EXHIBIT 13
(COVER PAGE)
2004 ANNUAL REPORT
Real
People.
Real
solutions.sm
(picture of Jenifer Schwartz at Snohomish branch with Red and Rover)
Cascade Financial Corporation Logo
Real
People.
Real community banking
Solutions.
When its doors opened in June 2004, expectations were high that the new
Snohomish branch would enjoy a warm welcome. In fact, deposits flowed into the
bank even before the last floor tile was installed. Within months, deposits had
grown well beyond plan.
This progress is testament to Cascade's excellent reputation and style of
exceptional customer service. Many Cascade employees make their homes in the
area and their roots run deep. They believe it makes sense to bank with a good
neighbor. Red and Rover agree and like to keep things close to home, too.
That's why they choose Cascade.
(Front cover: Red and Rover, loyal Cascade Bank customers, bring in their
lemonade stand earnings to Senior Financial Services Representative Jenifer
Schwartz at our new Snohomish branch.)
Financial Highlights . . . . . . . . . 1
Letter to Shareholders . . . . . . . . 2
Cascade Bank Management Team . . . . . 6
Board of Directors . . . . . . . . . . 8
Management Discussion and Analysis . . 10
Independent Auditors' Report . . . . . 18
Annual Meeting Information . . . . . . 47
Real
people.
Real partnership
solutions.
Our 2004 Annual Report takes its inspiration from our collaboration with
Cascade Bank customer Brian Basset and his nationally syndicated "Red and
Rover" comic strip.
The friendship between a 10-year-old boy and his beloved dog and their
shared adventures in life and commerce celebrate the idea that staying true
to the fundamentals really counts. Simple things like shared values, loyalty,
and relationships matter when building a lasting friendship or working together
to build Cascade Bank into a preferred community bank that consistently returns
value to shareholders.
Follow Red and Rover as they point out our 2004 performance highlights.
(Image of Brian Basset with cartoon characters Red and Rover at their lemonade
stand.)
Cartoonist Brian Basset with Red and Rover.
FIVE-YEAR FINANCIAL HIGHLIGHTS
Dollars in thousands except for per share and financial ratios.
12 MONTHS ENDED DECEMBER 31 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
Net interest income $ 32,397 $ 27,610 $ 26,024 $ 21,403 $ 18,738
Other income 4,747 5,306 4,039 3,322 2,399
Net income 10,785 9,599 8,072 5,617 3,821
Earnings per share (diluted) 1.16 1.13 0.98 0.70 0.47
AT DECEMBER 31 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
Assets $1,088,955 $885,220 $804,463 $762,323 $716,439
Loans, net 794,466 567,094 546,677 576,226 548,722
Deposits 721,908 564,314 509,850 419,980 395,976
Stockholders' equity 96,250 63,957 56,640 47,677 41,240
Book value per share 10.07 7.76 6.99 6.16 5.36
FINANCIAL RATIOS 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
Return on assets 1.09% 1.13% 1.05% 0.77% 0.57%
Return on average equity 13.22% 15.81% 15.49% 12.63% 10.16%
Return on tangible equity 16.24% 15.81% 15.49% 12.63% 10.16%
Net interest margin 3.44% 3.35% 3.44% 3.01% 2.86%
Nonperforming loans/total loans 0.07% 0.33% 0.17% 0.34% 0.42%
Efficiency ratio 54.70% 53.87% 54.29% 60.13% 68.62%
In 2001, following Cascade Bank's conversion from a thrift institution to a
commercial bank, Cascade Financial Corporation ("Cascade") changed its fiscal
year-end from June 30 to December 31 to align its reporting periods with those
of its commercial bank peers. Cascade's financial information for the years
ending December 31, 2001 and 2000, was prepared by management and is unaudited.
Special to Cascade Bank, Red and Rover characters are copyrighted by Brian
Basset and The Washington Post Writers Group, 2005 (c)
1
CEO Carol K. Nelson and Rover get acquainted as Red watches a winning
friendship take shape.
(Image of Carol Nelson shaking Rover's hand while Red looks on.)
DEAR SHAREHOLDERS, CUSTOMERS, AND EMPLOYEES:
I invite you to share pride in our 2004 accomplishments. We successfully
executed our growth strategy, growing assets to over $1 billion. Net income
increased to a record $10.8 million. Focus on solid banking fundamentals and
exceptional customer service continued to fuel our progress as a market leader.
Cascade is a stronger financial institution today than a year ago.
Cascade's growth strategy includes branch expansion, acquisition, and niche
banking. Our 2004 highlights include the June opening of our newest branch in
the city of Snohomish. The community welcomed the branch, which quickly
surpassed goals for new deposits. We also completed the acquisition of
Issaquah Bancshares, adding two new branches and more than $131 million in
assets. In addition to providing specialized banking for the medical/dental
professional market segment, we launched our Women's Financial Group, dedicated
to serving the banking needs of women business owners and professionals. These
market segments present tremendous potential for Cascade.
Loan and deposit growth, strong credit quality, and efficient operations
are the fundamentals that propel our business forward. Demonstrating continuous
improvement in all areas remains our emphasis as we create results that enhance
shareholder value. We were successful in growing higher-yielding business,
construction, and commercial real estate loans, which we funded with lower-cost
2
(Image of Red with Rover's leash)
deposits. In fact, total loans grew 40% and total deposits increased 28%. Our
cost of funds decreased with checking accounts showing strong growth. Adding to
our strength is our conservative credit culture. Nonperforming loans dropped to
just .07% of total loans. The charts throughout this report illustrate the
excellent progress we've made against key performance metrics.
Our vision is to be the preferred community bank. Our consistent pattern of
loan and deposit growth, the steady flow of quality referrals we enjoy from
satisfied consumer and commercial customers, and the customer loyalty we earn
through our actions indicate that we are well on our way toward realizing our
vision. Together with our team of experienced, knowledgeable and capable
bankers, we are bringing to life our "real people, real solutions" signature
with each customer touch point and every banking transaction.
Thank you for the confidence and commitment you express to Cascade Bank
through your loyal and valued support.
Sincerely,
/s/ Carol K. Nelson
- -------------------
Carol K. Nelson
President and Chief Executive Officer
Cascade Financial Corporation
February 15, 2005
3
Real
people.
Real lending
solutions.
Red's proposal for a new lemonade stand was on a slightly smaller scale than
developer Bob Gregg's proposal for The Gregory-a mixed-use project in downtown
Edmonds, Washington. The project occupies a city block and includes 14,000
square feet of commercial space on the ground floor with 28 condominiums above.
Bob says that Cascade Bank knows far more than the average bank about
construction lending. "At Cascade, they get the concept of quick turnaround
on a loan draw. They get the whole construction process."
Red and Rover can rest assured that their lemonade stand will be built by
an expert and financed by one, too.
Red and Rover discuss plans for a new lemonade stand that developer Bob Gregg
will build.
(Image of Bob Gregg showing blueprints of lemonade stand to Red and Rover.)
REVENUE
- -------
$ in millions, 2000 and 2001 are unaudited
(Revenue bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Net Interest Income 18.7 21.4 26.0 27.6 32.4
Other Income 2.4 3.3 4.0 5.3 4.7
NET INCOME
- ----------
$ in millions, 2000 and 2001 are unaudited
(Net Income bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Net Income 3.8 5.6 8.1 9.6 10.8
EFFICIENCY RATIO
- ----------------
%, 2000 and 2001 are unaudited
(Efficiency Ratio bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Efficiency Ratio 68.6 60.1 54.3 53.9 54.7
4
<PGAE>
Real
people.
Real business
solutions.
Red entrusts his smile to Dr. Jacqueline de Leon-Estes-a caring, attentive
orthodontist with a passion for working with children, teens and adults.
A beautiful smile speaks volumes about health and happiness, and Dr. de
Leon-Estes has plenty to grin about. She has grown her Mukilteo, Washington
practice by over 20% since purchasing it with Cascade's help in 2003. Now,
Cascade is helping her manage growth to achieve heightened success. Rover says
it is progress worth barking about.
Red urges Rover to open wide so
Dr. de Leon-Estes can check his teeth.
(Picture of Dr. de Leon-Estes checking Red's teeth while Rover holds Red's
mouth)
TOTAL DEPOSITS
- --------------
$ in millions, 2000 and 2001 are unaudited
(Total Deposits bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Total Deposits 396 420 510 564 722
BUSINESS LOANS
- --------------
$ in millions, 2000 and 2001 are unaudited
(Business Loans bar chart here)
2000 2001 2002 2003 2004
--------------------------------
Business Loans 97 125 142 204 292
LOANS
- -----
December 31, 2004: $804 Million
audited, % of loans
(Loans pie chart here)
Consumer 4%
Commercial R/E 22%
R/E Construction 13%
Residential 13%
Business 36%
Multifamily 12%
5
(Image of Red pulling a wagon with Rover and bags of groceries)
CASCADE BANK MANAGEMENT TEAM
- ----------------------------
Carol K. Nelson
President and Chief
Executive Officer
(Picture of Carol K. Nelson)
Rob Disotell
EVP, Chief Credit Officer
(Picture of Rob Disotell)
Steve Erickson
EVP, Real Estate Lending
(Picture of Steve Erickson)
LeAnne Frank
EVP, Chief
Administrative Officer
(Picture of LeAnne Frank)
6
Real
people.
Real community
solutions.
Red and Rover live in a time when houses are affordable and food is plentiful.
Real life can be tough, however, and that is when lending a hand really counts.
At Cascade, our employees offer time, talent, and dollars to many nonprofit
organizations. In fact, our employees initiated a November food drive to
benefit Volunteers of America food banks in Snohomish and King Counties
Together with our customers, we collected enough food to make the holiday
season merrier for 1,600 neighbors - and many of their pets.
Cascade employee Judy Austin gratefully accepts Red and Rover's donation of dog
and people food.
(Picture of Judy Austin next to food bank barrel accepting food donations from
Red and Rover.)
CASCADE BANK MANAGEMENT TEAM
- ----------------------------
Bob Ittes
President, Issaquah
Bank Division
(Picture of Bob Ittes)
Lars Johnson
EVP, Chief Financial Officer
(Picture of Lars Johnson)
Debbie McLeod
EVP, Retail Banking
(Picture of Debbie McLeod)
Bob Wojcik
EVP, Business Banking
(Picture of Bob Wojcik)
7
(Picture of Red and Rover with Red's piggy bank)
CASCADE FINANCIAL CORPORATION DIRECTORS
- ---------------------------------------
David W. Duce (1)
Chairman of the Board
Cascade Financial Corporation
Attorney
Duce Bastian Peterson
Carol K. Nelson (1, 4)
President and CEO
Cascade Financial Corporation
G. Brandt Westover (1, 3, 5)
Vice Chairman
Cascade Financial Corporation
Senior Vice President
UBS Financial Services, Inc.
Richard L. Anderson, CPA (2)
President
Hascal, Sjoholm & Company, P.S.
Janice Halladay (1, 3, 4, 5)
Retired Bank Executive
Dwayne Lane (3)
President
Dwayne Lane Auto Centers
Frank M. McCord (3)
Retired Bank Chairman and CEO
Dennis R. Murphy, Ph.D. (1, 2)
Dean, College of Business and
Economics
Professor of Economics
Western Washington University
David R. O'Connor (1, 3, 4, 5)
Co-Owner
Mobile Country Club
Henry M. Robinett (2, 4)
General Partner
Boyden, Robinett & Associates L.P.
Craig Skotdal (2, 5)
President
Skotdal Real Estate
Ronald E. Thompson (1, 2, 4, 5)
President
Windermere Commercial
and Property Management of
Snohomish County
1. Executive Committee
2. Audit and Finance Committee
3. Compensation and Personnel Committee
4. Loan Committee
5. Corporate Governance and Nominating Committee
(Pictures of David W. Duce, Carol K. Nelson, G. Brandt Westover, Richard L.
Anderson, Janice Halladay, Dwayne Lane, Frank M. McCord, Dennis R.
Murphy, Ph.D., David R. O'Connor, Henry M. Robinett, Craig Skotdal, Ronald
E. Thompson)
8
CASCADE FINANCIAL CORPORATION SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data.)
FOR THE
YEAR ENDED
DECEMBER 31,
2004 2003 2002
- ------------------------------------------------------------------------
Interest income $55,316 $50,363 $52,470
Interest expense 22,919 22,753 26,446
Net interest income 32,397 27,610 26,024
Provision for loan losses 675 1,275 1,895
Net interest income after
provision for loan losses 31,722 26,335 24,129
Other income 4,747 5,306 4,039
Other expense 20,317 17,733 16,321
Income before federal income taxes 16,152 13,908 11,847
Net income 10,785 9,599 8,072
Net income per common share, basic (1) 1.20 1.17 1.01
Net income per common share, diluted (1) 1.16 1.13 0.98
Book value per share (1) 10.07 7.76 6.99
AT DECEMBER 31,
2004 2003 2002
- ------------------------------------------------------------------------
Assets $1,088,955 $885,220 $804,463
Loans, net 794,466 567,094 546,677
Cash and securities 228,644 290,537 229,880
Deposits 721,908 564,314 509,850
Borrowings 36,356 50,123 30,879
FHLB advances 228,000 200,000 197,500
Stockholders' equity 96,250 63,957 56,640
Nonperforming loans 532 1,921 956
FINANCIAL RATIOS
FOR THE
YEAR ENDED
DECEMBER 31,
2004 2003 2002
- ------------------------------------------------------------------------
Return on assets 1.09% 1.13% 1.05%
Return on equity 13.22 15.81 15.49
Return on tangible equity 16.24 15.81 15.49
Net interest margin 3.44 3.35 3.44
Efficiency ratio 54.70 53.87 54.29
Average stockholders' equity to
average assets 8.25 7.15 6.75
Total risk based capital to risk
weighted assets 11.06 13.22 13.11
Tier 1 capital to adjusted total assets 8.04 8.34 8.07
(1) Per common share data is retroactively adjusted to reflect all stock splits
and stock dividends.
-9-
MANAGEMENT DISCUSSION AND ANALYSIS
- ----------------------------------
The following discussion is provided for the consolidated operations of Cascade
Financial Corporation (the "Corporation") as of December 31, 2004. The
Corporation has only one operating subsidiary: Cascade Bank (the "Bank"). The
purpose of this discussion is to focus on significant factors concerning the
Corporation's financial condition and results of operations, and to provide a
more comprehensive review of the Corporation's operating results and financial
condition than can be obtained from reading the consolidated financial
statements alone. This discussion should be read with the consolidated
financial statements and the notes thereto.
In addition to historical information, this report contains certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the
express purpose of availing the Corporation of the protections of the safe
harbor provisions of the PSLRA. The forward-looking statements contained
herein are subject to factors, risks, and uncertainties that may cause actual
results to differ materially from those projected. The following items are
among the factors that could cause actual results to differ materially from
the forward-looking statements: higher than expected loan delinquency rates,
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; competitive factors, including increased
competition with community, regional, and national financial institutions;
fluctuating interest rate environments; and similar matters. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date of the statement.
The Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in this and other documents the Corporation files from time to time
with the Securities and Exchange Commission.
Acquisition
- -----------
On June 3, 2004, the Corporation acquired Issaquah Bancshares, Inc.,
("Issaquah"). The acquisition was accounted for using the purchase method of
accounting and accordingly, the assets and liabilities were recorded based on
their fair values at the acquisition date. Shares of Issaquah were exchanged
for cash or cash and shares of the Corporation resulting in the issuance of
1,263,423 new shares. The merger enhances Cascade's commercial banking
franchise by expanding Cascade's presence in east King County. Total Issaquah
assets on June 3, 2004, were approximately $131 million and the total value of
the transaction, both cash and stock, was approximately $34.3 million as
measured under the provisions of FAS 141. In addition to the shares issued, the
Corporation paid cash of $9.5 million in connection with the merger. The Bank
booked $26.3 million in intangible assets associated with the transaction
including $25.2 million in goodwill and a $1.1 million core deposit intangible
that will be amortized using straight-line method over an eight year period of
time.
Critical Accounting Policies
- ----------------------------
Corporations may apply certain critical accounting policies requiring
management to make subjective or complex judgments, often as a result of the
need to estimate the effect of matters that are inherently uncertain. The
Corporation considers its only material critical accounting policy to be the
allowance for loan losses. The allowance for loan losses is established through
a provision for loan losses charged against earnings. The balance of the
allowance for loan losses is maintained at the amount management believes will
be adequate to absorb known and inherent losses in the loan portfolio. The
appropriate balance of the allowance for loan losses is determined by applying
estimated loss factors to the credit exposure from outstanding loans. Estimated
loss factors are based on subjective measurements including management's
assessment of the internal risk classifications, changes in the nature of the
loan portfolio, industry concentrations, and the impact of current local,
regional and national economic factors on the quality of the loan portfolio.
