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 March 31, 2004.
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 April 26, 2004
- ---------------------------- --------------------------------
Common Stock ($.01 par value) 8,266,432
1
CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended March 31, 2004
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 11
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 20
Item 4 - Controls and Procedures 22
PART II - Other Information 24
2
PART I -- FINANCIAL INFORMATION
-------------------------------
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, December 31,
ASSETS 2004 2003
- ------ --------- ------------
(unaudited)
Cash on hand and in banks $ 8,076 13,011
Interest-earning deposits in other institutions 9,008 1,060
Securities available-for-sale 169,393 189,747
Securities held-to-maturity (market value
of $87,147 and $85,344) 87,267 86,719
Loans 603,282 574,805
Allowance for loan losses (7,922) (7,711)
------- -------
Loans, net 595,360 567,094
Premises and equipment, at cost, net 8,649 8,587
Bank owned life insurance 11,277 11,162
Accrued interest receivable and other assets 8,323 7,840
------- -------
TOTAL ASSETS $897,353 885,220
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Deposits $583,989 564,314
Federal Home Loan Bank advances 190,000 200,000
Securities sold under agreements to repurchase 38,034 39,911
Junior subordinated debentures payable 10,213 10,212
Advance payments by borrowers for taxes and insurance 1,690 1,057
Dividends payable 579 577
Accrued expenses and other liabilities 5,358 4,515
Deferred federal income taxes 918 677
------- -------
TOTAL LIABILITIES 830,781 821,263
Stockholders' Equity:
- --------------------
Preferred stock, $.01 par value, Authorized
500,000 shares; no shares issued or outstanding - -
Common stock, $.01 par value, Authorized 25,000,000
shares; issued and outstanding 8,266,432 shares
at March 31, 2004 and 8,241,288 shares at
December 31, 2003 83 82
Additional paid-in capital 12,072 11,921
Retained earnings, substantially restricted 54,104 52,109
Accumulated other comprehensive income (loss) 313 (155)
------- -------
TOTAL STOCKHOLDERS' EQUITY 66,572 63,957
------- -------
Commitments and contingencies - -
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $897,353 885,220
======= =======
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
March 31,
2004 2003
Interest income: ------------------
Loans $ 9,335 9,629
Securities held-to-maturity 1,108 616
Securities available-for-sale 1,991 2,222
FHLB stock dividends 147 232
Interest-earning deposits 28 49
--------- ---------
Total interest income 12,609 12,748
Interest expense:
Deposits 2,373 2,869
Borrowings 2,764 2,865
Junior subordinated debentures 170 284
--------- ---------
Total interest expense 5,307 6,018
Net interest income 7,302 6,730
Provision for loan losses 225 375
--------- ---------
Net interest income after provision for loan losses 7,077 6,355
Other income:
Gain on sale of loans held-for-sale 62 205
Gain on sale of securities available-for-sale 269 765
Net gain on sale of real estate owned, investment
property and other repossessed assets 76 41
Service charges 582 425
Bank owned life insurance 134 148
Other 30 31
--------- ---------
Total other income 1,153 1,615
Other expenses:
Salaries and employee benefits 2,632 2,485
Occupancy 609 613
Marketing 94 111
Data processing 79 71
Other 1,027 872
Debt prepayment fees 26 442
--------- ---------
Total other expenses 4,467 4,594
Income before income taxes 3,763 3,376
Federal income taxes 1,189 1,072
--------- ---------
Net income $ 2,574 2,304
========= =========
Earnings per share, basic $ 0.31 0.28
Earnings per share, diluted 0.30 0.28
Dividends declared per share 0.07 0.04
Weighted average number of shares outstanding:
Basic 8,250,880 8,124,579
Diluted 8,619,193 8,377,116
See notes to condensed consolidated financial statements
4
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
Three months ended
March 31,
2004 2003
------------------------
Net Income $ 2,574 2,304
Increase in unrealized gain (loss) on
securities available-for-sale, net of tax
expense (benefit) of $173 and $(6) for the
three months ended March 31, 2004 and 2003,
respectively. 645 (12)
Less reclassification adjustment for gains included
in net income, net of tax of $(92) and $(260)
for the three months ended March 31, 2004 and 2003,
respectively. (177) (505)
-----------------------
Comprehensive Income $ 3,042 1,787
See notes to condensed consolidated financial statements
