**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 ENDEDJune
              30, 2005




OR





**o**
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR TRANSITION PERIOD
                FROM______________TO________________





Commission
      file number 0-25286





**CASCADE
      FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





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





Indicate
      by a check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding twelve months (or for such shorter periods that the registrant was
      required to file such reports), and (2) has been subject to such filing
      requirements for the past ninety days.  **Yes** þNo
o





Indicate
      by a check mark whether the registrant is an accelerated filer (as defined
      in
      Rule 12b-2 of the Act)  **Yes þ** **Noo**





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 July 31, 2005Common
                Stock ($.01 par value)
            9,580,584


1







**CASCADE
      FINANCIAL CORPORATION**





**FORM
      10-Q**


**for
      the Quarter Ended**  **June
      30, 2005**











INDEX


PART
                I — Financial Information:PAGEItem
                1
            —
                Financial Statements:—
                Condensed Consolidated Balance Sheets
            3—
                Condensed Consolidated Statements of Income
            4—
                Consolidated Statements of Comprehensive Income (Loss)
            5—
                Condensed Consolidated Statements of Cash Flows
            6—
                Notes to Condensed Consolidated Financial Statements
            8Item
                2
            —
                Management’s Discussion and Analysis of Financial Condition and
                Resultsof
                Operations
            10Item
                3
            —
                Quantitative and Qualitative Disclosures about Market Risk
            23Item
                4
            —
                Controls and Procedures
            24PART
                II — Other Information
            26








2


**PART
      I -- FINANCIAL INFORMATION**





**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(dollars
      in thousands)





June
                30,
            
            December
                31,2005
            
            2004(unaudited)
            
            (unaudited)**ASSETS**Cash
                on hand and in banks
            
            $
            19,041
            
            $
            11,692Interest-bearing
                deposits in other institutions
            
            
            1,523
            
            
            1,337Securities
                available-for-sale
            
            
            131,715
            
            
            124,276Securities
                held-to-maturity
            
            
            93,734
            
            
            91,339Loans
            
            
            857,588
            
            
            804,029Allowance
                for loan losses
            
            
            (9,891
            )
            
            (9,563
            )Loans,
                net
            
            
            847,697
            
            
            794,466Goodwill
                and intangibles, net
            
            
            26,204
            
            
            26,292Premises
                and equipment, net
            
            
            12,907
            
            
            12,824Cash
                surrender value of bank-owned life insurance
            
            
            16,979
            
            
            16,650Accrued
                interest receivable and other assets
            
            
            9,019
            
            
            10,079TOTAL
                ASSETS
            
            $
            1,158,819
            
            $
            1,088,955**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Liabilities:Deposits
            
            
            790,617
            
            
            721,908Federal
                Home Loan Bank advances
            
            
            223,000
            
            
            228,000Securities
                sold under agreements to repurchase
            
            
            21,046
            
            
            20,902Junior
                subordinated debentures payable
            
            
            15,693
            
            
            15,454Advance
                payments by borrowers for taxes and insurance
            
            
            1,015
            
            
            677Dividends
                payable
            
            
            766
            
            
            765Accrued
                interest payable, expenses and other liabilities
            
            
            5,217
            
            
            4,959Deferred
                federal income taxes
            
            
            251
            
            
            40TOTAL
                LIABILITIES
            
            
            1,057,605
            
            
            992,705Stockholders’
                Equity:Preferred
                stock, $.01 par value, Authorized 500,000 shares;no
                shares issued or outstanding
            
            
            -
            
            
            -Common
                stock, $.01 par value, Authorized 25,000,000 shares;issued
                and outstanding 9,580,034 shares at June 30, 2005and
                9,559,822 shares at December 31, 2004
            
            
            96
            
            
            96Additional
                paid-in capital
            
            
            37,898
            
            
            37,326Retained
                earnings, substantially restricted
            
            
            63,942
            
            
            59,975Accumulated
                other comprehensive income (loss)
            
            
            (722
            )
            
            (1,147
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            101,214
            
            
            96,250TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            1,158,819
            
            $
            1,088,955








See
      notes
      to condensed consolidated financial statements


3


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


(dollars
      in thousands, except per share amounts)


(unaudited)




Three
                months ended
            
            Six
                months endedJune
                30,
            
            June
                30,2005
            
            2004
            
            2005
            
            2004Interest
                income:Loans
            
            $
            14,147
            
            $
            10,146
            
            $
            27,303
            
            $
            19,481Securities
                available-for-sale
            
            
            1,391
            
            
            1,749
            
            
            2,693
            
            
            3,740Securities
                held-to-maturity
            
            
            1,092
            
            
            1,044
            
            
            2,167
            
            
            2,152FHLB
                stock dividends
            
            
            -
            
            
            151
            
            
            49
            
            
            298Interest-earning
                deposits
            
            
            36
            
            
            6
            
            
            54
            
            
            34Total
                interest income
            
            
            16,666
            
            
            13,096
            
            
            32,266
            
            
            25,705Interest
                expense:Deposits
            
            
            4,302
            
            
            2,533
            
            
            7,846
            
            
            4,906FHLB
                advances and repurchase agreements
            
            
            2,918
            
            
            2,547
            
            
            5,927
            
            
            5,312Junior
                subordinated debentures
            
            
            295
            
            
            170
            
            
            568
            
            
            339Total
                interest expense
            
            
            7,515
            
            
            5,250
            
            
            14,341
            
            
            10,557Net
                interest income
            
            
            9,151
            
            
            7,846
            
            
            17,925
            
            
            15,148Provision
                for loan losses
            
            
            250
            
            
            150
            
            
            495
            
            
            375Net
                interest income after provision for loan losses
            
            
            8,901
            
            
            7,696
            
            
            17,430
            
            
            14,773Other
                income:Gain
                on sale of loans
            
            
            434
            
            
            82
            
            
            464
            
            
            144Gain
                on sale of securities available-for-sale
            
            
            -
            
            
            112
            
            
            13
            
            
            381Net
                gain on sale of REO
            
            
            -
            
            
            23
            
            
            33
            
            
            99Checking
                service fees
            
            
            767
            
            
            503
            
            
            1,543
            
            
            944Other
                service fees
            
            
            207
            
            
            167
            
            
            420
            
            
            307BOLI
            
            
            190
            
            
            133
            
            
            378
            
            
            267Other
            
            
            69
            
            
            168
            
            
            416
            
            
            198Total
                other income
            
            
            1,667
            
            
            1,188
            
            
            3,267
            
            
            2,340Other
                expenses:Salaries
                and employee benefits
            
            
            3,012
            
            
            2,675
            
            
            6,180
            
            
            5,308Occupancy
            
            
            823
            
            
            635
            
            
            1,630
            
            
            1,244Marketing
            
            
            268
            
            
            148
            
            
            353
            
            
            242Data
                processing
            
            
            172
            
            
            97
            
            
            317
            
            
            176Prepayment
                fees on FHLB advances
            
            
            73
            
            
            -
            
            
            73
            
            
            26Other
            
            
            1,428
            
            
            1,745
            
            
            2,776
            
            
            2,770Total
                other expenses
            
            
            5,776
            
            
            5,300
            
            
            11,329
            
            
            9,766Income
                before provision for federal income taxes
            
            
            4,792
            
            
            3,584
            
            
            9,368
            
            
            7,347Provision
                for federal income taxes
            
            
            1,577
            
            
            1,300
            
            
            3,082
            
            
            2,489Net
                income
            
            $
            3,215
            
            $
            2,284
            
            $
            6,286
            
            $
            4,858Net
                income per common share, basic
            
            $
            0.34
            
            $
            0.27
            
            $
            0.66
            
            $
            0.58Weighted
                average number of shares outstanding, basic
            