Changes in these estimates and assumptions are reasonably possible and may have
a material impact on the Corporation's consolidated financial statements,
results of operation, or liquidity.
For additional information regarding the allowance for loan losses, its
relation to the provision for loan losses and risk related to asset quality,
see Note 4 in the Consolidated Financial Statements for the year ended December
31, 2004, and "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Provision for Loan Losses."
FINANCIAL CONDITION
- -------------------
Total Assets
- ------------
The Corporation's total assets at December 31, 2004, were $1.1 billion,
compared to $885.2 million at December 31, 2003, an increase of 23.0%. The
increase is due to internal growth and the acquisition of Issaquah Bancshares,
Inc. ("Issaquah"), the parent company of Issaquah Bank on June 3, 2004. At the
time of the acquisition Issaquah had $131.0 million in total assets. The
Corporation's total assets at December 31, 2002, were $804.5 million.
Investment Securities
- ---------------------
Securities designated as available for sale decreased to $124.3 million at
December 31, 2004, versus $189.7 million at December 31, 2003. Securities
designated as held to maturity increased to $91.3 million at December 31, 2004,
from $86.7 million a year earlier. The securities in both portfolios consist of
notes issued by Government Sponsored Enterprises ("GSE" e.g. FHLB, FNMA) or
mortgage-backed securities issued by either FNMA or FHLMC or a mortgage
-10-
conduit. Included in the available for sale portfolio is $11.9 million of
Federal Home Loan Bank of Seattle stock at December 31, 2004. During the year,
the available for sale portfolio held a small position in U.S. Treasury notes
and Corporate notes. All securities held during the year were of investment
grade. All but the corporate notes received the highest credit rating from at
least one of the major rating agencies. The investment portfolio has been used
to leverage our capital base as the growth in equity has exceeded the growth in
the loan portfolio.
The overall investment portfolio declined as investments were called or
sold and the mortgage-backed securities prepaid more quickly than replaced. The
net proceeds from the reduction in the investment portfolio were used to fund
the growth in the loan portfolio.
Loan Portfolio
- --------------
Net loans increased to $794.5 million at December 31, 2004, a 40% increase over
$567.1 million at December 31, 2003. Of that amount, $94.6 million were acquired
from Issaquah and $132.9 million represented internal growth. Net loans were
$546.9 million at December 31, 2002.
Business loans increased from $204.4 million at December 31, 2003, to
$292.1 million at December 31, 2004, a 42.9% increase. The strong growth in
this portfolio was the result of our ability to win new borrowing customers in
a very competitive market. Net construction loans increased to $107.4 million
at December 31, 2004, from $62.7 million at the prior year-end. Total
construction loans, which include loans in process, increased to $157.1 million
from $93.7 million. This portfolio experienced rapid turnover as the housing
market remained very robust during the year. Commercial real estate loans
increased from $83.9 million at December 31, 2003, to $178.7 million at
December 31, 2004. The Corporation's loan focus remains on small businesses,
builders and developers in the Puget Sound area. Construction lending is
directed toward building single-family housing and land development for
single-family housing. The Bank confines its lending to the Puget Sound
region of Washington State.
Total single-family residential loans increased slightly from $105.6
million at December 31, 2003, to $106.0 million at December 31, 2004. High
rates of refinancing activity due to very low interest rates impacted loan
balances in that the Corporation sells the vast majority of its 30 year
fixed-rate loans, its 15 year fixed-rate loans, and many of its conforming
intermediate term hybrid ARMs in the secondary mortgage market. Since these
were the preferred products in the market in 2004, many of the Corporation's
adjustable rate mortgages were refinanced into fixed rate loans and sold.
Multifamily loans outstanding increased from $87.2 million at December 31,
2003, to $92.4 million at December 31, 2004.
Consumer loans dropped $3.0 million to $30.1 million as of December 31,
2004. The Bank's consumer loan portfolio is comprised of home equity loans and
lines of credit, installment loans, and credit card loans. Home equity loans
generally take the form of a second mortgage. In terms of direct consumer
loans, the Bank has not emphasized this line of business, concluding that it is
at a competitive disadvantage against the very aggressive pricing of large
banks, captive finance companies and the specialty credit card issuers.
The chart below indicates the mix of the loan portfolio as of the dates
indicated:
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
(Dollars in thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- --------------------------------------------------------------------------------------------------
Business $292,117 34.11% $204,446 33.63% $142,273 24.68%
Commercial real estate 178,704 20.87 83,856 13.79 63,108 10.95
------------------------------------------------------------
Total business-like loans 470,821 54.98 288,302 47.42 205,381 35.63
Single-family residential 105,975 12.37 105,565 17.37 122,669 21.28
Real estate construction 157,088 18.34 93,704 15.41 104,790 18.18
Consumer 30,125 3.52 33,163 5.45 49,331 8.56
Multifamily loans 92,372 10.79 87,212 14.35 94,245 16.35
------------------------------------------------------------
Total gross loans 856,381 100.00% 607,946 100.00% 576,416 100.00%
------------------------------------------------------------
Loans in process (49,657) (30,962) (20,669)
Allowance for losses on loans (9,563) (7,711) (6,872)
Deferred loan fees and discounts (2,695) (2,179) (2,198)
------------------------------------------------------------
Net loans receivable $794,466 $567,094 $546,677
============================================================
Allowance for Loan Losses
- -------------------------
Management provides for possible loan losses by maintaining an allowance. The
allowance for loan losses reflects management's best estimate of probable
losses as of a particular balance sheet date, but there is no guarantee that
management's estimate will be sufficient to cover actual loan losses. The
allowance for loan losses is maintained at a level considered adequate based
on management's assessment of various factors affecting the loan portfolio,
including local economic conditions, growth of the loan portfolio, past loss
experience, and its composition. Increases in the allowance for loan losses
made through provisions primarily reflect loan growth, awareness of the greater
risk inherent in business lending and the impact of the economic climate on the
loan portfolio.
Management determines the amount of the allowance for loan losses by
utilizing a loan grading system to determine risk in the loan portfolio and by
considering the results of credit reviews. The loan portfolio is separated by
quality and then by loan type. Loans of acceptable quality are evaluated as a
group, by loan type, with a specific loss rate assigned to the total loans in
-11-
each type, but unallocated to any individual loan. Conversely, each adversely
classified loan is individually analyzed to determine an estimated loss amount.
A valuation allowance is also assigned to these adversely classified loans, but
at an assumed higher reserve rate due to the greater risk of loss. Past due and
impaired loans are actively managed to minimize the potential loss of principal.
At December 31, 2004, the allowance for loan losses was $9.6 million (1.38%
of average loans during 2004 and 1.19% of outstanding loans excluding loans in
process) compared to $7.7 million (1.36% of average loans and 1.34% of
outstanding loans excluding loans in process) at December 31, 2003, and $6.9
illion (1.21% of average loans outstanding and 1.24% of loans excluding loans
in process) at December 31, 2002. During 2004, the Corporation added $675,000
to the allowance compared to $1.3 million in 2003. The Corporation assumed the
$1.4 million allowance of Issaquah in the acquisition. The Corporation was able
to prudently decrease its ratio of the allowance to loans outstanding due to
the decrease in net loan charge-offs and small amount of nonperforming loans.
Net loan charge-offs were $218,000 in 2004 (or 0.03% of average loans
outstanding) compared to $436,000 in 2003 (or 0.08% of average loans
outstanding). Charge-offs in business loans accounted for most of the change,
decreasing from $390,000 in the year ended December 31, 2003, to $310,000 in
the year ended December 31, 2004. Net charge-offs were $1.3 million for the
year ended December 31, 2002. The coverage ratio (the allowance for loan
losses to nonperforming loans) was 1,798% at December 31, 2004, 401% at
December 31, 2003, and 719% at December 31, 2002.
Deposit Accounts
- ----------------
Deposit accounts totaled $721.9 million at December 31, 2004, an increase
of $157.6 million or 27.9% over the $564.3 million at December 31, 2003. The
Bank assumed $101.8 million in deposits with the acquisition of Issaquah
Bancshares. Checking account balances grew 79.0% to $112.6 million during the
year as the Bank continued its sales efforts to generate transaction accounts.
Money market deposit accounts grew by 29.8% to $172.6 million aided by low
rates offered by money market funds. Certificates of deposit grew 18.6% to
$436.8 million. As business banking activity increases, management expects
to increase its noninterest bearing accounts through the growth of commercial
checking accounts.
The market for deposits has remained very competitive and may intensify as
the Federal Reserve continues to increase its target Fed funds rate. It remains
a key goal of the Bank to increase its demand deposit accounts.
Other Borrowings
- ----------------
The Bank uses Federal Home Loan Bank of Seattle ("FHLB") advances to provide
intermediate and longer term funding, as well as to augment deposits. At
December 31, 2004, the Bank had $228.0 million in FHLB advances compared to
$200.0 million as of December 31, 2003. For 2004, FHLB advances averaged 18.9%
of assets compared to 22.9% in 2003. Subject to its line of credit with the
FHLB, the availability of collateral, and the parameters of liquidity
management, the Bank will continue to use advances as a funding source.
The Bank also uses repurchase agreements for short term funding to
partially offset the interest rate sensitivity of its prime-based loans. At
December 31, 2004, the Bank had executed $20.9 million in repurchase agreements
compared to $39.9 million a year earlier. In 2000 the Corporation issued $10
million in trust preferred securities, which are termed "junior subordinated
debentures", which mature on March 1, 2030, but are callable at a premium
beginning March 1, 2010. In December 2004, the Corporation issued an additional
$5 million in trust preferred securities/junior subordinated debentures. These
securities have a fixed coupon of 5.82% for the first 5 years and then float at
3-month LIBOR plus 1.90% for the remaining 25 years. The securities are
callable at par after 5 years and are considered Tier 1 capital by financial
institution regulators.
Capital
- -------
Banking regulations require the Bank to maintain minimum levels of capital.
As of December 31, 2004, Cascade Bank remained a "well capitalized" institution
(the FDIC's highest rating), under regulatory guidelines, with a core capital
to asset ratio of 8.04% and a risk-based capital to asset ratio of 11.06%. See
Note 13 of the Consolidated Financial Statements of the Annual Report for a
detail of the Bank's regulatory capital ratios.
Federal Reserve guidelines require the Corporation, on a consolidated
basis, to maintain minimum levels of capital as well. At December 31, 2004, the
Corporation's total risk-based capital to risk weighted assets was 11.18%,
compared to 13.42% at December 31, 2003, and 13.30% at December 31, 2002. The
Corporation projects that earnings retention and existing capital will be
sufficient to fund anticipated asset growth and the existing level of cash
dividends, while maintaining a "well capitalized" designation under the FDIC
and Federal Reserve guidelines. The Corporation has paid its shareholders a
cash dividend on a quarterly basis since 2002. In October 2004 the dividend was
increased from $.07 per share to $.08 per share. For the year, the Corporation
returned $2.8 million in dividends to its shareholders compared to $1.7 million
in 2003. The dividend pay out ratio (the ratio of dividends paid to net income)
for 2004 was a modest 26%.
The Corporation is committed to managing capital for maximum shareholder
benefit and maintaining protection for depositors and creditors. The
Corporation manages various capital levels at both the holding company and
subsidiary bank level to attempt to maintain adequate capital ratios and levels
in accordance with external regulations and capital guidelines established by
the Board of Directors of each institution.
-12-
RESULTS OF OPERATIONS
- ---------------------
Earnings
- --------
Cascade Financial Corporation earned net income for the year ended December 31,
2004, of $10.8 million, an increase of 12.5% over the $9.6 million net income
in the year ended December 31, 2003. Earnings per fully diluted share (EPS) were
$1.16 in 2004 and $1.13 in 2003. The Corporation incurred $356,000 of
acquisition related expenses in connection with its acquisition of Issaquah,
which translated to approximately $.04 a share. Without those expenses, 2004
diluted EPS would have been $1.20. Higher net interest income due to increased
earning assets and a decrease in the Bank's cost of funds contributed to the
improved results. Income was also enhanced by increased checking fees, which
partially offset the declines in gains on the sale of loans and securities. The
Corporation earned net income of $8.1 million or $0.98 per fully diluted share
for the fiscal year December 31, 2002.
Return on Average Equity
- ------------------------
Return on average equity for the year ended December 31, 2004, was 13.22%
compared to 15.81% for the same period of 2003. Return on average equity for
the fiscal year ending December 31, 2002, was 15.49%.
Return on Average Tangible Equity
- ---------------------------------
Return on average tangible equity (average equity less goodwill) was 16.24%
compared to 15.81% in 2003. The acquisition of Issaquah generated $25.2 million
in goodwill as an asset and a like amount of capital. Eliminating the asset and
reducing the capital by that amount produces tangible equity.
Return on average tangible equity is determined by methods other than in
accordance with Accounting Principles Generally Accepted in the United States
of America ("GAAP"). This measure excludes the average balance of
acquisition-related goodwill and intangibles in determining average tangible
shareholders' equity. Management believes the presentation of this financial
measure excluding the impact of these items provides useful supplemental
information that is essential for a proper understanding of the financial
results of Cascade Financial Corporation. This disclosure should not be viewed
as a substitute for results determined to be in accordance with GAAP, nor is it
necessarily comparable to non-GAAP performance measures that may be presented
by other companies.
A summary of tangible equity follows:
2004 2003
- --------------------------------------------------------------------
Net income $ 10,785 $ 9,599
Average equity 81,575 60,766
Average goodwill & intangibles 15,167 -
------- ------
Average tangible equity 66,408 60,766
Return on average tangible equity 16.24% 15.81%
Net Interest Income
- -------------------
The largest component of the Corporation's earnings is net interest income. Net
interest income is the difference between interest earned on earning assets
(primarily loans, interest bearing deposits with banks, and investment
securities) and the interest expense associated with interest bearing
liabilities (deposits and borrowings). Interest earned and interest paid is
affected by general economic conditions, including the demand for loans, cost
of deposits, market rates of interest, government policies, and the action of
regulatory authorities. The Corporation's operations are sensitive to changes
in interest rates and the resulting impact on net interest income. Despite the
increase in short term rates in the second half of the year, total interest
costs actually declined by 34 basis points for all of 2004.
Net interest income for the year ended December 31, 2004, increased by
17.4%, or $4.8 million, to $32.4 million from $27.6 million for the year ended
December 31, 2003. The improvement in net interest income was primarily due to
an improvement in our asset/liability mix as loans made up a large percentage
of earning assets and deposits were a large percentage of our liabilities. Net
interest income for the fiscal year ended December 31, 2002, was $26.0 million.
Average earning assets increased 14.4% to $942.8 million for the year ended
December 31, 2004, from $824.4 million for the year ended December 31, 2003.
Average earning assets were $755.4 million for the year ended December 31, 2002.
Net interest margin is net interest income expressed as a percent of
average earning assets and represents the difference between the yield on
earning assets and the composite interest rate paid on all sources of funds.
The net interest margin for the year ended December 31, 2004, was 3.44%,
compared to 3.35% for the year ended December 31, 2003. The yield on earning
assets dropped 24 basis points to 5.87% in 2004.
Average Balances and an Analysis of Average Rates Earned and Paid
- -----------------------------------------------------------------
The following tables show average balances and interest income or interest
expense, with the resulting average yield or rate by category or average
earning asset or interest-bearing liability.
