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 December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM_______TO_________
Commission file number 0-25286
CASCADE FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
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
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 December 31, 1998
----- -----------------------------------
Common Stock ($.01 par value) 4,328,839
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CASCADE FINANCIAL CORPORATION
FORM 10-Q
for the Quarter Ended December 31, 1998
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)
December 31, June 30,
------------ --------
ASSETS 1998 1998
- ------ ------ ------
Cash on hand and in banks $ 13,391 10,642
Interest-earning deposits in other institutions 1,772 1,324
Securities available for sale 42,009 27,412
Loans available for sale 40,554 19,920
Mortgage-backed securities held to maturity
(market value of $2,834 and $4,654) 2,862 4,725
Loans, net 373,144 364,814
Premises and equipment, at cost, net 9,347 8,764
Accrued interest receivable and other assets 6,728 6,554
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TOTAL ASSETS $ 489,807 444,155
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 335,529 312,518
Federal Home Loan Bank advances 106,916 73,436
Securities sold under agreements to repurchase 1,644 13,391
Advance payments by borrowers for taxes and
insurance 2,192 1,953
Accrued expenses and other liabilities 8,313 9,836
Deferred income tax 1,601 1,603
------- -------
TOTAL LIABILITIES 456,195 412,737
======= =======
Preferred stock, $.01 par value, 500,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value,5,000,000 shares
authorized; 4,328,839 and 4,265,624 shares
issued and outstanding 43 43
Additional paid-in capital 4,688 4,433
Retained earnings, substantially restricted 28,989 27,046
Cumulative comprehensive income, net (note 4) (108) (104)
------- -------
TOTAL STOCKHOLDERS' EQUITY 33,612 31,418
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 489,807 444,155
======= =======
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 Six Months
Ended December 31, Ended December 31,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
Interest income:
Loans $ 8,590 7,666 17,012 15,149
Mortgage-backed securities
held-to-maturity 39 80 90 162
Securities available for sale 516 442 889 1,089
FHLB stock dividends 110 104 214 207
Interest-earning deposits 58 74 128 147
----------------------------------------
Total interest income 9,313 8,366 18,333 16,754
Interest expense:
Deposits 4,034 3,753 8,057 7,705
Borrowings 1,361 1,218 2,582 2,465
----------------------------------------
Total interest expense 5,395 4,971 10,639 10,170
Net interest income 3,918 3,395 7,694 6,584
Provision for loan losses 150 99 300 201
----------------------------------------
Net interest income after provision
for loan losses 3,768 3,296 7,394 6,383
Other income:
Gain on sale of loans 231 125 459 84
Service charges 247 300 501 647
Gain on sale of securities
available-for-sale 12 13 17 94
Gain on sale of real estate owned 55 -- 55 1
Other 62 72 111 145
-----------------------------------------
Total other income 607 510 1,143 971
Other expenses:
Salaries and employee benefits 1,340 1,314 2,816 2,555
Occupancy 492 420 926 821
Advertising 111 105 218 176
Data processing 134 96 276 135
Other 694 645 1,358 1,412
-----------------------------------------
Total other expenses 2,771 2,580 5,594 5,099
Income before income taxes 1,604 1,226 2,943 2,255
Federal income taxes 545 453 1,000 835
-----------------------------------------
Net income $ 1,059 773 1,943 1,420
=========================================
Earnings per share, basic $ 0.24 0.18 0.45 0.33
Earnings per share, diluted 0.22 0.17 0.41 0.30
Weighted average number of shares
outstanding:
Basic 4,328,839 4,245,749 4,318,674 4,241,822
Diluted 4,731,497 4,669,343 4,742,269 4,669,375
See notes to consolidated financial statements
4
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CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Six Months Ended December 31,
-----------------------------
1998 1997
------ ------
Cash flows from operating activities:
Net income $ 1,943 1,420
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization of premises
and equipment 352 330
Amortization of retained servicing rights 231 154
Provision for losses on:
Loans 300 202
Mortgage servicing rights 154 --
Additions to mortgage servicing rights (505) (384)
Deferred loan fees, net of amortization (208) 43
Net change in loans available for sale (20,634) (3,975)
Net loss (gain) on sales of:
Securities available for sale (16) (94)
Premises and equipment (1) --
Real Estate Owned 16 8
Federal Home Loan Bank stock dividend received (214) (207)
Net change in accrued interest receivable
and other assets over accrued expenses
and other liabilities (1,595) 2,490
-------------------------
Net cash used in operating activities (20,177) (13)
Cash flows from investing activities:
Loans originated, net of principal repayments (8,784) (14,287)
Purchases of mortgage-backed securities
held-to-maturity (128) --
Principal repayments on securities held-to-
maturity 1,991 779
