US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT - TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM TO
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Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 91-1661954
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 Colby Avenue
Everett, Washington 98201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 339-5500
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of June 30, 2002
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Common Stock ($.01 par value) 6,408,410
CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended June 30, 2002
INDEX
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PART I - Financial Information:
Item 1 - Financial Statements:
- Condensed Consolidated Balance Sheets 3
- Condensed Consolidated Statements of Operations 4
- Consolidated Statements of Comprehensive Income 5
- Condensed Consolidated Statements of Cash Flows 6
- Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 19
PART II - Other Information 21
PART I -- FINANCIAL INFORMATION
CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
June 30, December 31,
ASSETS 2002 2001
- ----- ---- ----
Cash on hand and in banks $ 8,476 8,535
Interest-earning deposits in other institutions 25,999 3,087
Securities available-for-sale 151,362 150,338
Securities held-to-maturity (market value of
$10,180 and $5,883) 10,120 5,989
Loans 563,873 582,530
Allowance for loan losses (6,650) (6,304)
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Loans, net 557,223 576,226
Premises and equipment, at cost, net 8,426 8,620
Accrued interest receivable and other assets 8,641 9,218
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TOTAL ASSETS $ 770,247 762,013
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits $ 463,843 419,980
Federal Home Loan Bank advances 197,500 226,500
Securities sold under agreements to repurchase 38,132 49,792
Advance payments by borrowers for taxes
and insurance 1,217 1,574
Accrued interest payable, expenses and
other liabilities 4,860 5,213
Deferred federal income taxes 2,072 1,277
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TOTAL LIABILITIES 707,624 704,336
Trust preferred securities 10,000 10,000
Stockholders' Equity:
Preferred stock, $.01 par value, 500,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value,
8,000,000 shares authorized;
6,571,845 and 6,333,007 shares issued
and outstanding 65 63
Additional paid-in capital 11,044 10,421
Treasury stock, 163,435 and 132,092 shares at
cost (1,237) (972)
Retained earnings, substantially restricted 41,873 38,012
Accumulated other comprehensive (loss)
income, net 878 153
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TOTAL STOCKHOLDERS' EQUITY 52,623 47,677
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 770,247 762,013
========= =======
See notes to consolidated financial statements.
CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------ ----------------
Interest income:
Loans $ 10,517 12,119 21,360 24,191
Mortgage-backed securities
held-to-maturity 76 98 156 200
Securities available-for-sale 2,422 1,684 4,611 3,510
FHLB stock dividends 199 217 393 414
Interest-earning deposits 84 (26) 151 95
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Total interest income 13,298 14,092 26,671 28,410
Interest expense:
Deposits 3,172 4,679 6,342 9,604
Borrowings 3,256 3,963 6,714 8,032
Trust preferred securities 291 290 581 573
-------- ------ ------ ------
Total interest expense 6,719 8,932 13,637 18,209
Net interest income 6,579 5,160 13,034 10,201
Provision for loan losses 420 270 1,120 560
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Net interest income after
provision for loan losses 6,159 4,890 11,914 9,641
Other income:
Gain on sale of loans 111 139 229 228
Service charges 402 452 804 985
Gain on sale of securities
available-for-sale 354 56 387 136
Net (loss) gain on sale of
Real estate owned (23) 16 353 62
Other 49 50 92 94
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Total other income 893 713 1,865 1,505
Other expenses:
Salaries and employee benefits 2,328 1,991 4,469 4,080
Occupancy 548 651 1,149 1,266
Marketing 90 111 170 182
Data processing 67 31 127 104
Debt prepayment fees 220 20 325 20
Other 881 878 1,869 1,751
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Total other expenses 4,134 3,682 8,109 7,403
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Income before income taxes 2,918 1,921 5,670 3,743
Federal income taxes 906 653 1,810 1,276
-------- ------ ------ ------
Net income 2,012 1,268 3,860 2,467
======== ====== ===== =====
Earnings per share:
Basic $ 0.31 0.21 0.61 0.40
Diluted 0.30 0.20 0.59 0.38
Weighted average number of shares outstanding:
Basic 6,389,505 6,117,318 6,340,834 6,093,796
Diluted 6,619,322 6,422,429 6,569,590 6,451,836
See notes to consolidated financial statements.
CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
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Net Income $2,012 1,268 3,860 2,467
Increase in unrealized gain on
securities available for sale, net of
tax expense of $782 and $172 for the
three months ended June 30, 2002 and
2001 respectively and $505 and $453
for the six months ended June 30
2002 and 2001 respectively. 1,517 333 980 880
Less reclassification adjustment for
gains included in net income, net of
tax (benefit) of $(121) and $(19) for
the three months ended June 30, 2002
and 2001, and $(132) and $(46) for the
six months ended June 30, 2002 and
2001 respectively. (233) (37) (255) (90)
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Comprehensive Income $3,296 1,564 4,585 3,257
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See notes to consolidated financial statements.
CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Six Months Ended June 30,
2002 2001
-------------------------
Cash flows from operating activities:
Net income $ 3,860 2,467
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization of premises
and equipment 602 604
Amortization of retained servicing rights 101 138
Provision for losses on loans 1,120 560
Additions to mortgage servicing rights -- (3)
Deferred loan fees, net of amortization (128) (231)
Net change in loans available-for-sale -- (1,035)
Net gain on sales of securities available-
-for-sale (387) (136)
Net gain on sale of investment property (353) --
Gain on sale of premises and equipment 2 --
Federal Home Loan Bank stock dividend received (393) (414)
Deferred Federal income taxes 324 420
Net change in accrued interest receivable and
other assets over accrued expenses and
other liabilities 366 (1,382)
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Net cash used in operating activities 5,114 988
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Cash flows from investing activities:
Loans originated, net of principal repayments 17,264 (16,353)
Principal repayments on securities held-to-maturity 869 607
Purchases of securities held-to-maturity (5,000) --
Principal repayments on securities available-
for-sale 9,549 19,561
Purchases of securities available for sale (90,393) (86,004)
Proceeds from sales of securities available
for sale 81,698 60,678
Proceeds from sale of investment property 956 --
Purchases of premises and equipment (408) (714)
Proceeds from sales of premises and equipment (2) --
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Net cash used in investing activities 14,533 (22,225)
Subtotal, carried forward 19,647 (21,237)
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See notes to consolidated financial statements.
CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Six Months Ended June 30,
2002 2001
-------------------------
Subtotal, brought forward $ 19,647 (21,237)
Cash flows from financing activities:
Proceeds from issuance of common stock 625 236
Purchase of treasury stock (265) (139)
Net increase in deposits 43,863 5,939
Net (decrease) increase in Federal Home Loan
Bank advances (29,000) 9,147
Net decrease in securities sold under agreements
to repurchase (11,660) (345)
Net (decrease) increase in advance payments by
borrowers for taxes and insurance (357) 19
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Net cash provided by financing activities 3,206 14,857
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Net increase (decrease) in cash and cash
equivalents 22,853 (6,380)
Cash and cash equivalents at beginning of period 11,622 20,260
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Cash and cash equivalents at end of period $ 34,475 13,880
======= ======
Supplemental disclosures of cash flow information-
cash paid during the period for:
Interest 11,391 17,635
Federal income taxes 1,105 1,250
Supplemental schedule of non-cash investing activities:
Net mortgage loans transferred to real estate owned 747 913
See notes to consolidated financial statements.
CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
1. Presentation of Financial Information
The accompanying financial information is unaudited and has been prepared
from the consolidated financial statements of Cascade Financial Corporation
(the "Corporation"), its subsidiaries, Cascade Bank (the "Bank") and Cascade
Capital Trust I (the "Trust"), and the Bank's subsidiary, Cascade Investment
Services, Inc. All significant intercompany balances have been eliminated in
consolidation. In the opinion of management, the financial information reflects
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial condition, results of operations, and cash
flows of the Corporation pursuant to the requirements of the SEC for interim
reporting.
Certain information and footnote disclosures included in the Corporation's
financial statements for the year ended December 31, 2001, have been condensed
or omitted from this report. Accordingly, these statements should be read with
the financial statements and notes thereto included in the Corporation's
December 31, 2001 Annual Report on Form 10-K.
2. Commitments and Contingencies
In the normal course of business there are various commitments to fund
mortgage loans. Management does not anticipate any material loss as a result of
these commitments.
Periodically, there have been various claims and lawsuits against the
Corporation or the Bank, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incidental to the Corporation's and the Bank's business. In the opinion of
management, no significant loss is expected from any such pending lawsuits.
3. Earnings Per Share
The following table presents the computation of basic and diluted net
income per share for the six-month periods ended June 30:
Dollars in thousands, except share
and per share amounts 2002 2001
- ---------------------------------------------------------------------------
Numerator:
- ---------
Net income $ 3,860 $ 2,467
Denominator:
- -----------
Denominator for basic net income per share-
Weighted average shares 6,340,834 6,093,796
Effect of dilutive securities:
Stock options 228,756 358,040
Denominator for diluted net income per share-
Weighted average shares and assumed conversion
of dilutive stock options 6,569,590 6,451,836
Basic net income per share $ 0.61 $ 0.40
Diluted net income per share $ 0.59 $ 0.38
As of June 30, 2002, and 2001 there were anti-dilutive options to purchase
shares of 114,962 and 153,354 respectively, excluded from the above disclosure.
4. Recently Issued Accounting Standards
SFAS No. 141, "Business Combinations", was issued in June 2001. SFAS No.
