UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Washington 91-1661954
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(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
2828 Colby Avenue, Everett, Washington 98201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 339-5500
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock,
Par value $0.01
per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
The aggregate market value of Common Stock held by non-affiliates of
registrant at March 5, 2004 was $128.04 million on (based on the last reported
sale on such date). The number of shares of registrant's Common Stock
outstanding at March 5, 2004 was 8,261,483.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the year ended December 31,
2003, including the Selected Financial Data and the Management Discussion and
Analysis attached as Exhibit 13 (the "Annual Report") (Part I, II & IV).
2. Portions of registrant's Definitive Proxy Statement for the Annual Meeting
of Stockholders (the "Proxy Statement") (Part III).
Cascade Financial Corporation
FORM 10-K
December 31, 2003
TABLE OF CONTENTS
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Page
PART I ----
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Item 1. Description of Business 3
Loan Portfolio 5
Asset and Liability Management Activities 13
Investment Portfolio 16
Deposits 17
Return on Equity and Assets 18
Borrowings 18
Regulation 20
Taxation 25
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 27
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 27
Item 9A. Controls and Procedures 27
PART III
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Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management 30
Item 13. Certain Relationships and Related Transactions 30
Item 14. Principal Accountant Fees and Services 30
PART IV
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Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 31
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FORWARD LOOKING STATEMENTS
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In addition to historical information, this Form 10-K contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the
express purpose of availing Cascade Financial Corporation of the protections
of the safe harbor provisions of the PSLRA. The forward-looking statements
contained herein are subject to factors, risks, and uncertainties that may
cause ctual results to differ materially from those projected. The following
items are among the factors that could cause actual results to differ
materially from the forward-looking statements: general economic conditions,
including their impact on capital expenditures; business conditions in the
banking industry; recent world events and their impact on interest rates,
businesses and customers; the regulatory environment; new legislation; vendor
quality and efficiency; employee retention factors; rapidly changing technology
and evolving banking industry standards; competitive standards; competitive
factors, including increased competition with community, regional, and national
financial institutions; fluctuating interest rate environments; and similar
matters. Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's analysis only at the date of the
statement. The Corporation undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances that
arise after the date of this report. Readers should carefully review the risk
factors described in this and other documents the Corporation files from time
to time with the Securities and Exchange Commission. There can be no assurance
that any of the strategies described in this Form 10-K will be implemented, or
if implemented, achieve the amounts described or within the time periods
currently estimated. Sentences containing words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," "should," "projected," or
similar words may constitute such forward looking statements.
Item 1. Description of Business
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General
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Cascade Financial Corporation (the "Corporation") is a bank holding company
incorporated in the state of Washington that was formed in 1994. The
consolidated entity includes the Corporation and its wholly owned subsidiaries.
At December 31, 2003, the Corporation's wholly-owned subsidiaries were
Cascade Bank ("Cascade" or the "Bank") and Cascade Capital Trust I. The
executive offices of the Corporation are located at 2828 Colby Avenue, Everett,
Washington 98201. The telephone number is (425) 339-5500 and the web site is
www.CascadeBank.com.
The Bank has been serving the people of Snohomish and King Counties since
1916 when it was organized as a mutual savings and loan association. On
September 15, 1992, the Bank completed its conversion from a federal mutual to
a federal stock savings bank. The Corporation was organized on August 18, 1994
for the purpose of becoming the holding company for Cascade Bank. On October
23, 1994, the stockholders of the Bank approved a plan to reorganize the Bank
into the holding company form of ownership. The reorganization was completed
on November 30, 1994, on which date the Bank became the wholly-owned subsidiary
of the Corporation, and the stockholders of the Bank became stockholders of the
Corporation. Subsequent to the acquisition of Cascade, the primary activity of
the Corporation has been holding the stock of the Bank. Accordingly, the
information set forth in this report, including financial statements and
related data, relates primarily to the Bank.
In July of 2001, the Bank converted its charter from that of a federal stock
savings bank to a Washington state commercial bank, and the Corporation elected
to be treated as a financial holding company with the Federal Reserve Board. In
May of 2003, the Corporation transferred its state of domicile from Delaware,
which it had maintained since its formation as a holding company in 1994, to
Washington. Following this conversion, the Corporation changed its fiscal year
end from June 30 to December 31 to align its reporting period with those of its
commercial bank peers.
The Corporation conducts its business from its main office in Everett,
Washington, and fifteen other full service offices in the greater Puget Sound
region. At December 31, 2003, the Corporation had total assets of $885.2
million, total deposits of $564.3 million and stockholders' equity of $64.0
million.
The Bank, a full-service community bank, offers a wide range of products and
services. The deposits of the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC"), up to the limits specified by law.
Market Area
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Headquartered in Everett, Washington, the Corporation serves its customers
from fifteen full service offices, ten in Snohomish County and five in King
County. Located in the center of the western Washington region, Snohomish and
King counties have experienced significant growth in recent years, although
currently the area is recovering slowly from an economic slowdown.
-3-
The economy of our market area has been aided by a strong housing market and
the continued strength at Microsoft. While employment at Boeing continued to
contract in 2003, the rate of that decrease slowed dramatically. In December
2003, Boeing announced that Everett had been chosen to assemble its new
commercial airliner, the 7E7. It is too early to determine the impact on the
local economy, but the decision has the potential to arrest the decline in
manufacturing employment in the market area.
Our market area in King County includes the growing cities east of Seattle
and Lake Washington. This area's economy has been dominated by Microsoft, with
other high technology companies playing an important role. Slowdowns and
retrenchment with a number of these firms has led to slower economic growth
than in the past with a potential impact on the financial services firms that
serve the area. The commercial real estate market in east King County has
maintained high vacancy rates in 2003.
On the plus side, Everett is the home port of the Navy's carrier battle
ship, the USS Abraham Lincoln. The contribution that the Navy makes to the
economy is not dependent on other trends. The economy in the Corporation's
market area has become more dependent upon the health care and biotechnology
industries, two industries which have been less affected by the recent economic
slowdown. Snohomish County and Northeast King County are home to numerous
biotechnology companies, including Advanced Technology Labs, a manufacturer of
medical equipment.
As a gateway to Asia, the Bank's market area has also benefited from the
expansion of world trade. Economic weakness in either the United States or
Asia will reduce that trade. Such slowdowns in the international flow of goods
and services could prove detrimental to the economy of the market area and
potentially the quality of our loan portfolios.
Business Strategy
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The Corporation is in the process of implementing its business plan to
increase the Bank's emphasis on commercial banking. The Corporation is
attempting to pursue the following strategies:
* Increasing the percentage of its assets consisting of business,
construction, and commercial real estate loans with higher risk-adjusted
returns, shorter maturities and greater sensitivity to interest rate
fluctuations.
* Increasing deposits by attracting lower cost transaction accounts (such as
checking, savings and money market accounts) through an enhanced branch
network, customer service center and online banking.
* Diligently searching for additional sources of fee based revenue.
* Maintaining cost-effective operations by efficiently offering products and
services.
* Maintaining its capital position at or above the "well-capitalized" (as
defined for regulatory purposes) level.
* Exploring prudent means to grow the business internally and/or through
acquisitions.
The primary objectives of these strategies are to: enhance shareholder value
measured through increasing return on equity and/or increasing earnings per
share, and to increase the opportunity for quality earning asset growth,
deposit generation, and fee-based income activities. However, the shift in
emphasis to commercial banking does inherently contain additional risks (See
"LOAN PORTFOLIO" below).
Competition
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The Bank competes for both loans and deposits. The Puget Sound metropolitan
area has a high density of financial institutions, including major national
banks, several local community banks, and credit unions.
The Bank's competition for loans comes principally from other commercial
banks, the larger of whom offer quick, low documentation credit approval and
attractive pricing. Conversely, many of the local community banks have
specialized in commercial real estate and business lending and therefore may
have a more established reputation in that market. Cascade competes for loans
principally through its ability to customize competitively priced financing to
the needs of its customers, and its local decision-making.
Geographic location is still the primary factor in choosing a bank for the
checking account relationship. As a result, the Bank's competition for
checking deposits comes primarily from the large institutions with a broad
network of locations. Online banking continues to be an important convenience
service to attract checking customers from larger banks. In addition, Cascade
has recently made an arrangement with US Bank to allow customers to use US Bank
-4-
ATMs without a surcharge. Community banks, savings institutions, as well as
other non-banking financial institutions, provide the greatest competition for
the various savings vehicles such as money market deposit accounts and
certificates of deposit.
In addition to competition from other banking institutions, the Bank
continues to experience increased competition from non-banking companies such
as credit unions, financial services companies and brokerage houses. Recent
amendments to the federal banking laws to eliminate certain barriers between
banking and commercial firms are expected to result in even greater competition
in the future.
The Corporation anticipates continuing opportunities to arise from the
effects of substantial consolidation among financial institutions in Washington
that has occurred to date. Federal law allows mergers or other combinations,
relocations of a bank's main office and branching across state lines. Several
other financial institutions, which have greater resources than the Bank,
compete for banking business in the Bank's market area. Among the advantages
of some of these institutions are their ability to make larger loans, finance
extensive advertising and promotion campaigns, access international money
markets and allocate their investment assets to regions of highest yield and
demand.
LOAN PORTFOLIO
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General. The Bank originates business, real estate and consumer loans.
Total loans equaled $607.9 million at December 31, 2003. Total loans were
adjusted by loans in process, deferred loan fees, and the allowance for loan
losses for a net loan balance of $567.1 million. At December 31, 2003, $204.4
million or 33.6% of loans consisted of business loans; $93.7 million or 15.41%
were real estate construction loans; $83.9 million or 13.79% of loans consisted
of commercial real estate; $33.2 million or 5.45% were consumer loans; $105.6
million or 17.36% of the Bank's loans consisted of loans secured by one-to-four
family residential properties; and $87.2 million or 14.35% consisted of multi-
family loans, which brings the total loans secured by first liens on
residential real estate to $192.8 million or 31.71% of total loans. The
corporation sells all its 30 year fixed-rate loans and the vast majority of its
15 year fixed-rate loans in the secondary mortgage market. The Corporation had
non-mandatory forward commitments totaling $2,177 and $8,083 to sell loans into
the secondary market at December 31, 2003 and December 31, 2002, respectively.
-5-
Loan Portfolio Analysis. The following table sets forth the Corporation's
loan portfolio by type of loan and by type of security at the dates indicated.
