Cascade Financial (CASB) 10-Q 2010 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2010

OR

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

Commission file number 0-25286

CASCADE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

Indicate by 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 ninety days. Yes þ     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ    No ¨

Indicate by check mark whether the registrant is a “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer”, or a “smaller reporting company”. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨    Accelerated Filer ¨    Non-Accelerated Filer þ   Smaller Reporting Company ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of May 7, 2010
Common Stock ($.01 par value)		12,271,529

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CASCADE FINANCIAL CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2010

INDEX

		PAGE
PART I — Financial Information:
Item 1	— Financial Statements:
	— Consolidated Balance Sheets	3
	— Consolidated Statements of Operations	4
	— Consolidated Statements of Stockholders’ Equity	6
	— Consolidated Statements of Comprehensive Loss	7
	— Consolidated Statements of Cash Flows	8
	— Notes to Consolidated Financial Statements	10
Item 2	— Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3	— Quantitative and Qualitative Disclosures about Market Risk	54
Item 4	— Controls and Procedures	56
PART II — Other Information:
Item 1	— Legal Proceedings	57
Item 1A	— Risk Factors	57
Item 2	— Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3	— Defaults Upon Senior Securities	57
Item 4	— (Removed & Reserved)	57
Item 5	— Other Information	57
Item 6	— Exhibits	58
	— Signatures	59

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PART I –– FINANCIAL INFORMATION

Item 1 – Financial Statements

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share and per share amounts)	March 31, 2010		December 31, 2009
Assets
Cash on hand and in banks	$	4,371	$	4,008
Interest-earning deposits in other institutions		152,440		141,587
Securities available-for-sale, fair value		247,240		227,805
Securities held-to-maturity, amortized cost		32,956		36,177
Federal Home Loan Bank (FHLB) stock		11,920		11,920
Loans, net		1,126,103		1,173,213
Goodwill		12,885		12,885
Premises and equipment, net		14,268		14,526
Cash surrender value of bank-owned life insurance (BOLI)		24,759		24,522
Real estate owned (REO)		27,394		18,842
Prepaid FDIC insurance premiums		6,071		6,859
Federal income tax receivable		13,420		12,538
Accrued interest receivable and other assets		16,434		19,746
Total Assets	$	1,690,261	$	1,704,628
Liabilities
Deposits	$	1,172,258	$	1,139,774
FHLB advances		239,000		239,000
Federal Reserve Bank (FRB) Term Auction Facility (TAF) borrowing		-		20,000
Securities sold under agreements to repurchase		146,065		145,410
Junior subordinated debentures		15,465		15,465
Junior subordinated debentures, fair value		3,341		3,341
Accrued interest payable, expenses and other liabilities		9,879		7,188
Total Liabilities		1,586,008		1,570,178
Commitments and contingencies (Note 14)
Stockholders’ Equity
Preferred stock, no par value, authorized 38,970 shares; Series A (liquidation preference $1,000 per share); issued and outstanding 38,970 at March 31, 2010, and December 31, 2009		37,150		37,038
Preferred stock, $.01 par value, authorized 500,000 shares; no shares issued or outstanding		-		-
Common stock, $.01 par value, authorized 25,000,000 shares; issued and outstanding 12,171,529 shares at March 31, 2010, and 12,146,080 shares at December 31, 2009		122		121
Additional paid-in capital		43,719		43,649
Retained earnings, substantially restricted		22,047		54,797
Accumulated other comprehensive gain (loss), net of tax		1,215		(1,155	)
Total Stockholders’ Equity		104,253		134,450
Total Liabilities and Stockholders’ Equity	$	1,690,261	$	1,704,628

See notes to consolidated financial statements

3

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands, except share and per share amounts)	2010			2009
Interest income
Loans, including fees	$	16,166		$	18,215
Securities available-for-sale		2,472			1,875
Securities held-to-maturity		417			1,310
Interest-earning deposits		76			10
Total interest income		19,131			21,410
Interest expense
Deposits		4,251			4,956
FHLB advances		2,565			2,656
FRB TAF borrowing		2			46
Securities sold under agreements to repurchase		2,131			2,103
Junior subordinated debentures		495			530
Total interest expense		9,444			10,291
Net interest income		9,687			11,119
Provision for loan losses		31,290			13,875
Net interest loss after provision for loan losses		(21,603	)		(2,756	)
Other income
Checking service fees		1,263			1,112
Other service fees		233			249
Increase in cash surrender value of BOLI		237			222
Net gain on sales/calls of securities available-for-sale		25			-
Net gain on calls of securities held-to-maturity		3			118
Gain on sale of loans		26			39
Net gain on fair value of financial instruments		-			1,790
Other		125			117
Total other income		1,912			3,647
Other expenses
Salaries and employee benefits		3,682			3,605
Occupancy		1,014			1,049
FDIC insurance premiums		853			391
REO and real estate in acquisition (REA)		296			9
Writedowns, net of gain (loss) on sales of REO		698			54
Other insurance premiums		376			63
B&O tax		263			294
Other-than-temporary impairment (OTTI)		-			858
Other		2,055			2,287
Total other expenses		9,237			8,610
Loss before provision (benefit) for federal income taxes		(28,928	)		(7,719	)
Provision (benefit) for federal income taxes		3,211			(2,902	)
Net loss		(32,139	)		(4,817	)
Dividends on preferred stock		499			482
Accretion of issuance discount on preferred stock		112			105
Net loss attributable to common stockholders	$	(32,750	)	$	(5,404	)

See notes to consolidated financial statements

4

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands, except share and per share amounts)	2010			2009
Net loss per common share, basic	$	(2.69	)	$	(0.45	)
Weighted average number of common shares outstanding, basic		12,165,167			12,100,584
Net loss per common share, diluted	$	(2.69	)	$	(0.45	)
Weighted average number of common shares outstanding, diluted		12,165,167			12,100,584
Dividends declared per common share	$	0.00		$	0.01

See notes to consolidated financial statements

5

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share amounts)	Preferred		Common Stock				Additional Paid-in		Retained			Accumulated Other Comprehensive			Total Stockholders’
	Stock		Shares		Amount		Capital		Earnings			Gain (Loss), Net			Equity
Balances at December 31, 2008	$	36,616		12,071,032	$	121	$	43,293	$	80,752		$	(660	)	$	160,122
Dividends declared -
Common stock ($0.01 per share)		-		-		-		-		(122	)		-			(122	)
Preferred stock ($49.86 per share)		-		-		-		-		(1,943	)		-			(1,943	)
Stock award plan		-		75,048		-		209		-			-			209
Tax benefit from stock-based compensation		-		-		-		4		-			-			4
Stock compensation expense		-		-		-		143		-			-			143
Net loss		-		-		-		-		(23,468	)		-			(23,468	)
Accretion of discount on preferred stock		422		-		-		-		(422	)		-			-
Other comprehensive loss, net of tax benefit of $(266)		-		-		-		-		-			(495	)		(495	)
Balances at December 31, 2009	$	37,038		12,146,080	$	121	$	43,649	$	54,797		$	(1,155	)	$	134,450
Dividends declared -
Preferred stock ($12.80 per share)		-		-		-		-		(499	)		-			(499	)
Stock award plan		-		25,449		1		54		-			-			55
Stock compensation expense		-		-		-		16		-			-			16
Net loss		-		-		-		-		(32,139	)		-			(32,139	)
Accretion of discount on preferred stock		112		-		-		-		(112	)		-			-
Other comprehensive loss, net of tax benefit of $1,276		-		-		-		-		-			2,370			2,370
Balances at March 31, 2010	$	37,150		12,171,529	$	122	$	43,719	$	22,047		$	1,215		$	104,253

See notes to consolidated financial statements

6

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands, except share and per share amounts)	2010			2009
Net loss	$	(32,139	)	$	(4,817	)
Unrealized gain on securities available-for-sale, net of tax provision of $1,267 and $682 for the three months ended March 31, 2010, and 2009, respectively.		2,354			1,266
Reclassification adjustment for gains on securities included in net income, net of tax provision of $9 and $0 for the three months ended March 31, 2010, and 2009, respectively.		16			-
Comprehensive Loss	$	(29,769	)	$	(3,551	)

See notes to consolidated financial statements

7

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands)	2010			2009
Cash flows from operating activities:
Net loss	$	(32,139	)	$	(4,817	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		515			564
Provision for losses on loans		31,290			13,875
REO write-downs		706			54
Increase in cash surrender value of BOLI		(237	)		(222	)
Amortization of retained servicing rights		6			8
Amortization of core deposit intangible		35			35
Net change in deferred tax asset		(9,861	)		(2,838	)
Deferred loan fees, net of amortization		297			(295	)
Gain on sale of loans		(26	)		(39	)
Stock award plan compensation		55			132
Stock-based compensation		16			61
Excess tax benefit from stock-based payments		-			(4	)
Net change in fair value of financial instruments		-			(1,790	)
Net gain on sales/calls of securities available-for-sale		(25	)		-
Net gain on calls of securities held-to-maturity		(3	)		(118	)
Net gain on sales of REO		(8	)		-
Other-than-temporary impairment on investments		-			858
Net change in accrued interest receivable and other assets		11,761			488
Net change in accrued interest payable, expenses and other liabilities		1,887			(1,782	)
Net cash provided by operating activities		4,269			4,170
Cash flows from investing activities:
Loans originated, net of principal repayments		4,349			(5,582	)
Purchases of securities available-for-sale		(50,015	)		(78,011	)
Proceeds from sales/calls of securities available-for-sale		28,203			3,750
Principal repayments on securities available-for-sale		6,049			2,639
Purchases of securities held-to-maturity		(7,663	)		-
Proceeds from calls of securities held-to-maturity		10,000			43,500
Principal repayments on securities held-to-maturity		887			1,017
Purchases of premises and equipment		(257	)		(515	)
Proceeds from sales/retirements of REO		2,920			-
REO capital improvements		(970	)		-
Change in Community Reinvestment Act (CRA) investment		(23	)		(500	)
Net cash used in investing activities		(6,520	)		(33,702	)
Subtotal, carried forward	$	(2,251	)	$	(29,532	)

See notes to consolidated financial statements

8

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands)	2010			2009
Subtotal, brought forward	$	(2,251	)	$	(29,532	)
Cash flows from financing activities:
Dividends paid on common stock		-			(543	)
Dividends paid on preferred stock		-			(455	)
Excess tax benefits from stock-based payments		-			4
Net increase in deposits		32,484			8,581
Net increase in securities sold under agreements to repurchase		655			105
Net (decrease) increase in Federal Reserve TAF borrowing		(20,000	)		20,000
Net increase in advance payments by borrowers for taxes and insurance		328			807
Net cash provided by financing activities		13,467			28,499
Net increase (decrease) in cash and cash equivalents		11,216			(1,033	)
Cash and cash equivalents at beginning of period		145,595			53,466
Cash and cash equivalents at end of period	$	156,811		$	52,433
Supplemental disclosures of cash flow information—cash paid during the period for:
Interest	$	9,087		$	10,587
Income taxes		-			350
Supplemental schedule of non-cash investing activities:
Change in unrealized gain on securities available-for-sale, net of tax		(2,370	)		(1,266	)
Dividends accrued on common stock		-			121
Dividends accrued on preferred stock		499			244
Loans transferred to REO		11,200			7,690

See notes to consolidated financial statements

9

CASCADE FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(Unaudited)

Note 1 - Presentation of Financial Information

The accompanying financial information is unaudited and has been prepared from the consolidated financial statements of Cascade Financial Corporation (Corporation), and its operating subsidiary, Cascade Bank (Cascade or the Bank). All significant intercompany balances have been eliminated in the consolidation. In the opinion of management, the financial information reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial condition, results of operations, and cash flows of the Corporation pursuant to the requirements of the SEC for interim reporting. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Certain information and footnote disclosures included in the Corporation’s financial statements for the year ended December 31, 2009, have been condensed or omitted from this report. Accordingly, these statements should be read in conjunction with the financial statements and notes thereto included in the Corporation’s December 31, 2009 Annual Report on Form 10-K.

The Financial Accounting Standards Board’s (FASB’s) Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became the FASB’s officially recognized source of authoritative Generally Accepted Accounting Principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Note 2 - Recently Issued Accounting Standards

As discussed in Note 1 – Presentation of Financial Information, on July 1, 2009, the ASC became FASB’s officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

In June 2009, the FASB issued new authoritative guidance under SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167). Under FASB’s Codification at ASC 105-10-65-1-d, SFAS 167 will remain authoritative until integrated into the FASB Codification. SFAS 167 amends FIN 46 (Revised December 2003), “Consolidation of Variable Interest Entities,” to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.

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The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. SFAS 167 was effective January 1, 2010 and did not have a significant impact on the Corporation’s consolidated financial statements.

In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2009-16, Transfer and Servicing (Topic 860) – Accounting for Transfers of Financial Assets (ASU 09-16)which amendsASC 860-10, Transfers and Servicing-Overall (ASC 860-10) and adds transition paragraphs 860-10-65-3 of ASC 860-10. ASC 860-10requires more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. ASC 860-10 is effective at the start of a Corporation’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of ASC 860-10 did not have a material impact on the Corporation’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements (ASU 10-06). ASU 10-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Corporation’s disclosures about fair value measurements are presented in Note 13: Fair Value Measurements. These new disclosure requirements were adopted by the Corporation during the current period, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. With respect to the portions of this ASU that were adopted during the current period, the adoption of this standard did not have a material impact on the Corporation’s consolidated financial statements. Management does not believe that the adoption of the remaining portion of this ASU will have a material impact on the Corporation’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505) – Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. This update codifies the consensus reached in EITF Issue No. 09-E, “Accounting for Stock Dividends, Including Distributions to Shareholders with Components of Stock and Cash.” This update

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is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The implementation of this standard did not have a material impact on the Corporation’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements. The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements. Removal of the disclosure requirement is not expected to affect the nature or timing of subsequent events evaluations performed by the Corporation. This ASU became effective upon issuance.