141 requires that all business combinations after June 30, 2001 be accounted
for using the purchase method. It also defines certain criteria for intangible
assets that are acquired in a business combination, in order to be recognized
and reported separately from goodwill. SFAS No. 141 supersedes Accounting
Principles Board Opinion No. 16 (APB 16), "Business Combinations" and Financial
Accounting Standards Board Statement No. 38 (SFAS 38), "Accounting for Pre-
acquisition Contingencies of Purchased Enterprises".
SFAS No. 142, "Goodwill and Other Intangible Assets", was issued in June
SFAS No. 142 establishes accounting and reporting standards for intangible
assets. It requires that goodwill and intangible assets with indefinite useful
lives be tested for impairment annually rather than amortized. SFAS No. 142
supersedes Accounting Principles Bulleting No. 17 (APB 17), "Intangible
Assets".
The Corporation adopted SFAS 141 and SFAS 142 and the application of these
statements did not have a material effect on the consolidated financial
statements.
In June 2001, the Financial Accounting Standards Board issued Statement No.
143, Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of long-
ived assets that result from the acquisition, construction, development and
(or) normal use of the asset. Statement No. 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. The Corporation is required and plans to adopt the provisions of
Statement No. 143 for the quarter ending March 31, 2003. Management has not
yet determined the impact of adopting this Statement.
In August 2001, the Financial Accounting Standards Board (FASB or the
Board) issued FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While Statement
No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains
many of the fundamental provisions of that Statement. Statement No. 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. This statement was adopted January 1, 2002 and
did not have a material effect on the results of our operations or financial
position.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion is intended to assist in understanding the
financial condition and results of the Corporation. The information contained
in this section should be read with the unaudited condensed consolidated
financial statements and its accompanying notes, and the December 31, 2001
audited consolidated financial statements and its accompanying notes included
in our recent Annual Report on Form 10-K.
This section contains forward-looking statements that are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected. Those factors include, but are not limited to: the impact of
the current national and regional economic recession on small business loan
demand in the Puget Sound area; loan delinquency rates; the bank's ability to
continue to attract quality commercial business; interest rate movements;
changes in the demographic make-up of the company's market area; fluctuation in
demand for the company's products and services; the Corporation's ability to
attract and retain qualified people, and other factors. For a discussion of
factors that could cause actual results to differ, and for certain mandated SEC
guide 3 information that has not materially changed since the balance sheet,
please see its Annual Report on Form 10-K for the year ended December 31, 2001.
Selected Financial Data
The following table sets forth certain selected financial data concerning
the Corporation for the periods indicated:
At or for the At or for the
three months ended six months ended
June 30, June 30,
2002 2001 2002 2001
--------------------------------------
Return on average assets 1.06% 0.71% 1.02% 0.69%
Return on average stockholders' equity 15.95 11.64 15.65 11.56
Average stockholders' equity to average
assets 6.64 6.07 6.51 5.96
Other expenses to average assets 2.17 2.05 2.13 2.07
Efficiency ratio 55.33 62.69 54.43 63.24
Average interest-bearing assets to
average interest-bearing liabilities 110.23 108.66 109.93 108.46
CHANGES IN FINANCIAL CONDITION
Total assets increased 1.1% or $8.2 million to $770.2 million at June 30,
2002, compared to $762.0 million at December 31, 2001. Net loans decreased 3.3%
or $19.0 million to $557.2 million at June 30, 2002, from $576.2 million at
December 31, 2001.
Investment securities increased $5.2 million to $161.5 million at June 30,
2002, compared to $156.3 million at December 31, 2001. Interest-earning
deposits held at other institutions increased $22.9 million from $3.1 million
at December 31, 2001 to $26.0 million at June 30, 2002. The growth in
investments and interest-earning deposits offset the decline in loan balances.
Investments are concentrated in callable securities of Government Sponsored
Enterprises (GSEs, e.g FNMA or FHLMC) and collateralized mortgage obligations
(CMOs) backed by pools of single family residential mortgages. All additions
to the investment portfolio during the quarter were rated AAA in terms of
credit quality by Moody's and/or Standard & Poors.
As the Bank increased its focus on deposit generation, total deposits
increased by $43.8 million from $420.0 million at December 31, 2001 to $463.8
million at June 30, 2002. Since deposit growth exceeded asset growth, other
borrowings outstanding declined. Federal Home Loan Bank-Seattle (FHLB) advances
decreased by $29.0 million from $226.5 million at December 31, 2001 to $197.5
million at June 30, 2002. Securities sold under agreements to repurchase
decreased $11.7 million from $49.8 million at December 31, 2001 to $38.1
million at June 30, 2002.
Stockholders' equity increased by $4.9 million from $47.7 million at
December 31, 2001 to $52.6 million at June 30, 2002. The increase is primarily
attributable to the retention of all the net income for the period, which was
$3.9 million. The exercise of stock options generated $625,000 in new capital.
That amount was partially offset by the tender of $265,000 worth of outstanding
stock to exercise those options. An increase in accumulated comprehensive
income (i.e. mark to market changes on available for sale investment
securities) added $725,000 to the capital account.