            
            9,573,176
            
            
            8,583,163
            
            
            9,574,720
            
            
            8,438,534Net
                income per share, diluted
            
            $
            0.33
            
            $
            0.26
            
            $
            0.64
            
            $
            0.55Weighted
                average number of shares outstanding, diluted
            
            
            9,831,085
            
            
            8,915,706
            
            
            9,854,265
            
            
            8,789,473Dividends
                declared per share
            
            
            0.08
            
            
            0.07
            
            
            0.16
            
            
            0.14





See
      notes
      to condensed consolidated financial statements


4


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**


(dollars
      in thousands)


(unaudited)





Three
                months ended
            
            Six
                months EndedJune
                30,
            
            June
                30,2005
            
            2004
            
            2005
            
            2004Net
                Income
            
            $
            3,215
            
            $
            2,284
            
            $
            6,286
            
            $
            4,858Increase
                in unrealized gain (loss) on securitiesavailable-for-sale,
                net of tax (benefit) expenseof
                $874 and $(1,453) for the three monthsended
                June 30, 2005 and 2004, respectively,and
                $233 and $(1,120) for the six monthsJune
                30, 2005 and 2004, respectively
            
            
            1,623
            
            
            (2,820
            )
            
            399
            
            
            (2,175
            )Increase
                in unrealized gain (loss) on swapsavailable-for-sale,
                net of tax (benefit) expenseof
                $0 and $344 for the three monthsended
                June 30, 2005 and 2004, respectively,and
                $114 and $44 for the six monthsJune
                30, 2005 and 2004, respectively
            
            
            -
            
            
            722
            
            
            212
            
            
            84Less
                reclassification adjustment for gains on securitiesincluded
                in net income, net of tax (benefit) of $0 and$(38)
                for the three months ended June 30, 2005and
                2004, respectively, and $(4) and $(130)for
                the six months ended June 30, 2005 and2004,
                respectively.
            
            
            -
            
            
            (74
            )
            
            (8
            )
            
            (251
            )Less
                reclassification adjustment for gains on swapsincluded
                in net income, net of tax (benefit) of $(0)and
                $(44) for the three months ended June 30, 2005and
                2004, respectively, and $(96) and $(44)for
                the six months ended June 30, 2005 and2004,
                respectively.
            
            
            -
            
            
            (84
            )
            
            (179
            )
            
            (84
            )Comprehensive
                Income
            
            $
            4,838
            
            $
            28
            
            $
            6,710
            
            $
            2,432

































See
      notes
      to condensed consolidated financial statements


5


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(dollars
      in thousands, unaudited)





Six
                MonthsEnded
                June 30,2005
            
            2004Cash
                flows from operating activities:Net
                income
            
            $
            6,286
            
            $
            4,858Adjustments
                to reconcile net income to net cash provided by(used
                in) operating activities:Depreciation
                and amortization of premises and equipment
            
            
            922
            
            
            723Provision
                for losses on loans
            
            
            495
            
            
            375Increase
                in cash surrender value of bank owned life insurance
            
            
            (329
            )
            
            (229
            )Amortization
                of retained servicing rights
            
            
            -
            
            
            22Amortization
                of core deposit intangible
            
            
            88
            
            
            -Deferred
                federal income taxes
            
            
            (17
            )
            
            (374
            )Deferred
                loan fees, net of amortization
            
            
            411
            
            
            171Net
                gain on sales of securities available-for-sale
            
            
            (13
            )
            
            (381
            )Net
                gain on sales of real estate owned, investment property
                andother
                repossessed assets
            
            
            (33
            )
            
            (99
            )Federal
                Home Loan Bank stock dividend received
            
            
            (49
            )
            
            (298
            )Net
                increase (decrease) in accrued interest receivable and
                otherassets
                (under) over accrued interest payable, expenses and other
                liabilities
            
            
            1,641
            
            
            396Net
                cash provided by****operating
                activities
            
            
            9,402
            
            
            5,164Cash
                flows from investing activities:Loans
                originated, net of principal repayments
            
            
            (52,871
            )
            
            (146,332
            )Cash
                (used for) acquisition
            
            
            -
            
            
            (25,928
            )Purchase
                of securities held-to-maturity
            
            
            (5,054
            )
            
            (29,436
            )Proceeds
                from sales/calls of securities held-to-maturity
            
            
            -
            
            
            23,238Principal
                repayments on securities held-to-maturity
            
            
            2,659
            
            
            2,128Principal
                repayments on securities available-for-sale
            
            
            11,693
            
            
            20,972Purchases
                of securities available-for-sale
            
            
            (20,000
            )
            
            (97,166
            )Proceeds
                from sales of securities available-for-sale
            
            
            1,532
            
            
            94,498Purchases
                of premises and equipment
            
            
            (1,031
            )
            
            (4,862
            )Proceeds
                from sales/retirements of premises and equipment
            
            
            26
            
            
            11Proceeds
                from loan participations sold
            
            
            (1,268
            )
            
            (3,327
            )Net
                cash used in investing activities
            
            
            (64,314
            )
            
            (166,204
            )Subtotal,
                carried forward
            
            $
            (54,912
            )
            $
            (161,040
            )





























See
      notes
      to condensed consolidated financial statements


6




**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**


(dollars
      in thousands, unaudited)





Six
                MonthsEnded
                June 30,2005
            
            
            2004Subtotal,
                brought forward
            
            $
            (54,912
            )
            $
            (161,040
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock
            
            
            613
            
            
            24,971Dividends
                paid
            
            
            (1,530
            )
            
            (1,156
            )Repurchase
                of common stock
            
            
            (827
            )
            
            -Net
                increase in deposits
            
            
            68,709
            
            
            130,984Net
                (decrease) increase in Federal Home Loan Bank advances
            
            
            (5,000
            )
            
            11,500Net
                increase (decrease) in securities sold under agreements to
                repurchase
            
            
            144
            
            
            (2,639
            )Net
                increase (decrease) in advance payments by borrowers for taxes and
                insurance
            
            
            338
            
            
            (334
            )Net
                cash provided by financing activities
            
            
            62,447
            
            
            163,326Net
                increase (decrease) in cash and cash equivalents
            
            
            7,535
            
            
            2,286Cash
                and cash equivalents at beginning of period
            
            
            13,029
            
            
            14,071Cash
                and cash equivalents at end of period
            
            $
            20,564
            
            $
            16,357Supplemental
                disclosures of cash flow information—cash paid during the period
                for:Interest
            
            $
            17,302
            
            $
            10,691Federal
                income taxes
            
            
            3,245
            
            
            2,450Supplemental
                schedule of noncash investing activities:Net
                mortgage loans transferred to real estate owned
            
            
            -
            
            
            915Mark
                to market on securities available-for-sale
            
            
            1,111
            
            
            3,674Dividends
                declared
            
            
            1,532
            
            
            1,246


















































See
      notes
      to condensed consolidated financial statements.


