US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM TO
------ ------
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1661954
------------------------------ -----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 Colby Avenue
Everett, Washington 98201
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(425) 339-5500
--------------------------------------------------
(Registrant's telephone number, including area code)
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
----- -----
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes X No
----- -----
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 August 4, 2003
- ---------------------------- --------------------------------
Common Stock ($.01 par value) 6,565,688
CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended June 30, 2003
-----------------------------------
INDEX
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 Condensed Consolidated Financial Statements...................8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.......23
Item 4 - Controls and Procedures..........................................25
PART II - Other Information.................................................27
2
PART I -- FINANCIAL INFORMATION
-------------------------------
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
June 30, December 31,
ASSETS 2003 2002
- ------ -------- ------------
Cash on hand and in banks $ 10,436 9,640
Interest-earning deposits in other institutions 4,594 10,955
Securities available-for-sale 170,984 159,897
Securities held-to-maturity (market value of
$84,053 and $49,639) 83,512 49,078
Loans 567,151 553,549
Allowance for loan losses (7,576) (6,872)
----------------------
Loans, net 559,575 546,677
Premises and equipment, at cost, net 8,797 9,261
Bank owned life insurance 10,887 10,619
Accrued interest receivable and other assets 7,634 8,026
----------------------
TOTAL ASSETS $856,419 804,153
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Deposits $545,962 509,850
Federal Home Loan Bank advances 194,000 197,500
Securities sold under agreements to repurchase 34,057 20,569
Trust preferred securities 10,000 10,000
Advance payments by borrowers for taxes
and insurance 1,337 1,507
Dividends payable 328 324
Accrued expenses and other liabilities 8,444 6,254
Deferred federal income taxes 1,347 1,509
----------------------
TOTAL LIABILITIES 795,475 747,513
Stockholders' Equity:
- --------------------
Preferred stock, $.01 par value, 500,000
shares authorized; no shares issued
or outstanding - -
Common stock, $.01 par value, 25,000,000
shares authorized; 6,563,240 and 6,657,547
shares issued and outstanding 66 67
Additional paid-in capital 11,663 11,481
Treasury stock, 0 and 173,427 shares at cost - (1,347)
Retained earnings, substantially restricted 48,217 45,438
Cumulative other comprehensive income, net 998 1,001
----------------------
TOTAL STOCKHOLDERS' EQUITY 60,944 56,640
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $856,419 804,153
======================
See notes to condensed consolidated financial statements
3
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Interest income: --------------------- ---------------------
Loans $ 9,514 10,517 19,143 21,360
Securities held-to-maturity 734 80 1,350 160
Securities available-for-sale 2,064 2,431 4,286 4,631
FHLB stock dividends 186 199 418 393
Interest-earning deposits 34 71 83 127
--------------------- ---------------------
Total interest income 12,532 13,298 25,280 26,671
Interest expense:
Deposits 2,887 3,172 5,755 6,342
Borrowings 2,650 3,256 5,517 6,714
Trust preferred securities 284 291 567 581
--------------------- ---------------------
Total interest expense 5,821 6,719 11,839 13,637
Net interest income 6,711 6,579 13,441 13,034
Provision for loan losses 300 420 675 1,120
--------------------- ---------------------
Net interest income after
provision for loan losses 6,411 6,159 12,766 11,914
Other income:
Gain on sale of loans 269 111 474 229
Service charges 424 402 849 804
Gain on sale of securities
available-for-sale 575 354 1,340 387
Net (loss) gain on sale of real
estate owned, investment
property and other repossessed
assets 7 (23) 48 353
Bank owned life insurance 147 8 295 5
Other 29 41 60 77
--------------------- ---------------------
Total other income 1,451 893 3,066 1,865
Other expenses:
Salaries and employee benefits 2,320 2,332 4,805 4,475
Occupancy 639 548 1,251 1,149
Marketing 112 90 223 170
Data processing 69 67 140 127
Debt prepayment fees 276 220 718 325
Other 982 877 1,855 1,863
--------------------- ---------------------
Total other expenses 4,398 4,134 8,992 8,109
Income before income taxes 3,464 2,918 6,840 5,670
Federal income taxes 1,105 906 2,177 1,810
--------------------- ---------------------
Net income $ 2,359 2,012 4,663 3,860
===================== =====================
Earnings per share:
Basic $ 0.36 0.31 0.72 0.61
Diluted 0.35 0.30 0.69 0.59
Weighted average number of shares
outstanding:
Basic 6,537,703 6,389,505 6,517,818 6,340,834
Diluted 6,709,111 6,619,322 6,711,932 6,569,590
See notes to condensed consolidated financial statements
4
CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------------------- ---------------------
Net Income $2,359 2,012 4,663 3,860
Increase in unrealized gain on
securities available-for-sale,
net of tax expense of $194 and
$782 for the three months ended
June 30, 2003 and 2002,
respectively and $891 and $505
for the six months ended June
30, 2003 and 2002, respectively. 893 1,517 881 980
Less reclassification adjustment
for gains included in net income,
net of tax (benefit) of $(196)
and $(121) for the three months
ended June 30, 2003 and 2002,
respectively and $(456) and $(132)
for the six months ended June 30,
2003 and 2002, respectively. (379) (233) (884) (255)
----------------- -----------------
Comprehensive Income $2,873 3,296 4,660 4,585
----------------- -----------------
See notes to condensed consolidated financial statements
5
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Six Months Ended June 31,
2003 2002
Cash flows from operating activities: -------------------------
