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| CASB > SEC Filings for CASB > Form 10-Q on 4-May-2009 | All Recent SEC Filings |
4-May-2009
Quarterly Report
The following discussion is intended to assist in understanding the financial condition and results of the Corporation. The information contained in this section should be read with the unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report, and the December 31, 2008 audited consolidated financial statements and accompanying notes included in our recent Annual Report on Form 10-K.
Forward-Looking Statements
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995, that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. The
Corporation's actual results may differ materially from those included in the
forward-looking statements. Forward-looking statements are typically identified
by words or phrases such as "believe," "expect," "intend," "may increase," "may
fluctuate," and similar expressions or future or conditional verbs such as
"will," "should," "would," and "could." These forward-looking statements involve
risks and uncertainties including, but not limited to, economic conditions,
portfolio growth, the credit performance of the portfolios, including
bankruptcies, and seasonal factors; changes in general economic conditions
including the performance of financial markets, prevailing inflation and
interest rates, realized gains from sales of investments, gains from asset
sales, and losses on commercial lending activities; results of various
investment activities; the effects of competitors' pricing policies, of changes
in laws and regulations on competition and of demographic changes on target
market populations' savings and financial planning needs; industry changes in
information technology systems on which we are highly dependent; failure of
acquisitions to produce revenue enhancements or cost savings at levels or within
the time frames originally anticipated or unforeseen integration difficulties;
the adoption of the Corporation of an FFIEC policy that provides guidance on the
reporting of delinquent consumer loans and the timing of associated credit
charge-offs for financial
institution subsidiaries; and the resolution of legal proceedings and related matters. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect the Corporation's results. These and other important factors, including those discussed in our December 31, 2008 Form 10-K, filed with the Securities and Exchange Commission, under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and those discussed in this Form 10-Q under Part II, Item 1A "Risk Factors" below, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made.
Cascade Financial Corporation is a bank holding company incorporated in the state of Washington. The Corporation's sole operating subsidiary is Cascade Bank, a Washington State chartered commercial bank. The Corporation and the Bank are headquartered in Everett, Washington. The Bank offers loan, deposit, and other financial services through its twenty-one branches located in Snohomish, King and Skagit Counties (Washington).
Selected Financial Data
The following table sets forth certain selected financial data concerning the
Corporation for the periods indicated:
At or for the three months
ended March 31,
2009 2008
Return on average assets (2) (1.20 )% 0.71 %
Return on average common equity (2) (17.01 ) 8.42
Average stockholders' equity to average assets 9.87 8.48
Other expenses to average assets (2) 1.89 1.88
Efficiency ratio 58.20 53.64
Efficiency ratio (1) 52.38 53.64
Average interest-bearing assets to average interest-bearing
liabilities 107.78 111.75
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(1) Excludes an $858,000 OTTI charge on investments in Fannie Mae and Freddie Mac preferred
stock.
(2) Annualized.
Total assets increased 1% or $22.0 million to $1.66 billion at March 31, 2009, compared to $1.64 billion at December 31, 2008. Net loans, i.e. net of deferred loan fees and the allowance for loan losses, decreased 1% or $15.7 million to $1.22 billion at March 31, 2009, from $1.24 billion at December 31, 2008.
Total investment securities increased $28.3 million to $284.5 million at March 31, 2009, compared to $256.2 million at December 31, 2008. The investment portfolio is concentrated in securities issued by Government Sponsored Enterprises (GSEs, i.e. FNMA or FHLMC) as well as mortgage-backed pass-through securities and collateralized mortgage obligations backed by pools of single family residential mortgages (known collectively as MBS). All investment purchases during the three months ended March 31, 2009, were rated AAA or AA in terms of credit quality by Moody's and/or Standard & Poors. All MBS and GSE debt securities in the portfolio as of March 31, 2009, were also rated AAA.
During the quarter the available-for-sale portfolio grew by $72.7 million and the held-to-maturity portfolio declined by $44.4 million. $43.5 million of the held-to-maturity portfolio decline was a result of calls of agency notes. Purchases resulting from the proceeds from the calls, in addition to the incremental purchases, were all designated available-for-sale to increase flexibility in managing the portfolio.
