Item 1. Description of Business - --------------------------------
General - -------
Cascade Financial Corporation (the "Corporation") is a bank holding company incorporated in the state of Washington that was formed in 1994. The consolidated entity includes the Corporation and its wholly owned subsidiaries. At December 31, 2004, the Corporation's wholly-owned subsidiaries were Cascade Bank ("Cascade" or the "Bank"), Cascade Capital Trust I and Capital Trust II. The executive offices of the Corporation are located at 2828 Colby Avenue, Everett, Washington 98201. The telephone number is (425) 339-5500 and the web site is www.CascadeBank.com.
The Bank has been serving the people of Snohomish and King Counties since 1916 when it was organized as a mutual savings and loan association. On September 15, 1992, the Bank completed its conversion from a federal mutual to a federal stock savings bank. In July 2001, the Bank converted from a federal stock savings bank to a Washington state commercial bank.
The Corporation was organized on August 18, 1994, for the purpose of becoming the holding company for Cascade Bank. The reorganization was completed on November 30, 1994, on which date the Bank became the wholly-owned subsidiary of the Corporation, and the stockholders of the Bank became stockholders of the Corporation. Subsequent to the acquisition of Cascade, the primary activity of the Corporation has been holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank.
In June of 2004, the Corporation completed the acquisition of Issaquah Bancshares ("Issaquah"). Issaquah Bank, the only operating subsidiary of Issaquah, was merged into Cascade Bank and conducts business as the Issaquah Division of Cascade Bank.
In July of 2001, the Corporation elected to be treated as a financial holding company with the Federal Reserve Board. In May of 2003, the Corporation transferred its state of domicile from Delaware, which it had maintained since its formation as a holding company in 1994, to Washington. Following this conversion, the Corporation changed its fiscal year end from June 30 to December 31 to align its reporting period with those of its commercial bank peers.
The Corporation conducts its business from its main office in Everett, Washington, and seventeen other full service offices in the greater Puget Sound region. At December 31, 2004, the Corporation had total assets of $1.1 billion, total deposits of $721.9 million and stockholders' equity of $96.3 million.
The Bank, a full-service commercial bank, offers a wide range of products and services. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"), up to the limits specified by law.
Market Area - -----------
Headquartered in Everett, Washington, the Corporation serves its customers from eighteen full service offices, eleven in Snohomish County and seven in King County. Located in the center of the western Washington region, Snohomish and King counties have experienced significant growth in recent years, although currently the area is recovering from an economic slowdown.
Our market area in King County includes the growing cities east of Seattle and Lake Washington. This area's economy has been dominated by Microsoft, the Boeing Company, with other high technology companies playing an important role. The commercial real estate vacancy rates in east King County began improving in 2004.
Everett is the home port of the Navy's carrier battle ship, the USS Abraham Lincoln. The contribution that the Navy makes to the economy is not dependent on other trends. The economy in the Corporation's market area has become more dependent upon the health care and biotechnology industries, two industries which have been less affected by the recent economic slowdown. Snohomish County and Northeast King County are home to numerous biotechnology companies. Many of these companies were severely impacted by the recession that began in 2000. As a result, certain segments of the commercial real estate market were soft in the 2002-2004 period.
As a gateway to Asia, the Bank's market area has also benefited from the expansion of world trade. Economic weakness in either the United States or Asia could reduce that trade. Such slowdowns in the international flow of goods and services could prove detrimental to the economy of the market area and potentially the quality of our loan portfolios.
Business Strategy - -----------------
The Corporation is in the process of implementing its business plan to increase the Bank's emphasis on commercial banking. The Corporation is attempting to pursue the following strategies:
* Increasing the percentage of its assets consisting of business, construction, and commercial real estate loans with higher risk-adjusted returns, shorter maturities and greater sensitivity to interest rate fluctuations.
* Increasing deposits by attracting lower cost transaction accounts (such as checking, savings and money market accounts) through an enhanced branch network, customer service center and online banking.
* Diligently searching for additional sources of fee-based revenue.
* Maintaining cost-effective operations by efficiently offering products and services.
* Maintaining its capital position at or above the "well-capitalized" (as defined for regulatory purposes) level.
* Exploring prudent means to grow the business internally and through acquisitions.
The primary objectives of these strategies are to: enhance shareholder value measured through increasing returns, and to increase the opportunity for quality earning asset growth, deposit generation, and fee-based income activities. However, the shift in emphasis to commercial banking does inherently contain additional risks (See "LOAN PORTFOLIO" below).
Competition - -----------
The Bank competes for both loans and deposits. The Puget Sound metropolitan area has a high density of financial institutions, including major national banks, several local community banks, and credit unions.
The Bank's primary focus for loans is small to medium sized businesses, builders and developers, and real estate investors in the Puget Sound area. The major competitors for the Bank are large commercial and community banks. The large banks often compete on the basis of competitive pricing, while the community banks compete on the basis of local decision-making, loan structuring flexibility, and promises of a higher level of service.
The Bank's primary competitors for residential mortgages are mortgage bankers and local thrifts. The Bank's competitors for consumer business are numerous, including banks, captive finance subsidiaries of auto companies, etc. Cascade has made a conscious decision to de-emphasize consumer lending in that intense competition has led to very low margins in this area.
Geographic location is still the primary factor in choosing a bank for the checking account relationship. As a result, the Bank's competition for checking deposits comes primarily from the large institutions with a broad network of locations. Online banking continues to be an important convenience service to attract checking customers from larger banks. In addition, Cascade has recently made an arrangement with US Bank to allow customers to use US Bank ATMs without a surcharge. Community banks, savings institutions, as well as other non-banking financial institutions, provide the greatest competition for the various savings vehicles such as money market deposit accounts and certificates of deposit.
In addition to competition from other banking institutions, the Bank continues to experience increased competition from non-banking companies such as credit unions, financial services companies and brokerage houses. Recent amendments to the federal banking laws to eliminate certain barriers between banking and commercial firms are expected to result in even greater competition in the future.
The Corporation anticipates continuing opportunities to arise from the effects of substantial consolidation among financial institutions in Washington that has occurred to date. Federal law allows mergers or other combinations, relocations of a bank's main office and branching across state lines. Several other financial institutions, which have greater resources than the Bank, compete for banking business in the Bank's market area. Among the advantages of some of these institutions are their ability to make larger loans, finance extensive advertising and promotion campaigns, access international money markets and allocate their investment assets to regions of highest yield and demand.
LOAN PORTFOLIO - --------------
General. The Bank originates business, real estate and consumer loans. Total loans equaled $856.4 million at December 31, 2004. Total loans were adjusted by loans in process, deferred loan fees, and the allowance for loan losses for a net loan balance of $794.5 million. At December 31, 2004, $292.1 million or 34.1% of loans consisted of business loans; $157.1 million or 18.3% were real estate construction loans; $178.7 million or 20.9% of loans consisted of commercial real estate; $30.1 million or 3.5% were consumer loans; $106.0 million or 12.4% of the Bank's loans consisted of loans secured by one-to-four family residential properties; and $92.4 million or 10.8% consisted of multi- family loans. Total loans secured by first liens on residential real estate was $198.4 million or 23.2% of total loans. The corporation sells almost all its 30 year fixed-rate loans and the vast majority of its 15 year fixed-rate loans in the secondary mortgage market. The Corporation had non-mandatory forward commitments totaling $784 and $2,177 to sell loans into the secondary market at December 31, 2004, and December 31, 2003, respectively.
Loan Portfolio Analysis. The following table sets forth the Corporation's loan portfolio by type of loan and by type of security at the dates indicated.