7
 **CASCADE
        FINANCIAL CORPORATION AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**June
      30, 2005**


**(unaudited)**




1. Presentation
      of Financial Information




The
      accompanying financial information is unaudited and has been prepared from
      the
      consolidated financial statements of Cascade Financial Corporation (the
“Corporation”), its subsidiary, Cascade Bank (the “Bank” or “Cascade”), and the
      Bank’s subsidiary, Cascade Investment Services, Inc. All significant
      intercompany balances have been eliminated in the consolidation. In the opinion
      of management, the financial information reflects all adjustments (consisting
      of
      normal recurring adjustments) necessary for a fair presentation of the financial
      condition, results of operations, and cash flows of the Corporation pursuant
      to
      the requirements of the SEC for interim reporting.





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




2. Commitments
      and Contingencies




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





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





3. Stockholders’
      Equity




a) Earnings
      Per Share




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





Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,2005
            
            2004
            
            2005
            
            2004*(dollars
                in thousands, except share and per share amounts)***Numerator:**Net
                income
            $
            3,215
            
            $
            2,284
            
            $
            6,286
            
            $
            4,858




8


Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,2005
            
            2004
            
            2005
            
            2004**Denominator:**Denominator
                for basic net income per share-Weighted
                average shares
            9,573,176
            
            8,583,163
            
            9,574,720
            
            8,438,534Effect
                of dilutive securities:Stock
                options
            
            257,909
            
            
            332,543
            
            
            279,545
            
            
            350,939Denominator
                for diluted net income per share-Weighted
                average shares and assumedconversion
                of dilutive stock options
            
            9,831,085
            
            
            8,915,706
            
            
            9,854,265
            
            
            8,789,473Basic
                net income per share
            $
            0.34
            
            $
            0.27
            
            $
            0.66
            
            $
            0.58Diluted
                net income per share
            $
            0.33
            
            $
            0.26
            
            $
            0.64
            
            $
            0.55





For
      the
      quarter ended June 30, 2005, and 2004 there were anti-dilutive options to
      purchase shares of 135,635 and 81,630 respectively, excluded from the above
      calculation. For the six month period ended June 30, 2005 and 2004, there were
      anti-dilutive options to purchase shares of 106,228 and 45,512 respectively,
      excluded from the above calculation.




b)Cash
      Dividend
      Declared




On
      June 22, 2005, the company
      announced its twelfth consecutive cash dividend payment. The dividend was $0.08
      per share and was paid on July 20, 2005 to shareholders of record as of July
      6,
      2005.




c)Stock-based
      Compensation


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





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





Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,2005
            
            2004
            
            2005
            
            2004*(dollars
                in thousands, except per share amounts)*Net
                incomeAs
                reported
            $
            3,215
            
            $
            2,284
            
            $
            6,286
            
            $
            4,858Less
                FAS 123 compensation costs
            
            30
            
            
            61
            
            
            84
            
            
            105Pro
                forma
            $
            3,185
            
            $
            2,223
            
            $
            6,202
            
            $
            4,753




9




Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,2005
            
            2004
            
            2005
            
            2004*(dollars
                in thousands, except per share amounts)*Net
                income per common shareBasicAs
                reported
            $
            0.34
            
            $
            0.27
            
            $
            0.66
            
            $
            0.58Pro
                forma
            
            0.33
            
            
            0.26
            
            
            0.65
            
            
            0.56DilutedAs
                reported
            $
            0.33
            
            $
            0.26
            
            $
            0.64
            
            $
            0.55Pro
                forma
            
            0.32
            
            
            0.25
            
            
            0.63
            
            
            0.54





4. Recently
      Issued Accounting Standards




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








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


**Results
      of Operations**





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





*This
      section contains forward-looking statements, within the meaning of Section
      27A
      of the Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended, and subject to the safe harbor created by
      the
      Private Securities Litigation Reform Act of 1995, that are subject to risks
      and
      uncertainties that could cause actual results to differ materially from those
      projected. Those factors include, but are not limited to: the impact of the
      national and regional economic trends on small business loan demand in the
      Puget
      Sound area; loan delinquency rates; the Bank’s ability to continue to attract
      quality commercial business; interest rate movements; changes in the demographic
      make-up of the company’s market area; fluctuation in demand for the Bank’s
      products and services; the Corporation’s ability to attract and retain qualified
      people, and other factors. These factors should be considered in evaluating
      the
      forward-looking statements and undue reliance should not be placed on such
      statements. The Corporation shall not be responsible to update any such
      forward-looking statements. For a discussion of factors that could cause actual
      results to differ, and for certain mandated SEC guide 3 information that has
      not
      materially changed since the audited statements, please see the Corporation’s
      Annual Report on Form 10-K for the year ended December 31,
      2004.*




Cascade
      Financial Corporation is a bank holding company incorporated in the state of
      Washington. The Corporation’s sole operating subsidiary is Cascade Bank, a
      Washington state chartered commercial bank. The Corporation and the Bank are
      headquartered in Everett,


10


Washington.
      The Bank offers loan, deposit and other financial services through its seventeen
      branches located in Snohomish and King Counties (Washington) and two additional
      branches in King County through its Issaquah Bank Division.


**Acquisition**




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





**Selected
      Financial Data**




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




At
                  or for the
                three
                  months ended
                June
                  30,
              
              At
                  or for the
                Six
                  months ended
                June
                  30,2005
              
              2004
              
              2005
              
              2004Return
                  on average assets
              1.12
              
              0.97
              %
              1.11
              
              1.06
              %Return
                  on average stockholders’ equity
              13.27
              
              12.26
              
              13.04
              
              13.90Average
                  stockholders’ equity to average assets
              
              8.45
              
              
              7.91
              
              
              8.52
              
              
              7.65Other
                  expenses to average assets
              
              2.01
              
              
              2.25
              
              
              2.00
              
              
              2.14Efficiency
                  ratio
              
              53.39
              
              
              58.67
              
              
              53.50
              
              
              55.84Average
                  interest-bearing assets toaverage
                  interest-bearing liabilities
              
              111.71
              
              
              111.59
              
              
              111.75
              
              
              111.31


**CHANGES
      IN FINANCIAL CONDITION**





Total
      assets increased 6.4% or $70.0 million to $1.16 billion at June 30, 2005,
      compared to $1.09 billion at December 31, 2004. Net loans, i.e. net of deferred
      loan fees and the allowance for loan losses, increased 6.7% or $53.2 million
      to
      $847.7 million at June 30, 2005, from $794.5 million at December 31,
      2004.




Investment
      securities increased $9.8 million to $225.4 million at June 30, 2005, compared
      to $215.6 million at December 31, 2004. The investment portfolio is concentrated
      in the securities of Government Sponsored Enterprises (GSEs, e.g FNMA or FHLMC)
      as well as mortgage backed pass-through securities, and collateralized mortgage
      obligations (CMOs) backed by pools of single family residential mortgages
      (known collectively as MBS). All investment purchases during the six months
      ended June 30, 2005, were rated AAA in terms of credit quality by Moody’s and/or
      Standard & Poors.


