Exhibit 13
CASCADE FINANCIAL CORP
12/31/02 ANNUAL REPORT
Financial Highlights................................1
Letter to Shareholders..............................2
Cascade Bank Management Team.......................14
Board of Directors.................................16
Management Discussion and Analysis.................19
Independent Auditors' Report.......................31
Annual Meeting and Vote Information................56
FINANCIAL HIGHLIGHTS
- --------------------
Dollars in thousands except for per share and financial ratios.
YEAR ENDED DECEMBER 31 2002 2001 2000 1999 1998
- ---------------------- ------- ------- ------- ------- -------
Net interest income $ 26,024 21,403 18,738 17,911 14,907
Other income 4,039 3,322 2,399 2,711 2,630
Net income 8,072 5,617 3,821 4,152 4,048
Earnings per share (diluted) 1.22 0.87 0.59 0.65 0.63
AT DECEMBER 31 2002 2001 2000 1999 1998
- ---------------------- ------- ------- ------- ------- -------
Assets $ 804,153 762,013 716,129 616,958 489,807
Loans, net 546,677 576,226 548,722 511,735 413,698
Deposits 509,850 419,980 395,976 438,935 335,529
Stockholders' equity 56,640 47,677 41,240 35,371 33,612
Book value per share 8.74 7.70 6.70 5.91 5.64
FINANCIAL RATIOS 2002 2001 2000 1999 1998
- ---------------------- ------- ------- ------- ------- -------
Return on assets 1.05% 0.77 0.57 0.75 0.82
Return on average equity 15.49 12.63 10.16 12.04 12.87
Net interest margin 3.44 3.01 2.86 3.32 3.47
% Nonperforming loans/total loans 0.17 0.34 0.42 0.10 0.27
Efficiency ratio 54.29 60.13 68.62 67.18 64.00
In 2001, following Cascade Bank's conversion from a thrift institution to a
commercial bank, Cascade Financial Corporation ("Cascade") changed its fiscal
year-end from June 30 to December 31 to align its reporting periods with those
of its commercial bank peers. Except for the year ended December 31, 2002,
Cascade's financial information, prepared by management for the calendar years
ended December 31, is unaudited.
[PICTURED - Jenna Wahls, Accountant]
Dear Shareholders, Customers, and Employees:
Successfully transforming Cascade into a high performance commercial bank in
the Puget Sound market takes focus and discipline. It also requires a dedicated
and expert team of individuals. Over the last year, we have continued to make
tremendous progress in this transition. Throughout this Annual Report, you'll
see some of the many faces that have been instrumental in Cascade's changing
organization.
Through the disciplined execution of our business strategy, our employees
helped us surpass the five-year financial targets we set for ourselves
in 2001. These were challenging goals. For example, return on average equity
was 15.5% by year-end, exceeding our goal of 15%. You'll note that we've raised
the bar for the 2006 targets. For two consecutive years, we've increased
earnings by more than 40% by focusing on customer service and improving
operations at every level. These results allowed us to initiate our first cash
dividend for shareholders in October.
Our vision, to be the preferred community bank, continues to be guided by
the strong leadership of Cascade employees throughout the company.
"We will be the preferred community bank whose employees build relationships
to deliver financial solutions with exceptional service." Vision Statement
[PICTURED - Carol K. Nelson, President and Chief Executive Officer]
FINANCIAL TARGETS PREVIOUS 2002 2006
- ----------------- 2005 TARGET PERFORMANCE TARGET
----------- ----------- ---------
Return on average equity > 15% 15.5% 16 - 18%
Return on average assets - 1.05% >1.10%
Annual growth in earnings per share 10 to 15% 40% 10 to 15%
Ratio of nonperforming loans to
total loans <1.00% 0.17% <1.00%
Efficiency ratio < 60% 54% < 55%
Business owners and families typically choose a community bank because they are
looking for more personal service. They don't want to be just a number. At
Cascade, we know there are many local community banks available to our
customers and that's why we're focused on what will differentiate us-
exceptional service. In 2002 we added several members to our team,
strengthening our commercial banking expertise, both on the line and in key
support departments. Training is a priority throughout the organization. We
emphasize both service and technical skills to build a confident and effective
team of employees. Our management team takes a balanced, disciplined approach
to leading the people who serve our customers. Incentive programs not only
reward sales, but are also focused on credit quality, service levels, and
teamwork.
I would like to personally thank all the stakeholders in Cascade's success
this year-our employees, for helping make our vision a reality, and our
customers and shareholders for choosing Cascade.
Sincerely,
/s/.Carol K. Nelson
President and Chief Executive Officer
Cascade Financial Corporation
February 28, 2003
2002 highlights
- ---------------
Revenues increased 22%
Net income increased 44% and EPS increased 40%
Return on average equity increased 286 basis points to 15.49%
Return on average assets rose 28 basis points to 1.05%
The efficiency ratio improved 584 basis points to 54.3%
Asset quality remained strong with nonperforming loans at 0.17% of total loans
Quarterly cash dividends initiated with a $0.05 per share payment in October
REVENUE CHART - dollars in millions, unaudited except for 2002
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net income 8.1 5.6 3.8 4.2 4.0
NET INCOME CHART - dollars in millions, unaudited except for 2002
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net interest income 26.0 21.4 18.7 17.9 14.9
Other income 4.0 3.3 2.4 2.7 2.6
LOAN CHARTS
December 31, 1998: December 31, 2002
$418 Million unaudited $554 Million audited
Multifamily 15% 17%
Consumer 12 9
Commercial R/E 8 11
R/E Construction 8 15
Residential 46 22
Business 11 26
[PICTURED - Bruce Farnham, Business Banker]
BUSINESS LOANS CHART
Dollars in millions, information other than 2001 & 2002 is unaudited.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Business loans 142 125 97 77 48
Changing the mix
- ----------------
One of the clearest signs of Cascade's transition to a commercial bank is the
change in the composition of our loan portfolio. As our business banking team
builds relationships with more local companies, business, commercial real
estate, and construction loans continue to grow. Business loans increased to
26% of loans, commercial real estate to 11% and construction loans to 15%. In
contrast, refinance activity resulted in a decline in residential real estate
and multifamily loans, off $30.1 million and $15.5 million respectively. With
mortgage rates at a 40-year low, homeowners have been taking the opportunity
to refinance their properties. Most fixed rate mortgages originated by Cascade
are sold to investors.
To offset this decline, but continue our asset growth, Cascade's investment
securities in U.S. Treasury and Government Agency bonds increased by 34% to
$209 million. This effort resulted in 6% growth in total assets to $804
million.
Focusing on the customer experience
- -----------------------------------
Dr. Ortuzar has a thriving pediatric dentistry practice. When she wanted to
make her vision of a kid-friendly building a reality, business banker Barbara
Cooch was there to help with the financing and offer support throughout the
process.
"I wanted to make coming to the dentist a great experience for my young
patients.
With Barbara's help, I knew I would have an active partner." Cascade
finances commercial real estate for many of our customers. Our business bankers
are committed to making every borrowing experience a good one. To measure that,
we annually survey 100% of our business customers for their feedback.
[PICTURED - Barbara Cooch, Business Banker]
Financing local builders
- ------------------------
One of Cascade's long-standing strengths has been lending to premier local
builders. Net loans outstanding in real estate construction increased 11% to
$84.1 million. Real estate construction loans have focused on single family
housing development projects. Despite the sluggish economy in the Puget Sound
region, the housing and housing construction market has remained strong. Low
interest rates and the shift in consumer values toward home ownership have kept
housing demand high.
Every real estate construction loan gets Scott Gibson's careful review. As
Senior Underwriter he helps strike the balance between ensuring strong credit
quality and growing the
loan portfolio.
[PICTURED Scott Gibson, Sr. Underwriter]
REAL ESTATE CONSTRUCTION LOANS CHART
Dollars in millions, information other than 2001 & 2002 is unaudited.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Real Estate Construcion 84 76 51 50 34
Managing credit quality
- ------------------------
Cascade's loan portfolio continues to outperform national and state averages on
most measures of credit quality. Nonperforming loans as a percentage of total
loans was 0.17% at the end of 2002, and net charge-offs remain low at 0.24% of
total loans. This performance notwithstanding, Cascade continues to establish
reserves to reflect the changing nature of the portfolio and the current
economic environment in our market areas. The provision for loan losses
increased 38% to $1.9 million in 2002 compared to $1.4 million in 2001.
Allowance for loan losses as a percent of loans increased to 1.24%, up from
1.08% a year ago.
Capital ratios continue to be above the well- capitalized guidelines
established by regulatory agencies. The Corporation's Tier 1 capital/asset
ratio (including trust preferred securities), at year-end was 8.07% compared to
7.54% a year ago.
Credit Analyst Jon Sand adds continual value through his careful review of
credit relationships. Jon's thoughtful analysis helps to ensure that credits
meet the customer's needs and the bank's underwriting standards.
[PICTURED - Jon Sand, Credit Analyst]
Nonperforming Loans/Total Loans Comparison
- ------------------------------------------
December 31, 2002 December 30, 2001
----------------- -----------------
Cascade Bank 0.17% 0.34%
National Peer Banks 0.79% 0.74%
Washington State Peer Banks 1.12% 1.37%
Source: www.fdic.gov. Peers are defined as commercial banks with assets of $500
million to $1 billion.
Fine-tuning effectiveness
- -------------------------
Cascade employees are always seeking to improve operations, while improving our
customers' experience. A standard measure of a bank's performance is its
efficiency ratio. This ratio is calculated by dividing operating expense by
total revenue. The lower this ratio, the less a bank spends to generate
revenue.
Cascade Bank again has succeeded in lowering its efficiency ratio in 2002 to
54.3%, down from 60.1% in 2001. Our new long-term target is to maintain an
efficiency ratio of less than 55%. Cascade's goal is to balance investing in
our infrastructure with long-term growth and profitability.
Darlene Corcoran, Operations Manager, makes sure procedures work well for
both the Bank and for customers. She strives to get rid of unnecessary paper
and effort.
[PICTURED - Darlene Corcoran, Operations Manager]
EFFICIENCY RATIO CHART - unaudited except for 2002
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Efficiency Ratio 64.0 67.2 68.6 60.1 54.3
Building core deposits
- -----------------------
Our branch network was keenly focused on building Cascade's deposit base in
2002. This emphasis was designed to reduce Cascade's reliance on wholesale
funding sources and to build and broaden relationships with customers. We
attracted new relationships through periodic advertising campaigns, and
deepened relationships by cross-selling products to current customers. As a
result, deposits increased 21% from a year ago to $510 million. This deposit
growth led to a 13% reduction in Federal Home Loan Bank advances, which were
$198 million at year-end. Replacing advances with deposits contributed to a
higher net interest margin by the end of the year.
To further reduce the cost of deposits as well as drive growth in non-
interest income, Cascade continues to seek checking accounts. By year-end,
checking balances were $55 million, up 20% over last year. Our branches have
succeeded in growing the number of accounts on a net basis, with increases of
435 net new consumer accounts, up 7% and 173 net new business accounts, up 11%.
[PICTURED - Gayle Gassman, Branch Manager]
TOTAL DEPOSITS CHART - $ in millions, information other than 2001 & 2002 is
unaudited.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total deposits 510 420 396 439 336
CHECKING DEPOSITS CHART - $ in millions, information other than 2001 & 2002 is
unaudited.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Checking deposits 55 46 46 38 31
[PICTURED - Van Nguyen, Financial Services Representative]
Cascade offers a variety of checking account types to meet the needs of a
diverse customer base. A key product is free checking for consumers. Our
Cascade Advantage Checking product earns interest and rewards customers who
have $10,000 or more in other accounts at Cascade, including deposit products
as well as selected loan types.
Strengthening customer service
- ------------------------------
Convenient services like online banking and deposit courier for businesses
are part of Cascade's customer service strategy that is key in differentiating
us from the competition. Every new checking account customer is sent a survey
and each branch's performance is measured against service standards.
Customer service is measured throughout Cascade Bank. Employees rate each
internal department on key aspects of service every six months. Training and
team building programs help employees build their customer service skills.
In October, we opened our newest of 15 locations in the Pine Lake
neighborhood on the Sammamish Plateau. This location geographically complements
one of Cascade's oldest retail branches in downtown Issaquah, a thriving
suburban market just 17 miles east of Seattle. By the end of December,
employees there successfully captured $2 million in deposits. Like Cascade's
other grocery store locations, it offers convenient Saturday banking and
extended hours aimed at meeting the needs of today's busy families.
Convenient, local, personal service
- -----------------------------------
Cascade Bank was one of the first community banks in the Puget Sound area to
offer online banking. At the end of 2002, we launched another service
innovation-the Cascade Service Center. Every customer call is handled by Jody
Serl, Keith Halverson, Manager Cristina Buenbrazo, or Jason Stark during
business hours. And after hours, we offer TellerPhone, our automated account
information service.
[PICTURED - Cascade Service Center staff]
Brian and Brett Olson are brothers and co-owners of Alfy's Pizza, headquartered
in Snohomish County. They strive to be the leader in customer service in their
industry. To do that, they empower every employee, from busboy to manager, to
make the customer happy. Every meal is 100% guaranteed. You'll find
consistently good quality products along with that commitment to service at
all of their 12 locations. When it comes to their bank, the Olsons look for
good value and a solid partnership. They like Cascade Bank because we are
large enough to take care of their financial needs, but small enough so
customers get treated like individuals.
[PICTURED - Larry Jacobson, Business Banker; Brian and Brett Olson]
Cascade's Leadership
- --------------------
Key to delivering on our vision is focused, results-oriented leadership. Our
high-energy management team is experienced in the banking industry. As a team,
they bring together the best of Cascade's heritage, as well as best practices
from the financial services industry, to enhance the Corporation's performance.
[PICTURED - MANAGEMENT TEAM From left to right: LeAnne Frank, EVP, Quality of
Service and Technology - 2 years at Cascade Bank 16 years in Banking; Wayne
Fjelstad, EVP, Business Banking - 1 year at Cascade Bank, 22 years in Banking;
Vera Wildauer, EVP, Marketing - 5 years at Cascade Bank, 22 years in Banking;
Lars Johnson, EVP, Chief Financial Officer - 3 years at Cascade Bank, 28 years
in Banking; Debbie McLeod, EVP, Retail Banking - 2 years at Cascade Bank, 15
years in Banking; Rob Disotell, EVP, Chief Credit Officer - 25 years at Cascade
Bank, 25 years in Banking; Carol Nelson, President and Chief Executive Officer
- - 2 years at Cascade Bank, 25 years in Banking; Steve Erickson, EVP, Real Estate
Lending - 25 years at Cascade Bank, 25 years in Banking]
[PICTURED - BOARD OF DIRECTORS - From left to right:]
Craig Skotdal (2)
President - Skotdal Real Estate
Frank M. McCord (1)
Chairman of the Board - Cascade Financial Corporation
Henry M. Robinett (2, 4)
General Partner Boyden, Robinett & Associates L.P.
