Cascade Financial (CASB) 10-K 2008 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

þ           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008.

OR

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

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 incorporation or organization)	(I.R.S. Employer I.D. Number)
2828 Colby Avenue, Everett, Washington	98201
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code:	(425) 339-5500
Securities registered pursuant to Section 12(b) of the Act:	None
Securities registered pursuant to Section 12(g) of the Act:	Common Stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  

YES ¨NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.YES ¨  NO þ

Indicate by 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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ  NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act. (Check one):

Large Accelerated Filer ¨                                                Accelerated Filer þ                                           Non-Accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨     NO þ

 The aggregate market value of Common Stock held by non-affiliates of registrant at February 28, 2009 was $28.8 million (based on the last reported sale on such date). The number of shares of registrant’s Common Stock outstanding at February 28, 2009, was 12,110,434.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of Annual Report to Stockholders for the year ended December 31, 2008, including the Selected Financial Data and the Management Discussion and Analysis attached as Exhibit 13 (the “Annual Report”) (Part I, II & IV).

2. Portions of registrant’s Definitive Proxy Statement for the Annual Meeting of Stockholders (the “Proxy Statement”) (Part III).

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Cascade Financial Corporation

FORM 10-K

December 31, 2008

TABLE OF CONTENTS

	PART I	Page
Item 1.	Business	4
Item 1A.	Risk Factors	26
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	28
Item 3.	Legal Proceedings	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	30
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 8.	Financial Statements and Supplementary Data	30
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	30
Item 9A.	Controls and Procedures	30
Item 9B.	Other Information	32
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	33
Item 11.	Executive Compensation	34
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	34
Item 13.	Certain Relationships and Related Transactions, and Director Independence	34
Item 14.	Principal Accountant Fees and Services	34
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	35

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FORWARD LOOKING STATEMENTS

In addition to historical information, this Form 10-K contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the express purpose of availing Cascade Financial Corporation of the protections of the safe harbor provisions of the PSLRA. The forward-looking statements contained herein are subject to factors, risks and uncertainties that may cause actual results to differ materially from those projected.

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Reform Act.  The Corporation’s actual results may differ materially from those included in the forward-looking statements.  Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “intend,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could.”  These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors’ pricing policies, of changes in laws and regulations on competition and of demographic changes on target market populations’ savings and financial planning needs; industry changes in information technology systems on which we are highly dependent; failure of acquisitions to produce revenue enhancements or cost savings at levels or within the time frames originally anticipated or unforeseen integration difficulties; the adoption by the Corporation of an FFIEC policy that provides guidance on the reporting of delinquent consumer loans and the timing of associated credit charge-offs for financial institution subsidiaries; and the resolution of legal proceedings and related matters.  In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect the Corporation’s results.  These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made. Readers should carefully review the risk factors described in this and other documents the Corporation files from time to time with the Securities and Exchange Commission.  There can be no assurance that any of the strategies described in this Form 10-K will be implemented, or if implemented, achieve the amounts described or within the time periods currently estimated.

Item 1.  Business

General

Cascade Financial Corporation (the “Corporation”) is a bank holding company incorporated in the state of Washington that was formed in 1994.  The consolidated entity includes the Corporation and its wholly owned subsidiaries.  At December 31, 2008, the Corporation’s wholly owned subsidiaries were Cascade Bank (“Cascade” or the “Bank”), Cascade Capital Trust I, II, and III. The executive offices of the Corporation are located at 2828 Colby Avenue, Everett, Washington 98201.  The telephone number is (425) 339-5500 and the website is www.cascadebank.com. Information on the website is not part of this Report.

The Bank has been serving the people of Snohomish and King Counties since 1916 when it was organized as a mutual savings and loan association.  On September 15, 1992, the Bank completed its conversion from a federal mutual to a federal stock savings bank. In July 2001, the Bank converted from a federal stock savings bank to a Washington state commercial bank.

The Corporation was organized on August 18, 1994, for the purpose of becoming the holding company for Cascade Bank. The reorganization was completed on November 30, 1994, on which date the Bank became the wholly-owned subsidiary of the Corporation, and the stockholders of the Bank became stockholders of the Corporation. Subsequent to the acquisition of Cascade, the primary activity of the Corporation has been holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank.

In July of 2001, the Corporation elected to be treated as a financial holding company under the supervision of the Federal Reserve Board. In May of 2003, the Corporation transferred its state of domicile from Delaware, which it had maintained since its formation as a holding company in 1994, to Washington.  Following this conversion, the Corporation changed its fiscal year end from June 30 to December 31 to align its reporting period with those of its commercial bank peers.

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In June of 2004, the Corporation completed the acquisition of Issaquah Bancshares (“Issaquah”).  Issaquah Bank, the only operating subsidiary of Issaquah, was merged into Cascade Bank.

The Corporation conducts its business from its main office in Everett, Washington, and twenty other full-service offices in the greater Puget Sound Region. At December 31, 2008, the Corporation had total assets of $1.6 billion, total deposits of $1.0 billion and total equity of $160.1 million.

The Bank, a full-service commercial bank, offers a wide range of products and services.  The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”), up to the limits specified by law.

Market Area

Headquartered in Everett, Washington, the Corporation serves its customers from twenty-one full-service offices, twelve in Snohomish County, eight in King County, and one in Skagit County. In 2007, the Bank opened a loan production office in Burlington, Washington, in Skagit County. Located in the center of the western Washington region, Snohomish and King Counties have experienced significant growth in recent years.

Our market area in King County includes the growing cities east of Seattle and Lake Washington. This area’s economy has been dominated by Microsoft and the Boeing Company, with other high technology companies also playing an important role.

Everett is the homeport of the Navy’s carrier, the USS Abraham Lincoln. The contribution that the Navy makes to the economy is not as dependent on other trends. The economy in the Corporation’s market area has been enhanced by the growth of the health care and biotechnology industries. Snohomish County and Northeast King County are home to numerous biotechnology companies.

As a gateway to Asia, the Bank’s market area has also benefited from the continued expansion of world trade.  Economic weakness in either the United States or Asia could reduce that trade. Such slowdowns in the international flow of goods and services could prove detrimental to the economy of the market area and potentially the quality of our loan portfolios.

Business Strategy

The Corporation’s business plan is to increase the Bank’s emphasis on commercial banking. The Corporation is pursuing the following strategies:

· Increasing the percentage of its assets consisting of business and commercial real estate loans with higher risk-adjusted returns, shorter maturities and rates more sensitive to interest rate fluctuations;

· Aggressively managing the credit administration of the Bank’s loan portfolio;

· Increasing deposits by attracting lower cost transaction accounts (such as checking, savings and money market accounts) through an enhanced branch network, customer service center, online banking and an augmented treasury management program;

· Maintaining cost-effective operations by efficiently offering products and services;

· Maintaining its capital position at or above the “well-capitalized” (as defined for regulatory purposes) level;

· Exploring prudent means to grow the business internally and through acquisitions; and

· Searching for additional sources of fee-based revenue.

The primary objectives of these strategies are to enhance shareholder value measured through increasing returns, and to increase the opportunity for quality earning asset growth, deposit generation, and fee-based income activities.  However, the shift in emphasis to commercial banking does inherently contain additional risks (See “LOAN PORTFOLIO” below).

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Competition

The Bank competes for both loans and deposits. The Puget Sound metropolitan area has a high density of financial institutions, including major national banks, several local community banks, and credit unions.

The Bank’s primary focus for loans is small to medium sized businesses, builders and developers, and real estate investors in the Puget Sound area.  The major competitors for the Bank in these loan markets are large commercial and community banks. The large banks often compete on the basis of competitive pricing, while the community banks compete on the basis of local decision making, loan structuring flexibility, and promises of a higher level of service. The general pricing remains very intense as financial institutions scramble to meet their growth goals.

The Bank’s competitors for retail loans, which include residential real estate and consumer loans, are numerous, including banks, mortgage bankers, captive finance subsidiaries of automobile companies, etc. Cascade has made a conscious decision to de-emphasize consumer lending in that intense competition has led to very low margins combined with relatively high credit risk.

On the deposit side, geographic location is still the primary factor in choosing a bank for the checking account relationship.  As a result, the Bank’s competition for checking deposits comes primarily from the large institutions with a broad network of locations.  Online Banking continues to be an important convenience service to attract checking customers from larger banks. Community banks, savings institutions, as well as other non-banking financial institutions, provide the greatest competition for the various savings vehicles such as money market deposit accounts and certificates of deposit.

In addition to competition from other banking institutions, the Bank continues to experience competition from non-banking companies such as credit unions, financial services companies and brokerage firms. Many credit unions, including a large one in Cascade’s market area, have expanded their eligible membership by amending their charters.

LOAN PORTFOLIO

General.  The Bank originates business, real estate and consumer loans.  Total loans, which are net of construction loans in process, equaled $1.26 billion at December 31, 2008. Total loans were adjusted by deferred loan fees and the allowance for loan losses for a net loan balance of $1.24 billion. At December 31, 2008, $485.1 million or 39% of total loans consisted of business banking loans; $406.5 million or 32% were real estate construction loans; $123.0 million or 10% of loans consisted of commercial real estate; $30.8 million or 2% were consumer loans; $126.1 million or 10% of the Bank’s loans consisted of loans secured by one-to-four family residential properties; and $86.9 million or 7% consisted of multifamily loans.  Total loans secured by first liens on residential real estate were $213.0 million or 17% of total loans.  The Bank sells almost all of its 30 year fixed-rate loans and the vast majority of its 15 year fixed-rate loans in the secondary mortgage market.  The Bank had non-mandatory forward commitments totaling $127,000 and $0 to sell loans into the secondary market at December 31, 2008 and December 31, 2007, respectively.

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Loan Portfolio Analysis.  The following table sets forth the Bank’s loan portfolio by type of loan and by type of collateral at the dates indicated.

	At December 31,
(Dollars in thousands)	2008					2007					2006
	Amount		Percent			Amount		Percent			Amount		Percent
Type of Loan
Real estate mortgage
Residential (1)	$	126,089		10.02	%	$	98,384		8.88	%	$	91,256		9.03	%
Multifamily		86,864		6.90			11,397		1.03			34,719		3.44
Commercial real estate		122,951		9.77			120,421		10.87			119,298		11.81
Construction (2)		406,505		32.31			381,810		34.44			295,087		29.20
Business		485,060		38.55			468,453		42.28			442,391		43.78
Consumer (3)		30,772		2.45			27,688		2.50			27,686		2.74
Total loans	$	1,258,241		100.00	%	$	1,108,153		100.00	%	$	1,010,437		100.00	%
Less:
Deferred loan fees, net		3,069					3,724					3,434
Allowance for loan losses		16,439					11,653					10,988
Total loans, net	$	1,238,733				$	1,092,776				$	996,015
Type of Collateral
Real estate mortgage
One-to-four family (4)	$	557,760		44.33	%	$	501,762		45.28	%	$	402,415		39.83	%
Multifamily		86,864		6.90			11,397		1.03			34,719		3.44
Commercial real estate		122,951		9.77			120,421		10.87			119,298		11.81
Land loans		4,407		0.35			3,984		0.36			5,094		0.50
Other		486,259		38.65			470,589		42.46			448,911		44.42
Total loans	$	1,258,241		100.00	%	$	1,108,153		100.00	%	$	1,010,437		100.00	%
Less:
Deferred loan fees, net		3,069					3,724					3,434
Allowance for loan losses		16,439					11,653					10,988
Total loans, net	$	1,238,733				$	1,092,776				$	996,015
	At December 31,
	2005					2004
	Amount		Percent			Amount		Percent
Type of Loan	(Dollars in thousands)
Real estate mortgage
Residential (1)	$	89,422		10.15	%	$	102,429		12.70	%
Multifamily		52,057		5.91			92,372		11.45
Commercial real estate		141,109		16.02			178,704		22.15
Construction (2)		171,964		19.52			110,977		13.76
Business		394,034		44.75			292,117		36.21
Consumer (3)		32,160		3.65			30,125		3.73
Total loans	$	880,746		100.00	%	$	806,724		100.00	%
Less:
Deferred loan fees, net		3,443					2,695
Allowance for loan losses		10,254					9,563
Total loans, net	$	867,049				$	794,466

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	At December 31,
(Dollars in thousands)	2005					2004
	Amount		Percent			Amount		Percent
Type of Collateral
Real estate mortgage
One-to-four family (4)	$	279,652		31.76	%	$	231,504		28.70	%
Multifamily		52,057		5.91			92,372		11.45
Commercial real estate		141,109		16.02			178,704		22.15
Land loans		6,007		0.68			3,546		0.44
Other		401,921		45.63			300,598		37.26
Total loans	$	880,746		100.00	%	$	806,724		100.00	%
Less:
Deferred loan fees, net		3,443					2,695
Allowance for loan losses		10,254					9,563
Total loans, net	$	867,049				$	794,466

(1)	Includes construction loans converted to permanent loans
(2)	Includes land loans
(3)	Includes home equity loans and home equity lines of credit (“HELOC”)
(4)	Includes residential home equity loans, HELOC’s and construction loans

At December 31, 2008, deferred fees were $3.1 million and the allowance for loan losses was $16.4 million.