At December 31, 2004 2003 2002 Amount Percent Amount Percent Amount Percent --------------- --------------- --------------- (Dollars in thousands) Type of Loan - ------------ Real estate mortgage Residential (1) $198,347 23.16% $192,777 31.71% $216,914 37.63% Commercial 178,704 20.87 83,856 13.79 63,108 10.95 Construction 157,088 18.34 93,704 15.41 104,790 18.18 Business 292,117 34.11 204,446 33.63 142,273 24.68 Consumer (2) 30,125 3.52 33,163 5.46 49,331 8.56 -------------------------------------------------- Total loans 856,381 100.00 607,946 100.00 576,416 100.00 Less: Loans in process 49,657 30,962 20,669 Deferred loan fees, net 2,695 2,179 2,198 Allowance for loan losses 9,563 7,711 6,872 -------------------------------------------------- Total loans, net $794,466 $567,094 $546,677 ================================================== Type of Security - ---------------- Real estate mortgage One-to-four family (2) $281,161 32.83% $221,130 36.38% $262,474 45.52% Multi-family 92,372 10.79 87,212 14.35 94,245 16.35 Commercial 178,704 20.87 83,856 13.79 63,108 10.95 Land loans 3,546 0.41 1,786 0.29 1,720 0.30 Other 300,598 35.10 213,962 35.19 154,869 26.88 -------------------------------------------------- Total loans 856,381 100.00 607,946 100.00 576,416 100.00 Less: Loans in process 49,657 30,962 20,669 Deferred loan fees, net 2,695 2,179 2,198 Allowance for loan losses 9,563 7,711 6,872 -------------------------------------------------- Total loans, net $794,466 $567,094 $546,677 ==================================================
At December 31, At June 30, 2001 2001 2000 Amount Percent Amount Percent Amount Percent --------------- --------------- --------------- (Dollars in thousands) Type of Loan - ------------ Real estate mortgage Residential (1) $262,460 42.80% $272,363 44.90% $288,660 51.11% Commercial 62,938 10.26 56,913 9.38 54,320 9.62 Construction 104,131 16.98 103,206 17.01 73,488 13.01 Business 125,342 20.44 113,708 18.75 86,298 15.28 Consumer (2) 58,381 9.52 60,406 9.96 62,061 10.98 -------------------------------------------------- Total loans $613,252 100.00 $606,596 100.00 $564,827 100.00 ================================================== Less: Loans in process 28,220 33,337 17,132 Deferred loan fees, net 2,502 2,703 2,719 Allowance for loan losses 6,304 5,687 5,004 -------------------------------------------------- Total loans, net $576,226 $564,869 $539,972 ==================================================
At December 31, At June 30, 2001 2001 2000 Amount Percent Amount Percent Amount Percent --------------- --------------- --------------- (Dollars in thousands) Type of Loan - ------------ Real estate mortgage One-to-four family (2) 295,941 48.26% $307,049 50.62% $290,857 51.49% Multi-family 109,734 17.89 107,360 17.70 112,721 19.96 Commercial 62,938 10.26 56,913 9.38 54,320 9.62 Land loans 2,546 0.42 3,269 0.54 29 0.01 Other 142,093 23.17 132,005 21.76 106,900 18.92 -------------------------------------------------- Total loans $613,252 100.00 $606,596 100.00 $564,827 100.00 ================================================== Less: Loans in process 28,220 33,337 17,132 Deferred loan fees, net 2,502 2,703 2,719 Allowance for loan losses 6,304 5,687 5,004 -------------------------------------------------- Total loans, net $576,226 $564,869 $539,972 ==================================================
- ----------------- (1) Includes construction loans converted to permanent loans, multi-family and land loans. (2) Includes home equity loans and HELOCs.
At December 31, 2004, loans in process attributed to construction loans totaled $49.7 million; deferred fees were $2.7 million; and the allowance for loan losses was $9.6 million.
Business Loans. Business loans increased from $204.4 million at December 31, 2003, to $292.1 million at December 31, 2004. Unsecured business loans totaled $11.5 million at December 31, 2004. The Bank's business loan portfolio consists primarily of commercial business loans to small and medium sized businesses operating in Snohomish and King counties. These loans are secured primarily by real estate, receivables, equipment, other assets of the business and personal property, and the personal guarantee of the borrower. These loans typically have variable-rate terms or fixed rates with maturities of up to five years. The Bank also offers secured and unsecured operating lines of credit. Business loans are underwritten by the Bank on the basis of the borrower's cash flow, ability to service debt from earnings, and the underlying collateral value. The borrower is generally required to provide the Bank with financial statements, tax returns, current financial information on any and all guarantors, and other reports that show trends in their financial condition; and to update this information annually. Business loans also include owner occupied real estate loans with terms comparable to the Bank's commercial real estate loans. In addition, as the business banking activity increases, the Bank expects to expand its lower cost deposit franchise through the growth of commercial checking as a source of funding.
Business loans are inherently sensitive to adverse conditions in the economy. In the case of loans secured by accounts receivable, the availability of funds for the repayment of such loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Accordingly, the repayment of a business loan depends primarily on the successful operation of the borrower's business and creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
Construction Loans. The Bank originates construction loans on one-to-four family homes either to borrowers as custom construction loans or to builders as speculative construction loans. Construction loans generally have maturities of 12-18 months. The interest rates charged on construction loans are typically indexed to the prime rate and vary depending on the characteristics of the loan, particularly the credit risk inherent in the project. All construction loans require approval by various levels of Bank personnel, depending on the size of the loan. The Bank has attempted to increase its construction loan portfolio because these loans have relatively high margins, floating interest rates and short-term maturities. The historically strong housing market in the Puget Sound area has made construction lending attractive. At December 31, 2004, and December 31, 2003, the Corporation's construction loans were $157.1 million (including $49.7 million of loans in process) or 18.3% of the total loan portfolio and $93.7 million (including $31.0 million of loans in process) or 15.4% of the total loan portfolio, respectively. Of this amount, $123.9 million was to builders, including $45.8 million for land acquisition and development, and $26.8 million was to individuals for custom home construction. The strength of the local housing market led to a rapid turnover in this portfolio as builders were able to quickly sell new homes. The Bank's maximum outstanding commitment to one builder at December 31, 2004 totaled $10.2
million involving one construction project, which is performing in accordance with the terms of the loan.
Construction loans involve further credit risks because loan funds are advanced upon the security of the project under construction that is of uncertain value before completion. The Bank's risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of the construction. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance additional funds to complete the development. If upon completion of the project, the estimate of the marketability of the property is inaccurate, the borrower may be unable to sell the completed project in a timely manner or obtain adequate proceeds to repay the loan. Delays may arise from labor problems, material shortages and other unpredictable contingencies in completing the project. Furthermore, if the estimate of value of a completed project is inaccurate, the Bank may be confronted with a project with a value that is insufficient to assure full repayment. As a result, these loans may involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest.
Commercial Real Estate Loans. Commercial real estate loans totaled $178.7 million or 20.9% of the Bank's total loans at December 31, 2004, compared to $83.9 million or 13.8% of the portfolio at December 31, 2003. All commercial real estate loans are secured by properties in western Washington, mainly in the Puget Sound region. Improved property such as office buildings and small commercial business properties such as strip shopping centers secure the Bank's commercial real estate loans. These loans are primarily fixed rate with a maximum reset on the interest rate of five years. At December 31, 2004, the largest commercial real estate and land loan in the Bank's portfolio was $7.4 million, which was performing according to its terms at that date.
Commercial real estate loans are also sensitive to local economic conditions. An economic recession can lead to increased vacancies that would lower the borrower's ability to service the debt. Commercial real estate loans also have a degree of interest rate risk in that if rates fall borrowers refinance, if rates rise the Bank could experience a squeeze on net interest margin if the Bank does not accurately fund these loans, which often have a fixed rate for the initial five years of the loan.
Multi-family Loans. Multi-family loans totaled $92.4 million or 10.8% of the total loan portfolio at December 31, 2004. The multi-family portfolio is principally comprised of small to medium-size apartment projects with loan-to- value ratios usually up to 75%. All new loan originations are in the Puget Sound region with adjustable rates.
Multi-family residential and commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one-to-four family mortgage loans. However, loans secured by such properties usually are greater in amount and may involve a greater degree of risk than one-to-four family residential mortgage loans. Because payments on loans secured by multi-family residential and commercial properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. In addition, the low interest rate environment and robust housing market has induced many erstwhile renters to purchase houses. This has led to higher vacancy rates in some areas.
One-to-Four Family Residential Loans. At December 31, 2004, residential loans totaled $106.0 million or 12.4% of the total loan portfolio. Residential lending consists primarily of first mortgage loans secured by single family residential properties located principally in Snohomish and King Counties. The Bank originates both fixed rate and adjustable rate mortgages ("ARMs") with maturities up to 30 years. ARM loans are generally held in the Bank's portfolio. Newly originated ARMs have interest rates that adjust based on the One Year Constant Maturity Treasury Index. Borrower demand for ARMs versus fixed-rate mortgage loans is a function of the level of interest rates, the shape of the yield curve, and the differences between the interest rates and loan fees offered for fixed-rate mortgage loans and the rates and loan fees for ARMs.
Fixed rate residential loans are generally sold and the servicing released to one of the Bank's correspondents. The loans are sold on a "best efforts" basis. The Bank no longer packages its loans to sell as mortgage backed securities. The Bank had no loans held for sale at December 31, 2004, and no loans held for sale at December 31, 2003. Loans held for sale are not material and therefore the Bank does not include them as a separate line item on the balance sheet. The Bank has greatly reduced its emphasis on mortgage banking and mortgage lending in the past four years.
