Cascade Financial (CASB) 10-Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM ______________TO_________________

Commission file number 0-25286

CASCADE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington	91-1661954
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)
2828 Colby Avenue
Everett, Washington	98201
(Address of principal executive offices)	(Zip Code)
(425) 339-5500
(Registrant's telephone number, including area code)

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes þ No p

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No p

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes p No þ

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 October 25, 2005
Common Stock ($.01 par value)	9,588,987

1

CASCADE FINANCIAL CORPORATION

FORM 10-Q

For the Quarter EndedSeptember 30, 2005

INDEX

PART I — Financial Information:
		PAGE
Item 1	— Financial Statements:
	— Condensed Consolidated Balance Sheets	3
	— Condensed Consolidated Statements of Income	4
	— Consolidated Statements of Comprehensive Income (Loss)	5
	— Condensed Consolidated Statements of Cash Flows	6
	— Notes to Condensed Consolidated Financial Statements	8
Item 2	— Management’s Discussion and Analysis of Financial Condition and Results
	of Operations	10
Item 3	— Quantitative and Qualitative Disclosures about Market Risk	22
Item 4	— Controls and Procedures	23
PART II — Other Information		25

2

PART I -- FINANCIAL INFORMATION

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

	September 30,			December 31,
ASSETS		2005			2004
		(unaudited)
Cash on hand and in banks	$	19,303		$	11,692
Interest-bearing deposits in other institutions		22,475			1,337
Securities available-for-sale		111,097			112,405
Securities held-to-maturity		91,346			91,339
FHLB Stock		11,920			11,872
Loans		875,871			804,029
Allowance for loan losses		(10,081	)		(9,563	)
Loans, net		865,790			794,466
Goodwill and intangibles, net		26,095			26,292
Premises and equipment, net		12,656			12,824
Cash surrender value of bank-owned life insurance		17,148			16,650
Accrued interest receivable and other assets		9,272			10,079
TOTAL ASSETS	$	1,187,102		$	1,088,955
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	799,969		$	721,908
Federal Home Loan Bank advances		241,000			228,000
Securities sold under agreements to repurchase		20,513			20,902
Junior subordinated debentures payable		15,367			15,454
Advance payments by borrowers for taxes and insurance		1,106			677
Dividends payable		863			765
Accrued interest payable, expenses and other liabilities		5,325			4,959
Deferred federal income taxes		217			40
TOTAL LIABILITIES		1,084,360			992,705
Stockholders’ Equity:
Preferred stock, $.01 par value, Authorized 500,000 shares;
no shares issued or outstanding		-			-
Common stock, $.01 par value, Authorized 25,000,000 shares;
issued and outstanding 9,588,987 shares at September 30,
2005 and 9,559,822 shares at December 31, 2004		96			96
Additional paid-in capital		37,946			37,326
Retained earnings, substantially restricted		66,420			59,975
Accumulated other comprehensive income (loss)		(1,720	)		(1,147	)
TOTAL STOCKHOLDERS’ EQUITY		102,742			96,250
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,187,102		$	1,088,955

See notes to condensed consolidated financial statements

3

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share amounts)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Interest income:
Loans	$	14,949	$	11,895	$	42,253	$	31,376
Securities available-for-sale		1,310		1,383		4,003		5,124
Securities held-to-maturity		1,061		1,084		3,228		3,236
FHLB stock dividends		-		138		49		436
Interest-earning deposits		71		18		124		51
Total interest income		17,391		14,518		49,657		40,223
Interest expense:
Deposits		4,860		2,978		12,706		7,884
FHLB advances and repurchase agreements		2,890		2,811		8,817		8,123
Junior subordinated debentures		305		178		873		518
Total interest expense		8,055		5,967		22,396		16,525
Net interest income		9,336		8,551		27,261		23,698
Provision for loan losses		250		150		745		525
Net interest income after provision for loan losses		9,086		8,401		26,516		23,173
Other income:
Gain on sale of loans		241		55		705		199
Gain on sale of securities available-for-sale		-		129		13		510
Net gain on sale of REO		-		-		33		99
Checking service fees		801		569		2,344		1,513
Other service fees		252		201		672		508
BOLI		194		134		572		401
Other		76		150		492		349
Total other income		1,564		1,238		4,831		3,579
Other expenses:
Salaries and employee benefits		3,039		3,083		9,217		8,390
Occupancy		823		736		2,453		1,981
Marketing		193		118		546		359
Data processing		187		135		503		311
Prepayment fees on FHLB advances		37		-		110		26
Merger related expenses		-		-		-		356
Other		1,393		933		4,172		3,348
Total other expenses		5,672		5,005		17,001		14,771
Income before provision for federal income taxes		4,978		4,634		14,346		11,981
Provision for federal income taxes		1,634		1,531		4,716		4,020
Net income	$	3,344	$	3,103	$	9,630	$	7,961
Net income per common share, basic	$	0.35	$	0.33	$	1.01	$	0.91
Weighted average number of shares		9,583,650		9,540,663		9,577,761		8,770,054
Net income per share, diluted	$	0.34	$	0.32	$	0.98	$	0.87
Weighted average number of shares		9,848,740		9,835,923		9,852,327		9,098,496
Dividends declared per share	$	0.09	$	0.07	$	0.33	$	0.21

See notes to condensed consolidated financial statements

4

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
		2005			2004			2005			2004
Net Income	$	3,344		$	3,103		$	9,630		$	7,961
Increase in unrealized gain (loss) on securities
available-for-sale, net of tax (benefit) expense
of $(537) and $932 for the three months
ended September 30, 2005 and 2004,
respectively, and $(322) and $(448) for the nine
months ended September 30, 2005 and 2004,
respectively.		(998	)		1,809			(598	)		(869	)
Increase in unrealized gain (loss) on swaps
available-for-sale, net of tax (benefit) expense
of $0 and $(157) for the three months
ended September 30, 2005 and 2004,
respectively, and $(78) and $(201) for the nine
months ended September 30, 2005 and 2004,
respectively.		-			(305	)		(146	)		(389	)
Less reclassification adjustment for gains on
securities included in net income, net of tax
(benefit) of $0 and $44 for the three months
ended September 30, 2005 and 2004,
respectively, and $(4) and $173 for the
nine months ended September 30, 2005 and
2004, respectively.		-			85			(8	)		337
Less reclassification adjustment for gains on
swaps included in net income, net of tax (benefit)
of $0 and $33 for the three months ended
September 30, 2005 and 2004, respectively, and
$96 and $77 for the nine months ended
September 30, 2005 and 2004, respectively.		-			64			179			148
Comprehensive Income	$	2,346		$	4,756		$	9,057		$	7,188