5
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Three Months
Ended March 31,
2004 2003
-----------------
Cash flows from operating activities:
Net income $ 2,574 2,304
-----------------
Adjustments to reconcile net income to net cash provided
by(used in) operating activities:
Depreciation and amortization of premises and equipment 348 333
Provision for losses on loans 225 375
Additions to mortgage servicing rights 13 37
Deferred loan fees, net of amortization (56) 60
Net gain on sales of securities available-for-sale (269) (765)
Net gain on sales of real estate owned, investment
property and other repossessed assets (76) (41)
Federal Home Loan Bank stock dividend received (147) (232)
Deferred federal income taxes 160 161
Net change in accrued interest receivable and other
assets over accrued expenses and other liabilities 1,068 885
------------------
Net cash provided by operating activities 3,840 3,117
Cash flows from investing activities:
Loans originated, net of principal repayments (29,350) (11,817)
Principal repayments on securities held-to-maturity 649 601
Purchase of securities held-to-maturity (24,437) (9,990)
Proceeds from sales/calls of securities
held-to-maturity 23,238 26,913
Principal repayments on securities available-for-sale 5,266 19,866
Purchases of securities available-for-sale (57,049) (135,347)
Proceeds from sales of securities available-for-sale 73,261 71,218
Proceeds from sale of investment property -- --
Purchases of premises and equipment (410) (89)
Proceeds from sales/retirements of premises
and equipment -- 2
------------------
Net cash provided by (used in) investing activities (8,832) (38,643)
Subtotal, carried forward (4,992) (35,526)
------------------
See notes to condensed consolidated financial statements
6
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Three Months
Ended March 31,
2004 2003
-----------------
Subtotal, brought forward $(4,992) (35,526)
------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 151 202
Dividends paid (577) (324)
Repurchase of common stock -- (8)
Net increase in deposits 19,675 25,756
Net increase (decrease) in Federal Home
Loan Bank advances (10,000) (5,500)
Net increase (decrease) in securities sold
under agreements to repurchase (1,877) 5,337
Net increase in advance payments by borrowers
for taxes and insurance 633 591
------------------
Net cash provided by financing activities 8,005 26,054
------------------
Net increase (decrease) in cash and cash equivalents 3,013 (9,472)
Cash and cash equivalents at beginning of period 14,071 20,595
------------------
Cash and cash equivalents at end of period $ 17,084 11,123
==================
Supplemental disclosures of cash flow information-cash
paid during the period for:
Interest $ 7,441 6,901
Federal income taxes 150 850
------------------
Supplemental schedule of noncash investing activities:
Net mortgage loans transferred to real estate owned 915 75
See notes to condensed consolidated financial statements
7
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(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, 2003,
ave 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, 2003 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.
3. Financial Statement Reclassification
Certain amounts in the financial statements for 2003 have been
reclassified to conform with the financial statement classification for 2004.
8
4. Stockholders' Equity
a) Earnings Per Share
The following table presents the computation of basic and diluted net
income per share for the three-month period ended March 31:
Three Three
Months Months
Ended Ended
2004 2003
---------------------------
Dollars in thousands, except
share and per share amounts
Numerator:
Net income $ 2,574 2,304
===========================
Denominator:
Denominator for basic net income per share-
Weighted average shares 8,250,880 8,124,579
Effect of dilutive securities:
Stock options 368,313 252,537
Denominator for diluted net income per share- ----------------------------
Weighted average shares and assumed conversion
of dilutive stock options 8,619,193 8,377,116
Basic net income per share $ 0.31 0.28
Diluted net income per share $ 0.30 0.28
As of March 31, 2004, and 2003 there were anti-dilutive options to purchase
6,537 and 0 shares respectively, excluded from the above disclosure.
b) Cash Dividend Declared
On March 24th, the company announced its seventh consecutive cash dividend
payment. The dividend was $0.07 per share and was paid on April 22, 2004 to
shareholders of record on April 8, 2004.