At December 31, At June 30,
2003 2002 2001 2001 2000 1999
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------------------------------------------- ---------------------------------------------------
(Dollars in thousands)
Type of Loan
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Real estate mortgage
Residential (1) 192,777 33.99 216,914 39.68 262,460 45.55 272,363 48.22 288,660 53.46 263,987 57.93
Commercial 83,856 14.79 63,108 11.54 62,938 10.92 56,913 10.08 54,320 10.06 49,066 10.77
Construction 93,704 16.52 104,790 19.17 104,131 18.07 103,206 18.27 73,488 13.61 54,500 11.96
Business 204,446 36.05 142,273 26.03 125,342 21.75 113,708 20.13 86,298 15.98 61,676 13.53
Consumer (2) 33,163 5.85 49,331 9.02 58,381 10.13 60,406 10.69 62,061 11.49 52,219 11.45
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Total loans 607,946 107.20 576,416 105.44 613,252 106.42 606,596 107.39 564,827 104.60 481,448 105.64
Less:
Loans in process 30,962 5.46 20,669 3.78 28,220 4.90 33,337 5.90 17,132 3.17 19,087 4.19
Deferred loan fees, net 2,179 0.38 2,198 0.40 2,502 0.43 2,703 0.48 2,719 0.50 2,371 0.52
Allowance for loan losses 7,711 1.36 6,872 1.26 6,304 1.09 5,687 1.01 5,004 0.93 4,254 0.93
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Total loans, net 567,094 100.00% 546,677 100.00% 576,226 100.00% 564,869 100.00% 539,972 100.00% 454,736 100.00%
==========================================================================================================
Type of Security
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Real estate mortgage
One-to-four family (2) 221,130 38.99 262,474 48.01 295,941 51.36 307,049 54.35 290,857 53.86 261,822 57.45
Multi-family 87,212 15.38 94,245 17.24 109,734 19.04 107,360 19.01 112,721 20.87 85,893 18.85
Commercial 83,856 14.79 63,108 11.54 62,938 10.92 56,913 10.08 54,320 10.06 49,066 10.77
Land loans 1,786 0.31 1,720 0.32 2,546 0.44 3,269 0.58 29 0.01 106 0.02
Other 213,962 37.73 154,869 28.33 142,093 24.66 132,005 23.37 106,900 19.80 84,561 18.55
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Total loans 607,946 107.20 576,416 105.44 613,252 106.42 606,596 107.39 564,827 104.60 481,448 105.64
Less:
Loans in process 30,962 5.46 20,669 3.78 28,220 4.90 33,337 5.90 17,132 3.17 19,087 4.19
Deferred loan fees, net 2,179 0.38 2,198 0.40 2,502 0.43 2,703 0.48 2,719 0.50 2,371 0.52
Allowance for loan losses 7,711 1.36 6,872 1.26 6,304 1.09 5,687 1.01 5,004 0.93 4,254 0.93
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Total loans, net 567,094 100.00% 546,677 100.00% 576,226 100.00% 564,869 100.00% 539,972 100.00% 455,736 100.00%
==========================================================================================================
(1) Includes construction loans converted to permanent loans, multi-family and land loans.
(2) Includes home equity loans and HELOCs.
-6-
At December 31, 2003, loans in process attributed to construction loans,
totaled $31.0 million or 5.46% of total loans net, deferred fees were $2.2
million or .38%, and the allowance for loan losses was $7.7 million or 1.36% of
total loans, net.
Business Loans. Business loans increased from $142.3 million at December
31, 2002 to $204.4 million at December 31, 2003. Unsecured business loans
totaled $14.1 million at December 31, 2003. The Bank's business loan portfolio
consists primarily of commercial business loans to small and medium sized
businesses operating in Snohomish and King counties. These loans are secured
primarily by real estate, receivables, equipment, other assets of the business
and personal property, and the personal guarantee of the borrower. These loans
typically have variable-rate terms or fixed rates with maturities of up to five
years. The Bank also offers secured and unsecured operating lines of credit.
Business loans are underwritten by the Bank on the basis of the borrower's cash
flow and ability to service debt from earnings, as well as the underlying
collateral value. The borrower is generally required to provide the Bank with
financial statements, tax returns, current financial information on any and all
guarantors, and other reports that show trends in their financial condition;
and to update this information annually. Business loans also include owner
occupied real estate loans with terms comparable to the Bank's income property
loans. In addition, as the business banking activity increases, the Bank
expects to expand its lower cost deposit franchise through the growth of
commercial checking as a source of funding.
Business loans are inherently sensitive to adverse conditions in the
economy. In the case of loans secured by accounts receivable, the availability
of funds for the repayment of such loans may be substantially dependent on the
ability of the borrower to collect amounts due from its customers. The
collateral securing other loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business.
Accordingly, the repayment of a business loan depends primarily on the
successful operation of the borrower's business and creditworthiness of the
borrower (and any guarantors), while liquidation of collateral is a secondary
and often insufficient source of repayment.
While most of the business borrowers are established businesses with
successful track records, it is uncertain how the continuing economic slowdown
will affect these loans.
Construction Loans. The Bank originates construction loans on one-to-four
family homes either to borrowers as custom construction loans or to builders as
speculative construction loans. Construction loans generally have terms of
12-18 months. The interest rates charged on construction loans are indexed to
the prime rate and vary depending on the characteristics of the loan,
particularly the credit risk inherent in the project. All construction loans
require approval by various levels of Bank personnel, depending on the size of
the loan. The Bank has attempted to increase its construction loan portfolio
because these loans have relatively high margins, floating interest rates and
short-term maturities and because of the historically favorable housing market
in the Puget Sound area. At December 31, 2003 and December 31, 2002, the
Corporation's construction loans were $93.7 million (including $31.0 million of
loans in process) or 15.4% of the total loan portfolio and $104.8 million
(including $20.7 million of loans in process) or 18.2% of the total loan
portfolio, respectively. Of this amount, $79.4 million was to builders,
including $15.1 million for land acquisition and development, and $14.3 million
was to individuals for custom home construction. The strength of the local
housing market led to a rapid turnover in this portfolio as builders were able
to quickly sell new homes. This strength led to the decline in the portfolio
at December 31, 2003. The Bank's maximum outstanding commitment to one builder
at December 31, 2003 totaled $8.9 million involving several construction
projects which are performing in accordance with the terms of the loan.
Construction loans involve further credit risks because loan funds are
advanced upon the security of the project under construction that is of
uncertain value before completion. The Bank's risk of loss on a construction
loan is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction or development and the estimated
cost (including interest) of the construction. If the estimate of construction
costs proves to be inaccurate, the Bank may be required to advance additional
funds to complete the development. If upon completion of the project, the
estimate of the marketability of the property is inaccurate, the borrower may
be unable to sell the completed project in a timely manner or obtain adequate
proceeds to repay the loan. Delays may arise from labor problems, material
shortages and other unpredictable contingencies in completing the project.
Furthermore, if the estimate of value of a completed project is inaccurate,
the Bank may be confronted with a project with a value that is insufficient to
assure full repayment. As a result, these loans may involve the disbursement of
substantial funds with repayment dependent, in part, on the success of the
ultimate project rather than the ability of the borrower or guarantor to repay
principal and interest.
-7-
Commercial Real Estate Loans. Commercial real estate loans totaled $83.9
million or 13.8% of the Bank's total loans at December 31, 2003. All
commercial real estate loans are secured by properties in western Washington,
mainly in the Puget Sound region. Improved property such as office buildings
and small commercial business properties such as strip shopping centers secure
the Bank's commercial real estate loans. These loans are primarily fixed rate
with a maximum reset on the interest rate of five years. At December 31, 2003,
the largest commercial real estate and land loan in the Bank's portfolio was
$6.1 million, which was performing according to its terms at that date.
Multi-family Loans. Multi-family loans totaled $87.2 million or 14.4% of
the total loan portfolio at December 31, 2003. The multi-family portfolio is
principally comprised of small to medium-size apartment projects with loan-to-
value ratios usually up to 75%. All new loan originations are in the Puget
Sound region with adjustable rates.
Multi-family residential and commercial real estate lending affords the Bank
an opportunity to receive interest at rates higher than those generally
available from one-to-four family mortgage loans. However, loans secured by
such properties usually are greater in amount and may involve a greater degree
of risk than one-to-four family residential mortgage loans. Because payments on
loans secured by multi-family residential and commercial properties are often
dependent on the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real
estate market or the economy.
One-to-Four Family Residential Loans. At December 31, 2003, residential
loans totaled $105.6 million or 17.4% of the total loan portfolio. Residential
lending consists primarily of first mortgage loans secured by single family
residential properties located principally in Snohomish and King Counties. The
Bank originates both fixed rate and adjustable rate mortgages ("ARMs") with
maturities up to 30 years. ARM loans are generally held in the Bank's
portfolio. Newly originated ARMs have interest rates that adjust based on the
One Year Constant Maturity Treasury Index. Borrower demand for ARMs versus
fixed-rate mortgage loans is a function of the level of interest rates, the
shape of the yield curve, and the differences between the interest rates and
loan fees offered for fixed-rate mortgage loans and the rates and loan fees for
ARMs.
Fixed rate residential loans are generally sold and the servicing released
to one of the Bank's correspondents. The loans are sold on a "best efforts"
basis. The Bank no longer packages its loans to sell as mortgage backed
securities. The Bank had no loans held for sale at December 31, 2003 and $3.4
million in loans held for sale at December 31, 2002. Loans held for sale are
not material and therefore the Bank does not include them as a separate line
item on the balance sheet. The Bank has greatly reduced its emphasis on
mortgage banking and mortgage lending in the past three years.
The Bank's conforming residential loans meet the Federal Home Loan Mortgage
Corporation's underwriting standards with respect to credit, debt ratios and
documentation. The Bank's nonconforming residential loans are those that do not
conform to agency underwriting guidelines, due to the size of the loan, as a
result of credit histories, debt-to-income ratios, reliance on the borrower's
stated income, non-owner occupied property, rural property, or other exceptions
from agency guidelines. At December 31, 2003, $11.2 million or 1.8% of the
Bank's total outstanding loan portfolio and 10.6% of the Bank's one-to-four
family residential loan portfolio consisted of nonconforming one-to-four family
residential loans.
Consumer Loans. The Bank's consumer loan activities take two forms: home
equity loans or lines of credit, and installment loans. Home equity loans are
secured by a junior lien in priority on the borrower's home. Such loans may
have a combined loan-to-value ratio of up to 90% of the value of the home
securing the loan. Home equity loans are fixed amount loans which may have
fixed or floating interest rates. Home equity lines of credit can be drawn upon
at any time by the customer up to a specific amount. All these loans are at a
floating rate with a floor on that rate. The balance outstanding for both types
of home equity loans decreased to $23.6 million at December 31, 2003 as
compared to $36.7 million at December 31, 2002. At December 31, 2003 and
December 31, 2002, the total amount of unused lines of credit were $34.6
million and $38.3 million, respectively. The second type of consumer loans are
installment loans in which boats, automobiles, and recreational vehicles serve
as collateral. This portfolio was $9.5 million at December 31, 2003 as
compared to $12.6 million outstanding at December 31, 2002. Although boat loans
total $5.9 million of the Corporation's installment loans at December 31, 2003,
the Corporation has significantly decreased its origination of boat loans and
expects this amount to decline further in the future. Installment loans are
secured by depreciating assets such as automobiles or boats. Therefore, any
repossessed collateral for a defaulted installment loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower beyond obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrower's continuing financial ability, and
-8-
thus, are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various Federal and state
laws, including Federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans.