Loan Portfolio
As displayed in the following table, overall loans decreased by $19 million
as of June 30, 2002, compared to December 31, 2001. In keeping with the Bank's
evolution to a commercial bank, loans more closely associated with a commercial
bank, i.e. business and real estate construction loans grew solidly. On the
other hand, residential, multi-family and consumer lending balances declined.
The refinancing wave of late 2001, precipitated by low mortgage rates, led to a
$19 million (12%) reduction in our residential loan balances and a $7 million
decrease in multi-family balances.
The following summary reflects the Bank's loan portfolio as of the dates
indicated:
Types of Loans June 30, % of Dec. 31, % of
2002 Portfolio 2001 Portfolio
------- --------- -------- ---------
($ in thousands)
Business $128,635 22.7% $125,342 21.4%
Real estate construction (net) 81,910 14.5% 75,932 13.0%
Commercial real estate 62,211 11.0% 62,938 10.7%
Home equity and consumer 56,892 10.0% 58,381 10.0%
Residential 134,027 23.7% 152,706 26.1%
Multifamily 102,572 18.1% 109,733 18.8%
Total loans $566,247 100% $585,032 100%
(Loans held for sale are included in residential loans and at less than 1% of
total loans are not considered material.)
Asset Quality
Non-performing assets (non-performing loans and real estate owned) totaled
$3.5 million and $2.4 million at June 30, 2002 and December 31, 2001,
respectively. Non-performing loans, those on non-accrual, those that are
ninety days past due, and those that management otherwise has serious
reservations about their collectibility, increased to $2.9 million at June 30,
2002, compared to $2.0 million at December 31, 2001. The majority of the
increase in non-performing loans was the placement on non-accrual status of one
business loan, which has subsequently been brought current. Real estate owned
was $626,000 as of June 30, 2002 and $430,000 at December 31, 2001.
At June 30, 2002 the Bank's loan loss allowance totaled $6.7 million
compared to $6.3 million at December 31, 2001. The allowance for loan losses
was 1.17% of total loans outstanding at June 30, 2002 compared to 1.08% at
December 31, 2001. The allowance for loan losses was 228% of non-performing
loans at June 30, 2002. The allowance for loan losses is maintained at a
level sufficient to provide for losses based on management's evaluation of
known and inherent risks in the portfolio. This evaluation includes analyses
of the financial condition of the borrower, the value of the collateral
securing selected loans, consideration of historical loss experience and
management's projection of trends affecting credit quality. The increase in the
allowance is primarily attributable to the increase in non-performing loans, an
increase in loans adversely classified by our internal loan grading system, the
continued emphasis on business and construction lending, and a slowdown in the
economy of our market area. Management believes that the allowance for losses
on loans is adequate to provide for losses that may be incurred on non-
performing loans.
During the quarter ended June 30, 2002, loan charge-offs equaled $322,000
while recoveries were $20,000. The net charge-offs of $302,000 represented .05%
of total loans. Of this total, $175,000 represented the charge-off of a
specific reserve the Bank had established on a business borrower in a prior
period.
The following table provides summary information concerning asset quality:
June 30, December 31,
2002 2001
-------------------------
Non-performing loans to total assets .38 % .26 %
Non-performing loans to loans, total outstanding .51 .34
Non-performing assets to total assets .46 .32
Allowance for loan losses to non-performing loans 228 315
Allowance for loan losses to loans, net outstanding 1.17 1.09
Net charge-offs to total loans .05 .02
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended June 30, 2002 and 2001
General
Net income increased 58.7% to $2.0 million for the three months ended June
30, 2002 compared to $1.3 million during the comparable period in 2001.
Diluted net income per share was $0.30 for the quarter ended June 30, 2002 and
$0.20 per share for the quarter ended June 30, 2001. This increase is
primarily attributable to the increase in net interest income of $1.4 million
from $5.2 million during the quarter ended June 30, 2001 to $6.6 million during
the quarter ended June 30, 2002. Other income increased by $180,000 to
$893,000 for the quarter ended June 30, 2002. Other expense, net of debt
prepayment fees, increased $252,000 and Federal income tax expense increased
$253,000 compared to the three months ended June 30, 2001.
Net income for the six months ended June 30, 2002, was $3.9 million
compared with $2.5 million during the comparable period in 2001. Net income per
diluted share was $0.59 for the six months ended June 30, 2002, compared with
$0.38 in 2001. The $2.8 million increase in net interest income and the
$360,000 increase in other income more than offset the $706,000 increase in
other expenses, the increased provision for loan losses of $560,000, and the
increased income tax expense of $534,000.
Net Interest Income
Net interest income increased 28.0% or $1.4 million to $6.6 million for the
three months ended June 30, 2002 compared to $5.1 million for the three months
ended June 30, 2001. Of this increase virtually all of it can be attributed to
the increase in net interest margin. Net interest income for the six months
ended June 30, 2002 and 2001 was $13.0 million and $10.2 million respectively.