11


(Dollars
                in thousands)
            **JUNE
                30, 2005****AMORTIZED**
              **COST**
            
            **GROSS**
              **UNREALIZED**
              **GAINS**
              **LESS
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **GAINS**
              **MORE
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **LOSSES**
              **LESS
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **LOSSES**
              **MORE
                THAN**
              **1
                YEAR**
            
            **FAIR**
              **VALUE****Securities
                available-for-sale**MBS
            $
            35,047
            
            $
            29
            
            $
            24
            
            $
            99
            
            $
            277
            
            $
            34,724Agency
                notes
            
            85,859
            
            
            44
            
            
            -
            
            
            773
            
            
            59
            
            
            85,071FHLB
                Stock
            
            11,920
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            11,920$
            132,826
            
            $
            73
            
            $
            24
            
            $
            872
            
            $
            336
            
            $
            131,715





**AMORTIZED**
              **COST**
            
            **GROSS**
              **UNREALIZED**
              **GAINS**
              **LESS
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **GAINS**
              **MORE
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **LOSSES**
              **LESS
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **LOSSES**
              **MORE
                THAN**
              **1
                YEAR**
            
            **FAIR**
              **VALUE****Securities
                held-to-maturity**MBS
            $
            27,461
            
            $
            3
            
            $
            18
            
            $
            84
            
            $
            200
            
            $
            27,198Agency
                notes
            
            65,808
            
            
            9
            
            
            -
            
            
            58
            
            
            521
            
            
            65,238Corporate/other
            
            465
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            465$
            93,734
            
            $
            12
            
            $
            18
            
            $
            165
            
            $
            698
            
            $
            92,901





(Dollars
                in thousands)
            **DECEMBER
                31, 2004****AMORTIZED**
              **COST**
            
            **GROSS**
              **UNREALIZED**
              **GAINS**
              **LESS
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **GAINS**
              **MORE
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **LOSSES**
              **LESS
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **LOSSES**
              **MORE
                THAN**
              **1
                YEAR**
            
            **FAIR**
              **VALUE****Securities
                available-for-sale**MBS
            $
            43,208
            
            $
            50
            
            $
            20
            
            $
            544
            
            $
            212
            
            $
            42,522Agency
                notes
            
            70,910
            
            
            18
            
            
            —
            
            
            652
            
            
            394
            
            
            69,882FHLB
                Stock
            
            11,872
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            11,872$
            125,990
            
            $
            68
            
            $
            20
            
            $
            1,196
            
            $
            606
            
            $
            124,276





**AMORTIZED**
              **COST**
            
            **GROSS**
              **UNREALIZED**
              **GAINS**
              **LESS
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **GAINS**
              **MORE
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **LOSSES**
              **LESS
                THAN**
              **1
                YEAR**
            
            **GROSS**
              **UNREALIZED**
              **LOSSES**
              **MORE
                THAN**
              **1
                YEAR**
            
            **FAIR**
              **VALUE****Securities
                held-to-maturity**MBS
            $
            25,083
            
            $
            —
            
            $
            30
            
            $
            345
            
            $
            184
            
            $
            24,584Agency
                notes
            
            65,791
            
            
            21
            
            
            —
            
            
            367
            
            
            939
            
            
            64,506Corporate/other
            
            465
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            465$
            91,339
            
            $
            21
            
            $
            30
            
            $
            712
            
            $
            1,123
            
            $
            89,555





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




12




At
      June
      30, 2005, the Bank held Federal Home Loan Bank (FHLB) of Seattle stock of $11.9
      million. In December 2004, the FHLB of Seattle abandoned its practice of
      repurchasing stock that was not needed to support outstanding advances and
      announced it would not repurchase any stock until further notice. On April
      5,
      2005, the FHLB of Seattle submitted a proposed business and capital plan to
      its
      regulator, the Federal Housing Finance Board. In May, 2005, the Finance Board
      accepted the Seattle bank’s three year plan. To meet the Finance Board’s
      conditions under the three year plan, the Seattle bank’s board adopted a
      resolution that suspends dividends on all classes of stock going forward. The
      Seattle bank anticipates a trend of net losses for 2005 and 2006, with the
      potential for net income in 2007. Since December 2004, the Seattle bank board
      has suspended all Class B(1) stock repurchases and allowed limited Class B(2)
      stock repurchases.


Loan
      Portfolio




Virtually
      all the Bank’s loans are to businesses or individuals in the Puget Sound area.
      Business loans are made to small and medium sized businesses within that area
      for a wide range of purposes. Included in the business loan total are loans
      secured by real estate where the borrower is the primary tenant. Real estate
      construction loans are primarily extended to builders and developers of single
      family, residential real estate. The vast majority of these projects focus
      on
      entry level homes and/or first trade-up homes. Commercial real estate loans
      fund
      small, non-owner occupied buildings. Home equity and consumer loans are
      primarily second mortgages on the borrower’s primary residence. These loans
      comprise 74% of the home equity and consumer portfolio. The balance of this
      category is non-residential, e.g. automobiles, credit cards, or
      boats.





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





As
      displayed in the following table, total loans increased by $54.0 million to
      $860.7 million as of June 30, 2005, compared to $806.7 million at December
      31,
      2004. In keeping with the Bank’s evolution to a commercial bank, loans more
      closely associated with a commercial bank, i.e. business, real estate
      construction, and commercial real estate loans grew $74.4 million to $652.7
      million as of June 30, 2005, compared to $578.3 million as of December 31,
      2004.





Residential
      lending balances declined while consumer lending balances grew. Residential
      loans decreased by $1.2 million to $104.7 million. Multifamily loans decreased
      $21.5 million to $70.9 million primarily due to the sale of $21 million of
      these
      loans. Cascade sold the multifamily loans to diversify risk by lowering our
      concentration of commercial real estate loans. Selling these adjustable rate
      mortgages with an average duration of 2.5 years helped to reduce our exposure
      to
      higher short-term rates as we have replaced them with prime-based loans. While
      investor demand for such loans remains strong, we will continue to evaluate
      potential loan sales to help maintain a balanced portfolio. Home equity loans
      and other consumer loans increased $2.3 million to $32.4 million.


13


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





**Types
                of Loans**
            June
                30,
            
            %
                of
            
            December
                31,
            
            %
                of*($
                in thousands)*
            2005
            
            Portfolio
            
            2004
            
            PortfolioBusiness
            $
            341,352
            
            39.7
            %
            $
            292,117
            
            
            36.3
            %Real
                estate construction (net)
            
            137,946
            
            16.0
            
            
            107,431
            
            
            13.3Commercial
                real estate
            
            173,362
            
            20.1
            
            
            178,704
            
            
            22.2Home
                equity and consumer
            
            32,422
            
            3.8
            
            
            30,125
            
            
            3.7Residential
                real estate
            
            104,748
            
            12.2
            
            
            105,975
            
            
            13.1Multifamily
                real estate
            
            70,865
            
            8.2
            
            
            92,372
            
            
            11.4Total
                loans
            
            860,695
            
            100.0
            %
            
            806,724
            
            
            100.0
            %Deferred
                loan fees
            
            (3,107
            )
            
            
            
            (2,695
            )Loans
            $
            857,588
            
            
            
            $
            804,029





(Loans
      held for sale would be included in residential loans but there were no loans
      held for sale at June 30, 2005.)