Loan Maturity
- -------------
The following table sets forth information at December 31, 2003 regarding the
dollar amount of loans maturing in the Corporation's portfolio based on their
contractual terms to maturity, but does not include scheduled payments or
potential prepayments. Loan balances do not include deferred loan fees.
Construction loans are net of loans in process.
With variable rate With fixed rate
(for maturities of (for maturities of
Due in one year Due in one to Due after five more than one more than one
or less five years years Total year) year)
--------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Business $29,631 80,079 94,736 204,446 85,277 89,538
Construction $40,214 22,528 -- 62,742 22,528 --
Commercial Real Estate $ 794 1,191 81,871 83,856 80,207 2,855
Multi-family -- 2,683 84,529 87,212 83,496 3,716
Home Equity/Consumer $ 3,625 3,647 25,891 33,163 24,728 4,810
Residential $ 1,444 2,550 101,571 105,565 93,771 10,350
Asset Quality
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Banking regulations require that each insured institution review and classify
its assets regularly. In addition, in connection with examinations of insured
institutions, bank examiners have authority to identify problem assets and, if
appropriate, require them to be adversely classified. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets must have one or more defined weaknesses and are characterized by the
distinct possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or payment in full, based on currently existing facts, conditions
and values, questionable, and there is a high possibility of loss. An asset
classified loss is considered uncollectible and of such little value that its
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset, or portion thereof, is classified
loss, the insured institution must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset classified loss
or charge off such amounts. The bank uses two other asset classification
categories for potential problem loans. They are watch and special mention.
Borrowers with declining earnings, strained cash flow, increasing leverage
and/or weakening market fundamentals that indicate above average risk are
classified as watch. Loans on special mention represent borrowers who exhibit
potential credit weaknesses or downward trends deserving bank management's
close attention.
Cascade established the Credit Administration Division in 2001 which is
intended to assure that the Bank maintains the quality of its loan portfolio.
Management has comprehensive monthly and annual review procedures for
identifying and classifying assets for weaknesses. Reserves are maintained for
assets classified as substandard or doubtful. The objective of these review
procedures is to identify any trends and determine the levels of loss exposure
to evaluate the need for an adjustment to the reserve accounts.
Delinquencies. A report containing delinquencies of all loans is reviewed
monthly by the Asset Review Committee and periodically by the Board of
Directors. Procedures taken with respect to delinquent loans differ depending
on the particular circumstances of each loan. The Bank's general procedures
provide that when a loan becomes delinquent, the borrower is contacted, usually
-9-
by phone, within 15 to 30 days. When the loan is over 30 days delinquent, the
borrower is usually contacted in writing. Typically, the Bank will initiate
foreclosure action against the borrower when principal and interest become 90
days or more delinquent. In any event, interest income is reduced by the full
amount of accrued and uncollected interest on loans once they become 90 days
delinquent, go into foreclosure or are otherwise determined to be
uncollectible. Once interest has been paid to date or management considers the
loan fully collectable, it is returned to accrual status. An allowance for
loss is established when, in the opinion of management, the fair value less
sales costs of the property collateralizing the loan is less than the
outstanding principal and the collectibility of the loan's principal becomes
uncertain. It is intended that the Bank's allowance for loan losses be adequate
to cover known potential and reasonably estimated unknown losses. At December
31, 2003 and December 31, 2002, the Bank had $1.9 million and $1.0 million,
respectively, of loans accounted for on a non-accrual basis.
Allowance for Loan Losses/Non-Performing Assets
- -----------------------------------------------
Management provides for possible loan losses by maintaining an allowance. The
level of the allowance is determined based upon judgments regarding the size
and nature of the loan portfolio, historical loss experience, the financial
condition of borrowers, the level of non-performing loans, and anticipated
general economic conditions. Additions to the allowance are charged to expense.
Loans are charged against the allowance when management believes the collection
of principal is unlikely.
As Cascade Bank has evolved from a thrift into a commercial bank, the
inherent risk in its loan portfolio has increased, resulting in the trend of
increasing the allowance for loan losses both in terms of dollars and as a
percentage of total loans. Also impacting the allowance for loan losses has
been the slow economy in the Corporation's market area.
The allowance for loan losses reflects management's best estimate of
probable losses that may be incurred at the balance sheet date. The allowance
for loan losses is maintained at a level considered adequate by management to
provide for loan losses inherent in the loan portfolio based on management's
assessment of various factors affecting the loan portfolio, including local
economic conditions and growth of the loan portfolio and its composition. Net
charge-offs during these periods have been less than experienced by the average
peer banks. Increases in the allowance for loan losses made through provisions
were primarily a result of business loan growth, an increase in net
charge-offs, awareness of the greater risk inherent in business lending and the
impact of the economic climate on the loan portfolio.
Management measures the reasonableness of the allowance for loan losses by
utilizing a loan grading system to determine risk in the loan portfolio and by
considering the results of credit reviews. The loan portfolio is separated by
quality and then by loan type. Loans of acceptable quality are evaluated as a
group, by loan type, with a loss rate assigned to the total loans in each type,
but unallocated to any individual loan. Adversely classified loans may be
individually analyzed, to determine an estimated loss amount. A loss rate is
also assigned to these adversely classified loans, but at a higher rate due to
the greater risk of loss. Past due and impaired loans are actively managed to
minimize the potential loss.
Although management has allocated a portion of the allowance to the loan
categories using the method described above, the adequacy of the allowance must
be considered as a whole. To mitigate the imprecision in most estimates of
expected loan losses, the allocated component of the allowance is supplemented
by an unallocated component. The unallocated portion includes management's
judgmental determination of the amounts necessary for qualitative factors such
as the consideration of new products and policies, economic conditions,
concentrations of credit risk, and the experience and abilities of lending
personnel. Loan concentrations, quality, terms, and basic underlying
assumptions remained substantially unchanged during the period.
-10-
The following table presents information with respect to the Corporation's non-
performing assets and restructured loans at the dates indicated.
12/31/2003 12/31/2002 12/31/2001 6/30/2001 6/30/2000 6/30/1999
-------------------------------------------------------------------------------
(Dollars in thousands)
Non-performing loans:
Commercial loans:
Commercial $ 128 132 1,039 166 226 338
Commercial real estate -- -- -- -- -- --
-------------------------------------------------------------------------------
128 132 1,039 166 226 338
Residential 1,704 742 762 1,112 221 618
Real estate construction -- -- -- -- -- --
Consumer loans 89 82 198 37 126 245
------------------------------------------------------------------------------
Total non-performing loans 1,921 956 1,999 1,315 57 1,201
Other real estate 474 461 430 787 528 --
------------------------------------------------------------------------------
Total non-performing assets 2,395 $1,417 2,428 2,102 1,101 1,201
==============================================================================
Restructured loans 3,467 -- -- -- -- --
Total non-performing loans to net loans .34% .17% .35 .23 .11 .26
Total non-performing loans to total assets .22 .12 .26 .18 .08 .22
Total non-performing assets to total assets .27 .18 .32 .29 .16 .22
The Corporation's non-performing assets at December 31, 2003, consisting of
non-performing loans and other real estate, totaled $2.4 million or 0.27
percent of total assets. This is an increase from $1.4 million or 0.18 percent
of total assets at December 31, 2002, and a decrease from $2.4 million or 0.32
percent of total assets at December 31, 2001.
Loans are generally placed on non-accrual when they become past due over 90
days or when the collection of interest or principal is considered unlikely.
Loans past due over 90 or 120 days that are not on non-accrual status must be
well secured by tangible collateral and in the process of collection. The Bank
does not return a loan to accrual status until it is brought current with
respect to both principal and interest and future principal and interest
payments are no longer in doubt.
Non-performing loans increased to $1.9 million at December 31, 2003 compared
to a $1.0 million at December 31, 2002, and $2.0 million at December 31, 2001.
The increase in non-performing loans from December 31, 2002 to December 31,
2003 is due to an increase in non-performing residential loans. Management
believes that the allowance for losses on loans is adequate to provide for
losses that may be incurred on non-performing loans.
Other real estate owned includes property acquired by the Bank through
foreclosure and real estate held for development. Other real estate is carried
at the lower of the estimated fair value or the principal balance of the
foreclosed loans. Non-performing other real estate was $474,000 at December
31, 2003, an increase from $461,000 at December 31, 2002, and an increase from
$430,000 at December 31, 2001. All real estate owned was single-family
residential real estate.
Interest income that would have been recognized for the year ended December
31, 2003, December 31, 2002, the six month period ended December 31, 2001, and
for the fiscal years ended June 30, 2001, 2000 and 1999, had non-accrual loans
been current in accordance with their contractual terms amounted to $90,000,
$32,000, $87,000, $74,000, $32,000 and $86,000, respectively.
-11-
The following tables set forth information regarding changes in the
Corporation's allowance for loan losses for the most recent five years (dollars
in thousands).
Year Ended Six Months Ended Year Ended
12/31/03 12/31/02 12/31/01 12/31/01 12/31/00 6/30/01 6/30/00 6/30/99
------------------------------- ------------------- ---------------------------
Balance at beginning of period $ 6,872 6,304 5,342 5,687 5,004 5,004 4,254 4,143
Charge Offs:
Business 295 1,028 147 138 48 46 53 49
Commercial Real Estate 95 -- -- -- -- 2 -- --
Single-Family Residence 59 249 193 42 5 166 16 7
Multi-Family -- -- -- -- -- -- -- --
Real Estate Construction -- -- -- -- -- -- -- --
Consumer and other 302 164 93 26 48 115 77 267
Recoveries: (315) (114) (25) (13) (19) (32) (126) (7)
--------------------------------------------------------------------------------------
Net charge-offs (recoveries): 436 1,327 408 193 82 297 20 316
Provision for loan losses 1,275 1,895 1,370 810 420 980 770 427
--------------------------------------------------------------------------------------
Balance at end of period 7,711 6,872 6,304 6,304 5,342 5,687 5,004 4,254
Average loans outstanding $565,453 566,302 573,867 580,221 552,512 560,013 517,405 418,207
======================================================================================
Ratio of net charge-offs during
the period to average loans
outstanding .08 .23 .07 .03 .02 .05 -- .08
Ratio of allowance for loan losses
to average loans outstanding 1.36 1.21 1.10 1.09 .97 1.02 .97 1.02
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
Certain loans may meet the criteria of troubled debt restructuring as
defined in Statement of Financial Accounting Standards ("SFAS") No. 114 and No.
118, "Accounting by Creditors for Impairment of a Loan," and "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures,"
respectively.
The following tables set forth information concerning the Company's
allocation of the allowance for loan losses and the percentage of loans by
category at the dates indicated (dollars in thousands).