Net income $ 4,663 3,860
Adjustments to reconcile net income to net -----------------------
cash provided by (used in) operating activities:
Depreciation and amortization of premises
and equipment 708 602
Increase in cash surrender value of Bank Owned
Life Insurance (268) --
Amortization of retained servicing rights 109 101
Gain on sale of premises and equipment -- 2
Provision for losses on loans 675 1,120
Deferred loan fees, net of amortization 14 (128)
Net gain on sales of securities available-
for-sale (1,340) (387)
Net gain on sales of real estate owned,
investment property and other repossessed assets (49) (353)
Federal Home Loan Bank stock dividend received (418) (393)
Deferred federal income taxes (160) 324
Net change in accrued interest receivable and
other assets over accrued expenses and
other liabilities 2,598 366
-----------------------
Net cash provided by operating activities 6,532 5,114
Cash flows from investing activities:
Loans originated, net of principal repayments (14,160) 17,264
Principal repayments on securities held-to-
maturity 2,842 869
Purchase of securities held-to-maturity (72,189) (5,000)
Proceeds from calls of securities held-to-
maturity 34,913 --
Principal repayments on securities available-
for-sale 48,953 9,549
Purchases of securities available-for-sale (195,426) (90,393)
Proceeds from sales of securities available-
for-sale 137,138 81,698
Proceeds from sale of investment property -- 956
Purchases of premises and equipment (253) (408)
Proceeds from sales/retirements of premises
and equipment 9 (2)
Proceeds from loan participations sold 498 --
Net cash provided by (used in) -----------------------
investing activities (57,675) 14,533
Subtotal, carried forward $ (51,143) 19,647
-----------------------
See notes to condensed consolidated financial statements
6
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Six Months Ended June 31,
2003 2002
-------------------------
Subtotal, brought forward $ (51,143) 19,647
-----------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 381 625
Dividend paid (650) --
Purchase of treasury stock (8) (265)
Repurchase of common stock (75) --
Net increase in deposits 36,112 43,863
Net increase (decrease) in Federal Home Loan
Bank advances (3,500) (29,000)
Net increase (decrease) in securities sold
under agreements to repurchase 13,488 (11,660)
Net increase in advance payments by borrowers
for taxes and insurance (170) (357)
Net cash provided by financing activities 45,578 3,206
Net increase (decrease) in cash and cash equivalents (5,565) 22,853
Cash and cash equivalents at beginning of period 20,595 11,622
Cash and cash equivalents at end of period $ 15,030 34,475
Supplemental disclosures of cash flow information-
cash paid during the period for:
Interest $ 12,445 11,391
Federal income taxes 2,000 1,105
Supplemental schedule of noncash investing and
financing activities:
Net mortgage loans transferred to real estate owned 75 747
Mark to market on securities available-for-sale 6 (1,098)
Retirement of treasury stock in retained earnings (1,230) --
Dividends declared in retained earnings (654) --
See notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(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" or "Cascade")
and Cascade Capital Trust I (the "Trust"), and the Bank's subsidiary, Cascade
Investment Services, Inc. All significant intercompany balances have been
eliminated in the 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, 2002, 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, 2002 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 material loss is expected from any of such pending lawsuits.
8
3. Stockholders' Equity
a) Earnings Per Share
The following table presents the computation of basic and diluted net
income per share for the three and six-month period ended June 30:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
2003 2002 2003 2002
------------------------------------------
Dollars in thousands,
except share and per share amounts
Numerator:
- ---------
Net income $ 2,359 2,012 4,663 3,860
==========================================
Denominator:
- -----------
Denominator for basic net
income per share-Weighted
average shares 6,537,703 6,389,505 6,517,818 6,340,834
Effect of dilutive securities:
Stock options 171,408 229,817 194,114 228,756
------------------------------------------
Denominator for diluted net
income per share-Weighted
average shares and assumed
conversion of dilutive stock
options 6,709,111 6,619,322 6,711,932 6,569,590
==========================================
Basic net income per share $ 0.36 0.31 0.72 0.61
==========================================
Diluted net income per share $ 0.35 0.30 0.69 0.59
==========================================
As of June 30, 2003, and 2002 there were anti-dilutive options to purchase
shares of 0 and 114,962 respectively, excluded from the above disclosure.
b) Cash Dividend Declared
On June 25th, the company announced its third cash dividend payment of
$0.05 per share, which was paid on July 24, 2003, to shareholders of record
on July 10, 2003.
c) 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 to be consistent with the
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation," the Corporation's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
9
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
2003 2002 2003 2002
-----------------------------------------
Dollars in thousands,
except share and per share amounts
Net income
As reported $2,359 2,012 4,663 3,860
Less SFAS 123 compensation
costs 56 63 78 115
--------------------------------------
Pro forma $2,303 1,949 4,585 3,745
======================================
Net income per common share
Basic
As reported $ 0.36 0.31 0.72 0.61
Pro forma 0.35 0.31 0.70 0.59
Diluted
As reported $ 0.35 0.30 0.69 0.59
Pro forma 0.34 0.29 0.68 0.57
4. Recently Issued Accounting Standards
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
- -lived 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 Statement was adopted in March 2003 and did not have a material
effect on the results of our operations or financial position.