Business Loans. Business banking loans increased from $468.5 million at December 31, 2007, to $485.1 million at December 31, 2008. Unsecured business banking loans totaled $29.8 million at December 31, 2008, compared to $25.3 million as of December 31, 2007. The Bank’s business banking loan portfolio consists primarily of commercial business loans to small and medium sized businesses operating in Snohomish and King Counties. These loans are generally secured by real estate, receivables, equipment, other assets of the business and personal property, and the personal guarantee of the borrower. These loans typically have variable-rate terms or fixed-rates with maturities of up to five years. The Bank also offers secured and unsecured operating Lines of Credit. Business banking loans are underwritten by the Bank on the basis of the borrower's cash flow, ability to service debt from earnings, and the underlying collateral value. The borrower is generally required to provide the Bank with financial statements, tax returns, current financial information on any and all guarantors, and other reports that show trends in their financial condition; and to update this information annually. Business banking loans also include owner occupied real estate loans with terms comparable to the Bank’s commercial real estate loans. In addition, as business banking activity increases, the Bank expects to expand its lower cost deposit franchise through the growth of commercial checking as a source of funding.

Business banking loans are inherently sensitive to conditions in the economy. The collateral securing these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In the case of loans secured by accounts receivable, the availability of funds for the repayment of such loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Accordingly, the repayment of a business loan depends primarily on the successful operation of the borrower's business and creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and potentially insufficient source of repayment.

Construction Loans.  The Bank originates construction loans to fund the building of one-to-four family homes either to borrowers as custom construction loans or to builders as speculative construction loans. Construction loans generally have maturities of 12-18 months.  The interest rates charged on construction loans are typically indexed to the prime rate and vary depending on the characteristics of the loan, particularly the credit risk inherent in the project and/or the financial strength of the borrower. All construction loans require approval by various levels of Bank personnel, depending on the size of the loan. At December 31, 2008 and December 31, 2007, the Corporation’s construction loans were $406.5 million or 32.3% of the total loan portfolio and $381.8 million or 34.4% of the total loan portfolio, respectively. The construction loans are net of loans in process of $60.8 million at December 31, 2008, and $151.4 million at December 31, 2007. Of the total net construction loans, $401.7 million was to builders and developers, including $131.4 million for land acquisition and development.  An additional $1.8 million was to individuals for custom home construction and $3.0 million was for lot purchases. The Bank’s maximum outstanding commitment to one builder at December 31, 2008, totaled $21.5 million involving one construction project, which is performing in accordance with the loan terms.

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Construction loans involve higher credit risks because loan funds are advanced upon the security of the project under construction that is of uncertain value before completion. The Bank’s risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of the construction.  If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance additional funds to complete the development.  If upon completion of the project, the estimate of the marketability of the property is inaccurate, the borrower may be unable to sell the completed project in a timely manner or obtain adequate proceeds to repay the loan.  Delays may arise from labor problems, material shortages and other unpredictable contingencies in completing the project.  Furthermore, if the estimate of value of a completed project is inaccurate, the Bank may be confronted with a project with a value that is insufficient to assure full repayment.As a result, these loans may involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest.

Commercial Real Estate Loans.  Commercial real estate loans totaled $123.0 million or 9.8% of the Bank’s total loans at December 31, 2008, compared to $120.4 million or 10.9% of the portfolio at December 31, 2007. All commercial real estate loans are secured by properties in western Washington, mainly in the Puget Sound Region. Improved property including office buildings and small commercial business properties, such as strip shopping centers, secure the Bank’s commercial real estate loans. These loans are primarily adjustable-rate with a maximum term until reset on the interest rate of five years. At December 31, 2008, the largest commercial real estate loan in the Bank’s portfolio was $10.2 million, which is performing according to its terms.

Commercial real estate loans are also sensitive to local economic conditions.  An economic slowdown can lead to increased vacancies that would lower the borrower’s ability to service the debt.  Commercial real estate loans also have a degree of interest rate risk in that if rates fall, borrowers may refinance, and if rates rise, the Bank could experience a squeeze on net interest margin if the Bank does not properly fund these loans, which often have a fixed-rate for the initial five years of the loan.

Multifamily Loans. Multifamily loans totaled $86.9 million or 6.9% of the total loan portfolio at December 31, 2008. The multifamily portfolio is principally comprised of small to medium-size apartment projects with loan-to-value ratios usually up to 75%. All new loan originations are in the Puget Sound Region and have adjustable interest rates.

Multifamily residential and commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one-to-four family mortgage loans. However, loans secured by such properties usually are greater in amount and may involve a greater degree of risk than individual one-to-four family residential mortgage loans. Because payments on loans secured by multifamily residential and commercial properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy.

 One-to-Four Family Residential Loans.  At December 31, 2008, residential loans totaled $126.1 million or 10.0% of the total loan portfolio. Residential lending consists primarily of first mortgage loans secured by single-family residential properties located principally in Snohomish and King Counties. The Bank originates both fixed-rate and adjustable-rate mortgages (“ARMs”) with maturities up to 30 years. ARM loans are generally held in the Bank’s portfolio.  Newly originated ARMs have interest rates that adjust based on the One Year Constant Maturity Treasury Index after an initial fixed-rate period. Borrower demand for ARMs versus fixed-rate mortgage loans is a function of the level of interest rates, the shape of the yield curve, and the differences between the interest rates and loan fees offered for fixed-rate mortgage loans and the rates and loan fees for ARMs.

Fixed-rate residential loans are generally sold and the servicing released to one of the Bank’s correspondents.  The loans are sold on a “best efforts” basis.  The Bank no longer packages its loans to sell as mortgage-backed securities.  The Bank had $1.2 million in loans held for sale at December 31, 2008, and $129,000 in loans held for sale at December 31, 2007. Loans held for sale are not material and therefore the Bank does not include them as a separate line item on the balance sheet.

The Bank’s conforming residential loans meet the Federal Home Loan Mortgage Corporation's underwriting standards with respect to credit, borrower debt ratios and documentation. The Bank’s nonconforming residential loans are those that do not conform to agency underwriting guidelines, due to the size of the loan, as a result of credit histories, debt-to-income ratios, reliance on the borrower's stated income, non-owner occupied property, rural property, or other exceptions from agency guidelines. The Bank does not offer subprime loans.

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Consumer Loans.  The Bank’s consumer loan activities take three forms: home equity loans or lines of credit, installment loans, and Visa card loans. Home equity loans are secured by a junior lien in priority on the borrower's home. Such loans may have a combined loan-to-value ratio of up to 90% of the value of the home securing the loan. Home equity loans are fixed amount loans, which may have fixed or floating interest rates. Home equity lines of credit can be drawn upon at any time by the customer up to a specific amount.  These loans are at a floating-rate with a floor on that rate. The balance outstanding for both types of home equity loans increased to $25.2 million at December 31, 2008, as compared to $21.6 million at December 31, 2007. At December 31, 2008 and December 31, 2007, the total amount of unused lines of credit were $19.0 million and $20.4 million, respectively.  The second category of consumer loans are installment loans in which boats, automobiles, and recreational vehicles serve as collateral.  This portfolio was $5.6 million at December 31, 2008, as compared to $6.1 million outstanding at December 31, 2007. Since installment loans are secured by depreciating assets, any repossessed collateral for a defaulted loan is unlikely to provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections are dependent on the borrower’s continuing financial ability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

The Loan Maturity Table

The following table sets forth information at December 31, 2008 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Loan balances do not include deferred loan fees.  Construction loans are net of loans in process.

(Dollars in thousands)	Due in one year or less		Due in one to five years		Due after five years		Total		With variable or adjustable rate (for maturities of more than one year)		With fixed rate (for maturities of more than one year)
Business	$	120,483	$	156,976	$	207,601	$	485,060	$	167,413	$	197,164
Construction		221,422		156,448		28,635		406,505		171,727		13,356
Commercial real estate		3,350		35,605		83,996		122,951		116,928		2,673
Multifamily		10,067		47,933		28,864		86,864		47,710		29,087
Consumer		1,388		10,062		19,322		30,772		18,802		10,582
Residential		12,117		1,505		112,467		126,089		106,979		6,993

Asset Quality

Banking regulations require that each insured institution review and classify its assets regularly. In addition, bank examiners have the authority to identify problem assets and, if appropriate, require them to be adversely classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have sufficient weaknesses that make collection or payment in full, based on currently existing facts, conditions and values, questionable. An asset classified loss is considered uncollectible and of such little value that its continuance as an asset of the institution is not warranted.  Assets classified as substandard or doubtful require the institution to establish allowances for loan losses. If an asset, or portion thereof, is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge-off such amounts. The Bank uses two other asset classification categories for potential problem loans. They are watch and special mention. Borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk are classified as watch.  Loans on special mention represent borrowers who exhibit potential credit weaknesses or trends deserving Bank management’s close attention.

Cascade established the Credit Administration Division in 2001 to help assure that the Bank maintains the quality of its loan portfolio. Management has comprehensive monthly and annual review procedures for identifying and classifying assets for weaknesses. Reserves are maintained for assets classified as substandard or doubtful. The objective of these review procedures is to identify any trends and determine the levels of loss exposure to evaluate the need for an adjustment to the reserve accounts.

Delinquencies.  A report containing delinquencies of all loans is reviewed monthly by the Asset Review Committee and periodically by the Board of Directors.  Procedures taken with respect to delinquent loans differ depending on the particular circumstances of each loan.  The Bank’s general procedures provide that when a loan becomes delinquent, the borrower is contacted, usually by phone, within 30 days.  When the loan is over 30 days delinquent, the borrower is usually contacted in writing.  Typically, the Bank will initiate

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foreclosure or other corrective action against the borrower when principal and interest become 90 days or more delinquent.  In most cases, interest income is reduced by the full amount of accrued and uncollected interest on loans once they become 90 days delinquent, go into foreclosure or are otherwise determined to be uncollectible. Once interest has been paid to date or management considers the loan fully collectable, it is returned to accrual status.  An allowance for loss is established when, in the opinion of management, the fair value less sales costs of the property collateralizing the loan is less than the outstanding principal and the collectability of the loan’s principal becomes uncertain. It is intended that the Bank’s allowance for loan losses be adequate to cover known potential and reasonably estimated unknown losses. At December 31, 2008, and December 31, 2007, the Bank had $40.3 million and $1.5 million, respectively, of loans held on a non-accrual basis.