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
9
Stock Based Compensation," the Corporation's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
Three months ended March 31,
2004 2003
----------------------------
Dollars in thousands,
except per share amounts
Net income
As reported $ 2,574 2,304
Less SFAS 123 compensation costs 42 40
----------------------------
Pro forma $ 2,532 2,264
============================
Net income per common share
Basic
As reported $ 0.31 0.28
Pro forma 0.31 0.28
Diluted
As reported $ 0.30 0.28
Pro forma 0.29 0.27
4. Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities
and, in December 2003, issued Revised Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, which replaced FIN 46. We
adopted the disclosure provisions of FIN 46 effective December 31, 2003. At
December 31, 2003, we had a wholly owned trust (the Trust) that was formed and
issued trust-preferred securities in March of 2000. At December 31, 2003, as a
result of the adoption of FIN 46R, we deconsolidated the Trust and all periods
in the consolidated financial statements have been restated to reflect this
change.
In May 2003, the Financial Accounting Standards Board 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 Corporation has adopted the provisions of this Statement and as a result,
reclassified its Trust Preferred Securities from mezzanine capital to
liabilities.
10
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, 2003 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, 2003.
Cascade Financial Corporation is a bank holding company incorporated in
the state of Washington. The Corporation's sole operating subsidiary is
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 three
months ended March 31,
2004 2003
----------------------
Return on average assets 1.16% 1.13%
Return on average stockholders' equity 15.79 16.16
Average stockholders' equity to average assets 7.38 7.01
Other expenses to average assets 2.02 2.23
Efficiency ratio 52.83 55.05
Average interest-bearing assets to average
interest-bearing liabilities 111.02 110.11
CHANGES IN FINANCIAL CONDITION
------------------------------
Total assets increased 1.4% or $12.1 million to $897.4 million at
March 31, 2004, compared to $885.2 million at December 31, 2003. Net loans,
i.e. net of deferred loan fees and the allowance for loan losses, increased
5.0% or $28.3 million to $595.4 million at March 31, 2004, from $567.1 million
at December 31, 2003.
11
Investment securities decreased $19.8 million to $256.7 million at March
31, 2004, compared to $276.5 million at December 31, 2003. The net reduction
in the portfolio was the result of $46.6 million in called securities and $43.5
million in sales that were not totally offset with purchases. The decline in
the investment portfolio funded the growth of the loan portfolio and increases
in interest bearing deposits. 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.
March 31, 2004 December 31, 2003
-------------------------------------------------------------------------------------------
Gross Gross
Gross Unreal- Gross Unreal-
Amor- Unreal- ized Amor- Unreal- ized
tized ized losses Fair tized ized Losses Fair
Cost Gains less than Value Cost Gains less than Value
(Losses) 1 year (Losses) 1 year
------------------------------------------------------------------------------------------
Securities available-for-sale:
Mortgage-backed securities $ 74,832 $352 $199 $ 74,985 $ 70,200 $636 $ 313 $ 70,523
Agency notes 79,199 344 22 79,521 99,677 218 655 99,240
FHLB stock 14,887 - - 14,887 14,741 - - 14,741
Corporate/other - - - - 5,363 - 120 5,243
-----------------------------------------------------------------------------------------
$ 168,918 $696 $221 $ 169,393 $ 189,981 $854 $1,088 $189,747
March 31, 2004 December 31, 2003
Gross Gross
Gross Unreal- Gross Unreal-
Amor- Unreal- ized Amor- Unreal- ized
tized ized losses Fair tized ized Losses Fair
Cost Gains less than Value Cost Gains Less than Value
(Losses) 1 year (Losses) 1 year
------------------------------------------------------------------------------------------
Securities held-to-maturity:
Mortgage-backed securities $ 29,335 $140 $175 $ 29,300 $ 12,588 $ 63 $ 323 $ 12,328
Agency notes 57,622 97 179 57,540 73,821 49 1,161 72,709
Corporate/other 310 - 3 307 310 - 3 307
------------------------------------------------------------------------------------------
$ 87,267 $237 $357 $ 87,147 $ 86,719 $112 $1,487 $ 85,344
As the Bank continued its focus on deposit generation, total deposits
increased by $19.7 million from $564.3 million at December 31, 2003 to $584.0
million at March 31, 2004. Federal Home Loan Bank-Seattle (FHLB) advances
decreased by $10.0 million from $200.0 million at December 31, 2003 to $190.0
million at March 31, 2004. Securities sold under agreements to repurchase
decreased $1.9 million from $39.9 million at December 31, 2003 to $38.0 million
at March 31, 2004.