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The provisions of this
Statement are effective for exit and disposal activities that are initiated
after December 31, 2002. This statement was adopted January 1, 2003 and did
not have a material effect on the results of our operations or financial
position.
In October 2002, the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 147, Acquisitions of Certain Financial
Institutions-an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. This Statement addresses FAS No. 72, Accounting for
10
Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation
No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association
or a Similar Institution Is Acquired in a Business Combination Accounted for by
the Purchase Method, provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, this Statement removes
acquisitions of financial institutions from the scope of both Statement 72 and
Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. In addition, this Statement amends FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. This statement was
adopted in December 2002 and did not have a material effect on the results of
our operations or financial position.
In December 2002, the Financial Accounting Standards Board issued
Financial Accounting Standard (FAS) No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure provisions of this statement were adopted in December 2002 and did
not have a material effect on the results of our operations or financial
position.
In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, clarifying the accounting treatment and
financial statement disclosure of certain guarantees issued and outstanding.
Interpretation No. 45 clarifies that a guarantor is required to recognize, at
the inception of certain guarantees, a liability for the fair value undertaken
in issuing the guarantee. In addition, guarantors must disclose the
approximate term and nature of the guarantee, the maximum potential amount of
future payments, current carrying amount of the liability and the nature of
recourse provisions and collateral. The initial recognition and measurement
provisions of Interpretation No. 45 are effective for guarantees issued or
modified after December 31, 2002. Management does not expect the adoption of
the initial recognition and measurement provisions of Interpretation No. 45 to
have a material impact on our consolidated financial statements, results of
operations or liquidity. Disclosure provisions of Interpretation No. 45 became
effective and were adopted by us on December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, addressing consolidation by business enterprises of
certain variable interest entities. Under the provisions of Interpretation No.
46, an enterprise must consolidate a variable interest entity if that
enterprise will absorb a majority of the entity's expected losses or receive a
majority of the entity's residual returns, or both, regardless of the
enterprise's direct or indirect ability to make decisions about the entity's
activities through voting or similar rights. Interpretation No. 46 applies
immediately to interests in variable interest entities created or acquired
after January 31, 2003 and to the first fiscal year or interim period beginning
after June 15, 2003 for interests in variable interest entities acquired before
11
February 1, 2003. Application of this Interpretation did not have a material
effect on our financial statements.
In April 2003, the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. The provisions of this Statement are
effective for contracts entered into or modified after June 20, 2003 and
hedging relationships designated after June 30, 2003. Except for the
provisions related to FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, all provisions of this Statement should
be applied prospectively. The provisions of the Statement related to Statement
133 implementation issues that have been effective for fiscal quarters that
begin prior to June 15, 2003, should continue to be applied in accordance with
their respective effective dates. Management does not expect the adoption of
the provisions of this Statement to have a material effect on the Company's
operating results or financial position.
In May 2003, the Financial Accounting Standards Boards issued Financial
Accounting Standard (FAS) No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. The provisions of this
Statement are effective for financial instruments entered into or modified
after May 31, 2003 and otherwise are effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before May 15, 2003 and still existing at the
beginning of the interim period of adoption. Restatement is not permitted.
The Company has adopted the provisions of this Statement and as a result,
reclassified its Trust Preferred Securities from mezzanine capital to
liabilities.
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, 2002 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
Bank'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, 2002.
Cascade Financial Corporation is a bank holding company, incorporated in
Washington as of May 2003. The Corporation's sole operating subsidiary is
12
Cascade Bank, a Washington state chartered commercial bank. The Corporation
and the Bank are headquartered in Everett, Washington. The Bank offers loan,
deposit and other financial services through its fifteen branches located in
Snohomish and King Counties (Washington).
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 six months
ended June 30, ended June 30,
2003 2002 2003 2002
--------------------------------
Return on average assets 1.14% 1.06% 1.13% 1.02%
Return on average stockholders' equity 15.88 15.95 16.02 15.65
Average stockholders' equity to
average assets 7.16 6.64 7.08 6.51
Other expenses to average assets 2.17 2.17 2.21 2.13
Efficiency ratio 53.88 55.33 54.47 54.43
Average interest-bearing assets to
average interest-bearing liabilities 110.50 110.23 110.31 109.93
CHANGES IN FINANCIAL CONDITION
------------------------------
Total assets increased 6.5% or $52.2 million to $856.4 million at June 30,
2003, compared to $804.2 million at December 31, 2002. Net loans increased 2.4%
or $12.9 million to $559.6 million at June 30, 2003, from $546.7 million at
December 31, 2002.