12/31/03 12/31/02 12/31/01 6/30/01 6/30/00 6/30/99
Amount %* Amount %* Amount %* Amount %* Amount %* Amount %*
------------ ------------ ------------ ------------ ------------ ------------
Business $2,833 35.4 2,918 25.6 2,927 21.4 2,203 19.9 1,886 15.8 740 13.3
Commercial Real Estate 787 14.5 274 11.4 220 10.7 569 9.9 544 9.9 1,160 10.6
Single-Family Residential 745 18.3 745 22.0 861 26.1 1,097 28.8 1,019 32.1 961 38.5
Multi-Family 245 15.1 366 17.0 442 18.8 672 18.7 619 20.6 460 18.6
Real Estate Construction 642 10.9 1,887 15.1 887 13.0 771 12.2 569 10.3 450 7.7
Consumer and Other 444 5.8 252 8.9 356 10.0 295 10.5 367 11.3 370 11.3
Unallocated 2,015 -- 430 -- 611 -- 80 -- -- -- 113 --
---------------------------------------------------------------------------------------------
Total allowance for loan losses $7,711 100.0% 6,872 100.0 6,304 100.0 5,687 100.0 5,004 100.0 4,254 100.0
* Percent of loans in each category to total loans.
-12-
The provision for loan losses for the year ended December 31, 2003 totaled
$1,275,000 compared to $1,895,000 for the year ended December 31, 2002. The
provision for loan losses was $810,000 for the six month period ended December
31, 2001, and $420,000 for the six months ended December 31, 2000. Provisions
for the fiscal years ended June 30, 2001, 2000 and 1999 were $980,000,
$770,000, and $427,000 respectively. The decrease in the provision for loan
losses for the twelve month period ended December 31, 2003 was due to the
decrease in adversely classified loans (which includes the substandard and
doubtful categories) under the Bank's loan classification system. Adversely
classified loans decreased to $12.0 million at December 31, 2003 from $24.5
million at December 31, 2002.
ASSET AND LIABILITY MANAGEMENT ACTIVITIES
- -----------------------------------------
The Bank uses a variety of tools to measure, monitor, and manage interest
rate risk. The Board of Directors reviews the interest rate risk management
activities of the Bank on a regular basis and has established policies on the
amount of risk deemed appropriate. The Bank's primary rate risk management tool
is a financial simulation model. The Bank's net interest income and the value
of its capital are measured under different interest rate scenarios. To manage
its interest rate risk, the Bank has focused on originating more interest rate
sensitive assets, such as prime based loans, while reducing its long-term,
fixed rate assets through selling long term residential mortgages in the
secondary market. The vast majority of the loans that the Bank keeps in its
portfolio have repricing periods of five years or less. The Bank often uses
FHLB advances to fund its intermediate term assets. Cascade uses reverse
repurchase agreements to provide inexpensive short term funding. These
agreements are generally for three months or less and provide the Bank with
liabilities that reprice relatively quickly, which helps match the repricing
characteristics of our prime based loans.
The Board of Directors, through the Asset/Liability Management Policy,
establishes limits on the sensitivity to changes in the Bank's exposure to
changes in interest rates. Cascade uses a simulation model to measure rate
risk and the impact on net interest income, the fair value of equity, and the
fair value capital/asset ratio under different interest rate shock scenarios.
Using standard rate shock methodology, the Bank's net interest income
decreases 9.1% in the up 200 bp shock scenario and decreases 6.2% in the down
200 bp scenario, both are within the established limit of a 10% decline. The
Bank's fair value of equity decreases 25.2% in an up 200 bp shock scenario and
increases 2.6% in a down 200 bp shock. The established limit is a decline of
30% in either scenario. The adjusted capital/asset ratio is 5.52% in the up
200 bp scenario and 7.10% in the down 200 bp scenario. The established limit
is 5.0%.
While within the parameters established by policy, the Bank has taken steps
to reduce it exposure, particularly to rising rates. Limits have been
established on the final maturity of investments and limits have been initiated
on the price volatility of MBS (including CMOs). Additionally, the Bank will
look for opportunities to extend the maturities of its FHLB advance portfolio.
These actions, individually and collectively, may have a negative impact on
current net interest income and spread, especially given the steepness of the
yield curve.
The Bank uses interest rate swaps and has used caps and floors in the past
to control the amount of its interest rate risk.
In October 2003, Cascade entered into an interest rate swap agreement to
hedge its junior subordinated debentures payable. The terms of the agreement
include, among other things, a collateral requirement, which is intended to
offset any credit risk between the Company and the third party. The notional
principle on the swap was $10 million where the Corporation received a fixed
rate and paid on an adjustable LIBOR based rate. As of December 31, 2003, the
collateral requirement was $800,000 and a security with a $1.8 million market
value was pledged to meet the collateral requirement. Should interest rates
increase, it is probable that the required collateral on the interest rate swap
will exceed the minimum requirement of $800,000, which would require additional
securities to be pledged. As of December 31, 2003, the Corporation pledged one
security classified as held to maturity as collateral with a market value of
$1.8 million. The unrealized loss on the interest rate swap was $98,000 as of
December 31, 2003. Unrealized gains or losses on the interest rate swap are
recorded as other assets or liabilities with the corresponding change in the
amount of liability for the junior subordinated debentures payable. The change
in unrealized gains or losses on the interest rate swap is offset by the
corresponding changes in the unrealized gains or losses on the junior
subordinated debentures in the accompanying Consolidated Statements of
Operations.
-13-
The balance sheets and the section of Management's Discussion and Analysis
titled "Average Balances and an Analysis of Average Rates Earned and Paid"
contained in the Annual Report are incorporated herein by reference.
Rate/Volume Analysis. The following table sets forth the effects of
changing rates and volumes on net interest income of the Bank. Information is
provided with respect to (i) effects on interest income attributable to changes
in volume (changes in volume multiplied by prior rate); (ii) effects on
interest income attributable to changes in rate (changes in rate multiplied by
prior volume); and (iii) changes in rate/volume (change in rate multiplied by
change in volume).
-14-
Year Ended December 31, Year Ended December 31,
----------------------------------------- ----------------------------------------
2002 Compared to Year Ended
2003 Compared to Year Ended December 31, 2001
December 31, 2002 (unaudited)
Increase (Decrease) Due to Increase (Decrease) Due to
Rate Volume Rate/ Net Rate Volume Rate/ Net
Volume Volume
----------------------------------------- ----------------------------------------
(Dollars in thousands)
Interest-earning assets
- -----------------------
Mortgage loans (1) $(2,877) (2,180) 221 (4,836) (2,927) (1,621) 145 (4,403)
Consumer loans (1) (157) (1,203) 46 (1,314) (654) (421) 54 (1,021)
Business loans (1) (912) 3,251 (316) 2,023 (1,360) 1,461 (209) (108)
----------------------------------------- ----------------------------------------
Total loans (3,946) (132) (49) (4,127) (4,941) (581) (10) (5,532)
Securities held-to-maturity (1,595) 2,237 (399) 243 13 907 30 950
Securities available-for-sale (156) 2,426 (281) 1,989 (464) 1,608 (94) 1,050
Daily interest-earning deposits (83) (173) 44 (212) (88) 359 (153) 118
----------------------------------------- ----------------------------------------
Total net change in income on
interest earning assets (5,780) 4,358 (685) (2,107) (5,480) 2,293 (227) (3,414)
========================================= ========================================
Interest-bearing liabilities
- ----------------------------
Interest-bearing deposits (3,056) 1,984 (484) (1,556) (6,871) 2,887 (1,125) (5,109)
FHLB advances (1,364) (530) 60 (1,834) (395) (1,598) 45 (1,948)
Other borrowings (334) 38 (7) (303) (833) (208) 63 (978)
----------------------------------------- ----------------------------------------
Total net change in expenses on
interest-bearing liabilities $(4,754) 1,492 (431) (3,693) (8,099) 1,081 (1,017) (8,035)
========================================= ========================================
Net increase in net interest income $ 1,586 4,621
======== ======
(1) Does not include interest on loans 90 days or more past due.
Six Months Ended Year Ended June 30,
----------------------------------------- ----------------------------------------
December 31, 2001 Compared to 2001 Compared to Year
Six months ended December 31, 2000 Ended June 30, 2000
(unaudited) Increase (Decrease)
Increase (Decrease) Due to Due to
Rate Volume Rate/ Net Rate Volume Rate/ Net
Volume Volume
----------------------------------------- ----------------------------------------
(Dollars in thousands)
Interest-earning assets
- -----------------------
Mortgage loans (1) $(1,335) 267 528 (540) 755 1,248 30 2,033
Consumer loans (1) (428) (347) 401 (374) 243 488 25 756
Business loans (1) (1,443) 2,725 (865) 417 (32) 1,994 (9) 1,953
----------------------------------------- ----------------------------------------
Total loans (3,206) 2,645 64 (497) 966 3,730 46 4,742
Securities held-to-maturity (147) (301) 253 (195) 62 44 9 115
Securities available-for-sale (1,231) 1,302 (136) (65) 41 3,081 25 3,147
Daily interest-earning deposits (76) (25) 53 (48) (38) 175 (34) 103
----------------------------------------- ----------------------------------------
Total net change in income on
interest-earning assets (4,660) 3,621 234 (805) 1,031 7,030 46 8,107
========================================= =======================================
Interest-bearing liabilities
- ----------------------------
Interest-bearing deposits (5,172) 320 2,386 (2,466) 822 (497) (21) 304
FHLB advances (446) 973 (280) 247 923 3,475 352 4,750
Other borrowings (1,143) 442 273 (428) (71) 2,482 (184) 2,227
----------------------------------------- ----------------------------------------
Total net change in expenses on
interest-bearing liabilities $(6,761) 1,735 2,379 (2,647) 1,674 5,460 147 7,281
========================================= =======================================
Net increase in net interest income $1,842 826
======= =====
(1) Does not include interest on loans 90 days or more past due.
Mortgage loans include residential, multi-family, construction and commercial real estate.
-15-
INVESTMENT PORTFOLIO
- --------------------
The Board of Directors sets the investment policy of the Bank. This policy
dictates that investments will be made based on the safety of the principal
amount, interest rate risk, liquidity requirements of the Bank as well as the
return on the investment. The Bank's policy does not permit the purchase of
non-investment grade bonds. The policy permits the investment in various types
of assets permissible under FDIC regulation including: United States Treasury
obligations; securities of certain government sponsored enterprises, mortgage-
backed securities ("MBS") including collateralized mortgage obligations
("CMOs"), state and municipal government bonds, deposits at the FHLB-Seattle,
certificates of deposit of federally insured institutions, investment grade
corporate bonds, certain bankers' acceptances and Federal funds. Subject to
various restrictions, the Bank may also invest part of its assets in commercial
paper, corporate debt securities and mutual funds, if those assets conform to
FDIC regulations.
