UNITED STATES 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, 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 August 5, 2004
- ---------------------------- --------------------------------
Common Stock ($.01 par value) 9,532,956
1
CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended June 30, 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 10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 22
Item 4 - Controls and Procedures 24
PART II - Other Information 26
2
PART I -- FINANCIAL INFORMATION
-------------------------------
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
ASSETS 2004 2003
- ------ --------- ------------
(unaudited)
Cash on hand and in banks $ 15,694 13,011
Interest-earning deposits in other institutions 663 1,060
Securities available-for-sale 168,450 189,747
Securities held-to-maturity (fair value of
$87,046 and $85,344) 90,789 86,719
Loans 724,764 574,805
Allowance for loan losses (9,471) (7,711)
--------- ---------
Loans, net 715,293 567,094
Premises and equipment, at cost, net 12,714 8,587
Bank owned life insurance 11,391 11,162
Goodwill and intangibles 25,928 -
Deferred tax asset 945 -
Accrued interest receivable and other assets 9,188 7,840
--------- ---------
TOTAL ASSETS $1,051,055 885,220
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
- -----------
Deposits $ 695,298 564,314
Federal Home Loan Bank advance 211,500 200,000
Securities sold under agreements to repurchase 37,272 39,911
Junior subordinated debentures payable 10,080 10,212
Advance payments by borrowers for taxes and insurance 723 1,057
Dividends payable 667 577
Accrued expenses and other liabilities 5,401 4,515
Deferred federal income taxes - 677
--------- ---------
TOTAL LIABILITIES 960,941 821,263
Stockholders' Equity:
- --------------------
Preferred stock, $.01 par value, Authorized 500,000
shares; no shares issued or outstanding - -
Common stock, $.01 par value, Authorized 25,000,000
shares; issued and outstanding 9,531,855 shares
at June 30, 2004 and 8,241,288 shares at December
31, 2003 95 82
Additional paid-in capital 36,879 11,921
Retained earnings, substantially restricted 55,721 52,109
Accumulated other comprehensive income (loss) (2,581) (155)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 90,114 63,957
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,051,055 885,220
========= =========
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Interest income: --------------------- ---------------------
Loans $ 10,146 9,514 19,481 19,143
Securities held-to-maturity 1,044 734 2,152 1,350
Securities available-for-sale 1,749 2,064 3,740 4,286
FHLB stock dividends 151 186 298 418
Interest-earning deposits 6 34 34 83
--------------------- ---------------------
Total interest income 13,096 12,532 25,705 25,280
Interest expense:
Deposits 2,533 2,887 4,906 5,755
Borrowings 2,547 2,650 5,312 5,517
Junior subordinated debentures 170 284 339 567
--------------------- ---------------------
Total interest expense 5,250 5,821 10,557 11,839
Net interest income 7,846 6,711 15,148 13,441
Provision for loan losses 150 300 375 675
--------------------- ---------------------
Net interest income after
provision for loan losses 7,696 6,411 14,773 12,766
Other income:
Gain on sale of loans held-for
-sale 82 269 144 474
Gain on sale of securities
available-for-sale 112 575 381 1,340
Net gain on sale of real estate
owned, investment property
and other repossessed assets 23 7 99 48
Checking fees 503 317 944 601
Service charges 167 107 307 248
Bank owned life insurance 133 147 267 295
Other 168 29 198 60
--------------------- ---------------------
Total other income 1,188 1,451 2,340 3,066
Other expenses:
Salaries and employee benefits 2,675 2,320 5,308 4,805
Occupancy 635 639 1,244 1,251
Marketing 148 112 242 223
Data processing 97 69 176 140
Other 1,112 982 2,137 1,855
Debt prepayment fees - 276 26 718
Merger related expenses 633 - 633 -
--------------------- ---------------------
Total other expenses 5,300 4,398 9,766 8,992
Income before income taxes 3,584 3,464 7,347 6,840
Federal income taxes 1,300 1,105 2,489 2,177
--------------------- ---------------------
Net income $ 2,284 2,359 4,858 4,663
===================== =====================
Earnings per share, basic $ 0.27 0.29 0.58 0.57
Earnings per share, diluted 0.26 0.28 0.55 0.56
Dividends declared per share 0.07 0.05 0.14 0.10
Weighted average number of
shares outstanding:
Basic 8,583,163 8,172,129 8,438,534 8,147,273
Diluted 8,915,706 8,386,389 8,789,473 8,389,915
See notes to condensed consolidated financial statements
4
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------------------ -----------------
Net Income $2,284 2,359 $4,858 4,663
Increase in unrealized gain (loss)
on securities available-for-sale,
net of tax (benefit) expense of
$(1,453) and $460 for the three
months ended June 30, 2004 and
2003, respectively, and $(1,120)
and $454 for the six months June
30, 2004 and 2003, respectively (2,820) 893 (2,175) 881