See notes to condensed consolidated financial statements

5

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands, unaudited)

Nine Months Ended September 30,
		2005			2004
Cash flows from operating activities:
Net income	$	9,630		$	7,961
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of premises and equipment		1,384			1,135
Provision for losses on loans		745			525
Increase in cash surrender value of bank owned life insurance		(498	)		(344	)
Amortization of retained servicing rights		-			59
Amortization of core deposit intangible		197			35
Deferred federal income taxes		468			(929	)
Deferred loan fees, net of amortization		382			691
Net gain on sales of securities available-for-sale		(13	)		(510	)
Net gain on sales of real estate owned, investment property and
other repossessed assets		(33	)		(99	)
Federal Home Loan Bank stock dividend received		(49	)		(436	)
Net increase (decrease) in accrued interest receivable and other
assets (under) over accrued interest payable, expenses and other liabilities		1,201			2,364
Net cash provided by operating activities		13,414			10,452
Cash flows from investing activities:
Loans originated, net of principal repayments		(69,917	)		(205,435	)
Cash (used for) acquisition		-			(9,546	)
Purchase of securities held-to-maturity		(5,054	)		(35,436	)
Proceeds from sales/calls of securities held-to-maturity		-			23,238
Principal repayments on securities held-to-maturity		5,046			3,577
Principal repayments on securities available-for-sale		18,857			26,437
Purchases of securities available-for-sale		(20,000	)		(93,166	)
Proceeds from sales of securities available-for-sale		1,519			127,261
Purchases of premises and equipment		(1,244	)		(5,483	)
Proceeds from sales/retirements of premises and equipment		29			12
Proceeds from loan participations sold		(2,536	)		(2,031	)
Net cash used in investing activities		(73,300	)		(170,572	)
Subtotal, carried forward	$	(59,886	)	$	(160,120	)

See notes to condensed consolidated financial statements

6

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands, unaudited)

	Nine Months Ended September 30,
		2005			2004
Subtotal, brought forward	$	(59,886	)	$	(160,120	)
Cash flows from financing activities:
Proceeds from issuance of common stock		621			8,745
Dividends paid		(2,299	)		(1,823	)
Repurchase of common stock		(789	)		(105	)
Net increase in deposits		78,061			146,099
Net increase in Federal Home Loan Bank advances		13,000			30,000
Net increase (decrease) in securities sold under agreements to repurchase		(388	)		(19,025	)
Net increase (decrease) in advance payments by borrowers for taxes and insurance		429			(642	)
Net cash provided by financing activities		88,635			163,249
Net increase (decrease) in cash and cash equivalents		28,749			3,129
Cash and cash equivalents at beginning of period		13,029			14,071
Cash and cash equivalents at end of period	$	41,778		$	17,200
Supplemental disclosures of cash flow information—cash paid during the period for:
Interest	$	26,074		$	17,530
Federal income taxes		4,445			3,860
Supplemental schedule of noncash investing activities:
Net mortgage loans transferred to real estate owned		-			915
Mark to market on securities available-for-sale		882			1,171
Retirement of common stock in retained earnings		(43	)		(7	)
Dividends declared		(2,395	)		(1,246	)

See notes to condensed consolidated financial statements.

7

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(unaudited)

1.Presentation of Financial Information

The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Cascade Financial Corporation (the “Corporation”), its subsidiary, Cascade Bank (the “Bank” or “Cascade”), and the Bank’s subsidiary, Cascade Investment Services, Inc. All significant intercompany balances have been eliminated in the consolidation. In the opinion of management, the financial information reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial condition, results of operations, and cash flows of the Corporation pursuant to the requirements of the SEC for interim reporting. Operating results for the three months and nine months ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.

Certain information and footnote disclosures included in the Corporation’s financial statements for the year ended December 31, 2004 have been condensed or omitted from this report. Accordingly, these statements should be read with the financial statements and notes thereto included in the Corporation’s December 31, 2004 Annual Report on Form 10-K.

2.Commitments and Contingencies

In the normal course of business there are various commitments to fund loans. Management does not anticipate any material loss as a result of these commitments.

Periodically there have been various claims and lawsuits against the Corporation or the Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incidental to the Corporation’s and the Bank’s business. In the opinion of management no material loss is expected from any such pending lawsuits.

3.Stockholders’ Equity

a)Earnings Per Share

 The following table presents the computation of basic and diluted net income per share for the three and nine-month period ended September 30:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2005		2004		2005		2004
	(dollars in thousands, except share and per share amounts)
Numerator:
Net income	$	3,344	$	3,103	$	9,630	$	7,961

8

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2005		2004		2005		2004
Denominator:
Denominator for basic net income per share-
Weighted average shares		9,583,650		9,540,663		9,577,761		8,770,054
Effect of dilutive securities:
Stock options		265,090		295,260		274,566		328,442
Denominator for diluted net income per share-
Weighted average shares and assumed
conversion of dilutive stock options		9,848,740		9,835,923		9,852,327		9,098,496
Basic net income per share	$	0.35	$	0.33	$	1.01	$	0.91
Diluted net income per share	$	0.34	$	0.32	$	0.98	$	0.87

For the quarter ended September 30, 2005 and 2004, there were anti-dilutive options to purchase shares of 113,781 and 109,183 respectively, excluded from the above calculation. For the nine-month period ended September 30, 2005 and 2004, there were anti-dilutive options to purchase shares of 122,238 and 65,458 respectively, excluded from the above calculation.

b)Cash Dividend Declared

On September 28, 2005, the company announced its thirteenth consecutive quarterly cash dividend payment. The dividend was $0.09 per share and was paid on October 26, 2005 to shareholders of record as of October 12, 2005.

c)Stock-based compensation

 The Corporation measures its employee stock-based compensation arrangements using the provisions outlined in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," which is an intrinsic value-based method of recognizing compensation costs. As none of the Corporation's stock options have an intrinsic value at grant date, no compensation cost has been recognized for its stock option plans.