Note 3 - Investment Securities

The following table presents the amortized cost, unrealized gains, unrealized losses and fair value of available-for-sale and held-to-maturity securities at March 31, 2010, and December 31, 2009.

	March 31, 2010
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Mortgage-backed securities	$	34,996	$	763	$	(191	)	$	35,568
Agency notes & bonds		210,374		1,871		(573	)		211,672
Total	$	245,370	$	2,634	$	(764	)	$	247,240
Securities held-to-maturity
Mortgage-backed securities	$	22,181	$	595	$	(85	)	$	22,691
Agency notes & bonds		10,000		12		-			10,012
Corporate/other		775		-		-			775
Total	$	32,956	$	607	$	(85	)	$	33,478
	December 31, 2009
(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available-for-sale
Mortgage-backed securities	$	40,997	$	729	$	(446	)	$	41,280
Agency notes & bonds		188,585		88		(2,148	)		186,525
Total	$	229,582	$	817	$	(2,594	)	$	227,805
Securities held-to-maturity
Mortgage-backed securities	$	15,405	$	504	$	-		$	15,909
Agency notes & bonds		19,997		-		(187	)		19,810
Corporate/other		775		-		-			775
Total	$	36,177	$	504	$	(187	)	$	36,494

The amortized cost and estimated fair value of investment securities are shown in the following table by contractual or expected maturity at March 31, 2010. During certain interest rate environments, some, or all, of these securities may be called for redemption by their issuers prior to the scheduled maturities. Further, maturities within the mortgage-backed securities portfolio may differ from scheduled and contractual maturities because the mortgages underlying the securities may be called for redemption or repaid without

12

penalty. Therefore, these securities are not included in the maturity categories in the following maturity summary. Fair value of the securities was determined using quoted market prices.

	March 31, 2010
(Dollars in thousands)	Amortized Cost		Fair Value		Yield
Securities available-for-sale
Due less than one year	$	10,014	$	10,025		3.00	%
Due after one through five years		29,982		29,687		3.39
Due after five through ten years		170,335		171,917		4.15
Due after ten years		43		43		-
Subtotal		210,374		211,672		3.99
Mortgage-backed securities		34,996		35,568		4.82
Total	$	245,370	$	247,240		4.11	%
Securities held-to-maturity
Due less than one year	$	10,000	$	10,012		4.00	%
Due after ten years		775		775		-
Subtotal		10,775		10,787		4.00
Mortgage-backed securities		22,181		22,691		4.60
Total	$	32,956	$	33,478		4.42	%

The following table presents gross unrealized losses and fair value of available-for-sale and held-to-maturity securities at March 31, 2010, and December 31, 2009.

	March 31, 2010
	Fair Value		Gross Unrealized Losses Less Than 1 Year			Fair Value		Gross Unrealized Losses More Than 1 Year			TOTAL
(Dollars in thousands)											Fair Value		Unrealized  Losses
Securities available-for-sale
Mortgage-backed securities	$	16,701	$	(162	)	$	2,253	$	(29	)	$	18,954	$	(191	)
Agency notes & bonds		46,641		(360	)		9,769		(213	)		56,410		(573	)
Total	$	63,342	$	(522	)	$	12,022	$	(242	)	$	75,364	$	(764	)
Securities held-to-maturity
Mortgage-backed securities	$	7,776	$	(85	)	$	-	$	-		$	7,776	$	(85	)
Total	$	7,776	$	(85	)	$	-	$	-		$	7,776	$	(85	)
	December 31, 2009
	Fair Value		Gross Unrealized Losses Less Than 1 Year			Fair Value		Gross Unrealized Losses More Than 1 Year			TOTAL
(Dollars in thousands)											Fair Value		Unrealized Losses
Securities available-for-sale
Mortgage-backed securities	$	16,828	$	(375	)	$	3,597	$	(71	)	$	20,425	$	(446	)
Agency notes & bonds		140,981		(2,148	)		-		-			140,981		(2,148	)
Total	$	157,809	$	(2,523	)	$	3,597	$	(71	)	$	161,406	$	(2,594	)
Securities held-to-maturity
Agency notes & bonds	$	19,810	$	(187	)	$	-	$	-		$	19,810	$	(187	)
Total	$	19,810	$	(187	)	$	-	$	-		$	19,810	$	(187	)

At March 31, 2010, the Bank had one agency and four mortgage-backed securities in its available-for-sale portfolio with a fair value of $12.0 million that had an unrealized loss greater than one year of $242,000 and none in the held-to-maturity securities. As of December 31, 2009, the Bank had seventeen available-for-sale and four held-to-maturity securities considered to be temporarily impaired due to being in a loss position more than twelve months. The temporary impairment was less than 3% of the total book value of investments. Temporarily impaired securities are the result of changes in market interest rates or an increase in credit spreads and are expected to regain their value as the securities near maturity

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and/or market rates decline; other-than-temporarily impaired securities are the result of an actual or probable contractual failure by the issuer, are not expected to fully recover in price and the impaired amounts are considered not collectible. Management reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI), taking into consideration current market conditions; fair value in relationship to cost; extent and nature of the change in fair value; issuer rating changes and trends; whether management intends to sell a security or if it is likely that the Bank will be required to sell the security before recovery of the amortized cost basis of the investment, which may be upon maturity; and other factors. For debt securities, if management intends to sell the security or it is likely that the Bank will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If management does not intend to sell the security and it is not likely that the Bank will be required to sell the security, but management does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings.

Securities shown above having fair values less than amortized cost and containing unrealized losses are evaluated periodically by the Corporation for other-than-temporary impairment. In this analysis, the Corporation determined that the decline in value is temporary and is related to the change in market interest rates since purchase. All investment securities are rated AAA for credit quality by at least one major rating agency. The decline in value is not related to any company or industry specific event. The Corporation anticipates full recovery of par value with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment

Prior to June 30, 2009, the Corporation owned preferred shares issued by Fannie Mae (FNMA) with a par value of $10.0 million and Freddie Mac (FHLMC) with a par value of $10.0 million. On September 7, 2008, the Federal Housing Finance Agency (FHFA) announced it was placing Fannie Mae and Freddie Mac under conservatorship and would eliminate dividends on Fannie Mae and Freddie Mac common and preferred stock. The Corporation recorded a pre-tax impairment charge of $17.3 million, resulting in a charge of $11.3 million, net of taxes, to third quarter 2008 earnings. At March 31, 2009, the Corporation adjusted the value of these securities from $1.3 million to $436,000, which resulted in an additional charge of $858,000 taken in the first quarter of 2009. During the second quarter of 2009, these preferred shares of Fannie Mae and Freddie Mac were sold for an aggregate amount of $425,000, which resulted in an additional loss of $11,000.

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Note 4 - Loans

The following summary reflects the Bank’s loan portfolio, by business line, as of the dates indicated:

(Dollars in thousands)	March 31, 2010			December 31, 2009
Business	$	457,426		$	469,196
R/E construction(1)		205,401			256,917
Commercial R/E		183,027			183,286
Multifamily		89,920			82,418
Home equity/consumer		31,274			31,738
Residential(2)		188,930			179,133
Total loans	$	1,155,978		$	1,202,688
Deferred loan fees		(3,872	)		(3,575	)
Allowance for loan losses		(26,003	)		(25,900	)
Loans, net	$	1,126,103		$	1,173,213

(1)      Real estate construction loans are net of loans in process.

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

The following table presents the activity related to the allowance for loan losses for the periods presented:

	Three Months Ended
(Dollars in thousands)	March 31, 2010			March 31, 2009
Beginning balance	$	25,900		$	16,439
Charge-offs		(31,269	)		(5,323	)
Recoveries		82			24
Provision for losses		31,290			13,875
Off-balance sheet commitments		-			5
Ending balance	$	26,003		$	25,020

The following tables show information on impaired loans:

(Dollars in thousands)	March 31, 2010		December 31, 2009
Impaired loans(1)	$	176,143	$	183,739
Allowance for loan losses related to impaired loans	$	6,924	$	6,422
Total nonperforming loans		96,719		106,096
Total loans past-due ninety days or more and still accruing		309		247
Performing restructured loans		25,763		26,635
(1 Impaired loans as of 3/31/10 are net of charge-offs totaling $38.6 million.

At March 31, 2010 and December 31, 2009, impaired loans totaled $176.1 million and $183.7 million, respectively. Included in the $176.1 million in impaired loans at March 31, 2010, are $96.7 million in nonperforming loans and $79.4 million in loans that are performing. Performing impaired loans include $25.8 million in loans that have been designated as troubled debt restructures and are performing as agreed under the restructured notes, and $53.6 million in loans that are current with respect to both interest and principal, and have sufficient collateral support.

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The principal balance on loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties was $44.9 million and $51.9 million at March 31, 2010 and December 31, 2009, respectively. These restructured loan amounts have been included in the impaired loan totals noted above. Restructured loans totaling $25.8 million and $26.6 million at March 31, 2010 and December 31, 2009, respectively, were current in their payments and accruing interest.

Note 5 - Real Estate Owned

The following table presents REO for the periods presented:

	Three Months Ended
(Dollars  in thousands)	March 31, 2010			March 31, 2009
Beginning balance	$	18,842		$	1,446
Loans transferred to REO		11,200			7,690
Capitalized improvements		970			-
Sales		(2,912	)		-
Write-downs		(706	)		(54	)
Ending balance	$	27,394		$	9,082

Note 6 - Goodwill

At March 31, 2010, the Corporation had $12.9 million in goodwill as a result of a business combination. Beginning in 2009, the Corporation engaged an independent valuation consultant to assist in determining whether, and to what extent, its goodwill asset was impaired. Goodwill impairment valuations have been performed for three of the last four quarters including the quarter ending March 31, 2010.  The goodwill impairment test included two steps. Step one, used to identify potential impairment, compared to the estimated fair value of the Corporation with its carrying amount including goodwill. Step one inputs used to determine the implied fair value of the Corporation included the quoted market price of Cascade’s common stock, market prices of common stocks of other banking organizations, common stock trading multiples and inputs from comparable transactions. Discounted cash flows were used in the two prior goodwill impairment valuations but were not used in the current analysis due to uncertainty about the Bank’s earnings this year.   If the estimated fair value exceeds its carrying amount, goodwill is considered not to be impaired. If the carrying amount exceeds its estimated fair value, the second step of a goodwill impairment test is performed to measure the amount of impairment loss, if any.

The independent valuation consultant determined in each test that the carrying amount exceeded the estimated fair value of the Corporation and the second step of the goodwill impairment test was performed. Step two of the goodwill impairment test compared the implied estimated fair value of goodwill with the carrying amount of the currently recorded goodwill. If the carrying amount of goodwill exceeds the implied fair value of the recorded goodwill, an impairment charge is taken in an amount equal to that excess. The goodwill impairment test performed during the second quarter in 2009 showed that, as a result of the significant decline in Cascade’s stock price and market capitalization over the course of 2009, and in conjunction with similar declines in the value of most financial institutions and the ongoing disruption in related financial markets, management determined that the Corporation’s goodwill was impaired. As a result of the impairment analysis, the Corporation reduced the carrying value of goodwill in our Consolidated Balance Sheet by

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recording an $11.7 million write-down in the second quarter which reduced the Bank’s December 31, 2008 goodwill balance of $24.6 million to $12.9 million. The write-down of goodwill was a non-cash charge that did not affect the Corporation’s or the Bank’s liquidity or operations. Also, since goodwill is excluded from regulatory capital calculations, the impairment charge (which was not deductible for tax purposes) did not have an adverse effect on the regulatory capital ratios of the Corporation or the Bank. There was no goodwill impairment noted in the fourth quarter of 2009 or the first quarter of 2010 goodwill impairment tests. The goodwill impairment test performed during the last two quarters concluded that the fair value of the reporting unit exceeded its carrying value. There are many assumptions and estimates underlying the determination of whether goodwill has been impaired. Future events could cause management to conclude that the Corporation’s goodwill has become further impaired which would result in the Corporation recording an additional impairment loss.

Note 7 – Junior Subordinated Debentures

On March 1, 2000, $10.3 million of 11.0% junior subordinated debentures were issued by Cascade Capital Trust I, a wholly owned business trust whose common equity is 100% owned by Cascade Financial Corporation. The Trust exists for the exclusive purpose of issuing and selling 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. The junior subordinated debentures will mature on March 1, 2030, unless redeemed prior to such date if certain conditions are met.

On December 15, 2004, the Corporation issued $5.2 million in junior subordinated debentures, as Cascade Capital Trust II. These debentures had a fixed coupon of 5.82% for the first five years and as of January 7, 2010 float at the three-month LIBOR plus 1.90% for the remaining twenty-five years. The debentures were callable at par after the first five years.

On March 30, 2006, the Corporation issued an additional $10.3 million in junior subordinated debentures, as Cascade Capital Trust III. These debentures have a fixed coupon of 6.65% for the first five years and then float, if not called, at the three-month LIBOR plus 1.40% for the remaining twenty-five years.

The junior subordinated debentures issued under Cascade Capital Trusts II and III incorporate the same structure, for the same purposes as Cascade Capital Trust I. All of the above debentures are considered Tier 1 capital for regulatory purposes.

The Corporation applied fair value accounting to the junior subordinated debentures issued by Cascade Capital Trust I.  The change in fair market value of the junior subordinated debentures is recorded as a component of other income. The Corporation determines the fair value by using a model, primarily through establishing a discount rate. The rate is based upon the rate of 20 year T-notes (the approximate remaining maturity), plus a credit spread developed by reviewing a number of other issues via Bloomberg analytics; an awareness of where the junior subordinated debentures are currently trading in the market; and a liquidity premium of 500 basis points due to the size of the Corporation and the issue. As with similar bonds, the bonds are assumed to be outstanding until maturity. The valuation is considered a Level 3 measurement. The fair value option was not selected for the remaining variable rate junior subordinated debentures totaling $15.5 million. For the three months ended March 31, 2010, there was no change in the fair value of the junior subordinated debentures, as compared to December 31, 2009.

