US SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD
fROM_______TO__________
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 91-1661954
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 Colby Avenue
Everett, Washington 98201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 339-5500
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Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of March 31, 1999
----- --------------------------------
Common Stock ($.01 par value) 4,344,124
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CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended March 31, 1999
INDEX
PART I - Financial Information:
Item 1 - Financial Statements:
- Condensed Consolidated Balance Sheets. . . . . . . . . . . .3
- Condensed Consolidated Statements of Operations. . . . . . .4
- Condensed Consolidated Statements of Cash Flows. . . . . . .5
- Notes to Consolidated Financial Statements. . . . . . . . . 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 8
PART II - Other Information. . . . . . . . . . . . . . . . . . . 14
2
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PART I -- FINANCIAL INFORMATION
CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, unaudited)
March 31, June 30,
---------- ----------
1999 1998
---------- ----------
ASSETS
- ------
Cash on hand and in banks $ 12,615 10,642
Interest-earning deposits in other institutions 447 1,324
Securities available for sale 72,412 27,412
Loans available for sale 32,146 19,920
Mortgage-backed securities held to maturity
(market value of $1,854 and $4,654) 1,879 4,725
Loans, net 394,229 364,814
Premises and equipment, at cost, net 9,419 8,764
Accrued interest receivable and other assets 7,529 6,554
---------- ---------
TOTAL ASSETS $ 530,676 444,155
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 358,878 312,518
Federal Home Loan Bank advances 113,906 73,436
Securities sold under agreements to repurchase 6,414 13,391
Advance payments by borrowers for taxes and
insurance 3,425 1,953
Accrued expenses and other liabilities 10,177 9,836
Deferred income tax 2,929 1,603
---------- ---------
TOTAL LIABILITIES 495,729 412,737
Preferred stock, $.01 par value, 500,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value, 8,000,000 shares
authorized; 4,344,124 and 4,265,624 shares
issued and outstanding 43 43
Additional paid-in capital 4,721 4,433
Retained earnings, substantially restricted 30,321 27,046
Cumulative other comprehensive income,
net (note 4) (138) (104)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 34,947 31,418
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 530,676 444,155
========== =========
See notes to consolidated financial statements
3
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CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended, Nine Months Ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
Interest income:
Loans $ 8,723 7,758 25,735 22,907
Mortgage-backed securities
held-to-maturity 29 70 120 231
Securities available for sale 650 329 1,538 1,496
FHLB stock dividends 111 101 325 308
Interest-earning deposits 99 115 227 185
-------------------------------------------
Total interest income 9,612 8,373 27,945 25,127
Interest expense:
Deposits 4,122 3,699 12,179 11,405
Borrowings 1,276 1,189 3,858 3,653
-------------------------------------------
Total interest expense 5,398 4,888 16,037 15,058
Net interest income 4,214 3,485 11,908 10,069
Provision for loan losses 127 -- 427 202
-------------------------------------------
Net interest income after
provision for loan losses 4,087 3,485 11,481 9,867
Other income:
Gain on sale of loans 212 244 671 329
Gain on sale of servicing rights 583 -- 583 --
Service charges 304 328 805 975
Gain on sale of securities
available-for-sale -- (2) 17 93
Net gain (loss) on sale of real
estate owned 2 -- 41 (8)
Other 47 165 157 308
-------------------------------------------
Total other income 1,148 735 2,274 1,697
Other expenses:
Salaries and employee benefits 1,720 1,409 4,536 3,964
Occupancy 625 449 1,551 1,270
Advertising 114 97 332 273
Data processing 36 84 312 220
Other 716 669 2,058 2,071
-------------------------------------------
Total other expenses 3,211 2,708 8,789 7,798
-------------------------------------------
Income before income taxes 2,024 1,512 4,966 3,766
Federal income taxes 691 406 1,691 1,241
-------------------------------------------
Net income $ 1,333 1,106 3,275 2,525
===========================================
Earnings per share:
Basic $ 0.31 0.26 0.76 0.59
Diluted 0.28 0.24 0.69 0.54
Weighted average number of
shares outstanding:
Basic 4,344,124 4,250,110 4,327,157 4,244,584
Diluted 4,767,531 4,689,371 4,750,690 4,676,040
See notes to consolidated financial statements
4
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CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Nine Months Ended March 31,