Allowance for Loan Losses/Nonperforming Loans

Management provides for possible loan losses by maintaining an allowance. The level of the allowance is determined based upon judgments regarding the size and nature of the loan portfolio, including concentrations of collateral type, historical loss experience, the financial condition of borrowers, the level of nonperforming loans, trends in asset classification and anticipated general economic conditions. Additions to the allowance are charged to expense. Loans are charged against the allowance when management believes the collection of principal is unlikely.  The provision for loan losses increased $5.8 million to $7.2 million for the year ended December 31, 2008. Increases in the allowance for loan losses made through provisions were primarily a result of loan growth, awareness of the greater risk inherent in business lending, the impact of the economic climate on the loan portfolio, and the continued weakening in the local housing market.

Management measures the reasonableness of the allowance for loan losses by utilizing a loan grading system to determine risk in the loan portfolio and by considering the results of credit reviews. The loan portfolio is separated by quality and then by loan type. Loans of acceptable quality are evaluated as a group, by loan type, with a loss rate assigned to the total loans in each type, but unallocated to any individual loan. A loss rate is also assigned to adversely classified loans under $1.0 million, but at a higher rate due to the greater risk of loss.  Adversely classified loans in excess of $1.0 million are individually analyzed to determine an estimated loss amount. Past due and impaired loans are actively managed to minimize the potential loss. Although management has allocated a portion of the allowance to the loan categories using the method described above, the adequacy of the allowance must be considered as a whole. Loan concentrations, terms, and basic underlying assumptions remain substantially unchanged but the Bank does project a slow down in the economy and the pace of financial activity.

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The following table presents information with respect to the Bank’s nonperforming assets and restructured loans at the dates indicated.

(Dollars in thousands)	December 31,
	2008			2007			2006
Nonperforming loans:
Business	$	1,149		$	1,522		$	731
Construction		38,972			—			—
Residential		155			—			—
Consumer loans		2			1			120
Total nonperforming loans		40,278			1,523			851
Real estate owned and repossessed assets		1,446			—			—
Total nonperforming assets	$	41,724		$	1,523		$	851
Restructured loans	$	910		$	334		$	115
Total nonperforming loans to net loans		3.20	%		0.14	%		0.08	%
Total nonperforming loans to total assets		2.46			0.11			0.06
Total nonperforming assets to total assets		2.55			0.11			0.06

The Bank’s nonperforming assets at December 31, 2008, consisting of nonperforming loans and other real estate owned, totaled $41.7 million or 2.55% of total assets. This is an increase from $1.5 million or 0.11% of total assets at December 31, 2007, and an increase from $851,000 or 0.06% of total assets at December 31, 2006.

Loans are generally placed on non-accrual when they become past due over 90 days or when the collection of interest or principal is considered unlikely.  Loans past due over 90 days, that are not on non-accrual status, must be well secured by tangible collateral and in the process of collection. The Bank does not return a loan to accrual status until it is brought current with respect to both principal and interest and future principal and interest payments are no longer in doubt.

Nonperforming loans increased to $40.3 million at December 31, 2008, compared to $1.5 million at December 31, 2007, and $851,000 at December 31, 2006. The increase in nonperforming loans from December 31, 2007 to December 31, 2008, is due to increases in nonperforming real estate, construction and development loans. Management believes that the allowance for losses on loans is adequate to provide for losses that may be incurred on nonperforming loans.

Real estate owned (REO) includes property acquired by the Bank through foreclosure.  REO is carried at the lower of the estimated fair value or the principal balance of the foreclosed loans.  Real estate owned and repossessed assets totaled $1.4 million at December 31, 2008, $0 at December 31, 2007, and $0 at December 31, 2006. The REO as of December 31, 2008 consists of three single family residences.

Interest income that would have been recognized for the years ended December 31, 2008, December 31, 2007, and December 31, 2006, had non-accrual loans been current in accordance with their contractual terms, amounted to $871,742, $111,249, and $27,175, respectively.

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The following tables set forth information regarding changes in the Bank’s allowance for loan losses for the most recent five years.

(Dollars in thousands)	Years Ended December 31,
	2008			2007			2006			2005			2004
Balance at beginning of period	$	11,653		$	10,988		$	10,254		$	9,563		$	7,711
Issaquah Bank balance at June 2004		—			—			—			—			1,395
Charge-Offs
Business banking		1,212			288			47			1			310
Construction/land		1,941			—			—			—			—
Residential		—			—			—			116			34
Consumer and other		632			390			367			403			97
Recoveries:		(1,282	)		(135	)		(148	)		(266	)		(223	)
Net charge-offs (recoveries):		2,503			543			266			254			218
Provision for loan losses		7,240			1,350			1,000			945			675
Transfers to (from) off-balance sheet commitments		(49	)		142			—			—			—
Balance at end of period		16,439			11,653			10,988			10,254			9,563
Average total loans outstanding	$	1,183,072		$	1,046,093		$	955,692		$	854,684		$	691,372
Ratio of net charge-offs during the period to average loans outstanding		0.21	%		0.05	%		0.03	%		0.03	%		0.03	%
Ratio of allowance for loan losses to average loans outstanding		1.39			1.11			1.15			1.20			1.38
Ratio of allowance for loan losses to total loans outstanding		1.31			1.05			1.09			1.16			1.19

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the estimated losses on loans and foreclosed assets held for sale, management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.

Certain loans may meet the criteria of troubled debt restructuring as defined in Statement of Financial Accounting Standards (“SFAS”) No. 114 and No. 118, Accounting by Creditors for Impairment of a Loan, and Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, respectively.

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The following tables set forth information concerning the Bank’s allocation of the allowance for loan losses and the percentage of loans in each category to total loans at the dates indicated.

	December 31,
(Dollars in thousands)	2008					2007					2006
	Amount		%			Amount		%			Amount		%
Business	$	3,193		38.55	%	$	3,824		42.28	%	$	7,221		43.78	%
Construction		4,341		32.31			2,050		34.44			194		29.20
Commercial real estate		610		9.77			605		10.87			2,159		11.81
Multifamily		149		6.90			16		1.03			271		3.44
Consumer		333		2.45			326		2.50			605		2.74
Residential		253		10.02			205		8.88			255		9.03
Unallocated		7,560		—			4,627		—			283		—
Total allowance for loan losses	$	16,439		100.00	%	$	11,653		100.00	%	$	10,988		100.00	%

The provision for loan losses for the year ended December 31, 2008, totaled $7.2 million compared to $1.4 million for the year ended December 31, 2007, and $1.0 million for the year ended December 31, 2006. The increase in the provision for loan losses for the twelve-month period ended December 31, 2008, was primarily a result of loan growth, awareness of the greater risk inherent in business lending, the impact of the economic climate on the loan portfolio, and the continued weakening in the local housing market. Adversely classified loans increased to $87.3 million at December 31, 2008, from $29.1 million at December 31, 2007.

ASSET AND LIABILITY MANAGEMENT ACTIVITIES

The Bank’s Asset/Liability Management Committee (“ALCO”) has the responsibility to measure and monitor interest rate risk, the liquidity position, and capital adequacy. The Bank uses a variety of tools to measure, monitor, and manage interest rate risk. The Audit and Finance Committee of the Board of Directors reviews the interest rate risk management activities of the Bank on a regular basis and has established policies and guidelines on the amount of risk deemed acceptable.  The impact on the Bank’s net interest income and the fair value of its capital are modeled under different interest rate scenarios. The Board, through the Asset/Liability Management Policy, has established guidelines for the maximum negative impact that changes in interest rates have on the Bank’s net interest income, the fair value of equity and adjusted capital/asset ratios under certain interest rate shock scenarios. Cascade uses a simulation model to measure rate risk and the impact on net interest income, the fair value of equity, and the fair value capital/asset ratio. In general, the Bank seeks to manage its rate risk through its balance sheet. The Bank focuses on originating more interest rate sensitive assets, such as variable-rate loans, while reducing its long-term, fixed-rate assets through the sale of long-term residential mortgages in the secondary market. The vast majority of the loans that the Bank keeps in its portfolio have rate repricing periods of five years or less. The Bank often uses FHLB advances to fund its intermediate term assets.

Using standard interest rate shock methodology (an instantaneous uniform change in interest rates at all maturities), the Bank is well within the guidelines established by the Board of Directors for the changes in fair value of equity and the adjusted capital/asset ratios. The Bank’s fair value of equity decreases 21.3% in a down 200 bp shock scenario and 1.2% in an up 200 bp shock, within the established guideline of a maximum 30% decline. The adjusted capital/asset ratio is 11.5% in the up 200 bp scenario and 11.9% in the down 200 bp scenario, both above the 5% minimum established guideline. The net interest income increases 1.8% in the up 200 bp scenario and decreases 5.6% in the down 200 bp shock scenario well within the guideline of a 10% decline. 

To manage the rate risk in the investment portfolio, limits have been established on the final maturity of securities and limits have been initiated on the price volatility of mortgage-backed securities (“MBS”) (including collateralized mortgage obligations (“CMO”)). Additionally, the Bank extends the maturities of its liabilities by offering long-term deposit products to customers, and obtaining longer term FHLB advances. As of December 31, 2008, all of the $249.0 million in advances had original maturities greater than one year and $239.0 million have remaining maturities greater than one year.

The Bank has used interest rate swaps to control the amount of its interest rate risk. In April 2007, the Bank terminated its $10.0 million in notional principal swaps used to hedge certificates of deposit. In December 2006, the Bank terminated its $10.0 million swap used to hedge its initial issuance of Trust Preferred Securities when it became likely that the changes in the fair value of the swap would need to be marked to market through the income statement due to a change in the accounting rules.

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Another major component of asset/liability management is liquidity management. The Board of Directors has also established liquidity parameters that seek to assure the Bank will have sufficient liquidity to meet all its customer needs for funding and/or deposit withdrawals. Liquidity levels are monitored by the ALCO with liquidity analysis reports presented to the Board on a regular basis. The Bank seeks to diversify its funding sources to assure it maintains adequate liquidity. The ALCO also monitors and reports to the Board on the capital position of the Bank and the Corporation. Both seek to remain “well-capitalized” under FDIC and Federal Reserve guidelines.

The balance sheets and the section of Management’s Discussion and Analysis titled “Average Balances and an Analysis of Average Rates Earned and Paid” contained in the Annual Report are incorporated herein by reference.

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income of the Corporation. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume mix (change in rate multiplied by change in volume).