Investment securities increased to $276.5 million at December 31, 2003 from
$209.3 million at December 31, 2002, a 32% increase. The investment portfolio
represented 31% of total assets at December 31, 2003 compared to 26% at
December 31, 2002. MBS (including CMOs) available for sale decreased from
$90.1 million to $70.5 million as of December 31, 2003. However, agency notes
available for sale increased from $55.9 million to $99.2 million. Agency notes
held to maturity increased from $44.9 million to $73.8 million for the year
ended December 31, 2003, as the Corporation sought to capture additional income
by obtaining a higher coupon in return for giving the issuer the option to call
the security before its stated maturity.
The following tables set forth the Bank's securities available for sale at
the dates indicated.
December 31, 2003 December 31, 2002 December 31, 2001 June 30, 2001
--------------------------------------------------------------------------------------------------------------
Estimated Percent of Estimated Percent of Estimated Percent of Estimated Percent of
Fair Value Portfolio Fair Value Portfolio Fair Value Portfolio Fair Value Portfolio
--------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
MBS $ 70,523 37.17% 90,073 56.3 56,511 37.6 76,832 59.4
Agency notes 99,240 52.30 55,874 35.0 76,699 51.0 35,492 27.5
FHLB stock 14,741 7.77 13,950 8.7 13,119 8.7 12,668 9.8
Corporate/other 5,243 2.76 -- -- 4,009 2.7 4,221 3.3
-------- ------- ------- -------
Total $189,747 159,897 150,338 129,213
======== ======= ======= =======
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities available for sale at December
31, 2003. Securities with no stated maturity dates are reported as due within
one year.
Less Than One Year One to Five Years Five to Ten Years Over Ten Years
-----------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated Estimated
Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
MBS $ -- -- 945 6.83 -- -- 69,578 5.06
Agency notes 85 2.00 10,030 4.16 57,212 4.83 31,913 4.99
FHLB stock 14,741 5.00 -- -- -- -- -- --
Corporate/other -- -- -- -- 5,243 5.58 -- --
Total $ 14,826 10,975 62,455 101,491
The following table sets forth amortized cost and estimated fair values for
Cascade's securities held to maturity at the dates indicated.
December 31, 2003 December 31, 2002
Amortized Percent of Amortized Percent of
Cost Fair Value Portfolio Cost Fair Value Portfolio
-------------------------------------------------------------------------
(Dollars in thousands)
MBS $12,587 12,328 14.44% $ 4,212 4,378 8.8
Agency notes 73,822 72,709 85.20 44,866 45,261 90.6
Corporate/other 310 307 0.36 310 310 0.6
-------------------- --------------------
Total $86,719 85,344 $49,388 49,949
====== ====== ====== ======
-16-
December 31, 2001 June 30, 2001
Amortized Percent of Amortized Percent of
Cost Fair Value Portfolio Cost Fair Value Portfolio
-------------------------------------------------------------------------
(Dollars in thousands)
MBS $ 5,989 5,883 100% 6,592 6,456 100%
Corporate/other -- -- -- --
------------------- ----------------
Total $ 5,989 5,883 6,592 6,456
======= ===== ===== =====
The following table sets forth the contractual maturities and weighted
average yields of the Corporation's securities held to maturity at December 31,
2003. Securities with no stated maturity dates are reported as due within one
year.
Less Than One Year One to Five Years Five to Ten Years Over Ten Years
---------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated Estimated
Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
MBS $ -- -- -- -- -- -- 12,328 4.78
Agency Notes -- -- -- -- -- -- 72,709 4.93
Corporate/other -- -- -- -- -- -- 307 11.00
------
Total -- -- -- -- -- -- 85.344
======
For further information concerning the Corporation's securities portfolio,
see Note 2 of the Notes to the Consolidated Financial Statements contained in
the Annual Report listed in Item 15.
DEPOSITS
- --------
The Bank's primary source of funds is customer deposits. In addition to
checking accounts, the Bank offers a variety of interest-bearing accounts
designed to attract both short-term and longer-term deposits from customers.
Interest-bearing accounts earn interest at rates established by Bank
management based on competitive market factors and the Bank's need for funds.
Deposits increased to $564.3 million at December 31, 2003 from $509.9
million at December 31, 2002, an increase of 10.7% during this period. Deposits
at December 31, 2001 were $420.0 million and at June 30, 2001 were $401.9
million. The market for retail deposits remains fiercely competitive.
Previously, the Bank paid rates at the higher end of the competitive range of
financial institutions in its market area. In an attempt to lower the absolute
and relative cost of funds, the Bank modified its deposit pricing strategy by
pricing its deposits in the middle of that range.
The following table sets forth the average balances for each major category
of deposit and the weighted average interest rate paid for deposits during the
years ended December 31, 2003, 2002, and 2001, and for each of the three years
ended, June 30, 2001, 2000, and 1999 (dollars in thousands).
Average Deposits by Type
December 31, December 31, December 31, June 30, June 30, June 30,
2003 2002 2001 2001 2000 1999
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------------
Non-interest-bearing
demand deposits $ 38,243 -- 29,122 -- 23,028 -- 22,072 -- 22,089 -- 18,100 --
Interest-bearing
demand deposits 21,854 0.48% 22,641 1.04 22,051 1.23 21,783 1.81 18,408 2.11 18,540 2.21
Money market deposit 113,263 1.32 107,363 2.14 94,384 2.98 96,491 4.49 119,219 5.00 69,426 4.66
Savings 11,828 0.46 11,324 1.15 11,073 1.96 10,915 2.83 11,446 3.07 12,781 3.06
Time certificates 357,955 2.60 294,554 3.35 254,836 5.01 242,501 6.22 232,192 5.64 220,921 5.61
-------- ------- ------- ------- ------- -------
$543,143 465,004 405,372 393,762 403,354 339,768
======== ======= ======= ======= ======= =======
-17-
The following table indicates the amount of the Bank's jumbo certificates of
deposit by time remaining until maturity at December 31, 2003. Jumbo
certificates of deposit require minimum deposits of $100,000 and rates paid on
such accounts are negotiable.
Jumbo Certificates
Maturity Period of Deposit
- -------------------------------------------------
(Dollars in thousands)
Three months or less $ 61,345
Over three through six months 43,161
Over six through twelve months 83,261
Over twelve months 52,172
Total $239,939
The flow of deposits is influenced significantly by general economic
conditions, changes in the money market and prevailing interest rates. In
addition, there is strong competition for customer dollars from other financial
institutions, mutual funds and non-bank corporations, such as securities
brokerage companies and other diversified companies. The Bank's deposits are
obtained primarily from the areas in which its branches are located. The Bank
relies primarily on customer service and longstanding relationships with
customers to attract and retain these deposits. In the coming year, the Bank
will focus on its deposit gathering activities, and management expects a
significant portion of its deposit growth in 2004 will occur in its business
deposit products. In the event the Bank were liquidated, certain depositors
would be entitled to full payment of their deposit accounts prior to any
payment being made to the shareholders.
RETURN ON EQUITY AND ASSETS
- ---------------------------
The section entitled "Selected Financial Data" of the Annual Report listed
in Item 15 is incorporated herein by reference.
BORROWINGS
- ----------
The Bank relies on advances from the Federal Home Loan Bank of Seattle
(FHLB-Seattle) to supplement its supply of funds and to meet deposit
withdrawal requirements. Advances from the FHLB-Seattle are typically secured
by the Bank's first mortgage residential loans and eligible investment
securities. FHLB advances were $200 million at December 31, 2003, compared to
$197.5 million at December 31, 2002, a 1.3% increase. FHLB advances were
$226.5 million at December 31, 2001.
The FHLB provides credit for member financial institutions. As members,
financial institutions are required to own capital stock in the FHLB, and are
authorized to apply for advances on the security of such stock, certain home
mortgages, and government and agency securities (typically securities that are
obligations of, or guaranteed by, the United States). Advances are made to
member financial institutions pursuant to several different programs. These
programs are generally designed to meet the financial institution's needs while
still reflecting market terms and conditions. The Bank uses advances from the
FHLB to supplement funds available to lend and to meet liquidity guidelines.
Interest rates on these advances vary depending on capital market conditions.
The Bank enters into reverse repurchase agreements with nationally
recognized banks. Reverse repurchase agreements are accounted for as borrowings
by the Bank and are secured by designated investments, primarily the notes of
federal agencies and mortgage-backed securities guaranteed by those agencies.
The proceeds of these transactions are used to meet the cash flow and interest
rate risk management needs of the Bank.
Repurchase agreements increased to $39.9 million at December 31, 2003 from
$20.6 million at December 31, 2002. Repurchase agreements, with notes of
Government Sponsored Enterprises and/or mortgage-backed securities pledged as
collateral, are employed as short term funding vehicles that provide
liabilities with interest rate sensitivity more closely aligned to prime based
loans than the Bank's deposit base.
Cascade Bank has established Fed funds borrowing lines with two of its
correspondent banks. Neither line was used during the year ended December 31,
2003.
-18-
The following table sets forth certain information regarding borrowings by
the Corporation at the end of, and during, the periods indicated.
At or for the At or for the At or for the
year ended, six months ended year ended
December 31, December 31, June 30,
2003 2002 2001 2001 2000
-------------- --------------- ---------------
(Dollars in thousands)
Weighted average rate on:
Securities sold under agreements to repurchase 1.17 1.49 2.16 4.02 6.46
FHLB advances 4.85 5.78 5.79 6.07 6.21
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase 40,587 49,666 49,792 54,237 21,696
FHLB advances 211,750 226,500 235,322 236,712 215,656
Approximate average borrowings outstanding with respect to:
Securities sold under agreements to repurchase 35,334 34,415 38,264 34,231 9,082
FHLB advances 194,229 203,022 229,314 221,075 165,524
Approximate weighted average rate paid on:
Other interest-bearing liabilities* 3.39 4.00 4.93 7.05 7.60
FHLB advances 5.31 5.98 6.14 6.25 5.68
* Including Trust Preferred Securities.
Junior Subordinated Debentures Payable (Trust Preferred Securities). On
March 1, 2000, $10 million of 11 percent Capital Securities due March 1, 2030
were issued by a wholly owned business Trust whose common equity is 100% owned
by Cascade Financial Corporation. The Trust exists for the exclusive purposes
of issuing and selling the capital securities, using the proceeds from the sale
of the capital securities to acquire junior subordinated debentures issued by
Cascade Financial Corporation, and engaging in only those other activities
necessary, advisable or incidental to the above. The Corporation used the
proceeds for general corporate purposes including stock repurchases and
investment in its subsidiary bank. At December 31, 2003, as a result of the
adoption of FIN 46R, we deconsolidated the Trust and all periods in the
consolidated financial statements have been restated to reflect this change.