Stockholders' equity increased by $2.6 million from $64.0 million at
December 31, 2003 to $66.6 million at March 31, 2004. The increase is primarily
attributable to the retention of most of the net income for the period, which
was $2.6 million. The Corporation's seventh consecutive cash dividend, which
was declared March 24, 2004, reduced stockholders' equity by $579,000.
Accumulated comprehensive income increased by $468,000 to a positive $313,000
as of March 31, 2004, which effectively offset the dividend payment.
12
Loan Portfolio
- --------------
Virtually all the Bank's loans are to businesses or individuals in the
Puget Sound area. Business loans are made to small and medium sized businesses
within that area. Included in the business loan total are loans secured by
real estate where the borrower is the primary tenant. 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 71% of the home equity and consumer portfolio. The balance of this
category is non-residential, e.g. automobiles, credit cards, or boats.
Residential loans, held in the Bank's portfolio, are generally adjustable
rate loans secured by single family residences. The Bank also originates
longer term fixed rate residential loans, but sells the vast majority of those
loans into the secondary market on a servicing released basis. 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 $28.4
million to $605.4 million as of March 31, 2004, compared to $577.0 million
December 31, 2003. In keeping with the Bank's evolution to a commercial bank,
loans more closely associated with a commercial bank, i.e. business, real
estate construction, and commercial real estate loans grew $24.4 million to
$375.4 million as of March 31, 2004, compared to $351.0 million as of December
31, 2003.
Residential lending balances grew slightly while consumer lending balances
declined. Despite a dip in rates during the quarter that rekindled refinancing
activity, residential loans increased by $790,000 to $106.4 million. Multi-
family loans increased $5.2 million to $92.4 million. The Bank does not
emphasize its home equity loans and other consumer loans. As a result, these
loans declined $1.9 million to $31.3 million.
The following summary reflects the Bank's loan portfolio as of the dates
indicated:
Mar. 31, % of Dec. 31, % of
Types of Loans 2004 Portfolio 2003 Portfolio
- -------------------------------------------------------------------------------
($ in thousands)
Business $214,816 35.5% $204,446 35.4%
Real estate construction (net) 75,070 12.4 62,742 11.0
Commercial real estate 85,534 14.1 83,856 14.5
Home equity and consumer 31,250 5.1 33,163 5.7
Residential real estate 106,355 17.6 105,565 18.3
Multifamily real estate 92,380 15.3 87,212 15.1
--------------------------------------------
Total loans 605,405 100.0% 576,984 100.0%
Deferred loan fees (2,123) (2,179)
---------------------------------------------
Loans $603,282 $574,805
(Loans held for sale are included in residential loans and at less than 1% of
total loans are not considered material.)
13
Asset Quality
- -------------
Non-performing assets (non-performing loans and real estate owned) totaled
$2.5 million and $2.4 million at March 31, 2004 and December 31, 2003,
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, decreased to $1.5 million at March 31, 2004,
compared to $1.9 million at December 31, 2003. Of the $1.5 million, $324,000
were business loans, $1,051,000 were residential, and $146,000 were home equity
and consumer loans. Real estate owned (REO) was $1.0 million as of March 31,
2004 compared to $474,000 at December 31, 2003. The increase in REO was the
result of the foreclosure of three residential loans.