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On November 5, 2009, the Board of Directors elected to defer payments due on these instruments. Under the terms of each instrument deferral of payments are permitted without triggering an event of default. Generally, during any deferral period, the Corporation is prohibited from paying any dividends or distributions on, or redeem, purchase or acquire, or make a liquidation payment with respect to the Corporation’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Corporation that rank pari passu in all respects with, or junior to, the specific instrument. In addition, during any deferral period, interest on the trust preferred securities is compounded from the date such interest would have been payable.

Note 8 - Income Taxes

Cascade uses an estimate of future earnings, an evaluation of its loss carryback ability and tax planning strategies to determine whether or not the benefit of its net deferred tax asset will be realized. At March 31, 2010, Cascade assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. Cascade determined that the negative evidence associated with cumulative losses, the expectation of entering into a Consent Order (see Note 11 for more information regarding the Consent Order) with its regulators, and continued credit deterioration in its loan portfolio outweighed the positive evidence. Therefore, Cascade established a valuation allowance of $13.6 million against its deferred tax asset. At March 31, 2010, Cascade has recorded a $13.4 million income tax receivable which represents refunds of taxes that will be realized in the current year through loss carrybacks to prior tax years. 

Note 9 - Loss per Common Share

The following table presents the computation of basic and diluted net loss per common share for the periods indicated:

	Three Months Ended March 31,
(dollars in thousands ,except share and per share amounts)	2010			2009
Numerator:
Net loss	$	(32,139	)	$	(4,817	)
Less dividends on preferred stock		499			482
Less accretion of issuance discount on preferred stock		112			105
Net loss attributable to common stockholders	$	(32,750	)	$	(5,404	)
Denominator:
Weighted average number of common shares outstanding, basic		12,165,167			12,100,584
Effect of dilutive stock options		-			-
Weighted average number of  common shares outstanding, diluted		12,165,167			12,100,584
Loss per common share, basic	$	(2.69	)	$	(0.45	)
Loss per common share, diluted	$	(2.69	)	$	(0.45	)

For the three months ended March 31, 2010, and 2009, there were anti-dilutive options to purchase 623,950 and 656,883 shares, respectively, excluded from the above calculation.

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Note 10 - Stockholders’ Equity

(a) U.S. Treasury Department’s Capital Purchase Program – TARP

In response to the financial crises affecting the banking system and financial markets, the Emergency Economic Stabilization Act of 2008 (the “Act”) was enacted on October 3, 2008. In conjunction with the Act and the Troubled Asset Relief Program (TARP), the U.S. Treasury Department announced the voluntary Capital Purchase Program (CPP) to provide capital to financial institutions in the United States. Under the program the Treasury was authorized to purchase up to $250 billion of preferred stock and receive warrants to purchase common stock from qualifying institutions.

On November 21, 2008, the Corporation completed its $39.0 million capital raise as a participant in the U.S. Treasury Department’s Capital Purchase Program (CPP). Under the terms of the transaction, the Corporation issued 38,970 shares of Series A Fixed-Rate Cumulative Perpetual Preferred Stock and a warrant to purchase 863,442 shares of the Corporation’s common stock at an exercise price of $6.77 per share. The additional capital has enhanced the Bank’s capacity to support the communities it serves through its lending activities.

In determining the value of the Series A Preferred Stock and the attendant warrant from the U.S. Treasury’s Capital Purchase Program, the Corporation apportioned the values using the relative fair value approach. The Corporation computed the present value of the preferred stock at $23.5 million assuming a ten-year life, 5% interest rate for the first five years and 9% for the second five years (the dividend that the Corporation will pay the Treasury). A discount rate of 14% was used as the approximate current cost of capital for the Corporation.

The Corporation computed a fair value of the warrants using the Black-Scholes option valuation model. The assumptions in deriving the value were a 34% volatility rate of the Corporation’s common stock, a 2.60% annual dividend rate on the Corporation’s common stock, a 2.75% risk free interest rate, which corresponded to the yield on the five year Treasury note at the time of the issuance, and an assumed life of ten years. The present value of the warrants was computed to be $1.6 million. The present value of the preferred stock represented 93.87% of the combined present value of $25.0 million of the components of the $39.0 million received or $36.6 million. The resulting value for the warrants was 6.13% of the proceeds or $2.4 million.

The preferred shares issued under the CPP carry a 5% dividend for the first five years that increases to 9% thereafter. As a condition for participating in the CPP, the Corporation has accepted limitations on executive compensation and benefits. These limitations will be explained in greater detail in the Corporation’s proxy statement on Schedule 14A, which will be filed with the SEC in May 2010.

On November 5, 2009, the Board of Directors elected to defer the dividend payments on this preferred stock. Under the terms of the preferred stock, deferral of payment is permitted without triggering an event of default. Generally, during any deferral period, the Corporation is prohibited from paying any dividends or distributions on, and may not redeem, purchase or acquire, or make a liquidation payment with respect to the Corporation’s capital stock, or make any payment of principal or interest on, or repay, repurchase or

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redeem any debt securities of the Corporation that rank pari passu in all respects with, or junior to, the specific instrument. In addition, during any deferral period, dividends on the preferred stock are compounded from the date such dividends would have been payable.

(b) Restrictions on 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. In November 2008, the Corporation issued preferred stock to the U.S. Treasury. As a provision of that issuance, the Corporation cannot increase its current cash dividend without prior approval of the U.S. Treasury for three years or until November 2011.  While the Corporation was well-capitalized by regulatory standards, in June 2009, the Corporation announced that it would temporarily suspend its regular quarterly cash dividend on common stock to preserve capital.   

Cascade Bank was notified by the Federal Deposit Insurance Corporation (FDIC) in late September 2009 that based on an off-site review of its financial information, the Bank, among other restrictions, could not pay a cash dividend unless it obtained a non-objection from the FDIC and the Washington State Department of Financial Institutions (DFI). The Bank requested a non-objection and was informed orally that the request would be denied. Therefore, the Bank is unable to pay a cash dividend to the Corporation. Dividends from the Bank are the Corporation’s primary source of cash.

(c) Regulatory Capital

Cascade Bank is subject to regulatory capital requirements. Cascade Bank is in full compliance with all capital requirements established by the FDIC and the Washington State DFI. The Bank’s regulatory capital requirements are expressed as a percentage of assets. To be adequately capitalized, the Bank must hold adjusted capital levels equal to 4% of its assets and 8% of its risk-weighted assets. As of March 31, 2010, for the purposes of this calculation, the Bank’s average total assets and total risk-weighted assets were $1.7 billion and $1.2 billion, respectively. The related excess capital amounts as of March 31, 2010, are presented in the following table:

(Dollars in thousands)	Adequately Capitalized					Well-Capitalized
Cascade Bank core capital	Amount		Percentage			Amount		Percentage
Tier 1 (Core) capital	$	109,895		6.46	%	$	109,895		6.46	%
Minimum requirement		68,064		4.00			85,058		5.00
Excess	$	41,831		2.46	%	$	24,837		1.46	%
Cascade Bank risk-based capital	Amount		Percentage			Amount		Percentage
Risk-based capital	$	124,783		10.58	%	$	124,783		10.58	%
Minimum requirement(1)		94,389		8.00			117,986		10.00
Excess	$	30,394		2.58	%	$	6,797		0.58	%
(1) Based on risk-weighted assets.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) provides the FDIC with broad powers to take “prompt corrective action” to resolve problems of insured depository institutions. The actions the FDIC can take depend upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,”

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“significantly undercapitalized” or “critically undercapitalized” under FDIC guidelines. The amounts and corresponding ratios set forth in the table above for both “adequately capitalized” and “well capitalized” information are based upon Federal banking regulations. After the Bank enters into the Consent Order discussed below, the Bank will no longer be regarded as “well capitalized” for federal regulatory purposes and will likely be reclassified as “adequately capitalized,” even though it currently has capital ratios that exceed the FDIC’s “well capitalized” guidelines.  As a result of this reclassification, the Bank’s borrowing costs from the FRB, as well as its FDIC deposit insurance premiums, will increase.

Note 11 - Regulatory Matters

In January 2010 Cascade reported that it had entered into a Memorandum of Understanding (MOU) with the FDIC and Washington State DFI. The Corporation believes it has complied with all of the terms of the MOU, however, in light of the current challenging operating environment, along with its elevated level of nonperforming assets and adversely classified assets and its recent operating results, management expects Cascade Bank to enter into a Consent Order (Order) with the FDIC and Washington State DFI during the second quarter. Management expects that under the Order, Cascade Bank will be required, among other things, to improve asset quality and reduce classified assets; to improve profitability; and to increase Tier 1 capital.  In addition, the Bank must obtain prior regulatory approval before adding any new director or senior executive officer or changing the responsibilities of any current senior executive officer.

Management also expects the Corporation will enter into a similar Order with the Federal Reserve Bank of San Francisco.

In light of these expectations, the Corporation has engaged an investment banking advisor to actively engage in efforts to raise additional capital, and plans to request shareholder approval for an increase in authorized shares in an amount sufficient to achieve regulatory capital requirements at the annual meeting of shareholders schedule to be held on June 22, 2010.

Note 12 - Stock-based Compensation

Compensation expense related to stock-based compensation was $16,000 for the three months ended March 31, 2010, and $61,000 for the three months ended March 31, 2009.

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Changes in total options outstanding for the three months ended March 31, 2010, are as follows:

	Options		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding on December 31, 2009		647,976	$	10.46		4.11	$	-
Granted		-		-
Exercised		-		-
Forfeited/canceled		61,204		9.06
Outstanding on March 31, 2010		586,772	$	10.61		3.92	$	-
Exercisable on March 31, 2010		505,893	$	10.15		3.36	$	-

The unrecognized share-based compensation cost on unvested options at March 31, 2010, was $88,592, which will be recognized over the remaining average requisite service period of the options which is approximately two years.

Options are granted to certain employees and directors at prices equal to the market value of the stock at the close of trading on the dates the options are granted. The options granted have a term of ten years from the grant date. Incentive stock options granted to employees vest over a five-year period. Non-qualified options granted to directors vest over a four-year period. Compensation expense is recorded as if each vesting portion of the award is a separate award. The Bank has estimated the fair value of all stock option awards as of the date of the grant by applying a Black-Scholes option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. No options were granted during the first quarter of 2010. The total options authorized at March 31, 2010, were 1,058,567.

The Bank uses historical information for its key assumptions. Historical information is the primary basis for the selection of the expected volatility, projected dividend yield and expected lives of the options. The Bank has collected a long history of option activity and believes that this historical information presents the best basis for future projections related to expected term. The risk-free interest rate was selected based upon U.S. Treasury issues with a term equal to the expected life of the option being valued at the time of the grant.

The Bank is required to recognize stock-based compensation for the number of awards that are expected to vest. As a result, for most awards, recognized stock compensation expense was reduced by estimated forfeitures primarily based on historical forfeiture rates of 6.19%. Estimated forfeitures will be continually evaluated in subsequent periods and may change based on new facts and circumstances.

Note 13 - Fair Value Measurements

(a) Financial Instruments

The fair value estimates presented below are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. The Corporation has not included certain material items in its disclosure, such as the value of the long-term relationships with the Corporation’s lending and deposit customers, since this is an intangible and not a financial instrument. Additionally, the estimates do not include any tax

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ramifications. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could materially affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Corporation.

The following table presents a summary of the fair value of the Corporation’s financial instruments:

	March 31, 2010				December 31, 2009
(Dollars in thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cashequivalents	$	156,811	$	156,811	$	145,595	$	145,595
Securities available-for-sale		247,240		247,240		227,805		227,805
Securities held-to-maturity		32,956		33,478		36,177		36,494
FHLB stock		11,920		11,920		11,920		11,920
Loans, net		1,126,103		1,040,506		1,173,213		1,074,697
BOLI		24,759		24,759		24,522		24,522
REO		27,394		27,394		18,842		18,842
Financial liabilities:
Deposit accounts	$	1,172,258	$	1,146,640	$	1,139,774	$	1,116,840
FHLB advances		239,000		261,002		239,000		261,217
FRB TAF borrowings		-		-		20,000		20,000
Securities sold under agreements to repurchase		146,065		176,108		145,410		174,700
Junior subordinated debentures		15,465		11,501		15,465		8,079
Junior subordinated debentures, fair value		3,341		3,341		3,341		3,341

Below are explanations of how certain of the above categories are determined:

Cash and Cash Equivalents

The carrying amount represents fair value.

Securities including mortgage backed securities

Fair values are based on quoted market prices or dealer quotations when available or through the use of alternate approaches, such as matrix or model pricing, when market quotes are not readily available.

FHLB Stock

The Bank’s investment in FHLB stock is carried at par value ($100 per share), which reasonably approximates its fair value.

Bank Owned Life Insurance (BOLI)

The carrying amount of BOLI approximates its fair value, net of any surrender charges. Fair value of BOLI is estimated using the cash surrender value.

Loans

Fair values are estimated using current market interest rates to discount future cash flows for each of the different loan types. Interest rates used to discount the cash flows are based on published current market rates for similar products. Prepayment rates are based on expected future prepayment rates, or, where appropriate and available, market prepayment

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rates. In addition to the yield adjustment noted above the Bank also includes a credit adjustment to determine the fair value of loans. The credit adjustment applies discounts to loans based upon type of loan and current loan classifications. 

Real Estate Owned

The carrying amount represents fair value.

Deposits

The fair value of deposits with no stated maturity, such as checking accounts, money market deposit accounts and savings accounts, equals the amount payable on demand. The fair value of certificates of deposits is calculated based on the discounted value of contractual cash flows. The discount rate is equal to the rate currently offered on similar products.

FHLB advances and securities sold under agreements to repurchase

The fair value is calculated based on the discounted cash flow method, adjusted for market interest rates and terms to maturity.

Junior Subordinated Debentures

The fair value is calculated based on the discounted cash flow method, adjusted for market interest rates and terms to maturity.