Investment securities increased $45.5 million to $254.5 million at June
30, 2003, compared to $209.0 million at December 31, 2002. This investment
growth was partially funded by a decrease in interest-earning deposits held at
other institutions, which decreased $6.4 million from $11.0 million at December
31, 2002 to $4.6 million at June 30, 2003. The investments made during the
quarter, as well as the existing investment portfolio, are concentrated in the
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 continued its focus on deposit generation, total deposits
increased by $36.1 million from $509.9 million at December 31, 2002 to $546.0
million at June 30, 2003. Other borrowings outstanding in aggregate were
increased moderately. Federal Home Loan Bank-Seattle (FHLB) advances decreased
by $3.5 million from $197.5 million at December 31, 2002 to $194.0 million at
June 30, 2003. Securities sold under agreements to repurchase increased $13.5
million from $20.6 million at December 31, 2002 to $34.1 million at June 30,
2003.
Stockholders' equity increased by $4.3 million from $56.6 million at
December 31, 2002 to $60.9 million at June 30, 2003. The increase is primarily
attributable to the retention of most of the net income for the period, which
was $4.7 million. The Corporation's cash dividends reduced stockholders' equity
by $650,000. The dividend was declared June 25, 2003 and payable on July 24,
2003. Accumulated comprehensive income decreased by $3,000 to $998,000 as of
June 30, 2003.
13
Loan Portfolio
Virtually all the Bank's loans are to businesses and individuals in the
Puget Sound area. Business loans are made to businesses within that area.
Real estate construction loans are primarily extended to builders and
developers of single family, residential real estate. The vast majority
of these projects focus on entry level homes and/or first trade-up homes.
Commercial real estate loans fund small non-owner occupied buildings. Home
equity and consumer loans are primarily second mortgages on the borrower's
primary residence. These loans comprise 73% of the home equity and consumer
portfolio. The balance of this category are non-residential, e.g. automobiles,
credit cards, or boats.
Residential loans, held in the Bank's portfolio, are primarily adjustable
rate loans secured by single family residences. Multi-family loans are usually
adjustable rate loans secured by mortgages on projects with five or more units.
As displayed in the following table, total loans increased by $13.6
million as of June 30, 2003, compared to December 31, 2002. In keeping with
the Bank's evolution to a commercial bank, loans more closely associated with
a commercial bank, i.e. business and commercial real estate loans grew. The
Bank continued to win business in its market niche. Real estate construction
loans dipped due to a combination of factors. A strong housing market led to
good sales volumes and hence, loan paydowns by developers. Also, the Bank was
paid-off on one large project. On the other hand, residential and consumer
lending balances declined as refinancing activity continued with the dramatic
fall in rates. Since the Bank sells almost all its 15 year and 30 year fixed
rate residential originations, the continuing mortgage refinancing wave has led
to a $12.1 million (9.9%) reduction in our residential loan balances.
The following summary reflects the Bank's loan portfolio as of the dates
indicated:
Jun. 30, % of Dec. 31, % of
2003 portfolio 2002 portfolio
------------------------------------------
Types of Loans ($ in thousands)
- --------------
Business $184,307 32.4% $142,273 25.6%
Real estate construction (net) 73,571 12.9 84,229 15.1
Commercial real estate 75,661 13.3 63,108 11.4
Home equity and consumer 39,271 6.9 49,331 8.9
Residential 110,480 19.4 122,561 22.0
Multifamily 86,074 15.1 94,245 17.0
--------------------------------------
Total loans 569,364 100% 555,747 100%
Deferred loan fees (2,213) (2,198)
-------------------------------------
Loans $567,151 $553,549
(Loans held for sale are included in residential loans and at less than 1% of
total loans are not considered material.)
14
Asset Quality
- -------------
Non-performing assets (non-performing loans and real estate owned) totaled
$1.6 million and $1.4 million at June 30, 2003 and December 31, 2002,
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 $1.4 million at June 30,
2003, compared to $1.0 million at December 31, 2002, which represents 0.25% and
0.17% of total loans, respectively. Of the $1.4 million, $713,775 were Business
loans, $513,236 were Residential, and $199,752 were Home equity and consumer
loans. Real estate owned was $160,000 as of June 30, 2003 compared to $461,000
at December 31, 2002.
At June 30, 2003 the Bank's loan loss allowance totaled $7.6 million
compared to $6.9 million at December 31, 2002. The allowance for loan losses
was 1.33% of total loans outstanding at June 30, 2003 compared to 1.24% at
December 31, 2002. The allowance for loan losses was 531% of non-performing
loans at June 30, 2003. 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 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, 2003, loan charge-offs equaled $113,000
while recoveries were $128,000 resulting in a net recovery of $15,000. Of the
total, $74,000 represented the charge-offs of two business loans during the
quarter, and the bulk of the recoveries was due to the successful restructuring
of a business loan.