David R. O'Connor (1, 3, 4)
Co-Owner - Mobile Country Club
Carol K. Nelson (1, 4)
President and CEO - Cascade Financial Corporation
Dennis R. Murphy, Ph.D. (1, 2)
Dean, College of Business and Economics
Professor of Economics - Western Washington University
Janice Halladay (3, 4)
Retired Bank Executive
David W. Duce (1, 3)
Attorney - Duce, Bastian, Peterson
Dwayne Lane (3)
President - Dwayne Lane Auto Centers
G. Brandt Westover (1, 3)
Vice Chairman - Cascade Financial Corporation
Senior Vice President - UBS PaineWebber, Inc.
Ronald E. Thompson (2, 4)
President - Windermere Commercial and Property
Management of Snohomish County
- ----------------------
1. Executive Committee
2. Audit and Finance Committee
3. Compensation and Personnel Committee
4. Loan Committee
CASCADE FINANCIAL CORPORATION SELECTED FINANCIAL DATE
(Dollars in thousands, except per share data. As of December 31, 2001, Cascade
Financial Corporation changed its fiscal year to December 31st from June 30th.
To comply with disclosure requirements, the financial data for calendar/fiscal
years 2002 and 2001 are presented as well as the six month transition period in
2001. In addition, information for the Corporation's four previous complete
fiscal years that ended on June 30th are presented.)
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31, JUNE 30,
2002 2001 2001 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
(unaudited)
Interest income $ 52,470 55,885 27,474 56,689 48,582 38,205 33,916
Interest expense 26,446 34,481 16,272 37,128 29,847 21,956 20,118
Net interest income 26,024 21,403 11,202 19,561 18,735 16,249 13,798
Provision for loan losses 1,895 1,370 810 980 770 427 246
Net interest income after
provision for loan losses 24,129 20,033 10,392 18,581 17,965 15,822 13,552
Other income 4,039 3,322 1,817 2,643 2,276 2,837 2,458
Other expense 16,321 14,864 7,461 14,301 14,617 12,438 10,729
Income before Federal
income taxes 11,847 8,491 4,748 6,923 5,624 6,221 5,281
Net income 8,072 5,617 3,150 4,566 3,712 4,104 3,525
Net income per common
share, basic (1) 1.26 0.92 0.51 0.75 0.61 0.69 0.60
Net income per common share,
diluted (1) 1.22 0.87 0.49 0.71 0.57 0.63 0.55
Book value per share (1) 8.74 7.70 7.70 7.25 6.12 5.71 5.33
AT DECEMBER 31, AT JUNE 30,
2002 2001 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Assets $ 804,153 762,013 733,067 676,176 557,086 444,155
Loans, net 546,677 576,226 564,869 539,972 455,736 384,734
Cash and securities 229,570 167,949 149,685 117,655 84,611 44,103
Deposits 509,850 419,980 401,915 398,507 361,786 312,518
Borrowings 30,569 59,792 46,920 15,787 5,951 13,391
FHLB advances 197,500 226,500 232,124 215,656 141,996 73,436
Stockholders' equity 56,640 47,677 44,597 37,256 34,239 31,418
Nonperforming loans 956 1,999 1,315 573 1,201 1,921
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31, JUNE 30,
FINANCIAL RATIOS 2002 2001 2001 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
(unaudited)
Return on assets 1.05% 0.77 0.85 0.64 0.60 0.83 0.82
Return on equity 15.49 12.63 13.63 11.26 10.37 12.21 12.05
Net interest margin 3.44 3.01 3.10 2.84 3.13 3.43 3.40
Efficiency ratio 54.29 60.13 57.31 64.41 69.57 65.17 65.99
Average stockholders' equity
to average assets 6.75 6.11 6.25 5.71 5.78 6.77 6.89
Total risk based capital to
risk weighted assets 13.11 11.98 11.98 11.34 11.69 10.17 11.35
Tier 1 capital to adjusted
total assets 8.07 7.54 7.54 7.25 7.28 6.36 7.02
(1) Per common share data is retroactively adjusted to reflect all stock splits
and stock dividends.
MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion is provided for the consolidated operations of Cascade
Financial Corporation (the "Corporation") as of December 31, 2002. The
Corporation has only one operating subsidiary: Cascade Bank (the "Bank"). The
purpose of this discussion is to focus on significant factors concerning the
Corporation's financial condition and results of operations, and to provide a
more comprehensive review of the Corporation's operating results and financial
condition than can be obtained from reading the consolidated financial
statements alone. This discussion should be read with the consolidated
financial statements and the notes thereto.
In addition to historical information, this report contains certain "forward
- -looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 ("PSLRA"). This statement is included for the express
purpose of availing the Corporation of the protections of the safe harbor
provisions of the PSLRA. The forward-looking statements contained herein are
subject to factors, risks, and uncertainties that may cause actual results to
differ materially from those projected. The following items are among the
factors that could cause actual results to differ materially from the forward
- -looking statements: general economic conditions, including their impact on
capital expenditures; business conditions in the banking industry; recent world
events and their impact on interest rates, businesses, and customers; the
regulatory environment; new legislation; vendor quality and efficiency;
employee retention factors; rapidly changing technology and evolving banking
industry standards; competitive standards; competitive factors, including
increased competition with community, regional, and national financial
institutions; fluctuating interest rate environments; and similar matters.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date of the
statement. 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.
Critical accounting policies
- ----------------------------
Corporations may apply certain critical accounting policies requiring
management to make subjective or complex judgments, often as a result of the
need to estimate the effect of matters that are inherently uncertain. The
Corporation considers its only material critical accounting policy to be the
allowance for loan losses. The allowance for loan losses is established through
a provision for loan losses charged against earnings. The balance of allowance
for loan losses is maintained at the amount management believes will be
adequate to absorb known and inherent losses in the loan portfolio. The
appropriate balance of allowance for loan losses is determined by applying
estimated loss factors to the credit exposure from outstanding loans. Estimated
loss factors are based on subjective measurements including management's
assessment of the internal risk classifications, changes in the nature of the
loan portfolio, industry concentrations, and the impact of current local,
regional and national economic factors on the quality of the loan portfolio.
Changes in these estimates and assumptions are reasonably possible and may have
a material impact on the Corporation's consolidated financial statements,
results of operation, or liquidity.
For additional information regarding the allowance for loan losses, its
relation to the provision for loan losses and risk related to asset quality,
see Note 3 in the Consolidated Financial Statements for the year ended December
31, 2002, and "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Provision for Loan Losses."
FINANCIAL CONDITION
Total assets
- ------------
The Corporation's total assets at December 31, 2002, were $804.2 million,
compared to $762.0 million at December 31, 2001, an increase of 6%, due to the
increase in securities that more than offset the decline in net loans. The
Corporation's total assets at June 30, 2001, and 2000 were $733.1 million and
$676.2 million, respectively.
Investment securities
- ---------------------
Securities designated as available for sale increased to $159.9 million at
December 31, 2002, versus $150.3 million at December 31, 2001. Securities
designated as held to maturity increased to $49.1 million at December 31, 2002,
from $6.0 million a year earlier. All securities in both categories consist of
notes issued by Government Sponsored Enterprises (e.g. FHLB, FNMA) or mortgage
backed securities issued by either FNMA or FHLMC or a mortgage conduit. All
such securities have received the highest credit rating from at least one of
the major rating agencies. Securities in both classifications increased due to
increased deposits.
Loan portfolio
- --------------
Net loans were $546.7 million at December 31, 2002, a 5% decrease over the
$576.2 million at December 31, 2001. Net loans were $564.9 million at June 30,
2001, and $540.0 million at June 30, 2000.
Business loans increased from $125.3 million at December 31, 2001, to $142.3
million at December 31, 2002, as the Corporation continued its transformation
to a commercial bank. Net construction loans increased to $84.1 million at
December 31, 2002, from $75.9 million at the prior year end. Commercial real
estate loans were essentially flat at $63.1 million. The Corporation's loan
focus remains on small businesses, builders, and developers in the Puget Sound
area. Construction lending is directed toward building single-family housing
and land development for single-family housing.
Total single-family residential loans decreased from $152.7 million at
December 31, 2001, to $122.7 million at December 31, 2002. High rates of
Refinancing activity due to very low interest rates impacted loan balances in
that 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.
Since these were the preferred products in this market, many of the
Corporation's adjustable rate mortgages were refinanced into fixed rate loans
and sold. Multifamily loans outstanding also declined, dropping from $109.7
million as of December 31, 2001, to $94.2 million at December 31, 2002, as the
refinancing wave reduced this portfolio as well.
Consumer loans dropped $9.1 million to $49.3 million as of December 31,
2002. The Bank's consumer loan portfolio is comprised of home equity loans and
lines of credit, installment loans, and credit card loans. Many home equity
loans, which most often take the form of a second mortgage, were refinanced as
part of a first mortgage. In terms of installment loans and credit cards, the
Bank has de-emphasized these lines of business, concluding that it is at a
Supreme competitive disadvantage against the captive finance companies and the
Huge specialty credit card issuers.
The chart below indicates the mix of the loan portfolio as of the dates
indicated:
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001
dollars in thousands AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- -------------------------------------------------------------------------------
Business $142,273 24.7% $125,342 20.4% $113,708 18.7%
Commercial real estate 63,108 10.9 62,938 10.3 56,913 9.4
Real estate construction 104,790 18.2 104,131 17.0 103,206 17.0
Single-family residential 122,669 21.3 152,727 24.9 165,003 27.2
Multifamily loans 94,245 16.3 109,733 17.9 107,360 17.7
Consumer 49,331 8.6 58,381 9.5 60,406 10.0
- -------------------------------------------------------------------------------
Total loans 576,416 613,252 606,596
Loans in process (20,669) (28,220) (33,337)
Allowance for loan losses (6,872) (6,304) (5,687)
Deferred loan fees and
discounts (2,198) (2,502) (2,703)
- -------------------------------------------------------------------------------
Net loans receivable $546,677 $576,226 $564,869
===================================================
Management anticipates most of the trends toward an increase in business
loans and a decrease in single-family residential loans and consumer loans will
continue as the conversion from a thrift institution to a commercial bank
continues.
Allowance for loan losses
- -------------------------
Management provides for possible loan losses by maintaining an allowance. The
allowance for loan losses reflects management's best estimate of probable
losses as of a particular balance sheet date. The allowance for loan losses
is maintained at a level considered adequate based on management's assessment
of various factors affecting the loan portfolio, including local economic
conditions, growth of the loan portfolio, and its composition. Increases in the
allowance for loan losses made through provisions were primarily a result of
loan growth, awareness of the greater risk inherent in business lending and the
impact of the deteriorating economic climate on the loan portfolio.
Management determines the amount of the allowance for loan losses by
utilizing a loan grading system to determine risk in the loan portfolio and by
considering the results of credit reviews. The loan portfolio is separated by
quality and then by loan type. Loans of acceptable quality are evaluated as a
group, by loan type, with a specific loss rate assigned to the total loans in
each type, but unallocated to any individual loan. Conversely, each adversely
classified loan is individually analyzed, to determine an estimated loss
amount. A valuation allowance is also assigned to these adversely classified
loans, but at a higher loss rate due to the greater risk of loss. Past due and
impaired loans are actively managed to minimize the potential loss of principal.
At December 31, 2002, the allowance for loan losses was $6.9 million (1.23%
of average loans outstanding) compared to $6.3 million (1.10% of average loans
outstanding) as of December 31, 2001, $5.7 million (1.02% of average loans
outstanding) at June 30, 2001, and $5.0 million (0.97% of average loans
outstanding) at June 30, 2000. The coverage ratio (the allowance for loan
losses to nonperforming loans) was 719% at December 31, 2002, and 315% at
December 31, 2001. The coverage ratio was 432% at June 30, 2001, and 873% at
June 30, 2000.
Net loan charge-offs were $1.3 million for 2002 (or 0.23% of average loans
outstanding) compared to $408,000 (0.07% of average loans outstanding) for the
year ended December 31, 2001. Charge-offs in business loans accounted for most
of the change, increasing from $185,000 in the year ended December 31, 2001, to
$1.0 million in the year ended December 31, 2002. Charge-offs were $138,000 for
the six-month period ended December 31, 2001. These compare to $297,000 (0.05%
of average loans outstanding) for the fiscal year ended June 30, 2001, and
$20,000 (0.00% of average loans outstanding) for the fiscal year ended June 30,
2000.
During 2002 the economy in the Corporation's market area continued to
experience recessionary levels of economic activity. The recession's continuing
impact on the Bank's loan portfolio is uncertain.
Deposit accounts
- ----------------
Deposit accounts totaled $509.9 million at December 31, 2002, a 21% increase
over the $420.0 million at December 31, 2001. The Bank historically had paid
interest rates on deposits at the higher end of the competitive range of
financial institutions in its market area, but in an attempt to lower the
absolute and relative cost of funds, the Bank has recently modified its deposit
pricing strategy by pricing its deposits in the middle of that range. In
addition, as its business banking activity increases, the Bank expects to
increase its noninterest bearing accounts through the growth of commercial
checking accounts.
Other borrowings
- ----------------
The Bank uses Federal Home Loan Bank of Seattle advances to provide
intermediate and longer term funding, as well as augment deposits. As of
December 31, 2002, the Bank had $197.5 million in FHLB advances compared to
$226.5 as of December 31, 2001. The growth in deposits allowed the Bank to
repay or prepay $45 million in advances during the year. Subject to its line
of credit with the FHLB, the availability of collateral, and the parameters of
liquidity management, the Bank will continue to use advances as funding
sources.
The Bank also uses repurchase agreements for short term funding to match the
interest rate sensitivity of its prime based loans. At December 31, 2002, the
Bank had executed $20.6 million in repurchase agreements compared to $49.8
million a year earlier. The Corporation has issued $10 million in trust
preferred securities, which matures on March 1, 2030, but is callable at a
premium beginning March 1, 2010. These securities are considered Tier 1
capital by financial institution regulators.
Capital
- -------
Banking regulations require the Corporation to maintain minimum levels of
capital at both the bank and holding company levels. The Corporation manages
its capital to maintain a "well-capitalized" designation (the FDIC and the
Federal Reserve's highest rating). As of December 31, 2002, Cascade Bank
remained a "well-capitalized" institution, under regulatory guidelines. See
Note 11 to the Consolidated Financial Statements in the Annual Report for more
detail on the Corporation's regulatory capital ratios.
At December 31, 2002, the Corporation's core capital to asset ratio was
8.07%. The total risk based capital to risk weighted assets ratio was 13.11%
compared to 11.98% as of December 31, 2001, and 11.34% at June 30, 2001. The
Corporation projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth while maintaining a
well-capitalized designation from the FDIC.