The Bank's conforming residential loans meet the Federal Home Loan Mortgage Corporation's underwriting standards with respect to credit, borrower debt ratios and documentation. The Bank's nonconforming residential loans are those that do not conform to agency underwriting guidelines, due to the size of the loan, as a result of credit histories, debt-to-income ratios, reliance on the
borrower's stated income, non-owner occupied property, rural property, or other exceptions from agency guidelines.
Consumer Loans. The Bank's consumer loan activities take two forms: home equity loans or lines of credit, and installment loans. Home equity loans are secured by a junior lien in priority on the borrower's home. Such loans may have a combined loan-to-value ratio of up to 90% of the value of the home securing the loan. Home equity loans are fixed amount loans, which may have fixed or floating interest rates. Home equity lines of credit can be drawn upon at any time by the customer up to a specific amount. These loans are at a floating rate with a floor on that rate. The balance outstanding for both types of home equity loans decreased to $21.6 million at December 31, 2004, as compared to $23.6 million at December 31, 2003. At December 31, 2004 and December 31, 2003, the total amount of unused lines of credit were $22.7 million and $34.6 million, respectively. The second category of consumer loans are installment loans in which boats, automobiles, and recreational vehicles serve as collateral. This portfolio was $8.5 million at December 31, 2004, as compared to $9.5 million outstanding at December 31, 2003. Although boat loans total $4.1 million of the Corporation's installment loans at December 31, 2004, the Corporation has significantly decreased its origination of boat loans and expects this amount to decline further in the future. Since installment loans are secured by depreciating assets any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections are dependent on the borrower's continuing financial ability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
The Loan Maturity Table - -----------------------
The following table sets forth information at December 31, 2004 regarding the dollar amount of loans maturing in the Corporation's portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Loan balances do not include deferred loan fees. Construction loans are net of loans in process.
Asset Quality - -------------
Banking regulations require that each insured institution review and classify its assets regularly. In addition, bank examiners have the authority to identify problem assets and, if appropriate, require them to be adversely classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have sufficient weaknesses that make collection or payment in full, based on currently existing facts, conditions and values, questionable. There is a high possibility of loss. An asset classified "loss" is considered uncollectible and of such little value that its continuance as an asset of the institution is not warranted. Assets classified as "substandard" or "doubtful" require the institution to establish general allowances for loan losses. If an asset, or portion thereof, is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge off such amounts. The bank uses two other asset classification categories for potential problem loans. They are watch and special mention. Borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk are classified as watch. Loans on special mention represent borrowers who exhibit potential credit weaknesses or trends deserving bank management's close attention.
Cascade established the Credit Administration Division in 2001 which is intended to assure that the Bank maintains the quality of its loan portfolio. Management has comprehensive monthly and annual review procedures for identifying and classifying assets for weaknesses. Reserves are maintained for assets classified as substandard or doubtful. The objective of these review procedures is to identify any trends and determine the levels of loss exposure to evaluate the need for an adjustment to the reserve accounts.
Delinquencies. A report containing delinquencies of all loans is reviewed monthly by the Asset Review Committee and periodically by the Board of Directors. Procedures taken with respect to delinquent loans differ depending on the particular circumstances of each loan. The Bank's general procedures provide that when a loan becomes delinquent, the borrower is contacted, usually by phone, within 15 to 30 days. When the loan is over 30 days delinquent, the borrower is usually contacted in writing. Typically, the Bank will initiate foreclosure or other corrective action against the borrower when principal and interest become 90 days or more delinquent. In any event, interest income is reduced by the full amount of accrued and uncollected interest on loans once they become 90 days delinquent, go into foreclosure or are otherwise determined to be uncollectible. Once interest has been paid to date or management considers the loan fully collectable, it is returned to accrual status. An allowance for loss is established when, in the opinion of management, the fair value less sales costs of the property collateralizing the loan is less than the outstanding principal and the collectibility of the loan's principal becomes uncertain. It is intended that the Bank's allowance for loan losses be adequate to cover known potential and reasonably estimated unknown losses. At December 31, 2004 and December 31, 2003, the Bank had $532,000 and $1.9 million, respectively, of loans accounted for on a non-accrual basis.
Allowance for Loan Losses/Non-Performing Assets - -----------------------------------------------
Management provides for possible loan losses by maintaining an allowance. The level of the allowance is determined based upon judgments regarding the size and nature of the loan portfolio, historical loss experience, the financial condition of borrowers, the level of non-performing loans, and anticipated general economic conditions. Additions to the allowance are charged to expense. Loans are charged against the allowance when management believes the collection of principal is unlikely. Increases in the allowance for loan losses made through provisions were primarily a result of loan growth, awareness of the greater risk inherent in business lending and the impact of the economic climate on the loan portfolio.
Management measures the reasonableness of the allowance for loan losses by utilizing a loan grading system to determine risk in the loan portfolio and by considering the results of credit reviews. The loan portfolio is separated by quality and then by loan type. Loans of acceptable quality are evaluated as a group, by loan type, with a loss rate assigned to the total loans in each type, but unallocated to any individual loan. Adversely classified loans may be individually analyzed, to determine an estimated loss amount. A loss rate is also assigned to these adversely classified loans, but at a higher rate due to the greater risk of loss. Past due and impaired loans are actively managed to minimize the potential loss.
Although management has allocated a portion of the allowance to the loan categories using the method described above, the adequacy of the allowance must be considered as a whole. To mitigate the imprecision in most estimates of expected loan losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated portion includes management's judgmental determination of the amounts necessary for qualitative factors such as the consideration of new products and policies, economic conditions, concentrations of credit risk, and the experience and abilities of lending personnel. Loan concentrations, quality, terms, and basic underlying assumptions remained substantially unchanged during the period.
The following table presents information with respect to the Corporation's non-performing assets and restructured loans at the dates indicated.
December 31, 2004 2003 2002 ----------------------- (Dollars in thousands) Non-performing loans: Commercial loans: Commercial $ - $ 128 $ 132 Commercial real estate 488 - - ----------------------- 488 128 132
Residential 34 1,704 742 Consumer loans 10 89 82 ----------------------- Total non-performing loans 532 1,921 956 Other real estate 868 474 461 ----------------------- Total non-performing assets $1,400 $2,395 $1,417 =======================
Restructured loans $ 95 $3,467 $ - Total non-performing loans to net loans .07% .34% .17% Total non-performing loans to total assets .05 .22 .12 Total non-performing assets to total assets .13 .27 .18
The Corporation's non-performing assets at December 31, 2004, consisting of non-performing loans and other real estate, totaled $1.4 million or 0.13% of total assets. This is a decrease from $2.4 million or 0.27% of total assets at December 31, 2003, and a decrease from $1.4 million or 0.18% of total assets at December 31, 2002.
Loans are generally placed on non-accrual when they become past due over 90 days or when the collection of interest or principal is considered unlikely. Loans past due over 90 or 120 days that are not on non-accrual status must be well secured by tangible collateral and in the process of collection. The Bank does not return a loan to accrual status until it is brought current with respect to both principal and interest and future principal and interest payments are no longer in doubt.
Non-performing loans decreased to $532,000 at December 31, 2004, compared to a $1.9 million at December 31, 2003, and $1.0 million at December 31, 2002. The decrease in non-performing loans from December 31, 2003, to December 31, 2004 is due to a decrease in non-performing residential loans. Management believes that the allowance for losses on loans is adequate to provide for losses that may be incurred on non-performing loans.
Other real estate owned includes property acquired by the Bank through foreclosure. Other real estate is carried at the lower of the estimated fair value or the principal balance of the foreclosed loans. Non-performing other real estate was $868,000 at December 31, 2004, an increase from $474,000 at December 31, 2003, and an increase from $461,000 at December 31, 2002. All real estate owned was single-family residential real estate.
Interest income that would have been recognized for the year ended December 31, 2004, December 31, 2003, and December 31, 2002, had non-accrual loans been current in accordance with their contractual terms amounted to $2,000, $90,000, and $32,000, respectively.
The following tables set forth information regarding changes in the Corporation's allowance for loan losses for the most recent five years (dollars in thousands).