At March 31, 2004 the Bank's loan loss allowance totaled $7.9 million
compared to $7.7 million at December 31, 2003. The allowance for loan losses
was 1.31% of total loans outstanding at March 31, 2004 (or 1.36% of total
average loans for the quarter) compared to 1.34% at December 31, 2003 (or 1.36%
of total average loans at December 31, 2003). The allowance for loan losses was
521% of non-performing loans at March 31, 2004. 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 March 31, 2004, loan charge-offs equaled $46,000
while recoveries were $32,000 resulting in net charge-offs of $14,000.
The following table provides summary information concerning asset quality
as of and for the three months ended March 31, 2004 and December 31, 2003
respectively:
March 31, December 31,
2004 2003
-------- -----------
Non-performing loans to total assets 0.17% 0.22 %
Non-performing loans to total loans outstanding 0.25 0.33
Non-performing assets to total assets 0.28 0.27
Allowance for loan losses to non-performing loans 521 401
Allowance for loan losses to total average loans 1.36 1.36
Net charge-offs to total loans 0.00 0.04
14
RESULTS OF OPERATIONS
---------------------
Comparison of the Three Months Ended March 31, 2004 and 2003
General
- -------
Net income increased 11.7% to $2.6 million for the three months ended
March 31, 2004 compared to $2.3 million during the comparable period in 2003.
Diluted net income per share was $0.30 for the quarter ended March 31, 2004
and $0.28 per share for the quarter ended March 31, 2003, an increase of 8.6%.
This increase is primarily attributable to the increase in net interest
income of $572,000 to $7.3 million for the quarter ended March 31, 2004. Other
income decreased by $462,000 to $1.2 million for the quarter ended March 31,
2004. Other expense decreased $127,000 to $4.5 million for the quarter ended
March 31, 2004 as compared to the quarter ended March 31, 2003. During the
quarter, the Bank paid $26,000 in prepayment fees on Federal Home Loan Bank
(FHLB) advances compared to $442,000 during the quarter ended March 31, 2003.
Net Interest Income
- -------------------
Net interest income increased 8.5% or $572,000 to $7.3 million for the
three months ended March 31, 2004 compared to $6.7 million for the three months
ended March 31, 2003. Average interest earning assets increased $59.9 million
or 7.5% to $858.8 million for the three months ended March 31, 2004 compared to
the same period in 2003. Average total loans (including loans held for sale)
increased $20.7 million to $581.7 million and average investment securities
increased $41.3 million to $266.4 million for the three months ended March 31,
2004 compared to the same quarter of the prior year.
At or for the
three months ended
March 31,
(dollars in thousands)
2004 2003
-------------------------
Average interest earning assets $858,792 $798,937
Average interest bearing liabilities 773,515 725,571
Yield on interest earning assets 5.89 % 6.44%
Cost of interest bearing liabilities 2.76 3.36
Net interest spread 3.13 3.08
Net interest margin 3.40 3.38
The net interest margin increased 2 basis points to 3.40% for the three
months ended March 31, 2004 compared to the same quarter the prior year. The
yield on interest earning assets decreased 55 basis points to 5.89% for the
three months ended March 31, 2004, compared to 6.44% for the three months ended
March 31, 2003. The cost of funds decreased to 2.76% for the three months
ended March 31, 2003 compared to 3.36% for the same period in 2003, a drop of
60 basis points.
15
The yield on assets fell as the continued low rate environment led to the
refinancing or rate modification on many loans. Also, mortgage backed
securities prepaid and investment securities, with call features, were called.
The new assets were booked at lower yields.
On the other hand, the cost of liabilities declined as the rates paid on
deposits dropped with the general level of interest rates. Deposits continued
to reprice to slightly lower rates throughout the quarter. Also, during the
period, the Bank prepaid $8 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 $10 million in low rate advances.