The Corporation is committed to managing capital for maximum shareholder
benefit and maintaining strong protection for depositors and creditors. The
Corporation manages various capital levels at both the holding company and
subsidiary bank level to maintain adequate capital ratios and levels in
accordance with government regulations and capital guidelines established by
the Board of Directors of each institution. In October 2002 the
Corporation initiated the payment of a cash dividend at $.05 per share on a
quarterly basis as a capital management tool and as a direct means of
compensating its shareholders. The Corporation does not currently have a formal
stock repurchase program, but may institute one if its capital growth continues
to outpace its asset growth.
RESULTS OF OPERATIONS
Earnings
- --------
Cascade Financial Corporation earned net income for the year ended December 31,
2002, of $8.1 million or $1.22 per diluted share, an increase of 44% over the
$5.6 million or $0.87 per diluted share for the same twelve month period of
2001. Net income for the six months ended December 31, 2001, was $3.2 million.
The Corporation earned net income of $4.6 million or $0.71 per diluted share,
and $3.7 million or $0.57 per diluted share for the fiscal years ended June 30,
2001, and 2000, respectively.
Return on average equity
- ------------------------
Return on average equity for the year ended December 31, 2002, was 15.49%. For
the six month period ended December 31, 2001, the return on average equity was
13.63%. Return on average equity for the fiscal years ended June 30, 2001, and
2000 were 11.26% and 10.37%, respectively.
Net interest income
- -------------------
The largest component of the Corporation's earnings is net interest income. Net
interest income is the difference between interest earned on earning assets
(primarily loans and investment securities) and the interest expense associated
with interest bearing liabilities (deposits and borrowings). The volume of and
yields earned on earning assets and the volume of and the rates paid on
interest bearing liabilities determine net interest income. Interest earned and
interest paid is also affected by general economic conditions, including the
demand for loans, availability of deposits, market rates of interest,
government policies, and the action of regulatory authorities. The
Corporation's operations are sensitive to changes in interest rates and the
resulting impact on net interest income.
Net interest income for the year ended December 31, 2002, increased by 22%,
or $4.6 million, to $26.0 million from $21.4 million for the year ended
December 31, 2001. The improvement in net interest income was primarily due to
increased earning assets and an increase in net interest margin. Average
earning assets increased 6% to $755.4 million for the year ended December 31,
2002, from $710.1 million for the year ended December 31, 2001. The net
interest margin for the year ended December 31, 2002, was 3.44%, compared to
3.01% for the year ended December 31, 2001. The improvement in the margin for
these periods is primarily attributed to a larger decline in the cost of funds
than the decline in asset yield. Average asset yield declined 92 basis points
to 6.95% in 2002 from 7.87% in 2001. However, the cost of funds declined by 142
basis points to 3.87% for the year ended December 31, 2002, from 5.29% for the
prior year.
For the six months ended December 31, 2001, net interest income grew by
19.1% to $11.2 million from $9.4 million in the six month period ended December
31, 2000. Average earning assets increased by 6.1% to $722.6 million for the
six month period ended December 31, 2001. The net interest margin increased by
35 basis points to 3.10% for the six month period ended December 31, 2001,
compared to 2.75% for the same period the prior year. The yield on earning
assets was 7.60% compared to 8.30% for the six month period ended December 31,
2000. This yield reduction was more than offset by the decrease in the cost of
interest bearing liabilities, which declined to 4.93% for the six months ended
December 31, 2001, from 5.98% for the six month period ended December 31, 2000.
Net interest income for the fiscal year ended June 30, 2001, increased by
4.4% or $826,000 to $19.6 million from $18.7 million for the same period in
2000. The increase resulted from growth in earning assets, which offset the
contraction in the net interest margin. Average earning assets increased by 15%
to $689.5 million for the fiscal year ending June 30, 2001, from $598.1 million
for the same period in 2000. The net interest margin for fiscal years ended
June 30, 2001, and 2000 was 2.84% and 3.13%, respectively. For the fiscal years
ended June 30, 2001, and 2000, the yield on earning assets was 8.22% and 8.12%,
respectively, while the cost of interest bearing liabilities was 5.82% and
5.39%, respectively. For the fiscal year ended June 30, 2001, the increase in
net interest income was constrained by the escalation of market interest rates
during the first half of the fiscal year that was not fully offset by the
decrease in rates in the second half of the year. Also, net interest income was
adversely impacted by increased interest expense associated with a full year's
interest on the trust preferred securities.
Average balances and an analysis of average rates earned and paid
- -----------------------------------------------------------------
The following tables show average balances, interest income and interest
expense, with the resulting average yield or rate by category or average
earning asset or interest-bearing liability.
YEAR ENDED DECEMBER 31, 2002 YEAR ENDED DECEMBER 31, 2001
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDEND COST BALANCE DIVIDEND COST
- -----------------------------------------------------------------------------------------------------------------
Assets (Dollars in thousands)
- ------
Interest-earning assets (1)
Mortgage loans (2) $ 380,676 28,370 7.45 400,496 32,773 8.18
Consumer loans 56,030 4,101 7.32 61,046 5,122 8.39
Business loans 129,596 9,397 7.25 112,325 9,505 8.46
-------------------------------------------------------------
Total loans 566,302 41,868 7.39 573,867 47,400 8.26
-------------------------------------------------------------
Securities available-for-sale 147,625 8,939 6.06 122,643 7,890 6.43
Securities held-to-maturity 23,438 1,337 5.71 7,006 387 5.52
Daily interest-earning deposits 18,070 326 1.80 6,597 207 3.14
-------------------------------------------------------------
Total interest-earning assets 755,435 52,470 6.95 710,113 55,884 7.87
-------------------------------------------------------------
Noninterest-earning assets
Office properties and equipment, net 8,605 8,865
Real estate, net 694 521
Other noninterest-earning assets 7,121 8,891
-------- -------
Total assets $ 771,855 728,390
======== =======
Liabilities and stockholders' equity
Interest-bearing liabilities
Passbook accounts $ 11,324 130 1.15 10,936 246 2.25
Checking accounts 22,641 235 1.04 22,202 315 1.42
Money market accounts 107,363 2,293 2.14 91,552 3,198 3.49
Certificates of deposit 294,554 9,872 3.35 249,873 13,880 5.55
-------------------------------------------------------------
Total interest-bearing deposits 435,882 12,530 2.87 374,563 17,639 4.71
-------------------------------------------------------------
Other interest-bearing liabilities
FHLB advances 203,089 12,142 5.98 229,059 14,090 6.15
Other interest-bearing liabilities 44,415 1,774 4.00 48,025 2,752 5.73
-------------------------------------------------------------
Total interest-bearing liabilities 683,386 26,446 3.87 651,647 34,481 5.29
-------------------------------------------------------------
Other liabilities 36,366 32,248
-------- -------
Total liabilities 719,752 683,894
Stockholders' equity 52,103 44,496
-------- -------
Total liabilities and stockholders' equity $ 771,855 728,390
======== =======
Net interest income (3) 26,024 21,403
====== ======
Interest rate spread (4) 3.08 2.58
Net interest margin (5) 3.44 3.01
Average interest-earning assets to average
interest-bearing liabilities 110.54% 108.97
(Footnotes appear at end of section.)
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDEND COST BALANCE DIVIDEND COST
- -----------------------------------------------------------------------------------------------------------------
Assets (Dollars in thousands)
- ------
Interest-earning assets (1)
Mortgage loans (2) $ 400,515 15,986 7.98 397,309 16,526 8.32
Consumer loans 59,809 2,426 8.11 63,756 2,800 8.78
Business loans 119,897 4,797 8.00 91,447 4,380 9.58
-------------------------------------------------------------
Total loans 580,221 23,209 8.00 552,512 23,706 8.58
-------------------------------------------------------------
Securities available-for-sale 129,759 3,925 6.05 114,897 3,990 7.15
Securities held-to-maturity 6,425 187 5.82 10,612 382 7.20
Daily interest-earning deposits 6,159 153 4.97 3,218 201 6.13
-------------------------------------------------------------
Total interest-earning assets 722,564 27,474 7.60 681,239 28,279 8.30
-------------------------------------------------------------
Noninterest-earning assets
Office properties and equipment, net 8,753 8,904
Real estate, net 386 606
Other noninterest-earning assets 8,134 12,975
-------- -------
Total assets $ 739,837 703,724
======== =======
Liabilities and stockholders' equity
- ------------------------------------
Interest-bearing liabilities
Passbook accounts $ 11,073 109 1.97 11,032 172 3.12
Checking accounts 22,051 136 1.23 21,214 216 2.04
Money market accounts 94,384 1,404 2.98 104,262 2,536 4.86
Certificates of deposit 254,836 6,386 5.01 240,092 7,577 6.31
-------------------------------------------------------------
Total interest-bearing deposits 382,344 8,035 4.20 376,600 10,501 5.58
-------------------------------------------------------------
Other interest-bearing liabilities
FHLB advances 229,451 7,047 6.14 214,128 6,800 6.35
Other interest-bearing liabilities 48,264 1,190 4.93 42,469 1,618 7.62
-------------------------------------------------------------
Total interest-bearing liabilities 660,059 16,272 4.93 633,197 18,919 5.98
-------------------------------------------------------------
Other liabilities 33,549 32,176
-------- -------
Total liabilities 693,608 665,373
Stockholders' equity 46,229 38,351
-------- -------
Total liabilities and stockholders' equity $ 739,837 703,724
======== =======
Net interest income (3) 11,202 9,360
====== ======
Interest rate spread (4) 2.67 2.33
Net interest margin (5) 3.10 2.75
Average interest-earning assets to average
interest-bearing liabilities 109.47% 107.59
(Footnotes appear on following page.)
YEAR ENDED JUNE 30, 2001 YEAR ENDED JUNE 30, 2000 YEAR ENDED JUNE 30, 1999
INTEREST INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDEND COST BALANCE DIVIDEND COST BALANCE DIVIDEND COST
- ---------------------------------------------------------------------------------------------------------------------------------
Assets (Dollars in thousands)
- ------
Interest-earning assets (1)
Mortgage loans (2) $ 398,893 33,313 8.35 383,595 31,280 8.15 321,038 25,878 8.06
Consumer loans 63,020 5,496 8.72 57,138 4,740 8.30 48,755 4,273 8.76
Business loans 98,100 9,088 9.26 76,672 7,135 9.31 48,414 4,600 9.50
-------------------------------------------------------------------------------------
Total loans 560,013 47,897 8.55 517,405 43,155 8.34 418,207 34,751 8.31
-------------------------------------------------------------------------------------
Securities available-for-sale 118,356 8,075 6.82 72,826 4,928 6.77 48,229 3,049 6.32
Securities held-to-maturity 5,955 421 7.07 5,200 306 5.88 2,978 141 4.73
Daily interest-earning deposits 5,127 296 5.77 2,692 193 7.17 3,298 264 8.00
-------------------------------------------------------------------------------------
Total interest-earning assets 689,451 56,689 8.22 598,123 48,582 8.12 472,712 38,205 8.08
-------------------------------------------------------------------------------------
Noninterest-earning assets
Office properties and equipment, net 8,941 9,281 9,225
Real estate, net 630 491 209
Other noninterest-earning assets 11,311 11,559 13,947
-------- -------
Total assets $ 710,333 619,454 496,093
======== =======
Liabilities and stockholders' equity
- ------------------------------------
Interest-bearing liabilities
Passbook accounts $ 10,915 309 2.83 11,446 351 3.07 12,781 391 3.06
Checking accounts 21,783 395 1.81 18,408 389 2.11 18,540 409 2.21
Money market accounts 96,491 4,329 4.49 119,219 5,970 5.01 69,426 3,233 4.66
Certificates of deposit 242,501 15,072 6.22 232,192 13,091 5.64 220,921 12,392 5.61
-------------------------------------------------------------------------------------
Total interest-bearing deposits 371,690 20,105 5.41 381,265 19,801 5.19 321,668 16,425 5.11
-------------------------------------------------------------------------------------
Other interest-bearing liabilities
FHLB advances 221,397 13,843 6.25 160,182 9,093 5.68 102,045 5,280 5.17
Other interest-bearing liabilities 45,127 3,180 7.05 12,519 953 7.61 5,571 251 4.50
-------------------------------------------------------------------------------------
Total interest-bearing liabilities 638,214 37,128 5.82 553,966 29,847 5.39 429,284 21,956 5.11
-------------------------------------------------------------------------------------
Other liabilities 31,562 29,710 33,216
-------- ------- -------
Total liabilities 669,776 583,676 462,500
Stockholders' equity 40,557 35,778 33,593
-------- ------- -------
Total liabilities and stockholders'
equity $ 710,333 619,454 496,093
======== ======= =======
Net interest income (3) 19,561 18,735 16,249
====== ====== ======
Interest rate spread (4) 2.40 2.73 2.97
Net interest margin (5) 2.84 3.13 3.44
Average interest-earning assets to
average interest-bearing liabilities 108.03% 107.97 110.12
- ------------------
(1) Does not include interest on loans 90 days or more past due.
(2) Includes single-family and multifamily residential loans, construction
loans and commercial real estate loans.
(3) Interest and dividends on total interest-earning assets less interest on
total interest-bearing liabilities.
(4) Total interest-earning assets yield less total interest-bearing liabilities
cost.
(5) Net interest income as an annualized percentage of total interest-earning
assets.
Other income
- ------------
Other income is derived from sources other than interest and loan fees on
earning assets. The Corporation's primary sources of other income are service
fees on deposit accounts, as well as gains on the sale of loans and securities.
As part of the Bank's transition to a commercial bank, management changed its
strategy on the origination and retention of single-family residential
mortgage loans. As a result, more of the Bank's single-family mortgage loan
production is now sold directly to the secondary market.
Other income for the year ended December 31, 2002, was $4.0 million,
compared to $3.3 million for the same period in 2001. This increase was
attributable primarily to a $134,000 increase in gain on sale of loans, a
$646,000 increase in gain on sale of securities, and a $162,000 increase in
gain on the sale of real estate owned and investment property. The higher gain
on sale of loans reflects an increase in residential mortgage activity,
especially refinancings. The gain on sale of securities resulted primarily from
steps taken to reposition the investment portfolio to take advantage of
declining interest rates and a steep yield curve. The increase in the gain on
sale of real estate represents the sale of land that the Corporation held as an
investment, developing it after foreclosing upon it in 1996.
Service charges decreased by $284,000 as revenue from Cascade Investment
Services, the investment management subsidiary of the Bank, fell due to poor
capital market conditions and employee turnover. Net fees on loans serviced for
others decreased due to a more rapid amortization of mortgage servicing rights,
which was a byproduct of the refinancing wave.