Less reclassification adjustment for
gains included in net income, net
of tax (benefit) of $(38) and
$(196) for the three months ended
June 30, 2004 and 2003,
respectively, and $(130) and $(456)
for the six months ended June 30,
2004 and 2003, respectively. (74) (379) (251) (884)
------------------ -----------------
Comprehensive Income $ (610) 2,873 $2,432 4,660
------------------ -----------------
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 30,
2004 2003
Cash flows from operating activities: --------------------
Net income $ 4,858 4,663
Adjustments to reconcile net income to net --------------------
cash provided by (used in) operating activities:
Depreciation and amortization of premises and
equipment 723 708
Provision for losses on loans 375 675
Increase in cash surrender value of Bank
Owned Life Insurance (229) (268)
Amortization of retained servicing rights 22 109
Deferred loan fees, net of amortization 171 14
Net gain on sales of securities available-for-sale (381) (1,340)
Net gain on sales of real estate owned, investment
property and other repossessed assets (99) (48)
Federal Home Loan Bank stock dividend received (298) (418)
Deferred federal income taxes (374) (160)
Net change in accrued interest receivable and
other assets over accrued expenses and other
liabilities 396 2,597
-------------------
Net cash provided by operating activities 5,164 6,532
Cash flows from investing activities:
Loans originated, net of principal repayments (146,332) (14,160)
Principal repayments on securities held-to- maturity 2,128 2,842
Purchase of securities held-to-maturity (29,436) (72,189)
Proceeds from sales/calls of securities held-
to-maturity 23,238 34,913
Principal repayments on securities available-for-sale 20,972 48,953
Purchases of securities available-for-sale (97,166) (195,426)
Proceeds from sales of securities available-for-sale 94,498 137,138
Acquisition net of cash acquired (25,928) -
Purchases of premises and equipment (4,862) (253)
Proceeds from sales/retirements of premises
and equipment 11 9
Proceeds from loan participations sold (3,327) 498
-------------------
Net cash provided by (used in) investing activities (166,204) (57,675)
Subtotal, carried forward (161,040) (51,143)
-------------------
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 30,
2004 2003
--------------------
Subtotal, brought forward $(161,040) (51,143)
-------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 24,971 381
Dividends paid (1,156) (650)
Repurchase of common stock - (83)
Net increase in deposits 130,984 36,112
Net increase (decrease) in Federal Home Loan Bank
advances 11,500 (3,500)
Net (decrease) increase in securities sold under
agreements to repurchase (2,639) 13,488
Net increase in advance payments by borrowers for
taxes and insurance (334) (170)
-------------------
Net cash provided by financing activities 163,326 45,578
-------------------
Net increase (decrease) in cash and cash equivalents 2,286 (5,565)
Cash and cash equivalents at beginning of period 14,071 20,595
-------------------
Cash and cash equivalents at end of period $ 16,357 15,030
===================
Supplemental disclosures of cash flow information-
cash paid during the period for:
Interest $ 11,504 12,445
Federal income taxes 2,450 2,000
-------------------
Supplemental schedule of noncash investing activities:
Net mortgage loans transferred to real estate owned 915 75
Mark to market on securities available-for-sale 3,674 6
Retirement of treasury stock in retained earnings - (1,230)
Dividends declared 1,246 (654)
See notes to condensed consolidated financial statements.
7
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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, 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, 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 and six-month period ended June 30:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
2004 2003 2004 2003
------------------------------------------
Dollars in thousands,
except share and per share amounts
Numerator:
- ---------
Net income $ 2,284 2,359 4,858 4,663
=============================================
Denominator:
- -----------
Denominator for basic net
income per share-
Weighted average shares 8,583,163 8,172,129 8,438,534 8,147,273
Effect of dilutive securities:
Stock options 332,543 214,260 350,939 242,642
---------------------------------------------
Denominator for diluted net
income per share-
Weighted average shares and
assumed conversion of
dilutive stock options 8,915,706 8,386,389 8,789,473 8,389,915
=============================================
Basic net income per share $ 0.27 0.29 0.58 0.57
=============================================
Diluted net income per share* $ 0.26 0.28 0.55 0.56
=============================================
*Diluted net income per share excludes merger expenses
As of June 30, 2004, and 2003 there were anti-dilutive options to purchase
shares of 81,630 and 0 respectively, excluded from the above disclosure.