Junior Subordinated Debentures, at fair value

The fair value is calculated by using a model, primarily through establishing a discount rate. The rate is based upon the rate of 20 year T-notes (the approximate remaining maturity), plus a credit spread developed by reviewing a number of other issues via Bloomberg analytics; an awareness of where the junior subordinated debentures are currently trading in the market; and a liquidity premium of 500 basis points due to the size of the Corporation and the issue. As with similar bonds, the bonds are assumed to be outstanding until maturity. The valuation is considered a Level 3 measurement.

Off-balance-sheet financial instruments

Commitments to extend credit, standby letters of credit and financial guarantees represent the principal categories of off-balance instruments. The fair value of these commitments is not considered material because they are for a short period of time and subject to customary credit terms.

(b) Financial Assets and Liabilities Carried at Fair Value on a Recurring and Non-recurring Basis

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. It also establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. In determining fair value, the Bank maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s estimates for market assumptions.

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Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Bank. Unobservable inputs are assumptions based on the Bank’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy that gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

Determination of fair market values

Available-for-sale securities are priced using matrix pricing based on the securities’ relationship to other benchmark quoted prices (Level 2). Inputs to the valuation methodology include quoted prices for similar assets in active markets that are observable for the asset.

The Corporation applied fair value accounting to the junior subordinated debentures issued by Cascade Capital Trust I. The change in fair market value of the junior subordinated debentures is recorded as a component of other income. During the fourth quarter of 2009, FDIC restrictions prohibited dividend payments from the Bank to the holding company, which in turn led the Corporation to defer the payment of interest on the Trust Preferred Securities. The Corporation continues to accrue these payments and expects to resume cumulative payments on these securities upon FDIC approval. Because of the dividend suspension, the fair value of the Corporation’s $10.0 million par junior subordinated debentures declined significantly as of December 31, 2009, reducing the carrying value to $3.3 million, with the difference recorded as a $7.2 million gain for the year. The Corporation determined the fair value for Cascade Capital Trust I by calculating the net present value of the Trust’s expected cash flows. The discount rate used was the rate of 20 year U.S. Treasury Notes (the approximate remaining maturity) as of December 31, 2009, plus a credit spread developed by reviewing a number of other similar issues, plus a liquidity premium of 500 basis points due to the size of the Corporation and the issue. As with similar bonds, the bonds were assumed to be outstanding until maturity. The derived rate was 24.55% as of March 31, 2010 and December 31, 2009. The valuation is considered a Level 3 measurement. For the three months ended March 31, 2010, there was no change in the fair value of the junior subordinated debentures.

Fair values of impaired collateral dependent loans are sometimes recorded to reflect partial write-downs based on the current appraised value of the collateral, less estimated selling costs or internally developed models which contain management’s assumptions concerning the amount and timing of the cash flows associated with that loan.

Real estate owned and other repossessed assets are recorded at the lower of the carrying amount of the loan or fair value less selling costs at the time of acquisition. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell.

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The following table presents the balances of assets and liabilities measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009.

(Dollars in thousands)	Fair Value at March 31, 2010
Assets	Level 1		Level 2		Level 3		Total
Mortgage-backed securities	$	-	$	35,568	$	-	$	35,568
Agency notes & bonds		-		211,672		-		211,672
Total	$	-	$	247,240	$	-	$	247,240
Liabilities	Level 1		Level 2		Level 3		Total
Junior subordinated debentures	$	-	$	-	$	3,341	$	3,341
Total	$	-	$	-	$	3,341	$	3,341
(Dollars in thousands)	Fair Value at December 31, 2009
Assets	Level 1		Level 2		Level 3		Total
Mortgage-backed securities	$	-	$	41,280	$	-	$	41,280
Agency notes & bonds		-		186,525		-		186,525
Total	$	-	$	227,805	$	-	$	227,805
Liabilities	Level 1		Level 2		Level 3		Total
Junior subordinated debentures	$	-	$	-	$	3,341	$	3,341
Total	$	-	$	-	$	3,341	$	3,341

The following table presents the total fair value adjustments for the periods presented:

	Three Months Ended
(Dollars in thousands)	March 31, 2010		March 31, 2009
Assets
Mortgage-backed securities	$	288	$	657
Agency notes & bonds		3,359		451
Preferred stock		-		840
Total	$	3,647	$	1,948
Liabilities
Junior subordinated debentures	$	-	$	1,790
Total	$	-	$	1,790

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The change in fair market value of the junior subordinated debentures is recorded as a component of non-operating income. The following table presents the fair value adjustments for the junior subordinated debentures, which use significant unobservable inputs (Level 3) for the periods presented.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31,
(Dollars in thousands)	2010		2009
Beginning balance	$	3,341	$	10,510
Total gains recognized		-		(1,790	)
Ending balance	$	3,341	$	8,720

The following table presents the balance of assets measured at fair value on a nonrecurring basis at March 31, 2010 and December 31, 2009.

(Dollars in thousands)	Fair Value at March 31, 2010
Description	Level 1		Level 2		Level 3		Total
Impaired loans (1)	$	-	$	-	$	169,219	$	169,219
REO(2)		-		-		27,394		27,394
Total	$	-	$	-	$	196,613	$	196,613

(Dollars in thousands)	Fair Value at December 31, 2009
Description	Level 1		Level 2		Level 3		Total
Impaired loans (1)	$	-	$	-	$	177,317	$	177,317
REO(2)		-		-		18,842		18,842
Total	$	-	$	-	$	196,159	$	196,159

(1)   Impaired loans include loans on nonaccrual, classified doubtful and/or individually analyzed for impairment, adjusted by the impairment amount.

(2)   REO is disclosed at book balance, which fair value approximates.

The following table presents the total losses resulting from nonrecurring fair value adjustments for the periods presented:

(Dollars in thousands)	Three Months Ended
Description	March 31, 2010		March 31, 2009
Impaired loans(1)	$	28,544	$	3,923
REO(2)		698		54
Total	$	29,242	$	3,977

(1)   Total gains/losses for loans includes the actual impairment amount, plus the allowance for loan loss write downs during the quarter for those loans considered impaired.

(2)   Losses for REO are the net losses recognized during the quarter.

Note 14 - Commitments and Contingencies

(a) Lease Commitments

The Bank leases space for various branches. These leases run for a period ranging from 2 to 10 years and allow for established rent increases each year. Generally, these leases require the Bank to pay all taxes, maintenance and utility costs, as well as maintain certain types of insurance.

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Rent expense for the three months ended March 31, 2010 was $230,000 compared to $211,000 for the three months ended March 31, 2009.

(b) Loan Commitments

At March 31, 2010, the Bank had outstanding commitments to grant loans of $3.7 million compared to $11.1 million at December 31, 2009. The Bank had non-mandatory forward commitments totaling $404,700 and $479,000 to sell loans into the secondary market at March 31, 2010 and December 31, 2009, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While approximately 100% of commercial letters of credit are utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower.

Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Unfunded commitments under commercial lines of credit, revolving credit lines and loans in process are commitments for possible future extensions of credit to existing customers. Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, bond financing, and similar transactions. The Bank underwrites its standby letters of credit using its policies and procedures applicable to loans in general. Standby letters of credit are made on both an unsecured and secured basis. The Bank has not been required to perform on any financial guarantees during the past two years. The Bank did not incur any losses on its commitments in 2010 or 2009.

At March 31, 2010 and December 31, 2009, the following financial instruments with off-balance sheet risk were outstanding:

	March 31,		December 31,
(Dollars in thousands)	2010		2009
Commitments to grant loans	$	3,688	$	11,145
Unfunded commitments under lines of credit/loans in process		112,672		122,714
Standby letters of credit and financial guarantees written		1,923		1,695
Unused commitments on bankcards		13,423		13,621
Total	$	131,706	$	149,175

(c) Legal Contingencies

The Corporation is a defendant in various legal proceedings arising in connection with its business. It is the opinion of management that the financial position and the results of operations of the Corporation will not be materially adversely affected by the final outcome of these legal proceedings and will have no material effect on the Corporation’s Consolidated Financial Statements.

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(d) Regulatory Examinations

At periodic intervals, the Washington State DFI, the FDIC, and the FRB routinely examine the Corporation’s financial statements as part of their legally prescribed oversight of the banking industry. Based on these examinations, the regulators can direct that the Corporation’s financial statements be adjusted in accordance with their findings.

(e) Significant Concentrations of Credit Risk

Concentration of credit risk is the risk associated with a lack of diversification, such as having substantial loan concentrations in a specific type of loan within our loan portfolio, thereby exposing us to greater risks resulting from adverse economic, political, regulatory, geographic, industrial or credit developments. At March 31, 2010, our most significant concentration of credit risk was in loans secured by real estate. Approximately 86% of Cascade’s loan portfolio is secured by real estate. Over the last two years, there has been deterioration in the residential development market which has led to an increase in nonperforming loans and the allowance for loan losses.

At March 31, 2010, our most significant investment concentration of credit risk was with the U.S. Government, its agencies and Government Sponsored Enterprises. Our exposure, which results from positions in securities issued by the U.S. Government, and its agencies, and securities guaranteed by Government Sponsored Enterprises, was $275.5 million, or 95% of our total investment portfolio at March 31, 2010.

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in understanding the financial condition and results of the Corporation. The information contained in this section should be read with the unaudited consolidated financial statements and accompanying notes included in this Quarterly Report, and the December 31, 2009 audited consolidated financial statements and accompanying notes included in our recent Annual Report on Form 10-K.

Forward-Looking Statements

This report includes forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative thereof or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations,

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assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed below under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations are:

·   management’s ability to effectively execute its business plan and strategy;

·   the credit risks of lending activities, including changes in the level and trend of loan delinquencies, collections and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;

·   changes in general economic conditions, either nationally or in our market areas;

·   the availability of and costs associated with sources of liquidity;

·   inflation, interest rates, market and monetary fluctuations;

·   legislative or regulatory changes or changes in accounting principles, policies or guidelines;

·   the possibility that we will be unable to comply with certain conditions imposed upon us in regulatory actions, which could result in the imposition of further restrictions on our operations, penalties or other regulatory actions;

·   the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews;

·   our ability to attract and retain deposits;

·   further increases in premiums for deposit insurance;

·   the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

·   the failure or security breach of computer systems on which we depend;

·   increased competitive pressures among financial services companies;

·   adverse changes in the securities markets;

·   technological changes;

·   the ability to increase market share and control expenses;

·   our success at managing the risks involved in the foregoing; and

·   other risks which may be described in Cascade’s future filings with the SEC under the Securities Exchange Act of 1934.

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.  In addition, we may make certain statements in future Securities and Exchange Commission (SEC) filings, in press releases and in oral and written statements that are not statements of historical fact and may constitute forward-looking statements.

General

Cascade Financial Corporation (the Corporation) is a bank holding company incorporated in the state of Washington in 2003. At March 31, 2010, the Corporation’s wholly-owned subsidiaries were Cascade Bank (Cascade or the Bank), Colby Real Estate, LLC, a subsidiary opened by the Bank to hold real estate owned properties and Cascade Capital

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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 Puget Sound region 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 this date, 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 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.

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 21 other full-service offices in the greater Puget Sound region. At March 31, 2010, the Corporation had total assets of $1.69 billion, total deposits of $1.17 billion and total equity of $104.3 million.

Critical Accounting Policies and Estimates

The Corporation’s significant accounting policies and estimates are described in Note 1 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2009 included in the Form 10-K filed with the SEC on March 11, 2010.  These significant accounting policies and estimates are essential to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, which affect the reported amounts and disclosures. Actual results may differ from these estimates under different assumptions or conditions. The following policies involve a higher degree of judgment than do the Corporation’s other significant accounting policies.

Investment Securities

The Bank classifies its investments as available-for-sale or held-to-maturity. Available-for-sale securities are reported at their fair value, which is determined by obtaining quoted market prices. Unrealized gains and losses on available-for-sale securities are included in other comprehensive income and excluded from earnings. Realized gains and losses and declines in fair value judged to be other-than-temporary are included in earnings. Management reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI), taking into consideration current market conditions; fair value in relationship to cost; extent and nature of the change in fair value; issuer rating changes

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and trends; whether management intends to sell a security or if it is likely that the Bank will be required to sell the security before recovery of the amortized cost basis of the investment, which may be upon maturity; and other factors. For debt securities, if management intends to sell the security or it is likely that the Bank will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If management does not intend to sell the security and it is not likely that the Bank will be required to sell the security, but management does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, i.e., the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income. Impairment losses related to all other factors are presented as separate categories within other comprehensive income. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Allowance for Loan Losses

The Bank reviews historical origination and charge-off relationships, charge-off experience factors, collection data, delinquency reports, estimates of the value of the underlying collateral, and other information in order to make the necessary judgments as to the appropriateness of the provision for loan losses and the allowance for loan losses. The Bank also uses qualitative factors to analyze the adequacy of the loan loss allowance. Factors such as regional/local economic trends, the health of the real estate market, loan and collateral concentrations, size of borrowing relationships, trends in loan delinquencies and charge-offs and changes in loan classifications are included in the Bank’s analysis of the allowance for loan losses. Management has also added an additional management judgment factor where deemed appropriate. 

Loan losses are charged-off against the allowance when management confirms the uncollectibility of a loan balance or when the liquidation value of the collateral is less than the amount of the loan. The Bank believes that the allowance for loan losses is adequate to cover probable losses inherent in its loan portfolio. However, because the allowance for loan losses is based on estimates, there can be no assurance that the ultimate charge-off amount will not exceed the estimates.

Real Estate Owned

Real estate owned includes real estate acquired in settlement of loans. Real estate owned is recorded at the lower of cost or fair value, based upon the recent appraisal, less estimated costs to sell. Developments and improvements related to the property are capitalized. Any losses recorded at the time a foreclosure occurs is classified as a charge-off against the allowance for loan losses. Losses that result from the ongoing periodic valuation of these properties, are charged to expense in the period identified.

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Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities.