Other income for the six month period ended December 31, 2001, was $1.8
million and $1.1 million for the same period in 2000. Other income for the
fiscal years ended June 30, 2001, and 2000 was $2.6 million and $2.3 million,
respectively. The increase for the period ended June 30, 2001, was attributable
to $248,000 in growth of fee income and a $212,000 increase in gain on sale of
securities that more than compensated for the $91,000 decrease in gain on sale
of loans. The growth in fee income was attributable to an increase in
transaction fees. The gain on sale of securities resulted primarily from steps
taken to reposition the investment portfolio. The lower gain on sale of loans,
despite an increase in residential mortgage refinancings, reflected the
Corporation's strategic shift away from mortgage banking.
Other expense
- -------------
Other expense represents costs not associated with deposits and other interest
bearing liabilities. It includes expenses associated with personnel, premises
and equipment, data processing, and other operations.
Other expense increased by $1.4 million to $16.3 million for the year ended
December 31, 2002, from $14.9 million for the same period in 2001. The increase
in expenses was partially the result of prepayment fees to the Federal Home
Loan Bank of Seattle in the amount of $648,000 to retire high coupon advances
compared to $245,000 of prepayment fees incurred in 2001.
For the year ended December 31, 2002, the increase in other expenses, other
than prepayment fees, was primarily due to increased compensation expense as
staff was added to the Business Banking and Credit Administration divisions, as
well as opening a new branch and a customer service center. In addition, higher
profits produced higher incentive payments.
Other expense for the six month period ended December 31, 2001, was $7.5
million and $6.9 million for the same period in 2000. Other expense for the
fiscal years ended June 30, 2001, and 2000 was $14.3 million and $14.6 million,
respectively. For the fiscal year ended June 30, 2001, lower expenses were
partially the result of the reduction in mortgage banking operations, offset in
part by $300,000 in management transition expenses, including employee
severance, recruitment fees, and executive signing bonuses.
A standard measure used to evaluate overhead costs of financial institutions
is the efficiency ratio. The efficiency ratio is calculated by dividing other
expense by total revenue, which generally indicates how much an institution
spends to generate a dollar of revenue. The lower the efficiency ratio, the
more efficient the institution. For the years ended December 31, 2002, and 2001
the Corporation's efficiency ratio was 54.29%, and 60.13%, respectively.
Management continues to look for ways to improve its efficiency ratio by
increasing other income and net interest margin while diligently controlling
costs and maintaining high standards of service. For the fiscal years ended
June 30, 2001, and 2000 the Corporation's efficiency ratio was 64.41% and
69.57%, respectively.
Liquidity
- ---------
Liquidity is the term used to define the Corporation's ability to meet its
financial commitments. The Corporation is required by prudent business practice
and its regulators to maintain adequate levels of liquidity. The main liquidity
requirements are funding customer loan requests and deposit outflows of the
Bank. Primary sources of liquidity are cash and cash equivalents, which include
highly liquid investments. At December 31, 2002, December 31, 2001, and June
30, 2001, cash and cash equivalents totaled $20.6 million, $11.6 million and
$13.9 million, respectively. The Corporation's entire investment portfolio
consists of investment grade securities. All of these securities are of the
highest credit quality, with moderate interest rate risk.
Other significant sources of liquidity are Federal Home Loan Bank of Seattle
(FHLB-Seattle) advances, reverse repurchase agreements, and loan sales. At
December 31, 2002, $83.9 million of additional borrowing capacity remained
under the Bank's existing credit line from the FHLB-Seattle. The use of this
line of credit is subject to the availability of eligible collateral, which
includes residential mortgages, investment grade securities, and a limited
amount of other real estate related mortgages. In addition, the Bank has the
ability to borrow from primary dealers of United States government securities
through reverse repurchase agreements. Under these agreements, borrowings are
collateralized with mortgage-backed securities or other investment securities.
The Bank has also established Fed funds borrowing lines with two of its
correspondent banks. During the years ended December 31, 2002, and 2001 these
lines were not used.
Liquidity management is of critical importance to the Bank in that it
significantly relies upon wholesale sources of funds (e.g. FHLB-Seattle
advances). While these sources have proven to be stable and reliable, an
interruption in the availability of these sources could have an adverse impact
on the operations of the Corporation.
Market risk
- -----------
The Corporation's results of operations are largely dependent upon its ability
to manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on the Corporation's
financial condition and results of operations.
The Corporation has taken steps to balance its interest rate sensitivity by
altering its asset and liability mix. The origination of floating rate loans
such as business, construction, and other prime based loans is emphasized. The
vast majority of fixed rate loans have repricing periods with a maximum of five
years. The mix of floating and fixed rate assets is designed to mitigate the
impact of rate changes on the Corporation's net interest income. Virtually all
fixed rate residential loans with maturities greater than five years are sold
into the secondary market. Since most of the Bank's fixed rate loans do not
have provisions for prepayment fees, a drop in rates can precipitate a
refinancing of the Bank's assets.
Interest rate risk is monitored using several methodologies, principally
financial modeling to measure the change in market value of the Corporation's
assets and liabilities under different interest rate scenarios. Also, the near
term earnings exposure to interest rate changes is evaluated in the context of
certain upward and downward interest rate changes occurring instantaneously. At
December 31, 2002, a 200 basis point increase in rates would reduce forecasted
net interest income over a twelve month period by approximately 2%.
The Corporation does not maintain a trading account for any class of
financial instrument, engage in hedging activities, or purchase high risk
derivative instruments. Moreover, the Corporation is not subject to foreign
currency exchange rate risk or commodity price risk.
The individual categories of assets and liabilities that are subject to
interest rate sensitivity as of December 31, 2002, are shown in the following
table.
<1 1-3 3-5 5-10 10 FAIR
YEAR YEARS YEARS YEARS YEARS TOTAL VALUE
------------------------------------------------------
Interest-sensitive (Dollars in thousands)
assets
Loans $254,940 99,355 154,968 36,254 10,230 555,747 570,461
Investments and
other interest
-earning assets 141,527 33,283 18,858 10,717 15,545 219,930 220,491
Interest-sensitive
liabilities
Checking accounts 27,285 - - 27,285 - 54,570 54,586
Money market
accounts 51,337 - - 51,337 - 102,674 102,498
Savings accounts 5,639 - - 5,638 - 11,277 11,281
Certificates of
deposits 281,428 41,052 18,844 - 5 341,329 344,193
Borrowings 48,069 70,000 51,000 49,000 - 218,069 236,008
Trust preferred
Securities - - - - 10,000 10,000 10,000
Summation of factors that may affect financial condition and future results
- ---------------------------------------------------------------------------
Credit risk: The most significant risk that may impact Cascade Financial
Corporation would be a deterioration in the quality of the loan portfolio.
Cascade's loan growth in commercial lending has yet to withstand an economic
downturn. An economic downturn is exactly what its market area is now facing.
As an area that saw robust growth during the expansion of the 1990s, the
Corporation's market area is more vulnerable to the ensuing slow down.
Cascade's margins and capital levels could not sustain a large number of
impaired credits. The Corporation's ability to meet its profitability and
growth goals would be severely compromised. In addition, the Corporation and
its subsidiary, Cascade Bank, could face regulatory restrictions on its
activities.
Interest rate risk: While the Corporation actively manages its exposure to
changes in interest rates, volatile interest rates and/or the shape of the
yield curve have had a meaningful impact on Cascade's net income in the past.
Liquidity: Disruptions in the capital markets could have a major impact on
the Corporation's net income and balance sheet. As a user of Federal Home Loan
Bank advances and repurchase agreements, interruption or truncation of these
sources of funds could force the Corporation to liquidate assets at an
inauspicious time or cease lending activity, which could adversely affect
customer relationships for many years.
Recently issued accounting standards: In April 2002 the Financial Accounting
Standards Board issued Financial Accounting Standard (FAS) No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This statement was adopted June 1, 2002
and did not have an impact on the results of the Corporation's operations or
financial position.
In June 2002 the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The provisions of this
Statement are effective for exit and disposal activities that are initiated
after December 31, 2002. This statement was adopted January 1, 2003, and did
not have a material effect on the results of the Corporation's operations or
financial position.
In October 2002 the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 147, Acquisitions of Certain Financial
Institutions-an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. This Statement addresses FAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation
No. 9, Applying APB Opinions No. 16 and 17, When a Savings and Loan Association
or a Similar Institution Is Acquired in a Business Combination Accounted for by
the Purchase Method, provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both Statement 72
and Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. In addition, this Statement amends FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship,
intangible assets, and credit cardholder intangible assets. This statement was
adopted in December 2002 and did not have a material effect on the results of
the Corporation's operations or financial position.
In December 2002 the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 148, Accounting for Stock-Based Compensation-
Transition and Disclosure-an amendment of FASB Statement No. 123. This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of this statement were adopted in December 2002 and did
not have a material effect on the results of the Corporation's operations or
financial position.
In November 2002 the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, clarifying the accounting treatment and
financial statement disclosure of certain guarantees issued and outstanding.
Interpretation No. 45 clarifies that a guarantor is required to recognize, at
the inception of certain guarantees, a liability for the fair value undertaken
in issuing the guarantee. In addition, guarantors must disclose the approximate
term and nature of the guarantee, the maximum potential amount of future
payments, current carrying amount of the liability and the nature of recourse
provisions and collateral. The initial recognition and measurement provisions
of Interpretation No. 45 are effective for guarantees issued or modified after
December 31, 2002. Management does not expect the adoption of the initial
recognition and measurement provisions of Interpretation No. 45 to have a
material impact on the Corporation's consolidated financial statements, results
of operations, or liquidity. Disclosure provisions of Interpretation No. 45
became effective and were adopted by the Corporation on December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, addressing consolidation by business enterprises
of certain variable interest entities. Under the provisions of Interpretation
No. 46, an enterprise must consolidate a variable interest entity if that
enterprise will absorb a majority of the entity's expected losses or receive
a majority of the entity's residual returns, or both, regardless of the
enterprise's direct or indirect ability to make decisions about the entity's
activities through voting or similar rights. Interpretation No. 46 applies
immediately to interests in variable interest entities created or acquired
after January 31, 2003 and to the first fiscal year or interim period beginning
after June 15, 2003 for interests in variable interest entities acquired before
February 1, 2003. Application of this Interpretation is not expected to have a
material effect on the Corporation's financial statements.
FORM 10-K
- ---------
A copy of the Corporation's annual report on Form 10-K which is filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 is
available to shareholders, at no charge, upon written request to the Secretary
of Cascade Financial Corporation at 2828 Colby Avenue, Everett, Washington
98201.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheets of Cascade
Financial Corporation and subsidiaries (Corporation) as of December 31, 2002,
and December 31, 2001, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for the year
ended December 31, 2002, for the six month period ended December 31, 2001, and
for each of the years in the two year period ended June 30, 2001. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cascade
Financial Corporation and subsidiaries as of December 31, 2002, and December
31, 2001, and the results of their operations and their cash flows for the year
ended December 31, 2002, for the six month period ended December 31, 2001, and
for each of the years in the two year period ended June 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
Seattle, Washington
February 28, 2003
/s/ KPMG LLP
CONSOLIDATED BALANCE SHEETS
- ---------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
(Dollars in thousands, except share amounts)
Assets:
- ------
Cash on hand and in banks $ 9,640 8,535
Interest-bearing deposits
in other financial institutions 10,955 3,087
Securities available-for-sale 159,897 150,338
Securities held-to-maturity 49,078 5,989
Loans 553,549 582,530
Allowance for loan losses (6,872) (6,304)
-------- --------
Loans, net 546,677 576,226
Premises and equipment, net 9,261 8,620
Accrued interest receivable
and other assets 18,645 9,218
Total assets $ 804,153 762,013
======== =======
Liabilities and stockholders' equity:
- ------------------------------------
Deposits $ 509,850 419,980
Federal Home Loan Bank advances 197,500 226,500
Securities sold under agreements
to repurchase 20,569 49,792
Advance payments by borrowers for
taxes and insurance 1,507 1,574
Dividends payable 324 -
Accrued interest payable, expenses
and other liabilities 6,254 5,213
Deferred Federal income taxes 1,509 1,277
-------- -------
Total liabilities 737,513 704,336
-------- -------
Trust preferred securities 10,000 10,000
Stockholders' equity:
Preferred stock, $.01 par value.
Authorized 500,000 shares; no
shares issued or outstanding - -
Common stock, $.01 par value.