b) Cash Dividend Declared
On June 23, 2004 the company announced its eighth consecutive cash
dividend payment. The dividend was $0.07 per share and was paid on July 21,
2004 to shareholders of record on July 7, 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
9
Statement of Financial Accounting Standards (FAS) 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:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
2004 2003 2004 2003
------------------------------------------
Dollars in thousands,
except share and per share amounts
Net income
As reported $2,284 2,359 4,858 4,663
Less FAS 123 compensation costs 61 56 105 78
--------------------------------------
Pro forma $2,223 2,303 4,753 4,585
======================================
Net income per common share
Basic
As reported $ 0.27 0.29 0.58 0.57
Pro forma 0.26 0.28 0.56 0.56
Diluted
As reported $ 0.26 0.28 0.55 0.56
Pro forma 0.25 0.27 0.54 0.54
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 sixteen branches located in Snohomish
and King Counties (Washington) and two additional branches in King County
through its Issaquah Bank Division.
10
Acquisition
- -----------
On June 3, 2004 the Company acquired Issaquah Bancshares, Inc, "Issaquah".
The acquisition was accounted for using the purchase method of accounting and
accordingly, the assets and liabilities were recorded based on their fair
values at the acquisition date. The merger enhances Cascade's commercial
banking franchise by expanding Cascade's presence in East King County. Total
Issaquah assets on June 3, 2004 were approximately $131 million and the total
value of the transaction, both cash and stock, was approximately $34.3 million
as measured under the provisions of FAS 141. Cascade issued approximately 1.3
million shares and paid cash of $9.5 million in connection with the merger.
The Bank booked $25.9 million in intangible assets associated with the
transaction including $24.8 million in goodwill and a $1.1 million core deposit
intangible that will be amortized under the straight-line method over an eight
year period of time.
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,
2004 2003 2004 2003
--------------------------------
Return on average assets 0.97% 1.14% 1.06% 1.13%
Return on average stockholders' equity 12.26 15.88 13.90 16.02
Average stockholders' equity to average
assets 7.91 7.16 7.65 7.08
Other expenses to average assets 2.25 2.17 2.14 2.21
Efficiency ratio 58.67 53.88 55.84 54.47
Average interest-bearing assets to
average interest-bearing liabilities 111.59 110.50 111.31 110.31
CHANGES IN FINANCIAL CONDITION
------------------------------
Total assets increased 22.7% or $165.9 million to $1.1 billion at June 30,
2004, compared to $885.2 million at December 31, 2003. Of that amount, $131.0
million were obtained when Issaquah Bancshares merged with the Corporation on
June 3, 2004. Net loans, i.e. net of deferred loan fees and the allowance for
loan losses, increased 27.8% or $148.2 million to $715.3 million at June 30,
2004, from $567.1 million at December 31, 2003. Of that amount, $100.9 million
came from Issaquah Bancshares.
Even though $23.1 million in securities were obtained in the merger,
investment securities decreased $17.3 million for the Corporation to $259.2
million at June 30, 2004, compared to $276.5 million at December 31, 2003. The
net reduction in the investment portfolio from the beginning of the year was
the result of $49.3 million in called securities and $68.1 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
11
additions to the investment portfolio during the quarter were rated AA or
better in terms of credit quality by Moody's and/or Standard & Poors. As of
June 30, 2004, all investment securities are rated AAA, except a corporate bond
with a book value of $5.8 million that is rated AA by both rating services.