Under GAAP, a valuation allowance is required on deferred tax assets if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realization of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including income and losses in recent years, the forecast of future income, applicable tax planning strategies, and assessments of the current and future economic and business conditions. The Corporation considers both positive and negative evidence regarding the ultimate realization of deferred tax assets.

Cascade uses an estimate of future earnings, an evaluation of its loss carryback ability and tax planning strategies to determine whether or not the benefit of its net deferred tax asset will be realized. At March 31, 2010, Cascade assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. Cascade determined that the negative evidence associated with cumulative losses, the expectation of entering into a consent order with its regulators, and continued credit deterioration in its loan portfolio outweighed the positive evidence. Therefore, Cascade established a valuation allowance of $13.6 million against its deferred tax asset. At March 31, 2010, Cascade has recorded a $13.4 million income tax receivable which represents refunds of taxes that will be realized in the current year through loss carrybacks to prior tax years. 

Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements (ASU 10-06) establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. In determining fair value, the Bank maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s estimates for market assumptions.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market

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data and are obtained from a source independent of the Bank. Unobservable inputs are assumptions based on the Bank’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy that gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

Goodwill Impairment

Impairment analysis of the fair value of goodwill involves a substantial amount of judgment. Under ASC Topic 350, Intangibles – Goodwill and Other Intangibles, during the first quarter of 2010 the Corporation engaged an independent valuation consultant to assist in determining whether, and to what extent, its goodwill asset was impaired. A goodwill impairment test includes two steps. Step one, used to identify potential impairment, compares the estimated fair value of the Corporation with its carrying amount including goodwill. Step one inputs used to determine the implied fair value of the Corporation include the quoted market price of Cascade’s common stock, market prices of common stocks of other banking organizations, common stock trading multiples, and inputs from comparable transactions. If the estimated fair value exceeds its carrying amount, goodwill is considered not impaired. If the carrying amount exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step two of the goodwill impairment test compares the implied estimated fair value of goodwill with the carrying amount of the currently recorded goodwill. If the carrying amount of goodwill exceeds the implied fair value of the recorded goodwill, an impairment charge is taken in an amount equal to that excess. There was no goodwill impairment noted in the first quarter 2010 goodwill analysis. 

Due to the ongoing uncertainty in market conditions, which may continue to negatively impact the performance of the Corporation as well as the market valuations of financial institutions, management will continue to monitor and evaluate the carrying value of goodwill. Goodwill impairment could be recorded in future periods and such impairment could be material to the Corporation’s results of operations.

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Selected Financial Data

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

	At or for the Three Months Ended March 31,
	2010			2009
Return on average assets (1)		(7.60	)%		(1.20	)%
Return on average common equity (1)(2)		(137.53	)		(17.59	)
Average stockholders’ equity to average assets		7.79			9.87
Other expenses to average assets (1)		2.18			2.14
Efficiency ratio		79.64			58.31
Efficiency ratio (excluding OTTI) (3)		79.64			52.50

(1)      Annualized

(2)      Excludes preferred stock.

(3)      Non-GAAP measurement: excludes an $858,000 OTTI charge on investments in Fannie Mae and Freddie Mac preferred stock.

CHANGES IN FINANCIAL CONDITION

General

Total assets decreased 1% or $14.4 million to $1.69 billion at March 31, 2010, compared to $1.70 billion at December 31, 2009. Net loans, i.e. net of deferred loan fees and the allowance for loan losses, decreased 4% or $47.1 million to $1.13 billion at March 31, 2010, from $1.17 billion at December 31, 2009.

Interest-earning deposits, which were all held at the Federal Reserve Bank, increased to $152.4 million as of March 31, 2010 compared to $141.6 million as of December 31, 2009. Cash in banks increased to $4.4 million at March 31, 2010 from $4.0 million at December 31, 2009.

Investment Securities

Total securities increased by $16.2 million to $292.1 million as of March 31, 2010.  Securities designated as available-for-sale increased to $247.2 million at March 31, 2010, versus $227.8 million at December 31, 2009. Securities designated as held-to-maturity decreased to $33.0 million at March 31, 2010, from $36.2 million at December 31, 2009. FHLB stock was $11.9 million at March 31, 2010 and December 31, 2009. The securities in both portfolios consist of notes and mortgage-backed securities issued by U.S. government sponsored enterprises (GSE), including consolidated obligations of the Federal Home Loan Bank and Federal Farm Credit Bank systems and direct obligations of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. There were no investment securities that were backed by subprime loans and all investments received the highest credit rating from at least one of the major rating agencies.

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The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity securities at the dates indicated.

	March 31, 2010				December 31, 2009
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available-for-sale
Mortgage-backed securities	$	34,996	$	35,568	$	40,997	$	41,280
Agency notes & bonds		210,374		211,672		188,585		186,525
Total	$	245,370	$	247,240	$	229,582	$	227,805
	March 31, 2010				December 31, 2009
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities held-to-maturity
Mortgage-backed securities	$	22,181	$	22,691	$	15,405	$	15,909
Agency notes & bonds		10,000		10,012		19,997		19,810
Corporate/other		775		775		775		775
Total	$	32,956	$	33,478	$	36,177	$	36,494

Certain securities shown above currently have fair values less than amortized cost, and therefore, contain unrealized losses. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates and/or the widening of market spreads subsequent to the initial purchase of the securities or to disruptions to credit markets. Since all these securities are rated AAA, this temporary impairment is not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

Federal Home Loan Bank of Seattle Stock. The Bank’s investment in Federal Home Loan Bank of Seattle (FHLB) stock is carried at par value ($100 per share), which reasonably approximates its fair value. As a member of the FHLB, the Bank is required to maintain a minimum level of investment in FHLB stock, based on specified percentages of its outstanding FHLB advances. The Bank may request redemption at par value of any stock in excess of the amount the Bank is required to hold. Stock redemptions are at the discretion of the FHLB.

At March 31, 2010, the Bank had 119,203 shares of FHLB stock. FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to FHLB member institutions and can only be purchased and redeemed at par. Due to ongoing turmoil in the capital and mortgage markets, the FHLB of Seattle has a risk-based capital deficiency largely as a result of write-downs on its private label mortgage-backed securities portfolios.

The Bank evaluates FHLB stock for impairment. The determination of whether FHLB stock is impaired is based on an assessment of the ultimate recoverability of cost rather than declines in the book value of the shares. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB and (4) the liquidity position of the FHLB.

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Under Federal Housing Finance Agency regulations, a Federal Home Loan Bank that fails to meet any regulatory capital requirement may not declare a dividend or redeem or repurchase capital stock in excess of what is required for members’ current loans. Based upon an analysis by Standard and Poors regarding the Federal Home Loan Banks, they stated that the FHLB System has a special public status (organized under the Federal Home Loan Bank Act of 1932) and because of the extraordinary support offered to it by the U.S. Treasury in a crisis, (though not used), the FHLB system can be considered an extension of the government. The U.S. government would almost certainly support the credit obligations of the FHLB System. The Bank has determined there is not an other-than-temporary impairment on the FHLB stock investment as of March 31, 2010.

Loans

Virtually all of the Bank’s loans are to businesses or individuals in the Puget Sound area. Business loans are made to small and medium-sized businesses within this area for a wide array of purposes. Included in the business loan total are loans secured by real estate, the majority of which the borrower is the primary tenant of the property. Real estate construction loans are extended to builders and developers of residential and commercial real estate. Commercial real estate loans fund non-owner occupied buildings.

Residential loans held in the Bank’s portfolio are secured by single family residences. The Bank also originates longer term fixed rate residential loans, and sells many of those loans into the secondary market on a best efforts, servicing released basis. Beginning in 2009, the Bank has originated and holds loans generated under its Builder Loan Program, which offers attractive terms to qualified buyers of houses from builders financed by the Bank. As of March 31, 2010, the Bank held $65.4 million of these loans. Home equity loans are primarily second mortgages on the borrower’s primary residence. Consumer loans are non-residential, i.e. automobiles, credit cards or boats.

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

(Dollars in thousands)	March 31,  2010			% of Portfolio			December 31,  2009			% of  Portfolio
Business	$	457,426			39.6	%	$	469,196			39.0	%
R/E construction(1)
Spec construction		52,098			4.5			59,360			4.9
Land acquisition & development/land		108,402			9.4			146,164			12.2
Multifamily/custom construction		12,905			1.1			18,923			1.6
Commercial R/E construction		31,996			2.8			32,470			2.7
Total R/E construction		205,401			17.8			256,917			21.4
Commercial R/E		183,027			15.8			183,286			15.2
Multifamily		89,920			7.8			82,418			6.9
Home equity/consumer		31,274			2.7			31,738			2.6
Residential(2)		188,930			16.3			179,133			14.9
Total loans	$	1,155,978			100.0	%	$	1,202,688			100.0	%
Deferred loan fees		(3,872	)					(3,575	)
Allowance for loan losses		(26,003	)					(25,900	)
Loans, net	$	1,126,103					$	1,173,213

(1) Real estate construction loans are net of loans in process.

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

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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 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 identified as special mention represent borrowers who exhibit potential credit weaknesses or trends deserving Bank management’s close attention.

In order to proactively address credit quality issues within its loan portfolios, Cascade has added resources to its Credit Administration and Special Assets departments to address the increased volume of classified assets. Generally, when a loan becomes classified, the relationship is transferred to Cascade’s Special Assets department. Cascade actively engages the borrower and guarantor to determine a course of action. Current financial information is requested from the borrower(s) and guarantor(s) and updated collateral values are requested in order for Cascade’s management to perform evaluations for decision making and regulatory purposes and updated title information is obtained to determine the status of encumbrances on the collateral. When possible, Cascade requires the borrower to provide additional collateral or capital. In conjunction with the receipt of additional collateral, Cascade will sometimes modify the terms of the loan. Often the new modified terms of the loan are consistent with terms that Cascade would offer a new borrower. If the modification of terms is considered concessionary, Cascade classifies the loan as a troubled debt restructuring.

Cascade also may consider allowing a borrower to sell the underlying collateral for less than the outstanding balance on the loan if the current collateral evaluation supports the offer price. In such situations, Cascade often requires the borrower to sign a new note for the resulting deficiency or bring cash to closing. In some situations, Cascade releases the collateral only in a sale transaction, preserving its right to seek monetary judgments against the borrowers and guarantors and, in some situations.

If Cascade and a borrower are unable to achieve an acceptable resolution, Cascade may take a deed in lieu of foreclosure or initiate foreclosure on the underlying collateral. Under such circumstances, Cascade also simultaneously evaluates legal action for recovery against the borrowers and guarantors. After obtaining the collateral, Cascade actively works to sell the collateral.

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 typically contacted in writing. Generally, 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, the borrower establishes six months of timely repayment performance, and 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 March 31, 2010 and December 31, 2009, the Bank had $96.7 million and $106.1 million, respectively, of loans held on a nonaccrual basis.

Total loans decreased by $46.7 million from December 31, 2009 to March 31, 2010, primarily due to charge-offs and transfers to REO. During the first quarter, $39.3 million in loans were placed on nonaccrual status, $11.2 million were converted to REO status, $6.3 million were paid off or paid down, $14.8 million were charged off in connection with pending sales transactions, and additional charge-offs of $16.4 million were recorded to reflect updated appraisals on real estate collateral, primarily securing construction and land related loans in the Bank’s portfolio. Reclassifications totaling $6.6 million from the construction portfolio contributed to the decline in this category. The $6.6 million reclassification from construction to multifamily loans represented a 66 unit apartment project where construction was completed and the project was leased.

The following table presents the change in the Bank’s loan portfolio from December 31, 2009 to March 31, 2010.

(Dollars in thousands) Loans	Balance at March 31, 2010			Net Payoffs/ Additions			Reclassifi-cations			Transfers to REO			Charge-offs (1)			Balance at December 31, 2009			Change
Business	$	457,426		$	(11,060	)	$	-		$	-		$	(710	)	$	469,196			-3	%
R/E construction		205,401			(3,682	)		(6,600	)		(11,036	)		(30,198	)		256,917			-20	%
Commercial R/E		183,027			(259	)		-			-			-			183,286			0	%
Multifamily		89,920			902			6,600			-			-			82,418			9	%
Home equity/consumer		31,274			(408	)		-			-			(56	)		31,738			-1	%
Residential		188,930			10,204			-			(164	)		(243	)		179,133			5	%
Total loans	$	1,155,978		$	(4,303	)	$	-		$	(11,200	)	$	(31,207	)	$	1,202,688			-4	%
Deferred loan fees		(3,872	)		(297	)		-			-			-			(3,575	)		8	%
Allowance for loan losses		(26,003	)		(31,290	)		-			-			31,187			(25,900	)		0	%
Loans, net	$	1,126,103		$	(35,890	)	$	-		$	(11,200	)	$	(20	)	$	1,173,213			-4	%

(1)Loan charge-off detail excludes negative now accounts totaling $62,000, recoveries of $82,000

Management provides for potential future loan losses by maintaining an allowance for loan losses. The allowance for loan losses reflects management’s best estimate of probable losses as of a particular balance sheet date. The allowance for loan losses is maintained at levels based on management’s assessment of various factors affecting the loan portfolio, including analysis of adversely classified loans, delinquencies, trends in credit quality, local economic conditions, growth of the loan portfolio, past loss experience, and the

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portfolio’s composition. Increases in the allowance for loan losses made through provisions primarily reflect loan loss risks inherent in lending and the impact of the economic climate on the loan portfolio.