Year Ended December 31, 2004 2003 2002 ------------------------------- Balance at beginning of period $ 7,711 $ 6,872 $ 6,304 Issaquah Bank balance at June 2004 1,394 - - Charge Offs: Business 310 295 1,028 Commercial Real Estate - 95 - Single-Family Residence 34 59 249 Consumer and other 97 302 164 Recoveries: (223) (315) (114) ------------------------------- Net charge-offs (recoveries): 218 436 1,327 Provision for loan losses 675 1,275 1,895 ------------------------------- Balance at end of period 9,563 7,711 6,872 Average loans outstanding $691,372 $565,453 $566,302 =============================== Ratio of net charge-offs during the period to average loans outstanding .03% .08% .23% Ratio of allowance for loan losses to average loans outstanding 1.38 1.36 1.21
A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the estimated losses on loans and foreclosed assets held for sale, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.
Certain loans may meet the criteria of troubled debt restructuring as defined in Statement of Financial Accounting Standards ("SFAS") No. 114 and No. 118, "Accounting by Creditors for Impairment of a Loan," and "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," respectively.
The following tables set forth information concerning the Company's allocation of the allowance for loan losses and the percentage of loans by category at the dates indicated (dollars in thousands).
December 31, --------------------------------------------- 2004 2003 2002 Amount %* Amount %* Amount %* ------------- ------------- ------------- Business $4,181 34.11% $2,833 33.63% $2,918 24.68% Commercial Real Estate 583 20.87 787 13.79 274 10.95 Single-Family Residential 432 12.37 745 17.37 745 21.28 Multifamily 616 10.79 245 14.35 366 16.35 Real Estate Construction 1,295 18.34 642 15.41 1,887 18.18 Consumer and Other 513 3.52 444 5.45 252 8.56 Unallocated 1,943 - 2,015 - 430 - --------------------------------------------- Total allowance for loan losses $9,563 100.0% $7,711 100.0% $6,872 100.0%
* Percent of loans in each category to total loans.
The provision for loan losses for the year ended December 31, 2004, totaled $675,000 compared to $1,275,000 for the year ended December 31, 2003, and $1,895,000 for the year ended December 31, 2002. The decrease in the provision for loan losses for the twelve month period ended December 31, 2004, was due to the decrease in actual adversely classified loans (which includes the substandard and doubtful categories) under the Bank's loan classification system. Adversely classified loans decreased to $9.3 million at December 31, 2004, from $12.0 million at December 31, 2003.
ASSET AND LIABILITY MANAGEMENT ACTIVITIES - -----------------------------------------
A prime focus of the Bank's asset/liability management activity is interest rate risk management. The Bank uses a variety of tools to measure, monitor, and manage interest rate risk. The Board of Directors reviews the interest rate risk management activities of the Bank on a regular basis and has established policies and guidelines on the amount of risk deemed appropriate. The Bank's net interest income and the fair value of its capital are measured under different interest rate scenarios. The Board, through the Asset/Liability Management Policy, has established 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. Cascade uses a simulation model to measure rate risk and the impact on net interest income, the fair value of equity, and the fair value capital/asset ratio. In general the Bank seeks to manage its rate risk through its balance sheet. The Bank focuses on originating more interest rate sensitive assets, such as prime-based loans, while reducing its long-term, fixed rate assets through the sale of long-term residential mortgages in the secondary market. The vast majority of the loans that the Bank keeps in its portfolio have repricing periods of five years or less. The Bank often uses FHLB advances to fund its intermediate term assets. Cascade uses reverse repurchase agreements to provide inexpensive short term funding. These agreements are generally for three months or less and provide the Bank with liabilities that reprice relatively quickly, which helps match the repricing characteristics of our prime based loans.
Using standard interest rate shock methodology (an instantaneous uniform change in interest rates at all maturities), the Bank is well within the guidelines established by the Board of Directors for the changes in fair value of equity and the adjusted capital/asset ratios. The Bank's fair value of equity decreases 11.6% in an up 200 bp shock scenario and decreases 11.5% in a down 200 bp shock, within the established guideline of a maximum 30% decline. The adjusted capital/asset ratio is 9.3% in the up 200 bp scenario and 8.9% in the down 200 bp scenario, both above the 5% minimum established guideline. The net interest income increases 3.0% in the up 200 basis point scenario, well within the guideline of a 10% decline. In the unlikely down 200 bp shock scenario, the Bank's net income decreases 11.9%, slightly in excess of the 10% decline guideline. Additional action will be implemented to counter this exposure in the event of declining short-term interest rates.
Further, since the third quarter of 2003, the Bank has sought to limit exposure, particularly to rising rates. Limits have been established on the final maturity of investments and limits have been initiated on the price volatility of mortgage-backed securities (MBS) (including collateralized mortgage obligations (CMOs)). Additionally, the Bank extends the maturities of its liabilities by offering long-term deposit products to customers, and obtaining longer term FHLB advances. As of December 31, 2004, $196 million of the $228 million in advances had original maturities greater than one year and $151 million have remaining maturities greater than one year.
The Bank uses interest rate swaps and has used caps and floors in the past to control the amount of its interest rate risk. During the third quarter of 2004, the Bank implemented two $25 million interest rate swaps to reduce its exposure to increasing interest rates. The first of these swaps is a 5 year pay-fixed instrument used as a cash flow hedge to offset increases in LIBOR in a $25 million FHLB advance. The second swap is a 10 year, pay-fixed instrument, originally accounted for as a fair value hedge to offset changes in value of $26 million of the Bank's available for sale investment portfolio. As of December 15, 2004, due to narrowing of swap spreads, the hedge lost its "highly effective designation" and is being marked to market through the Bank's income statement.
Another major component of asset/liability management is liquidity management. The Board of Directors has also established liquidity parameters that seek to assure that the Bank will have sufficient liquidity to meet all its customer needs for funding and/or deposit withdrawals.
The balance sheets and the section of Management's Discussion and Analysis titled "Average Balances and an Analysis of Average Rates Earned and Paid" contained in the Annual Report are incorporated herein by reference.
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income of the Bank. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume).
INVESTMENT PORTFOLIO - --------------------
The Board of Directors sets the investment policy of the Bank. This policy dictates that investments will be made based on the safety of the principal amount, interest rate risk, liquidity requirements of the Bank as well as the return on the investment. The Bank's policy does not permit the purchase of non-investment grade bonds. The policy permits the investment in various types of assets permissible under FDIC regulation including: United States Treasury obligations; securities of government sponsored enterprises, MBS including CMOs, state and municipal government bonds, deposits at the FHLB-Seattle, certificates of deposit of federally insured institutions, investment grade corporate bonds, certain bankers' acceptances and Federal funds. Subject to various restrictions, the Bank may also invest part of its assets in commercial paper, corporate debt securities and mutual funds, if those assets conform to FDIC regulations.
Investment securities decreased to $215.6 million at December 31, 2004, from $276.5 million at December 31, 2003, a 22% decrease. The investment portfolio declined to assist in the funding of our loan portfolio throughout the year. The decline in the portfolio was also the result in the lower spread on investments compared to funding costs as the Fed began raising short-term rates in June 2004. The investment portfolio represented 20% of total assets at December 31, 2004 compared to 31% at December 31, 2003. MBS (including CMOs) available for sale decreased from $70.5 million to $42.5 million as of December 31, 2004. Agency notes available for sale also decreased from $99.2 million to $69.8 million. Agency notes held to maturity decreased from $73.8 million to $65.8 million for the year ended December 31, 2004.
The following tables set forth the Bank's securities available for sale at the dates indicated.
The following table sets forth the contractual maturities and weighted average yields of the Corporation's securities available for sale at December 31, 2004. Securities with no stated maturity dates are reported as due within one year.
The following table sets forth amortized cost and estimated fair values for Cascade's securities held to maturity at the dates indicated.
The following table sets forth the contractual maturities and weighted average yields of the Corporation's securities held to maturity at December 31, 2004. Securities with no stated maturity dates are reported as due within one year.
For further information concerning the Corporation's securities portfolio, see Note 2 of the Notes to the Consolidated Financial Statements contained in the Annual Report listed in Item 15.
DEPOSITS - --------
The Bank's primary source of funds is customer deposits. In addition to checking accounts, the Bank offers a variety of interest-bearing accounts designed to attract both short-term and longer-term deposits from customers. Interest-bearing accounts earn interest at rates established by Bank management based on competitive market factors and the Bank's need for funds.
Deposits increased to $721.9 million at December 31, 2004, from $564.3 million at December 31, 2003, an increase of 27.9% during this period. Deposits at December 31, 2002 were $509.9 million. The market for retail deposits remains fiercely competitive. Previously, the Bank paid rates at the higher end of the competitive range of financial institutions in its market area. In an attempt to lower the absolute and relative cost of funds, the Bank modified its deposit pricing strategy by pricing its deposits in the middle of that range.
The following table sets forth the average balances for each major category of deposit and the weighted average interest rate paid for deposits during the years ended December 31, 2004, 2003, and 2002 (dollars in thousands).