June 30, 2004
----------------------------------------------------------
Gross Gross
Gross Unreal- Unreal-
Amor- Unreal- ized ized
tized ized Losses Losses Fair
Cost Gains Less than More than Value
(Losses) 1 year 1 year
-----------------------------------------------------------
Securities available-for-sale:
Mortgage-backed securities $ 64,312 $139 $1,644 $190 $ 62,617
Agency notes 86,472 82 2,160 - 84,394
FHLB stock 15,734 - - - 15,734
Corporate/other 5,842 - 137 - 5,705
-----------------------------------------------------------
$172,360 $221 $3,941 $190 $168,450
Securities held-to-maturity:
Mortgage-backed securities $ 27,849 $ 33 $ 983 $ - $ 26,899
Agency notes 62,630 - 2,122 362 60,146
Corporate/other 310 - 7 - 303
-----------------------------------------------------------
$ 90,789 $ 33 $3,112 $362 $ 87,348
December 31, 2003
-----------------------------------------------------------
Gross Gross
Gross Unreal- Unreal-
Amor- Unreal- ized ized
tized ized Losses Losses Fair
Cost Gains Less than More than Value
(Losses) 1 year 1 year
-----------------------------------------------------------
Securities available-for-sale:
Mortgage-backed securities $ 70,200 $636 $ 313 - $ 70,523
Agency notes 99,677 218 655 - 99,240
FHLB stock 14,741 - - - 14,741
Corporate/other 5,363 - 120 - 5,243
-----------------------------------------------------------
$189,981 $854 $1,088 - $189,747
Securities held-to-maturity:
Mortgage-backed securities $ 12,588 $ 63 $ 323 - $ 12,328
Agency notes 73,821 49 1,161 - 72,709
Corporate/other 310 - 3 - 307
-----------------------------------------------------------
$ 86,719 $112 $1,487 - $ 85,344
12
We currently hold one security in our available-for-sale portfolio and one
security in our held to maturity portfolio that have had an unrealized loss for
more than one year. The losses are not related to credit deterioration, but
increases in interest rates. If rates were to move downward in the future, the
market value of these securities would rise accordingly. We have the ability
to hold the investments for a period of time sufficient for a market price
recovery. Therefore, we do not consider any portion of these investments to be
other-than-temporarily impaired.
As the Bank continued its focus on deposit generation, total deposits
increased by $131.0 million from $564.3 million at December 31, 2003 to $695.3
million at June 30, 2004, of which $105.8 million was from the merger with
Issaquah Bancshares. Federal Home Loan Bank-Seattle (FHLB) advances increased
by $11.5 million from $200.0 million at December 31, 2003 to $211.5 million at
June 30, 2004. Cascade assumed $15 million of advances in the merger.
Securities sold under agreements to repurchase decreased $2.6 million from
$39.9 million at December 31, 2003 to $37.3 million at June 30, 2004.
Stockholders' equity increased by $26.1 million from $64.0 million at
December 31, 2003 to $90.1 million at June 30, 2004. The increase is primarily
attributable to the issuance of stock in conjunction with the Issaquah
Bancshares merger, which was $24.8 million. The Corporation's eighth
consecutive cash dividend, which was declared June 23, 2004, reduced
stockholders' equity by $667,000. Accumulated comprehensive income decreased
by $2.4 million to a negative $2.6 million as of June 30, 2004.
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 extended to builders and developers of single family, residential
real estate. The 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 72% 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 "best efforts", servicing released basis.
Beginning in the third quarter 2004, the Bank intends to sell a large
percentage of its hybrid ARM's as well, i.e. loans with an initial fixed rate
period that then converts to an adjustable mortgage. Multi-family loans are
usually hybrid ARM's secured by mortgages on projects with five or more units.
As displayed in the following table, total loans increased by $150.1
million to $727.1 million as of June 30, 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 $142.1 million to
$493.1 million as of June 30, 2004, compared to $351.0 million as of December
31, 2003.
13
Residential lending balances and consumer lending balances grew slightly.
Residential loans increased by $2.8 to $108.3 million. Multi-family loans
increased $4.8 million to $92.0 million. Home equity loans and other consumer
loans increased $502,000 to $33.7 million.
The following summary reflects the Bank's loan portfolio as of the dates
indicated:
June 30, % of Dec. 31, % of
2004 portfolio 2003 portfolio
------------------------------------------
Types of Loans (dollars in thousands)
- --------------
Business $266,025 36.6% $204,446 35.4%
Real estate construction (net) 90,204 12.4 62,742 11.0
Commercial real estate 136,873 18.8 83,856 14.5
Home equity and consumer 33,665 4.6 33,163 5.7
Residential real estate 108,331 14.9 105,565 18.3
Multifamily real estate 92,016 12.7 87,212 15.1
----------------------------------------
Total loans 727,114 100.0% 576,984 100.0%
Deferred loan fees (2,350) (2,179)
----------------------------------------
Loans $724,764 $574,805
(Loans held for sale are included in residential loans and at less than 1% of
total loans are not considered material.)
Asset Quality
- -------------
Non-performing assets (non-performing loans and real estate owned) totaled
$1.6 million and $2.4 million at June 30, 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 $702,000 at June 30,
2004, from $1.9 million at December 31, 2003. Of the $702,000, $552,000 were
business loans, $113,000 were residential, and $37,000 were home equity and
consumer loans. Real estate owned (REO) was $919,000 as of June 30, 2004
compared to $474,000 at December 31, 2003. All REO, on both dates, represented
residential property.