 The Corporation applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock option plans. Had compensation cost on the fair value at the grant dates for the Corporation's stock option plan been determined to be consistent with the Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation," as amended, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated below:

9

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
	(dollars in thousands, except per share amounts)
Net income
As reported	$	3,344	$	3,103	$	9,630	$	7,961
Less FAS 123 compensation costs		35		61		119		128
Pro forma	$	3,309	$	3,042	$	9,511	$	7,833
Net income per common share
Basic
As reported	$	0.35	$	0.33	$	1.01	$	0.91
Pro forma		0.35		0.32		0.99		0.89
Diluted
As reported	$	0.34	$	0.32	$	0.98	$	0.87
Pro forma		0.34		0.31		0.97		0.86

4.Recently Issued Accounting Standards

In December 2004 the FASB issued No. 123(R), Share Based Payment, which is a revision of No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion 25, which the Corporation had used to report stock options granted to employees and directors. Statement 123(R) requires all share-based payments to employees, including stock options, be recognized in the income statement based on their fair values. The Corporation will adopt Statement 123(R) effective January 1, 2006.

Item 2 - Management’s Discussion and Analysis of Financial Condition and

Results of Operations

The following discussion is intended to assist in understanding the financial condition and results of the Corporation. The information contained in this section should be read with the unaudited condensed consolidated financial statements and accompanying notes, and the December 31, 2004 audited consolidated financial statements and accompanying notes included in our recent Annual Report on Form 10-K.

This section contains 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. Those factors include, but are not limited to: the impact of national and regional economic trends on small business loan demand in the Puget Sound area; loan delinquency rates; the Bank’s ability to continue to attract quality commercial business; interest rate movements; changes in the demographic make-up of the company’s market area; fluctuation in demand for the Bank’s products and services; the Corporation’s ability to attract and retain qualified people, and other factors. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. The Corporation shall not be responsible to update any such forward-looking statements. For a discussion of factors that could cause actual results to differ, and for certain mandated SEC guide 3 information that has not materially changed since the audited statements, please see the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004.

10

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 nineteen branches located in Snohomish and King Counties (Washington).

Acquisition

 On June 3, 2004, the Company completed its acquisition of Issaquah Bancshares, Inc. (“Issaquah”). The acquisition was accounted for using the purchase method of accounting and accordingly, the assets and liabilities were recorded based on their fair values at the acquisition date. The merger enhances Cascade’s commercial banking franchise by expanding Cascade’s presence in East King County, Washington. Total Issaquah assets on June 3, 2004 were approximately $131 million and the total value of the transaction, both cash and stock, was approximately $34.3 million as measured under the provisions of FAS 141, which used the value of Cascade stock offered as of February 2004, the time when the acquisition was announced. Cascade issued approximately 1.3 million shares and paid cash of $9.5 million in connection with the acquisition. The Bank booked $26.3 million in intangible assets associated with the transaction including $25.2 million in goodwill and a $1.1 million core deposit intangible (CDI). The CDI is amortized under the straight-line method over an eight-year period of time.

Selected Financial Data

 The following table sets forth certain selected financial data concerning the Corporation for the periods indicated:

	At or for the three months ended September 30,					At or for the nine months ended September 30,
		2005		2004			2005		2004
Return on average assets		1.15	%	1.19	%		1.13	%	1.11	%
Return on average stockholders’ equity		13.12		13.53			13.09		13.77
Average stockholders’ equity to average assets		8.74		8.78			8.60		8.06
Other expenses to average assets		1.95		1.92			1.98		2.06
Efficiency ratio		52.04		51.13			52.98		54.15
Average interest-bearing assets to
average interest-bearing liabilities		112.31		111.98			111.94		111.55

CHANGES IN FINANCIAL CONDITION

 Total assets increased 9.0% or $98.1 million to $1.19 billion at September 30, 2005, compared to $1.09 billion at December 31, 2004. Net loans, i.e. net of deferred loan fees and the allowance for loan losses, increased 9.0% or $71.3 million to $865.8 million at September 30, 2005, from $794.5 million at December 31, 2004.

11

 Investment securities decreased $1.2 million to $214.4 million at September 30, 2005, compared to $215.6 million at December 31, 2004. The investment portfolio is concentrated in the securities of Government Sponsored Enterprises (GSEs, e.g FNMA or FHLMC) as well as mortgage-backed pass-through securities, and collateralized mortgage obligations (CMOs) backed by pools of single family residential mortgages (known collectively as MBS). All investment purchases during the nine months ended September 30, 2005, were rated AAA in terms of credit quality by Moody’s and/or Standard & Poors.

(Dollars in thousands)	SEPTEMBER 30, 2005
			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	$	27,893		-	$	19	$	257	$	365	$	27,290
Agency notes		85,850		-		-		1,808		235		83,807
FHLB Stock		11,920		-		-		-		-		11,920
	$	125,663		-	$	19	$	2,065	$	600	$	123,017

			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	$	25,064		-	$	15	$	182	$	323	$	24,574
Agency notes		65,817		-		1		205		1,017		64,596
Corporate/other		465		-		-		-		-		465
	$	91,346		-	$	16	$	387	$	1,340	$	89,635

(Dollars in thousands)	DECEMBER 31, 2004
			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	$	43,208	$	50	$	20	$	544	$	212	$	42,522
Agency notes		70,910		18		-		652		394		69,882
FHLB Stock		11,872		-		-		-		-		11,872
	$	125,990	$	68	$	20	$	1,196	$	606	$	124,276

			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	$	25,083	$	-	$	30	$	345	$	184	$	24,584
Agency notes		65,791		21		-		367		939		64,506
Corporate/other		465		-		-		-		-		465
	$	91,339	$	21	$	30	$	712	$	1,123	$	89,555

12

 We currently hold seven securities in our available-for-sale portfolio and ten securities in our held-to-maturity portfolio that have had an unrealized loss for more than one year. The losses are due to increases in interest rates and are not related to credit deterioration. If rates were to move downward in the future, the market value of these securities would rise accordingly. We have the ability to hold the investments for a period of time sufficient for a market price recovery. Therefore, we do not consider any portion of these investments to be other-than-temporarily impaired.