---------------------------
1999 1998
------ ------
Cash flows from operating activities:
Net income $ 3,275 2,525
-----------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of
premises and equipment 639 500
Provision for losses on:
Loans 427 202
Mortgage servicing rights 187 --
Change in mortgage servicing rights 969 (398)
Deferred loan fees, net of amortization (105) (22)
Net change in loans available for sale (12,226) (17,987)
Net loss (gain) on sales of
Securities available for sale (17) (93)
Premises and equipment (1) --
Real estate owned (41) 8
Mortgage servicing rights (583) --
Investment property -- (101)
Federal Home Loan Bank stock dividend
received (325) (308)
Net change in accrued interest receivable
and other assets over accrued expenses
and other liabilities 63 5,992
-----------------------
Net cash used in operating activities (7,738) (9,682)
Cash flows from investing activities:
Loans originated, net of principal repayments (30,100) (15,032)
Purchases of mortgage-backed securities
held-to-maturity (291) --
Principal repayments on securities held-to
maturity 3,137 1,619
Principal repayments on securities available-
for-sale 5,276 3,996
Purchases of securities available for sale (56,003) (64)
Proceeds from sales of securities available
for sale 6,016 24,885
Proceeds from sales of real estate owned 478 546
Proceeds from sales of investment property -- 555
Purchases of premises and equipment (1,295) (1,414)
Proceeds from sales of premises and equipment 1 --
-----------------------
Net cash used in investing activities (72,781) 15,091
Subtotal, carried forward (80,519) 5,409
-----------------------
See notes to consolidated financial statements
5
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CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Nine Months Ended March 31,
---------------------------
1999 1998
------ ------
Subtotal, brought forward $ (80,519) 5,409
-----------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 289 97
Net increase in deposits 46,360 (2,701)
Proceeds from Federal Home Loan Bank
advances 482,950 208,400
Repayment of Federal Home Loan Bank advances (442,480) (210,113)
Net decrease in securities sold under
agreements to repurchase (6,977) (5,369)
Net decrease in advance payments by
borrowers for taxes and insurance 1,472 1,518
-----------------------
Net cash provided by (used in) financing
activities 81,614 (8,168)
-----------------------
Net increase in cash and cash equivalents 1,095 (2,759)
Cash and cash equivalents at beginning of
period 11,967 14,311
-----------------------
Cash and cash equivalents at end of period $ 13,062 11,552
=======================
Supplemental disclosures of cash flow
information-cash paid during the period for:
Interest $ 15,997 15,015
Federal income taxes 1,788 1,100
-----------------------
Supplemental schedule of noncash investing
activities:
Mortgage loans securitized into mortgage
backed securities and held-for-trading
and sold 18,092 20,861
Mortgage loans securitized into mortgage
backed securities and held-for-investment -- 13
Net mortgage loans transferred to real
estate owned 363 226
Funds due on sales of mortgage servicing
rights 1,320 --
See notes to consolidated financial statements.
6
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CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(unaudited)
1. Presentation of Financial Information
The accompanying financial information is unaudited and has been prepared
from the books and records of Cascade Financial Corporation (the
"Corporation"). The Corporation's sole subsidiary is Cascade Bank ("Cascade"
or the "Bank"). In the opinion of management, the financial information
reflects all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the financial condition, results of operations, and
cash flows in conformity with generally accepted accounting principles.
Certain information and footnote disclosures included in the Corporation's
financial statements for the year ended June 30, 1998, have been condensed or
omitted from this report. Accordingly, these statements should be read with
the financial statements and notes thereto included in the Corporation's Annual
Report on Form 10-K.
2. Commitments and Contingencies
In the normal course of business there are various commitments to fund
mortgage loans. Management does not anticipate any material loss as a result of
these commitments.
Periodically, there have been various claims and lawsuits against the
Corporation or the Bank, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incidental to the Corporation's and the Bank's business. In the opinion of
management, no significant loss is expected from any such pending lawsuits.
3. Financial Statement Reclassification
Certain amounts in the financial statements for fiscal 1998 have been
reclassified to conform with the financial statement classification for fiscal
1999.