Management determines the amount of the allowance for loan losses by utilizing a loan quality grading system to determine risk in the loan portfolio. The allowance consists of general and specific components.  When loans are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the Bank’s credit review process. The Bank’s loan quality grading methodology assigns a loan quality grade from 1 to 10, where a higher numerical rating represents higher risk. These loan quality rating categories are a primary factor in determining an appropriate amount for the allowance for loan losses. The loan portfolio is separated by loan type and then by risk rating. Loans of acceptable quality (loans graded “pass”) are evaluated as a group, by loan type, with a loss rate based on average historical losses and adjusted for qualitative (Q) factors. The ‘Q’ factors consist of a review of market conditions, loan concentrations, and changes in the quality of the loan portfolio. Allocations for ‘Q’ factors are based upon management’s review of each of the factors and are applied to all loans graded “pass.” The ‘Q’ factors augment the historical loss factors utilized in assessing the allowance to reflect the potential losses embedded in the loan portfolio as real estate property values have declined and sales have slowed. After reviewing all historical and qualitative factors by loan type, management has added a management judgment factor to several loan types due to concerns that there may be additional losses inherent in these portfolios that are not identified by using historical or other qualitative factors.  The loan types include construction, land, business, commercial real estate and multifamily. The vast majority of loans classified as substandard or doubtful that are on nonaccrual are reviewed individually for impairment. Other accruing classified loans are similarly reviewed either by relationship or pooled for smaller dollar homogeneous loans. Past due and impaired loans are actively managed to minimize the potential loss of principal.

At March 31, 2010, the allowance for loan losses was $26.0 million (2.25% of total loans) compared to $25.9 million (2.15% of total loans) at December 31, 2009. During the first quarter of 2010, the Corporation added $31.3 million to the allowance. The valuation reserve for off-balance sheet commitments was $69,000 at March 31, 2010 and December 31, 2009. The total allowance for loan losses, which includes the allowance for off-balance sheet commitments, was $26.1 million (2.26% of total loans) as of March 31, 2010 compared to $26.0 million (2.16% of total loans) as of December 31, 2009.

The slight increase in the allowance for loan losses was the result of a provision expense of $31.3 million for the first quarter and net charge-offs of $31.2 million. The charge-offs during the quarter were primarily related to land acquisition and development/land loans including the Bank’s two largest land loans which accounted for $14.8 million in charge-offs. The collateral for the first loan consisted of 263 lots, which were converted to REO in March 2010. The Bank has entered into a purchase and sale agreement for the sale of these lots, half of which are scheduled to close in the second quarter, and the remaining lots are expected to close in the third quarter. The collateral for the second loan included 134 lots located in King County that were converted to REO in April 2010. The Bank has executed a letter of intent to enter into a purchase and sale agreement for the sale of these lots, which is expected to close in the second quarter. Both transactions are subject to customary closing conditions and there can be no guarantee they will close as Cascade currently anticipates.

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Management believes that the allowance for losses on loans is adequate to provide for losses that may be incurred on loans; however, there is no guarantee that management’s estimate will be sufficient to cover actual loan losses.

The following table sets forth information regarding changes in the Bank’s allowance for loan losses for the periods presented.

	Three Months Ended
(Dollars in thousands)	March 31, 2010			March 31, 2009
Balance at beginning of period	$	25,900		$	16,439
Charge-Offs
Business		(710	)		(432	)
Construction/land		(30,198	)		(4,771	)
Residential		(243	)		-
Consumer and other		(118	)		(120	)
Recoveries		82			24
Net (charge-offs) recoveries		(31,187	)		(5,299	)
Provision for loan losses		31,290			13,875
Transfers to (from) off-balance commitments		-			5
Balance at end of period	$	26,003		$	25,020
Average total loans outstanding	$	1,196,091		$	1,259,331
Nonperforming loans		96,719			50,602
Ratio of net charge-offs during the period to average loans outstanding		2.61	%		0.42	%
Ratio of allowance for loan losses to average loans outstanding		2.17			1.99
Ratio of allowance for loan losses to total loans outstanding		2.25			2.00
Coverage ratio		26.89			49.44

At March 31, 2010, the allowance for loan losses was 26.89% of total nonperforming loans (coverage ratio) compared to 49.44% at March 31, 2009. The decrease in the coverage ratio for the current period was mainly due to the fact that the increase in nonperforming loans was in portfolios for which the Bank’s loan-to-value position was sufficient to cover potential collateral deficiencies. A significant portion of the nonperforming loans did not require a specific allowance given the adequacy of collateral coverage. As a consequence, the allowance for loan losses did not increase proportionately with the increase in nonperforming loans and the ratio of allowance for possible loan losses to total nonperforming loans decreased. At March 31, 2010, nonperforming assets consisting of nonperforming (nonaccruing) loans and REO, totaled $124.1 million or 7.34% of total assets. Nonperforming assets totaled $50.6 million or 3.60% of total assets at March 31, 2009.

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

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(Dollars in thousands) Nonperforming assets:	March 31, 2010			December 31, 2009
Business	$	12,602		$	6,988
R/E construction
Spec construction		20,804			13,787
Land acquisition & development/land		44,234			65,120
Commercial R/E construction		5,800			6,477
Total R/E construction		70,838			85,384
Commercial R/E		12,328			12,581
Home equity/consumer		332			486
Residential		619			657
Total nonperforming loans		96,719			106,096
REO		27,394			18,842
Total nonperforming assets	$	124,113		$	124,938
Performing restructured loans	$	25,763		$	26,635
Total nonperforming loans to total loans		8.37	%		8.82	%
Total nonperforming loans to total assets		5.72			6.22
Total nonperforming assets to total assets		7.34			7.33

Loans are generally placed on nonaccrual status 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 nonaccrual 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 decreased to $96.7 million at March 31, 2010, compared to $106.1 million at December 31, 2009. Included in nonperforming loans as of March 31, 2010, is $44.2 million in land acquisition and development/land loans, which is a net decrease of $20.9 million. Additions to nonperforming loans were $39.3 million, which were offset by $6.3 million in paydowns, $31.2 million in charge-offs and $11.2 million in transfers to REO. Nonperforming residential spec construction loans increased by $7.0 million.

Additions to nonperforming loans primarily relates to two construction loans and two land acquisition and development loans added during the quarter. At March 31, 2010, the two construction loans totaled $11.6 million and the two land acquisition and development loans totaled $9.7 million. These loans are secured by mostly completed residential developed lots and/or finished houses and each has been individually reviewed for impairment. As of March 31, 2010, the Bank has determined that the loans are on the books at their fair value.

The decrease in total land acquisition and development/land loans was the result of $648,000 in paydowns, $26.4 million in charge-offs and $9.6 million in transfers to REO. All loans in this category are collateralized by the property which the loan was used to develop. One loan comprises the commercial real estate category.

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The following table shows the migration of nonperforming loans (NPLs) through the portfolio in each category for the period March 31, 2010 compared to December 31, 2009:

	On Loans Designated NPLs as of March 31, 2010
(Dollars in thousands) Nonperforming loans	# of Loans		Balance at March 31, 2010		Additions		Paydowns			Charge-offs			Transfers to REO			Balance at December 31, 2009
Business		15	$	12,602	$	6,326	$	(2	)	$	(710	)	$	-		$	6,988
R/E construction
Spec construction		1		20,804		16,727		(5,172	)		(3,079	)		(1,459	)		13,787
Land acquisition & development/land		21		44,234		15,781		(648	)		(26,442	)		(9,577	)		65,120
Commercial R/E construction		6		5,800		-		-			(677	)		-			6,477
Total R/E construction		28		70,838		32,508		(5,820	)		(30,198	)		(11,036	)		85,384
Commercial R/E		1		12,328		-		(253	)		-			-			12,581
Home equity/consumer		5		332		98		(196	)		(56	)		-			486
Residential		3		619		369		-			(243	)		(164	)		657
Total		52	$	96,719	$	39,301	$	(6,271	)	$	(31,207	)	$	(11,200	)	$	106,096

Most of the Bank’s nonperforming loans are individually analyzed for impairment. Impaired loans are those loans where, based on current information and events, it is probable that Cascade will be unable to collect all amounts due according to the contractual terms of the agreement. Additionally, troubled debt restructured loans, which had a modification of terms, are considered impaired.

The Bank conducts an ongoing evaluation of its adversely classified credits including monthly loan reviews, monitoring sales activity and obtaining updated appraisals on the properties collateralizing these loans, reviews of the real estate market in general, obtaining current financial statements from the borrowers and guarantors and assessing the general market trend. From this analysis, the Bank determines the amount of charge-offs or impairment for any particular loan. As of March 31, 2010, management believes that the Bank’s allowance for loan losses is adequate to support the level of adversely classified loans.

As of March 31, 2010, 34% of total real estate construction loans and 7% of commercial real estate loans are nonperforming. The other designated loan categories had no significant amounts of nonperforming loans compared to total loans outstanding in the respective categories.

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The following table shows nonperforming loans versus total loans in each loan category:

(Dollars in thousands) LOAN PORTFOLIO	Balance at 3/31/2010		Nonperforming Loans (NPL)		NPL as a % of Loan Category
Business	$	457,426	$	12,602		3	%
R/E Construction
Spec construction		52,098		20,804		40	%
Land acquisition & development/land		108,402		44,234		41	%
Multifamily/custom construction		12,905		-		0	%
Commercial R/E construction		31,996		5,800		18	%
Total R/E construction		205,401		70,838		34	%
Commercial R/E		183,027		12,328		7	%
Multifamily		89,920		-		0	%
Home equity/consumer		31,274		332		1	%
Residential		188,930		619		0	%
Total	$	1,155,978	$	96,719		8	%

At March 31, 2010 and December 31, 2009, impaired loans totaled $176.1 million and $183.7 million, respectively. Included in the $176.1 million in impaired loans at March 31, 2010, are $96.7 million in nonperforming loans and $79.4 million in loans that are performing. Performing impaired loans include $25.8 million in loans that have been designated as troubled debt restructured loans and are performing as agreed under the restructured notes, and $53.6 million in loans that are current with respect to both interest and principal, and have sufficient collateral support. The allowance for loan losses allocated to total impaired loans was approximately $6.9 million and $6.4 million at March 31, 2010 and December 31, 2009, respectively.

Loans are classified as restructured when a modification of terms is processed by the Bank, for economic or legal reasons related to the debtor’s financial difficulty, at terms and conditions that the Bank would not otherwise consider. In some cases, the Bank has extended the interest-only period of a loan or allowed a borrower to make interest-only payments to assist the borrower while trying to sell the collateral securing the loan. Total restructured loans were $44.9 million, including $20.7 million in commercial real estate loans, $10.3 million in land acquisition and development/land loans, $8.7 million in spec construction loans, $3.6 million in business loans and $1.6 million in residential loans at March 31, 2010 compared to $51.9 million, which included $20.4 million in commercial real estate loans, $14.2 million in land acquisition and development/land loans, $11.8 million in spec construction loans, $3.6 million in business loans and $1.9 million in residential loans at December 31, 2009. Of the $44.9 million in total restructured loans at March 31, 2010, $25.8 million were current in their payments and accruing interest and $19.1 million were nonaccruing.

Loans categorized as substandard or doubtful are considered to be adversely classified. At March 31, 2010 and December 31, 2009, respectively, loans totaling $195.7 million and $208.1 million were adversely classified.

The Bank had two loans in the amount of $309,000 that were 90 days or more past due and still accruing interest at March 31, 2010.

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Interest income that would have been recognized for the three months ended March 31, 2010 and 2009, had non-accrual loans been current in accordance with their contractual terms, amounted to $931,000 and $579,000, respectively.

Real Estate Owned

REO consist of property acquired by the Bank through foreclosure and are carried at the lower of the estimated fair value or the principal balance of the foreclosed loans. REO totaled $27.4 million at March 31, 2010 compared to $18.8 million at December 31, 2009. REO as of March 31, 2010 consisted of $1.3 million in commercial real estate, $5.8 million in residential construction/land development projects, $8.7 million in raw land, $7.5 million in land zoned multifamily, $3.5 million in single-family residential condominiums, and $612,000 in completed single-family residences.

The following table shows REO activity for the periods presented:

	Three Months Ended March 31,
(Dollars  in thousands)	2010			2009
Beginning balance	$	18,842		$	1,446
Loans transferred to REO		11,200			7,690
Capitalized improvements		970			-
Sales		(2,912	)		-
Write-downs		(706	)		(54	)
Ending balance	$	27,394		$	9,082

Deposits

Total deposits increased by $32.5 million to $1.17 billion at March 31, 2010, compared to December 31, 2009. The mix shifted to a greater percentage of checking account balances. Checking account deposits increased as the Bank continued to focus its sales activities on retail deposit generation in general and checking/transaction accounts in particular. Total checking account balances increased by $24.8 million between December 31, 2009 and March 31, 2010 despite the reduction of $51.9 million in public checking deposits. 

Savings and money market accounts (MMDA) increased $58,000 to $133.2 million at March 31, 2010 compared to December 31, 2009. Total CDs increased $7.6 million to $569.4 million. Included in total CDs at March 31, 2010 was $163.1 million in brokered CDs.

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

(Dollars in thousands)	March 31, 2010		% of Deposits			December 31, 2009		% of Deposits
Checking accounts	$	469,700		40.1	%	$	444,922		39.0	%
Savings & MMDA		133,188		11.3			133,130		11.7
CDs		569,370		48.6			561,722		49.3
Total	$	1,172,258		100.0	%	$	1,139,774		100.0	%

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FHLB Advances

The Bank uses Federal Home Loan Bank of Seattle (FHLB) advances to provide intermediate and longer term funding, as well as to augment deposits. At March 31, 2010, the Bank had $239.0 in FHLB advances, which was unchanged from December 31, 2009. Subject to its line of credit with the FHLB, the availability of eligible collateral, and within the parameters of the Bank’s liquidity management policy, the Bank will continue to use FHLB advances as a funding source.

Securities Sold Under Agreements to Repurchase and Lines of Credit

The Bank also uses repurchase agreements for funding. At March 31, 2010, the Bank had executed $146.1 million in repurchase agreements compared to $145.4 million at December 31, 2009.