Of the $ 2.8 million increase in net interest income, $1.8 million resulted
from the increase in net interest margin and $1.0 million is the result of an
increase in average earning assets.
Average interest earning assets increased $45.6 million or 6.5% to $746.1
million for the quarter ended June 30, 2002 and $49.0 million or 7.0% for the
six months ended June 30, 2002 compared to the same periods in 2001. Average
total loans (including loans held for sale) decreased $10.1 million or 1.8% to
$560.6 million and average investment securities increased $42.3 million or
34.4% to $165.4 million for the three months ended June 30, 2002 compared to
the same quarter of the prior year.
At or for the At or for the
three months ended six months ended
June 30, June 30,
(dollars in thousands)
2002 2001 2002 2001
------------------------------------------
Average interest earning assets $746,065 $700,504 $746,703 $697,664
Average interest bearing liabilities 676,797 644,649 679,272 643,232
Yield on interest earning assets 7.14% 8.06% 7.18% 8.19%
Cost of interest bearing liabilities 3.98% 5.55% 4.05% 5.70%
Net interest spread 3.16% 2.51% 3.13% 2.48%
Net interest margin 3.53% 2.95% 3.50% 2.93%
The net interest margin increased 58 basis points to 3.53% for the three
months ended June 30, 2002 compared to the same quarter the prior year. The
improvement in the net interest margin is the result of a decrease in liability
costs that exceeded the decrease in asset yields. The yield on interest
earning assets decreased 92 basis points to 7.14% for the quarter ended June
30, 2002, compared to 8.06% for the quarter ended June 30, 2001. The cost of
funds decreased to 3.98% for the quarter ended June 30, 2002 compared to 5.55%
for the same quarter in 2001, a drop of 157 basis points. For the six months
ended June 30, 2002, the net interest margin expanded 57 basis points from
2.93% to 3.50%. As was the case with the quarterly results, the yield on
earnings assets fell less than the cost of interest bearing liabilities.
The yield on assets fell as prime based loans repriced lower throughout the
year as the Federal Reserve lowered the target Fed funds rate by 475 basis
points during 2001, including 175 basis points in response to the tragedy of
September 11th. Given the steep and rapid descent in rates, prime based loans
and refinanced loans repriced more quickly than our liabilities throughout the
period. In addition, many fixed rate loans, especially residential real estate
loans, refinanced to lower rates. Finally, asset yields were constrained by the
increased percentage of earning assets represented by cash equivalents and
investment securities.
On the other hand, the cost of liabilities declined as the rates paid on
deposits dropped with the general level of interest rates. However, deposits
continued to reprice to slightly lower rates throughout the quarter. Also,
during the period, the Bank prepaid $22 million in long term high rate FHLB
advances that resulted in the payment of fees, but lowered the cost of funds.
Provision for loan losses
Cascade's provision for loan losses was $420,000 for the three months and
$1.1 million for the six months ended June 30, 2002. The provision was
$270,000 and $560,000 for the same periods in 2001. The increase in the
provision reflects an increase in net charge-offs, an increase in adversely
classified loans, a heavier weighting of business and construction loans in the
loan mix, and concerns regarding the impact of the economic slowdown in the
Bank's market area and hence the prospects for the Bank's borrowers.
After a decade of steady growth, the immediate prospects for the economy in
the Corporation's market area (Snohomish County and East King County of
Washington state) remain less than robust. For example, the area's largest
employer, Boeing, continues to layoff employees due to the slowing demand for
commercial aircraft. The slowdown in many areas of technology has had a
negative impact on the demand for commercial real estate in our market area.
The vacancy rates for Class A, high rise office space has increased from almost
zero two years ago in Seattle and Bellevue to 18-20% today. While the impact
on the Bank's asset quality has been muted to date, a continued economic slump
will most likely have adverse ramifications for most borrowers and hence
lenders in our market.
This economic slowdown comes at a time when management intends to emphasize
the growth of the business and construction portfolios. These loans typically
have a higher credit risk that may require additions to the reserve in future
periods. Management monitors these loans at an increased level to maintain
credit quality and adequate reserve levels.
Other Income
Other income increased $180,000 or 25.2% to $893,000 for the three months
ended June 30, 2002 as compared to $713,000 for the three months ended June 30,
2001. Other income was $1.9 million and $1.5 million for the six month periods
ended June 30, 2002 and June 30, 2001 respectively. For the quarter ended June
30, 2002, gain on the sale of investment securities increased by $298,000 to
$354,000 as the Bank realigned its investment portfolio. This was offset by a
decrease in gain on sale of loans of $28,000 to $111,000 for the quarter ended
June 30, 2002 compared to the same quarter in 2001, as residential refinance
activity slowed. Also, service fee income dropped to $402,000 compared to
$452,000 for the same period in the prior year due to lower service fees in the
Bank's investment advisory subsidiary, Cascade Investment Services.