Authorized 8,000,000 shares;
issued and outstanding 6,657,547
shares at December 31, 2002,
and 6,333,007 shares at
December 31, 2001 67 63
Additional paid-in capital 11,481 10,421
Treasury stock, 173,427 shares
at December 31, 2002, and
132,092 shares at December 31,
2001, at cost (1,347) (972)
Retained earnings, substantially
restricted 45,438 38,012
Accumulated other comprehensive
income 1,001 153
-------- -------
Total stockholders' equity 56,640 47,677
-------- -------
Total liabilities and
stockholders' equity $ 804,153 762,013
======== =======
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
-------------------- ------------------ -------------------
(Dollars in thousands, except share amounts)
Interest income: (unaudited) (unaudited)
- ---------------
Loans $ 41,868 47,400 23,209 23,706 47,897 43,155
Securities held-to- maturity 1,337 387 187 382 421 306
Securities available-for-sale 8,109 7,025 3,474 3,617 7,288 4,306
FHLB stock dividends 831 865 451 373 787 622
Interest-bearing deposits 325 207 153 201 296 193
--------------------------------------------------------------------------
Total interest income 52,470 55,884 27,474 28,279 56,689 48,582
--------------------------------------------------------------------------
Interest expense:
- ----------------
Deposits 12,530 17,639 8,035 10,501 20,105 19,801
FHLB advances 12,142 14,090 7,047 6,800 13,843 9,093
Securities sold under agreements
to repurchase 626 1,598 609 1,025 2,014 565
Trust preferred securities 1,148 1,154 581 593 1,166 388
--------------------------------------------------------------------------
Total interest expense 26,446 34,481 16,272 18,919 37,128 29,847
--------------------------------------------------------------------------
Net interest income 26,024 21,403 11,202 9,360 19,561 18,735
Provision for loan losses 1,895 1,370 810 420 980 770
- ------------------------- --------------------------------------------------------------------------
Net interest income after
provision for loan losses 24,129 20,033 10,392 8,940 18,581 17,965
--------------------------------------------------------------------------
Other income:
- ------------
Gain on sale of loans held
-for-sale 697 563 335 107 336 427
Gain on sale of securities
available-for-sale 1,076 430 294 76 212 -
Gain on sale of real estate
owned and investment property 427 265 - - - -
Service charges 1,609 1,893 908 854 1,839 1,591
Other 230 171 280 101 256 258
--------------------------------------------------------------------------
Total other income 4,039 3,322 1,817 1,138 2,643 2,276
--------------------------------------------------------------------------
Other expenses:
- --------------
Salaries and employee benefits 8,771 7,927 3,847 3,623 7,702 7,914
Occupancy 2,287 2,482 1,216 1,453 2,719 2,889
Data processing 259 237 133 146 249 234
Marketing 455 369 187 273 454 509
Prepayment penalty FHLB 648 245 225 - 20 -
Other 3,901 3,604 1,853 1,402 3,157 3,071
--------------------------------------------------------------------------
Total other expenses 16,321 14,864 7,461 6,897 14,301 14,617
--------------------------------------------------------------------------
Income before Federal
income taxes 11,847 8,491 4,748 3,181 6,923 5,624
Federal income taxes 3,775 2,874 1,598 1,082 2,357 1,912
--------------------------------------------------------------------------
Net income $ 8,072 5,617 3,150 2,099 4,566 3,712
==========================================================================
Net income per common
share, basic $ 1.26 0.92 0.51 0.35 0.75 0.61
Weighted average number of
shares outstanding, basic 6,398,170 6,116,259 6,172,489 6,065,332 6,081,969 6,042,084
Net income per diluted share $ 1.22 0.87 0.49 0.33 0.71 0.57
Weighted average number of
Shares outstanding, diluted 6,609,158 6,456,770 6,465,467 6,411,499 6,427,574 6,523,426
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED
OTHER COM- TOTAL
ADDITIONAL PREHENSIVE STOCK-
COMMON PAID-IN TREASURY RETAINED (LOSS)/ HOLDERS'
SHARES STOCK CAPITAL STOCK EARNINGS INCOME, NET EQUITY
---------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
Balances at June 30, 1999 5,454,302 $ 55 4,792 - 31,148 (1,756) 34,239
Options exercised 77,575 - 248 - - - 248
Net income - - - - 3,712 - 3,712
Other comprehensive loss,
net of tax benefit of $(486) - - - - - (943) (943)
--------------------------------------------------------------------------------
Balances at June 30, 2000 5,531,877 55 5,040 - 34,860 (2,699) 37,256
Options exercised 162,318 2 444 - - - 446
Net income - - - - 4,566 - 4,566
Shares repurchased (100,935) - - (723) - - (723)
Other comprehensive income,
net of tax of $1,466 - - - - - 3,052 3,052
--------------------------------------------------------------------------------
Balances at June 30, 2001 5,593,260 57 5,484 (723) 39,426 353 44,597
Stock dividends 572,989 6 4,651 (93) (4,564) - -
Options exercised 54,429 - 286 - - - 286
Net income - - - - 3,150 - 3,150
Shares repurchased (19,763) - - (156) - - (156)
Other comprehensive loss,
net of tax benefit of $(103) - - - - - (200) (200)
--------------------------------------------------------------------------------
Balances at December 31, 2001 6,200,915 63 10,421 (972) 38,012 153 47,677
Dividends declared - - - - (646) - (646)
Options exercised 324,540 4 1,060 - - - 1,064
Net income - - - - 8,072 - 8,072
Shares repurchased (41,335) - - (375) - - (375)
Other comprehensive income,
net of tax of $437 - - - - - 848 848
--------------------------------------------------------------------------------
Balances at December 31, 2002 6,484,120 $ 67 11,481 (1,347) 45,438 1,001 56,640
================================================================================
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
--------------------------------------------------------
(Dollars in thousands, except share amounts)
Comprehensive Income (unaudited) (unaudited)
- --------------------
Net income $ 8,072 5,617 3,150 2,099 4,566 3,712
Increase in unrealized gains losses)
on securities available for sale, net
of tax expense (benefit) of $803, $450,
$(3), $1,084, $1,539, and $(486). 1,558 874 (6) 2,312 3,192 (943)
Less reclassification adjustment for gains
included in net income, net of tax benefit
of $(366), $(146), $(100), $(26), $(72)
and $0. (710) (284) (194) (50) (140) -
--------------------------------------------------------
Comprehensive Income $ 8,920 6,207 2,950 4,361 7,618 2,769
========================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
------------------------------------------------------------------
(Dollars in thousands, except share amounts)
Cash flows from operating activities: (unaudited) (unaudited)
- ------------------------------------
Net income $ 8,072 5,617 3,150 2,099 4,566 3,712
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,218 1,259 655 698 1,302 1,405
Amortization of retained servicing rights 187 273 135 130 268 257
Provision (recovery) for losses on:
Loans 1,895 1,370 810 420 980 770
Mortgage servicing rights - 30 30 - - (137)
Deferred Federal income taxes (205) 322 - 49 469 (486)
Additions to mortgage servicing rights - (7) (4) (24) (27) (204)
Deferred loan fees, net of amortization (304) (432) (202) 215 (16) 348
Net gain on sales of securities available
-for-sale (1,076) (430) (294) (76) (212) -
Gain on sales of mortgage loan servicing
rights - (22) - - - -
Gain on sales of premises and equipment (1) (170) (170) - - -
Gain on sale of real estate owned and
investment property (427) (18) - - - -
Federal Home Loan Bank stock dividend (831) (865) (451) (373) (787) (622)
Net change in accrued interest receivable
and other assets over (under) accrued
interest payable, expenses and other
liabilities 2,443 (62) 1,097 (1,004) (2,386) (3,581)
-----------------------------------------------------------------
Net cash provided by operating activities 10,971 6,865 4,756 2,134 4,157 1,462
-----------------------------------------------------------------
Cash flows from investing activities:
- ------------------------------------
Loans originated, net of principal
repayments 26,413 (29,565) (11,985) (9,619) (27,007) (86,546)
Purchases of securities held-to-maturity (66,408) - - - - (9,820)
Proceeds from calls on securities held-to
-maturity 21,511 - - - - -
Proceeds from sale of real estate owned
and investment property 956 - - - - -
Principal repayments on securities held-
to-maturity 1,808 1,210 603 652 1,259 707
Principal repayments on securities available
-for-sale 34,460 34,973 15,412 3,091 22,652 4,435
Purchases of securities available-for-sale (207,201) (182,597) (96,589) (45,631) (131,635) (25,968)
Proceeds from sales of securities available
-for-sale 166,374 121,176 60,498 21,052 81,730 -
Purchases of premises and equipment (1,873) (1,062) (348) (433) (1,147) (1,104)
Proceeds from sales of premises and equipment 15 227 227 - - -
Purchase of bank owned life insurance (10,000) - - - - -
-----------------------------------------------------------------
Net cash used in investing activities (33,945) (55,638) (32,182) (30,888) (54,148) (118,296)
-----------------------------------------------------------------
Subtotal, carried forward $ (22,974) (48,773) (27,426) (28,754) (49,991) (116,834)
-----------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
----------------------------------------------------------------
(Dollars in thousands, except share amounts)
(unaudited) (unaudited)
Subtotal, brought forward $ (22,974) (48,773) (27,426) (28,754) (49,991) (116,834)
----------------------------------------------------------------
Cash flows from financing activities:
- ------------------------------------
Proceeds from exercise of stock options 1,064 522 176 210 446 248
Dividends paid (322) - - - - -
Repurchase of common stock (375) (295) (156) (584) (723) -
Net increase (decrease) in deposits 89,870 24,004 18,065 (2,531) 3,408 36,721
Net (decrease) increase in Federal Home
Loan Bank advances (29,000) 3,523 (5,624) 7,321 16,468 73,660
Proceeds from trust preferred offering, net
of issuance costs - - - - - 9,234
Net (decrease) increase in securities sold
under agreements to repurchase (29,223) 12,527 12,872 31,478 31,133 164
Net (decrease) increase in advance payments
by borrowers for taxes and insurance (67) (146) (165) (240) (221) 13
----------------------------------------------------------------
Net cash provided by financing activities 31,947 40,135 25,168 35,654 50,511 120,040
----------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 8,973 (8,638) (2,258) 6,900 520 3,206
Cash and cash equivalents at beginning of period: 11,622 20,260 13,880 13,360 13,360 10,154
----------------------------------------------------------------
Cash and cash equivalents at end of period: $ 20,595 11,622 11,622 20,260 13,880 13,360
================================================================
Supplemental disclosures of cash flow information
- cash paid during the period for:
Interest $ 26,453 33,290 15,655 17,674 35,309 28,709
Federal income taxes 3,310 2,350 1,100 825 2,075 1,809
Supplemental schedule of non-cash investing
activities:
Mortgage loans securitized into FHLMC
participation certificates and held-for
-trading and sold - - - - - 8,814
Net mortgage loans transferred to real
estate owned $ 1,545 1,124 211 234 1,147 1,192
See accompanying notes to consolidated financial statements.
CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
(1) Summary of significant accounting policies
- ----------------------------------------------
The accounting and financial reporting policies of Cascade Financial
Corporation and subsidiaries (the "Corporation") conform to accounting
principles generally accepted in the United States of America and to general
practice within the financial institutions industry, where applicable. In
preparing the consolidated financial statements, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of income and expense. Actual
results could differ from those estimates.
The following is a description of the more significant policies which the
Corporation follows in preparing and presenting its consolidated financial
statements.
(a) Basis of presentation
The consolidated financial statements include the accounts of the
Corporation, its subsidiaries, Cascade Bank (the "Bank"), Cascade Capital Trust
I (the "Trust"), and the Bank's subsidiary, Cascade Investment Services, Inc.
All significant intercompany balances and transactions have been eliminated in
the consolidation.
(b) Cash equivalents
The Corporation considers all interest-bearing deposits and short-term
highly liquid investment securities with an original maturity of three months
or less to be cash equivalents.
(c) Loans
All of the Corporation's loans are located in Washington State, primarily in
the Puget Sound region. At December 31, 2002, the Corporation's loans were
principally secured by one-to-four-family residences (22%), multifamily
residences (17%), real estate construction (15%), business (26%), consumer
assets (9%), and commercial real estate properties (11%). Accordingly, the
ultimate collectibility of the Corporation's loan portfolio is susceptible to
changes in the economic and real estate market conditions in the Puget Sound
region.
Most of the commercial loans are secured. The security includes commercial
property, business inventories, commercial equipment and personal property of
the borrowers and/or guarantors. At December 31, 2002, $14.6 million in
commercial loans were unsecured. Home equity loans and lines of credit account
for the majority of the installment loan portfolio.
Real estate loans originated by the Corporation are generally secured by no
less than 80% of the lesser of the appraised value or purchase price of the
underlying property. The Corporation currently requires first mortgage,
residential customers to obtain private mortgage insurance on all loans above
an 80% loan-to-value ratio. Loans are stated at principal amounts outstanding,
net of deferred loan fees and costs.
Interest income
Interest is accrued only if deemed collectible. Accrual of interest income
is generally discontinued when a loan becomes 90 days past due and accrued
interest amounts are reversed. Once interest has been paid to date or
management considers the loan to be fully collectible, it is returned to
accrual status.
Loan origination fees and certain direct origination costs are deferred and
amortized as an adjustment of the loans' yields over their contractual lives
using the effective interest method. In the event loans are sold, the remaining
net deferred loan origination fees or costs are recognized as a component of
the gains or losses on the sales of loans. When portfolio loans pay off before
their contractual maturity, the remaining deferred fees or costs are recognized
as interest income or expense.
Loan commitment fees are deferred until loans are funded, at which time they
are amortized into interest income using the effective interest method. If the
commitment period expires, the fees are recognized as service charges.
Impairment of loans and allowance for loan losses
An allowance for loan losses is maintained at a level sufficient to provide
for losses based on management's evaluation of known and inherent risks in the
loan portfolio. This evaluation includes analyses of the fair value of the
financial condition of the borrower, collateral securing selected loans,
consideration of historical loss experience, and management's projection of
trends affecting credit quality. Interest income is normally recognized on the
accrual basis; however, if a loan is impaired then interest income is recorded
upon the receipt of cash. The difference between interest income recognized on
the accrual basis and cash basis is not significant.
The Corporation reviews all single-family loans, all consumer loans and
multifamily and commercial real estate loans with outstanding principal
balances under $1.0 million for impairment as smaller balance homogeneous loan
groups. The Corporation considers a loan to be impaired when it becomes
nonaccrual; if it is a multifamily or commercial real estate loan less than 90
days delinquent and management believes that the borrower may be experiencing
financial difficulty based on indicators such as an inconsistent payment
pattern, low debt coverage ratio, high loan-to-value ratio; or if it is a
restructured debt. The Corporation bases the measurement of loan impairment for
all loans on the fair value of the loan's underlying collateral. If the
recorded investment in a loan exceeds the measure of impairment, the
Corporation recognizes the impairment by creating a valuation allowance with
a corresponding charge to the provision for loan losses.
Management believes the allowances for losses on loans and real estate owned
are adequate. While management uses available information to recognize losses
on these assets, future additions to the allowances will be necessary based on
changes in economic conditions, particularly in the western Washington region.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowances for
losses on loans. Such agencies may require the Corporation to recognize
additions to the allowances, or change valuations, based on their judgments
about information available to them at the time of their examinations.
(d) Sales of loans
Loans held-for-sale
Any loan that management determines will not be held-to-maturity is
classified as held-for-sale at the time of origination. Loans held-for-sale are
carried at lower of cost or market value, determined on an aggregate basis.
Unrealized losses on such loans are included in gain on sale for loans held-for
- -sale. All loans are sold without recourse.
Mortgage loan servicing rights
The Corporation acquires mortgage servicing rights (MSR) through the
origination of mortgage loans and the sale of those loans with servicing
rights retained. The total cost of the mortgage loans sold is allocated to the
MSR and the loans based on their relative fair values. The Corporation assesses
its MSR for impairment based on the fair value of those rights. The carrying
value of the MSR is evaluated on a quarterly basis and any impairment is
recognized through a valuation allowance for each impaired stratum. For
purposes of measuring impairment, the Corporation stratifies its MSR by
various risk characteristics such as loan type, investor type, interest rate
and origination date with appropriate prepayment assumptions for the various
MSR pools. Reversal of the allowance is based upon the recovery of the fair
market value of the amortized asset. The MSR are included in other assets and
are amortized as an offset to service charges in proportion to, and over, the
period of estimated net servicing income.
Loan servicing generally consists of collecting mortgage payments and certain
charges from borrowers, such as late payment fees, maintaining escrow accounts,
and disbursing payments to investors. Loan servicing income is recognized when
earned and is recorded as service charges. Loan servicing costs are charged to
expense as incurred.
The Corporation may sell loan servicing rights. Gains and losses from sales
of loan servicing rights are calculated using the specific identification of
the related carrying value.
(e) Securities
Debt and equity securities, including mortgage-backed securities, are
classified as either trading, available-for-sale, or held-to-maturity.