	Year Ended December 31,												Year Ended December 31,
	2008 Compared to Year Ended December 31, 2007 Increase (Decrease) Due to												2007 Compared to Year Ended December 31, 2006 Increase (Decrease) Due to
(Dollars in thousands)
	Rate			Volume			Mix			Net			Rate			Volume			Mix			Net
Interest-earning assets
Residential loans	$	(74	)	$	809		$	(10	)	$	725		$	406		$	(219	)	$	(16	)	$	171
Multifamily loans		(128	)		2,285			(206	)		1,951			401			(1,621	)		(227	)		(1,447	)
Commercial real estate loan		(372	)		(31	)		1			(402	)		268			(1,781	)		(49	)		(1,562	)
Construction loans		(8,103	)		4,702			(1,266	)		(4,667	)		21			10,685			12			10,718
Consumer loans		(299	)		119			(17	)		(197	)		16			(191	)		(1	)		(176	)
Business banking loans		(2,457	)		1,542			(112	)		(1,027	)		602			2,107			41			2,750
Total loans		(11,433	)		9,426			(1,610	)		(3,617	)		1,714			8,980			(240	)		10,454
Securities held-for-trading		—			(1,884	)		—			(1,884	)		—			1,884			—			1,884
Securities available-for-sale		333			1,047			72			1,452			272			(2,094	)		(85	)		(1,907	)
Securities held-to-maturity		666			2,632			388			3,686			380			(384	)		(32	)		(36	)
Daily interest-earning deposits		(806	)		(667	)		472			(1,001	)		26			777			79			882
Total net change in income on   interest-earning assets	$	(11,240	)	$	10,554		$	(678	)	$	(1,364	)	$	2,392		$	9,163		$	(278	)	$	11,277
Interest-bearing liabilities
Interest-bearing deposits	$	(10,625	)	$	3,449		$	(829	)	$	(8,005	)	$	4,269		$	2,043		$	332		$	6,644
FHLB advances		(598	)		1,394			(81	)		715			(420	)		(554	)		21			(953	)
Other borrowings		1,529			1,466			441			3,436			435			1,019			127			1,581
Total net change in expenses on   interest-bearing liabilities	$	(9,694	)	$	6,309		$	(469	)	$	(3,854	)	$	4,284		$	2,508		$	480		$	7,272
Net increase in net interest income										$	2,490											$	4,005

15

	Year Ended December 31,
	2006 Compared to Year Ended December 31, 2005 Increase (Decrease) Due to
(Dollars in thousands)
	Rate			Volume			Mix			Net
Interest-earning assets
Residential loans	$	58		$	(354	)	$	(4	)	$	(300	)
Multifamily loans		111			(2,110	)		(47	)		(2,046	)
Commercial real estate loans		407			(1,488	)		(55	)		(1,136	)
Construction loans		1,915			6,114			1,148			9,177
Consumer loans		192			(91	)		(7	)		94
Business banking loans		1,648			5,670			399			7,717
Total loans		4,331			7,741			1,434			13,506
Securities available-for-sale		486			614			53			1,153
Securities held-to-maturity		87			167			2			256
Daily interest-earning deposits		15			(71	)		(3	)		(59	)
Total net change in income on interest-earning assets	$	4,919		$	8,451		$	1,486		$	14,856
Interest-bearing liabilities
Interest-bearing deposits	$	8,905		$	497		$	860		$	10,262
FHLB advances		257			(92	)		(3	)		162
Other borrowings		(603	)		3,158			(987	)		1,568
Total net change in expenses on interest-bearing liabilities	$	8,559		$	3,563		$	(130	)	$	11,992
Net increase in net interest income										$	2,864

There were no loans 90 days or more past due and still accruing as of December 31, 2008. There was $420,000 in accrued interest on loans 90 days or more past due as of December 31, 2007, and no interest accrued on loans 90 days or more past due at December 31, 2006.

INVESTMENT PORTFOLIO

The Board of Directors, through the Asset/Liability Management Policy, sets the investment policy of the Bank. This policy mandates that investments will be made based on the safety of the principal amount, interest rate risk, liquidity requirements of the Bank, and the return on the investment. The Bank’s policy does not permit the purchase of non-investment grade securities. The policy permits the investment in various types of assets permissible under FDIC regulation including:  United States Treasury obligations, securities of government sponsored enterprises, mortgage-backed securities (“MBS”) including collateralized mortgage obligations (“CMOs”), state and municipal government bonds, deposits at the FHLB-Seattle, certificates of deposit of federally insured institutions, investment grade corporate bonds and Federal funds. Subject to various restrictions, the Bank may also invest part of its assets in commercial paper and mutual funds, if those assets conform to FDIC regulations.

Investment securities increased 10.4% to $256.2 million at December 31, 2008, from $232.0 million at December 31, 2007. MBS (including CMOs) available-for-sale increased from $25.4 million to $42.0 million as of December 31, 2008. Agency notes available-for-sale also increased from $57.4 million to $81.4 million. MBS (including CMOs) held-to-maturity decreased from $22.5 million to $20.5 million as of December 31, 2008. Agency notes held-to-maturity also decreased from $114.0 million to $99.3 million for the year ended December 31, 2008.

16

The following tables set forth the Bank’s securities available-for-sale at the dates indicated.

	December 31, 2008					December 31, 2007					December 31, 2006
	Estimated		Percent of			Estimated		Percent of			Estimated		Percent of
(Dollars in thousands)	Fair Value		Portfolio			Fair Value		Portfolio			Fair Value		Portfolio
MBS	$	41,852		30.86	%	$	25,427		26.83	%	$	37,747		26.48	%
Agency notes		81,372		60.01			57,433		60.60			92,909		65.16
FHLB stock		11,920		8.80			11,920		12.57			11,920		8.36
Corporate/other		454		0.33			—		—			—		—
Total	$	135,598		100.00	%	$	94,780		100.00	%	$	142,576		100.00	%

The following table sets forth the contractual or expected maturities and weighted average yields of the Bank’s securities available-for-sale at December 31, 2008.

	Less Than One Year					One to Five Years					Five to Ten Years					Over Ten Years
	Estimated					Estimated					Estimated					Estimated
(Dollars in thousands)	Fair Value		Yield			Fair Value		Yield			Fair Value		Yield			Fair Value		Yield
MBS	$	22,345		4.32	%	$	19,507		5.40	%	$	—		—	%	$	—		—	%
Agency notes		—		—			—		5.03			71,458		5.09			9,914		6.05
FHLB stock		—		—			—		—			—		—			11,920		—
Corporate/other		—		—			—		—			—		—			454		—
Total	$	22,345				$	19,507				$	71,458				$	22,288

The following table sets forth amortized cost and estimated fair values for the Bank’s securities held-to-maturity at the dates indicated.

	December 31, 2008							December 31, 2007							December 31, 2006
	Amortized		Fair		% of			Amortized		Fair		% of			Amortized		Fair		% of
(Dollars in thousands)	Cost		Value		Portfolio			Cost		Value		Portfolio			Cost		Value		Portfolio
MBS	$	20,484	$	20,545		16.99	%	$	22,556	$	21,941		16.44	%	$	25,218	$	24,338		26.04	%
Agency notes		99,335		99,381		82.37			113,907		113,579		83.00			70,853		68,423		73.16
Corporate/other		775		775		0.64			775		775		0.56			775		775		0.80
Total	$	120,594	$	120,701		100.00	%	$	137,238	$	136,295		100.00	%	$	96,846	$	93,536		100.00	%

The following table sets forth the contractual or expected maturities and weighted average yields of the Bank’s securities held-to-maturity at December 31, 2008.

	Less Than One Year					One to Five Years					Five to Ten Years					Over Ten Years
	Estimated					Estimated					Estimated					Estimated
(Dollars in thousands)	Fair Value		Yield			Fair Value		Yield			Fair Value		Yield			Fair Value		Yield
MBS	$	—		—	%	$	—		—	%	$	8,552		4.69	%	$	11,993		4.80	%
Agency notes		—		—			5,059		4.25			46,944		6.00			47,378		5.97
Corporate/other		—		—			—		—			—		—			775		—
Total	$	—				$	5,059				$	55,496				$	60,146

For further information concerning the Bank’s securities portfolio, see Note 3 of the Notes to the Consolidated Financial Statements contained in the Annual Report listed in Item 15.

DEPOSITS

The Bank’s primary source of funds is customer deposits. In addition to checking accounts, the Bank offers a variety of interest-bearing accounts designed to attract both short-term and longer-term deposits from customers. Interest-bearing accounts earn interest at rates established by Bank management based on competitive market factors and the Bank’s need for funds.

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Deposits increased to $1.0 billion at December 31, 2008, from $904.4 million at December 31, 2007, an increase of 11.3% during this period. Deposits at December 31, 2006, were $855.4 million. The market for retail deposits remains fiercely competitive. Previously, the Bank paid rates at the higher end of the competitive range of financial institutions in its market area. In an attempt to lower the absolute and relative cost of funds, the Bank modified its deposit pricing strategy by pricing its deposits in the middle of that range.

The following table sets forth the average balances for each major category of deposits and the weighted average interest rate paid for deposits during the years ended December 31, 2008, 2007, and 2006.

	Average Deposits by Type
(Dollars in thousands)	December 31, 2008					December 31, 2007					December 31, 2006
	Amount		Rate			Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	88,185		—	%	$	87,284		—	%	$	80,457		—	%
Interest-bearing demand deposits		72,817		1.65			51,021		1.46			45,039		1.46
Money market deposit		297,312		2.46			284,843		4.32			229,788		3.70
Savings		10,888		0.49			13,261		0.50			14,748		0.51
Time certificates		497,114		3.75			444,726		4.97			446,437		4.33
	$	966,316				$	881,135				$	816,469

The following table indicates the amount of the Bank’s jumbo certificates of deposit by time remaining until maturity at December 31, 2008. Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are negotiable.

Maturity Period	Jumbo Certificates of Deposit
	(Dollars in thousands)
Three months or less	$	272,123
Over three through six months		132,838
Over six through twelve months		37,949
Over twelve months		19,357
Total	$	462,267

The flow of deposits is influenced significantly by general economic conditions, changes in money market conditions and prevailing interest rates. In addition, there is strong competition for customer dollars from other financial institutions, mutual funds and non-bank corporations, such as securities brokerage companies and other diversified companies.  The Bank’s deposits are obtained primarily from the areas in which its branches are located.  The Bank relies primarily on customer service and longstanding relationships with customers to attract and retain these deposits. In the coming year, the Bank will focus on its deposit gathering activities, especially the growth in demand deposits through its High Performance Checking program. In January 2007 the Bank launched its Business High Performance Checking Program to accelerate deposit growth. In the event the Bank were liquidated, certain depositors would be entitled to full payment of their deposit accounts prior to any payment being made to the shareholders.

BORROWINGS

The Bank relies on advances from the Federal Home Loan Bank of Seattle (FHLB-Seattle) to supplement its supply of funds. Advances from the FHLB-Seattle are typically secured by the Bank’s first mortgage residential loans, investment securities and other eligible mortgages secured by real estate.FHLB advances were $249.0 million at December 31, 2008, compared to $231.0 million at December 31, 2007, a 7.8% increase. FHLB advances were $243.0 million at December 31, 2006.

The Bank participates in the Federal Reserve term auction facility (TAF) and had an outstanding balance of $40.0 million at December 31, 2008.

The Bank enters into repurchase agreements with its authorized dealers. Repurchase agreements are accounted for as borrowings by the Bank and are secured by designated investments, primarily the notes of federal agencies and mortgage-backed securities guaranteed by those agencies. The proceeds of these transactions are used to meet the cash flow

18

and interest rate risk management needs of the Bank. These agreements have 8-10 year final maturities.  The counterparties have the right to terminate these agreements and may if rates dramatically increase.  Repurchase agreements increased to $146.4 million at December 31, 2008, from $120.6 million at December 31, 2007.

Cascade Bank has established Fed funds borrowing lines with three of its correspondent banks. Cascade used each of these lines during the year. The Bank also has a line of credit with the Federal Reserve Bank of San Francisco. As of December 31, 2008, there were no outstanding balances in any of these lines.

The following table sets forth certain information regarding borrowings by the Bank at the end of, and during, the periods indicated.