The $10.3 million of junior subordinated debentures issued by the Company to
the Trust were reflected as junior subordinated debentures payable in the
consolidated balance sheet at December 31, 2003. The junior subordinated
debentures will mature on March 1, 2030 unless redeemed prior to such date if
certain conditions are met. The Trust will redeem the trust preferred
securities when we pay the junior subordinated debentures at maturity or upon
any earlier redemption of the junior subordinated debentures.
Prior to December 31, 2003, the Trust was consolidated and was included in
liabilities in the consolidated balance sheet, as "Trust Preferred Securities."
The common securities and debentures, along with the related income effects
were eliminated in the consolidated financial statements.
Subsidiary Activity
- -------------------
The Corporation has two subsidiaries: Cascade Bank and Cascade Capital
Trust. The activities of the Corporation are primarily conducted through the
Bank. Accordingly, this Form 10-K principally discusses the Bank's operations.
Cascade Capital Trust I was formed for the exclusive purpose of issuing
Trust Preferred Securities and common securities and using the proceeds to
acquire junior subordinated debentures issued by the Corporation. The junior
subordinated debentures total $10.2 million, have an interest rate of 11.00%,
mature on March 1, 2030 and are the sole assets of Cascade Capital Trust I.
The junior subordinated debentures are prepayable, in whole or in part, at
the Corporation's option on or after March 1, 2010 at declining premiums to
maturity. Proceeds totaling approximately $9.23 million from the issuance of
the junior subordinated debentures were used to increase the capital level of
the Bank.
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Personnel
- ---------
At December 31, 2003, the Corporation had 172 full-time equivalent
employees. The Corporation believes that employees play a vital role in the
success of a service company and that the Corporation's relationship with its
employees is good. The employees are not represented by a collective
bargaining unit.
REGULATION
Introduction/General
- --------------------
The following generally refers to certain statutes and regulations affecting
the Corporation and the Bank. This provides only a brief summary of the
regulations impacting the Corporation and is not complete. This discussion is
qualified in its entirety by the statutes and regulations. In addition, some
statutes and regulations exist which impact the Corporation which are not
referenced below.
The Corporation is subject to extensive regulation, supervision and
examination. Such regulation and supervision govern the activities in which the
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities, which are intended to strengthen the financial condition of the
banking industry, including the imposition of restrictions on the operation of
an institution, the classification of assets by the institution and the
adequacy of an institution's allowance for loan losses. Any change in such
regulation and oversight could have an adverse material impact on the
Corporation, Cascade and their respective operations.
The Corporation
- ---------------
The Corporation is a bank holding company that has elected to be treated as
a financial holding company with the Board of Governors of the Federal Reserve
Board (the "FRB"). The Bank Holding Company Act of 1956, as amended ("BHCA")
subjects the Corporation and its subsidiaries to supervision and examination by
the FRB. The Corporation files annual reports of operations with the FRB.
Bank Holding Company Regulation. In general, the BHCA limits bank holding
company business to owning or controlling banks and engaging in other banking-
related activities. Bank holding companies must obtain the FRB's approval
before they: (1) acquire direct or indirect ownership or control of any voting
shares of any bank that results in total ownership or control, directly or
indirectly, of more than 5 percent of the voting shares of such bank; (2) merge
or consolidate with another bank holding company; or (3) acquire substantially
all of the assets of any additional banks. Subject to certain state laws, such
as age and contingency restrictions, a bank holding company that is adequately
capitalized and adequately managed may acquire the assets of both in-state and
out-of-state banks. With certain exceptions, the BHCA prohibits bank holding
companies from acquiring direct or indirect ownership or control of voting
shares in any company that is not a bank or a bank holding company unless the
FRB determines that the activities of such company are incidental or closely
related to the business of banking. If a bank holding company is well-
capitalized and meets certain criteria specified by the FRB, it may engage de
novo in certain permissible non-banking activities without prior FRB approval.
The Change in Bank Control Act of 1978, as amended, requires a person (or
group of persons acting in concert) acquiring "control" of a bank holding
company to provide the FRB with 60 days prior written notice of the proposed
acquisition. Following receipt of this notice, the FRB has 60 days within which
to issue a notice disapproving the proposed acquisition, but the FRB may extend
this time period for up to another 30 days. An acquisition may be completed
before expiration of the disapproval period if the FRB issues written notice of
its intent not to disapprove the transaction. In addition, any "company" must
obtain the FRB's approval before acquiring 25% (5% if the "company" is a bank
holding company) or more of the outstanding shares or otherwise obtaining
control over the Corporation.
Financial Holding Company Election/Affiliations. In 2001, the Corporation
elected to be treated as a financial holding company with the FRB, as permitted
under the Gramm-Leach-Bliley Financial Services Modernization Act (the "GLB").
This election allows the Corporation to conduct activities that previously were
unavailable to bank holding companies, provided that notice requirements are
generally required before engaging in any such activities.
-20-
In a change from previous law, bank holding companies are in a position to
be owned, controlled or acquired by any company engaged in financially related
activities, so long as such company meets certain regulatory requirements. To
the extent the legislation permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This consolidation could result in a growing number of larger
financial institutions that offer a wider variety of financial services than
the Corporation currently offers and that can aggressively compete in the
markets currently served by the Corporation.
Transactions with Affiliates. The Corporation and its subsidiaries are
deemed affiliates within the meaning of the Federal Reserve Act, and
transactions between affiliates are subject to certain restrictions.
Accordingly, the Corporation and its subsidiaries must comply with Sections 23A
and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B (1) limit
the extent to which a financial institution or its subsidiaries may engage in
"covered transactions" with an affiliate, as defined, to an amount equal to 10%
of such institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
Tie-In Arrangements. The Corporation and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of credit, sale or lease of property or furnishing of services. For example,
with certain exceptions, neither the Corporation nor its subsidiaries may
condition an extension of credit on either a requirement that the customer
obtain additional services provided by it or an agreement by the customer to
refrain from obtaining other services from a competitor.
State Law Restrictions. As a Washington corporation, the Corporation is
subject to certain limitations and restrictions as provided under applicable
Washington corporate laws.
Securities Registration and Reporting. The Corporation's common stock is
registered as a class with the SEC under the Securities Exchange Act of 1934
and thus the Corporation is subject to the periodic reporting and proxy
solicitation requirements and the insider-trading restrictions of that Act. The
periodic reports, proxy statements, and other information filed by the
Corporation under that Act can be inspected and copied at or obtained from the
Washington, D.C. office of the SEC. In addition, the securities issued by the
Corporation are subject to the registration requirements of the Securities Act
of 1933 and applicable state securities laws unless exemptions are available.
The corporation is listed as a NASDAQ/Small Capitalization stock. As such,
it is subject to the listing and reporting requirements of the NASD. Failure
to meet these requirements could lead to a delisting of the Corporation's
stock.
Disclosure Controls and Procedures. The Sarbanes-Oxley Act of 2002 and
related rulemaking by the SEC, which effect sweeping corporate disclosure and
financial reporting reform, generally require public companies to focus on
their disclosure controls and procedures. As a result, public companies such
as the Corporation now must have disclosure controls and procedures in place
and make certain disclosures about them in their periodic SEC reports (i.e.,
Forms 10-K and 10-Q) and their chief executive and chief financial officers
must certify in these filings that they are responsible for developing and
evaluating disclosure controls and procedures and disclose the results of an
evaluation conducted by them within the 90-day period preceding the filing of
the relevant report, among other things.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the
Corporation's net income for the past year is sufficient to cover both the cash
dividend and a rate of retention consistent with the Corporation's capital
needs. The FRB also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow to pay dividends.
Capital Requirements. The FRB has established capital adequacy guidelines
for bank holding companies that generally parallel the capital requirements the
FDIC has for the Bank. The FRB regulations provided that capital standards will
be applied on a consolidated basis in the case of a bank holding company with
more than $150 million in total consolidated assets. The Corporation's total
risk based capital must equal 8% of risk weighted assets and 4% must consist of
Tier 1 capital.
-21-
Stock Repurchases. Bank holding companies, except for certain "well
capitalized" and highly rated companies, are required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption is equal
to or greater than 10% of consolidated net worth during the preceding twelve
months. The FRB may disapprove any such purchase or redemption if it determines
that the proposal would constitute an unsafe or unsound practice.
Cascade Bank
- ------------
General. Applicable federal and state statutes and regulations governing a
bank's operations relate, among other matters, to capital requirements,
investments, loans, legal lending limits, mergers and consolidations,
borrowings, issuance of securities, payment of dividends, establishment of
branches, and dealings with affiliated persons. The Federal Deposit Insurance
Corporation ("FDIC") has authority to prohibit banks under its supervision from
engaging in what it considers to be unsafe or unsound practices in conducting
their business. Cascade Bank is a state-charted commercial bank subject to
extensive regulation and supervision by both the Washington Department of
Financial Institutions ("DFI") and the FDIC. The federal laws that apply to
Cascade Bank regulate, among other things, the scope of its business, its
investments, the timing of the availability of deposited funds and the nature
and amount of collateral for loans. The laws and regulations governing Cascade
Bank generally have been promulgated to protect depositors and not to protect
shareholders of such institutions or their holding companies.
CRA. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the FRB or
the FDIC evaluates the record of the financial institutions in meeting the
credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. The four possible ratings of meeting
community credit needs are outstanding, satisfactory, needs to improve and
substantial noncompliance. Cascade Bank received a satisfactory CRA rating at
the last examination.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees
and benefits ("Guidelines"). The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
If a federal banking agency determines that a financial institution fails to
meet any standard prescribed by the Guidelines, the agency may require the bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. Management is not aware of any conditions relating to these safety
and soundness standards which would require the submission of a plan of
compliance.
Insider Credit Transactions. Cascade Bank is also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the
same terms, including interest rates and collateral, and follow credit
underwriting procedures that are not less stringent than those prevailing at
the time for comparable transactions with persons not covered above and who are
not employees; and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features. Cascade Bank is also subject to certain
lending limits and restrictions on overdrafts to such persons. A violation of
these restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of Cascade Bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 (the "FDICIA"), each federal banking agency has prescribed, by regulation,
non-capital safety and soundness standards for institutions under its
authority. These standards cover internal controls, information systems, and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, such other operational
and managerial standards as the agency determines to be appropriate, and
standards for asset quality, earnings and stock valuation. An institution that
fails to meet these standards must develop a plan acceptable to the agency,
specifying the steps that the institution will take to meet the standards.
Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Management of the Corporation believes that Cascade Bank
meets all such standards, and therefore, does not believe that these regulatory
standards materially affect the Corporation's business operations currently.