4. New Accounting Pronouncements
Effective January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
Comprehensive income for the three months ended March 31, 1999 and 1998, was
$1.3 million and $1.0 million, respectively. Comprehensive income for the nine
months ended March 31, 1999 and 1998, was $3.2 million and $2.7 million,
respectively. Comprehensive income consists of net income and the change in
the unrealized gain on investments.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", was issued in June 1997 and redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. This statement was adopted
on July 1, 1998. Provisions of this statement require annual disclosure in the
year of adoption and interim reporting for periods thereafter.
7
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SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all quarters of fiscal years
beginning after June 15, 1999. Management is reviewing this statement and does
not expect that application of this statement will have a material effect on
the results of operations or the financial position of the Corporation.
Effective January 1, 1999, the Corporation has adopted SFAS No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". SFAS No.
134 requires that entities securitizing mortgage loans held for sale classify
any retained mortgage-backed securities in accordance with the provisions of
Statement No. 115, which requires the classification be based upon the
enterprise's ability and intent to sell or hold those investments.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section contains forward-looking statements that have been prepared on
the basis on the Corporation's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the control of the Corporation. In addition, these
forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to changes. Accordingly,
there can be no assurance that many of these strategies will be implemented, or
if implemented, achieve the amounts described or within the time periods
currently estimated.
MERGER
On August 1, 1997, Cascade Financial Corporation completed a merger with
AmFirst Bancorporation ("AmFirst"). This merger added three new full-service
offices to Cascade's branch network and immediately established Cascade's
commercial banking presence in Snohomish County. Acquired assets were $67.3
million, including $36.0 million primarily in commercial loans. Cascade also
acquired deposits of $60.7 million in the merger. The merger was accounted for
as a pooling-of-interests. Accordingly, the assets and liabilities of AmFirst
were added to those of Cascade at their recorded book values, and the financial
statements of Cascade were restated as if the merger had taken place at the
beginning of the periods covered.
ASSET/LIABILITY MANAGEMENT
Cascade, like other financial institutions, is subject to fluctuations in
interest rates because its interest-bearing liabilities reprice on different
terms than its interest-earning assets. During periods of interest rate
declines this position has a generally favorable impact on net interest income,
while increases in interest rates have a generally adverse impact on net
interest income.
8
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Cascade uses a simulation model to measure its interest rate risk and the
effects on net interest income resulting from changes in market interest rates.
Based on this model (which includes a number of significant assumptions and
estimates), a 200-basis point increase in general interest rates would reduce
Cascade's annual net interest income by 5% at September 30, 1998. Cascade
manages interest rate risk by retaining in its portfolio permanent and
construction adjustable rate loans with repricing periods that generally do not
exceed seven years. Principally, all new fifteen and thirty year fixed rate
loans are sold. Cascade extends the maturity of its liabilities by offering
deposit products to long-term, less rate sensitive customers, and by
periodically obtaining longer term Federal Home Loan Bank-Seattle ("FHLB")
advances. Cascade also uses interest rate swap and interest rate cap and floor
agreements to effectively extend the repricing of short-term deposit accounts
and protect segments of the Bank's loan portfolio from changes in market
interest rates.
Cascade uses mandatory and optional forward commitments from investment
banking firms to mitigate the interest rate risk from its mortgage banking
operation.
CHANGES IN FINANCIAL CONDITION
Total assets increased to $530.7 million at March 31, 1999, compared with
$444.2 million at June 30, 1998. Loans available for sale, net increased $12.2
million to $32.1 million at March 31, 1999. Loans, net increased by $29.4
million, and securities available for sale increased $45.0 million. Increases
in assets were funded by a $46.3 million increase in deposits and a $40.4
million increase in FHLB-Seattle advances.
ASSET QUALITY
Nonperforming assets totaled $951,000 and $2.0 million at March 31, 1999, and
June 30, 1998, respectively. Assets classified as substandard totaled $2.9
million at March 31, 1999, and $4.4 million at June 30, 1998. The decreases in
nonperforming and substandard assets resulted from the foreclosure of real and
personal property from one borrower totaling $745,000. The Bank incurred a
small loss on the sale of these repossessed properties.