(Dollars in thousands)	December 31,
	2008			2007			2006
Weighted average rate on:
Securities sold under agreements to repurchase		5.19	%		3.23	%		1.49	%
FHLB advances		4.27			4.27			4.76
	Year ended December 31,
	2008			2007			2006
Maximum amount of borrowings outstanding at any month end:
Securities sold under agreements to repurchase	$	147,740		$	120,625		$	96,007
FHLB advances		287,500			264,790			256,000
Approximate average borrowings outstanding with respect to:
Securities sold under agreements to repurchase	$	124,211		$	107,516		$	81,284
FHLB advances		256,898			226,124			237,888
Approximate weighted average rate paid on:
Other interest-bearing liabilities*		4.92	%		3.77	%		3.36	%
FHLB advances		4.26			4.53			4.71
* Including Trust Preferred Securities.

Junior Subordinated Debentures Payable (Trust Preferred Securities).  On March 1, 2000, $10.3 million of 11% Capital Securities due March 1, 2030, were issued by a wholly owned business Trust whose common equity is 100% owned by Cascade Financial Corporation. The Trust exists for the exclusive purposes of issuing and selling the capital securities, using the proceeds from the sale of the capital securities to acquire junior subordinated debentures issued by Cascade Financial Corporation, and engaging in only those other activities necessary, advisable, or incidental to the above.

The Corporation used the proceeds for general corporate purposes including stock repurchases and investment in its subsidiary bank.  At December 31, 2003, as a result of the adoption of FIN 46R, the Trust was deconsolidated and all periods in the consolidated financial statements have been restated to reflect this change. The $10.3 million of junior subordinated debentures issued by the Corporation to the Trust were reflected as junior subordinated debentures payable in the consolidated balance sheet at December 31, 2004. The Trust will redeem the trust preferred securities when the junior subordinated debentures are paid at maturity or upon any earlier redemption of the junior subordinated debentures.

Prior to December 31, 2003, the Trust was consolidated and was included in liabilities in the consolidated balance sheet. The common securities and debentures, along with the related income effects, were eliminated in the consolidated financial statements.

On December 15, 2004, Cascade Financial Corporation issued $5.2 million of 5.82% Capital Securities due January 7, 2035. The proceeds from the issuance were invested in Cascade Bank, which used the increased capital for general corporate purposes.

On March 30, 2006, Cascade Financial Corporation issued $10.3 million of 6.50% Capital Securities due June 15, 2036. The proceeds from the issuance were invested in Cascade Bank, which used the increased capital for general corporate purposes.

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Subsidiary Activity

The Corporation has four subsidiaries:  Cascade Bank, Cascade Capital Trust I, II, and III. The activities of the Corporation are primarily conducted through the Bank.  Accordingly, this Form 10-K principally discusses the Bank’s operations.

Cascade Capital Trust I was formed for the exclusive purpose of issuing Trust Preferred Securities and common securities and using the proceeds to acquire junior subordinated debentures issued by the Corporation.  The junior subordinated debentures total $10.2 million, have an interest rate of 11.00%, mature on March 1, 2030, and are the sole assets of Cascade Capital Trust I.  The junior subordinated debentures are pre-payable, in whole or in part, at the Corporation’s option on or after March 1, 2010, at declining premiums to maturity. Proceeds totaling approximately $9.2 million from the issuance of the junior subordinated debentures were used to increase the capital level of the Bank.

Cascade Capital Trust II incorporates the same structure for the same purposes as Cascade Capital Trust I.  The junior subordinated debentures issued under Cascade Capital Trust II equal $5.2 million and have a rate of 5.82% for the first 5 years of the security, and floats at the three-month LIBOR plus 190 bp thereafter. The securities are callable at par on a quarterly basis beginning January 7, 2010.

Cascade Capital Trust III incorporates the same structure for the same purposes as Cascade Capital Trust I and II. The junior subordinated debentures issued under Cascade Capital Trust III equal $10.3 million and have a rate of 6.50% for the first 5 years of the security, and floats at the three-month LIBOR plus 140 bp thereafter. The securities are callable at par on a quarterly basis beginning June 15, 2011.

Personnel

At December 31, 2008, the Corporation had 216 full-time equivalent employees.  The Corporation believes that employees play a vital role in the success of a service company and that the Corporation’s relationship with its employees is good.  The employees are not represented by a collective bargaining unit.

REGULATION

Introduction/General

The following generally refers to certain statutes and regulations affecting the Corporation and the Bank.  This provides only a brief summary of the regulations impacting the Corporation and is not complete.  This discussion is qualified in its entirety by the statutes and regulations.  In addition, some statutes and regulations exist which impact the Corporation but are not referenced below.

The Corporation is subject to extensive regulation, supervision and examination. Such regulation and supervision govern the activities in which the institution can engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities, which are intended to strengthen the financial condition of the banking industry, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses.  Any change in such regulation and oversight could have an adverse material impact on the Corporation, Cascade and their respective operations.

The Corporation

The Corporation is a bank holding company that has elected to be treated as a financial holding company with the Board of Governors of the Federal Reserve Board (the “FRB”).  The Bank Holding Company Act of 1956 (“BHCA”), as amended, subjects the Corporation and its subsidiaries to supervision and examination by the FRB.  The Corporation files quarterly and annual reports of operations with the FRB.

Bank Holding Company Regulation.  In general, the BHCA limits bank holding company business to owning or controlling banks and engaging in other banking-related activities. Bank holding companies must obtain the FRB's approval before they: (1) acquire direct or indirect ownership or control of any voting shares of any bank that results in total ownership or control, directly or indirectly, of more than 5 percent of the voting shares of such bank; (2) merge or consolidate with another bank holding company; or (3) acquire substantially all of

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the assets of any additional banks. Subject to certain state laws, such as age and contingency restrictions, a bank holding company that is adequately capitalized and adequately managed may acquire the assets of both in-state and out-of-state banks. With certain exceptions, the BHCA prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares in any company that is not a bank or a bank holding company unless the FRB determines that the activities of such company are incidental or closely related to the business of banking. If a bank holding company is well-capitalized and meets certain criteria specified by the FRB, it may engage de novo in certain permissible non-banking activities without prior FRB approval.

The Change in Bank Control Act of 1978, as amended, requires a person (or group of persons acting in concert) acquiring "control" of a bank holding company to provide the FRB with 60 days prior written notice of the proposed acquisition. Following receipt of this notice, the FRB has 60 days within which to issue a notice disapproving the proposed acquisition, but the FRB may extend this time period for up to another 30 days. An acquisition may be completed before expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove the transaction. In addition, any "company" must obtain the FRB's approval before acquiring 25% (5% if the "company" is a bank holding company) or more of the outstanding shares or otherwise obtaining control over the Corporation.

Financial Holding Company Election/Affiliations.  In 2001, the Corporation elected to be treated as a financial holding company with the FRB, as permitted under the Gramm-Leach-Bliley Financial Services Modernization Act (the “GLB”). This election allows the Corporation to conduct activities that previously were unavailable to bank holding companies, provided that notice requirements are generally required before engaging in any such activities.

In a change from previous law, bank holding companies are in a position to be owned, controlled or acquired by any company engaged in financially related activities, so long as such company meets certain regulatory requirements. To the extent the legislation permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Corporation currently offers and that can aggressively compete in the markets currently served by the Corporation.

Transactions with Affiliates.  The Corporation and its subsidiaries are deemed affiliates within the meaning of the Federal Reserve Act, and transactions between affiliates are subject to certain restrictions. Accordingly, the Corporation and its subsidiaries must comply with Sections 23A and 23B of the Federal Reserve Act (Reg W). Generally, Sections 23A and 23B (1) limit the extent to which a financial institution or its subsidiaries may engage in "covered transactions" with an affiliate, as defined, to an amount equal to 10% of such institution's capital and surplus and an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital and surplus, and (2) require all transactions with an affiliate, whether or not "covered transactions," to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.

Tying Arrangements. The Corporation and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Corporation nor its subsidiaries may condition an extension of credit on either a requirement that the customer obtain additional services provided by it or an agreement by the customer to refrain from obtaining other services from a competitor.

State Law Restrictions. As a Washington corporation, the Corporation is subject to certain limitations and restrictions as provided under applicable Washington corporate laws.

Securities Registration and Reporting.  The Corporation’s common stock is registered as a class with the SEC under the Securities Exchange Act of 1934 and thus the Corporation is subject to the periodic reporting and proxy solicitation requirements and the insider-trading restrictions of that Act. The periodic reports, proxy statement, and other information filed by the Corporation under that Act, can be inspected and copied at, or obtained from, the Washington, D.C. office of the SEC. In addition, the securities issued by the Corporation are subject to the registration requirements of the Securities Act of 1933 and applicable state securities laws unless exemptions are available.

The Corporation is listed on the NASDAQ/Global Select Market. As such, it is subject to the listing and reporting requirements of NASDAQ. Failure to meet these requirements could lead to a delisting of the Corporation’s stock.

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Disclosure Controls and Procedures.  The Sarbanes-Oxley Act of 2002 and related rulemaking by the SEC, which affect corporate disclosure and financial reporting reform, generally require public companies to focus on their disclosure controls and procedures. As a result, public companies such as the Corporation now must have disclosure controls and procedures in place and make certain disclosures about them in their periodic SEC reports (i.e., Forms 10-K and 10-Q) and their chief executive and chief financial officers must certify in these filings that they are responsible for developing and evaluating disclosure controls and procedures and disclose the results of an evaluation conducted by them within the 90-day period preceding the filing of the relevant report, among other things.

Dividends. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies which expresses the FRB’s view that a bank holding company should pay cash dividends only to the extent that the Corporation’s net income for the past year is sufficient to cover both the cash dividend and a rate of retention consistent with the Corporation’s capital needs.  The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow to pay dividends.

Capital Requirements. The FRB has established capital adequacy guidelines for bank holding companies that generally parallel the capital requirements the FDIC has for the Bank. The FRB regulations provided that capital standards will be applied on a consolidated basis in the case of a bank holding company with more than $150 million in total consolidated assets.  The Corporation’s total risk-based capital must equal 8% of risk-weighted assets and 4% must consist of Tier 1 capital.

Stock Repurchases. Bank holding companies, except for certain “well-capitalized” and highly rated companies, are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption is equal to or greater than 10% of consolidated net worth during the preceding twelve months. The FRB may disapprove any such purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice.

Capital Purchase Program Requirements. As an issuer of preferred stock to the U.S. Treasury under its Capital Purchase Program, which itself was a component of the Troubled Asset Relief Program, the Corporation agreed to certain terms and conditions. The issuance agreements established limitations on executive pay, requirements that the Corporation’s incentive/bonus programs do not encourage senior executive officers to take unnecessary and excessive risk, and provides for a claw back of previously paid bonuses if such payments are to be found based on materially inaccurate financial statements.  In addition, participation in the program required a modification of existing employment and/or change of control agreements with senior executive officers.

Cascade Bank

General. Applicable federal and state statutes and regulations governing a bank's operations relate, among other matters, to capital requirements, investments, loans, legal lending limits, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches, and dealings with affiliated persons. The Federal Deposit Insurance Corporation ("FDIC") has authority to prohibit banks under its supervision from engaging in what it considers to be unsafe or unsound practices in conducting their business. Cascade Bank is a state-charted commercial bank subject to extensive regulation and supervision by both the Washington Department of Financial Institutions (“DFI”) and the FDIC. The federal laws that apply to Cascade Bank regulate, among other things, the scope of its business, its investments, the timing of the availability of deposited funds and the nature and amount of collateral for loans. The laws and regulations governing Cascade Bank generally have been promulgated to protect depositors and not to protect shareholders of such institutions or their holding companies.