Junior Subordinated Debentures

In 2000, the Corporation issued $10.3 million in trust preferred securities, which are termed “junior subordinated debentures.” These junior subordinated debentures have a fixed rate of 11.0% and mature on March 1, 2030, but are callable at a premium beginning March 1, 2010. In December 2004, the Corporation issued an additional $5.2 million in junior subordinated debentures. These debentures had a fixed rate of 5.82% for the first five years and as of January 7, 2010, float at the three-month LIBOR plus 1.90% for the remaining twenty-five years. The debentures are callable at par after the first five years. On March 30, 2006, the Corporation issued an additional $10.3 million in junior subordinated debentures. These debentures have an initial rate of 6.65% set for five years and then convert to a three-month LIBOR plus 1.40% for the remaining twenty-five years. The debentures are callable at par after five years. The Corporation’s junior subordinated debentures are considered Tier 1 capital by financial institution regulators.

On November 5, 2009, the Board of Directors elected to defer payments due on these instruments. Under the terms of each instrument deferral of payments are permitted without triggering an event of default. Generally, during any deferral period, the Corporation is prohibited from paying any dividends or distributions on, or redeem, purchase or acquire, or make a liquidation payment with respect to the Corporation’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Corporation that rank pari passu in all respects with, or junior to, the specific instrument. In addition, during any deferral period, interest on the trust preferred securities is compounded from the date such interest would have been payable.

Income Tax Provision

Cascade recorded a federal income tax provision of $3.2 million for the three months ended March 31, 2010 and a benefit of $2.9 million for the three months ended March 31, 2009.  The effective tax rates were 11% and 38% respectively, for the three month periods ending March 31, 2010 and 2009.  At March 31, 2010, Cascade assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. Cascade determined that the negative evidence associated with cumulative losses, the expectation of entering into a consent order with its regulators, and continued credit deterioration in its loan portfolio outweighed the positive evidence. Therefore, Cascade established a valuation allowance

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of $13.6 million against its deferred tax asset. Cascade will not be able to recognize the tax benefits on current and future losses until it can show that it is more likely than not that it will generate enough taxable income in future periods to realize the benefits of its deferred tax asset and loss carryforwards.

Stockholders’ Equity and Regulatory Matters

 Total stockholders’ equity decreased $30.2 million from $134.5 million at December 31, 2009 to $104.3 million at March 31, 2010. The decrease in equity was due to the net loss for the period. The loss was primarily due to the $31.3 million loan loss provision that the Bank recorded during the period.

On November 21, 2008, Cascade completed its $39.0 million capital raise as a participant in the U.S. Treasury Department’s Capital Purchase Program. Under the terms of the transaction, the Corporation issued 38,970 shares of Series A Fixed-Rate Cumulative Perpetual Preferred Stock, and a warrant to purchase 863,442 shares of the Corporation’s common stock at an exercise price of $6.77 per share. On November 5, 2009, the Board of Directors elected to defer the dividend payments on this preferred stock. Under the terms of the preferred stock, deferral of payment is permitted without triggering an event of default. Generally, during any deferral period, the Corporation is prohibited from paying any dividends or distributions on, and may not redeem, purchase or acquire, or make a liquidation payment with respect to the Corporation’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Corporation that rank pari passu in all respects with, or junior to, the specific instrument. In addition, during any deferral period, dividends on the preferred stock are compounded from the date such dividends would have been payable.

The Bank’s capital ratios are above regulatory levels for well-capitalized banks with a risk-based capital ratio of 10.58% and a Tier 1 capital ratio of 6.46% as of March 31, 2010.

Federal Reserve guidelines require the Corporation, on a consolidated basis, to maintain minimum levels of capital as well. At March 31, 2010, the Corporation's total risk-based capital to risk-weighted assets was 11.00%, compared to 12.82% at December 31, 2009.

Although the Bank remains “well-capitalized” based on its regulatory capital ratios, the MOU suggests, and recent conversations with the Bank’s regulators have confirmed, the Bank’s need to raise additional capital, if and when available, to be able to address the potential risks of additional loan losses and current adverse economic conditions and increase the Bank’s regulatory capital ratios.

The Bank continues to take steps to strengthen its capital position. Evaluation of the need to raise additional capital began in mid 2009, and in the fourth quarter of 2009, the Board of Directors retained an investment banking firm to assist in raising capital and deleveraging our balance sheet. The Bank’s ability to raise additional capital has been adversely affected by unfavorable conditions in the capital markets and its financial performance, and the Bank has not raised additional capital to date.

The Corporation is committed to managing capital for maximum stockholder benefit and maintaining protection for depositors and creditors. The Corporation manages various capital levels at both the holding company and subsidiary bank level to attempt to maintain adequate capital ratios and levels in accordance with external regulations and

47

capital guidelines established by the Board of Directors. The Corporation had paid its shareholders a cash dividend on a quarterly basis since 2002. In June 2009, the Corporation announced that it would temporarily suspend its regular quarterly cash dividend on common stock to preserve capital.

Accumulated other comprehensive income increased to $1.2 million at March 31, 2010, compared to a $1.2 million deficit at December 31, 2009.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2010 and 2009

General

The Corporation had a net loss of $32.1 million for the three months ended March 31, 2010, compared to a net loss of $4.8 million for the three months ended March 31, 2009. Net loss attributable to common stockholders, which adjusts for the dividends and the accretion of the issuance discount on preferred stock paid to the U.S. Treasury, was $32.8 million or $2.69 per diluted common share compared to a net loss attributable to common stockholders of $5.4 million, or $0.45 per diluted common share, in the first quarter of 2009.

Net Interest Income

Net interest income before the provision for loan losses decreased 13% or $1.4 million to $9.7 million for the three months ended March 31, 2010, compared to $11.1 million for the three months ended March 31, 2009. Average interest-earning assets increased by $21.3 million or 1% to $1.51 billion for the three months ended March 31, 2010, compared to the same period in 2009 as a result of an increase in average interest-earning securities and deposits in other institutions, partially offset by a decline in average interest-earning loans. Average interest-earning investment securities and deposits increased $141.9 million to $423.2 million and average total interest-earning loans decreased $120.5 million to $1.09 billion for the three months ended March 31, 2010, compared to the same quarter of the prior year. Primarily due to the change in the mix of average interest-earning assets towards lower yielding investment securities and deposits in other institutions, the yield on earning assets declined 69 basis points to 5.13% for the three months ended March 31, 2010 as compared to 5.82% for the same period in 2009.  The cost of interest-bearing liabilities declined more slowly, a decline of 42 basis points, to 2.60% for the three months ended March 31, 2010 as compared to 3.02% for the same period in 2009, and resulted in a decline in the net interest spread for the quarter ending March 31, 2010 as compared to the same quarter a year earlier.

	Three Months Ended March 31,
(Dollars in thousands)	2010			2009
Average interest-earning assets	$	1,512,046		$	1,490,698
Average interest-bearing liabilities		1,473,069			1,383,150
Average interest-earning assets to average interest-bearing liabilities		102.65	%		107.78	%
Yield on interest-earning assets		5.13			5.82
Cost of interest-bearing liabilities		2.60			3.02
Net interest spread		2.53			2.80
Net interest margin		2.60			3.03

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A 27 basis point decrease in the net interest spread and a decrease in the ratio of interest-earning assets to interest-bearing liabilities reduced the net interest margin 43 basis points to 2.60% for the three months ended March 31, 2010, compared to the same quarter the prior year.

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Average Balances and an Analysis of Average Rates Earned and Paid

The following table shows average balances and interest income or interest expense, with the resulting average yield or cost by category.

		Three Months Ended March 31,
		2010									2009
(Dollars in thousands)		Average Balance			Interest and Dividend			Yield/ Cost			Average Balance			Interest and Dividend			Yield/ Cost
ASSETS
Interest-earning assets
Residential loans		$	182,554		$	2,208			4.91	%	$	126,952		$	1,857			5.93	%
Multifamily loans			85,580			1,373			6.51			87,798			1,356			6.26
Commercial R/E loans			170,759			2,653			6.30			137,857			2,294			6.75
R/E construction loans			166,108			2,020			4.93			347,648			4,374			5.10
Home equity/consumer loans			31,197			523			6.79			30,887			501			6.58
Business loans			452,668			7,389			6.62			478,227			7,833			6.64
Total loans(1)			1,088,866			16,166			6.02			1,209,369			18,215			6.11
Securities available-for-sale			243,443			2,472			4.12			155,281			1,875			4.90
Securities held-to-maturity			39,256			417			4.31			97,024			1,310			5.47
Interest-earning deposits in other institutions			140,481			76			0.22			29,024			10			0.15
Total securities and interest-earning deposits			423,180			2,965			2.84			281,329			3,195			4.61
Total interest-earning assets			1,512,046		$	19,131			5.13	%		1,490,698		$	21,410			5.82	%
Noninterest-earning assets
Office properties and equipment, net			14,341									15,569
REO, net			18,468									1,502
Nonperforming loans			107,225									49,962
Other noninterest-earning assets			63,444									76,583
Total assets		$	1,715,524								$	1,634,314
LIABILITIES AND EQUITY
Interest-bearing liabilities
Savings accounts		$	9,722		$	6			0.25	%	$	10,247		$	6			0.25	%
Checking accounts			368,858			1,246			1.37			129,015			452			1.42
Money market accounts			121,818			269			0.90			173,749			489			1.14
Certificates of deposit			566,374			2,730			1.95			577,649			4,009			2.81
Total interest-bearing deposits			1,066,772			4,251			1.57			890,660			4,956			2.26
Other interest-bearing liabilities
FHLB advances			239,000			2,565			4.35			249,000			2,656			4.33
Securities sold under agreements to repurchase			145,603			2,131			5.94			148,312			2,103			5.74
Junior subordinated debentures			18,806			495			10.68			25,955			530			8.28
Other borrowings			2,888			2			0.25			69,223			46			0.28
Total interest-bearing liabilities			1,473,069		$	9,444			2.60	%		1,383,150		$	10,291			3.02	%
Other liabilities			108,803									89,911
Total liabilities			1,581,872									1,473,061
Stockholders’ equity			133,652									161,253
Total liabilities and stockholders’ equity		$	1,715,524								$	1,634,314
Net interest income (2)					$	9,687								$	11,119
Interest rate spread (3)	��								2.53	%								2.80	%
Net interest margin (4)						2.60	%								3.03	%
Average interest-earning assets to average interest-bearing liabilities			102.65	%								107.78	%

(1) Does not include interest or balances on loans 90 days or more past due that are classified as nonaccruing.

(2) Interest and dividends on total interest-earning assets less interest on total interest-bearing liabilities.

(3) Total interest-earning assets yield less total interest-bearing liabilities cost.

(4) Net interest income as an annualized percentage of total interest-earning assets.

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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).

	Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009 Increase (Decrease) Due to
(Dollars in thousands)	Rate			Volume			Mix			Net
Interest-earning assets
Residential loans	$	(326	)	$	825		$	(148	)	$	351
Multifamily loans		54			(35	)		(2	)		17
Commercial R/E		(155	)		555			(41	)		359
R/E construction loans		(148	)		(2,316	)		110			(2,354	)
Home equity/consumer loans		17			5			-			22
Business loans		(27	)		(424	)		7			(444	)
Total loans		(585	)		(1,390	)		(74	)		(2,049	)
Securities available-for-sale		(303	)		1,080			(180	)		597
Securities held-to-maturity		(283	)		(791	)		181			(893	)
Interest-earning deposits in other institutions		5			41			20			66
Total securities and interest-earning deposits		(581	)		330			21			(230	)
Total net change in income on interest-earning assets	$	(1,166	)	$	(1,060	)	$	(53	)	$	(2,279	)
Interest-bearing liabilities
Interest-bearing deposits
Savings accounts	$	-		$	-		$	-		$	-
Checking accounts		(17	)		852			(41	)		794
Money market accounts		(106	)		(148	)		34			(220	)
Certificates of deposit		(1,242	)		(79	)		42			(1,279	)
Total deposits		(1,365	)		625			35			(705	)
FHLB advances		17			(108	)		-			(91	)
Securities sold under agreements to repurchase		73			(39	)		(5	)		29
Junior subordinated debentures		156			(148	)		(43	)		(35	)
Other borrowings		(6	)		(47	)		8			(45	)
Total net change in expenses on interest-bearing liabilities	$	(1,125	)	$	283		$	(5	)	$	(847	)
Net change in net interest income	$	(41	)	$	(1,343	)	$	(48	)	$	(1,432	)

Provision for Loan Losses

Cascade’s provision for loan losses was $31.3 million for the three months ended March 31, 2010, compared to $13.9 million for the same period in 2009. The increase in the provision was due to an increase in charge-offs, primarily related to land acquisition and development/land loans, including the Bank’s two largest land loans which accounted for $14.8 million in charge-offs. The collateral for the first loan consisted of 263 lots, which were converted to REO in March 2010. The Bank has entered into a purchase and sale agreement for the sale of these lots, half of which are scheduled to close in the second quarter, and the remaining lots are expected to close in the third quarter of 2010. The collateral for the second loan included 134 lots located in King County that were converted to REO in April 2010. The Bank has executed a letter of intent to enter into a purchase and sale

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agreement for the sale of these lots, which is expected to close in the second quarter.  Both transactions are subject to customary closing conditions and there can be no guarantee they will close as Cascade currently anticipates.

Other Income

Total other income was $1.9 million for the three months ended March 31, 2010, as compared to $3.7 million for the three months ended March 31, 2009. Gain on sold/called securities was $28,000 for the quarter ended March 31, 2010 compared to $118,000 in the first quarter of 2009. For the three months ended March 31, 2010, checking service fees increased $151,000 to $1.3 million, compared to the same period in the prior year. There was no fair value gain on junior subordinated debentures for the quarter ended March 31, 2010 compared to $1.8 million for the same period in 2009.

Other Expenses

Total other expenses were $9.3 million in the first quarter of 2010, compared to $8.6 million in the first quarter a year ago.  Compensation expense increased 2% primarily due to the opening of a new branch in Edmonds in May 2009 and increased health insurance costs.  These compensation increases were partially offset by a decrease in directors’ fees.  Increases of $462,000 in FDIC insurance premiums and a $931,000 increase in REO and real estate in acquisition (REA) expenses, including writedowns, accounted for most of the difference in other expenses.   The increased expenses in the current quarter, compared to one year ago, were mostly offset by charges taken in the first quarter of 2009 including an $858,000 OTTI charge and a $368,000 assessment paid to the Washington Public Depository Protection Commission related to the failure of The Bank of Clark County. 