 At September 30, 2005, the Bank held Federal Home Loan Bank (FHLB) of Seattle stock of $11.9 million. In December 2004, the FHLB of Seattle abandoned its practice of repurchasing stock that was not needed to support outstanding advances and announced it would not repurchase any stock until further notice. On April 5, 2005, the FHLB of Seattle submitted a proposed business and capital plan to its regulator, the Federal Housing Finance Board. In May 2005, the Finance Board accepted the Seattle bank’s three-year plan. To meet the Finance Board’s conditions under the three-year plan, the Seattle bank’s board adopted a resolution that suspends dividends on all classes of stock. The Seattle bank anticipates a period of low or negative profitability that may last up to three years. Since December 2004, the Seattle bank board has suspended all Class B(1) stock repurchases and allowed limited Class B(2) stock repurchases.

Loan Portfolio

 Virtually all the Bank’s loans are to businesses or individuals in the Puget Sound area. Business loans are made to small and medium sized businesses within that area for a wide array of purposes. Included in the business loan total are loans secured by real estate where the borrower is the primary tenant of the property. Real estate construction loans are primarily extended to builders and developers of single family, residential real estate. The vast majority of these projects focus on entry-level homes and/or first trade-up homes. Commercial real estate loans fund small, non-owner occupied buildings. Home equity and consumer loans are primarily second mortgages on the borrower’s primary residence. These loans comprise 75% of the home equity and consumer portfolio. The balance of this category is non-residential, e.g. automobiles, credit cards, or boats.

 Residential loans, held in the Bank’s portfolio, are generally adjustable rate loans secured by single family residences. The Bank also originates longer term fixed rate residential loans, but sells almost all of those loans into the secondary market on a best efforts, servicing released basis. Multifamily loans are usually adjustable rate loans secured by mortgages on properties with five or more units.

 As displayed in the following table, total loans increased by $72.2 million to $878.9 million as of September 30, 2005, compared to $806.7 million at December 31, 2004. In keeping with the Bank’s evolution to a commercial bank, loans more closely associated with a commercial bank, i.e. business, real estate construction, and commercial real estate loans grew $107.9 million to $686.2 million as of September 30, 2005, compared to $578.3 million as of December 31, 2004. Commercial real estate loans declined by $35 million and business loans increased by a like amount as we reclassified loans previously held at the Issaquah Bank division to conform with Cascade’s reporting of loans by business lines.

13

 Residential lending balances grew very modestly. Residential loans increased by $664,000 to $106.6 million. Multifamily loans decreased $39.0 million to $53.4 million primarily due to the sale of $22.0 million in the second quarter and $12.7 million in the third quarter of 2005. Cascade sold the multifamily loans to diversify risk by lowering our concentration of commercial real estate loans. Selling these hybrid adjustable rate mortgages with an average duration of 2.5 years helped to reduce our exposure to higher short-term rates as we have sought to replace them with prime-based loans and higher yielding commercial real estate loans. Home equity loans and other consumer loans increased $2.6 million to $32.8 million.

 The following summary reflects the Bank’s loan portfolio as of the dates indicated:

Types of Loans	September 30,			% of			December 31,			% of
($ in thousands)	2005			Portfolio			2004			Portfolio
Business banking	$	393,880			44.8	%	$	292,117			36.3	%
Real estate construction (net)		151,875			17.3			107,431			13.2
Commercial real estate		140,413			16.0			178,704			22.2
Home equity and consumer		32,752			3.7			30,125			3.7
Residential real estate		106,639			12.1			105,975			13.1
Multifamily real estate		53,389			6.1			92,372			11.5
Total loans	$	878,948			100.0	%	$	806,724			100.0	%
Deferred loan fees		(3,077	)					(2,695	)
Loans	$	875,871					$	804,029

(Loans held for sale are included in residential loans, and at less than 1% of total loans, are not considered material.)

Deposits, Other Borrowings, and Shareholder Equity

 Checking account deposits increased as the Bank continued to focus its branch activities on deposit generation in general and checking/transaction accounts in particular. In June 2005, the Bank launched its High Performance Checking (HPC) program to accelerate deposit growth. As of September 30, 2005, HPC accounts held $16.0 million of deposits. Total deposits increased by $78.1 million from $721.9 million at December 31, 2004 to $800.0 million at September 30, 2005.

 The following table reflects the Bank’s deposit mix as of the dates indicated:

	September 30,		% of			December 31,		% of
	2005		Deposits			2004		Deposits
Checking accounts	$	122,135		15.3	%	$	112,564		15.6	%
Savings & MMD		174,835		21.8			172,584		23.9
CD's		502,999		62.9			436,760		60.5
	$	799,969		100.0	%	$	721,908		100.0	%

 FHLB of Seattle advances increased by $13.0 million from $228.0 million at December 31, 2004 to $241.0 million at September 30, 2005. The primary reason for the increase was to pre-fund an advance that was maturing on October 13, 2005. Securities sold under agreements to repurchase decreased $388,000 to $20.5 million during the quarter.

14

 Stockholders’ equity increased by $6.4 million from $96.3 million at December 31, 2004 to $102.7 million at September 30, 2005. The increase is primarily attributable to the retention of net income for the period less dividend payments. The Corporation’s thirteenth consecutive cash dividend, which was declared September 28, 2005, reduced stockholders’ equity by $863,000. Accumulated other comprehensive loss decreased by $573,000 to a negative $1.7 million as of September 30, 2005.