At June 30, 2004 the Bank's loan loss allowance totaled $9.5 million
compared to $7.7 million at December 31, 2003, which includes $1.4 million
acquired from Issaquah Bancshares. The allowance for loan losses was 1.30% of
total loans outstanding at June 30, 2004 compared to 1.34% at December 31,
2003. The allowance for loan losses was 1,349% of non-performing loans at June
30, 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.
14
During the quarter ended June 30, 2004, loan charge-offs equaled $8,000
while recoveries were $13,000 resulting in net recoveries of $5,000 for the
three months ended June 30, 2004. Net charge-offs for the first six months of
the year were $10,000.
The following table provides summary information concerning asset quality
as of and for the three months ended June 30, 2004 and December 31, 2003
respectively:
June 30, December 31,
2004 2003
--------- ------------
Non-performing loans to total assets 0.07% 0.22%
Non-performing loans to total loans outstanding 0.10 0.33
Non-performing assets to total assets 0.15 0.27
Allowance for loan losses to non-performing loans 1,349 401
Allowance for loan losses to total loans 1.30 1.34
Net charge-offs to total loans 0.00 0.04
RESULTS OF OPERATIONS
---------------------
Comparison of the Three and Six Months Ended June 30, 2004 and 2003
General
Due to merger related expenses associated with the acquisition of Issaquah
Bancshares, net income decreased 3.2% to $2.3 million for the three months
ended June 30, 2004 compared to $2.4 million during the comparable period in
2003. Without merger expenses, net income was $2.8 million. The income
statement reflects one month of income and expense totals for Issaquah
Bancshares. Diluted net income per share was $0.26 for the quarter ended June
30, 2004 and $0.28 per share for the quarter ended June 30, 2003, a decrease of
8.9%. Net interest income before provision for loan losses increased $1.1
million to $7.8 million for the quarter ended June 30, 2004. Other income
decreased by $263,000 to $1.2 million for the quarter ended June 30, 2004.
Other expense increased $902,000 to $5.3 million for the quarter ended June
30, 2004 as compared to the quarter ended June 30, 2003. The Bank paid no
prepayment fees on Federal Home Loan Bank (FHLB) advances during the quarter
ended June 30, 2004, compared to $276,000 during the quarter ended June 30,
2003.
Net income for the six months ended June 30, 2004 was $4.9 million
compared with $4.7 million during the comparable period in 2003 (without
merger related expenses net income was $5.4 million). Net income per diluted
share was $0.55 for the six months ended June 30, 2004, compared with $0.56 in
2003. The $2.0 million increase in net interest income more than offset the
$726,000 decrease in other income and the $774,000 increase in other expenses.
Other expenses included a decrease of $692,000 in FHLB prepayment fees and an
increase of $503,000 in salaries and employee benefits.
Net Interest Income
Net interest income increased 16.9% or $1.1 million to $7.8 million for
the three months ended June 30, 2004 compared to $6.7 million for the three
months ended June 30, 2003. Net interest income for the six months ended June
15
30, 2004 and 2003 was $15.1 million and $13.4 million respectively. Average
interest earning assets increased $100.0 million or 12.4% to $908.4 million for
the three months ended June 30, 2004 and $79.9 million or 9.9% to $883.6 for
the six months ended June 30, 2004 compared to the same periods in 2003.
Average total loans (including loans held for sale) increased $81.6 million to
$640.7 million and average investment securities increased $26.9 million to
$266.5 million for the three months ended June 30, 2004 compared to the same
quarter of the prior year.
At or for the At or for the
three months ended six months ended
June 30, June 30,
2004 2003 2004 2003
----------------------------------------
(dollars in thousands)
Average interest earning assets $908,388 $808,384 $883,590 $803,661
Average interest bearing liabilities 814,036 731,551 793,775 728,561
Yield on interest earning assets 5.78% 6.21% 5.83% 6.32%
Cost of interest bearing liabilities 2.59 3.19 2.67 3.28
Net interest spread 3.19 3.02 3.16 3.05
Net interest margin 3.46 3.32 3.43 3.35
The net interest margin increased 14 basis points to 3.46% for the three
months ended June 30, 2004 compared to the same quarter the prior year. The
yield on interest earning assets decreased 43 basis points to 5.78% for the
three months ended June 30, 2004, compared to 6.21% for the three months ended
June 30, 2003. The cost of funds decreased 60 basis points to 2.59% for the
three months ended June 30, 2004 compared to 3.19% for the same period in 2003.
For the six months ended June 30, 2004, the net interest margin increased 8
basis points from 3.35% to 3.43%.
The yield on assets decreased as the low rate environment continued.
However, with the repayment of higher cost FHLB advances and a 3 basis point
reduction in cost of deposits, funding costs continue to fall. 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.