Securities classified as trading are carried at fair value with unrealized
gains and losses reported in earnings. Securities available-for-sale are
carried at fair value, with unrealized gains and losses reported as a component
of other comprehensive income. Investment securities held-to-maturity are
carried at amortized cost or principal balance, adjusted for amortization of
premiums and accretion of discounts. Amortization of premiums and accretion of
discounts are calculated using a method that approximates the level yield
method. The Corporation has the ability, and it is management's intention, to
hold such securities until maturity.
(f) Real estate owned
Real estate owned includes real estate acquired in settlement of loans. Real
estate owned is recorded at the lower of cost or fair value, based upon the
most recent appraisal, less estimated costs to sell. Any loss recorded at the
time a foreclosure occurs is classified as a charge-off against the allowance
for loan losses. Losses that result from the ongoing periodic valuation of
these properties are charged to operations in the period in which they are
identified. Real estate owned at December 31, 2002, and December 31, 2001, was
$461 and $430, respectively, which is included in other assets.
(g) Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Straight-line depreciation is provided over the estimated useful lives of the
respective assets. Leasehold improvements are amortized over the estimated
useful lives of the improvements, or terms of the related leases, whichever is
shorter.
(h) Federal income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on the deferred
tax assets and liabilities of a change in tax rates is recognized as income in
the period that includes the enactment date.
(i) Stock-based compensation
The Corporation measures its employee stock-based compensation arrangements
using the provisions outlined in Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," which is an intrinsic
value-based method of recognizing compensation costs. As none of the
Corporation's stock options have an intrinsic value at grant date, no
compensation cost has been recognized for its stock option plans.
The Corporation applies Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees," in accounting for its stock option
plans. Had compensation cost on the fair value at the grant dates for the
Corporation's stock option plan been determined consistent with the Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation," the Corporation's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
-------------------------------------------------
(Dollars in thousands, except share amounts)
Net income unaudited unaudited
As reported $8,072 5,617 3,150 2,099 4,566 3,712
Less: SFAS 123 compen-
sation costs 49 140 63 53 127 180
Pro forma $8,023 5,477 3,087 2,046 4,439 3,532
Net income per common share
Basic
As reported 1.26 0.92 0.51 0.35 0.75 0.61
Pro forma 1.25 0.90 0.50 0.34 0.73 0.58
Diluted
As reported 1.22 0.87 0.49 0.33 0.71 0.57
Pro forma 1.21 0.85 0.48 0.32 0.69 0.54
The fair value of options granted under the Corporation's stock option plan
was $3.31, $3.45, $3.57, and $2.40 respectively for the year ended December 31,
2002, the six months ended December 31, 2001, and the years ended June 30,
2001, and 2000. The fair value is estimated on the date of grant using the
Black-Scholes Model. The following weighted average assumptions were used for
December 31, 2002, December 31, 2001, June 30, 2001 and 2000: risk-free
interest rate of 1.25%, 1.75%, 4.75%, and 6.50%, an expected life of eight
years, no expected cash dividends, and a volatility factor of 24%.
(j) Reclassifications
Certain December 31, 2001, balances have been reclassified to conform to the
2002 presentation.
(2) Securities
A summary of securities at December 31, 2002, and December 31, 2001, follows:
DECEMBER 31, 2002 DECEMBER 31, 2001
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSSES VALUE COST GAIN LOSSES VALUE
----------------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
Securities available-for-sale:
MBS $ 89,145 928 - 90,073 56,696 - 185 56,511
Agency notes 55,285 589 - 55,874 76,266 433 - 76,699
FHLB stock 13,950 - - 13,950 13,119 - - 13,119
Other - - - - 4,025 - 16 4,009
----------------------------------------------------------------------------------------------
$158,380 1,517 - 159,897 150,106 433 201 150,338
==============================================================================================
Securities held-to-maturity:
MBS $ 4,212 167 - 4,378 5,989 - 106 5,883
Agency notes 44,866 394 - 45,261 - - - -
----------------------------------------------------------------------------------------------
$ 49,078 561 - 49,639 5,989 - 106 5,883
==============================================================================================
As of December 31, 2002, and 2001 the Corporation was required to maintain
92,610 and 113,250 shares, respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits was
$1,997 and $1,710 at December 31, 2002, and 2001, respectively.
Proceeds from the sale of securities available-for-sale including calls on
securities held-to-maturity and gross realized gains and losses are summarized
as follows for the years ended December 31, 2002, and 2001, for the six months
ended December 31, 2001, and 2000, and the year ended June 30, 2001. There were
no sales of securities available for sale for the year ended June 30, 2000.
PROCEEDS GAINS LOSSES
----------------------------
Year ended December 31, 2002 $187,885 1,076 -
Year ended December 31, 2001 (unaudited) 121,176 542 112
Six months ended December 31, 2001 60,498 295 1
Six months ended December 31, 2000 (unaudited) 21,052 76 -
Year ended June 30, 2001 81,730 323 111
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at December 31, 2002:
OVER OVER
WITHIN ONE TO FIVE TO OVER
ONE FIVE TEN TEN
YEAR YEARS YEARS YEARS TOTAL
--------------------------------------------------
(Dollars in thousands, except share amounts)
Amortized cost
MBS $ - - 1,383 87,762 89,145
Agency notes 83 - 32,465 22,737 55,285
FHLB stock 13,950 - - - 13,950
Total amortized cost $14,033 - 33,848 110,499 158,380
Fair value
MBS $ - - 1,413 88,660 90,073
Agency notes 83 - 32,788 23,003 55,874
FHLB stock 13,950 - - - 13,950
Total fair value $14,033 - 34,201 111,663 159,897
The contractual maturities of the Corporation's securities held-to-maturity at
December 31, 2002, were all greater than 5 years. Securities are classified
based upon contractual maturity dates. Actual maturities may differ from
contractual maturities because the borrowers have the right to prepay their
obligations. Available-for-sale securities pledged as collateral to secure
public deposits were $10,729 at December 31, 2002, and $1,356 at December 31,
2001.
(3) Loans and allowance for loan losses
- ---------------------------------------
A summary of loans at December 31, 2002 and 2001, follows:
DECEMBER 31, DECEMBER 31,
2002 2001
------------------------------
Residential real estate $122,669 152,727
Multifamily real estate 94,245 109,733
Commercial real estate 63,108 62,938
Real estate construction 104,790 104,131
Business 142,273 125,342
Consumer 49,331 58,381
--------------------------
Total loans 576,416 613,252
Loans in process (20,669) (28,220)
Deferred loan fees, net (2,198) (2,502)
--------------------------
Loans $553,549 582,530
==========================
Loans serviced for others $ 46,521 78,114
Accrued interest on loans was $2,759 and $3,267 at December 31, 2002, and
December 31, 2001, respectively. Loans to officers and directors totaled $1.8
million at December 31, 2002, and $2.9 million at December 31, 2001.
At December 31, 2002, the composition of the loan portfolio, less loans in
process, was as follows:
FIXED RATE ADJUSTABLE RATE
------------------------------
Term to maturity
Less than one year $ 12,549 90,519
1-3 years 19,242 32,467
3-5 years 33,248 17,660
5-10 years 16,226 35,750
10-20 years 8,211 47,927
Over 20 years 11,317 230,631
-------------------------
Total $100,793 454,954
=========================
Nonaccrual loans totaled $956, $1,999, and $1,315 respectively, at December 31,
2002, December 31, 2001, and June 30, 2001. If interest on these loans had been
recognized, such income would have been $32, $87, and $74 respectively, for the
periods ended December 31, 2002 and 2001, and June 30, 2001. The Corporation
has no commitments to extend additional credit on loans that are nonaccrual. At
December 31, 2002, and 2001, and June 30, 2001, loans totaling $24,564, $16,669,
and $5,625 were impaired, of which $0, $1,512, and $574 had allocated
allowances of $0, $480, and $105, respectively. The remaining $24,564, $15,157,
and $5,051 had no allowances allocated to them because the value of the
underlying collateral of the impaired loans was equal to or exceeded the
recorded investment. Of the $24,564, $16,669, and $5,625 of impaired loans,
$677, $1,401, and $1,121 were under foreclosure. The average balance of
impaired loans for the year ended December 31, 2002, the six month period ended
December 31, 2001, and the year ended June 30, 2001, respectively, was $19,524,
$8,853, and $6,065 and the Corporation recognized $1,718, $746 and $406 of
related interest income on such loans during the time such loans were impaired.
At December 31, 2002, the Corporation had outstanding commitments of $6,107
to fund loans with fixed interest rates and $4,337 for loans with adjustable
rates.
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.
A summary of the allowance for losses on loans follows:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
-----------------------------------------------
(Dollars in thousands, except share amounts)
(unaudited) (unaudited)
Balances at beginning
of year $6,304 5,342 5,687 5,004 5,004 4,254
Provision for loss 1,895 1,370 810 420 980 770
Recoveries 114 25 13 19 32 126
Charge-offs (1,441) (433) (206) (101) (329) (146)
-------------------------------------------------
Balances at end of year $6,872 6,304 6,304 5,342 5,687 5,004
=================================================
(4) Premises and equipment
- --------------------------
A summary of premises and equipment follows:
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIVES 2002 2001
-------------------------------------------
(Dollars in thousands, except share amounts)
Land $ 1,261 1,239
Buildings 40 years 7,868 7,660
Leasehold improvements Lease term 1,589 1,435
Furniture and equipment 2-10 years 10,056 8,973
-----------------------
20,774 19,307
Accumulated depreciation and amortization (11,513) (10,687)
-----------------------
$ 9,261 8,620
=======================
(5) Deposits
- ------------
Deposits at December 31, 2002 and 2001, are summarized as follows:
DECEMBER 31, DECEMBER 31,
2002 2001
----------------------------
Noninterest bearing checking accounts $ 32,116 23,028
Interest bearing checking accounts 22,454 22,538
Money market deposit accounts 102,674 96,909
Savings accounts 11,277 12,043
Certificates of deposit 341,329 265,462
-----------------------
$509,850 419,980
=======================
Time deposit accounts in amounts of $100 thousand or more totaled $200.8
million and $129.5 million at December 31, 2002, and December 31, 2001,
respectively.
WEIGHTED DEPOSIT
AVERAGE ACCOUNTS WITH ACCRUED
INTEREST BALANCES IN INTEREST
RATE ON EXCESS OF PAYABLE ON
DEPOSITS $100,000 DEPOSITS
--------------------------------------------
(Dollars in thousands, except share amounts)
December 31, 2002 2.23% $264,857 159
December 31, 2001 3.12 183,578 712
A summary of interest expense on deposits follows:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
-----------------------------------------------
(unaudited) (unaudited)
Checking and money
market accounts $ 2,528 3,513 1,540 2,752 4,724 6,359
Savings accounts and
time deposits 10,002 14,126 6,495 7,749 15,381 13,442
--------------------------------------------------
$12,530 17,639 8,035 10,501 20,105 19,801
==================================================
Maturities of time deposits at December 31, 2002 are as follows:
YEAR ENDING DECEMBER 31, 2002
2003 $281,428
2004 28,806
2005 12,246
2006 5,747
2007 13,097
Thereafter 5
-------
$341,329
=======
(6) Trust preferred securities
- ------------------------------
On March 1, 2000, $10 million of 11 percent Capital Securities due March 1,
2030, were issued by a business trust whose common equity is 100% owned by
Cascade Financial Corporation. The Corporation used the proceeds for general
corporate purposes including stock repurchases and investment in its subsidiary
bank. The trust preferred securities are included as a separate line item in
the consolidated balance sheet and distributions payable are treated as
interest expense in the consolidated statements of operations. The trust
preferred securities qualify as Tier I capital under regulatory capital
guidelines.
(7) FHLB advances
- -----------------
FHLB advances are summarized as follows:
DECEMBER 31, 2002 DECEMBER 31, 20001
WEIGHTED WEIGHTED
AVERAGE INTEREST AVERAGE INTEREST
MATURITY DATE AMOUNT RATE AMOUNT RATE
-----------------------------------------------------------
2002 $ - .-% 24,000 3.73%
2003 27,500 6.33 42,500 6.28
2004 25,000 6.45 25,000 6.45
2005 45,000 6.27 45,000 6.27
2006 21,000 4.77 21,000 4.77
2007 30,000 4.65 20,000 6.37
Thereafter 49,000 5.80 49,000 5.80
---------------------------------------
$197,500 5.78 226,500 5.79 %
=======================================
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-------------------------------
Maximum amount of outstanding FHLB
advances at any month-end $226,500 235,322
Average amount of outstanding FHLB
advances during the period 203,022 229,314
FHLB advances are collateralized by otherwise unencumbered permanent
residential mortgages and investment grade securities.
The Corporation had $138 million in fixed rate advances as of December 31,
2002, where the FHLB has the option to convert these advances to variable rate
advances after a specified period.
At December 31, 2002, the Bank had an unused line of credit from the
FHLB-Seattle of $83.9 million. The Bank's credit line with the FHLB-Seattle is
35% of total assets or up to approximately $281 million.
(8) Securities sold under agreements to repurchase and lines of credit
- ----------------------------------------------------------------------
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) that are treated as financing arrangements.
Accordingly, the obligations to repurchase securities sold are reflected as a
liability in the consolidated balance sheets, and the securities underlying the
agreements remain in the asset accounts. The securities underlying the
agreements are under the Corporation's control and are held by nationally known
government security dealers who are recognized as primary dealers by the
Federal Reserve Board, or other investment banking firms approved by the
Corporation's Board of Directors. Such agreements typically have maturities
ranging from 30 to 89 days.
Securities sold under agreements to repurchase the same securities consist
of agency notes and/or mortgage-backed securities summarized as follows:
UNDERLYING SECURITIES
WEIGHTED BOOK VALUE,
AVERAGE INCLUDING
BALANCE INTEREST ACCRUED MARKET
OUTSTANDING RATE INTEREST VALUE
December 31, 2002 $20,569 1.49% $20,586 20,317
December 31, 2001 49,792 2.16 50,625 49,723
Financial data pertaining to reverse repurchase agreements follows:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
-------------------------------------------------
(unaudited) (unaudited)
Maximum amount of
outstanding agreements
at any month-end $49,666 49,792 49,792 54,237 54,237 21,696
Average amount of
outstanding agreements
during the period 34,415 38,971 38,264 32,027 34,231 9,082
The Corporation has Fed funds borrowing lines with two of its correspondent
banks. During the year ended December 31, 2002, neither of these lines were
used.
(9) Federal income taxes
- ------------------------
Federal income tax expense (benefits) includes the following components:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
-----------------------------------------------------------
(Dollars in thousands, except share amounts)
(unaudited) (unaudited)
Current $3,980 2,552 1,696 1,033 1,888 2,398
Deferred (205) 322 (98) 49 469 (486)
-----------------------------------------------------------
$3,775 2,874 1,598 1,082 2,357 1,912
===========================================================
For the year ended December 31, 2002, the Corporation's effective tax rate was
32% compared to 34% for the year ended December 31, 2001. Tax benefits related
to interest on tax exempt loans and increases in cash surrender value of bank
owned life insurance accounted for the differences in the effective tax rates
between the two years.