Asset Quality

 Non-performing assets (non-performing loans and real estate owned) totaled $1.3 million and $1.4 million at September 30, 2005 and December 31, 2004, respectively. Non-performing loans, those on non-accrual, those that are ninety days past due, and those that management otherwise has serious reservations about their collectibility, increased to $910,000 at September 30, 2005, compared to $532,000 at December 31, 2004. Of the $910,000, $625,000 were business and construction loans, $193,000 were residential, and $92,000 were home equity and consumer loans. Real estate owned (REO) was $386,000 as of September 30, 2005 compared to $868,000 at December 31, 2004. The $482,000 decrease in REO was primarily due to the sale of two residential properties, which resulted in a gain of $33,000.

 At September 30, 2005, the Bank’s allowance for loan losses totaled $10.1 million compared to $9.6 million at December 31, 2004. The allowance for loan losses was 1.15% of total loans outstanding at September 30, 2005 compared to 1.19% at December 31, 2004. The allowance for loan losses was 1,108% of non-performing loans at September 30, 2005. The allowance for loan losses is maintained at a level sufficient to provide for losses based on management’s evaluation of known and inherent risks in the portfolio. This evaluation includes analyses of the financial condition of the borrower, the value of the collateral securing selected loans, consideration of historical loss experience and management’s projection of trends affecting credit quality. The increase in the allowance is primarily attributable to the continued emphasis on business and construction lending, and an increase in the portfolio of these loan types. Management believes that the allowance for losses on loans is adequate to provide for losses that may be incurred on non-performing loans.

 During the quarter ended September 30, 2005, loan charge-offs equaled $128,000 while recoveries were $68,000 resulting in net charge-offs of $60,000. Of those charge-offs, $34,000 represents losses sustained on checking accounts, which prior to 2005 were charged to checking fees instead of the loan loss reserve.

 The following table provides summary information concerning asset quality as of and for the three months ended September 30, 2005 and December 31, 2004 respectively:

	September 30,			December 31,
	2005			2004
Non-performing loans to total assets		0.08	%		0.05	%
Non-performing loans to total loans outstanding		0.10			0.07
Non-performing assets to total assets		0.11			0.13
Allowance for loan losses to non-performing loans		1,108			1,798
Allowance for loan losses to total loans		1.15			1.19
Net charge-offs to total loans		0.01			0.00

15

RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended September 30, 2005 and 2004

General

 Net income increased 7.8% to $3.3 million for the three months ended September 30, 2005 compared to $3.1 million during the comparable period in 2004. Diluted net income per share was $0.34 for the quarter ended September 30, 2005 and $0.32 per share for the quarter ended September 30, 2004, an increase of 7.6%. Net interest income before provision for loan losses increased $785,000 to $9.3 million for the quarter ended September 30, 2005. Other income increased by $326,000 to $1.6 million for the quarter ended September 30, 2005. Other expense increased $667,000 to $5.7 million for the quarter ended September 30, 2005 as compared to the quarter ended September 30, 2004. The Bank paid $37,000 in prepayment fees on Federal Home Loan Bank (FHLB) advances during the quarter ended September 30, 2005 and no prepayment fees were incurred for the quarter ended September 30, 2004.

 Net income for the nine months ended September 30, 2005 increased 21.0% to $9.6 million compared with $8.0 million during the comparable period in 2004. Net income per diluted share was $0.98 for the nine months ended September 30, 2005, compared with $0.87 in 2004. The $3.6 million increase in net interest income more than offset the $2.2 million increase in other expense. Operating results for the nine months ended September 30, 2004 had only four months of income and expense from Issaquah Bancshares.

Net Interest Income

 Net interest income increased 9.2% or $785,000 to $9.3 million for the three months ended September 30, 2005 compared to $8.6 million for the three months ended September 30, 2004. Net interest income for the nine months ended September 30, 2005 and 2004 was $27.3 million and $23.7 million respectively. Average interest earning assets increased $111.0 million or 11.3% to $1.1 billion for the three months ended September 30, 2005 and $159.5 million or 17.4% to $1.1 billion for the nine months ended September 30, 2005 compared to the same periods in 2004. Average total loans (including loans held for sale) increased $124.1 million to $868.3 million and average investment securities decreased $36.0 million to $220.3 million for the three months September 30, 2005 compared to the same quarter of the prior year.

	At or for the						At or for the
	three months ended						nine months ended
	September 30,						September 30,
	2005			2004			2005			2004
	(dollars in thousands)
Average interest earning assets	$	1,094,529		$	983,528		$	1,076,419		$	916,902
Average interest bearing liabilities		974,559			878,307			961,628			821,952
Yield on interest earning assets		6.33	%		5.89	%		6.16	%		5.85	%
Cost of interest bearing liabilities		3.28			2.70			3.11			2.68
Net interest spread		3.05			3.19			3.05			3.17
Net interest margin		3.41			3.48			3.38			3.45

16

 The net interest margin decreased 7 basis points to 3.41% for the three months ended September 30, 2005 compared to the same quarter the prior year. The yield on interest earning assets increased 44 basis points to 6.33% for the three months ended September 30, 2005, compared to 5.89% for the three months ended September 30, 2004. The cost of funds increased 58 basis points to 3.28% for the three months ended September 30, 2005 compared to 2.70% for the same period in 2004. For the nine months ended September 30, 2005, the net interest margin decreased 7 basis points from 3.45% to 3.38%. Despite the decrease in the net interest margin compared to 2004, Cascade's net interest margin margin for 2005 has improved from 3.34 for the quarter ended March 31, to 3.38 for the quarter ended June 30, to 3.41 for the quarter ended September 30.

 The yield on assets increased as the rates rose and loans increased as a percentage of earning assets. Funding costs also rose as the cost of liabilities increased and the rates paid on deposits rose with the general level of interest rates. Deposits continued to reprice to higher rates throughout the quarter.

Provision for Loan Losses

 Cascade’s provision for loan losses was $250,000 for the three months and $745,000 for the nine months ended September 30, 2005. The provision was $150,000 and $525,000 for the same periods in 2004, respectively. The provision is based on the size and composition of the portfolio, and management’s evaluation of known and inherent risks in the portfolio, as well as Cascade’s loss experience. The provision was larger in 2005 due to the overall growth in the portfolio.