Provision for loan losses
Cascade's provision for loan losses was $150,000 for the three months and
$375,000 for the six months ended June 30, 2004. The provision was $300,000
and $675,000 for the same periods in 2003, respectively. The provision is
based on management's evaluation of known and inherent risks in the portfolio,
as well as loss experience. With very low loss experience, a reduction in
adversely classified loans, and the addition of the $1.4 million in allowance
for loan loss from Issaquah Bancshares, the Bank was able to lower its
provision.
The immediate prospects for the economy in the Corporation's market area
(Snohomish County and East King County of Washington state) are gradually
improving. Boeing's decision to assemble the 7E7 in Everett has provided a
basis for optimism, as have the recent upbeat economic releases. In addition,
Microsoft has continued to add to its payroll and the housing market remains
strong.
16
Nonetheless, 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. A dramatic slowdown in the housing market
could have a material effect on the economy and its lending institutions.
Other Income
Other income decreased $263,000 or 18.1% to $1.2 million for the three
months ended June 30, 2004 as compared to $1.5 million for the three months
ended June 30, 2003. Other income was $2.3 million and $3.0 million for the
six months ended June 30, 2004 and June 30, 2003 respectively. For the three
months ended June 30, 2004, gain on the sale of investment securities decreased
by $463,000 to $112,000 compared to the same quarter in 2003. Checking fee
income rose to $503,000 compared to $317,000 for the same period in the prior
year. During 2004, the Bank added new checking fee services, made a concerted
effort to expand the deposit customer base, and was more diligent in the
collection of fees. The end of the refinancing wave resulted in a decline on
gain on sale of loans, which decreased $186,600 from $268,600 to $82,000 for
the quarter.
While the Corporation is pursuing many avenues to augment its other (non-
interest) income, it will continue to focus on replacing the gain on sale of
securities and loans with net interest income in the near future.
Other Expense
Other expense was $5.3 million for the three months and $9.8 million for
the six months ended June 30, 2004 compared with $4.4 million for the three
months and $9.0 million for the six months ended June 30, 2003. The increase in
other expense was primarily the result of $633,000 in merger related expenses
and personnel expenses.
Salary and employee benefit expenses increased $355,000 to $2.7 million
during the three months ended June 30, 2004 compared to the same quarter last
year. Salary and employee benefit expenses was $5.3 million for the six month
period ended June 30, 2004 and $4.8 million in the same period for 2003. The
increase in these expenses was primarily due to an increase in the number of
employees, as the Bank added to its lending staff.
Merger related expenses totaled $633,000 in the second quarter of 2004 and
were as follows:
Quarter ended
June 30, 2004
-------------
Professional fees $365,000
Data processing contract settlement 175,000
Other 93,000
-------
$633,000
The remaining other operating expense categories, excluding merger
expenses, totaled $2.0 million for the three months ended June 30, 2004 and
17
$3.8 million for the six months period as of the same date. For the same
period in 2003, other operating expenses were $1.8 million and $3.5 million
respectively.
Federal income tax expenses increased $195,000 to $1.3 million, an
increase of 17.6% during the three months ended June 30, 2004 compared to the
same period last year. For the three months ended June 30, 2004, the
Corporation's effective tax rate was 36% due to the non-deductible nature of
some merger related expenses. For the six months ended June 30, 2004, income
tax expense was $2.5 million compared to $2.2 million in 2003, with an
effective tax rate of 34%. 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 and six month periods ended June 30, 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 June 30, 2004
- ----------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------- ----------- ------------ -------- -------- -------------- ------
(dollars in thousands)
Condensed Income Statement
- --------------------------
Net interest income after
provision for loan losses $2,883 264 1,023 2,062 393 1,071 7,696
Other income 16 111 1 - 612 448 1,188
Other expense 335 162 99 134 361 4,209 5,300
Allocated overhead 740 345 253 618 101 (2,057) -
---------------------------------------------------------------------------------------
Income before income taxes 1,824 (132) 672 1,310 543 (633) 3,584
Federal income taxes 599 (44) 220 430 178 (83) 1,300
---------------------------------------------------------------------------------------
Net income $1,225 (88) 452 880 365 (550) 2,284
---------------------------------------------------------------------------------------
For the three months ended June 30, 2003
- ----------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------- ----------- ------------ -------- -------- -------------- ------
(dollars in thousands)
Condensed Income Statement
- --------------------------
Net interest income 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
Other expense 318 104 97 33 323 3,523 4,398
Allocated overhead 412 282 192 392 102 (1,380) -
---------------------------------------------------------------------------------------
Income before income taxes 1,023 309 656 1,088 388 - 3,464
Federal income taxes 326 99 209 347 124 - 1,105
---------------------------------------------------------------------------------------
Net income $ 697 210 447 741 264 - 2,359