The following table provides summary information concerning asset quality
as of and for the three months ended June 30, 2003 and December 31, 2002
respectively:
June 30, December 31,
2003 2002
-------- ------------
Non-performing loans to total assets .17% .12%
Non-performing loans to total loans outstanding .25 .17
Non-performing assets to total assets .19 .18
Allowance for loan losses to non-performing loans 531 719
Allowance for loan losses to total loans 1.33 1.24
Net charge-offs to total loans .00 .07
15
RESULTS OF OPERATIONS
---------------------
Comparison of the Three and Six Months Ended June 30, 2003 and 2002
Overview
Net income increased 17.0% to $2.36 million for the three months ended
June 30, 2003 compared to $2.01 million during the comparable period in 2002.
Diluted net income per share was $0.35 for the quarter ended June 30, 2003 and
$0.30 per share for the quarter ended June 30, 2002, an increase of 17%. This
increase is primarily attributable to the increase in net interest income of
$132,000 to $6.7 million for the quarter ended June 30, 2003. Other income
increased by $558,000 to $1.5 million for the quarter ended June 30, 2003.
Other expense increased $264,000 to $4.4 million for the quarter ended June
30, 2003 as compared to the quarter ended June 30, 2002. During the quarter,
the Bank paid $276,000 in prepayment fees on Federal Home Loan Bank (FHLB)
advances compared to $220,000 during the quarter ended June 30, 2002.
Net income for the six months ended June 30, 2003 was $4.7 million
compared with $3.9 million during the comparable period in 2002. Net income
per diluted share was $0.69 for the six months ended June 30, 2003, compared
with $0.59 in 2002. The $407,000 increase in net interest income and the $1.2
million increase in other income more than offset the $883,000 increase in
other expenses which included an increase of $393,000 in FHLB prepayment fees
and an increase of $330,000 in salaries and employee benefits.
Net Interest Income
Net interest income increased 2.0% or $132,000 to $6.7 million for the
three months ended June 30, 2003 compared to $6.6 million for the three months
ended June 30, 2002. An increase in average earning assets offset the
contraction in net interest margin. Net interest income for the six months
ended June 30, 2003 and 2002 was $13.4 million and $13.0 million respectively.
Average interest earning assets increased $62.3 million or 8.4% to $808.4
million for the three months ended June 30, 2003 and $57.0 million or 7.6% to
$803.7 for the six months ended June 30, 2003 compared to the same periods in
2002. Average total loans (including loans held for sale) decreased $6.9
million to $549.4 million and average investment securities increased $74.2
million to $239.6 million for the three months ended June 30, 2003 compared to
the same quarter of the prior year.
16
At or for the At or for the
three months ended six months ended
June 30, June 30,
2003 2002 2003 2002
----------------------------------------
(dollars in thousands)
Average interest earning assets $808,384 $746,065 $803,661 $746,703
Average interest bearing liabilities 731,551 676,797 728,561 679,272
Yield on interest earning assets 6.21% 7.14% 6.32% 7.18%
Cost of interest bearing liabilities 3.19% 3.98% 3.28% 4.05%
Net interest spread 3.02% 3.16% 3.05% 3.13%
Net interest margin 3.32% 3.53% 3.35% 3.50%
The net interest margin decreased 21 basis points to 3.32% for the three
months ended June 30, 2003 compared to the same quarter the prior year. The
decrease in the net interest margin is the result of a decrease in asset yields
that exceeded the decrease in liability costs. The yield on interest earning
assets decreased 93 basis points to 6.21% for the three months ended June 30,
2003, compared to 7.14% for the three months ended June 30, 2002. The cost of
funds decreased to 3.19% for the three months ended June 30, 2003 compared to
3.98% for the same period in 2002, a drop of 79 basis points. For the six
months ended June 30, 2003, the net interest margin dropped 15 basis points
from 3.50% to 3.35%. As was the case with the quarterly results, the yield on
earnings assets decreased more than the cost of interest bearing liabilities,
86 basis points versus 77 basis points respectively.
The yield on assets fell as the steep descent in rates led to the
refinancing or rate modification on many loans. Also, mortgage backed
securities repaid more rapidly than forecasted and investment securities with
call features, were called. Asset yields were also lowered by the increased
percentage of earning assets represented by investment securities and cash
equivalents. Finally, the purchase of $10 million in Bank Owned Life Insurance
(BOLI) in November 2002 decreased the total of interest earning assets as a
percent of total assets. The income from BOLI is categorized as a separate
line item of other income.
On the other hand, the cost of liabilities declined as the rates paid on
deposits and repurchase agreements dropped with the general level of interest
rates and FHLB advances were prepaid. Deposits continued to reprice to slightly
lower rates throughout the quarter. Also, during the period, the Bank prepaid
$10.0 million in long term, high rate FHLB advances that resulted in prepayment
fees, but lowered the cost of funds as the bank replaced these high rate
advances with $7.0 million in low rate advances.