-13-
For the year ended December 31,
-----------------------------------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividend Cost Balance Dividend Cost Balance Dividend Cost
-----------------------------------------------------------------------------------------
ASSETS (Dollars in thousands)
- ------
Interest-earning assets (1)
Single-family loans $106,187 $ 6,219 5.86% $112,299 $ 7,450 6.63% $135,021 $ 10,353 7.67%
Multifamily loans 91,410 5,839 6.39 87,028 6,293 7.23 101,485 7,829 7.71
Commercial real estate loans 122,958 7,888 6.37 74,381 5,292 7.11 64,104 5,069 7.91
Construction loans 88,635 5,579 6.34 77,717 4,499 5.79 80,066 5,119 6.39
Consumer loans 32,016 2,254 7.06 39,592 2,787 7.04 56,030 4,101 7.32
Business loans 250,166 16,447 6.57 174,436 11,420 6.55 129,596 9,397 7.25
----------------------------------------------------------------------------------------
Total loans 691,372 44,226 6.40 565,453 37,741 6.67 566,302 41,868 7.39
----------------------------------------------------------------------------------------
Securities available-for-sale 155,563 6,692 4.30 184,558 9,182 4.98 147,625 8,939 6.06
Securities held-to-maturity 91,747 4,326 4.72 65,956 3,327 5.04 23,438 1,337 5.71
Daily interest-earning deposits 4,123 71 1.73 8,455 113 1.34 18,070 326 1.80
----------------------------------------------------------------------------------------
Total securities and interest-
earning deposits 251,433 11,089 4.41 258,969 12,622 4.87 189,133 10,602 5.61
----------------------------------------------------------------------------------------
Total interest-earning assets 942,805 55,315 5.87% 824,422 50,363 6.11% 755,435 52,470 6.95%
Noninterest-earning assets
Office properties and
equipment, net 11,117 8,806 8,605
Real estate, net 769 361 694
Other noninterest-
earning assets 33,976 16,189 7,121
----------------------------------------------------------------------------------------
Total assets $988,667 $849,778 $771,855
========================================================================================
LIABILITIES AND EQUITY
Interest-bearing liabilities
Savings accounts $ 14,895 $ 43 0.29% $ 11,828 $ 55 0.46% $ 11,324 $ 130 1.15%
Checking accounts 29,562 93 0.31 21,854 105 0.48 22,641 235 1.04
Money market accounts 145,626 1,872 1.29 113,263 1,499 1.32 107,363 2,293 2.14
Certificates of deposit 401,620 9,151 2.28 357,955 9,314 2.60 294,554 9,872 3.35
----------------------------------------------------------------------------------------
Total interest-bearing deposits 591,703 11,159 1.89 504,900 10,973 2.17 435,882 12,530 2.87
Other interest-bearing liabilities
FHLB advances 210,023 10,601 5.05 194,229 10,308 5.31 203,089 12,142 5.98
Other interest-bearing liabilities 41,511 1,159 2.79 45,360 1,472 3.24 44,415 1,774 4.00
----------------------------------------------------------------------------------------
Total interest-bearing liabilities 843,237 22,919 2.72% 744,489 22,753 3.06% 683,386 26,446 3.87%
----------------------------------------------------------------------------------------
Other liabilities 63,855 44,523 36,366
----------------------------------------------------------------------------------------
Total liabilities 907,092 789,012 719,752
Stockholders' equity 81,575 60,766 52,103
Total liabilities and
retained earnings $988,667 $849,778 $771,855
========================================================================================
Net interest income (2) $ 32,396 $ 27,610 $ 26,024
========================================================================================
Interest rate spread (3) 3.15% 3.05% 3.08%
Net interest margin (4) 3.44% 3.35% 3.44%
Average interest-earning assets
to average interest-bearing
liabilities 111.81% 110.74% 110.54%
- --------------------
(1) Does not include interest on loans 90 days or more past due.
(2) Interest and dividends on total interest-earning assets less interest on
total interest-bearing liabilities.
(3) Total interest-earning assets yield less total interest-bearing liabilities
cost.
(4) Net interest income as an annualized percentage of total interest-earning
assets.
-14-
Other Income
- ------------
Other income is derived from sources other than interest and fees on earning
assets. The Corporation's primary sources of other income are service charge
fees on deposit accounts, the accretion of cash surrender value of bank owned
life insurance ("BOLI"), gains on the sale of single-family residential loans,
gains on the sale of securities, and rental income, primarily on space at the
building that formerly served as the headquarters of Issaquah. Other income for
the year ending December 31, 2004, was $4.7 million, compared to $5.3 million
and $4.0 million for the same periods in 2003 and 2002, respectively. This
decrease was attributable primarily to a $627,000 decline in gain on sale of
loans and a $1.3 million decline in gain on sale of securities. Partially
offsetting these declines was an $654,000 increase in checking fees and a
$224,000 increase in other service charges. The lower gain on sale of loans
reflects a decrease in residential mortgage activity, especially refinancings.
The decrease in gain on sale of securities resulted primarily from an interest
rate environment that was stable for longer dated securities, but saw a
dramatic increase in short-term rates as the Fed began increasing its target
Fed funds rate in June 2004.
Other Expense
- -------------
Other expense represents costs not associated with deposits and other interest
bearing liabilities. It includes expenses associated with personnel, premises
and equipment, data processing, and other operations.
Other expense increased by $2.6 million to $20.3 million for the year ended
December 31, 2004, from $17.7 million and $16.3 million for 2003 and 2002,
respectively. The increase in expense was primarily due to costs associated
with the operations of the Issaquah Bank Division, which was acquired in June
2004. Salaries and employee benefits increased overall by $1.9 million to $11.5
million. The increase in expenses was offset by a decline in the payment of
prepayment fees to the Federal Home Loan Bank of Seattle, which were $26,000 in
2004, and $863,000 in 2003. Cascade also incurred $356,000 in acquisition
related expenses in 2004 in association with the merger with Issaquah.
A standard measurement used to calculate the overhead costs of financial
institutions is the efficiency ratio. The efficiency ratio is calculated by
dividing other expense by total revenue, which generally indicates how much an
institution spends to generate a dollar of revenue. The lower the efficiency
ratio, the more efficient the institution. For the years ending December 31,
2004, 2003, and 2002, the Corporation's efficiency ratio was 54.70%, 53.87%,
and 54.29%, respectively. Management continues to look for ways in which to
improve the efficiency ratio by increasing other income and net interest margin
while diligently controlling costs and maintaining high standards of service.
Liquidity Management
- --------------------
Liquidity is a term used to define the Corporation's ability to meet its
financial commitments. The Corporation is required by prudent business practice
and its regulators to maintain adequate levels of liquidity. The main liquidity
requirements are funding customer loan requests and deposit outflows of Cascade
Bank. Primary sources of liquidity are cash and cash equivalents, which include
highly liquid investments. At December 31, 2004, December 31, 2003, and
December 31, 2002, cash and cash equivalents totaled $13.0 million, $14.1
million, and $20.6 million, respectively. Another source of liquidity is the
Corporation's investment portfolio, which consists of investment grade
securities. These securities are of the highest credit quality and can be sold
or used as collateral to secure borrowings.
The primary source of borrowings is Federal Home Loan Bank of Seattle
(FHLB-Seattle) advances and repurchase agreements. At December 31, 2004,
$147.5 million of additional borrowing capacity remained under Cascade Bank's
existing credit line from the FHLB-Seattle based upon the total, which is 35%
of Cascade's assets. The use of this line of credit is subject to the
availability of eligible collateral, which includes residential mortgages,
investment grade securities, and commercial real estate mortgages. At December
31, 2004, Cascade had unencumbered eligible collateral of approximately $98.7
million to pledge against the line. In addition, Cascade Bank has the ability
to borrow reverse repurchase agreements. Under these agreements, borrowings are
collateralized with mortgage-backed securities or other investment securities.
The Bank has Fed funds borrowing lines with two of its larger correspondent
banks. Cascade used the line once to test the operational aspects of the
facility as part of our liquidity planning process. The Bank also opened a line
of credit with the Federal Reserve Bank of San Francisco. As of December 31,
2004, there were no outstanding balances in any of these lines.
Liquidity management is of critical importance to Cascade Bank in that it
significantly relies upon wholesale sources of funds (e.g. FHLB-Seattle
advances). While these sources have proven to be stable and reliable, an
interruption in the availability of these sources could have an adverse impact
on the operations of the Corporation.
Interest Rate Risk Management
- -----------------------------
The Corporation's results of operations are largely dependent upon its ability
to manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on the Corporation's
financial condition and results of operations.
The Corporation has taken steps to balance its sensitivity to changes in
interest rates by altering its asset and liability mix. The origination of
floating rate loans such as business, construction and other prime based loans
is emphasized. The vast majority of fixed rate loans have repricing periods
with a maximum of five years. The mix of floating and fixed rates assets is
designed to mitigate the impact of rate changes on the Corporation's net
interest income. Virtually all fixed rate residential loans with maturities
greater than five years are sold into the secondary market. Since most of
Cascade Bank's fixed rate loans do not have provisions for prepayment fees, a
drop in rates can precipitate a refinancing of Cascade Bank's assets.
-15-
Interest rate risk is monitored using several methodologies, principally
financial modeling. The earnings exposure to interest rate changes is evaluated
in the context of certain upward and downward interest rate changes occurring
instantaneously. At December 31, 2004, a 200 basis point increase in rates
would increase forecasted net interest income over a twelve-month period by
approximately 3.0%. A 200 basis point decrease in rates (although unlikely in
the current low interest rate environment) would lower net interest income by
11.9% according to the model, which slightly exceeds the 10% guideline
established by the Bank's Asset/Liability Management Policy.
The changes of the fair value of assets and liabilities and the resulting
impact on the fair value of equity are also modeled under different rate
scenarios. In the 200 basis point increase scenario, the fair value of equity
declines by $12.8 million or 11.6%.
The Bank uses interest rate swaps to manage its interest rate exposure.
The first swap effectively converts the junior subordinated debentures of
Capital Trust I, $10 million notional value, to a LIBOR based borrowing. The
second swap is a $25 million pay-fixed instrument used to effectively convert
floating rate debt to fixed rate and is accounted for as a cash flow hedge. The
third swap is also a $25 million pay-fixed swap that began as a fair value
hedge of investment securities but, due to a narrowing in swap spreads, lost
its "highly effective" status in that the correlation between the change in
value of the hedge and securities was not within our established parameters.
This hedge was terminated in the fourth quarter because it was ineffective. The
final swap is for $10 million and effectively converts a fixed rate CD into a
LIBOR-based liability.
The Corporation does not maintain a trading account for any class of
financial instrument. Moreover, the Corporation is not subject to foreign
currency exchange rate risk or commodity price risk.
The individual categories of assets and liabilities that are subject to
interest rate sensitivity as of December 31, 2004, are shown in the following
table.
<1 year 1-3 years 3-5 years 5-10 years 10 years Total Fair Value
Interest-Sensitive Assets -----------------------------------------------------------------------------------
- ------------------------- (Dollars in thousands)
Loans, excluding deferred
loan fees $405,847 $219,246 $169,300 $11,738 $ 593 $806,724 $818,230
Investments and other
interest earning assets 25,559 57,480 41,312 76,841 15,817 217,009 213,645
Interest-Sensitive Liabilities
- ------------------------------
Checking accounts $ 8,294 $ 15,833 $ 6,786 $ 6,107 $ 679 $ 37,699 $ 37,699
Money market accounts 34,396 65,667 28,142 25,328 2,814 156,347 156,347
Savings accounts 3,572 6,820 2,923 2,630 292 16,237 16,237
Certificates of deposit (1) 350,661 61,774 23,601 724 - 436,760 436,939
Borrowings 121,868 46,034 16,000 65,000 - 248,902 256,901
Junior subordinated
debentures payable (2) 10,299 - - 5,155 - 15,454 15,454
(1) Net of $131 mark-to-market on swap.
(2) Net of $(11) mark-to-market on swap (see note 7 to the Consolidated
Financial Statements for the year ended December 31, 2004).
Off-Balance Sheet Transactions: Credit Commitments
- --------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
The Bank underwrites its standby letters of credit using its policies and
procedures applicable to loans in general. Standby letters of credit are made
on an unsecured and secured basis. The Bank has not incurred any losses on its
commitments in 2004 or 2003.
A summary of the notional amount of the Bank's financial instruments with
off-balance sheet risk at December 31, 2004, follows:
THERE
(Dollars in thousands) <1 YEAR 1-3 YEARS 3-5 YEARS AFTER TOTAL
- -------------------------------------------------------------------------------
Commitments to extend credit $126,499 $30,079 $1,062 $33,207 $190,847
Standby letters of credit and
financial guarantees written 4,605 997 - - 5,602
Unused commitments on bankcards - - - 11,103 11,103
-----------------------------------------------
Total $131,104 $31,076 $1,062 $44,310 $207,552
===============================================
-16-
Contractual Obligations and Commitments
- ---------------------------------------
The following table sets forth the Corporation's long-term contractual
obligations:
PAYMENTS DUE PER PERIOD
THERE
(Dollars in thousands) <1 YEAR 1-3 YEARS 3-5 YEARS AFTER TOTAL
- -------------------------------------------------------------------------------
Certificates of deposit $114,828 $61,647 $23,471 $ 722 $200,668
Federal Home Loan Bank
Advances 49,000 45,000 41,000 65,000 200,000
Capital lease obligations 52 48 - - 100
Operating lease obligations 582 1,164 1,164 6,395 9,305
Junior subordinated debentures
Payable - - - 15,454 15,454
-----------------------------------------------
Total $164,462 $107,859 $65,635 $87,571 $425,527
===============================================
At December 31, 2004, the Corporation's long-term contractual obligations
related to debt totaled $215.5 million. See additional discussion under Note 7
and 8 to the Consolidated Financial Statements for the year ended December 31,
2004.
The Corporation also has operating leases comprised of leases for office
space.
Summation of Factors That May Affect Financial Condition and Future Results
- ---------------------------------------------------------------------------
Credit risk: The most significant risk that may impact Cascade Financial
Corporation would be a deterioration in the quality of the loan portfolio.
Cascade's loan growth has been focused on commercial lending. Historically
for the banking industry, commercial loans have a higher level of losses than
residential loans. The Corporation's ability to meet its profitability and
growth goals would be severely compromised with a large number of impaired
credits. In addition, the Corporation and its subsidiary, Cascade Bank, could
face regulatory restrictions on its activities.
Interest rate risk: While the Corporation actively manages its exposure
to changes in interest rates, volatile interest rates and/or changes in the
shape of the yield curve could have a meaningful impact on Cascade's net
income. Many of the assets and liabilities of the Corporation have embedded
options, which add another layer of complexity in its interest rate risk
practices.
Liquidity: Disruptions in the capital markets could have a major impact
on the Corporation's net income and balance sheet. As a user of Federal Home
Loan Bank advances, repurchase agreements and brokered CDs, interruption or
truncation of these sources of funds could force the Corporation to liquidate
assets at an inauspicious time or cease lending activity, which could adversely
affect customer relationships for many years.
Recently issued accounting standards: In October 2002, the Financial
Accounting Standards Board issued Financial Accounting Standard (FAS) No. 147,
Acquisitions of Certain Financial Institutions-an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9. This Statement addresses FAS No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17, When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method, provided interpretive
guidance on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
this Statement removes acquisitions of financial institutions from the scope
of both Statement 72 and Interpretation 9 and requires that those transactions
be accounted for in accordance with FASB Statements No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition,
this Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship, intangible assets, and credit cardholder
intangible assets. This statement was adopted in December 2002 and has not had
an effect on the results of the Corporation's operations or financial position
because there has been no impairment or disposal of assets covered by this
standard.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, addressing consolidation by business enterprises of
certain variable interest entities. Under the provisions of Interpretation No.
46, an enterprise must consolidate a variable interest entity if that
enterprise will absorb a majority of the entity's expected losses, receive a
majority of the entity's residual returns, or both, regardless of the
enterprise's direct or indirect ability to make decisions about the entity's
activities through voting or similar rights. Interpretation No. 46 applies
immediately to interests in variable interest entities created or acquired
after January 31, 2003, and to the first fiscal year or interim period
beginning after June 15, 2003 for interests in variable interest entities
acquired before February 1, 2003. Application of this Interpretation has
required the Corporation's equity interest in Cascade Capital Trust I be
included in the consolidated balance sheet. Previously this interest had been
eliminated in consolidation.
In December 2004 the FASB issued No. 123(R), Shared Based Payment, which is
a revision of No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion 25, which the Corporation had used to report
stock options granted to employees and directors. Statement 123(R) requires
all share-based payments to employees, including stock options, be recognized
in the income statement based on their fair values. The Corporation will adopt
Statement 123(R) effective July 1, 2005.
FORM 10-K
- ---------
A copy of the Corporation's annual report on Form 10-K, which is filed with
the Securities and Exchange Commission under the Securities Exchange Act of
1934, is available to shareholders, at no charge, upon written request to the
Secretary of Cascade Financial Corporation at 2828 Colby Avenue, Everett,
Washington 98201.
-17-
Report of Independent Registered Public Accounting Firm
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheet of Cascade
Financial Corporation and subsidiaries (Corporation) as of December 31, 2004,
and the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the year ended December 31, 2004.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board of the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cascade
Financial Corporation and subsidiaries as of December 31, 2004, and the results
of their operations and their cash flows for the year ended December 31, 2004,
in conformity with accounting principles generally accepted in the United
States of America.