(Dollars in thousands) March 31, 2009
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains gains losses losses
Amortized less than more than less than more than Fair
cost 1 year 1 year 1 year 1 year value
Securities available-for-sale
MBS $ 44,988 $ 596 $ - $ (133 ) $ (203 ) $ 45,248
Agency notes 150,033 1,196 - (522 ) - 150,707
Corporate/other 436 - - - - 436
Total $ 195,457 $ 1,792 $ - $ (655 ) $ (203 ) $ 196,391
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains gains losses losses
Amortized less than more than less than more than Fair
cost 1 year 1 year 1 year 1 year value
Securities held-to-maturity
MBS $ 19,463 $ 434 $ 20 $ (39 ) $ - $ 19,878
Agency notes 55,957 157 - (20 ) - 56,094
Corporate/other 775 - - - - 775
Total $ 76,195 $ 591 $ 20 $ (59 ) $ - $ 76,747
December 31, 2008
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains gains losses losses
Amortized less than more than less than more than Fair
cost 1 year 1 year 1 year 1 year value
Securities available-for-sale
MBS $ 42,250 $ 288 $ - $ (281 ) $ (405 ) $ 41,852
Agency notes 81,149 368 - (145 ) - 81,372
Corporate/other 1,294 - - (840 ) - 454
Total $ 124,693 $ 656 $ - $ (1,266 ) $ (405 ) $ 123,678
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(Dollars in thousands) December 31, 2008
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains gains losses losses
Amortized less than more than less than more than Fair
cost 1 year 1 year 1 year 1 year value
Securities held-to-maturity
MBS $ 20,484 $ 195 $ 14 $ (139 ) $ (9 ) $ 20,545
Agency notes 99,335 442 - (396 ) - 99,381
Corporate/other 775 - - - - 775
Total $ 120,594 $ 637 $ 14 $ (535 ) $ (9 ) $ 120,701
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As of March 31, 2009, the Bank held six securities in its available-for-sale portfolio and none in its held-to-maturity portfolio that have had an unrealized loss for more than one year. The losses on the available-for-sale securities as of December 31, 2008, have become unrealized gains due to lower market rates on agency notes and mortgages. We have the intent and ability to hold the investments below market value for the period of time management believes to be sufficient for a market price recovery. We hold no securities that are backed by sub-prime loans or collateralized debt obligations.
The Bank owns preferred shares issued by Fannie Mae ($10 million par value) and Freddie Mac ($10 million par value) with a combined adjusted book value of $1.3 million as of December 31, 2008. With a fair value of $436,000 as of March 31, 2009, the Corporation took an additional charge of $858,000 during the first quarter of 2009 to allow for flexibility in managing those securities.
At March 31, 2009, the Bank held FHLB of Seattle stock with a par value of $11.9 million. The Corporation does not anticipate any impairment charges associated with these instruments. Thus, according to the AICPA Audit Guide, FHLB stock does not have readily determinable fair value for purposes of FASB Statement No. 115, Accounting for Certain Investment in Debt and Equity Securities, and the equity ownership rights are more limited than would be the case for a public company because of the FHFA's oversight role in budgeting and approving dividends. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost. Thus, when evaluating FHLB stock for impairment, its value should be determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
Loan Portfolio
Virtually all of the Bank's loans are to businesses or individuals in the Puget Sound area. Business loans are made to small and medium sized businesses within that area for a wide array of purposes. Included in the business loan total are loans secured by real estate, the majority of which the borrower is the primary tenant of the property. Real estate construction loans are extended to builders and developers of residential and commercial real estate. Commercial real estate loans fund small, non-owner occupied buildings.
Residential loans, held in the Bank's portfolio, are generally adjustable rate loans secured by single family residences. The Bank also originates longer term fixed rate residential loans, but sells most of those loans into the secondary market on a best efforts, servicing released basis. Home equity loans are primarily second mortgages on the borrower's primary residence. Consumer loans are non-residential, i.e. automobiles, credit cards or boats.
The following summary reflects the Bank's loan portfolio as of the dates indicated:
(Dollars in thousands) December 31,
March 31, 2009 % of Portfolio 2008 % of Portfolio
Business $ 477,220 38.2 % $ 485,060 38.6 %
Real estate construction(1) 342,796 27.4 406,505 32.3
Commercial real estate 176,356 14.1 122,951 9.8
Home equity/consumer 30,567 2.4 30,772 2.4
Residential(2) 127,176 10.2 126,089 10.0
Multifamily real estate 96,758 7.7 86,864 6.9
Total loans $ 1,250,873 100.0 % $ 1,258,241 100.0 %
Deferred loan fees (2,774 ) (3,069 )
Allowance for loan losses (25,020 ) (16,439 )
Loans, net $ 1,223,079 $ 1,238,733
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(1) Real estate construction loans exclude loans in process.