---------------------------------------------------------------------------------------
18
For the six months ended June 30, 2004
- --------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------- ----------- ------------ -------- -------- -------------- ------
(dollars in thousands)
Condensed Income Statement
- --------------------------
Net interest income after
provision for loan losses $5,345 600 1,940 3,883 766 2,239 14,773
Other income 24 197 3 - 1,145 971 2,340
Other expense 686 323 176 213 682 7,686 9,766
Allocated overhead 1,380 668 457 1,138 200 (3,843) -
---------------------------------------------------------------------------------------
Income before income taxes 3,303 (194) 1,310 2,532 1,029 (633) 7,347
Federal income taxes 1,066 (64) 422 816 332 (83) 2,489
---------------------------------------------------------------------------------------
Net income $2,237 (130) 888 1,716 697 (550) 4,858
---------------------------------------------------------------------------------------
For the six months ended June 30, 2003
- --------------------------------------
Income Administration/
Business Residential Construction Property Consumer Treasury Total
-------- ----------- ------------ -------- -------- -------------- ------
(dollars in thousands)
Condensed Income Statement
- --------------------------
Net interest income 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
Other expense 594 248 182 61 635 7,272 8,992
Allocated overhead 706 525 372 719 197 (2,519) -
---------------------------------------------------------------------------------------
Income before income taxes 1,955 596 1,345 2,177 767 - 6,840
Federal income taxes 622 190 428 693 244 - 2,177
---------------------------------------------------------------------------------------
Net income $1,333 406 917 1,484 523 - 4,663
---------------------------------------------------------------------------------------
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 June 30, 2004, Cascade
had $40.9 million of construction loans in process, $70.8 million in unused
business lines of credit and $22.0 million in unused consumer lines of credit.
While most of 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
34% of their lines at any given time. About 45% 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
19
customer deposits. As indicated on the Company's condensed Consolidated
Statement of Cash Flows, net cash from operating activities for the six months
ended June 30, 2004 contributed $1.3 million to liquidity compared to $3.4
million for the three months ended June 30, 2003. Net cash from operating
activities for the six months ended June 30, 2004 contributed $5.1 million to
liquidity compared to $6.5 million for the six months ended June 30, 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 $663,000 as of June 30, 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 $110.4 million at the
end of the quarter and $127.0 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 $367.9
million at current asset levels. At June 30, 2004, the Bank had $211.5 million
in advances and an unused line of credit from the FHLB-Seattle of approximately
$156.4 million. The Bank also uses reverse repurchase agreements to provide a
flexible source of funding. At June 30, 2004 the Bank had $37.3 million in
reverse repurchase agreements outstanding. The Bank also has combined Fed funds
lines of $13.0 million with two of its correspondent banks; neither of which
were used during the quarter.
Capital Resources
The Corporation's usual main source of capital is the retention of its net
income. In connection with the acquisition of Issaquah Bancshares, the
Corporation issued 1.263 million shares of common stock. The value of the
stock, for financial reporting purposes, was valued at $79.50 per share, the
average price per share for the five trading days before and after February 11,
2004, the date the merger announcement was made. Consistent with FAS 141, the
total value of stock issued was recorded as $24.8 million.
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 June 2004 meeting, the Board of Directors authorized a stock
repurchase program of up to 200,000 shares of the Corporation's stock. As of
June 30, 2004, no stock had been repurchased under this program. The
repurchase program does not obligate the Corporation to acquire any specific
number of shares. The main focus of the program is to offset the dilution
created by the exercise of stock options and other stock grants.
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
20
"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.
On June 23, 2004, the Board of Directors declared the Corporation's eighth
consecutive cash dividend. The $.07 per share dividend was paid on July 21st
to shareholders of record on July 7th. The $667,000 dividend payout represented
29.2% of quarterly earnings.
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 June 30, 2004, for the purposes of this
calculation, the Bank's average total assets and total risk-weighted assets
were $910.1 million and $794.2 million respectively. The related excess capital
amounts as of June 30, 2004 are presented in the following table (dollars in
thousands):
Core capital Amount Percentage
------------ ------ ----------
Tier 1 (Core) capital $75,059 8.25%
Less: Minimum requirement 36,403 4.00
------ ------
Excess $38,656 4.25%
====== ======
Risk-based capital Amount Percentage
------------------ ------ ----------
Risk-based capital $84,530 10.64%
Less: Minimum requirement(1) 63,535 8.00
------ ------
Excess $20,995 2.64%
====== ======
(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, 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 8.43% and a Risk Based ratio of 10.84%.