Provision for loan losses
- -------------------------
Cascade's provision for loan losses was $225,000 for the three months
ended March 31, 2004. The provision was $375,000 for the same period in 2003.
The provision is based on management's evaluation of known and inherent risks
in the portfolio, as well as loss experience.
The immediate prospects for the economy in the Corporation's market area
(Snohomish County and East King County of Washington state) are improving but
remain less than robust. Boeing's decision to assemble the 7E7 in Everett has
provided a basis for optimism, as have the recent upbeat economic releases.
However, the vacancy rates for Class A, high rise office space in Seattle and
Bellevue remains near 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 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 continues to
emphasize the growth of the business, construction, and income property
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.
Nonetheless, a dramatic slowdown in the housing market could have a material
and ripple effect on the economy and its lending institutions.
Other Income
- ------------
Other income decreased $462,000 or 28.6% to $1.2 million for the three
months ended March 31, 2004 as compared to $1.6 million for the three months
ended March 31, 2003. For the three months ended March 31, 2004, gain on the
sale of investment securities decreased by $496,000 to $269,000. Service fee
income rose to $582,000 compared to $425,000 for the same period in the prior
year. During 2003, the Bank added new checking fee services, made a concerted
effort to expand the deposit customer base, and decrease the number of waived
fees. Gain on sale of loans decreased $143,000 from $205,000 to $62,000.
While the Corporation is pursuing many avenues to augment its other
non-interest) income, it will continue to replace the gain on sale of
securities and loans with net interest income in the near future.
16
Other Expense
- -------------
Other expense was $4.5 million for the three months ended March 31, 2004
compared with $4.6 million for the three months ended March 31, 2003. The
decrease in other expense was the result of the reduction in prepayment fees
on Federal Home Loan Bank advances.
Salary and employee benefit expenses increased $147,000 to $2.6 million
during the three months ended March 31, 2004 compared to the same quarter last
year. The increase in these expenses was primarily due to an increase in the
number of employees, as the Bank added to its lending staff.
The remaining other operating expense categories, excluding prepayment
fees, totaled $1.8 million for the three months ended March 31, 2004. For the
same period in 2003, other operating expenses were $1.7 million.
Federal income tax expenses increased $117,000 to $1.2 million, an
increase of 10.9% during the three months ended March 31, 2004 compared to the
same period last year. For the three months ended March 31, 2004, the
Corporation's effective tax rate was 32% as it was for the same period in 2003.
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.
Segment Results
- ---------------
The following is a summary of selected operating segment information for
the three month periods ended March 31, 2004 and 2003. 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 March 31, 2004
- -----------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------------------------------------------------------------------------------------
(In thousands)
Condensed Income Statement
Net Interest after
Provision for loan losses $ 2,464 335 918 1,820 372 1,168 7,077
Other Income 8 86 2 - 534 523 1,153
Direct Expense 351 160 79 79 321 3,477 4,467
Allocated Overhead 640 323 204 520 99 (1,786) -
-------------------------------------------------------------------------------------
Income before Income Tax 1,481 (62) 637 1,221 486 - 3,763
Federal Income Taxes 468 (20) 201 386 154 - 1,189
-------------------------------------------------------------------------------------
Net Income $ 1,013 (42) 436 835 332 - 2,574
17
For the three months ended March 31, 2003
- -----------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------------------------------------------------------------------------------------
(In thousands)
Condensed Income Statement
Net Interest after
Provision for loan losses $ 1,488 443 954 1,444 432 1,594 6,355
Other Income 14 231 - - 354 1,016 1,615
Direct Expense 276 144 85 28 312 3,749 4,594
Allocated Overhead 294 243 180 327 95 (1,139) -
-------------------------------------------------------------------------------------
Income before Income Tax 932 287 689 1,089 379 - 3,376
Federal Income Taxes 296 91 219 346 120 - 1,072
-------------------------------------------------------------------------------------
Net Income $ 636 196 470 743 259 - 2,304
Income Property includes Commercial Real Estate and Multi-family lending.