(2) Loans held-for-sale are included in residential loans, and at less than 1% of total loans, are not considered material.
Net loans decreased by $15.6 million to $1.22 billion as of March 31, 2009, compared to $1.24 billion at December 31, 2008. Total originations exceeded payoffs by $5.6 million. However, the transfer from the loan portfolio of $7.7 million (which has been adjusted for a $1.3 million write-off that has been captured in the net charge-offs of $5.3 million for the quarter) to real estate owned and a provision for loan losses, which grew the allowance for loan losses by a net of $8.6 million, resulted in the lower net loan total.
Within the portfolio, reclassification from the construction portfolio to commercial real estate ($49.0 million), multifamily ($9.0 million) and residential ($714,000) reduced the construction portfolio by $58.8 million. In those cases, the reclassified loans were secured by projects that had been completed and began to generate sufficient cash flow to justify the move.
(Dollars in
thousands) Balance at Balance at
March 31, Net new loans Transfers December 31,
Loans 2009 - payments Reclassifi-cations to REO (1) Charge-offs 2008 Change
Business $ 477,220 $ (7,408 ) $ - $ - $ (432 ) $ 485,060 -2 %
R/E construction 342,796 7,574 (58,801 ) (7,690 ) (4,792 ) 406,505 -16 %
Commercial real
estate 176,356 4,364 49,041 - - 122,951 43 %
Multifamily 96,758 848 9,046 - - 86,864 11 %
Home
equity/consumer 30,567 (109 ) - - (96 ) 30,772 -1 %
Residential 127,176 373 714 - - 126,089 1 %
Total loans $ 1,250,873 $ 5,642 $ - $ (7,690 ) $ (5,320 ) $ 1,258,241 -1 %
Deferred loan
fees (2,774 ) 274 - - 21 (3,069 ) -10 %
Allowance for
loan losses (25,020 ) (13,875 ) (5 ) - 5,299 (16,439 ) 52 %
Loans, net $ 1,223,079 $ (7,959 ) $ (5 ) $ (7,690 ) $ - $ 1,238,733 -1 %
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(1) Total loans transferred to REO were $9.0 million as of December 31, 2008, with $7.7 million transferred to REO and $1.3 million included in charged-off loans.
Deposits, Other Borrowings, and Stockholders' Equity
Total deposits increased by $8.6 million to $1.0 billion at March 31, 2009. Savings and money market accounts (MMDA) decreased $68.1 million as municipalities reduced their balances by $69.0 million as the Bank sought to reduce and realign its level of public deposits in light of the assessment to cover the uninsured deposits associated with the failure of the Bank of Clark County. CDs decreased $9.4 million to $606.5 million.
Checking account deposits increased as the Bank continued to focus its sales activities on deposit generation in general and checking/transaction accounts in particular. Total checking account balances increased by $86.1 million between December 31, 2008 and March 31, 2009. Of that increase, approximately $40.0 million represented the migration of municipal deposits to FDIC insured accounts from CDs and MMDAs.
The following table reflects the Bank's deposit mix as of the dates indicated:
(Dollars in thousands) December 31,
March 31, 2009 % of Deposits 2008 % of Deposits
Checking accounts $ 272,979 26.9 % $ 186,843 18.5 %
Savings & MMDA 135,917 13.4 204,035 20.3
CDs 606,467 59.7 615,904 61.2
Total $ 1,015,363 100.0 % $ 1,006,782 100.0 %
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FHLB advances were $249.0 million at December 31, 2008 and March 31, 2009. Securities sold under agreements to repurchase were $146.4 million at December 31, 2008, and $146.5 at March 31, 2009. Cascade participates in the Federal Reserve's term auction facility (TAF) and had a balance of $40.0 million at December 31, 2008 and $60.0 million at March 31, 2009. The Bank uses FHLB advances and repurchase agreements to meet the cash flow and interest rate risk management needs of the Bank.