Deposits
      and Shareholder Equity





Checking
      account deposits increased a s
      the
      Bank continued to focus its branch activities on deposit generation in general
      and checking/transaction accounts in particular. In June 2005, the Bank launched
      its High Performance Checking campaign to accelerate deposit growth. Total
      deposits increased by $68.7 million from $721.9 million at December 31, 2004
      to
      $790.6 million at June 30, 2005.





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





June
                30,
            
            December
                31,2005
            
            2004Checking
                accounts
            $
            134,074
            
            $
            112,564Savings
                & MMD
            
            191,022
            
            
            172,584CD's
            
            465,521
            
            
            436,760$
            790,617
            
            $
            721,908





FHLB
      of
      Seattle advances decreased by $5.0 million from $228.0 million at December
      31,
      2004 to $223.0 million at June 30, 2005. Securities sold under agreements to
      repurchase increased $144,000 to $21.0 million during the quarter.





Stockholders’
      equity increased by $4.9 million from $96.3 million at December 31, 2004 to
      $101.2 million at June 30, 2005. The increase is primarily attributable to
      the
      retention of most of the net income for the period less dividend payments.
      The
      Corporation’s twelfth consecutive cash dividend, which was declared June 22,
      2005, reduced stockholders’ equity by $766,000. Accumulated other comprehensive
      loss decreased by $425,000 to a negative $722,000 as of June 30, 2005. As
      indicated under Part II - Other Information, Item 2 - Unregistered Sales of
      Equity Securities and Use of Proceeds, the Corporation repurchased 404
      shares of its stock at a cost of $6,614 during the quarter ended June
      30,
      2005.




14


**Asset
      Quality**





Non-performing
      assets (non-performing loans and real estate owned) totaled $1.7 million and
      $1.4 million at June 30, 2005 and December 31, 2004, respectively.
      Non-performing loans, those on non-accrual, those that are ninety days past
      due,
      and those that management otherwise has serious reservations about their
      collectibility, increased to $1.3 million at June 30, 2005, compared to $532,000
      at December 31, 2004. Of the $1.3 million, $1.0 million were business and
      construction loans, $240,000 were residential, and $100,000 were home equity
      and
      consumer loans. Most of the increase relates to the addition of four loans
      to
      the non-performing list. Real estate owned (REO) was $331,000 as of June 30,
      2005 compared to $868,000 at December 31, 2004. The $537,000 decrease in REO
      was
      primarily due to the sale of two residential properties, which resulted in
      a
      gain of $33,000.





At
      June
      30, 2005 the Bank’s loan loss allowance totaled $9.9 million compared to $9.6
      million at December 31, 2004. The allowance for loan losses was 1.15% of total
      loans outstanding at June 30, 2005 (or 1.16% of total average loans for the
      quarter) compared to 1.19% at December 31, 2004 (or 1.20% of total average
      loans
      at December 31, 2004). The allowance for loan losses was 737% of non-performing
      loans at June 30, 2005. The allowance for loan losses is maintained at a level
      sufficient to provide for losses based on management’s evaluation of known and
      inherent risks in the portfolio. This evaluation includes analyses of the
      financial condition of the borrower, the value of the collateral securing
      selected loans, consideration of historical loss experience and management’s
      projection of trends affecting credit quality. The increase in the allowance
      is
      primarily attributable to the continued emphasis on business and construction
      lending, and a slowdown in the economy of our market area. Management believes
      that the allowance for losses on loans is adequate to provide for losses that
      may be incurred on non-performing loans.





During
      the quarter ended June 30, 2005, loan charge-offs equaled $77,000 while
      recoveries were $37,000 resulting in net charge-offs of $40,000. Of those
      charge-offs, approximately one-half represent losses sustained on checking
      accounts, which prior to 2005 were charged to checking fees instead of the
      loan
      loss reserve.





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





June
                30,
            
            December
                31,2005
            
            2004Non-performing
                loans to total assets
            0.12
            %
            
            0.05
            %Non-performing
                loans to total loans outstanding
            0.16
            
            
            0.07Non-performing
                assets to total assets
            0.14
            
            
            0.13Allowance
                for loan losses to non-performing loans
            737
            
            
            1,798Allowance
                for loan losses to total loans
            1.15
            
            
            1.19Net
                charge-offs to total loans
            0.00
            
            
            0.00





15
 **RESULTS
        OF OPERATIONS**





Comparison
      of the Three and Six Months Ended June 30, 2005 and 2004





General





Net
      income increased 41% to $3.2 million for the three months ended June 30, 2005
      compared to $2.3 million during the comparable period in 2004. Diluted net
      income per share was $0.33 for the quarter ended June 30, 2005 and $0.26 per
      share for the quarter ended June 30, 2004, an increase of 28%. Net interest
      income before provision for loan losses increased $1.3 million to $9.2 million
      for the quarter ended June 30, 2005. Other income increased by $500,000 to
      $1.7
      million for the quarter ended June 30, 2005. Other expense increased $500,000
      to
      $5.8 million for the quarter ended June 30, 2005 as compared to the quarter
      ended June 30, 2004. The Bank paid $73,000 in prepayment fees on Federal Home
      Loan Bank (FHLB) advances during the quarter ended June 30, 2005 and no
      prepayment fees for the quarter ended June 30, 2004.





Net
      income for the six months ended June 30, 2005 was $6.3 million compared with
      $4.9 million during the comparable period in 2004. Net income per diluted share
      was $0.64 for the six months ended June 30, 2005, compared with $0.55 in 2004.
      The $2.8 million increase in net interest income more than offset the $1.6
      million increase in other expense. Operating results for 2004 had one month
      of
      income and expense from Issaquah Bancshares.





Net
      Interest Income





Net
      interest income increased 17% or $1.4 million to $9.2 million for the three
      months ended June 30, 2005 compared to $7.8 million for the three months ended
      June 30, 2004. Net interest income for the six months ended June 30, 2005 and
      2004 was $17.9 million and $15.1 million respectively. Average interest earning
      assets increased $173 million or 19.1% to $1.08 billion for the three months
      ended June 30, 2005 and $184 million or 20.8% to $1.07 billion for the six
      months ended June 30, 2005 compared to the same periods in 2004. Average total
      loans (including loans held for sale) increased $212 million to $852 million
      and
      average investment securities decreased $40 million to $227 million for the
      three months ended June 30, 2005 compared to the same quarter of the prior
      year.