RESULTS OF OPERATIONS
Comparison of the Three and Nine Months Ended March 31, 1998 and 1999
General
Net income for the three months ended March 31, 1999, increased to $1.3
million compared with $1.1 million in 1998. The principal reason for the
increase in the three months earnings was an increase in net interest income of
$602,000 after provisions for loan losses and a gain on sale of servicing
rights of $583,000. These increases were partially offset by an increase of
$503,000 in other expenses, principally due to an increase of $311,000 in
salaries and employee benefits and an increase of $176,000 in occupancy. Net
income for the nine months ended March 31, 1999, increased to $3.3 million from
$2.5 million in 1998. The principal reason for the increase in the nine months
earnings was an increase in net interest income of $1.6 million after
provisions for loan losses and a gain on sale of servicing rights of $583,000.
Part of the increase in net interest income for the nine month period was
offset by an increase in other expenses of $1.0 million, principally due to an
increase of $572,000 in salaries and benefits expenses and $281,000 in
occupancy expenses. Both increases can be attributed to the in-house data
processing system conversion and an increase in customer service personnel.
9
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Net Interest Income
Net interest income increased $729,000 to $4.2 million for the three months
ended March 31, 1999, compared with the $3.5 million for the quarter ended
March 31, 1998. Net interest income increased by $1.8 million to $11.9 million
for the nine months ended March 31, 1999, compared with the $10.1 million for
the nine months ended March 31, 1998. The Bank's net interest margin increased
9 basis points to 3.51% for the most recent quarter and 17 basis points to
3.48% for the nine months ended March 31, 1999. Average interest earning
assets increased $63.4 million to $479.6 for the quarter ended March 31, 1999,
and $71.8 million for the nine months ended March 31, 1999, as compared to the
same periods in 1998. Average loans increased $53.4 million and average
securities increased $20.1 million during the most recent quarter as compared
with the same quarter in 1998. Average loans increased $51.7 million and
average securities increased $892,000 during the nine months ended March 31,
1999, compared with the nine months ended March 31, 1998. The increase in
average loans, which provide higher yields than investments, coupled with a
decrease of 20 basis points in the Bank's cost of funds, which decreased to
4.73% for the quarter ended March 31, 1999, were the primary factors leading to
the increase in net interest margin.
Cascade is focusing on adding commercial businesses, nonconforming one-to-
four family loans, multi-family loans, home equity lines of credit, and one-to-
four family construction loans to its portfolio. Nonconforming loans generally
include loans where the borrower has a debt level or other financial
consideration that makes the loan unsaleable to government agencies such as
FHLMC and FNMA. Management believes these products provide the best returns
for Cascade and can be underwritten conservatively to ensure low delinquency,
absent unforeseen changes in local or national economic conditions.
Additionally, these loan types are typically variable rate loans and are not
effected as much by refinance activity as conforming fixed rate loans. This
should help to lower Cascade's overall origination and servicing costs in the
future.
Provision for Loan Losses
Cascade's provision for loan losses was $127,000 for the three months ended
March 31, 1999, as compared with $0 for the 1998 period. Provisions were
$427,000 and $202,000 for the respective nine months. At March 31, 1999, and
June 30, 1998, the Bank's loan loss allowance totaled $4.3 million and $4.1
million, respectively, and the loan loss allowance as a percent of net loans
outstanding was 1.1% at each date. Nonperforming loans decreased $969,000 to
$951,000 at March 31, 1999, as compared to the period ending June 30, 1998.
Substandard loans decreased $1.6 million to $2.9 million during the same
period. The provision for loan losses reflects management's quarterly
evaluation of the adequacy of the allowance for losses on loans. In
determining adequacy, management considers changes in the size and composition
of the loan portfolio, actual loan loss experience, current and anticipated
economic conditions and other factors. Management intends to grow the
commercial, nonconforming, construction and income property portfolios. These
loans typically have a higher credit risk that will require additions to the
reserve in future periods. Management monitors these loans at an increased
level to maintain credit quality and adequate reserve levels.
Other Income
Other income increased $413,000 to $1.1 million for the three months ended
March 31, 1999, as compared with the three months ended March 31, 1998. This
increase was the result of a gain on sale of servicing rights of $583,000.
This gain was partially offset by a decrease in other income of $118,000. For
the nine months ended March 31, 1999, other income increased $584,000 to $2.3
million as compared with the nine months ended March 31, 1998. This increase
is primarily due to a gain on sale of servicing rights of $583,000 and an
increase in gain on sales of loans of $342,000. These gains were partially
offset by decreases in service charges of $70,000 and other income of $151,000.