/s/ Moss Adams LLP
Everett, Washington
February 28, 2005
-18-
KPMG LLP
Suite 900
801 Second Avenue
Seattle, WA 98104
Report of Independent Registered Public Accounting Firm
The Board of Directors
Cascade Financial Corporation:
We have audited the accompanying consolidated balance sheet of Cascade
Financial Corporation and subsidiaries (Corporation) as of December 31, 2003,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2003. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cascade Financial
Corporation and subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Seattle, Washington
February 20, 2004
KPMG LLP, a limited liability partnership, is the U.S.
member firm of KPMG International, a Swiss cooperative
-19-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
Years ended December 31, 2004, and 2003
DECEMBER 31,
(Dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------
ASSETS
Cash on hand and in banks $ 11,692 $ 13,011
Interest-bearing deposits in other financial
institutions 1,337 1,060
Securities available-for-sale 124,276 189,747
Securities held-to-maturity 91,339 86,719
Loans 804,029 574,805
Allowance for loan losses (9,563) (7,711)
-----------------------
Loans, net 794,466 567,094
Goodwill and intangibles, net 26,292 80
Premises and equipment, net 12,824 8,587
Cash surrender value of bank-owned life insurance 16,650 11,162
Accrued interest receivable and other assets 10,079 7,760
------------------------
Total assets $ 1,088,955 $ 885,220
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 721,908 $ 564,314
Federal Home Loan Bank advances 228,000 200,000
Securities sold under agreements to repurchase 20,902 39,911
Junior subordinated debentures payable 15,454 10,212
Advance payments by borrowers for taxes and insurance 677 1,057
Dividends payable 765 577
Accrued interest payable, expenses and other
liabilities 4,959 4,515
Deferred federal income taxes 40 677
------------------------
Total liabilities 992,705 821,263
------------------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
500,000 shares; no shares issued or outstanding - -
Common stock, $.01 par value. Authorized
25,000,000 shares; issued and outstanding
9,559,822 shares at December 31, 2004, and
8,241,288 shares at December 31, 2003 96 82
Additional paid-in capital 37,326 11,921
Retained earnings, substantially restricted 59,975 52,109
Accumulated other comprehensive income (loss) (1,147) (155)
------------------------
Total stockholders' equity 96,250 63,957
------------------------
Total liabilities and stockholders' equity $ 1,088,955 $ 885,220
========================
(See accompanying notes to consolidated financial statements.)
-20-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2004, 2003, and 2002
YEAR ENDED
DECEMBER 31,
(Dollars in thousands, except share amounts) 2004 2003 2002
- -------------------------------------------------------------------------------
Interest income:
Loans $ 44,226 $ 37,741 $ 41,868
Securities held-to-maturity 4,292 3,327 1,337
Securities available-for-sale 6,291 8,391 8,109
FHLB stock dividends 436 791 831
Interest-bearing deposits 71 113 325
--------------------------------
Total interest income 55,316 50,363 52,470
--------------------------------
Interest expense:
Deposits 11,159 10,973 12,530
FHLB advances 10,601 10,308 12,142
Securities sold under agreements
to repurchase 436 438 626
Junior subordinated debentures payable 723 1,034 1,148
--------------------------------
Total interest expense 22,919 22,753 26,446
--------------------------------
Net interest income 32,397 27,610 26,024
Provision for loan losses 675 1,275 1,895
--------------------------------
Net interest income after provision
for loan losses 31,722 26,335 24,129
--------------------------------
Other income:
Gain on sale of loans held-for-sale 228 855 697
Gain on sale of securities available-for-sale 510 1,790 1,076
Gain on sale of REO 82 48 427
Checking service fees 2,069 1,415 1,007
Other service fees 704 480 602
BOLI 566 598 86
Other 588 120 144
--------------------------------
Total other income 4,747 5,306 4,039
--------------------------------
Other expenses:
Salaries and employee benefits 11,483 9,617 8,793
Occupancy 2,745 2,551 2,287
Data processing 448 284 259
Marketing 547 461 455
Prepayment penalty FHLB 26 863 648
Merger expense 356 - -
Other 4,712 3,957 3,879
--------------------------------
Total other expenses 20,317 17,733 16,321
--------------------------------
Income before provision for federal
income taxes 16,152 13,908 11,847
Provision for federal income taxes 5,367 4,309 3,775
--------------------------------
Net income $ 10,785 $ 9,599 $ 8,072
================================
Net income per common share, basic $ 1.20 $ 1.17 $ 1.01
Weighted average number of shares
outstanding, basic 8,952,493 8,184,455 7,997,713
Net income per share, diluted $ 1.16 $ 1.13 $ 0.98
Weighted average number of shares
outstanding, diluted 9,276,232 8,461,503 8,261,448
(See accompanying notes to consolidated financial statements.)
-21-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31, 2004, 2003, and 2002
ACCUMULATED
OTHER TOTAL
ADDITIONAL COMPREHENSIVE STOCK-
(Dollars in thousands, COMMON PAID-IN RETAINED INCOME HOLDERS'
except share amounts) SHARES STOCK CAPITAL EARNINGS (LOSS), NET EQUITY
- ------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 7,751,144 $78 $10,254 $37,192 $ 153 $47,677
Cash dividends - - - (646) - (646)
Options exercised 405,675 4 1,060 - - 1,064
Net income - - - 8,072 - 8,072
Shares repurchased (51,669) (1) (46) (328) - (375)
Other comprehensive income,
net of tax of $437 - - - - 848 848
-------------------------------------------------------------------------
Balances at December 31, 2002 8,105,150 81 11,268 44,290 1,001 56,640
Cash dividends - - - (1,692) - (1,692)
Options exercised 144,051 1 661 - - 662
Net income - - - 9,599 - 9,599
Shares repurchased (7,913) - (8) (88) - (96)
Other comprehensive loss,
net of tax of $(596) - - - - (1,156) (1,156)
-------------------------------------------------------------------------
Balances at December 31, 2003 8,241,288 82 11,921 52,109 (155) 63,957
Cash dividends - - - (2,777) - (2,777)
Options exercised 63,865 1 634 - - 635
Net income - - - 10,785 - 10,785
Shares repurchased (8,754) - (8) (142) - (150)
Other comprehensive loss,
net of tax of $(537) - - - - (992) (992)
Issaquah Bank merger 1,263,423 13 24,779 - - 24,792
-------------------------------------------------------------------------
Balances at December 31, 2004 9,559,822 $96 $37,326 $59,975 $(1,147) $96,250
Comprehensive Income
- --------------------
YEARS ENDED
DECEMBER 31,
2004 2003 2002
---------------------------
Net income $10,785 $9,599 $8,072
Increase in unrealized (losses)
gains on securities available
for sale, net of tax expense (benefit)
of $(364), $13, and $803. (655) 25 1,558
Less reclassification adjustment for gains
included in net income, net of tax
benefit of $(173), $(609), and $(366) (337) (1,181) (710)
----------------------------
Comprehensive Income $ 9,793 $8,443 $8,920
============================
(See accompanying notes to consolidated financial statements.)
-22-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
YEAR ENDED
DECEMBER 31,
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 10,785 $ 9,599 $ 8,072
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment 2,725 1,454 1,218
Provision for losses on loans 675 1,275 1,895
Increase in cash surrender value of bank owned life insurance (488) (542) (80)
Amortization of retained servicing rights 40 230 187
Amortization of core deposit intangible 70 - -
Deferred federal income taxes (100) (236) (205)
Deferred loan fees, net of amortization 516 (19) (304)
Net gain on sales of securities available-for-sale (510) (1,790) (1,076)
Gain/loss on sales of premises and equipment 6 - (1)
Net gain on sale of real estate owned, investment property
and other repossessed assets (82) (48) (427)
Federal Home Loan Bank stock dividend received (436) (791) (831)
Net increase (decrease) in accrued interest receivable
and other assets (under) over accrued interest payable,
expenses and other liabilities 7,172 (1,154) 2,592
-------------------------------------
Net cash provided by operating activities 20,373 7,978 11,040
-------------------------------------
Cash flows from investing activities:
Loans originated, net of principal repayments (230,348) (22,239) 26,413
Purchases of securities held-to-maturity (35,436) (105,085) (66,408)
Proceeds from sales/calls on securities held-to-maturity 26,095 54,913 21,511
Proceeds from sale of investment property - - 956
Principal repayments on securities held-to-maturity 4,876 12,841 1,808
Principal repayments on securities available-for-sale 31,471 96,515 34,460
Purchases of securities available-for-sale (93,167) (337,004) (207,201)
Proceeds from sales of securities available-for-sale 127,261 211,470 166,374
Purchases of premises and equipment (6,974) (799) (1,873)
Proceeds from sales/retirements of premises and equipment 5 19 15
Proceeds from loan participations sold 446 - -
Cash (used for)/provided by acquisition (9,546) - -
Purchase of bank owned life insurance (5,000) - (10,000)
-------------------------------------
Net cash used in investing activities (190,317) (89,369) (33,945)
-------------------------------------
Subtotal, carried forward $(169,944) $(81,391) $(22,905)
-------------------------------------
(See accompanying notes to consolidated financial statements.)
-23-
Consolidated Statements of Cash Flows, Continued
YEAR ENDED
DECEMBER 31,
(Dollars in thousands) 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
Subtotal, brought forward $(169,944) $(81,391) $(22,905)
-------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 436 547 995
Dividends paid (2,589) (1,440) (322)
Repurchase of common stock (150) (96) (375)
Net increase in deposits 157,594 54,464 89,870
Net increase (decrease) in Federal Home Loan Bank advances 28,000 2,500 (29,000)
Net (decrease) increase in securities sold under agreements
to repurchase (19,009) 19,342 (29,223)
Net (decrease) in advance payments by borrowers
for taxes and insurance (380) (450) (67)
Proceeds from junior subordinated debentures payable 5,000 - -
-------------------------------------
Net cash provided by financing activities 168,902 74,867 31,878
-------------------------------------
Net increase (decrease) in cash and cash equivalents (1,042) (6,524) 8,973
Cash and cash equivalents at beginning of period 14,071 20,595 11,622
-------------------------------------
Cash and cash equivalents at end of period $ 13,029 $ 14,071 $ 20,595
=====================================
Supplemental disclosures of cash flow information -
Cash paid during the period for:
Interest $ 24,083 $ 23,238 $ 26,453
Federal income taxes 5,802 4,350 3,310
Supplemental schedule of non-cash operating activities:
Retirement of treasury stock in retained earnings - (1,237) -
Supplemental schedule of non-cash investing activities:
Net mortgage loans transferred to real estate owned 1,339 566 1,545
Mark-to-market on securities available-for-sale 1,529 1,752 (1,285)
Tax benefit of non-qualified options exercised 199 115 69
Issaquah Bank merger 24,792 - -
(See accompanying notes to consolidated financial statements below.)
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(1) Summary of Significant Accounting Policies
- ----------------------------------------------
The accounting and financial reporting policies of Cascade Financial
Corporation and subsidiaries (the "Corporation") conform to accounting
principles generally accepted in the United States of America and to general
practice within the financial institutions industry, where applicable. In
preparing the consolidated financial statements, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense. Actual results could
differ from those estimates. 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.
The following is a description of the more significant policies that the
Corporation follows in preparing and presenting its consolidated financial
statements.
-24-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(a) Basis of Presentation
- -------------------------
The consolidated financial statements include the accounts of the Corporation,
its subsidiaries, Cascade Bank (the "Bank") and the Bank's subsidiary Cascade
Investment Services, Inc. All significant intercompany balances and
transactions have been eliminated in the consolidation. In January 2003, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities and, in December 2003,
issued Revised Interpretation No. 46 (FIN 46R), Consolidation of Variable
Interest Entities, which replaced FIN 46. Historically, issuer trusts that
issued trust preferred securities have been consolidated by their parent
companies and trust preferred securities have been treated as eligible for Tier
1 capital treatment by bank holding companies under Federal Reserve Board (FRB)
rules and regulations relating to minority interests in equity accounts of
consolidated subsidiaries.
Applying the provisions of FIN 46R, we deconsolidated our issuer trust as
of December 31, 2003, and all periods in the consolidated financial statements
have been restated to reflect this change. In a Supervisory Letter dated
July 2, 2003, the FRB stated that trust preferred securities continue to
qualify as Tier 1 capital until notice is given to the contrary. The FRB will
review the regulatory implications of any accounting treatment changes and will
provide further guidance if necessary or warranted.
(b) Cash Equivalents
- --------------------
The Corporation considers all interest-bearing deposits and short-term highly
liquid investment securities with an original maturity of three months or less
to be cash equivalents.
(c) Interest Bearing Deposits with Financial Institutions
- ---------------------------------------------------------
Interest bearing deposits with other financial institutions include
interest-bearing deposits at various financial institutions including the
Federal Home Loan Bank. At times throughout the year, the Bank has balances
that exceed FDIC insurance limits.
(d) Federal Home Loan Bank (FHLB) Stock
- ---------------------------------------
As a member of the FHLB system, the Bank is required to maintain a minimum
level of investment in FHLB stock based on specified percentages of its
outstanding FHLB advances. The Bank's investment in FHLB stock is carried at
par value ($100 per share), which reasonably approximates its fair value. The
Bank may request redemption at par value of any stock in excess of the amount
the Bank is required to hold. Stock redemptions are at the discretion of the
FHLB. During 2002, the FHLB revised its capital structure from the issuance of
one class of stock to two, B (1) and B (2) stock. B (1) stock can be sold back
to the FHLB at cost, but is restricted as to purchase, sale and redemption.
Class B (2) is not a required investment for institutions and is not restricted
to purchase and sale, but has the same redemption restrictions as class B (1)
stock. Included in the balance sheet as of December 31, 2004, the Bank has
$11,872 and $0 of class B (1) and B (2) stock, respectively.
(e) Transfer of Financial Assets
- --------------------------------
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
(f) Mortgage Servicing Rights
- -----------------------------
Servicing assets are recognized when rights are acquired through the sale of
mortgage loans. Capitalized servicing rights are reported in other assets.
Mortgage loans serviced for others include whole loans sold. Loans being
serviced totaled $9.0 million and $16.4 million at December 31, 2004, and
2003, respectively.
(g) Marketing Costs
- -------------------
The Bank expenses most marketing costs as they are incurred but some marketing
costs are capitalized and amortized over the useful life of the expenditure.
Marketing expense was $547, $461 and $455 for the years ended December 31,
2004, 2003, and 2002, respectively.
(h) Comprehensive Income
- ------------------------
Comprehensive income is comprised of net income and other comprehensive income.
Other comprehensive income includes items previously recorded directly to
equity, such as unrealized gains and losses on securities available-for-sale
and certain derivative instruments. Comprehensive income is presented in the
consolidated statement of shareholders' equity.
-25-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(i) Segment Reporting
- ---------------------
The Corporation's sole operating subsidiary is Cascade Bank, which is managed
along five major lines of business: business banking, retail banking,
construction lending, income property lending and residential lending. The
Bank's operations are solely in the financial services industry and include
providing to its customers traditional banking and other financial services.
The administrative group, although not considered a line of business, is
responsible for the management of investments, interest rate risk, marketing,
data processing and regulatory and stockholder reporting. The Bank operates
primarily in the Puget Sound geographical region of Washington State. The
financial performance of these business lines is measured by the Corporation's
profitability reporting processes, which utilize various management accounting
techniques to ensure that each business line's financial results reflect the
underlying performance of that business.
(j) Earnings Per Share (EPS) Data
- ---------------------------------
The Corporation displays basic and diluted EPS in the consolidated statement of
income. Basic EPS is computed by dividing net income by the weighted average
number of shares outstanding during the year. Diluted EPS is computed by
dividing net income by diluted weighted average shares outstanding, which
includes common stock equivalent shares outstanding using the treasury stock
method, unless such shares are anti-dilutive. Common stock equivalents include
stock options.
(k) Goodwill and Other Intangible Assets
- ----------------------------------------
Goodwill and other intangible assets represent the excess of the purchase price
over the fair value of net assets acquired by the Corporation. The excess cost
over fair value of net assets acquired consists mainly of goodwill and core
deposit premiums. Core deposit intangibles are amortized on a straight-line
basis over 8 years. Intangibles are evaluated periodically and at least
annually, for impairment.
Goodwill and other intangible assets consisted of the following at December
31, 2004, and 2003:
GROSS CARRYING AMOUNT
----------------------------
Intangible assets carrying value 2004 2003
- --------------------------------------------------------------------------
Core deposit intangible, net $ 1,057 $ -
Goodwill 25,195 -
Mortgage servicing rights, net 40 80
-----------------------------
Total $ 26,292 $ 80
=============================
At December 31, 2004, and 2003, the Company had $70 and $0 of accumulated
amortization related to core deposit intangibles. The Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, and
accordingly no longer amortizes goodwill.
Amortization and write-downs of intangible assets for 2004, and 2003, was
as follows:
AMORTIZATION AND
WRITE-DOWN
YEARS ENDED DECEMBER 31,
------------------------
Intangible assets amortization and impairment 2004 2003
- -------------------------------------------------------------------------------
Core deposit intangible $ 70 $ -
Mortgage servicing rights 40 230
------------------------
Total $ 110 $ 230
========================
Forecasted existing intangible asset amortization for the next five years is
as follows:
Estimated amortization expense
- ----------------------------------------------------------------
For year ended 12/31/05 $ 181
For year ended 12/31/06 141
For year ended 12/31/07 141
For year ended 12/31/08 141
For year ended 12/31/09 141
-26-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(l) Loans
- ---------
All of the Corporation's loans are located in Washington State, primarily
in the Puget Sound region. At December 31, 2004, the Corporation's loans were
classified as one-to-four-family residences (12%), multifamily residences
(11%), real estate construction (18%), business assets (34%), consumer assets
(4%), and commercial real estate properties (21%). Accordingly, the ultimate
collectibility of the Corporation's loan portfolio is susceptible to changes in
the economic and real estate market conditions in the Puget Sound region.