The following table indicates the amount of the Bank's jumbo certificates of deposit by time remaining until maturity at December 31, 2004. Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are negotiable.
Maturity Period Jumbo Certificates of Deposit -------------------------------------------------------- (Dollars in thousands) Three months or less $ 55,624 Over three through six months 110,590 Over six through twelve months 76,809 Over twelve months 34,319 ------- Total $277,342 =======
The flow of deposits is influenced significantly by general economic conditions, changes in the money market and prevailing interest rates. In addition, there is strong competition for customer dollars from other financial institutions, mutual funds and non-bank corporations, such as securities
brokerage companies and other diversified companies. The Bank's deposits are obtained primarily from the areas in which its branches are located. The Bank relies primarily on customer service and longstanding relationships with customers to attract and retain these deposits. In the coming year, the Bank will focus on its deposit gathering activities, and management expects a significant portion of its deposit growth in 2005 will occur in its business deposit products. In the event the Bank were liquidated, certain depositors would be entitled to full payment of their deposit accounts prior to any payment being made to the shareholders.
RETURN ON EQUITY AND ASSETS - ---------------------------
The section entitled "Selected Financial Data" of the Annual Report listed in Item 15 is incorporated herein by reference.
BORROWINGS - ----------
The Bank relies on advances from the Federal Home Loan Bank of Seattle (FHLB-Seattle) to supplement its supply of funds and to meet deposit withdrawal requirements. Advances from the FHLB-Seattle are typically secured by the Bank's first mortgage residential loans, investment securities and other eligible mortgages secured by real estate. FHLB advances were $228.0 million at December 31, 2004, compared to $200.0 million at December 31, 2003, a 14.0% increase. FHLB advances were $197.5 million at December 31, 2002.
The Bank enters into repurchase agreements with its correspondent banks. Reverse repurchase agreements are accounted for as borrowings by the Bank and are secured by designated investments, primarily the notes of federal agencies and mortgage-backed securities guaranteed by those agencies. The proceeds of these transactions are used to meet the cash flow and interest rate risk management needs of the Bank. Repurchase agreements decreased to $20.9 million at December 31, 2004, from $39.9 million at December 31, 2003.
Cascade Bank has established Fed funds borrowing lines with two of its correspondent banks. One line was used for three days during 2004. The usage was a test of our liquidity management processes.
The following table sets forth certain information regarding borrowings by the Corporation at the end of, and during, the periods indicated.
At or for the year ended December 31, 2004 2003 2002 --------------------------- (Dollars in thousands) Weighted average rate on: Securities sold under agreements to repurchase 2.23% 1.17 1.49 FHLB advances 4.86% 4.85 5.78
Maximum amount of borrowings outstanding at any month end: Securities sold under agreements to repurchase $ 40,251 40,587 49,666 FHLB advances $237,500 211,750 226,500
Approximate average borrowings outstanding with respect to: Securities sold under agreements to repurchase $ 31,085 35,334 34,415 FHLB advances $210,023 194,229 203,022
Approximate weighted average rate paid on: Other interest-bearing liabilities* 2.79% 3.39 4.00 FHLB advances 5.05% 5.31 5.98
* Including Trust Preferred Securities.
Junior Subordinated Debentures Payable (Trust Preferred Securities). On March 1, 2000, $10 million of 11 percent Capital Securities due March 1, 2030 were issued by a wholly owned business Trust whose common equity is 100% owned by Cascade Financial Corporation. The Trust exists for the exclusive purposes of issuing and selling the capital securities, using the proceeds from the sale of the capital securities to acquire junior subordinated debentures issued by Cascade Financial Corporation, and engaging in only those other activities necessary, advisable, or incidental to the above. The Corporation used the proceeds for general corporate purposes including stock repurchases and investment in its subsidiary bank. 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. The $10.3 million of junior subordinated debentures issued by the Company to the Trust were reflected as junior subordinated debentures payable in the
consolidated balance sheet at December 31, 2004. The Trust will redeem the trust preferred securities when we pay the junior subordinated debentures at maturity or upon any earlier redemption of the junior subordinated debentures.
Prior to December 31, 2003, the Trust was consolidated and was included in liabilities in the consolidated balance sheet, as "Trust Preferred Securities. " The common securities and debentures, along with the related income effects were eliminated in the consolidated financial statements.
On December 15, 2004, Cascade Financial Corporation issued $5 million of 5.82% capital securities due January 7, 2035. The proceeds from the issuance were invested in Cascade Bank, which will use the increased capital for general corporate purposes.
Subsidiary Activity - -------------------
The Corporation has three subsidiaries: Cascade Bank, Cascade Capital Trust I and Capital Trust II. The activities of the Corporation are primarily conducted through the Bank. Accordingly, this Form 10-K principally discusses the Bank's operations.
Cascade Capital Trust I was formed for the exclusive purpose of issuing Trust Preferred Securities and common securities and using the proceeds to acquire junior subordinated debentures issued by the Corporation. The junior subordinated debentures total $10.2 million, have an interest rate of 11.00%, mature on March 1, 2030, and are the sole assets of Cascade Capital Trust I. The junior subordinated debentures are prepayable, in whole or in part, at the Corporation's option on or after March 1, 2010, at declining premiums to maturity. Proceeds totaling approximately $9.23 million from the issuance of the junior subordinated debentures were used to increase the capital level of the Bank.
Cascade Capital Trust II incorporates the same structure for the same purposes as Capital Trust I. The junior subordinated debentures issued under Capital Trust II equals $5.2 million and has a rate of 5.82% for the first 5 years of the security, and floats at the 3 month LIBOR plus 190 basis points thereafter.
Personnel - ---------
At December 31, 2004, the Corporation had 200 full-time equivalent employees. The Corporation believes that employees play a vital role in the success of a service company and that the Corporation's relationship with its employees is good. The employees are not represented by a collective bargaining unit.
REGULATION ---------- Introduction/General - --------------------
The following generally refers to certain statutes and regulations affecting the Corporation and the Bank. This provides only a brief summary of the regulations impacting the Corporation and is not complete. This discussion is qualified in its entirety by the statutes and regulations. In addition, some statutes and regulations exist which impact the Corporation which are not referenced below.
The Corporation is subject to extensive regulation, supervision and examination. Such regulation and supervision govern the activities in which the institution can engage and is intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities, which are intended to strengthen the financial condition of the banking industry, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Any change in such regulation and oversight could have an adverse material impact on the Corporation, Cascade and their respective operations.
The Corporation - ---------------
The Corporation is a bank holding company that has elected to be treated as a financial holding company with the Board of Governors of the Federal Reserve
Board (the "FRB"). The Bank Holding Company Act of 1956, as amended ("BHCA") subjects the Corporation and its subsidiaries to supervision and examination by the FRB. The Corporation files annual reports of operations with the FRB.
Bank Holding Company Regulation. In general, the BHCA limits bank holding company business to owning or controlling banks and engaging in other banking- related activities. Bank holding companies must obtain the FRB's approval before they: (1) acquire direct or indirect ownership or control of any voting shares of any bank that results in total ownership or control, directly or indirectly, of more than 5 percent of the voting shares of such bank; (2) merge or consolidate with another bank holding company; or (3) acquire substantially all of the assets of any additional banks. Subject to certain state laws, such as age and contingency restrictions, a bank holding company that is adequately capitalized and adequately managed may acquire the assets of both in-state and out-of-state banks. With certain exceptions, the BHCA prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares in any company that is not a bank or a bank holding company unless the FRB determines that the activities of such company are incidental or closely related to the business of banking. If a bank holding company is well- capitalized and meets certain criteria specified by the FRB, it may engage de novo in certain permissible non-banking activities without prior FRB approval.
The Change in Bank Control Act of 1978, as amended, requires a person (or group of persons acting in concert) acquiring "control" of a bank holding company to provide the FRB with 60 days prior written notice of the proposed acquisition. Following receipt of this notice, the FRB has 60 days within which to issue a notice disapproving the proposed acquisition, but the FRB may extend this time period for up to another 30 days. An acquisition may be completed before expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove the transaction. In addition, any "company" must obtain the FRB's approval before acquiring 25% (5% if the "company" is a bank holding company) or more of the outstanding shares or otherwise obtaining control over the Corporation.
Financial Holding Company Election/Affiliations. In 2001, the Corporation elected to be treated as a financial holding company with the FRB, as permitted under the Gramm-Leach-Bliley Financial Services Modernization Act (the "GLB"). This election allows the Corporation to conduct activities that previously were unavailable to bank holding companies, provided that notice requirements are generally required before engaging in any such activities.