Other Income

 Other income increased $326,000 or 26.3% to $1.6 million for the three months ended September 30, 2005 as compared to $1.2 million for the three months ended September 30, 2004. Other income was $4.8 million and $3.6 million for the nine months ended September 30, 2005 and September 30, 2004 respectively. For the three months ended September 30, 2005, checking fee income rose to $801,000 compared to $569,000 for the same period in the prior year. The gain on checking fees reflected more checking accounts mainly as a result of the HPC program. Gain on sale of loans increased $186,000 from $55,000 to $241,000 for the three months ended September 30, 2005, primarily due to the sale of multifamily loans. Other service fee income increased $51,000 to $252,000 for the quarter. There was no gain on the sale of investment securities compared to $129,000 for the same quarter in 2004.

 While the Corporation is pursuing many avenues to augment its other (non-interest) income, it will continue to focus on replacing the gain on sale of securities and loans with higher service fees and net interest income in the near future.

Other Expense

 Other expense was $5.7 million for the three months and $17.0 million for the nine months ended September 30, 2005 compared with $5.0 million for the three months and $14.8 million for the nine months ended September 30, 2004. The increase in other expense was primarily the result of a full quarter of operation of a new branch and expenses related to the HPC deposit generation program. Further, non-interest expense was lower than usual for the quarter ended September 30, 2004, as Cascade was able to reverse $235,000 of a termination fee for data processing services associated with the acquisition of Issaquah Bancshares in June 2004.

17

 Salary and employee benefit expenses decreased $44,000 to $3.0 million during the three months ended September 30, 2005 compared to the same quarter last year. Salary and employee benefit expenses were $9.2 million for the nine month period ended September 30, 2005 and $8.4 million in the same period for 2004. The remaining other operating expense categories totaled $2.6 million for the three months ended September 30, 2005 and $7.8 million for the nine months period as of the same date. For the same periods in 2004, other operating expenses, excluding merger expenses, were $1.9 million and $6.0 million respectively.

 Federal income tax expenses increased $103,000 to $1.6 million, an increase of 6.7% during the three months ended September 30, 2005 compared to the same period last year. For the three months ended September 30, 2005, the Corporation’s effective tax rate was 33%. For the nine months ended September 30, 2005, income tax expense was $4.7 million compared to $4.0 million in 2004, with an effective tax rate of 33%. Tax benefits related to bank owned life insurance and interest on tax-exempt loans accounted for the difference from the “expected” Federal income tax rate of 35% during each of the periods.

Segment Results

 The following is a summary of selected operating segment information for the three month and nine month periods ended September 30, 2005 and 2004. The Corporation manages its operations and prepares management reports with a primary focus on its various business units. The accounting policies of the individual units are the same as those of the Corporation. The Corporation allocates centrally provided services to the business units based upon estimated usage of those services. All amounts are in thousands.

For the three months ended September 30, 2005

	Business		Residential			Construction		Income Property		Consumer		Administration/ Treasury			Total
	(dollars in thousands)
Condensed Income Statement
Net interest income after
provision for loan losses	$	3,858	$	204		$	2,420	$	1,718	$	228	$	658		$	9,086
Other income		16		65			3		231		966		283			1,564
Other expense		381		103			94		170		441		4,483			5,672
Contribution before overhead		3,493		166			2,329		1,779		753		(3,542	)		4,978
Support transfer		1,571		416			572		855		128		(3,542	)		-
Income before provision for
income tax		1,922		(250	)		1,757		924		625		-			4,978
Provision for income tax		631		(82	)		577		303		205					1,634
Net Income (loss)	$	1,291	$	(168	)	$	1,180	$	621	$	420	$	-		$	3,344

18

For the three months ended September 30, 2004

	Business		Residential			Construction		Income Property		Consumer		Administration/ Treasury			Total
	(dollars in thousands)
Condensed Income Statement
Net interest income after
provision for loan losses	$	3,480	$	149		$	1,358	$	2,181	$	444	$	789		$	8,401
Other income		31		84			2		-		698		423			1,238
Other expense		394		211			110		239		432		3,619			5,005
Contribution before overhead		3,117		22			1,250		1,942		710		(2,407	)		4,634
Support transfer		1,001		386			344		833		121		(2,685	)		-
Income before provision for
income tax		2,116		(364	)		906		1,109		589		278			4,634
Provision for income tax		700		(120	)		299		366		194		92			1,531
Net Income (loss)	$	1,416	$	(244	)	$	607	$	743	$	395	$	186		$	3,103

For the nine months ended September 30, 2005

	Business		Residential			Construction		Income Property		Consumer		Administration/ Treasury			Total
	(dollars in thousands)
Condensed Income Statement
Net interest income after
provision for loan losses	$	11,023	$	563		$	5,947	$	6,145	$	771	$	2,067		$	26,516
Other income		54		205			12		623		2,793		1,144			4,831
Other expense		1,150		346			322		698		1,357		13,128			17,001
Contribution before overhead		9,927		422			5,637		6,070		2,207		(9,917	)		14,346
Support transfer		3,894		1,217			1,470		2,978		358		(9,917	)		-
Income before provision for
income tax		6,033		(795	)		4,167		3,092		1,849		-			14,346
Provision for income tax		1,983		(261	)		1,369		1,016		609					4,716
Net Income (loss)	$	4,050	$	(534	)	$	2,798	$	2,076	$	1,240	$	-		$	9,630

For the nine months ended September 30, 2004

	Business		Residential			Construction		Income Property		Consumer		Administration/ Treasury			Total
	(dollars in thousands)
Condensed Income Statement
Net interest income after
provision for loan losses	$	8,824	$	749		$	3,298	$	6,064	$	1,210	$	3,028		$	23,173
Other income		56		281			5		-		1,843		1,394			3,579
Other expense		1,080		534			286		452		1,114		11,305			14,771
Contribution before overhead		7,800		496			3,017		5,612		1,939		(6,883	)		11,981
Support transfer		2,381		1,054			801		1,971		321		(6,528	)		-
Income before provision for
income tax		5,419		(558	)		2,216		3,641		1,618		(355	)		11,981
Provision for income tax		1,766		(184	)		721		1,182		526		9			4,020
Net Income (loss)	$	3,653	$	(374	)	$	1,495	$	2,459	$	1,092	$	(364	)	$	7,961

Income Property includes Commercial Real Estate and Multifamily lending.