The increase in other income for the six month period included a gain of
$383,000 on the sale of a property that the Bank held for investment, which
occurred in the quarter ended March 31, 2002, offset by a modest loss on the
sale of another property resulting in a net gain on the sale of real estate for
the six months ended June 30, 2002 of $353,000 compared to $62,000 for the same
period in 2001.
Other Expense
Other expense was $4.1 million for the three months and $8.1 million for
the six months ended June 30, 2002 compared with $3.7 million for the three
months and $7.4 million for the six months ended June 30, 2001. The increase
in other expense was driven by increases in salary and benefit expense and
prepayment fees on Federal Home Loan Bank advances.
Salary and employee benefit expenses increased $337,000 to $2.3 million
during the three months ended June 30, 2002 compared to the same quarter last
year. Salary and benefit expenses were $4.5 million for the six month period
ended June 30, 2002 and $4.1 million for the same period in 2001. The increase
in these expenses was due to: a modest increase in the employee count;
increased incentive accruals based upon the Corporation's financial
performance; as well as an increase in health insurance premiums paid on behalf
of employees.
The remaining other operating expense categories, excluding prepayment
fees, totaled $1.6 million for the quarter ended June 30, 2002 and $3.3 million
for the six month period as of the same date. For the same periods in 2001,
other operating expenses were $1.7 million and $3.3 million respectively. The
Corporation's decision to change its fiscal year end to December 31st from June
30th caused it to incur incremental expenses, e.g. an additional year end audit.
Prepayment fees on Federal Home Loan Bank advances were $220,000 for the
three months ended June 30, 2002 and $325,000 for the six month period. For
the three month and six month periods ended June 30, 2001, the Bank incurred
$20,000 in prepayment fees. The prepayments of advances were made possible by
deposit growth exceeding asset growth. The advances prepaid were high rate
and were extinguished to lower the cost of funds and improve the net interest
margin.
Federal income tax expenses increased $253,000 to $906,000, an increase of
38.7% during the three months ended June 30, 2002 compared to the same quarter
last year. For the quarter ended June 30, 2002, the Corporation's effective
tax rate was 33% compared to 34% for the same period in 2001. For the six
months ended June 30, 2002 income tax expense was $1.8 million, with an
effective tax rate of 32% compared to $1.3 million, with an effective rate of
34% in 2001.
Segment Results
The following is a summary of selected operating segment information for
the three and six month periods ended June 30, 2002 and 2001. The Corporation
manages its operations and prepares management reports with a primary focus on
its various business units. The accounting policies of the individual units
are the same as those of the Corporation. The Corporation allocates centrally
provided services to the business units based upon estimated usage of those
services. All amounts are in thousands.
For the three months ended June 30, 2002
Income Administration/
Business Residential Construction Property Consumer Treasury Total
---------------------------------------------------------------------------------------------
Condensed Income Statement
Net interest income after
provision for loan losses $1,349 594 918 1,244 440 1,614 6,159
Other Income 11 141 -- 3 326 412 893
Direct Expense 279 182 75 25 283 3,290 4,134
Allocated Overhead 286 304 174 373 127 (1,264) --
---------------------------------------------------------------------------------------------
Income before Income Tax 795 249 669 849 356 -- 2,918
Federal Income Taxes 248 77 207 263 111 -- 906
---------------------------------------------------------------------------------------------
Net Income $ 547 172 462 586 245 -- 2,012
---------------------------------------------------------------------------------------------
For the three months ended June 30, 2001
Income Administration/
Business Residential Construction Property Consumer Treasury Total
---------------------------------------------------------------------------------------------
Condensed Income Statement
Net interest income after
provision for loan losses $1,217 498 1,075 486 157 1,457 4,890
Other Income 17 166 -- 3 147 380 713
Direct Expense 249 267 84 44 309 2,729 3,682
Allocated Overhead 182 268 112 238 92 (892) --
---------------------------------------------------------------------------------------------
Income before Income Tax 803 129 879 207 (97) -- 1,921
Federal Income Taxes 274 44 300 71 (36) -- 653
---------------------------------------------------------------------------------------------
Net Income $ 529 85 579 136 (61) -- 1,268
For the six months ended June 30, 2002
Income Administration/
Business Residential Construction Property Consumer Treasury Total
---------------------------------------------------------------------------------------------
Condensed Income Statement
Net interest income after
provision for loan losses $2,501 1,154 1,837 2,510 894 3,018 11,914
Other Income 27 291 -- 5 640 902 1,865
Direct Expense 566 330 168 56 571 6,418 8,109
Allocated Overhead 563 608 340 741 246 (2,498) --
---------------------------------------------------------------------------------------------
Income before Income Tax 1,399 507 1,329 1,718 717 -- 5,670
Federal Income Taxes 447 162 434 548 229 -- 1,810
---------------------------------------------------------------------------------------------
Net Income $ 952 345 905 1,170 488 -- 3,860
For the six months ended June 30, 2001
Income Administration/
Business Residential Construction Property Consumer Treasury Total
---------------------------------------------------------------------------------------------
Condensed Income Statement
Net interest income after
provision for loan losses $2,090 1,512 1,925 1,684 659 1,771 9,641
Other Income 52 308 -- 3 662 480 1,505
Direct Expense 508 450 124 75 598 5,648 7,403
Allocated Overhead 627 1,038 363 996 373 (3,397) --
---------------------------------------------------------------------------------------------
Income before Income Tax 1,007 332 1,438 616 350 -- 3,743
Federal Income Taxes 343 113 490 210 120 -- 1,276
---------------------------------------------------------------------------------------------
Net Income $ 664 219 948 406 230 -- 2,467
Income Property includes Commercial Real Estate and Multi-family lending.