CRA. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their jurisdiction, the FRB or the FDIC evaluates the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The four possible ratings of meeting community credit needs are outstanding, satisfactory, needs to improve and substantial noncompliance.  Cascade Bank received a “satisfactory” CRA rating at the last examination.

Standards for Safety and Soundness.  The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits (“Guidelines”).  The Guidelines set forth the safety and soundness standards that

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the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  If a federal banking agency determines that a financial institution fails to meet any standard prescribed by the Guidelines, the agency may require the bank to submit to the agency an acceptable plan to achieve compliance with the standard.  Management is not aware of any conditions relating to these safety and soundness standards which would require the submission of a plan of compliance.

Insider Credit Transactions. Cascade Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders, or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparable transactions with persons not covered above and who are not employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Cascade Bank is also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent, or other person participating in the conduct of the affairs of Cascade Bank, the imposition of a cease and desist order, and other regulatory sanctions.

FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. Management of the Corporation believes that Cascade Bank meets all such standards, and therefore, does not believe that these regulatory standards materially affect the Corporation's business operations currently.

Loans to One Borrower.  Cascade Bank is subject to limitations on the aggregate amount of loans that it can make to any one borrower, including related entities. Applicable regulations generally limit loans to one borrower to 20% of unimpaired capital and surplus. At December 31, 2008, the Bank had no borrowers with balances in excess of the loans-to-one-borrower limit.

Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide interstate banking and branching under certain circumstances. This legislation generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Currently, bank holding companies may purchase banks in any state, and states may not prohibit such purchases. Additionally, banks are permitted to merge with banks in other states as long as the home state of neither merging bank has "opted out." The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. With regard to interstate bank mergers, Washington has "opted in" to the Interstate Act and allows in-state banks to merge with out-of-state banks subject to certain aging requirements. Washington law generally authorizes the acquisition of an in-state bank by an out-of-state bank or bank holding company through the acquisition of or a merger with a financial institution that has been in existence for at least 5 years prior to the acquisition.

Deposit Insurance. Effective until December 31, 2009, the limit on federal deposit insurance coverage is temporarily increased to $250,000 per depositor. On January 1, 2010, the limit will return to $100,000 per depositor and $250,000 for Individual Retirement Accounts through the Savings Association Insurance Fund (the "SAIF") administered by the FDIC. All insured banks are required to pay semi-annual deposit insurance premium assessments to the FDIC. The FDICIA included provisions to reform the Federal Deposit Insurance System, including the implementation of risk-based deposit insurance premiums. The FDICIA also permits the FDIC to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources, or for any other purpose the FDIC deems necessary. The FDIC has implemented a risk-based insurance premium system under which banks are assessed insurance premiums based on how much risk they present to the SAIF. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.

Dividends.  The principal source of the Corporation's revenue is dividends received from Cascade Bank. The payment of dividends is subject to government regulation, in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Other than the laws and

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regulations noted above, which apply to all banks and bank holding companies, neither the Corporation nor Cascade Bank is currently subject to any regulatory restrictions on its dividends.

Capital Adequacy.  Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. If capital falls below minimum guideline levels, the holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. The FDIC and FRB use risk-based capital guidelines for banks and bank holding companies. These are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the FRB has noted that bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimum. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I capital. Tier I capital for bank holding companies includes common shareholders' equity, certain qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less intangibles. At December 31, 2008, the Corporation had Tier 1 capital equal to $160.1 million or 10.3% of average total assets, which is $97.9 million above the minimum leverage requirement of 4% as in effect on that date.

The FDIC also employs a leverage ratio, which is Tier I capital as a percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines. The principal objective of the leverage ratio is to constrain the maximum degree to which a bank holding company may leverage its equity capital base. The FDIC requires a minimum leverage ratio of 3%. However, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, the FDIC expects an additional cushion of at least 1% to 2%.

FDICIA created a statutory framework of supervisory actions indexed to the capital level of the individual institution. Under regulations adopted by the FDIC, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio, together with certain subjective factors. Institutions which are deemed to be "undercapitalized" depending on the category to which they are assigned are subject to certain mandatory supervisory corrective actions. The Corporation does not believe that these regulations have any material effect on its operations currently.

Reference is made to Note 12 of the Notes to the Consolidated Financial Statements in the Annual Report, which is listed as an exhibit under Item 15, for additional information concerning regulatory capital.

The FDIC risk-based requirement requires financial institutions to have total capital of at least 8% of risk-weighted assets. Total capital consists of Tier I capital and supplementary capital.  Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as Tier I capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of Tier I capital.

In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset.  For example, prudently underwritten permanent one-to-four family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination, unless insured to such ratio by an insurer approved by FNMA or FHLMC, have been assigned a risk weight of 50%.

On December 31, 2008, the Bank had total risk-based capital of approximately $177.3 million, including $160.8 million in Tier I capital and $16.5 million in qualifying supplementary capital (the allowance for loan losses), and risk-weighted assets of $1.33 billion, or total capital of 13.32% of risk-weighted assets. This amount was $70.8 million above the 8% requirement in effect on that date.

FDIC capital requirements are designated as the minimum acceptable standards for banks whose overall financial condition is fundamentally sound.  The FDIC regulations state that if the FDIC determines that conditions so warrant, it may impose a greater capital standard on a particular institution.

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Management believes that the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, if circumstances were to materially and adversely impact the future earnings of the Bank, the ability of the Bank to meet its capital requirements could be impaired.

Prompt Corrective Action. Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based capital of not less than 4%, and a leverage ratio of not less than 4%.  Any institution which fails to meet these levels will be considered undercapitalized.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions, which become more extensive as an institution becomes more severely undercapitalized.  Failure by an institution to comply with applicable capital requirements will result in restrictions on their activities and lead to enforcement actions, including the issuance of a capital directive to ensure the maintenance of adequate capital levels.  Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.

At December 31, 2008, Cascade was a “well-capitalized” institution under the prompt corrective action regulations of the FDIC and the Federal Reserve Board.

TAXATION

Federal Taxation

The Corporation reports its income on a fiscal year basis using the accrual method of accounting and is subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly Cascade’s reserve for bad debts as discussed below.  In 2001, the Corporation’s fiscal year was changed to the calendar year.  The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Corporation.

Tax Bad Debt Reserves

The reserve method of accounting for bad debt reserves was repealed for tax years beginning after December 31, 1995. As a result, the Bank is no longer able to calculate its deduction for bad debts using the percentage-of-taxable-income method.  Instead, Cascade is required to compute its deduction based on specific charge-offs during the taxable year.

Distributions

To the extent that the Bank makes “non-dividend distributions” to the Corporation that are considered as made (i) from the reserve for losses as of June 30, 1988, or (ii) from the supplemental reserve for losses on loans (“Excess Distributions”), then an amount based on the amount distributed will be included in Cascade’s taxable income.  Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation.  However, dividends paid out of Cascade’s current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank’s bad debt reserve.  Thus, any dividends to the Corporation that would reduce amounts appropriated to the Bank’s bad debt reserve and deducted for federal income tax purposes would create a tax liability for Cascade.  The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution.  Thus, if Cascade makes a “non-dividend distribution,” then approximately one and one-half times the amount so used would be included in gross income for federal income tax purposes.

Dividends-Received Deduction and Other Matters

The Corporation may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.  The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Corporation and the Bank will not file a consolidated tax return, except that if the Corporation or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.

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Washington Tax

The Bank is subject to a business and occupation tax which is imposed under Washington law at the rate of 1.5% of gross receipts; however, interest received on loans secured by mortgages or deeds of trust on residential properties and interest on obligations issued or guaranteed by the United States are not presently subject to the tax.  On August 15, 1994, the Department of Revenue of the State of Washington began an audit of the Corporation’s records for compliance regarding the business and occupation tax. The Department of Revenue issued a tax billing for approximately $148,000 of which the Corporation had accrued $104,000 and paid $16,000. In December 2006, the Corporation settled with the State in the amount of $95,000.

Availability of Filings

       You may access, free of charge, copies of the following reports of the Corporation on the SEC’s website at www.sec.gov, or the Bank’s website at www.cascadebank.com:

 1) Annual Reports on Form 10-K; and

 2)   Quarterly Reports on Form 10-Q; and

 3)   Current Reports on Form 8-K.

These documents are generally posted within 24 hours after the Corporation files these documents electronically with the Securities and Exchange Commission.  The Corporation is also willing to provide electronic or paper copies of its filings upon reasonable request.

Item 1A.  Risk Factors

The Bank, like all financial institutions, is subject to a number of risks as it conducts its business. The Management Committee, consisting of the Bank’s senior officers, serves as the integrated body that oversees the management enterprise risk bank wide. Within each division, processes are in place to ensure risk is measured, monitored and managed within the parameters established by the relevant Bank policies and consistent with stated goals and strategies.

The discussion hereafter sets forth some of the more important risk factors that could affect our business, financial condition or results of operations. However, other factors, besides those discussed below or elsewhere in this or other of our reports filed with or furnished to the SEC, also could adversely affect our business or results. Cascade cannot assure you that the risk factors described below or elsewhere in this document are a complete set of all potential risks that it may face. These risk factors also serve to describe factors which may cause our results to differ materially from those described in forward-looking statements included herein or in other documents or statements that make reference to this report. See “Forward-Looking Statements.”

Current levels of market volatility are unprecedented.

The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system.

On Oct. 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (EESA) in response to the current crisis in the financial sector. The U.S. Department of the Treasury and banking regulators are implementing a number of programs under this legislation to address capital and liquidity issues in the banking system. There can be no assurance, however, as to the actual impact that the EESA will have on the financial markets, including the extreme levels of volatility and limited credit availability currently

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being experienced. The failure of the EESA to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect Cascade’s business, financial condition, results of operations, access to credit or the value of Cascade’s securities.

Cascade’s issuance of securities to the United States Treasury may limit our ability to return capital to shareholders and is dilutive to the holders of our common stock.

In connection with our sale of Series A Preferred to the U.S. Treasury, Cascade also issued to Treasury a warrant to purchase approximately 863,442 shares of our common stock. The terms of the transaction with Treasury will result in limitations on our ability to pay dividends and repurchase our shares. Until November 21, 2011 or until Treasury no longer holds any shares of the Series A Preferred, Cascade will not be able to increase dividends above current levels ($0.045 per share of common stock on a quarterly basis) nor repurchase any of our shares without Treasury approval, with limited exceptions, most significantly purchases in connection with benefit plans. In addition, we will not be able to pay any dividends at all on our common stock unless we are current on our dividend payments on the Series A Preferred. These restrictions, as well as the dilutive impact of the warrant, may have a negative effect on the market price of our common stock.

Unless Cascade is able to redeem the Series A Preferred prior to February 15, 2014, the cost of this capital will increase substantially on that date, from 5.00% (approximately $1.95 million annually) to 9.00% (approximately $3.16 million annually). Depending on our financial condition at the time, this increase in dividends on the Series A Preferred could have a negative effect on our liquidity.

Future offerings of debt, which would be senior to our common stock upon liquidation, and/or preferred equity securities which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources or, if our or our banking subsidiary’s capital ratios fall below the required minimums, we or our banking subsidiary could be forced to raise additional capital by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution.

You may not receive dividends on the common stock.

Holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically declared cash dividends on our common stock, we are not required to do so and our board of directors may reduce or eliminate our common stock dividend in the future. Further, the terms of the Series A Preferred limit our payment of dividends on common stock, as described above. This could adversely affect the market price of our common stock.

We may be required to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations.