Increased saleable production origination volumes resulted in significant
increases to gain on sale of loans.
10
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Other Expenses
Other expenses increased to $3.2 million for the three months ended March 31,
1999 compared with $2.7 million for the three months ended March 31, 1998.
This increase is due primarily to increases in salaries and employee benefits
of $311,000 and occupancy costs of $176,000. Both increases are due to the in-
house data processing system conversion and an increase in customer service
personnel. For the nine month period ended March 31, 1999, other expenses
totaled $8.8 million, a $1.0 million increase from the March 31, 1998, total.
Increases in salaries and employee benefits and occupancy costs related to
development of new products and services and the in-house data processing
system conversion were the primary causes of this increase.
Liquidity and Sources of Funds
Cascade maintains liquidity balances in FHLB deposits and short-term
securities at levels in accordance with regulatory guidelines. The Bank held
average liquid assets of $32.5 million in March 1999, which were in excess of
the required liquidity level of $16.6 million.
Loan commitments outstanding at March 31, 1999, were $15.3 million and will
be funded through sales of loans, existing liquidity balances, FHLB-Seattle
advances, and other borrowings. Outstanding commitments to sell loans totaled
$7.2 million at March 31, 1999.
At March 31, 1999, the Bank had an unused line of credit from the FHLB-
Seattle of $71.9 million. The Bank's credit line with the FHLB-Seattle is 35%
of total assets or up to approximately $185.8 million. The Bank also had $6.4
million of reverse repurchase agreements outstanding, a decrease of $7.1
million from June 30, 1998.
Capital Resources
Cascade Bank is in full compliance with all capital requirements established
by the Office of Thrift Supervision ("OTS") at March 31, 1999. Cascade's
regulatory capital requirements and related excess capital amounts as of March
31, 1999, are presented in the following table:
Core capital Amount Percentage
------------ -------- ----------
Tier 1 (Core) capital $ 34,533 6.52%
Less: Minimum requirement 21,181 4.00
-------- ------
Excess $ 13,352 2.52%
======== ======
Risk-based capital Amount Percentage
------------------ -------- ----------
Risk-based capital $ 38,194 10.70%
Less: Minimum requirement (1) 28,553 8.00
-------- ------
Excess $ 9,641 2.70%
======== ======
______________________
(1) Based on risk-weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
was signed into law on December 19, 1991. Among other things, the FDICIA
provides the OTS, effective December 19, 1992, with broad powers to take
"prompt corrective action" to resolve problems of insured depository
institutions. The actions the OTS can take depend upon whether the institution
in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." The OTS has advised the Corporation that at March 31, 1999,
Cascade Bank is a "well capitalized" institution.
11
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The OTS issued a final rule on December 1, 1998, that provides comprehensive
guidance to management and examiners covering among other things, interest rate
risk, investment securities and the use of financial derivatives. The guidance
provides guidelines for examiners to use in evaluating the effectiveness of a
financial institution's risk management practices and identifies a set of
"sound practices" management should consider to improve their own risk
management practices. The rule describes the qualitative and quantitative
guidelines examiners will use to rate an institution's exposure to interest
rate risk.
Management does not believe the rule will materially adversely effect the
current business strategy.
YEAR 2000 DISCLOSURE
In the past, computer software commonly condensed a century date to just two
digits to conserve computer storage space. Thus, computers may interpret "00"
as "1900" rather than "2000". This could result in the inability of software
applications to properly process transactions with the dates in the Year 2000
or thereafter. The Year 2000 problem is of particular concern to Cascade and
other financial institutions because most financial transactions, such as
interest accruals and payments, are date sensitive and there is much
interaction with numerous customers, vendors and third party service providers
whom must also address the century date change issue.
State of Readiness
Cascade is committed to providing continuous, secure, quality banking
operations and services as we transition to the twenty-first century. Cascade
has established a Year 2000 team (the "Team") which is comprised of employees
from all significant operational areas of the Bank. This Team is managed at
the executive vice president level and provides regular status reports to
senior management and the board of directors. Examiners from the OTS have also
reviewed the Bank's Year 2000 progress and project plans.