Liquidity and Sources of Funds
The Bank monitors its liquidity position to assure that it will have
adequate resources to meet its customers needs. Potential uses of funds are new
loans; the disbursement of construction loans in process; draws on unused
business lines of credit and unused consumer lines of credit; and deposit
withdrawals. As of June 30, 2002, Cascade had $31.3 million of construction
loans in process and a total of $70.6 million in unused lines of credit. While
virtually all the loans in process will be funded as the construction projects
move toward completion, only a modest portion of the lines of credit will
require funding.
Funding needs are met through the sale of loans, existing liquidity
balances, repayment of existing loans, deposit growth, FHLB-Seattle advances,
and other borrowings. Cascade maintains liquidity balances in FHLB deposits,
which equaled $26.0 million as of June 30, 2002 and $3.1 million at December
31, 2001. Liquidity is also provided by the Bank's unencumbered securities
portfolio. Securities that could be pledged to secure additional funding were
$82.0 million at the end of the quarter.
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 $269
million at current asset levels. At June 30, 2002, the Bank had $197.5 million
in advances and an unused line of credit from the FHLB-Seattle of approximately
$71.5 million. During the six month period the Bank prepaid $28 million in
advances. The Bank also uses reverse repurchase agreements to provide a
flexible source of funding. At June 30, 2002 the Bank had $38.1 million in
reverse repurchase agreements outstanding. The Bank also has a $5 million Fed
funds line with its correspondent bank, which was not used during the quarter.
Capital Resources
On March 1, 2000 Cascade Capital Trust I issued ten million par value Trust
Preferred Securities. These securities are considered core capital for the
purposes of regulatory capital requirements. Cascade Capital Trust I, a wholly
owned subsidiary, is a statutory business trust created for the exclusive
purposes of issuing and selling capital securities and utilizing sale proceeds
to acquire junior subordinated debt issued by Cascade Financial Corporation.
Accordingly, the junior subordinated debentures are the sole assets of the
Trust, and payments under the junior subordinated debentures will be the sole
revenues of the Trust. All of the common securities of the Trust are owned by
the Corporation.
The Corporation's primary source of capital is the retention of its net
income. Although the Corporation periodically reviews its dividend policy, the
Corporation has not paid a cash dividend. The Corporation also receives capital
through the exercise of options granted to employees and directors.
In July of 2000, the Corporation authorized a stock repurchase program,
which permits the Corporation to repurchase up to 5% of its outstanding shares.
Also, the Corporation permits employees and directors to tender shares of the
Corporation stock which they have held for a minimum of six months to exercise
options. As of June 30, 2002, the Corporation has repurchased approximately
163,000 shares of stock at a cost of $1.2 million. These shares, which
represent 2.5% of shares outstanding, are accounted for as Treasury Stock.
Capital Requirements
Cascade Bank is in full compliance with all capital requirements
established by the FDIC and the Washington State Department of Financial
Institutions at June 30, 2002. The Bank's regulatory capital requirements and
related excess capital amounts as of June 30, 2002 are presented in the
following table:
Core capital Amount Percentage
- ------------ ------ ----------
Tier 1 (Core) capital $59,816 7.86%
Less: Minimum requirement 30,428 4.00
------ ------
Excess $29,388 3.86%
====== ======
Risk-based capital Amount Percentage
- ------------------ ------ ----------
Risk-based capital $66,466 12.30%
Less: Minimum requirement(1) 43,235 8.00
------ ------
Excess $23,231 4.30%
====== ======
(1) Based on risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991. Among other things, the
FDICIA provides the FDIC, effective December 19, 1992, with broad powers to
take "prompt corrective action" to resolve problems of insured depository
institutions. The actions the FDIC can take depend upon whether the
institution in question is "well capitalized," "adequately capitalized,
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under FDIC guidelines, Cascade Bank is a "well
capitalized" institution as of June 30, 2002.