At
                or for the
            
            At
                or for thethree
                months ended
            
            six
                months endedJune
                30,
            
            June
                30,2005
            
            2004
            
            2005
            
            2004(dollars
                in thousands)Average
                interest earning assets
            
            $
            1,081,868
            
            $
            908,388
            
            $
            1,067,364
            
            $
            883,590Average
                interest bearing liabilities
            
            
            968,469
            
            
            814,036
            
            
            955,161
            
            
            793,775Yield
                on interest earning assets
            
            
            6.17
            %
            
            5.78
            %
            
            6.07
            %
            
            5.83
            %Cost
                of interest bearing liabilities
            
            
            3.11
            
            
            2.59
            
            
            3.03
            
            
            2.67Net
                interest spread
            
            
            3.06
            
            
            3.19
            
            
            3.04
            
            
            3.16Net
                interest margin
            
            
            3.38
            
            
            3.46
            
            
            3.36
            
            
            3.43





The
      net
      interest margin decreased 8 basis points to 3.38% for the three months ended
      June 30, 2005 compared to the same quarter the prior year. The yield on interest
      earning assets increased 39 basis points to 6.17% for the three months ended
      June 30, 2005, compared to 5.78% for the three months ended June 30, 2004.
      The
      cost of funds increased 52 basis points to 3.11% for the three months ended
      June
      30, 2005 compared to 2.59% for the same period in 2004. For the six months
      ended
      June 30, 2005, the net interest margin decreased 7 basis points from 3.43%
      to
      3.36%.




16


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





Provision
      for Loan Losses





Cascade’s
      provision for loan losses was $250,000 for the three months and $495,000 for
      the
      six months ended June 30, 2005. The provision was $150,000 and $375,000 for
      the
      same periods in 2004, respectively. The provision is based on the size and
      composition of the portfolio, and management’s evaluation of known and inherent
      risks in the portfolio, as well as Cascade’s loss experience.





Other
      Income





Other
      income increased $500,000 or 40% to $1.7 million for the three months ended
      June
      30, 2005 as compared to $1.2 million for the three months ended June 30, 2004.
      Other income was $3.3 million and $2.3 million for the six months ended June
      30,
      2005 and June 30, 2004 respectively. For the three months ended June 30, 2005,
      there was no gain on the sale of investment securities compared to $112,000
      for
      the same quarter in 2004. Checking fee income rose to $767,000 compared to
      $503,000 for the same period in the prior year. Gain on sale of loans increased
      $352,000 from $82,000 to $434,000 for the three months ended June 30, 2005,
      primarily due to the sale of multifamily loans. Other service fee income
      increased $40,000 to $207,000 for the quarter.





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





Other
      Expense





Other
      expense was $5.8 million for the three months and $11.3 million for the six
      months ended June 30, 2005 compared with $5.3 million for the three months
      and
      $9.8 million for the six months ended June 30, 2004. The increase in other
      expense was primarily the result of two additional months of expenses of the
      Issaquah Bank that was acquired in June 2004; a full quarter of operation of
      a
      new branch; and expenses related to the High Performance Checking deposit
      generation program.





Salary
      and employee benefit expenses increased $337,000 to $3.0 million during
      the three months ended June 30, 2005 compared to the same quarter last
      year .
      Salary
      and employee benefit expenses were $6.2 million for the six month period ended
      June 30, 2005 and $5.3 million in the same period for 2004. The remaining other
      operating expense categories totaled $2.8 million for the three months ended
      June 30, 2005 and $5.1 million for the six months period as of the same date.
      For the same periods in 2004, other operating expenses were $2.6 million and
      $4.5 million respectively.




17


Federal
      income tax expenses increased $277,000 to $1.6 million, an increase of
      21% during
      the three months ended June 30, 2005 compared to the same period last
      year .
      For the
      three months ended June 30, 2005, the Corporation’s effective tax rate was 33%.
      For the six months ended June 30, 2005, income tax expense was $3.1 million
      compared to $2.5 million in 2004, with an effective tax rate of 33%. Tax
      benefits related to bank owned life insurance and interest on tax exempt loans
      accounted for the difference from the “expected” Federal income tax rate of 35%
      during each of the periods.





Segment
      Results





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





**For
      the three months ended June 30, 2005**


Business
                    
                    Residential
                    
                    Construction
                    
                    Income
                      Property
                    
                    Consumer
                    
                    Administration/
                      Treasury
                    
                    Total(dollars
                        in thousands)Condensed
                        Income StatementNet
                        interest income afterprovision
                        for loan losses
                    
                    $
                    3,357
                    
                    $
                    228
                    
                    $
                    1,894
                    
                    $
                    2,420
                    
                    $
                    270
                    
                    $
                    732
                    
                    $
                    8,901Other
                        income
                    
                    
                    2
                    
                    
                    63
                    
                    
                    6
                    
                    
                    391
                    
                    
                    934
                    
                    
                    271
                    
                    
                    1,667Other
                        expense
                    
                    
                    377
                    
                    
                    113
                    
                    
                    112
                    
                    
                    282
                    
                    
                    475
                    
                    
                    4,417
                    
                    
                    5,776Contribution
                        before overhead
                    
                    
                    2,982
                    
                    
                    178
                    
                    
                    1,788
                    
                    
                    2,529
                    
                    
                    729
                    
                    
                    (3,414
                    )
                    
                    4,792Support
                        transfer
                    
                    
                    1,258
                    
                    
                    422
                    
                    
                    499
                    
                    
                    1,111
                    
                    
                    124
                    
                    
                    (3,414
                    )
                    
                    -Income
                        before provision forincome
                        tax
                    
                    
                    1,724
                    
                    
                    (244
                    )
                    
                    1,289
                    
                    
                    1,418
                    
                    
                    605
                    
                    
                    -
                    
                    
                    4,792Provision
                        for income tax
                    
                    
                    567
                    
                    
                    (80
                    )
                    
                    424
                    
                    
                    467
                    
                    
                    199
                    
                    
                    -
                    
                    
                    1,577Net
                        Income (loss)
                    
                    $
                    1,157
                    
                    $
                    (164
                    )
                    $
                    865
                    
                    $
                    951
                    
                    $
                    406
                    
                    $
                    -
                    
                    $
                    3,215


18


**For
      the three months ended June 30, 2004**


Business
                
                Residential
                
                Construction
                
                Income
                  Property
                
                Consumer
                
                Administration/
                  Treasury
                
                Total(dollars
                    in thousands)Condensed
                    Income StatementNet
                    interest income afterprovision
                    for loan losses
                
                $
                2,883
                
                $
                264
                
                $
                1,023
                
                $
                2,062
                
                $
                393
                
                $
                1,071
                
                $
                7,696Other
                    income
                
                
                16
                
                
                111
                
                
                1
                
                
                -
                
                
                612
                
                
                448
                
                
                1,188Other
                    expense
                
                
                335
                
                
                162
                
                
                99
                
                
                134
                
                
                361
                
                
                4,209
                
                
                5,300Contribution
                    before overhead
                
                
                2,564
                
                
                213
                
                
                925
                
                
                1,928
                
                
                644
                
                
                (2,690
                )
                
                3,584Support
                    transfer
                
                
                740
                
                
                345
                
                
                253
                
                
                618
                
                
                101
                
                
                (2,057
                )
                
                -Income
                    before provision forincome
                    tax
                
                
                1,824
                
                
                (132
                )
                
                672
                
                
                1,310
                
                
                543
                
                
                (633
                )
                