In a change from previous law, bank holding companies are in a position to be owned, controlled or acquired by any company engaged in financially related activities, so long as such company meets certain regulatory requirements. To the extent the legislation permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Corporation currently offers and that can aggressively compete in the markets currently served by the Corporation.
Transactions with Affiliates. The Corporation and its subsidiaries are deemed affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Accordingly, the Corporation and its subsidiaries must comply with Sections 23A and 23B of the Federal Reserve Act. Generally, Sections 23A and 23B (1) limit the extent to which a financial institution or its subsidiaries may engage in "covered transactions" with an affiliate, as defined, to an amount equal to 10% of such institution's capital and surplus and an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital and surplus, and (2) require all transactions with an affiliate, whether or not "covered transactions," to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non- affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.
Tie-In Arrangements. The Corporation and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Corporation nor its subsidiaries may condition an extension of credit on either a requirement that the customer obtain additional services provided by it or an agreement by the customer to refrain from obtaining other services from a competitor.
State Law Restrictions. As a Washington corporation, the Corporation is subject to certain limitations and restrictions as provided under applicable Washington corporate laws.
Securities Registration and Reporting. The Corporation's common stock is registered as a class with the SEC under the Securities Exchange Act of 1934 and thus the Corporation is subject to the periodic reporting and proxy solicitation requirements and the insider-trading restrictions of that Act. The periodic reports, proxy statements, and other information filed by the
Corporation under that Act can be inspected and copied at or obtained from the Washington, D.C. office of the SEC. In addition, the securities issued by the Corporation are subject to the registration requirements of the Securities Act of 1933 and applicable state securities laws unless exemptions are available.
The corporation is listed as a NASDAQ/Small Capitalization stock. As such, it is subject to the listing and reporting requirements of the NASD. Failure to meet these requirements could lead to a delisting of the Corporation's stock.
Disclosure Controls and Procedures. The Sarbanes-Oxley Act of 2002 and related rulemaking by the SEC, which effect sweeping corporate disclosure and financial reporting reform, generally require public companies to focus on their disclosure controls and procedures. As a result, public companies such as the Corporation now must have disclosure controls and procedures in place and make certain disclosures about them in their periodic SEC reports (i.e., Forms 10-K and 10-Q) and their chief executive and chief financial officers must certify in these filings that they are responsible for developing and evaluating disclosure controls and procedures and disclose the results of an evaluation conducted by them within the 90-day period preceding the filing of the relevant report, among other things.
Dividends. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that the Corporation's net income for the past year is sufficient to cover both the cash dividend and a rate of retention consistent with the Corporation's capital needs. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow to pay dividends.
Capital Requirements. The FRB has established capital adequacy guidelines for bank holding companies that generally parallel the capital requirements the FDIC has for the Bank. The FRB regulations provided that capital standards will be applied on a consolidated basis in the case of a bank holding company with more than $150 million in total consolidated assets. The Corporation's total risk based capital must equal 8% of risk weighted assets and 4% must consist of Tier 1 capital.
Stock Repurchases. Bank holding companies, except for certain "well securities if the gross consideration for the purchase or redemption is equal to or greater than 10% of consolidated net worth during the preceding twelve months. The FRB may disapprove any such purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice.
Cascade Bank - ------------
General. Applicable federal and state statutes and regulations governing a bank's operations relate, among other matters, to capital requirements, investments, loans, legal lending limits, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches, and dealings with affiliated persons. The Federal Deposit Insurance Corporation ("FDIC") has authority to prohibit banks under its supervision from engaging in what it considers to be unsafe or unsound practices in conducting their business. Cascade Bank is a state-charted commercial bank subject to extensive regulation and supervision by both the Washington Department of Financial Institutions ("DFI") and the FDIC. The federal laws that apply to Cascade Bank regulate, among other things, the scope of its business, its investments, the timing of the availability of deposited funds and the nature and amount of collateral for loans. The laws and regulations governing Cascade Bank generally have been promulgated to protect depositors and not to protect shareholders of such institutions or their holding companies.
CRA. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their jurisdiction, the FRB or the FDIC evaluates the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The four possible ratings of meeting community credit needs are outstanding, satisfactory, needs to improve and substantial noncompliance. Cascade Bank received a satisfactory CRA rating at the last examination.
Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If a federal banking agency determines that a financial institution fails to
meet any standard prescribed by the Guidelines, the agency may require the bank to submit to the agency an acceptable plan to achieve compliance with the standard. Management is not aware of any conditions relating to these safety and soundness standards which would require the submission of a plan of compliance.
Insider Credit Transactions. Cascade Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Cascade Bank is also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent, or other person participating in the conduct of the affairs of Cascade Bank, the imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems, and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. Management of the Corporation believes that Cascade Bank meets all such standards, and therefore, does not believe that these regulatory standards materially affect the Corporation's business operations currently.
Loans to One Borrower. Cascade Bank is subject to limitations on the aggregate amount of loans that it can make to any one borrower, including related entities. Applicable regulations generally limit loans to one borrower to 20% of unimpaired capital and surplus. At December 31, 2004, the Bank had no borrowers with balances in excess of the loans-to-one-borrower limit.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide interstate banking and branching under certain circumstances. This legislation generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Currently, bank holding companies may purchase banks in any state, and states may not prohibit such purchases. Additionally, banks are permitted to merge with banks in other states as long as the home state of neither merging bank has "opted out." The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. With regard to interstate bank mergers, Washington has "opted in" to the Interstate Act and allows in-state banks to merge with out-of-state banks subject to certain aging requirements. Washington law generally authorizes the acquisition of an in-state bank by an out-of-state bank or bank holding company through the acquisition of or a merger with a financial institution that has been in existence for at least 5 years prior to the acquisition.
Deposit Insurance. The deposits of Cascade Bank are currently insured to a maximum of $100,000 per depositor through the Savings Association Insurance Fund (the "SAIF") administered by the FDIC. All insured banks are required to pay semi-annual deposit insurance premium assessments to the FDIC. The FDICIA included provisions to reform the Federal Deposit Insurance System, including the implementation of risk-based deposit insurance premiums. The FDICIA also permits the FDIC to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources, or for any other purpose the FDIC deems necessary. The FDIC has implemented a risk-based insurance premium system under which banks are assessed insurance premiums based on how much risk they present to the SAIF. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.
Dividends. The principal source of the Corporation's revenue is dividends received from Cascade Bank. The payment of dividends is subject to government regulation, in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Other than the laws and regulations noted above, which apply to all banks and bank holding companies, neither the Corporation nor Cascade Bank is currently subject to any regulatory restrictions on its dividends.
Capital Adequacy. Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. The FDIC and FRB use risk-based capital guidelines for banks and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the FRB has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I capital. Tier I capital for bank holding companies includes common shareholders' equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles except as described above. At December 31, 2004, the Bank had Tier 1 capital equal to $85.0 million or 8.04% of average total assets, which is $42.7 million above the minimum leverage requirement of 4% as in effect on that date.
The FDIC also employs a leverage ratio, which is Tier I capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The FDIC requires a minimum leverage ratio of 3 percent. However, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, the FDIC expects an additional cushion of at least 1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. Institutions which are deemed to be "undercapitalized" depending on the category to which they are assigned are subject to certain mandatory supervisory corrective actions. The Corporation does not believe that these regulations have any material effect on its operations currently.
Reference is made to Note 11 of the Notes to the Consolidated Financial Statements in the Annual Report, which is listed as an exhibit under Item 15, for additional information concerning regulatory capital.
The FDIC risk-based requirement requires financial institutions to have total capital of at least 8% of risk-weighted assets. Total capital consists of Tier I capital and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as Tier I capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of Tier I capital.
In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, prudently underwritten permanent one-to-four family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by FNMA or FHLMC, have been assigned a risk weight of 50%.
On December 31, 2004, the Bank had total risk-based capital of approximately $94.6 million, including $85.0 million in Tier I capital and $9.6 million in qualifying supplementary capital (the allowance for loan losses), and risk-weighted assets of $854.8 million, or total capital of 11.06% of risk-weighted assets. This amount was $26.2 million above the 8% requirement in effect on that date.
FDIC capital requirements are designated as the minimum acceptable standards for banks whose overall financial condition is fundamentally sound. The FDIC regulations state that if the FDIC determines that conditions so warrant, it may impose a greater capital standard on a particular institution.
Management believes that the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, if circumstances were to materially and adversely impact the future earnings of the Bank, the ability of the Bank to meet its capital requirements could be impaired.