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. The Corporation is well capitalized under Federal Reserve
guidelines with a Tier 1 ratio of 8.12% and a Risk Based ratio of 12.64%.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
ASSET/LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to fluctuations in
interest rates because its interest-bearing liabilities re-price on different
terms than its interest-earning assets.
The Bank has sought to manage its interest rate exposure through the
structure of its balance sheet. It has migrated its loan mix toward prime based
business and construction loans. The Bank sells virtually all new 15 and 30
year fixed rate residential loans. The Bank's fixed rate loans secured by real
estate consist primarily of mortgages with initial fixed rate periods of three
or five years that after the initial period convert to one year adjustable
rates loans.
The growth in the Bank's investment portfolio has been generally limited to
collateralized mortgage obligations (CMOs) with expected average lives under
five years and callable Agency securities. The callable Agency securities have
intermediate maturities with durations less than five years but final
maturities of up to 15 years in some cases. Given the steep nature of the
fixed income yield curve, these securities offer very attractive yields
compared to securities with shorter final maturities. However, in an
increasing interest rate environment, these securities could produce mark to
market losses that would be reflected in the Corporation's comprehensive
income. If however, interest rates decline, these securities could be called
by the issuer. During the quarter ended June 30, 2002, $10 million of these
securities were called.
The Bank extends the maturity of its liabilities by offering deposit
products to long-term, less rate sensitive customers, and by obtaining longer
term FHLB-Seattle advances. As of June 30, 2002, 96% of the $197.5 million of
advances have maturities greater than one year.
Cascade uses a simulation model to measure its interest rate risk and the
effects on net interest income resulting from changes in market interest rates.
Cascade uses mark to market reports to measure the impact of changes in rates
on the fair value of its balance sheet in rate shock scenarios. Cascade's
Board of Directors has established policies that limit the reduction in the
Bank's net interest income, the fair value of equity and adjusted capital/asset
ratios under certain interest rate shock scenarios.
Using standard rate shock methodology, the Bank's net interest income
decreases 4.7% in the up 200 basis points scenario and increases 0.7% in the
down 200 basis point scenario, both within the Board established limit of a 10%
decline. The Bank's fair value of equity decreases 26.8% in the up 200 basis
points shock and increases 30.1% in the down 200 basis point scenario. The
established limit is a 30% decline. The minimum adjusted capital to asset
limit is 5% in either scenario. In the up 200 basis point scenario, the
capital/asset ratio is 5.52%. In the down 200 basis point shock, the capital
ratio is 8.96%.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
- ---------------------------
The Corporation and the Bank have certain litigation and negotiations in
progress resulting from activities arising from normal operations. In the
opinion of management, none of these matters is likely to have a materially
adverse effect on the Corporation's financial position.
Item 2. Changes in Securities.
- -------------------------------
Not applicable
Item 3. Defaults upon Senior Securities.
- -----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
The Annual Shareholders meeting of Cascade Financial Corporation was held
on May 8, 2002. At that meeting, David W. Duce, Frank M. McCord, Carol K.
Nelson, and David O'Connor were re-elected to the Board of Directors for terms
that expire in 2005 or until their successors are elected and qualified. Each
nominee received in excess of 99.8% of the votes that were cast.
Directors Janice Halladay, Dwayne Lane, Dennis R. Murphy, Henry Robinett,
Craig G. Skotdal, Ronald E. Thompson, and G. Brand Westover continue to serve
on the Board.
Item 5. Other information.
- ---------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Cascade Financial Corporation (1)
3.2 Bylaws of Cascade Financial Corporation (1)
10.1 Cascade Financial Corporation 1994 Employee Stock Purchase Plan (1)
10.2 Cascade Financial Corporation 1992 Stock Option and Incentive Plan (2)
10.3 Cascade Financial Corporation Employee Stock Ownership Plan (2)
10.4 Cascade Financial Corporation 1997 Stock Option Plan (3)
Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended June
30, 2002.
- -------------------
(1) Incorporated by reference to the Corporation's Registration Statement on
Form S-4 (File No. 33-83200).
(2) Incorporated by reference to the Corporation's Form 10-KSB for June 30,
1995.
(3) Incorporated by reference to Appendix E to the Prospectus included in the
Corporation's Registration Statement on Form S-4 (File no. 333-24203).
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASCADE FINANCIAL CORPORATION
August 12, 2002 /s/ Lars H. Johnson
------------------------------
By: Lars H. Johnson,
Executive Vice President
(Chief Financial Officer)
CERTIFICATION
To my knowledge, this Report on Form 10-Q for the quarter ended June 30,
2002, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934, and the information contained in this
Report fairly presents, in all material respects, the financial condition and
the results of operation of Cascade Financial Corporation.
/s/ Carol K. Nelson
----------------------------------------
Carol K. Nelson, President and CEO
/s/ Lars H. Johnson
----------------------------------------
Lars H. Johnson, Chief Financial Officer