                3,584Provision
                    for income tax
                
                
                599
                
                
                (44
                )
                
                220
                
                
                430
                
                
                178
                
                
                (83
                )
                
                1,300Net
                    Income (loss)
                
                $
                1,225
                
                $
                (88
                )
                $
                452
                
                $
                880
                
                $
                365
                
                $
                (550
                )
                $
                2,284






**For
      the six months ended June 30, 2005**


Business
                
                Residential
                
                Construction
                
                Income
                  Property
                
                Consumer
                
                Administration/
                  Treasury
                
                Total(dollars
                    in thousands)Condensed
                    Income StatementNet
                    interest income afterprovision
                    for loan losses
                
                $
                7,164
                
                $
                360
                
                $
                3,527
                
                $
                4,426
                
                $
                543
                
                $
                1,410
                
                $
                17,430Other
                    income
                
                
                38
                
                
                140
                
                
                10
                
                
                391
                
                
                1,827
                
                
                861
                
                
                3,267Other
                    expense
                
                
                769
                
                
                243
                
                
                229
                
                
                528
                
                
                915
                
                
                8,645
                
                
                11,329Contribution
                    before overhead
                
                
                6,433
                
                
                257
                
                
                3,308
                
                
                4,289
                
                
                1,455
                
                
                (6,374
                )
                
                9,368Support
                    transfer
                
                
                2,323
                
                
                801
                
                
                897
                
                
                2,123
                
                
                230
                
                
                (6,374
                )
                
                -Income
                    before provision forincome
                    tax
                
                
                4,110
                
                
                (544
                )
                
                2,411
                
                
                2,166
                
                
                1,225
                
                
                -
                
                
                9,368Provision
                    for income tax
                
                
                1,352
                
                
                (179
                )
                
                793
                
                
                713
                
                
                403
                
                
                -
                
                
                3,082Net
                    Income (loss)
                
                $
                2,758
                
                $
                (365
                )
                $
                1,618
                
                $
                1,453
                
                $
                822
                
                $
                -
                
                $
                6,286






**For
      the six months ended June 30, 2004**


Business
                
                Residential
                
                Construction
                
                Income
                  Property
                
                Consumer
                
                Administration/
                  Treasury
                
                Total(dollars
                    in thousands)Condensed
                    Income StatementNet
                    interest income afterprovision
                    for loan losses
                
                $
                5,345
                
                $
                600
                
                $
                1,940
                
                $
                3,883
                
                $
                766
                
                $
                2,239
                
                $
                14,773Other
                    income
                
                
                24
                
                
                197
                
                
                3
                
                
                -
                
                
                1,145
                
                
                971
                
                
                2,340Other
                    expense
                
                
                686
                
                
                323
                
                
                176
                
                
                213
                
                
                682
                
                
                7,686
                
                
                9,766Contribution
                    before overhead
                
                
                4,683
                
                
                474
                
                
                1,767
                
                
                3,670
                
                
                1,229
                
                
                (4,476
                )
                
                7,347Support
                    transfer
                
                
                1,380
                
                
                668
                
                
                457
                
                
                1,138
                
                
                200
                
                
                (3,843
                )
                
                -Income
                    before provision forincome
                    tax
                
                
                3,303
                
                
                (194
                )
                
                1,310
                
                
                2,532
                
                
                1,029
                
                
                (633
                )
                
                7,347Provision
                    for income tax
                
                
                1,066
                
                
                (64
                )
                
                422
                
                
                816
                
                
                332
                
                
                (83
                )
                
                2,489Net
                    Income (loss)
                
                $
                2,237
                
                $
                (130
                )
                $
                888
                
                $
                1,716
                
                $
                697
                
                $
                (550
                )
                $
                4,858






Income
      Property includes Commercial Real Estate and Multifamily
      lending.


19
 Interest
        income is assigned based upon the loans held by that line of business.
        Investment income is assigned to Administration. Interest expense is allocated
        based upon the Corporation’s cost of funds and the average maturity of the line
        of business’s assets. Overhead is allocated on the basis of average total
        assets.





Liquidity
      and Sources of Funds





The
      Bank
      monitors its liquidity position to assure that it will have adequate resources
      to meet its customer’s needs. Potential uses of funds are new loans; the
      disbursement of construction loans in process; draws on unused business lines
      of
      credit and unused consumer lines of credit; the purchase of investment
      securities; and deposit withdrawals. As of June 30, 2005, Cascade had $73.9
      million of construction loans in process, $87.3 million in unused business
      lines
      of credit and $38.5 million in unused consumer lines of credit including credit
      cards and $22.0 million in other un-disbursed commitments. Recent history
      indicates construction lines will be funded at 65% of commitments at any point
      in time. Historically, the Bank’s business customers use 36% of their lines at
      any given time. About 46% of the home equity lines of credit are drawn upon
      at
      any point in time. Cash flows from operations contribute to liquidity as well
      as
      proceeds from maturities of securities and customer deposits. As indicated
      on
      the Company’s condensed Consolidated Statement of Cash Flows, net cash from
      operating activities for the six months ended June 30, 2005 contributed $9.4
      million to liquidity compared to $5.2 million for the six months ended June
      30,
      2004.





Funding
      needs are met through existing liquidity balances, deposit growth, FHLB-Seattle
      advances, and other borrowings, as well as the repayment of existing loans
      and
      the sale of loans. Cascade maintains balances in FHLB deposits, which equaled
      $1.5 million as of June 30, 2005 and $1.3 million at December 31, 2004.
      Liquidity is also provided by the Bank’s unencumbered securities portfolio.
      Securities that could be pledged to secure additional funding at the
      FHLB-Seattle or the repurchase market were $64.2 million at the end of the
      quarter and $46.0 million as of December 31, 2004. $56.0 million in commercial
      real estate loans is being used as an alternative source of
      collateral.





Subject
      to the availability of eligible collateral, the Bank’s credit line with the
      FHLB-Seattle is 35% of total assets or up to approximately $405 million at
      current asset levels, subject to certain requirements. At June 30, 2005, the
      Bank had $223.0 million in advances and an unused line of credit from the
      FHLB-Seattle of approximately $182.0 million. The Bank also uses reverse
      repurchase agreements to provide a flexible source of funding. At June 30,
      2005
      the Bank had $21.0 million in reverse repurchase agreements outstanding. The
      Bank also has a total of $33 million in Fed funds lines with its correspondent
      banks, none of which were used during the quarter.





Capital
      Resources




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




20


At
      its
      June 2004 meeting, the Board of Directors authorized a stock repurchase program
      of up to 200,000 shares of the Corporation’s stock. As of May 31, 2005, the
      expiration date of the program, 41,791 shares had been repurchased during the
      year. The Board of Directors authorized a new stock repurchase program of up
      to
      200,000 shares of the Corporation’s stock at its May 2005 meeting. As of June
      30, 2005, there were 375 shares repurchased under this program. The repurchase
      program does not obligate the Corporation to acquire any specific number of
      shares. The main focus of the program is to attempt to offset the dilution
      created by the exercise of stock options and other stock grants; see Part II
      -
      Other Information, Item 2 - Unregistered Sales of Equity Securities and Use
      of
      Proceeds.