Principal repayments on securities available-
for-sale 3,665 2,353
Purchases of securities available for sale (24,054) (64)
Proceeds from sales of securities available
for sale 6,016 23,886
Proceeds from sales of real estate owned 363 546
Purchases of premises and equipment (935) (762)
-------------------------
Net cash used in investing activities (21,866) 12,451
Subtotal, carried forward (42,043) 12,438
-------------------------
See notes to consolidated financial statements
5
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CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands, unaudited)
Six Months Ended December 31,
-----------------------------
1998 1997
------ ------
Subtotal, brought forward $ (42,043) 12,438
Cash flows from financing activities:
Proceeds from issuance of common stock 256 86
Net increase (decrease) in deposits 23,011 (4,111)
Proceeds from Federal Home Loan Bank advances 364,950 125,300
Repayment of Federal Home Loan Bank advances (331,470) (132,503)
Net decrease in securities sold under
agreements to repurchase (11,747) (4,917)
Net decrease in advance payments by borrowers
for taxes and insurance 239 432
-------------------------
Net cash provided by (used in) financing
activities 45,239 (15,713)
-------------------------
Net increase (decrease) in cash and cash
equivalents 3,196 (3,275)
Cash and cash equivalents at beginning of period 11,967 14,311
-------------------------
Cash and cash equivalents at end of period $ 15,163 11,036
=========================
Supplemental disclosures of cash flow information-
cash paid during the period for:
Interest $ 10,752 10,116
Federal income taxes 1,361 500
Supplemental schedule of noncash investing
activities:
Mortgage loans securitized into mortgage
backed securities and held-for-trading
and sold 13,072 18,345
Net mortgage loans transferred to real
estate owned 363 226
See notes to consolidated financial statements.
6
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CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(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 SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income for the three months ended December
31, 1998 and 1997, was $921 and $946, respectively. Comprehensive income for
the six months ended December 31, 1998 and 1997 was $1,939 and $1,671,
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
<PAGE>
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.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", was issued in October 1998 and requires that entities securitizing
mortgage loans held for sale shall 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. This statement is effective for the first
fiscal quarter beginning after December 15, 1998. Application of this statement
will not have a material effect on the results of operations or the financial
position of the Corporation.
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.
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.
8
<PAGE>
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 $489.8 million at December 31, 1998, compared with
$444.2 million at June 30, 1998. Loans available for sale, net increased $20.6
million to $40.6 million at December 31, 1998. Refinance activity increased
dramatically as mortgage interest rates continued to decline. Loans, net
increased by $8.3 million, and securities available for sale increased $14.7
million. Increases in assets were funded by a $23.0 million increase in
deposits and a $33.5 million increase in FHLB-Seattle advances.
ASSET QUALITY
Nonperforming assets totaled $1.0 million and $2.0 at December 31, 1998 and
June 30, 1998, respectively. Assets classified as substandard totaled $2.9
million at December 31, 1998, and $4.4 million at June 30, 1998. The decreases
in non performing and substandard assets resulted from the foreclosure of real
and personal property from one borrower totaling $745,000. The Bank loss less
than $4,000 on the sale of these repossessed properties.
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended December 31, 1998 and 1997
General
Net income for the three months ended December 31, 1998, increased to $1.1
million compared with $773,000 in 1997. The principal reason for the increase
in the three months earnings was an increase in net interest income of $472,000
after provisions for loan losses. The three month net interest income increase
was partially offset by an increase of $191,000 in other expenses, principally
due to an increase of $72,000 in occupancy and an increase of $38,000 in data
processing expenses. Net income for the six months ended December 31, 1998,
increased to $1.9 million from $1.4 million in 1997. The principal reason for
the increase in the six months earnings was an increase in net interest income
of $1.0 million after provisions for loan losses. Part of the increase in net
interest income for the six month period was offset by an increase in other
expenses, principally due to an increase of $261,000 in salaries and benefits
expenses and $141,000 in data processing expenses. Both increases can be
attributed to the in-house data processing system conversion and an increase in
personnel.