Prompt Corrective Action. Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. An institution's category depends upon where its capital levels are in relation to relevant capital measures. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based capital of not less than 4%, and a leverage ratio of not less than 4%. Any institution which fails to meet these levels will be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions, which become more extensive as an institution becomes more severely undercapitalized. Failure by an institution to comply with applicable capital requirements will result in restrictions on their activities and lead to enforcement actions, including the issuance of a capital directive to ensure the maintenance of adequate capital levels. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.
At December 31, 2004, Cascade was a "well capitalized" institution under the prompt corrective action regulations of the FDIC.
TAXATION -------- Federal Taxation - ----------------
The Corporation reports its income on a fiscal year basis using the accrual method of accounting and is subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly Cascade's reserve for bad debts as discussed below. In 2001, the Corporation's fiscal year was changed to the calendar year. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Corporation.
Tax Bad Debt Reserves - ---------------------
The reserve method of accounting for bad debt reserves was repealed for tax years beginning after December 31, 1995. As a result, the Bank is no longer able to calculate its deduction for bad debts using the percentage-of-taxable- income method. Instead, Cascade is required to compute its deduction based on specific charge-offs during the taxable year.
Distributions - -------------
To the extent that the Bank makes "non-dividend distributions" to the Corporation that are considered as made (i) from the reserve for losses as of June 30, 1988, or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in Cascade's taxable income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of Cascade's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Corporation that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for Cascade. The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if Cascade makes a "non-dividend distribution," then approximately one and one-half times the amount so used would be included in gross income for federal income tax purposes.
Dividends-Received Deduction and Other Matters - ----------------------------------------------
The Corporation may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Corporation and the Bank will not file a consolidated tax return, except that if the Corporation or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.
Washington Tax - --------------
The Bank is subject to a business and occupation tax which is imposed under Washington law at the rate of 1.5% of gross receipts; however interest received on loans secured by mortgages or deeds of trust on residential properties and interest on obligations issued or guaranteed by the United States are not presently subject to the tax. On August 15, 1994, the Department of Revenue of the State of Washington began an audit of the Corporation's records for compliance regarding the business and occupation tax. The Corporation had not been audited for 18 years. The Department of Revenue has issued a tax billing for approximately $148,000 of which the Corporation has accrued $104,000 and paid $16,000. The Corporation has filed an appeal with the Department of Revenue. A determination has been issued reversing two of the three billing issues in the audit. The Corporation has filed another appeal regarding the final issue.
Availability of Filings - -----------------------
You may access, free of charge, copies of the following reports of the Corporation on the SEC's website at www.sec.gov, or the Bank's website at www.cascadebank.com:
1) Annual Reports on Form 10-K; and 2) Quarterly Reports on Form 10-Q.
These documents are generally posted within 24 hours after the Corporation files these documents electronically with the Securities and Exchange Commission. The Corporation is also willing to provide electronic or paper copies of its filings (subject to actual copying costs) upon reasonable request.
Item 2.
Item 2. Properties - -------------------
The Corporation owns eight full service branch locations and leases ten full service locations. Owned offices range in size from 3,500 to 52,000 square feet and have a total net book value at December 31, 2004, including leasehold improvements, furniture and fixtures, of $12.9 million. The Corporation leases approximately 5% of its main office, approximately 25% of its Marysville office, and 50% of its Issaquah West office to non-affiliated parties. See Note 4 of the Notes to the Consolidated Financial Statements contained in the Annual Report which is listed in Item 15.
Item 3.
Item 3. Legal Proceedings - --------------------------
The Corporation is not engaged in any legal proceedings of a material nature at the present time. Periodically, there have been various claims and lawsuits involving the Corporation and the Bank, principally as a defendant, 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 incident to the Corporation's business. In the opinion of management and the Corporation's legal counsel, no significant loss is expected from any of such pending claims or lawsuits.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------------------------------------------------------------------------------
(a) Cascade Financial Corporation's common stock is traded on the NASDAQ Small Cap Market under the symbol CASB. The table below indicates the high/low trading range of Cascade stock over the last eight quarters:
Quarter Ended High Low ---------------------------------- March 31, 2003 $10.56 9.04 June 30, 2003 13.20 9.16 September 30, 2003 16.00 12.01 December 31, 2003 20.99 14.92
March 31, 2004 $20.63 16.52 June 30, 2004 21.28 15.30 September 30, 2004 17.98 15.25 December 31, 2004 19.72 16.62
(b) Cascade Financial Corporation has only one class of stock outstanding which is common stock. At December 31, 2004, there were 9,559,822 shares outstanding.
(c) The Table below indicates the cash dividends paid on each share of its common stock:
Quarter Ended Record Date Payment Date Dividend Declared ------------------------------------------------------------------ December 2003 01/07/04 01/22/04 $0.07 March 2004 04/08/04 04/22/04 0.07 June 2004 07/07/04 07/21/04 0.07 September 2004 10/13/04 10/27/04 0.08
1) During the periods presented there were 424 shares purchased, which were acquired at current market values as consideration for the exercise of fully vested options.
2) 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. This program will expire on May 31, 2005.
Item 6.
Item 6. Selected Financial Data - --------------------------------
The information contained in the section entitled "Selected Financial Data" of the Annual Report listed in Item 15 is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------
The information contained in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Annual Report listed in Item 15 is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------
The information contained under the section captioned "Market Risk" in the Management's Discussion and Analysis section of the Annual Report listed in Item 15 is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
The financial statements and supplementary data in the Annual Report listed in Item 15 is incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------
On November 10, 2003, the Audit Committee of the Board of Directors of Cascade Financial Corporation ("Registrant") engaged the accounting firm of Moss Adams LLP as independent accountants for the Registrant for the fiscal year 2004. On November 10, 2003, the Board notified KPMG LLP ("KPMG") that KPMG would be dismissed upon the completion of its independent audit of the 2003 consolidated financial statements of the Registrant and would not be retained to serve as the Registrant's independent public accountants for the fiscal year 2004.
KPMG's report on the consolidated financial statements of the Company for the years 2003 and 2002, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits of the Company's consolidated financial statements as of and for the years ended December 31, 2003 and 2002, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference thereto in its reports on the consolidated financial statements for such years. During the Company's years ended December 2003 and 2002, there were no "reportable events," as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
Item 9A.
Item 9A. Controls and Procedures - ---------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Corporation'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 Corporation's Chief Executive Officer, Chief Financial Officer and several other members of the Corporation's senior management effective December 31, 2003. The Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation'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.
(b) Changes in Internal Controls: In the year ended December 31, 2004, the Corporation 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 the Corporation's reports filed under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all to permit the preparation of financial statements in conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls. The Corporation's management does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the 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 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.
As permitted by the Order Under Section 36 of the Securities Exchange Act of 1934 Granting an Exemption from Specified Provisions of Exchange Act Rules 13a-1 and 15d-1 issued by the SEC on November 30, 2004, the Company will file Management's Annual Report on Internal Control Over Financial Reporting and the related Attestation Report of the Registered Public Accounting Firm by April 30, 2005 through an amendment to this annual report on Form 10-K.
Item 9B.
Item 9B. Other Information - ---------------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
The information contained under the section captioned "Proposal I-Election of Directors" contained in the Corporation's Definitive Proxy Statement for the Corporation's Annual Meeting of Stockholders (the "Proxy Statement"), is incorporated herein by reference. Reference is made to the cover page of this report for information regarding compliance with Section 16(a) of the Exchange Act, and to the section therein captioned "COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT".
The following table sets forth information with respect to the executive officers of the Corporation and the Bank.
Name Age (a) Position - ---- ------- -------- David M. Duce 45 Chairman, Cascade Financial Corporation Chairman, Cascade Bank
Carol K. Nelson (b) 48 President, Chief Executive Officer and Director of Cascade Bank and Cascade Financial Corporation
Robert M. Ittes 54 President, Issaquah Bank Division of Cascade Bank
Robert G. Disotell 50 Executive Vice President, Chief Credit Officer
Steven R. Erickson(b) 49 Executive Vice President, Real Estate Lending
Lars H. Johnson(b) 51 Executive Vice President, Chief Financial Officer
LeAnne M. Frank 35 Executive Vice President, Chief Administrative Officer
Robert F. Wojcik 55 Executive Vice President, Business Banking
Debbie E. McLeod 39 Executive Vice President, Retail Banking
(a) At December 31, 2004. (b) Officer of the Corporation and Bank.
The principal occupation of each executive officer of the Corporation and Bank is set forth in the Proxy Statement or below. There are no family relationships among or between the executive officers listed above.