We are experiencing increasing loan delinquencies and credit losses and we increased our provision for loan losses in 2008, which adversely affected our results of operations. If current adverse conditions in the housing and real estate markets and the economy continue, we expect that we will continue to experience higher than normal delinquencies and credit losses. Moreover, if a prolonged recession occurs we expect that it could severely impact economic conditions in our market areas and that we could experience significantly higher delinquencies and credit losses. As a result, we may be required to make further increases in our provision for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations. We may elect to make further increases in our provision for loan losses in the future, particularly if economic conditions continue to deteriorate, which also could have a material adverse effect on our financial condition and results of operations.

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Recent negative developments in the financial industry and credit markets may continue to adversely impact our financial condition and results of operations.

Negative developments in the sub-prime mortgage market and the securitization markets for such loans, and other factors, have resulted in uncertainty in the financial markets in general and a related general economic downturn. Many lending institutions, including us, have experienced substantial declines in the performance of their loans, including construction and land loans, multifamily loans, commercial loans and consumer loans. Moreover, competition among depository institutions for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many construction and land, commercial and multifamily and other commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. These conditions may have a material adverse effect on our financial condition and results of operations. In addition, as a result of the foregoing factors, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of formal enforcement orders. Negative developments in the financial industry and the impact of new legislation in response to those developments could restrict our business operations, including our ability to originate or sell loans, and adversely impact our results of operations and financial condition.

We may experience future goodwill impairment.

Recently, the Company’s common stock has been trading at a price below its book value, including goodwill and other intangible assets. The valuation of goodwill is determined using discounted cash flows of forecasted earnings, estimated sales price based on recent observable market transactions and market capitalization based on current stock price. If impairment was deemed to exist, a write down of the asset would occur with a charge to earnings.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Western Washington market in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect to raise additional capital. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Should we be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.

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If our allowance for loan losses is not sufficient to cover actual loan losses or if we are required to increase our provision for loan losses, our results of operations and financial condition could be materially adversely affected.

We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and the loss and delinquency experience, and evaluate economic conditions. If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses. Material additions to the allowance or increases in our provision for loan losses could have a material adverse effect on our financial condition and results of operations.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations.

Fluctuations in interest rates could reduce our profitability and affect the value of our assets.

Like other financial institutions, we are subject to interest rate risk, which is the primary market risk affecting our financial performance. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa. In addition, the individual market interest rates underlying our loan and deposit products (e.g., prime) may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, our earnings may be negatively affected. In addition, loan volume and quality and deposit volume and mix can be affected by market interest rates. Changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, origination volume and overall profitability. We currently believe that declining interest rates will adversely affect our results of operations.

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.

Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.

Our investment portfolio includes securities that are sensitive to interest rates and variations in interest rates may adversely impact our profitability.

Our securities portfolio includes securities which are insured or guaranteed by U.S. government agencies or government-sponsored enterprises, and other securities which are sensitive to interest rate fluctuations. The unrealized gains or losses in our available-for-sale portfolio are reported as a separate component of stockholders’ equity until realized upon sale. As a result, future interest rate fluctuations may impact stockholders’ equity, causing material fluctuations from quarter to quarter. Failure to hold our securities until maturity or until market conditions are favorable for a sale could adversely affect our financial condition, profitability and prospects.

Our ability to service our debt, pay dividends and otherwise pay our obligations as they come due is substantially dependent on capital distributions from Cascade Bank, and these distributions are subject to regulatory limits and other restrictions.

A substantial source of our income from which we service our debt, pay our obligations and from which we can pay dividends is the receipt of dividends from Cascade Bank. The availability of dividends from Cascade Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of Cascade Bank, and other factors, that the applicable regulatory authorities could assert that payment of dividends or other payments is an unsafe or unsound practice. If Cascade Bank is unable to pay dividends to us, we

29

may not be able to service our debt, pay our obligations or pay dividends on our common stock. The inability to receive dividends from Cascade Bank would adversely affect our business, financial condition, results of operations and prospects.

Cascade’s Controls and Procedures May Fail or be Circumvented.

Management regularly reviews and updates Cascade’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of Cascade’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Cascade’s financial condition and results of operations.

Cascade May be Required to Pay Significantly Higher Federal Deposit Insurance Corporation (FDIC) Premiums in the Future.

The Bank may be required to pay significantly higher FDIC insurance premiums due to the Bank’s participation in the FDIC’s Temporary Liquidity Guarantee Program and other EESA programs and because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. Any increase in insurance premiums will reduce the profitability of Cascade.

Cascade Continually Encounters Technological Change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Cascade’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in Cascade’s operations. Many of Cascade’s competitors have substantially greater resources to invest in technological improvements. Cascade may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on Cascade’s financial condition and results of operations.

Item 1B.  Unresolved Staff Comments

None

Item 2.  Properties

The Corporation owns nine full service branch locations and leases twelve full service locations. Owned offices range in size from 3,500 to 52,000 square feet and have a total net book value at December 31, 2008, including leasehold improvements, furniture and fixtures, of $15.5 million. The Corporation leases approximately 5% of its main office, approximately 25% of its Marysville office, and 50% of its Issaquah West office to non-affiliated parties.  See Note 5 of the Notes to the Consolidated Financial Statements contained in the Annual Report which is listed in Item 15.

Item 3.  Legal Proceedings

The Corporation is not engaged in any legal proceedings of a material nature at the present time.  Periodically, there have been various claims and lawsuits involving the Corporation and the Bank, principally as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Corporation’s business.  In the opinion of management and the Corporation’s legal counsel, no significant loss is expected from any of such pending claims or lawsuits.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Cascade Financial Corporation’s common stock is traded on the NASDAQ/Global Select Market under the symbol CASB. The table below indicates the high/low trading range of Cascade stock over the last eight quarters:  

Quarter Ended	High		Low
March 31, 2007	$	18.25	$	16.61
June 30, 2007		17.54		15.65
September 30, 2007		16.75		14.33
December 31, 2007		16.32		12.80
March 31, 2008	$	14.36	$	11.88
June 30, 2008		12.18		6.51
September 30, 2008		9.62		5.62
December 31, 2008		7.98		4.89

(b) Cascade Financial Corporation has two classes of stock outstanding, which are preferred and common stock.  On November 24, 2008, Cascade completed its $39 million capital raise as a participant in the U.S. Treasury Department’s Capital Purchase Program.  Under the terms of the transaction the company issued 38,970 shares of Series A Fixed-Rate Cumulative Perpetual Preferred Stock, and a warrant to purchase 863,442 shares of the company’s common stock at an exercise price of $6.77 per share.  At December 31, 2008, there were 12,071,032 common shares outstanding which were held of record by approximately 2,600 shareholders.  

(c) The Table below indicates the cash dividends paid on each share of its common stock for the past two years:

Quarter Ended	Dividend Declared		Record Date	Payment Date
December 2006	$	0.080	1/11/07	1/25/07
March 2007		0.080	4/11/07	4/25/07
June 2007		0.080	7/11/07	7/25/07
September 2007		0.090	10/10/07	10/24/07
December 2007	$	0.090	1/10/08	1/24/08
March 2008		0.090	4/11/08	4/23/08
June 2008		0.090	7/14/08	7/28/08
September 2008		0.045	10/15/08	10/29/08

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Issuer Purchases of Equity Securities
		2008 PLAN				Total Number		Maximum Number
						of Shares Purchased		of Shares that may
Period		Total Number		Average Price		as Part of Publicly		Yet be Purchased
Beginning	Ending	of Shares Purchased		Paid per Share		Announced Plan		Under the Plan (1)
June 1, 2008	June 30, 2008		-	$	-		-		300,000
July 1, 2008	July 31, 2008		-		-		-		300,000
August 1, 2008	August 31, 2008		-		-		-		300,000
September 1, 2008	September 30, 2008		-		-		-		300,000
October 1, 2008	October 31, 2008		-		-		-		300,000
November 1, 2008	November 30, 2008		-		-		-		300,000
December 1, 2008	December 31, 2008		-		-		-		300,000
Total			-	$	-		-		300,000
During the period presented there were no shares purchased.
1) In May 2008, the Corporation announced a new stock repurchase plan to purchase up to 300,000 shares of the Corporation’s stock. The Plan will expire on May 31, 2009.

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Shareholder Return Performance Graph

The following graph compares the Company's cumulative shareholder return on its common stock with the return on the NASDAQ Composite Index and a peer group of the NASDAQ's OTC Bank Index. Total return assumes (i) the reinvestment of all dividends and (ii) the value of the investment in the Company's common stock and each index was $100 at the close of trading on December 31, 2003.

	12/31/03		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08
Cascade Financial Corporation		100.00		97.01		91.59		110.10		87.72		34.96
NASDAQ Composite Index		100.00		108.57		110.08		120.56		132.39		78.72
NASDAQ Bank Index		100.00		110.99		106.18		118.34		91.85		69.88

Item 6.  Selected Financial Data

The information contained in the section entitled “Selected Financial Data” of the Annual Report listed in Item 15 is incorporated herein by reference.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report listed in Item 15 is incorporated herein by reference.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The information contained under the section captioned “Market Risk” in the Management’s Discussion and Analysis section of the Annual Report listed in Item 15 is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

The financial statements and supplementary data in the Annual Report listed in Item 15 is incorporated herein by reference.

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Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures:  An evaluation of the Corporation's disclosure controls and procedures (as defined in section 13(a) - 14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Corporation's Chief Executive Officer, Chief Financial Officer and several other members of the Corporation's senior management effective December 31, 2008. The Corporation's Chief Executive Officer and Chief

Financial Officer concluded that the Corporation's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s (“the SEC’s”) rules and forms.

(b)

Changes in Internal Controls: In the year ended December 31, 2008, the Corporation did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.

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

Limitations on the Effectiveness of Controls.  The Corporation's management does not expect that our disclosure controls or our internal controls will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of 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 the Corporation have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Management’s Report on Internal Control over Financial Reporting.  Management of Cascade Financial Corporation is responsible for preparing the Corporation’s annual financial statements. Management is also responsible for establishing and maintaining effective internal control over financial reporting presented in conformity with both accounting principles generally accepted in the United States of America and regulatory reporting in conformity with the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income (call report instructions). The Corporation’s internal controls contain monitoring mechanisms, and actions are taken to correct deficiencies identified.

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

34

It is also management’s responsibility to ensure satisfactory compliance with all designated laws and regulations, and in particular, those laws and regulations concerning loans to insiders and dividend restrictions.

Management assessed the Corporation’s internal control over financial reporting presented in conformity with both U.S. generally accepted accounting principles and call report instructions as of December 31, 2008. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2008, the Corporation maintained effective internal control over financial reporting presented in conformity with both accounting principles generally accepted in the United States of America and call report instructions.  Management also believes that there was satisfactory compliance during 2008 with the designated laws and regulations.

The Company’s registered public accounting firm has audited the Company’s consolidated financial statements as of and for the year ended December 31, 2008 that are included in this annual report and issued their Report of Independent Registered Public Accounting Firm, listed in Item 15, which includes an attestation report on the Company’s internal control over financial reporting. The attestation report expresses an unqualified opinion on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2008.

Item 9B.  Other Information

None.

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PART III

Item 10.  Directors, Executive Officers and Corporate Governance

The information contained under the section captioned “Proposal I--Election of Directors” contained in the Corporation’s Definitive Proxy Statement for the Corporation’s Annual Meeting of Stockholders (the “Proxy Statement”), is incorporated herein by reference.  Reference is made to the cover page of this report for information regarding compliance with Section 16(a) of the Exchange Act, and to the section therein captioned “COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT”.