Business loans comprise 34% of the total loan portfolio. Most of the
business loans are secured with collateral such as commercial property,
business inventories, commercial equipment and personal property of the
borrowers and/or guarantors. At December 31, 2004, $22.5 million in
commercial loans were unsecured. Home equity loans and lines of credit account
for the majority of the installment loan portfolio.
Real estate loans originated by the Corporation are generally secured by
no less than 80% of the lesser of the appraised value or purchase price of the
underlying property. The Corporation currently requires first mortgage,
residential customers to obtain private mortgage insurance on all loans above
an 80% loan-to-value ratio. Loans are stated at principal amounts outstanding,
net of deferred loan fees and costs.
Interest Income
- ---------------
Interest is accrued only if deemed collectible. Accrual of interest income is
generally discontinued when a loan becomes 90 days past due and accrued
interest amounts are reversed. Once interest has been paid to date or
management considers the loan to be fully collectible, it is returned to
accrual status.
Loan origination fees and certain direct origination costs are deferred
and amortized as an adjustment of the loans' yields over their contractual
lives using the effective interest method. In the event loans are sold, the
remaining net deferred loan origination fees or costs are recognized as a
component of the gains or losses on the sale of loans. When portfolio loans
pay off before their contractual maturity, the remaining deferred fees or costs
are recognized as interest income or expense.
Loan commitment fees are deferred until loans are funded, at which time
they are amortized into interest income using the effective interest method.
If the commitment period expires, the fees are recognized as service charges.
Impairment of Loans and Allowance for Loan Losses
- -------------------------------------------------
An allowance for loan losses is maintained at a level believed sufficient to
provide for losses based on management's evaluation of known and inherent risks
in the loan portfolio. This evaluation includes analyses of the fair value of
the financial condition of the borrower, collateral securing selected loans,
consideration of historical loss experience and management's projection of
trends affecting credit quality. Interest income is normally recognized on the
accrual basis; however, if a loan is impaired then interest income is recorded
upon the receipt of cash. The difference between interest income recognized on
the accrual basis and cash basis is not significant.
The Corporation reviews all single-family loans, all consumer loans,
multifamily and commercial real estate loans with outstanding principal
balances under $1.0 million for impairment as smaller balance homogeneous loan
groups. The Corporation considers a loan to be impaired when it becomes
nonaccrual; if it is a multifamily or commercial real estate loan less than 90
days delinquent and management believes that the borrower may be experiencing
financial difficulty based on indicators such as an inconsistent payment
pattern, low debt coverage ratio, high loan-to-value ratio; or if it is a
restructured debt. The Corporation bases the measurement of loan impairment for
all loans on the fair value of the loan's underlying collateral. If the
recorded investment in a loan exceeds the measure of impairment, the
Corporation recognizes the impairment by creating a valuation allowance with a
corresponding charge to the provision for loan losses.
Management believes the allowance for losses on loans is adequate. While
management uses available information to recognize losses on these assets,
future additions to the allowances will be necessary based on changes in
economic conditions, particularly in the western Washington region. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowances for
losses on loans. Such agencies may require the Corporation to recognize
additions to the allowances, or change valuations, based on their judgments
about information available to them at the time of their examinations.
(m) Sales of Loans
- ------------------
Any loan that management determines will not be held-to-maturity is classified
as held-for-sale at the time of origination. Loans originated and designated as
held-for-sale are carried at cost. Gains or losses on the sale of such loans
are based on the specific identification method. The Bank held no loans for
sale at December 31, 2004, or 2003. All loans are sold without recourse on a
best efforts servicing released basis.
-27-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(n) Securities
- --------------
Debt and equity securities, including MBS, are classified as trading,
available-for-sale, or held-to-maturity. Securities classified as trading are
carried at fair value with unrealized gains and losses reported in earnings.
Securities available-for-sale are carried at fair value, with unrealized gains
and losses reported as a component of other comprehensive income. Investment
securities held-to-maturity are carried at amortized cost or principal balance,
adjusted for amortization of premiums and accretion of discounts. Amortization
of premiums and accretion of discounts are calculated using a method that
approximates the level yield method. The Corporation has the ability, and it is
management's intention, to hold such securities until maturity. Investments
with fair values that are less than amortized cost are considered impaired.
Impairment may result from either a decline in the financial condition of the
issuing entity or, in the case of fixed interest rate investments, from rising
interest rates. At each financial statement date, management assesses each
investment to determine if impaired investments are temporarily impaired or if
the impairment is other-than-temporary based upon the positive and negative
evidence available. Evidence evaluated includes, but is not limited to,
industry analyst reports, credit market conditions, and interest rate trends.
If negative evidence outweighs positive evidence that the carrying amount is
recoverable within a reasonable period of time, the impairment is deemed to be
other-than-temporary and the security is written down in the period in which
such determination is made.
(o) Real Estate Owned
- ---------------------
Real estate owned includes real estate acquired in settlement of loans. Real
estate owned is recorded at the lower of cost or fair value, based upon the
most recent appraisal, less estimated costs to sell. Development, improvement
and direct holding costs related to the property are capitalized. Any loss
recorded at the time a foreclosure occurs is classified as a charge-off against
the allowance for loan losses. Losses that result from the ongoing periodic
valuation of these properties are charged to operations in the period in which
they are identified. Real estate owned at December 31, 2004, and December 31,
2003, was $868, and $474, respectively, which is included in other assets.
(p) Premises and Equipment
- --------------------------
Premises and equipment are stated at cost less accumulated depreciation.
Straight-line depreciation is provided over the estimated useful lives of the
respective assets. Leasehold improvements are amortized over the estimated
useful lives of the improvements, or terms of the related leases, whichever
is shorter.
(q) Federal Income Taxes
- ------------------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases using the asset and liability method. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
(r) Stock-Based Compensation
- ----------------------------
The Corporation measures its employee stock-based compensation arrangements
using the provisions outlined in Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, which is an intrinsic value-based
method of recognizing compensation costs. As none of the Corporation's stock
options have an intrinsic value at grant date, no compensation cost has been
recognized for its stock option plans.
The Corporation applies Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, in accounting for its stock option
plans. Had compensation cost on the fair value at the grant dates for the
Corporation's stock option plan been determined consistent with the Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation," as amended, the Corporation's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
-28-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
YEAR ENDED
DECEMBER 31,
2004 2003 2002
--------------------------
Net income
As reported $ 10,785 $ 9,599 $ 8,072
Less: SFAS 123 compensation costs 183 140 49
--------------------------
Pro forma $ 10,602 $ 9,459 $ 8,023
==========================
Net income per common share
Basic
As reported $ 1.20 $ 1.17 $ 1.01
Pro forma 1.18 1.16 1.00
Diluted
As reported $ 1.16 $ 1.13 $ 0.98
Pro forma 1.14 1.12 0.97
The fair value of options granted under the Corporation's stock option plan
was $5.36, $4.22, and $3.31, respectively for the years ended December 31,
2004, December 31, 2003, and December 31, 2002. The fair value is estimated on
the date of grant using the Black-Scholes Model. The following weighted average
assumptions were used for December 31, 2004, December 31, 2003, and December
31, 2002: risk-free interest rate of 2.25%, 1.00%, and 1.25%, an expected life
of eight years, cash dividends of $0.32 in 2004, cash dividends of $0.28 in
2003, and no cash dividends in 2002, and a volatility factor of 24%.
Beginning July 1, 2005, the Corporation shall begin accounting for stock
options as required by SFAS 123R. The fair value of the options and all other
equity-based compensation shall be considered a compensation expense at the
time of vesting.
(s) Interest Rate Swap Agreements
- ---------------------------------
For asset/liability management purposes, the Corporation uses interest rate
swap agreements to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Interest rate swaps are
contracts in which a series of interest rate flows are exchanged over a
prescribed period. The notional amount on which the interest payments are
based is not exchanged. Such derivatives are linked to specific assets or
liabilities, and have high correlation between the contract and the underlying
item being hedged, both at inception and throughout the hedge period.
The Corporation utilizes interest rate swap agreements to convert a portion
of its variable-rate debt to a fixed rate (cash flow hedge), or to convert a
portion of its fixed-rate assets to a variable rate (fair value hedge).
Under SFAS No. 133, the gain or loss on a swap designated and qualifying as
a fair value hedging instrument, as well as the offsetting gain or loss on the
hedged item attributable to the risk being hedged, is recognized currently in
earnings in the same accounting period. The effective portion of the gain or
loss on a swap designated and qualifying as a cash flow hedging instrument is
reported as a component of other comprehensive income. The ineffective portion
of the gain or loss on the swap instrument, if any, is recognized currently in
earnings.
Interest rate derivative financial instruments receive hedge accounting
treatment only if they are designated as a hedge and are expected to be, and
are, effective in substantially reducing interest rate risk arising from the
assets and liabilities. Those swaps that do not meet the hedging criteria
discussed below would be recorded at fair value with changes in fair value
recorded in income. Swaps must meet specific effectiveness tests (e.g., over
time the change in their fair values due to the designated hedge risk must be
within 80 to 125 percent of the opposite change in the fair values of the
hedged assets or liabilities). If periodic assessment indicates derivatives no
longer provide an effective hedge, the derivatives contracts would be closed
out and settled or mark- to-market through income.
Beginning January 1, 2001, in accordance with SFAS No. 133, hedges of
variable-rate debt are accounted for as cash flow hedges, with changes in fair
value recorded in derivative assets or liabilities and other comprehensive
income. The net settlement (upon close out or termination) that offsets changes
in the value of the hedged debt is deferred and amortized into net interest
income over the life of the hedged debt. Hedges of fixed-rate assets are
accounted for as fair value hedges, with changes in fair value recorded in
derivative assets or liabilities and interest income. The net settlement
(upon close out or termination) that offsets changes in the value of the
assets adjusts the basis of the assets and is deferred and amortized to
interest income over the life of the assets. The portion, if any, of the net
settlement amount that did not offset changes in the value of the hedged asset
or liability is recognized immediately in noninterest income.
Cash flows resulting from the derivative financial instruments that are
accounted for as hedges of assets and liabilities are classified in the cash
flow statement in the same category as the cash flows of the items being
hedged.
-29-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(t) Reclassifications
- ---------------------
Certain balances have been reclassified to conform to the 2004 presentation.
(u) Recent Accounting Pronouncements
- ------------------------------------
On December 16, 2004, FASB issued Statement No. 123 (revised 2004), Share Based
Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123 (R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement 123 (R) is
similar to the approach described in Statement No. 123. However, Statement 123
(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
Statement 123 (R) must be adopted no later than July 1, 2005, and we expect
to adopt the Statement on that date. As permitted by Statement 123, the
Corporation currently accounts for share-based payments to employees using the
intrinsic value method as detailed in Opinion 25 and, as such, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123 (R)'s fair value method will have an impact on our
results of operations, although it will have no impact on our overall financial
position. The impact of adoption of Statement 123 (R) cannot be predicted at
this time because it will depend on levels of share-based payments granted in
the future. However, had we adopted Statement 123 (R) in prior periods, the
impact of the standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income and earnings per share
discussed above.
(2) Restricted Assets
- ---------------------
Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances as either cash on hand, in the vault or on deposit
with the Federal Reserve Bank. The minimum reserve balance as of December 31,
2004, and 2003, was approximately $2,821 and $290 respectively.
(3) Securities
- --------------
A summary of securities at December 31, 2004, and December 31, 2003, follows:
DECEMBER 31, 2004
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS GAINS LOSSES LOSSES
AMORTIZED LESS THAN MORE THAN LESS THAN MORE THAN FAIR
COST 1 YEAR 1 YEAR 1 YEAR 1 YEAR VALUE
----------------------------------------------------------------------------
Securities available-for-sale
MBS $ 43,208 $ 50 $ 20 $ 544 $ 212 $ 42,522
Agency notes 70,910 18 - 652 394 69,882
FHLB Stock 11,872 - - - - 11,872
----------------------------------------------------------------------------
$125,990 $ 68 $ 20 $1,196 $ 606 $124,276
============================================================================
DECEMBER 31, 2004
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS GAINS LOSSES LOSSES
AMORTIZED LESS THAN MORE THAN LESS THAN MORE THAN FAIR
COST 1 YEAR 1 YEAR 1 YEAR 1 YEAR VALUE
----------------------------------------------------------------------------
Securities held-to-maturity
MBS $ 25,083 $ - $ 30 $ 345 $ 184 $ 24,584
Agency notes 65,791 21 - 367 939 64,506
Corporate/other 465 - - - - 465
----------------------------------------------------------------------------
$ 91,339 $ 21 $ 30 $ 712 $1,123 $ 89,555
============================================================================
-30-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
DECEMBER 31, 2003
--------------------------------------
GROSS GROSS
AMOR- UNREAL- UNREAL-
TIZED IZED IZED FAIR
COST GAIN LOSSES VALUE
--------------------------------------
Securities available-for-sale
MBS $ 70,200 $636 $313 $70,523
Agency notes 99,677 218 655 99,240
FHLB stock 14,741 - - 14,741
Corporate/other 5,363 - 120 5,243
--------------------------------------
$ 189,981 $854 $1,088 $189,747
======================================
Securities held-to-maturity
MBS $ 12,588 $ 63 $ 323 $ 12,328
Agency notes 73,821 49 1,161 72,709
Corporate/other 310 - 3 307
--------------------------------------
$ 86,719 $112 $1,487 $ 85,344
======================================
At December 31, 2004, Cascade had four securities with a gross unrealized loss
totaling $606 in our available-for-sale portfolio with a fair value of $14.4
million that had an unrealized loss for greater than one year and six
held-to-maturity securities with a gross unrealized loss totaling $1.1 million
with a fair value of $27.0 million that have had an unrealized loss for more
than one year. The majority of the impairment on available-for-sale securities
was in the Agency Notes category, which accounted for 65% of the total
impairment. As of December 31, 2004, the Bank had four available-for-sale and
six held-to-maturity securities included in the temporarily impaired report,
compared to twelve available-for-sale and six held-to-maturity with unrealized
gains. The temporary impairment was less than 1% of the total book value of
investments. Temporarily impaired securities are a result of market value
changes and are expected to regain the lost value with market shifts;
other-than-temporarily impaired securities are a result of contractual failure
by the issuer and are not expected to rebound and are considered not
collectable. The Bank had no securities with other-than-temporary impairments.
Certain investment securities shown above currently have fair values less
than amortized cost and therefore contain unrealized losses. The Corporation
has evaluated these securities and has determined that the decline in value is
temporary and is related to the change in market interest rates since purchase.
All are rated AAA by at least one major rating agency. The decline in value is
not related to any company or industry specific event. The Corporation
anticipates full recovery of amortized cost with respect to these securities at
maturity or sooner in the event of a more favorable market interest rate
environment.
As of December 31, 2004, and 2003, the Corporation maintained 97,501 and
89,722 shares, respectively, of $100 par value FHLB stock.
Accrued interest receivable on securities and interest-bearing deposits
was $1,728 and $2,445 at December 31, 2004, and 2003, respectively.
Proceeds from the sale of securities available-for-sale including calls
on securities held-to-maturity and gross realized gains and losses are
summarized as follows for the year ended December 31, 2004, 2003, and 2002.
PROCEEDS GAINS LOSSES
------------------------------------
Year ended December 31, 2004 $ 153,356 $ 510 $ -
Year ended December 31, 2003 266,383 1,790 -
Year ended December 31, 2002 187,885 1,076 -
The following table shows the contractual maturities of the Corporation's
securities available-for-sale at December 31, 2004:
WITHIN ONE OVER ONE TO OVER FIVE TO OVER TEN
YEAR FIVE YEARS TEN YEARS YEARS TOTAL
------------------------------------------------------------------
Amortized Cost
MBS $15,962 $25,028 $ 2,218 $ - $ 43,208
Agency notes 86 11,000 43,937 15,887 70,910
FHLB stock 11,872 - - - 11,872
----------------------------------------------------------------
Total amortized cost $27,920 $36,028 $46,155 $15,887 $125,990
================================================================
Fair Value
MBS $15,809 $24,598 $ 2,115 $ - $ 42,522
Agency notes 86 11,006 43,108 15,682 69,882
FHLB stock 11,872 - - - 11,872
----------------------------------------------------------------
Total fair value $27,767 $35,604 $45,223 $15,682 $124,276
================================================================
-31-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The following table shows the contractual maturities of the Corporation's
securities held-to-maturity at December 31, 2004:
WITHIN ONE OVER ONE TO OVER FIVE TO OVER TEN
YEAR FIVE YEARS TEN YEARS YEARS TOTAL
------------------------------------------------------------------
Amortized Cost
MBS $ - $21,320 $ 3,763 $ - $ 25,083
Agency notes - 20,927 17,904 26,960 65,791
Corporate/other - - - 465 465
----------------------------------------------------------------
Total amortized cost $ - $42,247 $21,667 $27,425 $ 91,339
================================================================
Fair Value
MBS $ - $20,901 $ 3,683 $ - $ 24,584
Agency notes - 20,504 17,816 26,186 64,506
Corporate/other - - - 465 465
----------------------------------------------------------------
Total fair value $ - $41,405 $21,499 $26,651 $ 89,555
================================================================
Securities are classified based upon contractual maturity dates. Actual
maturities may differ from contractual maturities because the borrowers have
the right to prepay their obligations. Available-for-sale securities pledged
as collateral to secure public deposits were $17.6 million at December 31,
2004, and $32.5 million at December 31, 2003. Securities of $103.1 million were
pledged to the FHLB at December 31, 2004, and $54.2 million at December 31,
2003. In addition, $3.7 million was pledged to a third party as collateral for
derivative contracts at December 31, 2004.