19

 Interest income is assigned based upon the loans held by that line of business. Investment income is assigned to Administration. Interest expense is allocated based upon the Corporation’s cost of funds and the average maturity of the line of business’s assets. Overhead is allocated on the basis of average total assets.

Liquidity and Sources of Funds

 The Bank monitors its liquidity position to assure that it will have adequate resources to meet its customer’s needs. Potential uses of funds are new loans; the disbursement of construction loans in process; draws on unused business lines of credit and unused consumer lines of credit; the purchase of investment securities; and deposit withdrawals. As of September 30, 2005, Cascade had $74.5 million of construction loans in process, $80.8 million in unused business lines of credit and $36.1 million in unused consumer lines of credit including credit cards and $26.0 million in other un-disbursed commitments. Recent history indicates construction lines will be funded at 66% of commitments at any point in time. Historically, the Bank’s business customers use 42% of their lines at any given time. About 47% of the home equity lines of credit are drawn upon at any point in time. Cash flows from operations contribute to liquidity as well as proceeds from maturities of securities and customer deposits. As indicated on the Company’s condensed Consolidated Statement of Cash Flows, net cash from operating activities for the nine months ended September 30, 2005 contributed $13.4 million to liquidity compared to $10.5 million for the nine months ended September 30, 2004.

 Funding needs are met through existing liquidity balances, deposit growth, FHLB-Seattle advances, and other borrowings, as well as the repayment of existing loans and the sale of loans. Cascade maintains balances in FHLB deposits, which equaled $22.5 million as of September 30, 2005 and $1.3 million at December 31, 2004. Liquidity is also provided by the Bank’s unencumbered securities portfolio. Securities that could be pledged to secure additional funding at the FHLB-Seattle or the repurchase market were $59.4 million at the end of the quarter and $46.0 million as of December 31, 2004. Commercial real estate loans totaling $54.0 million are being used as an alternative source of collateral.

 Subject to the availability of eligible collateral, the Bank’s credit line with the FHLB-Seattle is 35% of total assets or up to approximately $415.5 million at current asset levels, subject to certain requirements. At September 30, 2005, the Bank had $241.0 million in advances and an unused line of credit from the FHLB-Seattle of approximately $174.5 million. The Bank also uses reverse repurchase agreements to provide a flexible source of funding. At September 30, 2005 the Bank had $20.5 million in reverse repurchase agreements outstanding. The Bank also has a total of $33 million in Fed funds lines with its correspondent banks and an $18 million line of credit at the Federal Reserve Bank of San Francisco, none of which were used during the quarter.

Capital Resources

 The Corporation’s usual main source of capital is the retention of its net income. The Corporation also receives capital through the exercise of options granted to employees and directors. The Corporation permits employees and directors to tender shares of Cascade’s stock, which they have held for a minimum of six months to exercise options.

20

 At its June 2004 meeting, the Board of Directors authorized a stock repurchase program of up to 200,000 shares of the Corporation’s stock. As of May 31, 2005, the expiration date of the program, 41,791 shares had been repurchased during the year. The Board of Directors authorized a new stock repurchase program of up to 200,000 shares of the Corporation’s stock at its May 2005 meeting. As of September 30, 2005, there were 263 shares repurchased under this program. The repurchase program does not obligate the Corporation to acquire any specific number of shares. The main focus of the program is to attempt to offset the dilution created by the exercise of stock options and other stock grants; see Part II - Other Information, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.

 On December 15, 2004, Cascade Capital Trust II issued $5 million in par value junior subordinated debentures. Cascade Capital Trust II is a statutory business trust created for the exclusive purposes of issuing and selling capital securities and utilizing sale proceeds to acquire junior subordinated debt issued by Cascade Financial Corporation. Accordingly, the junior subordinated debentures are the sole assets of the Trust, and payments under the junior subordinated debentures will be the sole revenues of the Trust. All of the common securities of the Trust are owned by the Corporation. On March 1, 2000, Cascade Capital Trust I issued $10.0 million par value trust preferred securities. The structure of Cascade Capital Trust I is identical to Cascade Capital Trust II. In keeping with the recently adopted FIN 46R, the Corporation’s balance sheet has replaced “trust preferred securities” with “junior subordinated debentures payable”, although there have been no changes in terms of the underlying obligations. The Trust has been deconsolidated upon adoption of FIN 46R at December 31, 2003 and did not have a significant impact on the Corporation’s financial condition or results of operations

Capital Requirements

 Cascade Bank is subject to regulatory capital requirements. Cascade Bank is in full compliance with all capital requirements established by the FDIC and the Washington State Department of Financial Institutions. The Bank’s regulatory capital requirements are expressed as a percentage of assets. To be adequately capitalized, the Bank must hold capital equal to 4% of its assets and 8% of its risk-weighted assets. As of September 30, 2005, for the purposes of this calculation, the Bank’s average total assets and total risk-weighted assets were $1.14 billion and $9.49 million respectively. The related excess capital amounts as of September 30, 2005 are presented in the following table (dollars in thousands):

Core capital		Amount	Percentage
Tier 1 (Core) capital	$	92,514	8.14	%
Less: Minimum requirement		45,462	4.00
Excess	$	47,052	4.14	%
Risk-based capital		Amount	Percentage
Risk-based capital	$	102,595	10.81	%
Less: Minimum requirement(1)		75,940	8.00
Excess	$	26,655	2.81	%
(1) Based on risk-weighted assets.

21

 The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) was signed into law on December 19, 1991. Among other things, the FDICIA provides the FDIC, effective December 19, 1992, with broad powers to take “prompt corrective action” to resolve problems of insured depository institutions. The actions the FDIC can take depend upon whether the institution in question is “well capitalized,”“adequately capitalized,”“undercapitalized,”“significantly undercapitalized” or “critically undercapitalized.” Under FDIC guidelines, Cascade Bank is a “well capitalized” institution as of September 30, 2005, which requires a core capital to assets of at least 6% and a risk-based capital to assets of at least 10%.