Under certain provisions of the Internal Revenue Code, the Corporation was
allowed a statutory bad debt deduction (based upon a percentage of taxable
income before such deduction) for additions to tax bad debt reserves
established for the purpose of absorbing losses on loans or property acquired
through foreclosure. Savings banks are not required to provide a deferred tax
liability for additions to the tax bad debt reserve accumulated as of December
31, 1987, which amount for the Corporation is $473. This amount represents
allocations of income to bad debt deductions for tax reporting purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses
will create income for tax reporting purposes only, which will be subject to
the then current corporate income tax rate.
The following table presents major components of the net deferred tax
liability resulting from differences between financial reporting and tax bases
at December 31, 2002, and December 31, 2001:
DECEMBER 31, DECEMBER 31,
2002 2001
Deferred tax assets: ----------------------------
Loans $ 2,125 1,679
---------------------
Gross deferred tax assets 2,125 1,679
Deferred tax liabilities:
Deferred loan fees (861) (882)
Securities available-for-sale (516) (79)
Premises and equipment (201) (236)
FHLB stock (2,002) (1,720)
Other (54) (39)
---------------------
Gross deferred tax liabilities (3,634) (2,956)
---------------------
Net deferred tax (liability) $(1,509) (1,277)
=====================
A valuation allowance for deferred tax assets was not considered necessary at
December 31, 2002 or 2001. Management believes the Corporation will fully
realize its total deferred income tax assets as of December 31, 2002 and 2001,
based upon its total deferred income tax liabilities, previous taxes paid and
its current and expected future levels of taxable income.
(10) Earnings per share
- -----------------------
The following table presents EPS information:
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
------------------------------------------------------------------------------
(Dollars in thousands, except share amounts)
unaudited unaudited
Net income $ 8,072 5,617 3,150 2,099 4,566 3,712
Common shares
outstanding (basic) 6,398,170 6,116,259 6,172,489 6,065,332 6,081,969 6,042,084
Effect of dilutive
stock options 210,988 340,511 292,978 346,167 345,605 481,342
-------------------------------------------------------------------------------
Common shares
Outstanding (diluted) 6,609,158 6,456,770 6,465,467 6,411,499 6,427,574 6,523,426
===============================================================================
EPS, basic $ 1.26 0.92 0.51 0.35 0.75 0.61
EPS, diluted 1.22 0.87 0.49 0.33 0.71 0.57
For purposes of calculating basic and diluted earnings per share, the numerator
of net income is the same. There were 73,164, 176,312, 207,567, and 98,494
outstanding options to purchase common stock at December 31, 2002, December 31,
2001, June 30, 2001, and 2000, respectively, that are considered nondilutive
and have been excluded from the above calculation. Nondilutive options have an
exercise price which is greater than the current market price of the stock.
(11) Stockholders' equity
- -------------------------
(a) Restrictions on dividends
Current regulations allow the Bank to pay dividends on its stock if its
regulatory capital would not thereby be reduced below the amount required for
the statutory capital requirements set by the Federal Deposit Insurance
Corporation ("FDIC").
(b) Regulatory capital
At December 31, 2002, banking regulations required institutions to have a
minimum total risk-based capital to risk-weighted assets ratio of 8% and a
Tier 1 (core) capital to adjusted total assets ratio of 4%.
At December 31, 2002, the Bank was in compliance with the regulatory
requirements for well-capitalized institutions. As of January 31, 2003, the
most recent notification from the FDIC categorized the Bank as well-capitalized
under the regulatory framework. There are no conditions or events since the
notification that management believes have changed the Bank's category.
MINIMUM
REQUIREMENTS
FOR CAPITAL WELL-CAPITALIZED
ACTUAL ADEQUACY REQUIREMENTS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
December 31, 2002: ------------------------------------------------------------
Total risk-based capital to risk-weighted assets (1) $ 71,336 13.11% $ 43,516 8.00% $ 54,395 10.00%
Tier 1 (core) capital to risk-weighted assets 64,536 11.86 21,758 4.00 32,637 6.00
Tier 1 (core) capital to adjusted total assets 64,536 8.07 32,007 4.00 40,009 5.00
December 31, 2001:
Total risk-based capital to risk-weighted assets (1) $ 62,426 11.98% $ 41,702 8.00% $ 52,128 10.00%
Tier 1 (core) capital to risk-weighted assets 56,122 10.77 20,851 4.00 31,277 6.00
Tier 1 (core) capital to adjusted total assets 56,122 7.54 29,763 4.00 37,204 5.00
(1) The FDIC requires institutions to maintain Tier 1 capital of not less than
one-half of total capital.
(12) Mortgage servicing rights
- ------------------------------
A summary of capitalized mortgage servicing rights, included in other assets,
at December 31, 2002, and December 31, 2001, follows:
DECEMBER 31, DECEMBER 31,
2002 2001
---------------------------
Balance at beginning of year $ 497 658
Additions - 4
Amortization (187) (135)
Allowance for losses - (30)
------------------
Balance at end of year $ 310 497
==================
(13) Employee benefit plans
- ---------------------------
(a) Savings plan
The Corporation maintains a savings plan under section 401(k) of the Internal
Revenue Code, covering employees working a minimum of 20 hours per week. Under
the plan, employee contributions are matched by the Corporation at a rate of
50%, up to a maximum of $6,000. Such matching becomes vested over a six year
graded schedule. Employees may make investments in various stock, fixed income
or money market plans, or may purchase stock in the Corporation. The
Corporation contributed $92, $64, $106 and $75 to the plan for the year ended
December 31, 2002, the six months ended December 31, 2001, and the years ended
June 30, 2001, and 2000, respectively.
(b) Employee stock ownership plan
The Corporation established an employee stock ownership plan (ESOP) which
became effective on July 1, 1992 for employees of the Corporation, the Bank,
and its subsidiary who have at least one year of continuous service. The
Corporation pays all ESOP expenses. Shares purchased by the ESOP are held in a
suspense account for allocation among the participants. Benefits become 20%
vested after the third year of service with an additional 20% vesting each year
thereafter until 100% vesting after seven years. Allocations to individual
participant's accounts are based on total compensation during the year.
Forfeitures are reallocated annually among remaining participating employees.
For the year ended December 31, 2002, the six months ended December 31, 2001,
and the years ended June 30, 2001, and 2000 the Corporation contributed $112,
$55, $108, and $175, respectively, to the ESOP, which is invested in Cascade
Financial Corporation stock. Allocated and unallocated shares at December 31,
2002, were 163,699 and zero, respectively. The Corporation has the right of
first refusal to purchase the allocated shares of separated employees.
(c) Employee stock purchase plan
The Corporation maintains an employee stock purchase plan, under the terms of
which 154,283 shares of common stock have been authorized for issuance. The
plan allows employees of the Corporation with three months of service the
opportunity to purchase common stock through accumulated salary deductions
during each offering period. On the first day of each six month offering
period (January 1 and July 1 of each year), eligible employees who elect to
participate are granted options to purchase a limited number of shares and
unless the participant withdraws from the plan, the option is automatically
exercised on the last day of each offering period. The aggregate number of
shares to be purchased in any given offering is determined by dividing the
accumulated salary deduction for the period by the lower of 85% of the market
price of a common share at the beginning or end of an offering period.
(d) Stock options
The Corporation maintains stock option plans pursuant to which shares of
Common Stock have been authorized for issuance to certain key employees and
directors of the Corporation and its subsidiaries upon exercise of stock
options. The options granted under these plans are, in general, exercisable
under a vesting schedule whereby all options become exercisable over seven
years, and expire not more than ten years after the date of grant.
All options granted have limited rights that enable a holder upon a change
in control of the Corporation, to elect to receive cash equal to the difference
between the exercise price of the option and the fair market value of the
common stock on the date of exercise. At December 31, 2002, and December 31,
2001, 238,586 and 484,800 shares, respectively, were fully exercisable.
Changes in total options outstanding for the year ended December 31, 2002,
the six months ended December 31, 2001, and the years ended June 30, 2001, and
2000 are as follows:
SHARES WEIGHTED AVERAGE
UNDER EXERCISE PRICE OF
OPTION OPTION SHARES
-------------------------------
YEAR ENDED DECEMBER 31, 2002
Outstanding at beginning of year 855,216 $ 5.49
Granted during year 109,802 8.81
Exercised during year (324,540) 2.83
Forfeited during year (64,378) 8.96
--------
Outstanding at end of year 576,100 7.23
========
SIX MONTHS ENDED DECEMBER 31, 2001
Outstanding at beginning of period 834,672 $ 5.85
Granted during period 13,445 8.11
Exercised during period (54,429) 3.33
Five-for-four stock split 73,987 -
Forfeited during period (12,459) 8.19
--------
Outstanding at end of period 855,216 5.49
========
YEAR ENDED JUNE 30, 2001
Outstanding at beginning of year 864,272 $ 5.02
Granted during year 210,080 7.49
Exercised during year (162,318) 2.01
Forfeited during year (77,362) 9.07
--------
Outstanding at end of year 834,672 5.85
========
YEAR ENDED JUNE 30, 2000
Outstanding at beginning of year 848,345 $ 4.28
Granted during year 122,442 9.49
Exercised during year (77,575) 2.19
Forfeited during year (28,940) 9.86
--------
Outstanding at end of year 864,272 5.02
========
Financial data pertaining to outstanding stock options were as follows at
December 31, 2002:
WEIGHTED
WEIGHTED AVERAGE
WEIGHTED AVERAGE EXERCISE
AVERAGE EXERCISE NUMBER OF PRICE OF
RANGES OF NUMBER OF REMAINING PRICE OF EXERCISABLE EXERCISABLE
EXERCISE OPTION CONTRACTUAL OPTION OPTION OPTION
PRICES SHARES LIFE SHARES SHARES SHARES
- -------------------------------------------------------------------------------
$1.15-2.35 18,408 0.45 $ 2.00 18,408 $ 2.00
2.76-6.33 134,593 3.40 4.99 115,235 4.80
6.48-7.05 178,791 9.30 6.92 31,726 6.91
7.27-8.65 92,177 7.67 7.65 23,204 7.64
9.00-11.01 152,131 7.57 9.98 50,013 9.91
---------------------------------------------------------------
576,100 5.68 $ 7.23 238,586 $ 6.25
===============================================================
(14) Fair value of financial instruments
- ----------------------------------------
The fair value estimates presented below are subjective in nature, involve
uncertainties and matters of significant judgement and, therefore, are not
necessarily indicative of the amounts the Corporation could realize in a
current market exchange. The Corporation has not included certain material
items in its disclosure, such as the value of the long-term relationships with
the Corporation's lending and deposit customers since this is an intangible and
not a financial instrument. Additionally, the estimates do not include any tax
ramifications. There may be inherent weaknesses in any calculation technique,
and changes in the underlying assumptions used, including discount rates and
estimates of future cash flows that could materially affect the results. For
all of these reasons, the aggregation of the fair value calculations presented
herein do not represent, and should not be construed to represent, the
underlying value of the Corporation.
The following table presents a summary of the fair value of the Corporation's
financial instruments:
DECEMBER 31, DECEMBER 31,
2002 2001
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
Financial assets: ------------------------------------------
Cash and cash equivalents $ 20,595 20,595 11,622 11,622
Securities available-for-sale 159,897 159,897 150,338 150,338
Securities held-to-maturity 49,078 49,639 5,989 5,883
Loans, net 546,677 561,383 576,226 589,675
Servicing rights 310 357 497 551
Financial liabilities:
Deposit accounts 509,850 512,680 419,980 419,824
Borrowings 218,069 236,008 276,292 289,156
Trust preferred securities 10,000 10,480 10,000 10,000
Cash and cash equivalents
The carrying amount represents fair value.
Securities including mortgage backed securities
Fair values are based on quoted market prices or dealer quotations.
Loans
Fair values are estimated using current market interest rates to discount
future cash flows for each of fifteen different loan segments. Interest rates
used to discount the cash flows are based on U.S. Treasury yields or other
market interest rates with appropriate spreads for each segment. The spread
over the treasury yields or other market rates is used to account for
liquidity, credit quality and higher servicing costs. Prepayment rates are
based on expected future prepayment rates or where appropriate and available,
market prepayment rates.
Servicing rights
Fair values for mortgage servicing rights are based on quoted market prices
discounted for costs to sell.
Deposit accounts
The fair value of deposits with no stated maturity, such as checking accounts,
money market deposit accounts and savings accounts, equals the amount payable
on demand. The fair value of certificates of deposits is calculated based on
the discounted value of contractual cash flows. The discount rate is equal to
the rate currently offered on similar products.
Borrowings
The fair value is calculated based on the discounted cash flow method, adjusted
for market interest rates and terms to maturity.
Trust preferred securities
The fair value is calculated based on the discounted cash flow method, adjusted
for market interest rates and terms to maturity.
(15) Contingencies
- ------------------
The Corporation is a defendant in various legal proceedings arising in
connection with its business. It is the opinion of management that the
financial position and the results of operations of the Corporation will not be
materially adversely affected by the final outcome of these legal proceedings
and that adequate provision has been made in the accompanying consolidated
financial statements.
At periodic intervals, the Washington State Department of Financial
Institutions and the Federal Deposit Insurance Corporation routinely examine
the Corporation's financial statements as part of their legally prescribed
oversight of the banking industry. Based on these examinations, the regulators
can direct that the Corporation's financial statements be adjusted in
accordance with their findings.