(4) Loans and Allowance for Loan Losses
- ---------------------------------------
A summary of loans at December 31, 2004, and 2003, follows:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------------------------
Residential real estate $ 105,975 $ 105,565
Multifamily real estate 92,372 87,212
Commercial real estate 178,704 83,856
Real estate construction 157,088 93,704
Business 292,117 204,446
Consumer 30,125 33,163
--------------------------------
Total loans 856,381 607,946
Loans in process (49,657) (30,962)
Deferred loan fees, net (2,695) (2,179)
--------------------------------
Loans $ 804,029 $ 574,805
================================
Loans serviced for others $ 9,038 $ 16,411
Accrued interest on loans was $3,340 and $2,388 at December 31, 2004, and
December 31, 2003, respectively. Loans to officers and directors totaled $2.7
million at December 31, 2004, and $3.3 million at December 31, 2003. During the
period, repayments totaling $482 were received, additional advances of $18 were
made, and a loan to a former executive officer for $20 is no longer included in
the total.
At December 31, 2004, the composition of the loan portfolio, including
loans in process, was as follows:
ADJUSTABLE
FIXED RATE RATE
--------------------------
Term to maturity
Less than one year $ 13,634 $ 126,958
1-3 years 46,272 53,446
3-5 years 94,022 17,094
5-10 years 47,822 162,882
10-20 years 7,247 37,953
Over 20 years 7,863 191,531
-------------------------
Total $ 216,860 $ 589,864
=========================
-32-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Nonaccrual loans totaled $532, $1,921, and $956, respectively, at December
31, 2004, December 31, 2003, and December 31, 2002. If interest on these loans
had been recognized, such income would have been $2, $90, and $32 respectively,
for the periods ended December 31, 2004, 2003, and 2002. The Corporation has no
commitments to extend additional credit on loans that are nonaccrual. At
December 31, 2004, 2003, and 2002, loans totaling $9,319, $11,969, and $24,564,
were adversely classified, of which there were no allocated allowances. These
loans had no allowances allocated to them because the value of the underlying
collateral of the adversely classified loans was equal to or exceeded the
recorded investment. Of the adversely classified loans, $166, $1,758, and $677
were under foreclosure. The average balance of adversely classified loans for
the year ended December 31, 2004, December 31, 2003, respectively, was $7,152,
and $17,265 and the Corporation recognized $534, and $1,250 of related interest
income on such loans during the time such loans were impaired.
At December 31, 2004, the Corporation had outstanding commitments of
$22,568 to fund loans with fixed interest rates and $21,153 for loans with
adjustable rates.
The Corporation had non-mandatory forward commitments totaling $784 and
$2,177 to sell loans into the secondary market at December 31, 2004, and
December 31, 2003, respectively.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. While approximately 100% of
commercial letters of credit are utilized, a significant portion of such
utilization is on an immediate payment basis. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the borrower. Collateral held
varies but may include accounts receivable, inventory, property, plant, and
equipment, and income-producing commercial properties.
Unfunded commitments under commercial lines of credit, revolving credit
lines and loans in process are commitments for possible future extensions of
credit to existing customers.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, bond financing, and similar transactions. The
Bank underwrites its standby letters of credit using its policies and
procedures applicable to loans in general. Standby letters of credit are made
on an unsecured and secured basis. The Bank has not been required to perform on
any financial guarantees during the past two years. The Bank did not incur any
significant losses on its commitments in 2004 or 2003.
At December 31, 2004, and 2003, the following financial instruments with
off-balance sheet risk were outstanding:
2004 2003
------------------------
Commitments to grant loans $ 45,972 $ 17,327
Unfunded commitments under lines of
credit/loans in process 144,875 90,606
Standby letters of credit and financial
guarantees written 5,602 665
Unused commitments on bankcards 11,103 9,324
------------------------
Total $ 207,552 $ 117,922
========================
A summary of the allowance for losses on loans follows:
YEAR ENDED
DECEMBER 31,
2004 2003 2002
--------------------------
Balances at beginning of year $7,711 $6,872 $6,304
Issaquah Bank allowance assumed 1,395 - -
Provision for loss 675 1,275 1,895
Recoveries 223 315 114
Charge-offs (441) (751) (1,441)
---------------------------
Balances at end of year $9,563 $7,711 $6,872
===========================
-33-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(5) Premises and Equipment
- --------------------------
A summary of premises and equipment follows:
ESTIMATED DECEMBER 31, DECEMBER 31,
USEFUL LIVES 2004 2003
-------------------------------------------
Land $ 2,577 $ 1,261
Buildings 40 years 10,527 7,873
Leasehold improvements Lease term 1,985 1,644
Furniture and equipment 2-10 years 12,362 9,738
-----------------------
27,451 20,516
Accumulated depreciation and amortization (14,627) (11,929)
-----------------------
$ 12,824 $ 8,587
========================
(6) Deposits
- ------------
Deposits at December 31, 2004, and 2003, are summarized as follows:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------------------
Noninterest bearing checking accounts $ 74,865 $ 39,275
Interest bearing checking accounts 37,699 23,652
Money market deposit accounts 156,347 120,569
Savings accounts 16,237 12,417
Certificates of deposit 436,760 368,401
--------------------------
$721,908 $564,314
==========================
Time deposit accounts in amounts of $100 thousand or more totaled $277.3
million and $239.9 million at December 31, 2004, and December 31, 2003,
respectively.
DEPOSIT ACCOUNTS
WEIGHTED AVERAGE WITH BALANCES ACCRUED INTEREST
INTEREST RATE ON IN EXCESS PAYABLE ON
RATE ON DEPOSITS OF $100,000 DEPOSITS
----------------------------------------------------------
December 31, 2004 1.87% $428,293 $906
December 31, 2003 1.68 323,901 232
A summary of interest expense on deposits follows:
YEAR ENDED DECEMBER 31,
2004 2003 2002
--------------------------------
Checking and money market accounts $ 1,965 $ 1,604 $ 2,528
Savings accounts and time deposits 9,194 9,369 10,002
--------------------------------
$11,159 $10,973 $12,530
================================
Maturities of time deposits at December 31, 2004, are as follows:
Years ending December 31, 2005 $ 350,693
2006 44,524
2007 17,208
2008 18,159
2009 5,452
Thereafter 724
---------
$ 436,760
==========
-34-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(7) Junior Subordinated Debentures Payable (Trust Preferred Securities)
- -----------------------------------------------------------------------
On March 1, 2000, $10.3 million of 11% 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 payable,
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. 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, and 2004. 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.
In October 2003, Cascade entered into an interest rate swap agreement
with a third party as a hedge of the interest rate on the Corporation's
junior subordinated debentures. Under the terms of the agreement, Cascade will
receive an 11% fixed rate and pay a floating rate of USD-six month LIBOR-BBA
plus 520 basis points. The rate paid at December 31, 2004, is 7.19%. The
floating rate will reprice the first calendar day of each March and September.
The unrealized loss on the interest rate swap was $11,000 as of December 31,
2004. 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. 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 junior subordinated debentures
in the accompanying Consolidated Statements of Operations.
On December 15, 2004, the Corporation issued an additional $5 million in
trust preferred securities/junior subordinated debentures. These securities
have a fixed coupon of 5.82% for the first 5 years and then float at 3-month
LIBOR plus 1.90% for the remaining 25 years. The securities are callable at
par after 5 years. These securities are considered Tier 1 capital by financial
institution regulators. The junior subordinated debentures issued under Capital
Trust II incorporates the same structure for the same purposes as Capital
Trust I.
(8) FHLB Advances
- -----------------
FHLB advances are summarized as follows:
DECEMBER 31, DECEMBER 31,
2004 2003
-----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
MATURITY DATE AMOUNT RATE AMOUNT RATE
--------------------------------------------------------------------------
At December 31,
2004 $ - -% $ 65,000 2.72%
2005 77,000 4.55 45,000 6.27
2006 23,000 4.57 21,000 4.77
2007 22,000 6.06 20,000 6.37
2008 2,000 3.51 - -
2009 39,000 2.97 4,000 5.45
Thereafter 65,000 5.14 45,000 5.83
----------------------------------------
$228,000 4.59% $200,000 4.85%
========================================
YEAR ENDED DECEMBER 31,
2004 2003
-----------------------
Maximum amount of outstanding FHLB
advances at any month-end $237,500 $211,750
Average amount of outstanding FHLB
advances during the year 215,733 194,229
The Corporation had $150.0 million in fixed-rate advances as of December
31, 2004, where the FHLB has the option to convert these advances to variable
rate advances after a specified period.
-35-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
At December 31, 2004, the Bank had an unused line of credit from the
FHLB-Seattle of $147.5 million subject to the availability of eligible
collateral. The Bank's credit line with the FHLB-Seattle is 35% of total
assets, or up to approximately $381.1 million.
FHLB advances are collateralized by otherwise unencumbered permanent
residential mortgages, investment grade securities, and other eligible real
estate mortgages. Federal statute requires all members of the FHLB to
maintain collateral on FHLB borrowings and advances equivalent to the amount
borrowed on a daily basis.
(9) Securities Sold Under Agreements to Repurchase and Lines of Credit
- ----------------------------------------------------------------------
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements) that are treated as financing arrangements.
Accordingly, the obligations to repurchase securities sold are reflected as a
liability in the consolidated balance sheets, and the securities underlying the
agreements remain in the asset accounts. The securities underlying the
agreements are under the Corporation's control and are held by nationally known
government security dealers who are recognized as primary dealers by the
Federal Reserve Board, or other investment banking firms approved by the
Corporation's Board of Directors. Such agreements typically have maturities
ranging from 30 to 91 days.
Securities sold under agreements to repurchase the same securities consist
of agency notes and/or mortgage-backed securities summarized as follows:
UNDERLYING SECURITIES
---------------------
WEIGHTED- BOOK VALUE,
AVERAGE INCLUDING
BALANCE INTEREST ACCRUED MARKET
OUTSTANDING RATE INTEREST VALUE
-----------------------------------------------
December 31, 2004 $ 20,902 2.38% $20,358 $19,758
December 31, 2003 39,911 1.17 44,046 43,002
Financial data pertaining to reverse repurchase agreements follows:
DECEMBER 31, DECEMBER 31,
2004 2003
------------------------------
Maximum amount of outstanding
agreements at any month-end $40,251 $40,587
Average amount of outstanding
agreements during the year 30,125 35,334
The Bank has Fed funds borrowing lines with two of its correspondent banks.
One line is for $13.0 million and matures July 1, 2005. The other facility is
for $10.0 million and matures June 30, 2005. Interest rates for both lines are
quoted at the time of borrowing. Cascade used one of the lines once to test the
operational aspects of the facility as part of our liquidity planning process.
The Bank also has the ability to borrow from the Federal Reserve Bank of San
Francisco based on the volume of collateral pledged. As of December 31, 2004,
there were no outstanding balances in any of these lines.
(10) Federal Income Taxes
- -------------------------
Federal income tax expense (benefits) includes the following components:
YEAR ENDED
DECEMBER 31,
2004 2003 2002
---------------------------
Current $5,467 $4,545 $3,980
Deferred (100) (236) (205)
----------------------------
$5,367 $4,309 $3,775
============================
For the year ended December 31, 2004, the Corporation's effective tax
rate was 34.6% compared to 31.0% for the year ended December 31, 2003. Tax
benefits related to interest on tax exempt loans and increases in cash
surrender value of bank owned life insurance accounted for the differences in
the effective tax rates between the two years.
Income tax expense differs from that computed by applying the U.S. federal
income tax rate of 34.6% to pretax income for the years ended December 31 as a
result of the following:
2004 2003 2002
-----------------------------
Computed "expected" tax expense $ 5,588 $4,729 $4,028
Bank owned life insurance (169) (184) (27)
Tax exempt interest (69) (89) (79)
Non-deductible acquisition cost 122 - -
Other, net (105) (147) (147)
------------------------------
$ 5,367 $4,309 $3,775
=============================
-36-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Under certain provisions of the Internal Revenue Code, the Corporation was
allowed a statutory bad debt deduction (based upon a percentage of taxable
income before such deduction) for additions to tax bad debt reserves
established for the purpose of absorbing losses on loans or property acquired
through foreclosure. This amount represents allocations of income to bad debt
deductions for tax reporting purposes only. Reduction of amounts so allocated
for purposes other than tax bad debt losses will create income for tax
reporting purposes only, which will be subject to the then-current corporate
income tax rate.
The following table presents major components of the net deferred tax
liability resulting from differences between financial reporting and tax bases
at December 31, 2004, and December 31, 2003:
DECEMBER 31, DECEMBER 31,
2004 2003
------------------------------
Deferred tax assets:
Securities available-for-sale $ 617 $ 80
Loans 2,788 2,539
------------------------------
Gross deferred tax assets 3,405 2,619
Deferred tax liabilities:
Deferred loan fees (1,031) (745)
Core deposit intangible (395) -
Premises and equipment (205) (200)
FHLB stock (1,732) (2,271)
Other (82) (80)
------------------------------
Gross deferred tax liabilities (3,445) (3,296)
------------------------------
Net deferred tax asset (liability) $ (40) $ (677)
==============================
A valuation allowance for deferred tax assets was not considered necessary at
December 31, 2004, or 2003. Management believes the Corporation will fully
realize its total deferred income tax assets as of December 31, 2004, and
2003, based upon its total deferred income tax liabilities, previous taxes
paid and its current and expected future levels of taxable income.
(11) Acquisition
- ----------------
On June 3, 2004, the Company acquired Issaquah Bancshares, Inc., ("Issaquah").
The acquisition was accounted for using the purchase method of accounting and
accordingly, the assets and liabilities were recorded based on their fair
values at the acquisition date. Shares of Issaquah were exchanged for cash or
cash and shares of Cascade. The merger enhances Cascade's commercial banking
franchise by expanding Cascade's presence in east King County. Total Issaquah
assets on June 3, 2004, were approximately $131.0 million and the total value
of the transaction, both cash and stock, was approximately $34.3 million as
measured under the provisions of FAS 141. Cascade issued approximately 1.3
million shares and paid cash of $9.5 million in connection with the merger.
The Bank booked $26.3 million in intangible assets associated with the
transaction including $25.2 million in goodwill and a $1.1 million core deposit
intangible that will be amortized under the straight-line method over an eight
year period of time.
The following information presents unaudited pro forma results of
operations for the years ended December 31, 2004, and 2003, as though the
Issaquah acquisition had occurred on January 1, 2003. The pro forma results
do not necessarily indicate the results that would have been obtained had the
acquisitions actually occurred on January 1, 2003.
YEARS ENDED DECEMBER 31,
(unaudited)
--------------------------
2004 2003
-------- ---------
Net interest income $ 34,736 $ 32,736
Provision for credit losses 700 1,465
Noninterest income 4,983 6,030
Noninterest expense 22,818 21,075
--------- ----------
Income before provision for income taxes 16,201 16,226
Provision for income taxes 5,379 5,088
--------- ---------
Net income $ 10,822 $ 11,138
========= =========
Basic earnings per share $ 1.21 $ 1.18
Diluted earnings per share $ 1.17 $ 1.15
-37-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The fair values of the Issaquah assets acquired and liabilities assumed
as of June 3, 2004, were initially recorded as follows:
Investment securities $ 23,087
Loans and leases, net 94,556
Premises 3,866
Goodwill 25,195
Core deposit intangibles 1,127
Other assets 825
-------
$148,656
=======
Deposits $101,759
Other borrowings 15,200
Other liabilities 960
Acquisition cost, net of cash acquired 30,737
-------
$148,656
=======
As a result of the merger and merger-related activities, the Company
incurred expenses that were classified as merger-related. The components of
these charges for the year ended December 31, 2004, were as follows:
Professional fees $ 354
Other 2
-------
$ 356
(12) Earnings Per Share
- -----------------------
The following table presents EPS information:
YEAR ENDED
DECEMBER 31,
2004 2003 2002
----------------------------------
Net income $ 10,785 $ 9,599 $ 8,072
Common shares outstanding (basic) 8,952,493 8,184,455 7,997,713
Effect of dilutive stock options 323,739 277,048 263,735
------------------------------------
Common shares outstanding (diluted) 9,276,232 8,461,503 8,261,448
====================================
EPS, basic $ 1.20 $ 1.17 $ 1.01
EPS, diluted 1.16 1.13 0.98
For purposes of calculating basic and diluted earnings per share, the numerator
of net income is the same. There were outstanding options to purchase 136,544,
69,199, and 73,164 shares of common stock at December 31, 2004, December 31,
2003, and December 31, 2002, respectively that are considered nondilutive and
have been excluded from the above calculation. Nondilutive options have an
exercise price that is greater than the current market price of the stock.