The following table sets forth information with respect to the executive officers of the Corporation and the Bank.

Name	Age (a)	Position
Carol K. Nelson (b)	53	President, Chief Executive Officer and Director of Cascade Bank and Cascade Financial Corporation
Robert G. Disotell	54	Executive Vice President, Chief Credit Officer
Steven R. Erickson(b)	53	Executive Vice President, Real Estate Lending
Lars H. Johnson(b)	55	Executive Vice President, Chief Financial Officer
LeAnne M. Harrington	39	Executive Vice President, Chief Administrative Officer
Debbie E. McLeod	43	Executive Vice President, Retail Banking

(a)      At December 31, 2008.

(b)      Officer of the Corporation and Bank.

The principal occupation of each executive officer of the Corporation and Bank is set forth in the Proxy Statement or below. There are no family relationships among or between the executive officers listed above.

CAROL K. NELSON was appointed Chief Executive Officer of the Company commencing May 1, 2002.  She has served as President of the Company and President and Chief Executive Officer of the Bank since February 2001.  She was previously Senior Vice President and Northern Region Executive of Bank of America from 1996 to 2001.  Ms. Nelson holds a Bachelor’s degree in Business Finance and a Master’s degree in Business Administration from Seattle University.  Ms. Nelson serves on the Board of Directors of the Seattle Branch of the Federal Reserve Bank of San Francisco, the Washington Roundtable, the Washington State Major League Baseball Stadium Public Facilities District, Premera Blue Cross and the Washington Bankers Association where she recently concluded a successful year as chair.  She also serves as a Trustee for Seattle University.  In 2007, Ms. Nelson was appointed to chair the Governor’s Task Force on Homeowner Security.  Ms. Nelson serves as Vice Chair of the Company’s Executive Committee and as a member of the Bank’s Loan Committee.  She is a resident of Edmonds, Washington.

ROBERT G. DISOTELL has been employed by Cascade Bank since 1977 and has served as Executive Vice President of the Credit Administration Division and Chief Credit Officer since February 2001. He is responsible for managing Credit Underwriting, Special Assets, Loan Servicing and Credit Operations including overseeing the credit quality of the Bank’s loan portfolios.  Mr. Disotell has managed a variety of business groups in his tenure at Cascade, including Mortgage Banking, Secondary Marketing, Retail Banking, and Community Reinvestment Act (CRA) activities. Mr. Disotell is a resident of Arlington, Washington.

STEVEN R. ERICKSON is the Executive Vice President and Commercial Banking Executive for the Bank. He is responsible for managing commercial and income property lending and serves as the Assistant Secretary for the Corporation. Mr. Erickson joined Cascade in 1978. He is a member of the Board for Big Brothers and Big Sisters of Snohomish County, Advisory Board Member for Snohomish County’s Pre-Diversion Program, and past board member of the Boys and Girls Club of Snohomish County.  He is a resident of Marysville, Washington.

36

LARS H. JOHNSON is the Executive Vice President, Chief Financial Officer of the Bank and Corporation and also serves as the corporate secretary.  Mr. Johnson joined Cascade in April 2000.  Mr. Johnson has 33 years of financial management experience, including 16 years with the Federal Home Loan Bank of Seattle. He serves as Treasurer of the Downtown Everett Association. Mr. Johnson is a resident of Edmonds, Washington.

LEANNE M. HARRINGTON is the Executive Vice President and Chief Administrative Officer for the Bank.  She has 22 years of banking experience starting with Rainier Bank and Bank of America, where she served as Vice President and Region Service Manager. Ms. Harrington joined Cascade in February 2001. She is a 2006 graduate of Pacific Coast Banking School and a member of the Board for the Snohomish County Red Cross. Ms. Harrington is a resident of Everett, Washington.

DEBBIE E. McLEOD is Executive Vice President of Retail Banking for the Bank.  Ms. McLeod joined Cascade Bank in February 2001.  She has over 20 years of commercial banking experience and was previously Vice President and Northern Region Sales Manager for Bank of America. Ms. McLeod is the current Board Chair for United Way of Snohomish County and she serves on the Board of the United Way of Skagit County. Ms. McLeod resides in Burlington, Washington.

Item 11.  Executive Compensation

The information contained under the section captioned “Executive Compensation” in the Proxy Statement is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

(a)	Security Ownership of Certain Beneficial Owners Information required by this Item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
(b)	Security Ownership of Management The information required by this Item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” of the Proxy Statement.
(c)	Changes in Control

The Corporation is not aware of any arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the Corporation.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated herein by reference to the section captioned “Transactions with Management and Others” of the Proxy Statement.

Item 14.  Principal Accountant Fees and Services

The information required by this Item is incorporated herein by reference to the section captioned “INDEPENDENT AUDITORS” of the Proxy Statement.

37

PART IV

Item 15.  Exhibits, Financial Statement Schedules

(a)	(1)(2)	Reports of Independent Registered Public Accounting Firm Consolidated Financial Statements
		(a)	Consolidated Balance Sheets at December 31, 2008, and December 31, 2007.
		(b)	Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006.
		(c)	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006.
		(d)	Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006.
		(e)	Notes to Consolidated Financial Statements.

All schedules have been omitted, as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in the Annual Report.

Exhibit No.	Exhibit
3.1(i)	Articles of Incorporation of Cascade Financial Corporation (incorporated by reference to exhibit A to the definitive proxy statement filed on March 26, 2003 (File No. 000-25286)).
3.2(i)	Amendment to the Articles of Incorporation of Cascade Financial Corporation, including Statement of Designations for the Series A Preferred Stock (incorporated by reference to the registrant’s Form 8-K/A filed November 26, 2008 (File No. 000-25286)).
3.3(ii)	Bylaws of Cascade Financial Corporation (incorporated by reference to the registrant’s registration statement on Form S-4 filed March 31, 2004 (File No. 333-114087)).
3.4(ii)	Amendment to the Bylaws of Cascade Financial Corporation (incorporated by reference to the Corporation’s Form 8-K filed September 27, 2005 (File No. 0-25286)).
4.1	Form of Series A Preferred Stock Certificate (incorporated by reference to the Corporation’s Form 8-K/A filed November 26, 2008 (File No. 000-25286)).
4.2	Warrant to purchase 863,442 shares of Common Stock issued on November 21, 2008 (incorporated by reference to the registrant’s Form 8-K/A filed November 26, 2008 (File No. 000-25286)).
10.1	Cascade Financial Corporation 1994 Employee Stock Purchase Plan (Incorporated by reference to the Corporation’s Registration Statement on Form S-4 (File No. 33-83200)).
10.2	Cascade Financial Corporation 1992 Stock Option and Incentive Plan (Incorporated by reference to the Corporation’s Form 10-KSB for the period ending June 30, 1995).
10.3	Cascade Financial Corporation Employee Stock Ownership Plan (Incorporated by reference to the Corporation’s Annual Report on Form 10-KSB for the period ending June 30, 1995).
10.4	Cascade Financial Corporation 1997 Stock Option Plan (Incorporated by reference to Appendix E to the Prospectus included in the Corporation’s Registration Statement on Form S-4 (File No. 333-24203)).
10.5	Cascade Financial Corporation 1997 Elective Equity Plan. (Incorporated by reference to Exhibit 10.7 of the Corporation’s Form 10-K for the period ending December 31, 2001).
10.8	Cascade Bank Non-Qualified Deferred Compensation Plan dated February 1, 2008 (Incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed January 16, 2008 (File No. 000-25286)).
10.9	Letter Agreement, dated November 21, 2008, including Securities Purchase Agreement – Standard Terms, between the Company and the United States Department of the Treasury (Incorporated by reference to the Corporation’s Form 8-K/A filed November 26, 2008 (File No. 000-25286)).
10.10	Form of Agreement to Amend Compensation Agreements with Senior Executive Officer, executed by Carol K. Nelson, Lars H. Johnson, Robert G. Disotell, LeAnne M. Harrington, Debbie E. McLeod, and Steven R. Erickson (Incorporated by reference to the Corporation’s Form 8-K/A filed November 26, 2008 (File No. 000-25286)).
13	Cascade Financial Corporation December 31, 2008 Annual Report to Stockholders, including the Selected Financial Data and Management Discussion and Analysis.
21	Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm – Moss Adams LLP.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)   Reports on Form 8-K

On October 21, 2008, the Corporation filed a Form 8-K reporting an attached press release announcing earnings information for the third quarter ended December 31, 2008, under Items 2.02 and 9.01 of Form 8-K.

On September 9, 2008, the Corporation filed a Form 8-K announcing the potential loss on the Company’s investments in Fannie Mae and Freddie Mac preferred stock, under Items 8.01of Form 8-K.

On November 3, 2008, the Corporation filed a Form 8-K announcing preliminary approval from the U.S. Treasury Department to participate in its Capital Purchase Program under the Emergency Economic Stabilization Act of 2008, under Items 8.01 and 9.01 of Form 8-K.

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(b)   Reports on Form 8-K (continued)

On November 25, 2008, the Corporation filed a Form 8-K announcing that the company had completed its $39 million capital raise as a participant in the U.S. Department of the Treasury’s Capital Purchase Program, under Items 1.01, 3.02, 3.03, 5.02 and 5.03 of Form 8-K.

On November 26, 2008, the Corporation filed a Form 8-K/A amending the current report on Form 8-K reporting the Company’s participation in the U.S. Department of the Treasury’s Capital Purchase program which was filed on November 25, 2008 but inadvertently failed to attach the required exhibits, under Item 9.01of Form 8-K/A.

On December 19, 2008, the Corporation announced that the Company filed a shelf registration statement on Form S-3. The shelf registration statement, when declared effective by the SEC, registers the shares of series A preferred and the warrant the Company issued to the U.S. Treasury on November 21, 2008 for $38,970,000, and the 863,442 shares of common stock reserved for exercise of the warrant, and will allow the Company to raise up to $60 million of additional capital from time to time, through the sale of common stock, preferred stock, senior debt securities, subordinated debt securities, purchase contracts, units, warrants and rights, under Item 8.01 of Form S-3.

On January 27, 2009, the Corporation filed a Form 8-K reporting an attached press release announcing earnings information for the fourth quarter ended December 31, 2008, under Items 2.02 and 9.01 of Form 8-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CASCADE FINANCIAL CORPORATION
Date:  March 12, 2009	By:	/s/ Carol K. Nelson
		Carol K. Nelson
		President and Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:	/s/ Lars H. Johnson	By:	/s/ D. R. Murphy
	Lars H. Johnson Executive Vice President (Chief Financial Officer)		D. R. Murphy Chairman
Date:	March 12, 2009	Date:	March 12, 2009
By:	/s/ David W. Duce	By:	/s/ Ronald E Thompson
	David W. Duce Director		Ronald E. Thompson Director
Date:	March 12, 2009	Date:	March 12, 2009
By:	/s/ Janice Halladay	By:	/s/ G. Brandt Westover
	Janice Halladay Director		G. Brandt Westover Director
Date:	March 12, 2009	Date:	March 12, 2009
By:	/s/ Craig Skotdal	By:	/s/ Dwayne Lane
	Craig Skotdal Director		Dwayne Lane Director
Date:	March 12, 2009	Date:	March 12, 2009
By:	/s/ David O’Connor	By:	/s/ Richard Anderson
	David O’Connor Director		Richard Anderson Director
Date:	March 12, 2009	Date:	March 12, 2009
By:	/s/ Katherine M. Lombardo	By:	/s/ Jim Gaffney
	Katherine M. Lombardo Director		Jim Gaffney Director
Date:	March 12, 2009	Date:	March 12, 2009

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