Total stockholders' equity decreased $3.9 million from $160.1 million at December 31, 2008, to $156.2 million at March 31, 2009. The decrease in equity was due to the net loss for the period that was partially offset by the $1.3 million gain in accumulated other comprehensive income. The quarterly loss was primarily due to the $13.9 million loan loss provision that the Bank recorded during the period. During the three months ended March 31, 2009, no Cascade common stock was repurchased under the Board approved stock repurchase plan. Accumulated other comprehensive income increased to $606,000 compared to a $660,000 loss at December 31, 2008 as a result of unrealized gains on available-for-sale securities.
Asset Quality
Non-performing assets (non-performing loans, real estate owned and other
repossessed property) totaled $59.7 million and $41.8 million at March 31, 2009,
and December 31, 2008, respectively. Non-performing loans (NPLs) increased to
$50.6 million at March 31, 2009, compared to $40.3 million at December 31, 2008.
NPLs consist of loans on non-accrual, which includes most loans that are ninety
days past due, and loans that management otherwise has serious reservations
about the collectibility of all principal and interest owed within the time
frame of the underlying notes. Of the $50.6 million, $49.7 million were real
estate construction and land development loans, four were business loans
totaling $730,000, one was a residential loan totaling $155,000 and one was an
installment loan totaling $4,000. The Bank had one loan which was 90 days or
more past due and still accruing, totaling $1.9 million at March 31, 2009. This
loan is secured by real estate and well supported by current appraised values.
There was $9.1 million of real estate owned (REO) at March 31, 2009 compared to
$1.4 million at December 31, 2008. The REO consists of three completed new
houses and 112 developed single family lots.
On loans designated NPLs as of 12/31/08
(Dollars in
thousands) Balance at Additions Paydowns Balance at
March 31, during during Charge-offs during Transfers December 31,
Nonperforming Loans 2009 quarter quarter quarter to REO (1) 2008
Business $ 730 $ - $ - $ (420 ) $ - $ 1,150
Real estate
construction
Spec construction 24,915 19,690 (2,071 ) (252 ) (4,187 ) 11,735
Land acquisition and
development 16,475 601 (490 ) (1,630 ) (4,805 ) 22,799
Land 8,323 3,886 - - - 4,437
Total real estate
constuction 49,713 24,177 (2,561 ) (1,882 ) (8,992 ) 38,971
Commercial real
estate - - - - - -
Consumer 4 4 - (2 ) - 2
Residential 155 - - - - 155
Multifamily real
estate - - - - - -
Total $ 50,602 $ 24,181 $ (2,561 ) $ (2,304 ) $ (8,992 ) $ 40,278
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(1) Balance on loans as of 12/31/08. A $1.3 million write-down was taken at the time of foreclosure and the underlying properties were transferred to REO.
Management remains concerned about the residential housing slowdown and the effect it has had on credit quality. Inventories of unsold homes and building lots continue to increase in Snohomish, King and Pierce counties during the first quarter of 2009. The trend towards slowing of the overall economy only increases our concerns. Management has increased monitoring of construction and land acquisition loans and has reduced originations in these portfolios.
At March 31, 2009, the Bank's allowance for loan losses was $25.0 million compared to $16.4 million at December 31, 2008. Additionally, at March 31, 2009, $88,000 was recorded in a general valuation allowance allocated to off-balances sheet commitments, i.e. lines of credit and construction loans in process. This reserve is recorded as an "other liability" on the Corporation's balance sheet. During the quarter ended March 31, 2009, this account was reduced by $5,000 to $88,000 compared to $93,000 at December 31, 2008. Total allowance for loan losses, which includes the allowance for off-balance sheet commitments, was 2.01% of total loans outstanding at March 31, 2009, compared to 1.31% at December 31, 2008. Total allowance for loan losses was 50% of non-performing loans at March 31, 2009, compared to 41% at December 31, 2008. As a result of FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, management has performed extensive analyses on the impaired loans, including obtaining and evaluating updated appraisals, to determine the adequacy of the allowance for loan losses, as well as recording appropriate charge-offs.
The economy in our market area is dependent to a significant degree on real estate and related industries (i.e. construction, housing). Although we maintain a reasonably diversified loan portfolio, the present downturn in real estate including construction has had an adverse effect on borrowers' ability to repay loans and has affected our results of operations and financial condition, and these changes are taken into account when we evaluate our allowance for loan losses. We frequently review and update our underwriting guidelines and monitor our delinquency levels for any negative or adverse trends and adjust projected loan concentration limits and credit standards when necessary.
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