ROBERT M. ITTES is President of the Issaquah Bank Division of the Bank. He joined Cascade Bank in 2004 as a result of the Bank's acquisition of Issaquah Bancshares, Inc. Mr. Ittes' responsibilities include managing the business lending activities in the Issaquah and North Bend market areas. His community activities include serving on the boards of the Issaquah Chamber of Commerce, Issaquah Schools Foundation/Communities In School Issaquah, and the Issaquah Historical Society. He is also involved in government relations activities, both with the Washington Bankers Association and the Eastside Business Alliance. Mr. Ittes is a resident of Sammamish, Washington.
ROBERT G. DISOTELL has been employed by Cascade Bank since 1977 and currently serves as Executive Vice President of Credit Administration. He is responsible for overseeing the credit quality of the Bank's loan portfolios. Mr. Disotell has managed a variety of business groups in his tenure at Cascade, including Mortgage Banking, Loan Servicing, Secondary Marketing, Retail Banking, and Community Reinvestment Act (CRA) activities. Mr. Disotell is a resident of Arlington, Washington.
STEVEN R. ERICKSON is the Executive Vice President of Real Estate Lending for the Bank, responsible for managing commercial and income property lending and serves as the Assistant Secretary for the Corporation. Mr. Erickson joined
Cascade in 1978. He is a member of the Board for Big Brothers and Big Sisters of Snohomish County, Advisory Board Member for Snohomish County's Pre-Diversion Program, and Trustee of the Boys and Girls Club of Snohomish County. He is a resident of Marysville, Washington.
LARS H. JOHNSON is the Executive Vice President, Chief Financial Officer of the Bank and Corporation and also serves as the corporate secretary. Mr. Johnson joined Cascade in April 2000. Mr. Johnson has 30 years of financial management experience, including 16 years with the Federal Home Loan Bank of Seattle. Mr. Johnson is a resident of Edmonds, Washington.
LEANNE M. FRANK is the Executive Vice President and Chief Administrative Officer for the Bank. She has 18 years of consumer banking experience starting with Rainier Bank and most recently Bank of America, where she served as Vice President and Region Service Manager. She is a 2002 graduate of Leadership Snohomish County and has served as Vice President of the Everett Theatre Society Board. Ms. Frank is a resident of Everett, Washington.
ROBERT F. WOJCIK is the Executive Vice President of Business Banking for the Bank, responsible for managing business relationships consisting of business loans, business deposits, lines of credit, owner occupied commercial real estate and other business services. Mr. Wojcik joined Cascade Bank in August 2004. He has 26 years of commercial banking experience, recently retiring from Bank of America after 25 years in commercial banking. Mr. Wojcik is a Trustee for the Snohomish County YMCA and has been involved in numerous other community organization as a board member, coach and volunteer.
DEBBIE E. McLEOD is Executive Vice President of Retail Banking for the Bank. Ms. McLeod joined Cascade Bank in February 2001. She has over 15 years of commercial banking experience and was previously Vice President and Northern Region Sales Manager for Bank of America. Ms. McLeod is a past Board Chair for United Way of Skagit County and is a Director of United Way of Snohomish County. Ms. McLeod resides in Burlington, Washington.
Item 11.
Item 11. Executive Compensation - --------------------------------
The information contained under the section captioned "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by reference to the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the Corporation.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
The information required by this Item is incorporated herein by reference to the section captioned "Transactions with Management and Others" of the Proxy Statement.
Item 14.
Item 14. Principal Accountant Fees and Services - ------------------------------------------------
The information required by this Item is incorporated herein by reference to the section captioned "INDEPENDENT AUDITORS" of the Proxy Statement."
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------
(a) (1)(2) Reports of Independent Registered Public Accounting Firms Consolidated Financial Statements (a) Consolidated Balance Sheets at December 31, 2004, and December 31, 2003. (b) Consolidated Statements of Operations for the year ended December 31, 2004, 2003 and 2002. (c) Consolidated Statements of Stockholders' Equity and Comprehensive Income for the year ended December 31, 2004, 2003 and 2002. (d) Consolidated Statements of Cash Flows for the year ended December 31, 2004, 2003 and 2002. (e) Notes to Consolidated Financial Statements
All schedules have been omitted, as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in the Annual Report.
(3) Exhibits 3.1 Certificate of Incorporation of Cascade Financial Corporation (Incorporated by reference to the Corporation's Proxy statement on Form S-4 (File No. 33-83200)). 3.2 Bylaws of Cascade Financial Corporation (Incorporated by reference to the Corporation's Registration Statement on Form S-4 (File No.33-83200)). 10.1 Cascade Financial Corporation 1994 Employee Stock Purchase Plan (Incorporated by reference to the Corporation's Registration Statement on Form S-4 (File No. 33-83200)). 10.2 Cascade Financial Corporation 1992 Stock Option and Incentive Plan (Incorporated by reference to the Corporation's Form 10-KSB for the period ending June 30, 1995). 10.3 Cascade Financial Corporation Employee Stock Ownership Plan (Incorporated by reference to the Corporation's Annual Report on Form 10-KSB for the period ending June 30, 1995). 10.4 Cascade Financial Corporation 1997 Stock Option Plan (Incorporated by reference to Appendix E to the Prospectus included in the Corporation's Registration Statement on Form S-4 (File No. 333-24203)). 10.5 Employment Agreement entered into between the Bank and Carol K. Nelson dated November 27, 2001. (Incorporated by reference to Exhibit 10.5 of the Corporation's Form 10-K for the period ending December 31, 2001). 10.6 Form of Change of Control Agreement entered into between the Bank and its executive officers. (Incorporated by reference to Exhibit 10.6 of the Corporation's Form 10-K for the period ending December 31, 2001). 10.7 Cascade Financial Corporation 1997 Elective Equity Plan. (Incorporated by reference to Exhibit 10.7 of the Corporation's Form 10-K for the period ending December 31, 2001). 10.8 Employment Agreement Extension with Carol K. Nelson dated January 27, 2004 (Incorporated by reference to Exhibit 10.6 of the Corporation's Form 10-Q for the period ending March 31, 2004). 10.9 Cascade Bank Deferred Compensation Plan, Election Form, and Election Form of Mr. Ittes. (Incorporated by reference to Exhibits 99.1, 99.2 & 99.3 of the Corporation's Form 8-K filed with the SEC on December 20, 2004). 13 Cascade Financial Corporation December 31, 2004 Annual Report to Stockholders, including the Selected Financial Data and Management Discussion and Analysis. 21 Subsidiaries 23 Consent of Independent Registered Public Accounting Firm - Moss Adams LLP 23.1 Consent of Independent Registered Public Accounting Firm - KPMG LLP 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On December 21, 2004, the Corporation filed a Form 8-K reporting a $.08 quarterly cash dividend under item 2.02 of Form 8-K. The dividend was paid on January 27, 2005 to shareholders of record on January 13, 2005.
On December 16, 2004, the Corporation filed a Form 8-K announcing that Cascade Bank, the banking subsidiary of Cascade Financial Corporation, adopted the Cascade Bank Deferred Compensation Plan, under Item 1.01 of Form 8-K.
On October 20, 2004, the Corporation filed a Form 8-K reporting and attached press release announcing earnings information for the third quarter and nine months ended September 30, 2004, under Item 2.02 of Form 8-K.
On October 1, 2004, the Corporation filed a Form 8-K reporting a $.08 quarterly cash dividend under item 8.1 of Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 11, 2005 By: /s/ Carol K Nelson ------------------ Carol K. Nelson President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Lars H. Johnson By: /s/ D. R. Murphy ------------------- ---------------- Lars H. Johnson D. R. Murphy Executive Vice President Director (Chief Financial Officer) Date: March 11, 2005 Date: March 11, 2005
By: /s/ David W. Duce By: /s/ Ronald E Thompson ----------------- --------------------- David W. Duce Ronald E. Thompson Chairman Director Date: March 11, 2005 Date: March 11, 2005
By: /s/ Janice Halladay By: /s/ G. Brandt Westover ------------------- ---------------------- Janice Halladay G. Brandt Westover Director Director Date: March 11, 2005 Date: March 11, 2005
By: /s/ Frank M. McCord By: /s/ Craig Skotdal ------------------- ----------------- Frank M. McCord Craig Skotdal Director Director Date: March 11, 2005 Date: March 11, 2005
By: /s/ David O'Connor By: /s/ Dwayne Lane ------------------ --------------- David O'Connor Dwayne Lane Director Director Date: March 11, 2005 Date: March 11, 2005
By: /s/ Henry Robinett By: /s/ Richard Anderson ------------------ -------------------- Henry Robinett Richard Anderson Director Director Date: March 11, 2005 Date: March 11, 2005