Provision for Loan Losses
Cascade's provision for loan losses was $300,000 for the three months and
$675,000 for the six months ended June 30, 2003. The provision was $420,000
and $1.12 million for the same periods in 2002. The decrease in net charge-offs
allowed us to increase our allowance for loan losses while taking a smaller
provision for loan losses in the periods.
17
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. 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 in Seattle and Bellevue to 25% today. While the impact on the Bank's
asset quality has been muted to date, a continued economic slump will have
adverse ramifications for some borrowers and hence lenders in our market. On
the positive side, Microsoft has continued to add to its payroll and the
housing market remains strong.
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 $558,000 or 62.5% to $1.5 million for the three
months ended June 30, 2003 as compared to $893,000 for the three months ended
June 30, 2002. Other income was $3.07 million and $1.87 million for the six
months ended June 30, 2003 and June 30, 2002 respectively. For the three
months ended June 30, 2003, gain on the sale of investment securities
increased by $221,000 to $575,000 as the Bank realigned its investment
portfolio as rates fell to levels not seen in 45 years. The Bank increased
its checking fees by reducing the number and amount of waived service charges.
Service fee income rose to $424,000 compared to $402,000 for the same period in
the prior year. Gain on sale of loans increased $158,000 from $111,000 to
$269,000 due to continued high levels of refinance activity. Other income was
reduced by the amortization of mortgage servicing rights that exceeded fees by
$40,000.
Other Expense
Other expense was $4.4 million for the three months and $9.0 million for
the six months ended June 30, 2003 compared with $4.1 million for the three
months and $8.1 million for the six months ended June 30, 2002. The increase in
other expense was driven by increases in occupancy expense and debt prepayment
fees on Federal Home Loan Bank advances.
Compensation expense was essentially unchanged between the quarter ended
June 30, 2003 and the same quarter in the prior year. Compensation expense was
$4.8 million for the six-month period ended June 30, 2003 and $4.5 million in
the same period in 2002.
The remaining other operating expense categories, excluding prepayment
fees, totaled $1.8 million for the three months ended June 30, 2003 and $3.5
million for the six months period as of the same date. For the same periods in
2002, other operating expenses were $1.6 million and $3.3 million respectively.
Prepayment fees on Federal Home Loan Bank advances were $276,000 for the
three months ended June 30, 2003 and $718,000 for the six-month period. For
the three-month and six-month periods ended June 30, 2002, the Bank incurred
$220,000 and $325,000 respectively. The prepayments of advances were made
18
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 expense increased $199,000 to $1.1 million, an increase
of 22.0% during the three months ended June 30, 2003 compared to the same
period last year. For the three months ended June 30, 2003, the Corporation's
effective tax rate was 32% compared to 31% for the same period in 2002. For
the six months ended June 30, 2003 income tax expense was $2.2 million compared
to $1.8 million in 2002, both with an effective tax rate of 32%. Tax benefits
related to bank owned life insurance and interest on tax exempt loans accounted
for the difference from the "expected" Federal income tax rate of 34% during
each of the periods.
Since the Corporation has no goodwill on its balance sheet, the
implementation of the new accounting standard for goodwill had no impact on its
operating results.
Segment Results
The following is a summary of selected operating segment information for
the three month and six month periods ended June 30, 2003 and 2002. 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, 2003
- ----------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------- ----------- ------------ -------- -------- -------------- ------
(In thousands)
Condensed Income Statement
Net Interest after
provision for loan losses $1,737 441 945 1,511 411 1,366 6,411
Other Income 16 254 - 2 402 777 1,451
Direct Expense 318 104 97 33 323 3,523 4,398
Allocated Overhead 412 282 192 392 102 (1,380) -
----------------------------------------------------------------------------------------
Income before Income Tax 1,023 309 656 1,088 388 - 3,464
Federal Income Tax 326 99 209 347 124 - 1,105
----------------------------------------------------------------------------------------
Net Income $ 697 210 447 741 264 - 2,359
----------------------------------------------------------------------------------------
19
For the three months ended June 30, 2002
- ----------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------- ----------- ------------ -------- -------- -------------- ------
(In thousands)
Condensed Income Statement
Net Interest 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 Tax 248 77 207 263 111 - 906
----------------------------------------------------------------------------------------
Net Income $ 547 172 462 586 245 - 2,012
----------------------------------------------------------------------------------------
For the six months ended June 30, 2003
- --------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------- ----------- ------------ -------- -------- -------------- ------
(In thousands)
Condensed Income Statement
Net Interest after
provision for loan losses $3,225 884 1,899 2,955 843 2,960 12,766
Other Income 30 485 - 2 756 1,793 3,066
Direct Expense 594 248 182 61 635 7,272 8,992
Allocated Overhead 706 525 372 719 197 (2,519) -
----------------------------------------------------------------------------------------
Income before Income Tax 1,955 596 1,345 2,177 767 - 6,840
Federal Income Tax 622 190 428 693 244 - 2,177
----------------------------------------------------------------------------------------
Net Income $1,333 406 917 1,484 523 - 4,663
----------------------------------------------------------------------------------------
For the six months ended June 30, 2002
- --------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------- ----------- ------------ -------- -------- -------------- ------
(In thousands)
Condensed Income Statement
Net Interest 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 Tax 447 162 424 548 229 - 1,810
----------------------------------------------------------------------------------------
Net Income $ 952 345 905 1,170 488 - 3,860
----------------------------------------------------------------------------------------
Income Property includes Commercial Real Estate and Multi-family lending.