(16) Condensed financial information of Cascade Financial Corporation
- ---------------------------------------------------------------------
Following are the condensed financial statements of Cascade Financial
Corporation (parent only) for the period indicated: (Dollars in thousands,
except share amounts)
BALANCE SHEET
DEC. 31, DEC. 31,
2002 2001
Assets: --------------------
Cash $ 964 518
Investment in subsidiary 64,536 56,123
Other assets 855 1,166
------------------
$66,355 57,807
==================
Liabilities and stockholders' equity:
Other liabilities $ 716 283
Trust preferred securities 10,000 10,000
Stockholders' equity 55,639 47,524
------------------
$66,355 57,807
==================
STATEMENT OF OPERATIONS
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
----------------------------------------------
(Dollars in thousands, except share amounts)
unaudited unaudited
Equity in undistributed net
income of the subsidiary $ 9,113 6,653 3,740 2,548 5,462 4,124
Interest Income - trust
preferred securities 34 60 17 - 42 -
Operating expenses (464) (476) (330) (88) (234) (240)
Interest expense - trust
preferred securities (1,148) (1,154) (581) (593) (1,166) (388)
-----------------------------------------------
Income before Federal
income taxes 7,535 5,083 2,846 1,867 4,104 3,496
Income tax benefit 537 534 304 232 462 216
-----------------------------------------------
Net income $ 8,072 5,617 3,150 2,099 4,566 3,712
===============================================
STATEMENT OF CASH FLOWS
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
2002 2001 2001 2000 2001 2000
---------------------------------------------------------
(Dollars in thousands, except share amounts)
Cash flows from operating activities: unaudited unaudited
Net income $ 8,072 5,617 3,150 2,099 4,566 3,712
Adjustments to reconcile net income to net
cash (used in) operating activities:
Equity in net income of subsidiaries (9,113) (6,653) (3,740) (2,548) (5,462) (4,124)
(Increase) decrease in other assets 311 (276) (295) 62 85 (913)
(Decrease) increase in other liabilities 109 (33) 4 46 9 380
----------------------------------------------------------
Net cash used in operating activities (621) (1,345) (881) (341) (802) (945)
Cash flows from investing activities:
Dividends received from subsidiaries 700 1,600 700 800 1,700 -
Investment in subsidiary - - - - - (9,709)
----------------------------------------------------------
Net cash provided (used) by
investing activities 700 1,600 700 800 1,700 (9,709)
Cash flows from financing activities:
Repurchase of common stock (375) (295) (156) (584) (723) -
Proceeds from exercise of stock options 1,064 415 176 210 446 248
Dividends paid (322) - - - - -
Proceeds from trust preferred offering - - - - - 10,000
----------------------------------------------------------
Net cash provided by financing activities 367 120 20 (374) (277) 10,248
----------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 446 375 (161) 85 621 (406)
----------------------------------------------------------
Cash and cash equivalents:
Beginning of year 518 143 679 58 58 464
----------------------------------------------------------
End of year $ 964 518 518 143 679 58
==========================================================
(17) Lines of business
- ----------------------
The Corporation's sole operating subsidiary is Cascade Bank, which is managed
along five major lines of business: business banking, retail banking,
construction lending, income property lending and residential lending. The
administrative group, although not considered a line of business, is
responsible for the management of investments, interest rate risk, marketing,
data processing and regulatory and stockholder reporting. The financial
performance of these business lines is measured by the Corporation's
profitability reporting processes, which utilize various management accounting
techniques to ensure that each business line's financial results reflect the
underlying performance of that business.
Each line of business segment is managed by a senior executive. Back office
support is provided to each segment through executives responsible for
information systems, finance and administration.
The principal activities conducted by Business Banking are the origination
and servicing of commercial business loans and associated merchant services.
Retail Banking includes all deposit products, with their related fee income,
and all consumer loan products such as home equity and installment loans and
credit card products. The Construction unit provides financing to builders and
developers for residential construction and land acquisition and development.
The Income Property unit originates loans secured by multifamily properties and
commercial real estate. The Residential unit's activities are the origination
of single-family loans and the associated loan servicing activities.
The Bank's reportable business segments are the strategic lines of business
noted above, which are managed by the Management Committee, under the direction
of the President and Chief Executive Officer. The Management Committee, which
is the senior decision making group of the Bank, is comprised of eight members
including the President and Chief Executive Officer. To better assess the
contribution of its various business lines, the Bank generates segment results
that include balances directly attributable to business line activities.
Expenses or activities not directly controlled by business unit managers are
allocated to the Administrative unit. In this way, management can assess the
performance of a particular business. The bank is constantly analyzing its line
of business performance and developing better ways to measure profitability.
The accounting policies of the segments are the same as those described in
"Note 1: Summary of Significant Accounting Policies." Direct revenues and
expenses are allocated to business segments in determining their net income.
Corporate overhead, centralized support costs and other costs are assigned to
the Administration unit. The Corporation evaluates performance based on net
income of the respective business segments. Depreciation is allocated to the
segments based upon the utilization of the assets by the segments. All
depreciating assets are included in Administration's total assets.
The organizational structure of the Bank and the allocated methodologies it
employs result in business line financial results that are not necessarily
comparable across companies. As such, the Bank's business line performance may
not be directly comparable with similar information from other financial
institutions.
YEAR ENDED DECEMBER 31, 2002
RESI- CONS- INCOME ADMIN-
BUSINESS DENTIAL TRUCTION PROPERTY CONSUMER ISTRATION TOTAL
(Dollars in thousands, except share amounts)
Condensed income statement
Net interest income after
provision for loan losses $ 5,297 1,961 3,931 5,745 2,019 5,176 24,129
Other income 69 812 - 7 1,308 1,843 4,039
Other expense 2,487 2,015 1,163 1,832 1,805 7,019 16,321
Income before income tax 2,879 758 2,768 3,920 1,522 - 11,847
Federal income taxes 917 242 882 1,250 484 - 3,775
Net income $ 1,962 516 1,886 2,670 1,038 - 8,072
AT DECEMBER 31, 2002
Total assets $142,273 122,669 84,121 157,353 49,331 248,406 804,153
SIX MONTHS ENDED DECEMBER 31, 2001
RESI- CONS- INCOME ADMIN-
BUSINESS DENTIAL TRUCTION PROPERTY CONSUMER ISTRATION TOTAL
(Dollars in thousands, except share amounts)
Condensed income statement
Net interest income after
provision for loan losses $ 2,085 1,244 1,968 1,650 746 2,699 10,392
Other income 21 410 - 6 656 724 1,817
Other expense 975 948 495 800 820 3,423 7,461
Income before income tax 1,131 706 1,473 856 582 - 4,748
Federal income taxes 380 238 496 288 196 - 1,598
Net income $ 751 468 977 568 386 - 3,150
AT DECEMBER 31, 2001
Total assets $125,342 152,727 75,911 172,671 58,381 176,981 762,013
YEAR ENDED JUNE 30, 2001
RESI- CONS- INCOME ADMIN-
BUSINESS DENTIAL TRUCTION PROPERTY CONSUMER ISTRATION TOTAL
(Dollars in thousands, except share amounts)
Condensed income statement
Net interest income after
provision for loan losses $ 3,573 2,713 3,824 2,687 1,331 4,453 18,581
Other income 73 533 - 5 1,212 820 2,643
Other expense 1,992 2,647 809 1,724 1,856 5,273 14,301
Income before income tax 1,654 599 3,015 968 687 - 6,923
Federal income taxes 562 204 1,025 329 237 - 2,357
Net income $ 1,092 395 1,990 639 450 - 4,566
AT JUNE 30, 2001
Total assets $113,707 161,729 58,796 164,274 60,406 174,155 733,067
YEAR ENDED JUNE 30, 2000
RESI- CONS- INCOME ADMIN-
BUSINESS DENTIAL TRUCTION PROPERTY CONSUMER ISTRATION TOTAL
(Dollars in thousands, except share amounts)
Condensed income statement
Net interest income after
provision for loan losses $ 3,330 3,811 2,934 3,678 1,253 2,959 17,965
Other income 43 706 - 8 1,135 384 2,276
Other expense 1,800 5,022 746 1,837 1,869 3,343 14,617
Income before income tax 1,573 (505) 2,188 1,849 519 - 5,624
Federal income taxes 535 (172) 744 629 176 - 1,912
Net income $ 1,038 (333) 1,444 1,220 343 - 3,712
AT JUNE 30, 2000
Total assets $ 86,298 175,911 56,385 167,041 62,060 128,481 676,176
(18) Selected quarterly financial data (Unaudited)
- --------------------------------------
QUARTER ENDED
MAR 31, JUNE 30, SEPT 30, DEC 31,
2002 2002 2002 2002
--------------------------------------
(Dollars in thousands, except share amounts)
Interest income $13,373 13,298 12,748 13,051
Interest expense 6,919 6,719 6,456 6,352
--------------------------------------
Net interest income 6,454 6,579 6,292 6,699
Provision for loan losses 700 420 375 400
Other income 972 893 1,146 1,028
Other expense 3,975 4,134 4,098 4,114
--------------------------------------
Income before Federal income taxes 2,751 2,918 2,965 3,213
Federal income taxes 903 906 907 1,058
--------------------------------------
Net income $ 1,848 2,012 2,058 2,155
======================================
Earnings per share, basic $ 0.29 0.31 0.32 . 0.33
Earnings per share, diluted 0.28 0.30 0.31 0.32
QUARTER ENDED
SEPT 30, DEC 31,
2001 2001
------------------
Interest income $13,937 13,537
Interest expense 8,614 7,658
----------------
Net interest income 5,323 5,879
Provision for loan losses 270 540
Other income 896 921
Other expense 3,708 3,753
----------------
Income before Federal income taxes 2,241 2,507
Federal income taxes 745 853
================
Net income $ 1,496 1,654
Earnings per share, basic $ 0.24 0.27
Earnings per share, diluted 0.23 0.26
QUARTER ENDED
SEPT 30, DEC 31, MAR 31, JUNE 30,
2002 2002 2002 2002
Interest income $13,840 14,439 14,318 14,092
Interest expense 9,195 9,725 9,277 8,931
--------------------------------------
Net interest income 4,645 4,714 5,041 5,161
Provision for loan losses 210 210 290 270
Other income 516 623 793 711
Other expense 3,393 3,505 3,722 3,681
--------------------------------------
Income before Federal income taxes 1,558 1,622 1,822 1,921
Federal income taxes 530 551 623 653
--------------------------------------
Net income $ 1,028 1,071 1,199 1,268
Earnings per share, basic $ 0.17 0.18 0.20 0.21
Earnings per share, diluted 0.16 0.17 0.18 0.20
QUARTER ENDED
SEPT 30, MAR 31, MAR 31, JUNE 30,
1999 1999 2000 2000
--------------------------------------
(Dollars in thousands, except share amounts)
Interest income $11,016 12,053 12,386 13,126
Interest expense 6,339 7,375 7,719 8,414
--------------------------------------
Net interest income 4,677 4,678 4,667 4,712
Provision for loan losses 210 140 210 210
Other income 486 531 596 664
Other expense 3,476 3,533 3,775 3,833
--------------------------------------
Income before Federal income taxes 1,477 1,536 1,278 1,333
Federal income taxes 501 522 433 456
--------------------------------------
Net income $ 976 1,014 845 877
======================================
Earnings per share, basic $ 0.16 0.17 0.14 0.14
Earnings per share, diluted 0.15 0.15 0.13 0.14
QUARTER ENDED
SEPT 30, DEC 31, MAR 31, JUNE 30,
1998 1998 1999 1999
Interest income $ 9,020 9,313 9,612 10,260
Interest expense 5,245 5,395 5,398 5,918
--------------------------------------
Net interest income 3,775 3,918 4,214 4,342
Provision for loan losses 150 150 127 -
Other income 536 607 1,148 546
Other expense 2,823 2,771 3,211 3,633
--------------------------------------
Income before Federal income taxes 1,338 1,604 2,024 1,255
Federal income taxes 455 545 691 426
--------------------------------------
Net income $ 883 1,059 1,333 829
======================================
Earnings per share, basic $ 0.15 0.18 0.22 0.14
Earnings per share, diluted 0.14 0.16 0.20 0.13
ANNUAL SHAREHOLDERS' MEETING
The Annual Shareholders' meeting will be held at the Everett Golf & Country
Club, 1500 52nd Street SE, Everett, WA, on Tuesday, May 6th, 2003 at 6:30 p.m.
Pacific Time.
CAST YOUR VOTE
Your vote is very important. Whether or not you are able to attend it is
important that your common shares be represented at the meeting. Accordingly,
we ask that you please sign, date and return the enclosed proxy card at your
earliest convenience.
CORPORATE INFORMATION
- ---------------------
www.cascadebank.com ISSAQUAH
305 Front Street N.
CASCADE SERVICE CENTER Mukilteo, WA
(800)326-8787 (425) 391-5500
MAIN OFFICE LAKE STEVENS
2828 Colby Avenue 8915 Market Place
Everett, WA Everett, WA
(425) 257-1745 (425) 334-8880
BELLEVUE LYNNWOOD
200 108th Avenue NE 19419 Highway 99
Bellevue, WA Lynnwood, WA
(425) 455-2300 (425) 775-6666
CLEARVIEW MARYSVILLE
17512 SR 9 SE 815 State Avenue
Snohomish, WA Marysville, WA
(360) 668-1243 (360) 659-7614
CROSSROADS NORTH MARYSVILLE
15751 NE 15th Street 3711 88th Street NE
Bellevue, WA Marysville, WA
(425) 643-6200 (360) 651-9200
EVERETT/BROADWAY PINE LAKE
2602 Broadway 2902 228th Avenue SE
Everett, WA Issaquah, WA
(425) 259-1243 (425) 369-8322
EVERETT/EVERGREEN WAY SMOKEY POINT
6920 Evergreen Way 3532 172nd Street NE
Everett, WA Arlington,, WA
(425) 353-1243 (360) 653-1900
HARBOUR POINTE WOODINVILLE
11700 Mukilteo Speedway 17641 Garden Way NE
Mukilteo, WA Woodinville, WA
(425) 290-7767 (425) 481-0820
All shareholders are encouraged to read Cascade's Form 10-K for the year ended
December 31, 2002, as filed with the Securities and Exchange Commission (the
"SEC"). The Form 10-K includes the significant risk factors that could affect
Cascade's projections and future operating performance. This document is
qualified in its entirety by the information contained in the Form 10-K.
The Form 10-K, together with all other information filed by Cascade with the
SEC, is available on the Internet at the SEC's web site at http://www.sec.gov.
The Form 10-K will be furnished by Cascade, upon receipt of written request
addressed to Cascade Financial Corporation, 2828 Colby Avenue, Everett, WA
98201.
The common stock of Cascade Financial Corporation is traded on the NASDAQ
SmallCap Market under the symbol CASB. As of December 31, 2002, there were
approximately 2,500 shareholders of record. The following table sets forth
market price information for the Corporation's common stock.
QUARTERS ENDED HIGH LOW
- --------------------------------
3/31/01 $ 7.62 6.65
6/30/01 8.18 6.39
9/30/01 9.09 7.04
12/31/01 9.09 7.60
QUARTERS ENDED HIGH LOW
- --------------------------------
3/31/02 $ 9.75 7.60
6/30/02 12.23 9.25
9/30/02 11.27 9.90
12/31/02 11.99 10.25
STOCK TRANSFER AGENT
- --------------------
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606
(800) 356-2017
(800) 231-5469 TDD for Hearing Impaired
(201) 329-8660 Foreign Shareholders
(201) 329-8354 TDD Foreign Shareholders
www.melloninvestor.com
AUDITORS
- --------
KPMG LLP
801 2nd Avenue, Suite 900
Seattle, Washington 98104
LEGAL COUNSEL
- -------------
Keller Rohrback, LLP
1201 Third Avenue, Suite 3200
Seattle, WA 98101-3052
SPECIAL COUNSEL
- ---------------
Anderson Hunter, PS
2707 Colby Avenue, Suite 1001
Everett, Washington 98201CORPORATE INFORMATION