Net Interest Income
Net interest income increased $523,000 to $3.9 million for the three months
ended December 31, 1998 compared with the $3.4 million for the quarter ended
December 31, 1997. Net interest income increased by $1.1 million to $7.7
million for the six months ended December 31, 1998 compared with the $6.6
million for the six months ended December 31, 1997. The Bank's net interest
margin increased 8 basis points to 3.53% for the most recent quarter and 21
basis points to 3.46% for the six months ended December 31, 1998. Average
interest earning assets increased $51.8 million to $456.8 for the quarter ended
December 31, 1998 and $40.1 million for the six months ended December 31, 1998
as compared to the same periods in 1997. Average loans increased $56.1 million
and average securities decreased $338,000 during the most recent quarter as
compared with the same quarter in 1997. Average loans increased $50.9 million
and average securities decreased $8.7 million during the six months ended
December 31, 1998 compared with the six months ended December 31, 1997. The
increase in average loans, which provide higher yields than investments, coupled
with a decrease of 29 basis points in the Bank's cost of funds, which decreased
to 4.93% for the quarter ended December 31, 1998, were the primary factors
leading to the increase in net interest margin.
9
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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 $150,000 for the three months ended
December 31, 1998, as compared with $99,000 for the 1997 period. Provisions
were $300,000 and $201,000 for the respective six months. At December 31, 1998,
and June 30, 1998, the Bank's loan loss allowance totaled $4.2 million and $4.0
million, respectively, and the loan loss allowance as a percent of net loans
outstanding was 1.1% at each date. Nonperforming loans decreased $929,000 to
$992,000 at December 31, 1998, as compared to the period ending June 30, 1998.
Substandard loans decreased $1.5 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 $97,000 to $607,000 for the three months ended
December 31, 1998 as compared with the three months ended December 31, 1997.
For the six months ended December 31, 1998, other income increased $172,000 to
$1.1 million as compared with the six months ended December 31, 1997. These
increases were the result of increases in gain on sale of loans of $106,000 and
$375,000 for the three and six month periods, respectively. These gains were
offset by decreases in service charges of $53,000 and $146,000 for the same
periods.
Other Expenses
Other expenses increased to $2.8 million for the three months ended December
31, 1998 compared with $2.6 million for the three months ended December 31,
1997. This increase is due primarily to increases in occupancy of $72,000 and
an increase in data processing costs of $38,000 resulting from the Corporation's
expansion of products and services. For the six month period ended December 31,
1998 other expenses totaled $5.6 million, a $495,000 increase from the December
31, 1997 total. Increases in salaries, employee benefits and information
service costs related to development of new products and services were the cause
of this increase.
10
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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 $34.2 million in December 1998, which were in excess of
the required liquidity level of $15.9 million.
Loan commitments outstanding at December 31, 1998, were $36.1 million and
will be funded through sales of loans, existing liquidity balances, FHLB-Seattle
advances, and other borrowings. Outstanding commitments to sell loans totaled
$40.6 million at December 31, 1998.
At December 31, 1998, the Bank had an unused line of credit from the FHLB-
Seattle of $65 million. The Bank's credit line with the FHLB-Seattle is 35% of
total assets or up to approximately $172 million. The Bank also had $1.6
million of reverse repurchase agreements outstanding, a decrease of $11.8
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 December 31, 1998. Cascade's
regulatory capital requirements and related excess capital amounts as of
December 31, 1998 are presented in the following table:
Core capital Amount Percentage
------------ ------ ----------
Tier 1 (Core) capital $33,118 6.78%
Less: Minimum requirement 19,548 4.00
------ -----
Excess $13,570 2.78%
====== =====
Risk-based capital Amount Percentage
------------------ ------ ----------
Risk-based capital $36,661 11.56%
Less: Minimum requirement(1) 25,371 8.00
------ -----
Excess $11,290 3.56%
====== =====
(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 December 31, 1998, Cascade Bank is a "well capitalized"
institution.
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 the current
business strategy.
11
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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 the software
application 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, 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 calls 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.
Most of the 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.
Mission critical software was tested in 1998 and this testing has been
completed. The hardware for mission critical systems will be tested in
February. Cascade intends to participate in the Mortgage Bankers Association
Year 2000 Inter-System Readiness Test, an industry-wide test of various mortgage
banking software platforms. This testing is scheduled for the March-to-May
period and will involve a test of loan origination and loan closing systems.
Testing of the software and hardware for ATM and debit card systems will be
conducted in both March and April.
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 200 issues. As of December 31, 1998, the
Bank has expensed $68,000 of the budgeted amount. The Bank added one additional
employee to work on Year 2000 projects, and does not anticipate adding any
additional employees. These expenses will be funded through normal cash flows
from operations.
12
<PAGE>
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 many 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 even 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 writing a manual for all employees and testing of this
plan will occur in early April.
13
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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
February 12, 1999 /s/ Russell E. Rosendal
-------------------------
By: Russell E. Rosendal
Executive Vice President
(Chief Financial Officer)
14
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