(13) Stockholders' Equity
- -------------------------
(a) Restrictions on Dividends
- -----------------------------
Current regulations allow the Bank to pay dividends on its stock if its
regulatory capital would not thereby be reduced below the amount required for
the statutory capital requirements set by the Federal Deposit Insurance
Corporation (FDIC).
(b) Regulatory Capital
- ----------------------
At December 31, 2004, banking regulations required institutions to have a
minimum total risk-based capital to risk-weighted assets ratio of 8% and a
Tier 1 (core) capital to adjusted total assets ratio of 4%.
At December 31, 2004, the Bank was in compliance with the regulatory
requirements for well-capitalized institutions. As of December 31, 2004, the
most recent notification from the FDIC categorized the Bank as well-capitalized
under the regulatory framework. There are no conditions or events since the
notification that management believes have changed the Bank's category.
-38-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
MINIMUM
REQUIREMENTS
FOR CAPITAL WELL-CAPITALIZED
ACTUAL ADEQUACY REQUIREMENTS
---------------------------------------------------------
CASCADE BANK AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------
December 31, 2004:
Total risk-based capital to risk-weighted assets (1) $94,574 11.06% $68,380 8.00% $85,476 10.00%
Tier I (core) capital to risk-weighted assets 85,011 9.95 34,190 4.00 51,285 6.00
Tier I (core) capital to average total assets 85,011 8.04 42,307 4.00 52,884 5.00
December 31, 2003:
Total risk-based capital to risk-weighted assets (1) $80,588 13.22% $48,759 8.00% $60,949 10.00%
Tier I (core) capital to risk-weighted assets 72,970 11.97 24,380 4.00 36,569 6.00
Tier I (core) capital to average total assets 72,970 8.34 35,000 4.00 43,750 5.00
The Corporation, as a bank holding company regulated by the Federal Reserve,
is also subject to capital requirements that are similar to those for Cascade
Bank.
MINIMUM
REQUIREMENTS
FOR CAPITAL WELL-CAPITALIZED
ACTUAL ADEQUACY REQUIREMENTS
---------------------------------------------------------
CASCADE FINANCIAL CORP AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------------------
December 31, 2004:
Total risk-based capital to risk-weighted assets (1) $95,704 11.18% $68,496 8.00% $85,620 10.00%
Tier I (core) capital to risk-weighted assets 86,141 10.06 34,248 4.00 51,372 6.00
Tier I (core) capital to average total assets 86,141 8.14 42,307 4.00 52,884 5.00
December 31, 2003:
Total risk-based capital to risk-weighted assets (1) $81,948 13.42% $48,839 8.00% $61,049 10.00%
Tier I (core) capital to risk-weighted assets 74,316 12.17 24,420 4.00 36,629 6.00
Tier I (core) capital to average total assets 74,316 8.49 35,000 4.00 43,750 5.00
The FDIC requires institutions to maintain Tier I capital of not less than
one-half of total capital.
(14) Mortgage Servicing Rights
- ------------------------------
A summary of capitalized mortgage servicing rights, included in other assets,
at December 31, 2004, and December 31, 2003, follows:
DECEMBER 31, DECEMBER 31,
2004 2003
----------------------------
Balance at beginning of year $80 $ 310
Additions - -
Amortization (40) (230)
Allowance for losses - -
----------------------------
Balance at end of year $40 $ 80
============================
(15) Employee Benefit Plans
- ---------------------------
(a) Savings Plan
- ----------------
The Corporation maintains a savings plan under section 401(k) of the Internal
Revenue Code, covering substantially all full-time employees. Under the plan,
employee contributions are matched by the Corporation at a rate of 50% of the
first $12 contributed. Such matching becomes vested over a period of five years
of credited service. Employees may make investments in various stock, fixed
income or money market plans, or may purchase stock in the Corporation. The
Corporation contributed $290, $188, and $92 to the plan for the years ended
December 31, 2004, 2003, and 2002, respectively.
-39-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(b) Employee Stock Ownership Plan
- ---------------------------------
The Corporation established an employee stock ownership plan (ESOP) which
became effective on July 1, 1992, for employees of the Corporation, the Bank,
and its subsidiary who have at least one year of continuous service. The
Corporation pays all ESOP expenses. The shares of Cascade Financial Corporation
stock purchased by the ESOP are held in a suspense account for allocation among
the participants. Benefits become 20% vested after the first year of service
with an additional 20% vesting each year thereafter until 100% vesting after
five years. Allocations to individual participant's accounts are based on
total compensation during the year. Forfeitures are reallocated annually among
remaining participating employees. For the years ended December 31, 2004, 2003,
and 2002, the Corporation contributed $14, $54, and $112, respectively, to the
ESOP, which is invested in Cascade Financial Corporation stock. Allocated and
unallocated shares at December 31, 2004, were 182,709 and 0, respectively. The
Corporation has the right of first refusal to purchase the allocated shares of
separated employees.
(c) Employee Stock Purchase Plan
- --------------------------------
The Corporation maintains an employee stock purchase plan, under the terms of
which 182,353 shares of common stock have been authorized for issuance. The
plan allows employees of the Corporation with three months of service the
opportunity to purchase common stock through accumulated salary deductions
during each offering period. On the first day of each six-month offering
period (January 1 and July 1 of each year), eligible employees who elect to
participate are granted options to purchase a limited number of shares and
unless the participant withdraws from the plan, the option is automatically
exercised on the last day of each offering period. The aggregate number of
shares to be purchased in any given offering is determined by dividing the
accumulated salary deduction for the period by the lower of 85% of the market
price of a common share at the beginning or end of an offering period.
(d) Stock Options
- -----------------
The Corporation maintains stock option plans pursuant to which shares of Common
Stock have been authorized for issuance to certain key employees and directors
of the Corporation and its subsidiaries upon exercise of stock options. The
options granted under these plans are, in general, exercisable under a vesting
schedule whereby all options become exercisable over seven years, and expire
not ore than ten years after the date of grant.
All options granted have limited rights that enable a holder upon a change
in control of the Corporation to elect to receive cash equal to the difference
between the exercise price of the option and the fair market value of the
common stock on the date of exercise. At December 31, 2004, and December 31,
2003, 281,256 and 243,842 shares, respectively, were fully exercisable.
Changes in total options outstanding for the year ended December 31,
are as follows:
SHARES WEIGHTED AVERAGE
UNDER EXERCISE PRICE OF
OPTION OPTION SHARES
YEAR ENDED DECEMBER 31, 2004
---------------------------------
Outstanding at beginning of year 654,827 $ 7.24
Granted during year 123,592 18.56
Exercised during year (57,766) 6.02
Forfeited during year (51,083) 11.53
---------------------------------
Outstanding at end of year 669,570 $ 9.13
=================================
YEAR ENDED DECEMBER 31, 2003
---------------------------------
Outstanding at beginning of year 576,100 $ 7.23
Granted during year 96,100 12.34
Exercised during year (115,619) 3.77
Forfeited during year (16,739) 6.85
5-for-4 stock split 114,985 -
--------------------------------
Outstanding at end of year 654,827 $ 7.24
================================
-40-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
YEAR ENDED DECEMBER 31, 2002
------------------------------
Outstanding at beginning of year 855,216 $ 5.49
Granted during year 109,802 8.81
Exercised during year (324,540) 2.83
Forfeited during year (64,378) 8.96
------------------------------
Outstanding at end of year 576,100 $ 7.23
=============================
Financial data pertaining to outstanding stock options were as follows at
December 31, 2004:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE EXERCISE
WEIGHTED EXERCISE NUMBER OF PRICE OF
NUMBER OF AVERAGE PRICE OF EXERCISABLE EXERCISABLE
RANGES OF EXERCISE OPTION REMAINING OPTION OPTION OPTION
PRICES SHARES CONTRACTUAL LIFE SHARES SHARES SHARES
- --------------------------------------------------------------------------------------------
$ 3.47 - 5.54 81,288 3.97 $ 4.79 49,938 $ 4.47
5.54 - 5.55 137,499 6.07 5.55 73,937 5.55
5.64 - 7.76 172,041 6.13 6.56 78,735 6.27
7.85 - 12.50 162,700 6.37 10.42 77,521 8.89
14.82 - 19.90 116,042 9.33 18.41 1,125 16.07
- --------------------------------------------------------------------------------------------
$ 3.47 - 19.90 669,570 6.47 $ 9.13 281,256 $ 6.52
============================================================================================
(16) Fair Value of Financial Instruments
- ----------------------------------------
The fair value estimates presented below are subjective in nature, involve
uncertainties and matters of significant judgment and, therefore, are not
necessarily indicative of the amounts the Corporation could realize in a
current market exchange. The Corporation has not included certain material
items in its disclosure, such as the value of the long-term relationships with
the Corporation's lending and deposit customers, since this is an intangible
and not a financial instrument. Additionally, the estimates do not include any
tax ramifications. There may be inherent weaknesses in any calculation
technique, and changes in the underlying assumptions used, including discount
rates and estimates of future cash flows, that could materially affect the
results. For all of these reasons, the aggregation of the fair value
calculations presented herein do not represent, and should not be construed to
represent, the underlying value of the Corporation.
The following table presents a summary of the fair value of the
Corporation's financial instruments:
DECEMBER 31, DECEMBER 31,
2004 2003
--------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------
Financial assets:
Cash and cash equivalents $ 13,029 $ 13,029 $ 14,071 $ 14,071
Securities available-for-sale 124,276 124,276 189,747 189,747
Securities held-to-maturity 91,339 89,555 86,719 85,344
Loans, net 794,466 805,971 567,094 570,799
Servicing rights 40 40 80 80
Financial liabilities:
Deposit accounts 721,908 722,550 564,314 566,760
Borrowings 248,902 256,901 239,911 251,021
Junior subordinated debentures
payable (1) 15,454 15,454 10,212 10,212
Mark-to-market on swaps (522) (522) 98 98
- ---------------------
(1) Net of $11 mark-to-market on swap (see note 6)
Cash and Cash Equivalents
The carrying amount represents fair value.
Securities including mortgage backed securities
Fair values are based on quoted market prices or dealer quotations.
-41-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Loans
- -----
Fair values are estimated using current market interest rates to discount
future cash flows for each of the six different loan types. Interest rates used
to discount the cash flows are based on U.S. Treasury yields or other market
interest rates with appropriate spreads for each segment. The spread over the
Treasury yields or other market rates is used to account for liquidity, credit
quality and higher servicing costs. Prepayment rates are based on expected
future prepayment rates, or, where appropriate and available, market prepayment
rates.
Deposit Accounts
- ----------------
The fair value of deposits with no stated maturity, such as checking accounts,
money market deposit accounts and savings accounts, equals the amount payable
on demand. The fair value of certificates of deposits is calculated based on
the discounted value of contractual cash flows. The discount rate is equal to
the rate currently offered on similar products.
Borrowings
- ----------
The fair value is calculated based on the discounted cash flow method, adjusted
for market interest rates and terms to maturity.
Junior Subordinated Debentures Payable (Trust Preferred Securities)
- -------------------------------------------------------------------
The fair value is calculated based on the discounted cash flow method,
adjusted for market interest rates and terms to maturity.
(17) On-Balance Sheet Derivative Instruments and Hedging Activities
- -------------------------------------------------------------------
Derivative Financial Instruments
- --------------------------------
The Corporation has derivative financial instruments in the form of interest
rate swap agreements, which derive their value from underlying interest rates.
These transactions involve both credit and market risk. Direct credit exposure
is limited to the net difference between the calculated amounts to be received
and paid, and any change in fair value of the contract in which the
counterparty would owe the Corporation if the contract were terminated. Such
difference, which represents the fair value of the derivative instruments, is
reflected on the Corporation's balance sheet as derivative assets and
derivative liabilities. The Corporation controls the credit risk of its
financial contracts through credit approvals, limits and monitoring procedures,
and does not expect any counterparties to fail to meet their obligations.
Risk Management Policies - Hedging Instruments
- ----------------------------------------------
The primary focus of the Corporation's asset/liability management program is
to monitor the sensitivity of the Corporation's net income and fair value of
equity under varying interest rate scenarios to take steps to control its risks
(see Management Discussion and Analysis - Interest Rate Risk Management).
Interest Rate Risk Management - Cash Flow Hedging Instruments
- -------------------------------------------------------------
The Corporation uses long-term variable rate debt as a source of funds for
use in the Corporation's lending and investment activities and other general
business purposes. These debt obligations expose the Corporation to variability
in interest payments due to changes in interest rates. Management believes it
is prudent to limit the variability of a portion of its interest payments and,
therefore, may hedge a portion of its variable-rate interest payments. To meet
this objective, management enters into interest rate swap agreements whereby
the Corporation receives variable interest rate payments and makes fixed
interest rate payments during the contract period.
At December 31, 2004, and 2003, the information pertaining to an
outstanding interest rate swap agreement used to hedge FHLB Advances is as
follows:
DECEMBER 31,
2004 2003
-----------------------
Notional amount $25,000 $ -
Fixed pay rate 4.02% -
Weighted average receive rate 1.83% -
Maturity in years 4.6 -
Unrealized (loss) relating to interest rate swap $ (50) -
This agreement provides for the Corporation to make payments at a
fixed-rate in exchange for receiving payments at a variable-rate determined
by a three-month LIBOR.
At December 31, 2004, and 2003, the unrealized loss relating to use of
the interest rate swap was recorded in derivative liabilities in accordance
with SFAS No. 133.
-42-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
Risk management results for the years ended December 31, 2004, and 2003,
related to the balance sheet hedging of long-term debt indicate that the hedge
was 100% effective and that there was no component of the derivative
instrument's gain or loss which was excluded from the assessment of hedge
effectiveness.
Interest Rate Risk Management - Fair Value Hedging Instruments
- --------------------------------------------------------------
The Corporation holds fixed- and variable-rate assets and liabilities. Fixed
rates may expose the Corporation to variability in their fair value due to
changes in the level of interest rates. The Corporation may utilize interest
rate swaps as an asset/liability management strategy to hedge the change in
value of the assets due to changes in interest rate assumptions.
At December 31, 2004, and 2003, the information pertaining to an
outstanding interest rate swap agreement used to hedge junior subordinated
debentures (trust preferred securities) is as follows:
DECEMBER 31,
2004 2003
-----------------------
Notional amount $10,000 $10,000
Weighted average pay rate 6.76% 6.38%
Fixed receive rate 11.00% 11.00%
Maturity in years 26.2 27.2
Unrealized gain relating to interest rate swap $ 11 $ 98
This agreement provides for the Corporation to make payments at a variable
rate determined by a six-month LIBOR in exchange for receiving payments at a
fixed rate.
Risk management results for the years ended December 31, 2004, and 2003,
related to the balance sheet hedging of junior subordinated debentures indicate
that the hedge was 100% effective and that there was no component of the
derivative instrument's gain or loss which was excluded from the assessment of
hedge effectiveness.
At December 31, 2004, and 2003, the information pertaining to an
outstanding interest rate swap agreement used to hedge certificates of deposit
is as follows:
DECEMBER 31,
2004 2003
-----------------------
Notional amount $10,000 $ -
Weighted average pay rate 2.38% -
Fixed receive rate 5.00% -
Maturity in years 9.4 -
Unrealized (loss) relating to interest rate swap $ (131) $ -
This agreement provides for the Corporation to make payments at a variable
rate determined by a three-month LIBOR in exchange for receiving payments at a
fixed rate.
Risk management results for the years ended December 31, 2004, and 2003,
related to the balance sheet hedging of certificates of deposit indicate that
the hedge was 100% effective and that there was no component of the derivative
instrument's gain or loss which was excluded from the assessment of hedge
effectiveness.
At December 31, 2004, the Corporation had an outstanding interest rate swap
agreement that was originally designated to hedge available-for-sale
securities. This agreement provides for the Corporation to make payments at a
fixed rate in exchange for receiving payments at a variable rate determined by
a three-month LIBOR.
As of December 15, 2004, the Corporation determined that due to a narrowing
of swap spreads that the hedge was no longer "highly effective" in that the
change in the fair value of the swap did not sufficiently correlate with the
change in the fair value of the designed securities. Therefore, at December 31,
2004, and 2003, the unrealized loss relating to the use of this swap was
recorded in derivative liabilities and other expense in the income statement,
in accordance with SFAS No. 133.