21
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. Cascade actively monitors the inherent
interest rate risk for the potential impact of changes in rates on the Bank.
The Bank uses a simulation model as its primary tool to measure its
interest rate risk. A major focus of the Bank's asset/liability management
process is to preserve and enhance net interest income in likely interest rate
scenarios. Further, Cascade's Board of Directors has enacted policies that
establish targets for maximum negative impact that changes in interest rates
have on the Bank's net interest income, the fair value of equity and adjusted
capital/asset ratios under certain interest rate shock scenarios. Key
assumptions are made to evaluate the change to Cascade's income and capital to
changes in interest rates. These assumptions, while deemed reasonable by
management, are inherently uncertain. As a result, the estimated effects of
changes in interest rates from the simulation model could likely be different
than actual experience.
Using standard interest rate shock (an instantaneous uniform change in
interest rates at all maturities) methodology, as of June 30, 2004 the Bank is
well within the guidelines established by the Board for the changes in net
interest income and the adjusted capital/asset ratios. As of June 30, 2004,
the Bank's net interest income decreases 9.1% in the up 200 basis point
scenario and decreases 5.4% in the down 200 basis point scenario, within the
established guideline of a 10% decline. Using the same methodology, the
adjusted capital/asset ratio is 6.2% in the up 200 basis point scenario, and
11.2% in the down 200 basis point scenario, both above the 5% established
guideline. Under the down 200 basis point scenario, the Bank's fair value of
equity increases 18%. In the up 200 basis point scenario, the Bank's fair
value of equity decreases 39%, which is in excess of the maximum guideline of
30% established by the Board. This increase in measured exposure from the
prior period is primarily as a result of a change in the interest risk model
used by the Bank that had the effect of lengthening the average life attributed
under the shock methodology test of certain investment securities held by the
Bank.
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
rise. The maximum final maturity of callable investments eligible for purchase
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 Asset/Liability Policy has been amended to
include limits on the percentage of investments that mature in greater than 10
years and limits on CMOs that have too large of variability in average lives.
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
sought to emphasize its loan mix toward prime based business and construction
loans. In addition to selling virtually all new 15 and 30 year fixed rate
loans, it has begun selling its hybrid ARM residential loans as well.
22
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, 2004, $183.0 million of the $211.5 million in advances
had original maturities greater than one year, $28.5 million matured in less
than one year. Of the total amount, $160.0 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 $10
million would be converted within six months.
During the first quarter of 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 whether the transaction would qualify for
hedge accounting treatment under FAS 133, the Bank opted to terminate these
agreements at a small net gain in early April 2004.
23
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 June 30, 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 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, 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 likelihood
24
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.
25
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.
- -------------------------------------------------------------
The Annual Shareholders Meeting of the Corporation was held on May 4,
2004. At that meeting, the shareholders elected three directors. Janice
Halladay, Henry Robinett, and Craig G. Skotdal were re-elected to the Board
of Directors for terms that expire in 2007 or until their successors are
elected and qualified. Each nominee received an excess of 99% of the votes
that were cast.
Directors David W. Duce, Frank M. McCord, Carol K. Nelson, David O'Connor,
Dwayne Lane, Dennis R. Murphy, Ph. D., Ronald E. Thompson, and G. Brandt
Westover continue to serve on the Board of Directors.
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)
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 the Sarbanes-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).
(b) Reports on Form 8-K
On April 20, 2004, the Corporation filed Form 8-K announcing first quarter
2004 earnings, under item 7 and 12.
On June 4, 2004, the Corporation filed Form 8-K announcing the completion
of its acquisition of Issaquah Bancshares, under item 5 and 7.
On June 9, 2004, the Corporation filed Form 8-K announcing Richard L.
Anderson joined the Board of Directors of Cascade Financial Corporation and
its subsidiary, Cascade Bank, under item 5 and 7.
On June 14, 2004, the Corporation filed Form 8-K announcing the Board of
Directors authorized the purchase of up to 2% of its outstanding shares of
common stock over the twelve-month period commencing June 1, 2005, under item
5 and 7.
On June 24, 2004, the Corporation filed Form 8-K announcing a $.07
quarterly cash dividend paid on July 21, 2004 to shareholders of record on
July 7, 2004, under item 5 and 7.
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Signatures
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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 6, 2004 /s/ Lars H. Johnson
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By: Lars H. Johnson,
Executive Vice President
(Chief Financial Officer)
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