 The Corporation, as a bank holding company regulated by the Federal Reserve, is also subject to capital requirements that are similar to those for Cascade Bank. As of September 30, 2005, the Corporation is well capitalized under Federal Reserve guidelines with a Tier 1 ratio of 8.22% and a risk-based ratio of 10.89%.

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

ASSET/LIABILITY MANAGEMENT

 The Bank, like other financial institutions, is subject to fluctuations in interest rates because its interest-bearing liabilities reprice on different terms than its interest-earning assets. Cascade actively monitors the inherent interest rate risk for the potential impact of changes in rates on the Bank.

 The Bank uses a simulation model as its primary tool to measure its interest rate risk. A major focus of the Bank’s asset/liability management process is to preserve and enhance net interest income in likely interest rate scenarios. Further, Cascade’s Board of Directors has enacted policies that establish targets for maximum negative impact that changes in interest rates may have on the Bank’s net interest income, the fair value of equity and adjusted capital/asset ratios under certain interest rate shock scenarios. Key assumptions are made to evaluate the change to Cascade’s income and capital to changes in interest rates. These assumptions, while deemed reasonable by management, are inherently uncertain. As a result, the estimated effects of changes in interest rates from the simulation model could likely be different than actual experience.

 Using standard interest rate shock (an instantaneous uniform change in interest rates at all maturities) methodology, as of September 30, 2005, the Bank is within all the guidelines established by the Board for the changes in net interest income, fair value of equity, and the adjusted capital/asset ratios. As of September 30, 2005, the Bank’s fair value of equity decreases 20.2% in the up 200 basis point scenario and 4.5% in the down 200 basis point scenario, within the established guideline of a maximum 30% decline. Using the same methodology, the adjusted capital/asset ratio is 8.4% in the up 200 basis point scenario, and 9.5% in the down 200 basis point scenario, both above the 5% minimum established guideline. The net interest income increases 2.8% in the up 200 basis point scenario and decreases 5.8% in the down 200 basis point scenario, both are within the guideline of a 10% decline.

 The Bank has sought to manage its interest rate exposure through the structure of its balance sheet. To limit its interest rate risk, the Bank has sought to emphasize its loan mix toward prime based business and construction loans. In addition to selling virtually all new 15 and 30 year fixed rate loans, it has begun selling some of its hybrid ARM residential loans as well.

22

 The Bank extends the maturity of its liabilities by offering long-term deposit products to customers, and by obtaining longer term FHLB-Seattle advances. As of September 30, 2005, $241.0 million ($25 million of which is a 3-month LIBOR adjustable) in advances had original maturities greater than one year, none had original maturities of less than one year. Currently, $38.0 million have remaining maturities less than one year. Of the total amount, $205.0 million of these advances have provisions that allow the FHLB to convert the advance to a LIBOR based, adjustable rate borrowing. The FHLB would exercise this option if interest rates rise.

Item 4 - Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 An evaluation of the Registrant's disclosure controls and procedures (as defined in section 13(a) - 14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Registrant's Chief Executive Officer, Chief Financial Officer, and several other members of the registrant's senior management as of September 30, 2005. The Registrant's Chief Executive Officer and Chief Financial Officer concluded that the Registrant's disclosure controls and procedures as then in effect were effective in ensuring that the information required to be disclosed by the Registrant in the reports it files or submits under the Act is (i) accumulated and communicated to the Registrant's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

CHANGES IN INTERNAL CONTROLS

 In the quarter ended September 30, 2005, the Registrant did not make any significant changes in, nor take any corrective actions regarding, its internal controls, or other factors that have materially affected or are reasonably likely to materially affect these controls.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS

 Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in Cascade Financial Corporation’s reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance regarding the reliability of financial reporting, including that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all to permit the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America.

23

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

Cascade Financial Corporation’s management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Cascade Financial Corporation have been detected, but can only provide a reasonable level of assurance. 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.

24

PART II-OTHER INFORMATION

Item 1. Legal Proceedings.

 The Corporation and the Bank are involved in litigation and have 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. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities
			2005 PLAN				Total Number		Maximum
							of Shares Purchased		Number of Shares that
Period			Total Number		Average Price		as Part of Publicly		May Yet be Purchased
Beginning	Ending		of Shares Purchased(1)		Paid per Share		Announced Plan		Under the  Plan (2)
July 1, 2005		July 31, 2005		-	$	-		-		200,000
August 1, 2005		August 31, 2005		-		-		-		200,000
September 1, 2005		September 30, 2005		263		17.10		-		200,000
Total				263	$	17.10		-		200,000
1) During the period presented, there were 263 shares purchased, which were acquired at current market values as consideration for the exercise of fully vested options. 2) In May, 2005, the Corporation announced a new stock repurchase plan to purchase up to 200,000 shares of the Corporation’s stock. The Plan will expire on May 31, 2006.

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.

(a) Exhibits

 10.1 Employment Agreement with Carol K. Nelson dated July 12, 2005

 31.1 Certificationsof the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

 31.2 Certifications of the Chief Finanial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

 32    Certification pursuant to Section 906 of the Sarbanes-Oxley Act

________________

¹Incorporated by reference to the Corporation’s Form 8-K filed on July 15, 2005.

25

(b)   Reports on Form 8-K

On September 20, 2005, the Corporation filed a Form 8-K reporting the resignation of Henry M. Robinett from the Board of Directors of both Cascade Financial Corporation and its banking subsidiary, Cascade Bank, effective September 20, 2005, under Item 5.02(b) of Form 8-K.

On September 28, 2005, the Corporation filed a Form 8-K reporting an amendment to Cascade’s Bylaws, under Item 5.03 and 9.01 of Form 8-K.

On October 18, 2005, the Corporation filed a Form 8-K reporting an attached press release announcing earnings information for the third quarter ended September 30, 2005, under Items 2.02 and 9.01 of Form 8-K.

26

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

November 7, 2005	/s/ Lars H. Johnson
	By:    Lars H. Johnson, Executive Vice President (Chief Financial Officer)

27