Nelson, certify that:
1. I have reviewed this annual report on Form 10-K of Cascade Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Carol K. Nelson,
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lars H. Johnson, certify that:
1. I have reviewed this annual report on Form 10-K of Cascade Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Lars H. Johnson,
Chief Financial Officer
Exhibit 99
CERTIFICATION OF ANNUAL REPORT ON FORM 10-K
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned are the Chief Executive Officer and the Chief Financial
Officer of Cascade Financial Corporation (the "Registrant"). This Certification
is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This
Certification accompanies the Annual Report on Form 10-K of the Registrant for
the annual period ended December 31, 2002.
We certify that such Annual Report on Form 10-K fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in such 10-K Report fairly presents, in all
material respects, the financial condition and the results of operations of the
Registrant.
Date: March 26, 2003
/s/ Carol K. Nelson
Carol K. Nelson, President
and Chief Executive Officer
/s/ Lars H. Johnson
Lars H. Johnson, Chief
Financial Officer