The Year 2000 problem will impact both information technology ("IT") and non-
IT. IT includes computer hardware and software, whereas non-IT typically
includes embedded technology, such as microcontrollers, automated teller
machines ("ATMs") and elevators. With this in mind, the Team performed an
assessment of its Year 2000 exposure and created a business readiness report in
terms of the Bank's critical business processes (both IT and non-IT), hardware
and software inventories, significant borrowers, funding sources and
significant business partners. This assessment was followed with a technical
review of the automated systems of the Bank. The report provides a Year 2000
project plan with testing schedules, budget estimates and contingency plans.
The Team identified certain systems as "mission critical" and the project plan
called for all mission critical Year 2000 testing be completed by December 31,
1998. Testing for non-mission critical systems is on-going and testing for
these systems not tested in 1998 will continue into 1999.
The majority of software systems used by Cascade Bank are standard vendor-
supplied solutions under maintenance contracts. These solutions have either
been certified by the vendors as year 2000 compliant, are being modified for
Year 2000 compliance by the vendor, or are being replaced by the Bank with Year
2000 compliant systems.
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<PAGE>
Mission critical software was tested in 1998 and this testing has been
completed. Hardware testing for mission critical systems was completed in
February. Cascade is participating in the Mortgage Bankers Association Year
2000 Inter-System Readiness Test, an industry-wide test of various mortgage
banking software platforms. This testing is to be completed in May and
involves testing of loan origination and loan closing systems. Testing of the
software and hardware for ATM and debit card systems was completed in April.
On May 7, 1999, the Bank was notified its ATM and debit card third party
processor had not completed all Year 2000 testing as proscribed by the Federal
Banking Regulators. This processor handles many other financial institutions
as well as the Bank. The processor has until June 30, 1999 to meet its testing
requirements. Management is reviewing options previously identified in its
renovation plans for resolving this potential issue.
Costs to address Year 2000 issues
The Team anticipated the Bank would need to spend approximately $250,000 to
upgrade computer equipment, test software, purchase software upgrades and hire
additional temporary staff for Year 2000 issues. As of March 31, 1999, the
Bank has expensed $85,000 of the budgeted amount. The Bank added one
additional employee to work on Year 2000 projects and does not anticipate
adding additional employees. These expenses will be funded through normal cash
flows from operations. There may be costs associated with resolving the ATM-
debit card processor issue. These costs, if incurred, would not be material
in any single reporting period. Management will take whatever steps necessary
to enforce its contractual rights.
Risks associated with the Year 2000
The nature of the Year 2000 problem makes it difficult, if not impossible, to
determine what the exact risks will be to the Bank. There are numerous issues
beyond the Bank's control, such as electric power and telephone communications.
The Bank interacts with many customers, vendors and third party service
providers, who in turn interact with many of the same. Due to the
interdependence of computer systems today, it is simply impossible for any one
party to eliminate the risk related to the Year 2000 problem. If the computer
systems of a third party on which Cascade relies are not converted by the Year
2000, there may be significant costs incurred by Cascade. The Bank has been in
contact with its large loan customers, to insure they are aware of the Year
2000 problem and are in the process of addressing the issues. In the event
that these loan customers are unable to operate due to a Year 2000 problem,
there may be a loss of revenue for Cascade.
Contingency Plans
As the nature of the problems that may result from the Year 2000 problem are
extremely varied and vague, it has proven to be quite challenging to create one
contingency plan. However, the Team has created a worst-case-scenario
contingency plan for each of its mission critical systems. The Team is
currently in the stage of implementing this plan and testing will occur in
June.
13
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
- ---------------------------
The Corporation and the Bank have certain litigation and negotiations in
progress resulting from activities arising from normal operations. In the
opinion of management, none of these matters is likely to have a materially
adverse effect on the Corporation's financial position.
Item 2. Changes in Securities.
- -------------------------------
Not applicable
Item 3. Defaults upon Senior Securities.
- -----------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable
Item 5. Other information.
- ---------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
Not applicable
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASCADE FINANCIAL CORPORATION
May 14, 1999 /S/ Russell E. Rosendal
-----------------------------
By: Russell E. Rosendal
Executive Vice President
(Chief Financial Officer)
14
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