20
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, 2003, Cascade had $27.9 million of construction loans in
process, $38.6 million in unused business lines of credit and $26.5 million in
unused consumer 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 business and consumer lines will require funding. Historically,
the Bank's business customers use approximately 40% of their line. About 50%
of the home equity lines of credit are not drawn upon at any point in time.
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 balances in FHLB deposits, which
equaled $4.6 million as of June 30, 2003 and $11.0 million at December 31,
2002. Liquidity is also provided by the Bank's unencumbered securities
portfolio. Securities that could be pledged to secure additional funding were
$140.9 million at the end of the quarter and $105.9 million as of December 31,
2002.
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 $291
million at current asset levels. At June 30, 2003, the Bank had $194.0 million
in advances and an unused line of credit from the FHLB-Seattle of approximately
$97.0 million. The Bank also uses reverse repurchase agreements to provide a
flexible source of funding. At June 30, 2003 the Bank had $34.1 million in
reverse repurchase agreements outstanding. The Bank also has a $10 million Fed
funds line with a correspondent bank, which was not used during the quarter.
Capital Resources
The Corporation's primary source of capital is the retention of its net
income. On June 25, 2003, the Board of Directors voted to declare the
Corporation's fourth cash dividend. The $.05 per share dividend was payable on
July 24th to shareholders of record on July 10th. The $328,000 dividend payout
represented 14% of quarterly earnings.
The Corporation also receives capital through the exercise of options
granted to employees and directors. The Corporation permits employees and
directors to tender shares of Cascade's stock which they have held for a
minimum of six months to exercise options.
On May 6, 2003, Cascade's shareholders approved a proposal to change the
company's state of incorporation from Delaware to Washington. At the time of
this change, all treasury stock was automatically canceled and returned to
authorized but unissued shares.
At its May 2003 meeting, the Board of Directors authorized a stock
repurchase program of up to 5% of the Corporation's stock. As of June 30,
2003, no stock had been repurchased under this program. The repurchase program
does not obligate the Corporation to acquire any specific number of shares.
21
On March 1, 2000 Cascade Capital Trust I issued ten million par value
Trust Preferred Securities. Cascade Capital Trust I 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
has adopted the provisions of FASB Statement No. 150 and as a result,
reclassified its Trust Preferred Securities from mezzanine capital to
liabilities.
Capital Requirements
Cascade Bank is in full compliance with all capital requirements
established by the FDIC and the Washington State Department of Financial
Institutions. The Bank's regulatory capital requirements are expressed as a
percentage of assets. As of June 30, 2003, for the purposes of this
calculation, the Bank's total assets and total risk based assets were $822.6
million and $597.2 million respectively. The related excess capital amounts as
of June 30, 2003 are presented in the following table ($ amounts in 000's):
Core capital Amount Percentage
------ ----------
Tier 1 (Core) capital $68,411 8.32%
Less: Minimum requirement 32,905 4.00
------ -----
Excess $35,506 4.32%
====== =====
Risk-based capital Amount Percentage
------ ----------
Risk-based capital $75,878 12.70%
Less: Minimum requirement(1) 47,780 8.00
------ -----
Excess $28,098 4.70%
====== =====
(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, 2003, which requires a core capital to assets of at
least 6% and a risk based capital to assets of at least 10%.
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 8.50% and a Risk Based ratio of 12.95%.
22
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. While the Bank has used interest rate swaps and
other off balance sheet instruments in the past, it has not used any such
contracts during the time periods covered by this report. Instead, to limit its
interest rate risk, the Bank 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, servicing released to its correspondent
mortgage banks on a best efforts basis. The Bank's fixed rate portfolio 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 rate 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 steepness of the yield
curve, these securities offer very attractive yields compared to securities
with shorter final maturities. Since many of these securities are classified
as "available-for-sale", 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,
2003, $41.0 million of these securities were called.
The Bank extends the maturity of its liabilities by offering long-term
deposit products to customers, and by obtaining longer term FHLB-Seattle
advances. As of June 30, 2003, $189 million of the $194.0 million of advances
had original maturities greater than one year and the remaining $5 million had
original maturities of less than one month. All but $29 million of the
advances have remaining maturities greater than one year. Of the total amount,
$140 million of these advances have provisions that allow the FHLB to convert
the advance to a LIBOR based, adjustable rate borrowing. In a +200 basis point
rate shock scenario, only a total of $20 million would be converted.