At December 31, 2004, and 2003, the information pertaining to an
outstanding interest rate swap agreement that was originally designated to
hedge fixed-rate available-for-sale securities is as follows:
DECEMBER 31,
2004 2003
---------------------
Notional amount $25,000 $ -
Fixed pay rate 4.79% -
Weighted average receive rate 1.83% -
Maturity in years 9.6 -
Unrealized (loss) relating to interest rate swap $ (352) $ -
-43-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The Company enters into rate lock commitments to extend credit to borrowers
for generally a 30-day or 60-day period for the origination of loans.
On March 13, 2002, the Financial Accounting Standards Board determined that
loan commitments related to the origination or acquisition of mortgage loans
that will be held for sale must be accounted for as derivative instruments.
Accordingly, the Corporation adopted such accounting on July 1, 2002, and such
commitments, along with any related fees received from potential borrowers, are
recorded at fair value in derivative assets or liabilities, with changes in
fair value recorded in the net gain or loss on sale of mortgage loans. Since
the Corporation originates its saleable loans on a "best effort" basis and
delivers those loans to the purchaser within 10 days at the committed price,
there will generally be no gain or loss recorded on those commitments.
The Corporation had non-mandatory forward commitments totaling $784 and
$2,177 to sell loans into the secondary market at December 31, 2004, and
December 31, 2003, respectively.
(18) Contingencies
- ------------------
The Corporation is a defendant in various legal proceedings arising in
connection with its business. It is the opinion of management that the
financial position and the results of operations of the Corporation will not
be materially adversely affected by the final outcome of these legal
proceedings and that adequate provision has been made in the accompanying
consolidated financial statements.
At periodic intervals, the Washington State Department of Financial
Institutions and the Federal Deposit Insurance Corporation routinely examine
the Corporation's financial statements as part of their legally prescribed
oversight of the banking industry. Based on these examinations, the regulators
can direct that the Corporation's financial statements be adjusted in
accordance with their findings.
(19) Condensed Financial Information of Cascade Financial Corporation
- ---------------------------------------------------------------------
Following are the condensed financial statements of Cascade Financial
Corporation (parent only) for the period indicated:
BALANCE SHEET DECEMBER 31, 2004 DECEMBER 31, 2003
- ------------- ----------------------------------------
Assets:
Cash $ 410 $ 1,272
Investment in subsidiary 110,120 72,823
Other assets 2,585 1,127
-----------------------------------
$ 113,115 $ 75,222
===================================
Liabilities and stockholders' equity:
Other liabilities 1,411 1,053
Junior subordinated debentures payable 15,454 10,212
Stockholders' equity 96,250 63,957
-----------------------------------
$ 113,115 $ 75,222
===================================
INCOME STATEMENT FOR THE YEARS ENDED DECEMBER 31,
- ---------------- 2004 2003 2002
---------------------------------
Equity in undistributed net
income of the subsidiary $ 11,833 $ 10,542 $ 9,113
Interest income - junior subordinated
debentures payable 35 34 34
Operating expenses (704) (429) (464)
Interest expense - junior subordinated
debentures payable (723) (1,034) (1,148)
--------------------------------
Income before provision for federal
income taxes 10,441 9,113 7,535
Provision for federal income taxes 344 486 537
--------------------------------
Net income $ 10,785 $ 9,599 $ 8,072
================================
-44-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
- ----------------------- 2004 2003 2002
---------------------------------
Cash flows from operating activities:
Net income $ 10,785 $ 9,599 $ 8,072
Adjustments to reconcile net income to
net cash (used in) operating activities:
Equity in net income of subsidiaries (11,833) (10,542) (9,113)
Increase (decrease) in other assets (1,303) 38 311
(Decrease) increase in other liabilities 257 (13) 109
---------------------------------
Net cash used in operating activities (2,094) (918) (621)
Cash flows from investing activities:
Dividends received from subsidiaries 12,882 2,100 700
Investment in subsidiary (5,000) - -
Cash (used for) provided by acquisition (9,546) - -
---------------------------------
Net cash provided (used) by investing
Activities (1,664) 2,100 700
Cash flows from financing activities:
Repurchase of common stock (150) (96) (375)
Proceeds from exercise of stock options 635 662 1,064
Dividends paid (2,589) (1,440) (322)
Proceeds from junior subordinated
debentures payable 5,000 - -
---------------------------------
Net cash provided by financing
Activities 2,896 (874) 367
---------------------------------
Net increase (decrease) in cash and cash
Equivalents (862) 308 446
---------------------------------
Cash and cash equivalents:
Beginning of year 1,272 964 518
---------------------------------
End of year $ 410 $ 1,272 $ 964
=================================
Supplemental schedule of non-cash
investing activities:
Issaquah Bank merger 24,792 - -
(20) Lines of Business
- ----------------------
The Corporation's sole operating subsidiary is Cascade Bank, which is managed
along five major lines of business: business banking, retail banking,
construction lending, income property lending and residential lending. The
administrative group, although not considered a line of business, is
responsible for the management of investments, interest-rate risk, marketing,
data processing and regulatory and stockholder reporting. The financial
performance of these business lines is measured by the Corporation's
profitability reporting processes, which utilize various management accounting
techniques to ensure that each business line's financial results reflect the
underlying performance of that business.
Each line of business segment is managed by a senior executive. Back office
support is provided to each segment through executives responsible for
information systems, finance and administration.
The principal activities conducted by business banking are the origination
and servicing of commercial business loans and associated merchant services.
Retail banking includes all deposit products, with their related fee income,
and all consumer loan products such as home equity and installment loans and
credit card products. The construction unit provides financing to builders
and developers for residential construction and land acquisition and
development. The income property unit originates loans secured by multifamily
properties and commercial real estate. The residential unit's activities are
the origination of single-family loans and the associated loan servicing
activities.
The Bank's reportable business segments are the strategic lines of
business noted above, which are managed by the Management Committee, under
the direction of the President and Chief Executive Officer. The Management
Committee, which is the senior decision making group of the Bank, is comprised
of eight members including the President and Chief Executive Officer. To better
assess the contribution of its various business lines, the Bank generates
segment results that include balances directly attributable to business line
activities. Expenses or activities not directly controlled by business unit
managers are allocated to the administrative unit. In this way, management
can assess the performance of a particular business. The Bank is constantly
analyzing its line of business performance and developing better ways to
measure profitability.
The accounting policies of the segments are the same as those described
in "Note 1: Summary of Significant Accounting Policies." Direct revenues and
expenses are allocated to business segments in determining their net income.
Corporate overhead, centralized support costs and other costs are assigned to
the administrative unit. The Corporation evaluates performance based on net
income of the respective business segments. Depreciation is allocated to the
segments based upon the utilization of the assets by the segments. All
depreciating assets are included in administrative unit's total assets.
-45-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
The organizational structure of the Bank and the allocated methodologies
it employs result in business line financial results that are not necessarily
comparable across companies. As such, the Bank's business line performance may
not be directly comparable with similar information from other financial
institutions.
Year Ended December 31, 2004
----------------------------
Resi- Constr- Income Admin-
Business dential uction Property Consumer istration Total
----------------------------------------------------------------------------
Condensed income statement
Net interest income after
provision for loan losses $ 12,497 $ 912 $ 4,996 $ 8,219 $ 1,573 $ 3,525 $ 31,722
Other income 75 326 7 - 2,545 1,794 4,747
Other expense 1,446 658 435 738 1,550 15,490 20,317
----------------------------------------------------------------------------
Contribution before overhead 11,126 580 4,568 7,481 2,568 (10,171) 16,152
Support transfer 3,544 1,492 1,266 3,063 450 (9,815) -
----------------------------------------------------------------------------
Income before provision for
income tax 7,582 (912) 3,302 4,418 2,118 (356) 16,152
Provision for federal
income taxes 2,465 (297) 1,072 1,431 688 8 5,367
----------------------------------------------------------------------------
Net income $ 5,117 $ (615) $ 2,230 $ 2,987 $ 1,430 $ (364) $ 10,785
============================================================================
At December 31, 2004
Total Assets $292,117 $105,975 $107,431 $271,076 $30,125 $282,231 $1,088,955
Year Ended December 31, 2003
----------------------------
Resi- Constr- Income Admin-
Business dential uction Property Consumer istration Total
-------------------------------------------------------------------------
Condensed income statement
Net interest income after
provision for loan losses $ 7,723 $ 1,334 $ 3,683 $ 6,331 $ 1,521 $ 5,743 $ 26,335
Other income 50 872 8 3 1,744 2,629 5,306
Other expense 1,243 602 334 111 1,311 14,132 17,733
----------------------------------------------------------------------------
Contribution before overhead 6,530 1,604 3,357 6,223 1,954 (5,760) 13,908
Support transfer 1,807 1,134 778 1,645 396 (5,760) -
----------------------------------------------------------------------------
Income before provision for
income tax 4,723 470 2,579 4,578 1,558 - 13,908
Provision for federal
income taxes 1,457 159 801 1,414 478 - 4,309
----------------------------------------------------------------------------
Net income $ 3,266 $ 311 $ 1,778 $ 3,164 $ 1,080 $ - $ 9,599
============================================================================
At December 31, 2003
Total Assets $204,446 $105,565 $ 62,742 $171,068 $33,163 $308,236 $ 885,220
Year Ended December 31, 2002
----------------------------
Resi- Constr- Income Admin-
Business dential uction Property Consumer istration Total
-------------------------------------------------------------------------
Condensed income statement
Net interest income after
provision for loan losses $ 5,297 $ 1,961 $ 3,931 $ 5,745 $ 2,019 $ 5,176 $ 24,129
Other income 69 812 - 7 1,308 1,843 4,039
Other expense 1,101 628 318 106 1,225 12,943 16,321
----------------------------------------------------------------------------
Contribution before overhead 4,265 2,145 3,613 5,646 2,102 (5,924) 11,847
Support transfer 1,386 1,387 845 1,726 580 (5,924) -
----------------------------------------------------------------------------
Income before provision for
income tax 2,879 758 2,768 3,920 1,522 - 11,847
Provision for federal
income taxes 917 242 882 1,250 484 - 3,775
----------------------------------------------------------------------------
Net income $ 1,962 $ 516 $ 1,886 $ 2,670 $ 1,038 $ - $ 8,072
============================================================================
At December 31, 2002
Total Assets $142,273 $122,669 $ 84,121 $157,353 $49,331 $248,716 $ 804,463
-46-
CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts)
(21) Selected Quarterly Financial Data (Unaudited)
- --------------------------------------------------
QUARTER ENDED
-------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31,
2004 2004 2004 2004
-------------------------------------
Interest income $12,609 $13,096 $14,518 $15,093
Interest expense 5,307 5,250 5,967 6,395
-------------------------------------
Net interest income 7,302 7,846 8,551 8,698
Provision for loan losses 225 150 150 150
Other income 1,153 1,188 1,238 1,168
Other expense 4,467 5,300 5,005 5,545
-------------------------------------
Income before provision for federal
income taxes 3,763 3,584 4,634 4,171
Provision for federal income taxes 1,189 1,300 1,531 1,347
-------------------------------------
Net income $ 2,574 $ 2,284 $ 3,103 $ 2,824
=====================================
Earnings per share, basic $ .31 $ .27 $ .33 $ .30
Earnings per share, diluted .30 .26 .32 .29
QUARTER ENDED
-------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31,
2003 2003 2003 2003
-------------------------------------
Interest income $12,748 $12,532 $12,506 $12,577
Interest expense 6,018 5,821 5,660 5,254
-------------------------------------
Net interest income 6,730 6,711 6,846 7,323
Provision for loan losses 375 300 300 300
Other income 1,615 1,451 1,353 887
Other expense 4,594 4,398 4,333 4,409
-------------------------------------
Income before provision for federal
income taxes 3,376 3,464 3,566 3,501
Provision for federal income taxes 1,072 1,105 1,133 999
-------------------------------------
Net income $ 2,304 $ 2,359 $ 2,433 $ 2,502
=====================================
Earnings per share, basic $ .28 $ .29 $ .30 $ .30
Earnings per share, diluted .28 .28 .29 .29
QUARTER ENDED
-------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31,
2002 2002 2002 2002
-------------------------------------
Interest income $13,373 $13,298 $12,748 $13,051
Interest expense 6,919 6,719 6,456 6,352
-------------------------------------
Net interest income 6,454 6,579 6,292 6,699
Provision for loan losses 700 420 375 400
Other income 972 893 1,146 1,028
Other expense 3,975 4,134 4,098 4,114
-------------------------------------
Income before provision for federal
income taxes 2,751 2,918 2,965 3,213
Provision for federal income taxes 903 906 907 1,058
-------------------------------------
Net income $ 1,848 $ 2,012 $ 2,058 $ 2,155
=====================================
Earnings per share, basic $ .24 $ .25 $ .26 $ .26
Earnings per share, diluted .22 .24 .25 .26
ANNUAL SHAREHOLDERS' MEETING
- ----------------------------
The Annual Shareholders' meeting will be held at the Everett Golf & Country
Club, 1500 52nd Street SE, Everett, Washington, on Tuesday, April 26, 2005
at 6:30 p.m. Pacific time.
-47-
(BACK COVER)
CORPORATE INFORMATION
- ---------------------
CASCADE BANK: PINE LAKE QUARTERS
WWW.CASCADEBANK.COM 2902 228th Ave. SE, Issaquah ENDED HIGH LOW
(425) 369-8322 -----------------------
CASCADE SERVICE CENTER 3/31/04 $20.63 16.52
(800) 326-8787 SMOKEY POINT 6/30/04 21.28 15.30
3532 172nd St. NE, Arlington 9/30/04 17.98 15.25
MAIN OFFICE (360) 653-1900 12/31/04 19.72 16.62
2828 Colby Ave., Everett
(425) 257-1745 SNOHOMISH QUARTERS
1101 Ave. 'D,' Snohomish ENDED HIGH LOW
BELLEVUE (360) 862-9800 ------------------------
200 108th Ave. NE, Bellevue 3/31/03 $10.56 9.04
(425) 455-2300 WOODINVILLE 6/30/03 13.20 9.16
17641 Garden Way NE, Woodinville 9/30/03 16.00 12.01
12/31/03 20.99 14.92
CLEARVIEW (425) 481-0820
17512 SR 9 SE, Snohomish STOCK TRANSFER AGENT
(360) 668-1243 ISSAQUAH BANK DIVISION: Mellon Investor Services LLC
ISSAQUAH WEST P.O. Box 3315
CROSSROADS 1055 NW Maple Street, Issaquah South Hackensack, NJ 07606
15751 NE 15th St., Bellevue (425) 392-8000 (800) 839-2983
(425) 643-6200 (201) 329-8660 Foreign
NORTH BEND Shareholders
EVERETT/BROADWAY 139 Bendigo Blvd. N, North Bend www.melloninvestor.com
2602 Broadway, Everett (425) 831-1761
(425) 259-1243 AUDITORS
Moss Adams, LLP
All shareholders are encouraged 2707 Colby Avenue, Suite 801
EVERETT/EVERGREEN WAY to read Cascade's Form 10-K for Everett, WA 98201
6920 Evergreen Way, Everett the year ended December 31, 2004,
(425) 353-1243 as filed with the Securities and LEGAL COUNSEL
Exchange Commission ("SEC"). The Keller Rohrback, LLP
Form 10-K includes the significant 1201 Third Avenue, Suite 3200
HARBOUR POINTE risk factors that could affect Seattle, WA 98101-3052
11700 Mukilteo Speedway, Mukilteo Cascade's projections and future
(425) 290-7767 operating performance. This annual SPECIAL COUNSEL
report is qualified in its entirety Anderson Hunter, PS
ISSAQUAH by the information contained in the 2707 Colby Avenue, Suite 1001
305 Front St. N, Issaquah Form 10-K. Everett, WA 98201
(425) 391-5500 The Form 10-K, together with all
other information filed by Cascade Cascade Financial Corporation Logo
LAKE STEVENS with the SEC, is available on the 2828 COLBY AVENUE, EVERETT, WA 98201
8915 Market Pl., Everett Internet at the SEC's web site at WWW.CASCADEBANK.COM
(425) 334-8880 http://www.sec.gov. The Form 10-K
will be furnished by Cascade, upon
LYNNWOOD receipt of written request
19419 Highway 99, Lynnwood addressed to Cascade Financial
(425) 775-6666 Corporation, 2828 Colby Avenue,
Everett, WA 98201.
MARYSVILLE The common stock of Cascade
815 State Ave., Marysville Financial Corporation is traded
(360) 659-7614 on the NASDAQ SmallCap Market
under the symbol CASB. As of
NORTH MARYSVILLE December 31, 2004, there were
3711 88th St. NE, Marysville approximately 2,760 shareholders
(360) 651-9200 of record. The following table
sets forth market price information
for the Corporation's common stock.