Interest income is assigned based upon the loans held by that line of
business. Investment income is assigned to Administration. Interest expense
is allocated based upon the Corporation's cost of funds and the average
maturity of the line of business's assets. Overhead is allocated on the basis
of average total assets.
Liquidity and Sources of Funds
- ------------------------------
The Bank monitors its liquidity position to assure that it will have
adequate resources to meet its customer's 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; the purchase of
investment securities; and deposit withdrawals. As of March 31, 2004, Cascade
had $37.7 million of construction loans in process, $41.0 million in unused
business lines of credit and $24.0 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 36% of their lines. About 50% of the home equity lines of
credit are drawn upon at any point in time. Cash flows from operations
contribute to liquidity as well as proceeds from maturities of securities and
customer deposits. As indicated on the Company's condensed Consolidated
Statement of Cash Flows, net cash from operating activities for the three
months ended March 31, 2004 contributed $910,000 to liquidity compared to
$676,000 for the three months ended March 31, 2003.
Funding needs are met through existing liquidity balances, deposit growth,
FHLB-Seattle advances, and other borrowings, as well as the repayment of
existing loans and sale of single family loans. Cascade maintains balances in
FHLB deposits, which equaled $9.0 million as of March 31, 2004 and $1.1 million
at December 31, 2003. Liquidity is also provided by the Bank's unencumbered
securities portfolio. Securities that could be pledged to secure additional
funding at the FHLB-Seattle or the repurchase market were $125 million at the
end of the quarter and $127 million as of December 31, 2003.
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 $314
million at current asset levels. At March 31, 2004, the Bank had $190 million
18
in advances and an unused line of credit from the FHLB-Seattle of approximately
$124 million. The Bank also uses reverse repurchase agreements to provide a
flexible source of funding. At March 31, 2004 the Bank had $38 million in
reverse repurchase agreements outstanding. The Bank also has $10 million Fed
funds lines with its correspondent banks, neither of which were used during the
quarter.
Capital Resources
- -----------------
The Corporation's primary source of capital is the retention of its net
income. On March 24, 2004, the Board of Directors voted to declare the
Corporation's seventh consecutive cash dividend. The $.07 per share dividend
was payable on April 22nd to shareholders of record on April 7th. The $579,000
dividend payout represented 22.5% 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.
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 March 31,
2004, no stock had been repurchased under this program. The price of the
Corporation's stock exceeded the maximum price/book value ratio established by
the Board of Directors. The repurchase program does not obligate the
Corporation to acquire any specific number of shares.
On March 1, 2000 Cascade Capital Trust I issued $10.0 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. In keeping with
the recently adopted FIN 46R, the Corporation's balance sheet has replaced
"trust preferred securities" with "junior subordinated debentures payable",
although there have been no changes in terms of the underlying obligations.
The Trust has been deconsolidated upon adoption of FIN 46R at December 31,
2003 and did not have a significant impact on the Corporation's financial
condition or results of operations.
Capital Requirements
- --------------------
Both the Corporation and Cascade Bank are subject to regulatory 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 March 31, 2004, for the purposes of this
calculation, the Bank's average total assets and total risk-weighted assets
were $882.6 million and $660.5 million respectively. The related excess capital
amounts as of March 31, 2004 are presented in the following table
(dollars in thousands):
Core capital Amount Percentage
------------ ------------ ----------
Tier 1 (Core) capital $ 75,433 8.55%
Less: Minimum requirement 35,303 4.00
------------ --------
Excess $ 40,130 4.55%
============ =========
19
Risk-based capital Amount Percentage
------------------ ------------ ----------
Risk-based capital $ 83,355 12.62%
Less: Minimum requirement(1) 52,842 8.00
------------ -----------
Excess $ 30,513 4.62%
============ ===========
(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 March 31, 2004, 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 8.66% and a Risk Based ratio of 12.76%.
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. 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 have offered very attractive yields compared to
securities with shorter final maturities. Since most 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 March
31, 2004, $47 million of these securities were called.