-22-
Loans to One Borrower. Cascade Bank is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans to one borrower
to 20 percent of unimpaired capital and surplus. At December 31, 2003, the Bank
had no borrowers with balances in excess of the loans-to-one-borrower limit.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching under certain circumstances. This legislation
generally authorizes interstate branching and relaxes federal law restrictions
on interstate banking. Currently, bank holding companies may purchase banks in
any state, and states may not prohibit such purchases. Additionally, banks are
permitted to merge with banks in other states as long as the home state of
neither merging bank has "opted out." The Interstate Act requires regulators to
consult with community organizations before permitting an interstate
institution to close a branch in a low-income area. With regard to interstate
bank mergers, Washington has "opted in" to the Interstate Act and allows in-
state banks to merge with out-of-state banks subject to certain aging
requirements. Washington law generally authorizes the acquisition of an
in-state bank by an out-of-state bank or bank holding company through the
acquisition of or a merger with a financial institution that has been in
existence for at least 5 years prior to the acquisition.
Deposit Insurance. The deposits of Cascade Bank are currently insured to a
maximum of $100,000 per depositor through the Savings Association Insurance
Fund (the "SAIF") administered by the FDIC. All insured banks are required to
pay semi-annual deposit insurance premium assessments to the FDIC. The FDICIA
included provisions to reform the Federal Deposit Insurance System, including
the implementation of risk-based deposit insurance premiums. The FDICIA also
permits the FDIC to make special assessments on insured depository institutions
in amounts determined by the FDIC to be necessary to give it adequate assessment
income to repay amounts borrowed from the U.S. Treasury and other sources, or
for any other purpose the FDIC deems necessary. The FDIC has implemented a
risk-based insurance premium system under which banks are assessed insurance
premiums based on how much risk they present to the SAIF. Banks with higher
levels of capital and a low degree of supervisory concern are assessed lower
premiums than banks with lower levels of capital or a higher degree of
supervisory concern.
Dividends. The principal source of the Corporation's revenue is dividends
received from Cascade Bank. The payment of dividends is subject to government
regulation, in that regulatory authorities may prohibit banks and bank holding
companies from paying dividends that would constitute an unsafe or unsound
banking practice. In addition, a bank may not pay cash dividends if that
payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Other than the laws and
regulations noted above, which apply to all banks and bank holding companies,
neither the Corporation nor Cascade Bank is currently subject to any regulatory
restrictions on its dividends.
Capital Adequacy. Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and
banks. If capital falls below minimum guideline levels, the holding company or
bank may be denied approval to acquire or establish additional banks or
non-bank businesses or to open new facilities. The FDIC and FRB use risk-based
capital guidelines for banks and bank holding companies. These are designed to
make such capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the FRB has noted that bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of the
minimum. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8 percent, of which at least 4 percent must be Tier I capital. Tier I
capital for bank holding companies includes common shareholders' equity,
certain qualifying perpetual preferred stock and minority interests in equity
accounts of consolidated subsidiaries, less intangibles except as described
above. At December 31, 2003, the Bank had Tier 1 capital equal to $73.0 million
or 8.34% of average total assets, which is $38.0 million above the minimum
leverage requirement of 4% as in effect on that date.
The FDIC also employs a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The FDIC requires a minimum leverage ratio of 3 percent.
However, for all but the most highly rated bank holding companies and for bank
holding companies seeking to expand, the FDIC expects an additional cushion of
at least 1 percent to 2 percent.
-23-
FDICIA created a statutory framework of supervisory actions indexed to the
capital level of the individual institution. Under regulations adopted by the
FDIC, an institution is assigned to one of five capital categories depending on
its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which
are deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. The
Corporation does not believe that these regulations have any material effect on
its operations currently.
Reference is made to Note 11 of the Notes to the Consolidated Financial
Statements in the Annual Report, which is listed as an exhibit under Item 15,
for additional information concerning regulatory capital.
The FDIC risk-based requirement requires financial institutions to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
Tier I capital and supplementary capital. Supplementary capital consists of
certain permanent and maturing capital instruments that do not qualify as Tier
I capital and general valuation loan and lease loss allowances up to a maximum
of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy
the risk-based requirement only to the extent of Tier I capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example,
prudently underwritten permanent one-to-four family first lien mortgage loans
not more than 90 days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
FNMA or FHLMC, have been assigned a risk weight of 50%.
On December 31, 2003, the Bank had total risk-based capital of approximately
$80.6 million, including $73.0 million in Tier I capital and $7.6 million in
qualifying supplementary capital (the allowance for loan losses), and risk-
weighted assets of $609.5 million, or total capital of 13.22% of risk-weighted
assets. This amount was $31.8 million above the 8% requirement in effect on
that date.
FDIC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound. The FDIC
regulations state that if the FDIC determines that conditions so warrant, it
may impose a greater capital standard on a particular institution.
Management believes that the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, if circumstances were to
materially and adversely impact the future earnings of the Bank, the ability of
the Bank to meet its capital requirements could be impaired.
Prompt Corrective Action. Federal statutes establish a supervisory framework
based on five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8%, a Tier 1 risk-based capital of not less than 4%, and a leverage
ratio of not less than 4%. Any institution which fails to meet these levels
will be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions, which become more
extensive as an institution becomes more severely undercapitalized. Failure by
an institution to comply with applicable capital requirements will result in
restrictions on their activities and lead to enforcement actions, including the
issuance of a capital directive to ensure the maintenance of adequate capital
levels. Banking regulators will take prompt corrective action with respect to
depository institutions that do not meet minimum capital requirements.
At December 31, 2003, Cascade was a "well capitalized" institution under the
prompt corrective action regulations of the FDIC.
Prior Regulation. Prior to converting to a commercial bank, the Bank was
subject to supervision by the Office of Thrift Supervision ("OTS"). The OTS is
an office in the Department of the Treasury subject to the general oversight of
the Secretary of the Treasury. The OTS has extensive authority over the
operations of savings associations. Among its functions, the OTS issues and
enforces regulations affecting federally-insured savings associations and
regularly examines these institutions. All savings associations are required to
-24-
pay assessments to the OTS to fund the agency's operations. The general
assessments, paid on a semi-annual basis, are determined based on the savings
association's total assets, including consolidated subsidiaries.
TAXATION
--------
Federal Taxation
- ----------------
The Corporation reports its income on a fiscal year basis using the accrual
method of accounting and is subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly
Cascade's reserve for bad debts discussed below. In 2001, the Corporation's
fiscal year was changed to the calendar year. The following discussion of tax
matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Bank or the
Corporation.
Tax Bad Debt Reserves
- ---------------------
The reserve method of accounting for bad debt reserves was repealed for
tax
years beginning after December 31, 1995. As a result, the Bank is no longer
able to calculate its deduction for bad debts using the percentage-of-taxable-
income method. Instead, Cascade is required to compute its deduction based on
specific charge-offs during the taxable year.
Distributions
- -------------
To the extent that the Bank makes "non-dividend distributions" to the
Corporation that are considered as made (i) from the reserve for losses as of
June 30, 1988 or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will
be included in Cascade's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of Cascade's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. Thus, any dividends to the Corporation that would reduce
amounts appropriated to the Bank's bad debt reserve and deducted for federal
income tax purposes would create a tax liability for Cascade. The amount of
additional taxable income attributable to an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if Cascade makes a "non-dividend
distribution," then approximately one and one-half times the amount so used
would be included in gross income for federal income tax purposes.
Dividends-Received Deduction and Other Matters
- ----------------------------------------------
The Corporation may exclude from its income 100% of dividends received from
the Bank as a member of the same affiliated group of corporations. The
corporate dividends-received deduction is generally 70% in the case of
dividends received from unaffiliated corporations with which the Corporation
and the Bank will not file a consolidated tax return, except that if the
Corporation or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
Washington Tax
- --------------
The Bank is subject to a business and occupation tax which is imposed under
Washington law at the rate of 1.5% of gross receipts; however interest received
on loans secured by mortgages or deeds of trust on residential properties and
interest on obligations issued or guaranteed by the United States are not
presently subject to the tax. On August 15, 1994, the Department of Revenue of
the State of Washington began an audit of the Corporation's records for
compliance regarding the business and occupation tax. The Corporation had not
been audited for 18 years. The Department of Revenue has issued a tax billing
for approximately $148,000 of which the Corporation has accrued $104,000 and
paid $16,000. The Corporation has filed an appeal with the Department of
Revenue. A determination has been issued reversing two of the three billing
issues in the audit. The Corporation has filed another appeal regarding the
final issue.
-25-
Subsequent Events
- -----------------
On February 11, 2004, the Corporation signed a Definitive Merger Agreement
to acquire Issaquah Bancshares (Issaquah) and its operating subsidiary,
Issaquah Bank. The merger, which is expected to be completed in the second
quarter of 2004, will expand the Corporation's market presence in East King
County (Washington). Issaquah is a $128 million asset bank holding company
headquartered in Issaquah, Washington. Issaquah will be merged into the
Corporation and Issaquah Bank will be merged into Cascade Bank, where it will
operate as a separate division. As a bank holding company and a bank
respectively, Issaquah is subject to the same legal and regulatory framework
as the Corporation and Cascade Bank. Also, Issaquah has the same risk
characteristics (i.e. credit, interest rate, liquidity and operational) as the
Corporation and Cascade Bank. After an initial due diligence period,
Management believes that the merger with Issaquah will not materially alter the
risk profile of the Corporation.
Availability of Filings
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You may access, free of charge, copies of the following reports of the
Corporation on the SEC's website at www.sec.gov:
1) Annual Reports on Form 10-K; and
2) Quarterly Reports on Form 10-Q.
These documents are posted on the SEC's website, generally within twenty-
four hours after the Corporation files these documents electronically with the
Securities and Exchange Commission. As these reports are currently available
from the SEC's website, the Corporation does not currently post its reports on
its website, but is willing to provide electronic or paper copies of its
filings (subject to actual copying costs) upon reasonable request.
Item 2. Properties
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The Corporation owns six full service branch locations and leases nine full
service locations. Owned offices range in size from 3,500 to 52,000 square
feet and have a total net book value at December 31, 2003, including leasehold
improvements, furniture and fixtures, of $8.6 million. The Corporation leases
approximately 10% of its main office and approximately 25% of its Marysville
office to non-affiliated parties. See Note 4 of the Notes to the Consolidated
Financial Statements contained in the Annual Report which is listed in Item 15.
Item 3. Legal Proceedings
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The Corporation is not engaged in any legal proceedings of a material nature
at the present time. Periodically, there have been various claims and lawsuits
involving the Corporation and the Bank, principally as a defendant, such as
claims to enforce liens, condemnation proceedings on properties in which the
Bank holds security interests, claims involving the making and servicing of
real property loans and other issues incident to the Corporation's business.
In the opinion of management and the Corporation's legal counsel, no significant
loss is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
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None.
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The information contained on the back inside cover of the Annual Report
listed in Item 15 is incorporated herein by reference.