Efficiency Ratio

A standard measurement used to calculate the overhead costs of financial institutions is the efficiency ratio. The efficiency ratio is calculated by dividing other expense by total revenue, which generally indicates how much an institution spends to generate a dollar of revenue. The lower the efficiency ratio, the more efficient the institution. Management continues to look for ways to improve the efficiency ratio by increasing other income and net interest income while diligently controlling costs and maintaining high standards of service. For the three months ended March 31, 2010 and 2009, the Corporation’s efficiency ratio was 79.64% and 58.31%, respectively.

Non-GAAP Financial Measure – Efficiency Ratio (Excluding OTTI)

The efficiency ratio (excluding OTTI) is determined by methods other than those in accordance with accounting principles generally accepted in the United States of America (GAAP). For the three months ended March 31, 2010 and 2009, the Corporation’s efficiency ratio (excluding OTTI) was 79.64% and 52.50%, respectively. The efficiency ratio calculation for the three months ended March 31, 2009 excludes an OTTI charge of $858,000. Management believes the presentation of this financial measure, excluding the impact of these items, provides useful supplemental information that is essential for a proper understanding of the financial results of the Corporation. This disclosure should not be viewed as a substitute for results determined to be in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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A summary of the efficiency ratio (excluding OTTI) follows:

(Dollars in thousands)	Three Months Ended March 31,
	2010			2009
Total other expenses	$	9,237		$	8,610
Less OTTI		-			858
Total other expenses	$	9,237		$	7,752
Net interest income	$	9,687		$	11,119
Other income		1,912			3,647
Total income	$	11,599		$	14,766
Efficiency ratio (excluding OTTI)		79.64	%		52.50	%

Off-Balance Sheet Arrangements: Credit Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Bank underwrites its standby letters of credit using its policies and procedures applicable to loans in general. Standby letters of credit are made on an unsecured and secured basis. The Bank has not incurred any losses on its commitments in 2010 or 2009.

At March 31, 2010 and December 31, 2009, the following financial instruments with off-balance sheet risk were outstanding:

	March 31,		December 31,
(Dollars in thousands)	2010		2009
Commitments to grant loans	$	3,688	$	11,145
Unfunded commitments under lines of credit/loans in process		112,672		122,714
Standby letters of credit and financial guarantees written		1,923		1,695
Unused commitments on bankcards		13,423		13,621
Total	$	131,706	$	149,175

Contractual Obligations and Commitments

The following table sets forth the Corporation’s long-term contractual obligations:

	Payments Due Per Period
(Dollars in thousands)	<1 Year		1-3 Years		3-5 Years		Thereafter		Total
Certificates of deposit	$	462,939	$	90,243	$	16,188	$	-	$	569,370
Federal Home Loan Bank advances		-		70,000		20,000		149,000		239,000
Securities sold under agreements to repurchase		1,065		-		-		145,000		146,065
Operating leases		898		1,762		1,680		7,561		11,901
Junior subordinated debentures		-		-		-		18,806		18,806
Total	$	464,902	$	162,005	$	37,868	$	320,367	$	985,142

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Significant Concentrations of Credit Risk

Concentration of credit risk is the risk associated with a lack of diversification, such as having substantial loan concentrations in a specific type of loan within our loan portfolio, thereby exposing us to greater risks resulting from adverse economic, political, regulatory, geographic, industrial or credit developments. At March 31, 2010, our most significant concentration of credit risk was in loans secured by real estate. Approximately 86% of Cascade’s loan portfolio is secured by real estate. Over the last two years, there has been deterioration in the residential development market which has led to an increase in nonperforming loans and the allowance for loan losses.

At March 31, 2010, our most significant investment concentration of credit risk was with the U.S. Government, its agencies and Government Sponsored Enterprises. Our exposure, which results from positions in securities issued by the U.S. Government, and its agencies, and securities guaranteed by Government Sponsored Enterprises, was $275.5 million, or 95% of our total investment portfolio at March 31, 2010.

Segment Results

The Corporation and the Bank are managed as a legal entity and not by lines of business. The Bank’s operations include commercial banking services, such as lending activities, business services, deposit products and other services. The performance of the Bank as a whole is reviewed by the Board of Directors and Management Committee.

The Management Committee, which is the senior decision making group of the Bank, is comprised of six members including the President/CEO. Segment information is not necessary to be presented in the notes to the consolidated financial statements because operating decisions are made based on the performance of the Corporation as a whole.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

ASSET/LIABILITY MANAGEMENT

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 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.

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Interest Rate Risk Management

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

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

Using standard interest rate shock (an instantaneous uniform change in interest rates at all maturities) methodology, as of March 31, 2010, the Bank is within all the guidelines established by the Board for the changes in net interest income, fair value of equity, and adjusted capital/asset ratios. As of March 31, 2010, the Bank’s fair value of equity decreases 14.2% in the up 200 basis point scenario and 9.3% in the down 200 basis point scenario, within the established guideline of a maximum 30% decline. Using the same methodology, the adjusted capital/asset ratio is 5.8% in both the up and down 200 basis point scenarios, both above the 5% minimum established guideline. The net interest income increases 4.7% in the up 200 basis point scenario and decreases 3.4% in the down 200 basis point scenario, both within the guideline of a 10% decline.

The Bank has sought to manage its interest rate exposure through the structure of its balance sheet. To limit its interest rate risk, the Bank has sought to emphasize its loan mix toward prime based loans with rate floors. In addition, the Bank sells many of its 15 and 30 year fixed rate residential loans. The table below summarizes the Bank’s loan portfolio by rate type at March 31, 2010.

Type	% of Portfolio
Variable		18	%
Adjustable		46	%
Fixed		36	%
		100	%

The Bank extends the maturity of its liabilities by offering long-term deposit products to customers, by obtaining longer term FHLB advances, and by extending the maturities of brokered CDs. As of March 31, 2010, the entire portfolio of $239.0 million in long-term advances had original maturities greater than one year. This portfolio consists entirely of advances with put provisions that allow the FHLB to request repayment under certain rate conditions and on specific dates.

In addition to writing embedded options in some of its liabilities, the Bank invests in mortgage backed securities and callable GSE (agency) securities. The Bank receives higher yields in return by writing call options. The Bank models this optionality in measuring, monitoring, and managing its interest rate exposure. As of March 31, 2010, the Bank did not use any interest rate swap agreements, including caps, floors or collars.

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Liquidity and Sources of Funds

The primary objective of our liquidity management program is to ensure that we will have adequate funds readily available at reasonable cost to meet the financial obligations of the company. Potential uses of funds include new loan originations or advances against existing loan commitments, deposit withdrawals, and repayment of borrowings and other liabilities. Potential sources of funds include existing liquid assets; cash flow from operations; deposit growth; Federal Home Loan Bank of Seattle (FHLB) advances; other borrowings, including wholesale repurchase agreements; repayment of existing loans; the sale of loans; and borrowings from the Federal Reserve Bank of San Francisco (FRB).

To meet the Bank’s immediate liquidity needs, we maintain readily available funds in deposit accounts at the FHLB and the FRB. In addition, we invest excess funds in short-term, highly liquid securities that can later be used as collateral for borrowing or sold as needed. At March 31, 2010, our combined deposit balances at FHLB and FRB were $152.4 million, compared with $141.6 million at December 31, 2009. Unpledged investments totaled $31.4 million at March 31, 2010.

In addition to meeting our funding needs using liquid assets, we also borrow from the FHLB, the FRB, and through the use of wholesale repurchase agreements. At March 31, 2010, the Bank had $239.0 million in FHLB borrowings, plus a $65.0 million Letter of Credit that is being used to secure public funds. Based upon collateral pledged, at March 31, 2010 the Bank had excess borrowing capacity from the FHLB of approximately $20.9 million. The Bank also uses reverse repurchase agreements (securities sold under agreements to repurchase) as a source of funding. At March 31, 2010, the Bank had $146.1 million in reverse repurchase agreements outstanding. The Bank also has pledged collateral in an amount adequate to borrow up to $157.2million at the FRB. As of March 31, 2010, the Bank had no borrowings outstanding from the FRB.

As indicated on the Corporation’s Consolidated Statement of Cash Flows, net cash from operating activities for the three months ended March 31, 2010, contributed $4.3 million to liquidity compared to $4.2 million for the three months ended March 31, 2009. Also during the quarter, funds were provided by net growth in deposits, which totaled $32.5 million in the first quarter of 2010 compared with $8.6 million one year earlier.

Item 4 - Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

An evaluation of the Registrant's disclosure controls and procedures (as defined in section 13(a) - 14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Registrant's Chief Executive Officer, Principal Financial Officer, and several other members of the Registrant's senior management as of March 31, 2010. The Registrant's Chief Executive Officer and Principal Financial Officer concluded that the Registrant's disclosure controls and procedures as then in effect were effective in ensuring that the information required to be disclosed by the Registrant in the reports it files or submits under the Act is (i) accumulated and communicated

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to the Registrant's management (including the Chief Executive Officer and Principal Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

CHANGES IN INTERNAL CONTROLS

In the quarter ended March 31, 2010, the Registrant did not make any significant changes in, nor take any corrective actions regarding its internal controls, or other factors that have materially affected or are reasonably likely to materially affect these controls.

PART II –– OTHER INFORMATION

Item 1.  Legal Proceedings

The Corporation and the Bank are involved in litigation and have negotiations in progress resulting from activities arising from normal operations. In the opinion of management, none of these matters are likely to have a materially adverse effect on the Corporation’s financial position.

Item 1A.  Risk Factors

There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A. – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The Corporation entered into an agreement with the Treasury to participate in the TARP Capital Purchase Program on November 21, 2008.  Prior to that date the Corporation had paid a quarterly dividend of $0.045.  The Corporation’s ability to increase its quarterly common dividend above $0.045 in future periods is restricted as long as the Corporation is a participant in the TARP Capital Purchase Program. The Board approved stock repurchase plan expired May 31, 2009 and was not reauthorized.

Item 3.  Defaults upon Senior Securities

 None

Item 4.  (Removed and Reserved)

Item 5.  Other information

Cascade Bank was notified by the FDIC in late September 2009, that based on an off-site review of its financial information, the Bank, among other restrictions, could not pay a cash dividend unless it obtained a non-objection from the FDIC.  The Bank requested a non-objection and was informed orally that the request would be denied. Therefore, the Bank is unable to pay a cash dividend from the Bank to the Corporation. Dividends from the Bank are the Corporation’s primary source of cash. Without receiving a cash dividend from the  Bank, the Corporation does not have sufficient cash to pay, when due, interest on its three (3) Trust Preferred Securities:  (i) Trust Preferred Securities I ($10 million at 11% interest); (ii) Trust Preferred Securities II ($5 million at 5.82% interest); and (iii) Trust Preferred Securities III ($10 million at 6.65% interest), or to pay the dividend, when due, on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the United States Department of the Treasury (the “Preferred Stock”).  In light of the foregoing, on November 5, 2009, the Board of Directors elected to defer the next payments due on these instruments.  Under the terms of each instrument, deferral of payment is permitted without triggering an

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event of default.  Generally, during any deferral period, the Corporation is prohibited from paying any dividends or distributions on, or redeem, purchase or acquire, or make a liquidation payment with respect to the Corporation’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Corporation that rank pari passu in all respects with, or junior to, the specific instrument.  In addition, during any deferral period, interest on the trust preferred securities is compounded from the date such interest would have been payable. The dividends on the Preferred Stock, if not paid on the dividend payment date, are compounded from the dividend payment date and are payable in arrears on each payment date.

Item 6.  Exhibits

(a)  Exhibits

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

31.2	Certifications of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act

(b) Reports on Form 8-K

On March 22, 2010, the Corporation filed a Form 8-K in response to a letter from Gary F. Linden of the law firm of Helsell Fetterman LLP, attorney for Craig Skotdal and the other members of the shareholder group identified in the Schedule 13D filed with the SEC on March 2, 2010 (the “Skotdal Group”), under items 8.01 and 9.01 of Form 8-K.

On April 15, 2010, the Corporation filed a Form 8-K reporting an attached press release announcing that the Bank has entered into agreements to sell assets associated with two of their largest land acquisition and development loans, under Item 2.02 and 9.01 of Form 8-K.

On April 21, 2010, the Corporation filed a Form 8-K announcing that Director Katherine M. Lombardo has decided not to stand for reelection due to the increasing overseas travel requirements of her position with the Gates Foundation. Ms. Lombardo intends to resign her position as a Cascade director as soon as the Board names a replacement, under item 5.02 of Form 8-K.

On April 22, 2010, the Corporation filed a Form 8-K reporting an attached press release announcing it has appointed Marion R. (“Robin”) Foote to its Board of Directors. Ms. Foote was appointed by Cascade’s Board of Directors and will stand for election at the Corporation’s next annual meeting of shareholders on Tuesday, June 22, 2010, under Item 5.02 and 9.01 of Form 8-K.

On April 29, 2010, the Corporation filed a Form 8-K reporting an attached press release announcing earnings for the quarter ended March 31, 2010, under Items 2.02 and 9.01 of Form 8-K.

On April 29, 2010, the Corporation filed a Form 8-K reporting an attached press release announcing the Corporation had entered into an agreement to settle a proxy contest pertaining to the election of directors to the Corporation’s Board of Directors at the Corporation’s 2010 annual meeting of shareholders, under Items 1.01 and 9.01 of Form 8-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CASCADE FINANCIAL CORPORATION
May 7, 2010	/s/ Carol K. Nelson
	By:     Carol K. Nelson, President and Chief Executive Officer (Principal Executive Officer)
May 7, 2010	/s/ Terry Stull
	By:     Terry Stull, Senior Vice President and Controller (Chief Accounting Officer and Principal Financial Officer)

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