Since the third quarter of 2003, the Bank has sought to limit the
extension risk of the investment portfolio in the event that interest rates
20
rise. The maximum final maturity of callable investments has been reduced
from 15 years to 7 years. CMO's purchased must generally not have average
life extensions of more than 6 years in an up 200 basis point interest rate
shock scenario.
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 March 31, 2004, $180 million of the $190 million in advances
had original maturities greater than one year, $10 million matured in less
than one year. Of the total amount, $155 million of these advances have
provisions that allow the FHLB to convert the advance to a LIBOR based,
adjustable rate borrowing. The FHLB would exercise this option if interest
rates rise. In a +200 basis point rate shock scenario, only a total of $25
million would be converted.
In October 2003, the Bank entered into an interest rate swap agreement
to convert the $10 million in junior subordinated debentures (trust preferred
securities) from a fixed 11% rate to a LIBOR based liability, at 6 month LIBOR
+ 520 basis points. The swap is accounted for as a fair value hedge against
the junior subordinated debentures under FAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended.
During the quarter ended March 31, 2004, the Bank sought to extend the
maturity of its liabilities through interest rate swaps. The swaps,
representing $20 million of notional 5 years and $20 million of notional 10
years, were executed as cash flow hedges in anticipation of maturing Federal
Home Loan Bank advances. Given the uncertainty of the proper accounting
treatment, the Bank opted to terminate these agreements at a small net gain in
early April 2004. As of the end of the quarter, the fair value of the swaps
was a slight gain. Determining the gain was immaterial, the Corporation did
not recognize that gain in its March 31, 2004 income statement.
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, as of March 31, 2004 the Bank's net
interest income decreases 1.1% in the up 200 basis points scenario and
decreases 4.9% 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
28.6% in the up 200 basis points shock and decreases 0.7% 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 7.00%.
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.
21
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, Chief Financial Officer, and
several other members of the registrant's senior management as of March 31,
2004. The Registrant's Chief Executive Officer and Chief Financial Officer
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 Chief Financial Officer) in a
imely 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 March 31, 2004, 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 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 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 errors 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 the 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
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
22
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.
23
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, Use of Proceeds, and Issuer Purchases of Equity
- -------------------------------------------------------------------------------
Securities.
- ------------
Not applicable
Item 3. Defaults upon Senior Securities.
- -----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable
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 Employee Stock Ownership Plan(2)
10.3 Cascade Financial Corporation 1997 Stock Option Plan(3)
10.4 Form of Change of Control Agreement(4)
10.5 Employment Agreement with Carol K. Nelson dated March 26, 2002(5)
10.6 Employment Agreement Extension with Carol K. Nelson dated January
27, 2004
10.7 Cascade Financial Corporation 2003 Long Term Stock Incentive
Plan(6)
31.1 Certifications of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
31.2 Certifications of the Chief Financial Officer pursuant to Section
302 of theSarbanes-Oxley Act
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
- -----------------
(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).
(4) Incorporated by reference to the Corporation's Form 10-K for December
31, 2001.
(5) Incorporated by reference to the Corporation's Form 10-Q for March 31,
2002.
(6) Incorporated by reference to the Corporation's Form DEF 14A for March
31, 2004.
24
(b) Reports on Form 8-K
On January 27, 2004, the Corporation released earnings information for
the fourth quarter ended December 31, 2003 and year ended December 31, 2003,
under Item 12 on Form 8-K.
On February 12, 2004, the Corporation announced that it had entered into
an Agreement and Plan of Merger with Issaquah Bancshares, Inc., under Items 5
and 7 on Form 8-K.
On March 19, 2004, the Corporation filed Form 8-K/A to supplement and
update the information provided in the Form 8-K filed on November 14, 2003, and
to reflect that fact that KPMG LLP completed its audit of the financial
statements for the fiscal year ended December 31, 2003.
25
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
May 6, 2004 /s/ Lars H. Johnson
---------------------
By: Lars H. Johnson,
Executive Vice President
(Chief Financial Officer)
26