Cascade uses a simulation model to measure its interest rate risk, which
is defined as the impact 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
increases 0.11% in the up 200 basis points scenario and decreases 5.15% 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 10.10% in the up 200 basis
points shock and increases 10.5% in the down 200 basis point scenario. The
established limit is a 30% decline. The minimum adjusted capital to asset
23
limit is 5% in either scenario. In the up 200 basis point scenario, the
capital/asset ratio is 7.17%. In the down 200 basis point shock, the capital
ratio is 8.41%.
These assumptions are inherently uncertain and, as a result, the model
cannot precisely predict the impact of higher or lower interest rates. Actual
results will differ from simulated results.
24
Item 4 - Controls and Procedures
--------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
------------------------------------------------
An evaluation of the Registrant's disclosure controls and procedures (as
defined in section 13(a) - 14(c) of the Securities Exchange Act of 1934 (the
"Act")) was carried out under the supervision and with the participation of the
Registrant's Chief Executive Officer, Secretary/Treasurer and several other
members of the registrant's senior management as of the last day of the
quarter. The Registrant's Chief Executive Officer and Secretary/Treasurer
concluded that the Registrant's disclosure controls and procedures as currently
in effect are effective in ensuring that the information required to be
disclosed by the Registrant in the reports it files or submits under the Act is
(i) accumulated and communicated to the Registrant's management (including the
Chief Executive Officer and Secretary/Treasurer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
CHANGES IN INTERNAL CONTROLS
----------------------------
In the quarter ended June 30, 2003, the Registrant did not make any
significant changes in, nor take any corrective actions regarding, its internal
controls or other factors that could significantly affect these controls.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
-----------------------------------------
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in Cascade Financial
Corporation's reports filed under the Securities Exchange Act of 1934 (Exchange
Act) is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's (SEC) rules and forms.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, as appropriate
to allow timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) transactions are properly authorized; (2) assets are
safeguarded against unauthorized or improper use; and (3) transactions are
properly recorded and reported, all to permit the preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
--------------------------------------------
Cascade Financial Corporation's management does not expect that our
disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within Cascade Financial
Corporation have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
25
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The design of any system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
26
PART II-OTHER INFORMATION
-------------------------
Item 1. Legal Proceedings.
- ---------------------------
The Corporation and the Bank is involved in 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 the Corporation was held on May 6,
2003. At that meeting, the shareholders elected four directors, approved a
proposal to change the Corporation's domicile from Delaware to Washington, and
adopted the Corporation's 2003 Long-Term Stock Incentive Plan.
At the meeting, Dwayne Lane, Dennis R. Murphy, Ph.D, Ronald E. Thompson,
and G. Brandt Westover were re-elected to the Board of Directors for terms that
expire in 2006 or until their successors are elected and qualified. Each
nominee received an excess of 99% of the votes that were cast.
Directors Janice Halladay, Henry Robinett, Craig G. Skotdal, David W.
Duce, Frank M. McCord, Carol K. Nelson, and David O'Connor continue to serve on
the Board of Directors.
At the meeting, the shareholders approved a proposal to change the
Corporation's state of incorporation from Delaware to Washington through a
merger of the Corporation with a newly formed, wholly owned Washington
subsidiary that is authorized to issue 25 million shares of common stock. This
proposal was approved by an excess of 96% of the votes that were cast.
At the meeting, the shareholders adopted the Cascade Financial Corporation
2003 Long-Term Stock Incentive Plan. This proposal was approved by an excess of
94% of the votes that were cast.
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)
27
10.4 Cascade Financial Corporation 1997 Stock Option Plan(3)
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
(b) Reports on Form 8-K
On April 22, 2003, the Corporation announced that the Board of Directors
authorized the purchase of up to 5% of its outstanding shares of common stock
over the 12-month period commencing June 1, 2003, under Item 5 of Form 8-K.
On May 30, 2003, the Corporation released earnings information for the
first quarter ended March 31, 2003, under Item 9 of Form 8-K.
- ---------------
(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 December
31, 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).
28
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, 2003 /s/ Lars H. Johnson
-------------------------
By: Lars H. Johnson,
Executive Vice President
(Chief Financial Officer)
29
Exhibit 31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carol K. Nelson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cascade Financial
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2003
/s/ Carol K. Nelson
---------------------------
By: Carol K. Nelson
President and
Chief Executive Officer
30
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lars H. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cascade Financial
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2003
/s/ Lars H. Johnson
--------------------------------
By: Lars H. Johnson
Executive Vice President and
Chief Financial Officer
31
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FININCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Carol K. Nelson, Chief Executive Officer and President, and Lars H. Johnson,
Chief Financial Officer of Cascade Financial Corporation (the "Company"), each
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002:
1. The Form 10-Q of the Company for the quarterly period ended June 30, 2003
(the "Form 10-Q"), fully complies with requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
2. The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: August 12, 2003
/s/ Carol K. Nelson
--------------------------------
By: Carol K. Nelson
President and
Chief Executive Officer
/s/ Lars H. Johnson
--------------------------------
By: Lars H. Johnson
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to the Corporation and
will be retained by the Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
32