Item 6. Selected Financial Data
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The information contained in the section entitled "Selected Financial Data"
of the Annual Report listed in Item 15 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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The information contained in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Annual
Report listed in Item 15 is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained under the section captioned "Market Risk" in the
Management's Discussion and Analysis section of the Annual Report listed in
Item 15 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements and supplementary data in the Annual Report listed
in Item 15 is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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On November 10, 2003, the Audit Committee of the Board of Directors of
Cascade Financial Corporation ("Registrant") engaged the accounting firm of
Moss Adams LLP as independent accountants for the Registrant for the fiscal
year 2004. On November 10, 2003, the Board notified KPMG LLP ("KPMG") that
KPMG would be dismissed upon the completion of its independent audit of the
2003 consolidated financial statements of the Registrant and would not be
retained to serve as the Registrant's independent public accountants for the
fiscal year 2004.
Item 9A. Controls and Procedures
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(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Corporation's disclosure controls and procedures (as defined in section 13(a)
- 14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out
under the supervision and with the participation of the Corporation's Chief
Executive Officer, Chief Financial Officer and several other members of the
Corporation's senior management effective December 31, 2003. The Corporation's
Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Corporation in the reports it files or submits under the Act is (i)
accumulated and communicated to the Corporation's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the year ended December 31, 2003, the
Corporation did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
Disclosure Controls and Internal Controls. Disclosure controls are
procedures that are designed with the objective of ensuring that information
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required to be disclosed in the Corporation's reports filed under the
Securities Exchange Act of 1934 (Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's (SEC) rules and forms. Disclosure controls are also
designed with the objective of ensuring that such information is accumulated
and communicated to our management, as appropriate to allow timely decisions
regarding required disclosure. Internal Controls are procedures which are
designed with the objective of providing reasonable assurance that (1)
transactions are properly authorized; (2) assets are safeguarded against
unauthorized or improper use; and (3) transactions are properly recorded and
reported, all to permit the preparation of financial statements in conformity
with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The Corporation's management
does not expect that our disclosure controls or our internal controls will
prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Corporation have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
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PART III
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Item 10. Directors and Executive Officers of the Registrant
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The information contained under the section captioned "Proposal I-Election
of Directors" contained in the Corporation's Definitive Proxy Statement for the
Corporation's Annual Meeting of Stockholders (the "Proxy Statement"), is
incorporated herein by reference. Reference is made to the cover page of this
report for information regarding compliance with Section 16(a) of the Exchange
Act, and to the section therein captioned "COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT".
The following table sets forth information with respect to the executive
officers of the Corporation and the Bank.
Name Age (a) Position
- ---- ------ --------
Frank M. McCord (b) 72 Chairman, Cascade Financial Corporation
Chairman, Cascade Bank
Carol K. Nelson (b) 46 President, Chief Executive Officer and
Director of Cascade Bank
And Cascade Financial Corporation
Robert G. Disotell 49 Executive Vice President, Chief Credit
Officer
Steven R. Erickson 48 Executive Vice President, Real Estate
Lending
Lars H. Johnson 50 Executive Vice President, Chief
Financial Officer (b)
LeAnne M. Frank 34 Executive Vice President, Quality of
Service and Technology
Wayne M. Fjelstad 45 Executive Vice President, Business
Banking
Vera E. Wildauer 45 Executive Vice President, Marketing
Director
Debbie E. McLeod 38 Executive Vice President, Retail Banking
(a) At December 31, 2003.
(b) Officer of the Corporation and Bank.
The principal occupation of each executive officer of the Corporation and
Bank is set forth in the Proxy Statement or below. There are no family
relationships among or between the executive officers listed above.
ROBERT G. DISOTELL has been employed by Cascade Bank since 1977 and
currently serves as Executive Vice President of Credit Administration. He is
responsible for overseeing the credit quality of the Bank's loan portfolios.
Mr. Disotell has managed a variety of business groups in his tenure at Cascade,
including Mortgage Banking, Loan Servicing, Secondary Marketing, Retail
Banking, and Community Reinvestment Act (CRA) activities. Mr. Disotell is a
resident of Arlington, Washington.
STEVEN R. ERICKSON is the Executive Vice President of Real Estate Lending
for the Bank, responsible for managing residential and income property lending
and serves as the Assistant Secretary for the Corporation. Mr. Erickson joined
Cascade in 1978. He is a member of the Board for Big Brothers and Big Sisters
of Snohomish County and Trustee of the Boys and Girls Club of Snohomish County.
He is a resident of Marysville, Washington.
LEANNE M. FRANK is the Executive Vice President and Chief Administrative
Officer for the Bank. She has 17 years of consumer banking experience starting
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with Rainier Bank and most recently Bank of America, where she served as Vice
President and Region Service Manager. She is Vice President of the Everett
Theatre Society Board. Ms. Frank is a resident of Everett, Washington.
LARS H. JOHNSON is the Executive Vice President, Chief Financial Officer of
the Bank and Corporation and also serves as the corporate secretary. Mr.
Johnson joined Cascade in April 2000. Mr. Johnson has 29 years of financial
management experience, including 16 years with the Federal Home Loan Bank of
Seattle. Mr. Johnson is a resident of Edmonds, Washington.
WAYNE M. FJELSTAD is the Executive Vice President of Business Banking for
the Bank, responsible for managing business loans, lines of credit, owner-
occupied commercial real estate, and other business services. Mr. Fjelstad
joined Cascade Bank in 2002. He has 23 years of banking experience, previously
working for Bank of America Small Business Banking, and also as a commercial
lender for Frontier Bank. He is involved in a number of community events,
volunteer coaches, and teaches classes in local elementary schools.
DEBBIE E. McLEOD is Executive Vice President of Retail Banking for the Bank.
Ms. McLeod joined Cascade Bank in February 2001. She has over 15 years of
commercial banking experience and was previously Vice President and Northern
Region Sales Manager for Bank of America. Ms. McLeod resides in Burlington,
Washington.
VERA E. WILDAUER joined Cascade in 1997 as Senior Vice President, Marketing
Director. In 2000, she was elected Executive Vice President, Marketing. Ms.
Wildauer has 23 years experience in a full range of bank marketing disciplines
among major Washington State financial institutions. She is Board President of
Bridgeways, a mental health organization in Everett. Ms. Wildauer is a
resident of Bothell, Washington.
Item 11. Executive Compensation
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The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
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(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the section captioned "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge
by any person of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated herein by reference to
the section captioned "Transactions with Management and Others" of the Proxy
Statement.
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
The information required by this Item is incorporated herein by reference to
the section captioned "INDEPENDENT AUDITORS" of the Proxy Statement."
-31-
PART IV
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Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1)(2) Independent Auditors' Report
Consolidated Financial Statements
(a) Consolidated Balance Sheets at December 31, 2003 and December
31, 2002.
(b) Consolidated Statements of Operations for the year ended
December 31, 2003, 2002 and 2001, for the six months ended December 31, 2001
and 2000, and the year ended June 30, 2001.
(c) Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the year ended December 31, 2003, 2002 and 2001, and
the year ended June 30, 2001.
(d) Consolidated Statements of Cash Flows for the year ended
December 31, 2003, 2002 and 2001, for the six months ended December 31, 2001
and 2000, and the year ended June 30, 2001.
(e) Notes to Consolidated Financial Statements
All schedules have been omitted, as the required information is either
inapplicable or contained in the Consolidated Financial Statements or related
Notes contained in the Annual Report.
(3) Exhibits
3.1 Certificate of Incorporation of Cascade Financial Corporation
(Incorporated by reference to the Corporation's Proxy statement on Form S-4
(File No. 33-83200)).
3.2 Bylaws of Cascade Financial Corporation (Incorporated by
reference to the Corporation's Registration Statement on Form S-4 (File No. 33-
83200)).
10.1 Cascade Financial Corporation 1994 Employee Stock Purchase Plan
(Incorporated by reference to the Corporation's Registration Statement on Form
S-4 (File No. 33-83200)).
10.2 Cascade Financial Corporation 1992 Stock Option and Incentive
Plan (Incorporated by reference to the Corporation's Form 10-KSB for the period
ending June 30, 1995).
10.3 Cascade Financial Corporation Employee Stock Ownership Plan
(Incorporated by reference to the Corporation's Annual Report on Form 10-KSB
for the period ending June 30, 1995).
10.4 Cascade Financial Corporation 1997 Stock Option Plan
(Incorporated by reference to Appendix E to the Prospectus included in the
Corporation's Registration Statement on Form S-4 (File No. 333-24203)).
10.5 Employment Agreement entered into between the Bank and Carol K.
Nelson dated November 27, 2001.(Incorporated by reference to Exhibit 10.5 of
the Corporation's Form 10-K for the period ending December 31, 2001).
10.6 Form of Change of Control Agreement entered into between the
Bank and its executive officers. (Incorporated by reference to Exhibit 10.6 of
the Corporation's Form 10-K for the period ending December 31, 2001).
10.7 Cascade Financial Corporation 1997 Elective Equity Plan.
(Incorporated by reference to Exhibit 10.7 of the Corporation's Form 10-K for
the period ending December 31, 2001).
13 Cascade Financial Corporation December 31, 2003 Annual Report to
Stockholders, including the Selected Financial Data and Management Discussion
and Analysis.
21 Subsidiaries
23 Consent of Independent Auditors
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Annual Report on Form 10-K pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On December 1, 2003, Cascade Financial Corporation, parent company of
Cascade Bank, declared a 25% stock dividend, under Item 5 of Form 8-K.
On November 10, 2003, the Corporation announced that the Audit Committee of
the Board of Directors of Cascade Financial Corporation ("Registrant") engaged
the accounting firm of Moss Adams LLP as independent accountants for the
Registrant for the fiscal year 2004, under Item 4 of Form 8-K.
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On October 21, 2003, the Corporation released earnings information for the
third quarter ended September 30, 2003, under Item 12 of Form 8-K.
SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CASCADE FINANCIAL CORPORATION
Date: March 12, 2004 By: /s/ Carol K Nelson
-------------------------------------
Carol K. Nelson
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Lars H. Johnson By: /s/ D. R. Murphy
---------------------------- ----------------------------
Lars H. Johnson D. R. Murphy
Executive Vice President Director
(Chief Financial Officer) Date: March 12, 2004
Date: March 12, 2004
By: /s/ Frank M. McCord By: /s/ Ronald E Thompson
---------------------------- ----------------------------
Frank M. McCord Ronald E. Thompson
Chairman Director
Date: March 12, 2004 Date: March 12, 2004
By: /s/ Janice Halladay By: /s/ G. Brandt Westover
---------------------------- ----------------------------
Janice Halladay G. Brandt Westover
Director Director
Date: March 12, 2004 Date: March 12, 2004
By: /s/ David W. Duce By: /s/ Craig Skotdal
---------------------------- ----------------------------
David W. Duce Craig Skotdal
Director Director
Date: March 12, 2004 Date: March 12, 2004
By: /s/ David O'Connor By: /s/ Dwayne Lane
---------------------------- ----------------------------
David O'Connor Dwayne Lane
Director Director
Date: March 12, 2004 Date: March 12, 2004
By: /s/ Henry Robinett
----------------------------
Henry Robinett
Director
Date: March 12, 2004
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