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





Capital
      Requirements





Both
      the
      Corporation and Cascade Bank are subject to regulatory capital requirements.
      Cascade Bank is in full compliance with all capital requirements established
      by
      the FDIC and the Washington State Department of Financial Institutions. The
      Bank’s regulatory capital requirements are expressed as a percentage of assets.
      To be adequately capitalized, the Bank must hold capital equal to 4% of its
      assets and 8% of its risk weighted assets. As of June 30, 2005, for the purposes
      of this calculation, the Bank’s average total assets and total risk-weighted
      assets were $1.12 billion and $934.2 million respectively. The related excess
      capital amounts as of June 30, 2005 are presented in the following table
      (dollars in thousands):








Core
                capital
            
            Amount
            
            PercentageTier
                1 (Core) capital
            
            $
            89,828
            
            
            8.01
            %Less:
                Minimum requirement
            
            
            44,861
            
            
            4.00Excess
            
            $
            44,967
            
            
            4.01Risk-based
                capital
            
            
            Amount
            
            
            PercentageRisk-based
                capital
            
            $
            99,719
            
            
            10.68
            %Less:
                Minimum requirement(1)
            
            
            74,733
            
            
            8.00Excess
            
            $
            24,986
            
            
            2.68(1)
                Based on risk-weighted assets.




21


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





The
      Corporation, as a bank holding company regulated by the Federal Reserve, is
      also
      subject to capital requirements that are similar to those for Cascade Bank.
      As
      of June 30, 2005, the Corporation is well capitalized under Federal Reserve
      guidelines with a Tier 1 ratio of 8.09% and a Risk Based ratio of
      10.76%.


22
 **Item
        3 - Quantitative and Qualitative Disclosures about Market
        Risk**





**ASSET/LIABILITY
      MANAGEMENT**





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





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





Using
      standard interest rate shock (an instantaneous uniform change in interest rates
      at all maturities) methodology, as of June 30, 2005 the Bank is within all
      the
      guidelines established by the Board for the changes in net interest income,
      fair
      value of equity, and the adjusted capital/asset ratios. As of June 30, 2005,
      the
      Bank’s fair value of equity decreases 17.0% in the up 200 basis point scenario
      and 9.6% in the down 200 basis point scenario, within the established guideline
      of a maximum 30% decline. Using the same methodology, the adjusted capital/asset
      ratio is 8.9% in the up 200 basis point scenario, and 9.2% in the down 200
      basis
      point scenario, both above the 5% minimum established guideline. The net
      interest income increases 2.2% in the up 200 basis point scenario and decreases
      9.7% in the down 200 basis point scenario, both are within the guideline of
      a
      10% decline.





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





The
      Bank
      extends the maturity of its liabilities by offering long-term deposit products
      to customers, and by obtaining longer term FHLB-Seattle advances. As of June
      30,
      2005, $223 million ($25 million of which is a 3-month LIBOR adjustable) in
      advances had original maturities greater than one year, none had original
      maturities of less than one year. Currently, $50 million have remaining
      maturities less than one year. Of the total amount, $185 million of these
      advances have provisions that allow the FHLB to convert the advance to a LIBOR
      based, adjustable rate borrowing. The FHLB would exercise this option if
      interest rates rise significantly, however in an up 200 basis point rate shock
      scenario, it is unlikely any of these advances would be converted within the
      next six months .




23


**Item
      4 - Controls and Procedures**





**EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES**





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





**CHANGES
      IN INTERNAL CONTROLS**





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





**DISCLOSURE
      CONTROLS AND INTERNAL CONTROLS**





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





**LIMITATIONS
      ON THE EFFECTIVENESS OF CONTROLS**




Cascade
        Financial Corporation’s management does not expect that our disclosure controls
        or our internal controls will prevent all errors and all fraud. A control
        system, no matter how well conceived and operated, can provide only reasonable,
        not absolute, assurance that the objectives of the control system are met.
        Further, the design of the control system must reflect the fact that there
        are
        resource constraints, and the benefits of controls must be considered relative
        to their costs. Because of the inherent limitations in all control systems,
        no
        evaluation of controls can provide absolute assurance that all control issues
        and instances of fraud, if any, within Cascade Financial Corporation have
        been
        detected, but can only provide a reasonable level of assurance. These inherent
        limitations include the realities that judgments in decision-making can be
        faulty, and that breakdowns can occur because of simple error or mistake.
        Additionally, controls can be circumvented by the individual acts of some
        persons, by collusion of two or more people, or by management override of
        the
        control.
 24
 The
            design of any system of controls also is based in part upon certain assumptions
            about the likelihood of future events, and there can be no assurance
            that any
            design will succeed in achieving its stated goals under all potential
            future
            conditions; over time, controls may become inadequate because of changes
            in
            conditions, or the degree of compliance with the policies or procedures
            may
            deteriorate. Because of the inherent limitations in a cost-effective
            control
            system, misstatements due to error or fraud may occur and not be
            detected.
 25
 Item
              1. Legal Proceedings.




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





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




**Issuer
                Purchases of Equity Securities****2004
                PLAN**
            
            Total
                Number
            
            Maximumof
                Shares
              Purchased
            
            Number
                of
              Shares
                thatPeriod
            
            Total
              Number
            
            Average
              Price
            
            as
                Part of
              Publicly
            
            May
                Yet be
              PurchasedBeginning
            Ending
            
            of
                Shares
              Purchased
            
            Paid
                per
              Share
            
            Announced
              Plan
            
            Under
                the
              Plan(1)April
                1, 2005
            April
                30, 2005
            
            29
            
            $16.00
            
            29
            
            151,641May
                1, 2005
            May
                31, 2005
            
            --
            
            $--
            
            --
            
            151,641Total
            
            
            29
            
            $16.00
            
            29
            
            151,6411)
                The 2004 Plan, announced in June, 2004, ended on May 31, 2005.**2005
                PLAN**
            
            Total
                Number
            
            Maximumof
                Shares
              Purchased
            
            Number
                of
              Shares
                thatPeriod
            
            Total
              Number
            
            Average
              Price
            
            as
                Part of
              Publicly
            
            May
                Yet be
              PurchasedBeginning
            Ending
            
            of
                Shares
              Purchased
            
            Paid
                per
              Share
            
            Announced
              Plan
            
            Under
                the
              Plan(1)June
                1, 2005
            June
                30, 2005
            
            375
            
            $16.40
            
            375
            
            199,625Total
            
            
            375
            
            $16.40
            
            375
            
            199,6251)
                In May, 2005, the Corporation announced a new stock repurchase plan
                to
                purchase up to 200,000 shares of the Corporation’s stock. The Plan will
                expire on May 31, 2006.




26
 Item
        3. Defaults upon Senior Securities.


Not
      applicable




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




The
      Annual Shareholders Meeting of the Corporation was held on April 26, 2005.
      The
      shareholders elected one new director and re-elected three incumbent directors.
      Richard L. Anderson was elected for a two-year term expiring in 2007, and David
      W. Duce, Carol K. Nelson, and David R. O’Connor were re-elected for terms
      expiring in 2008 The only issues voted on was the election of
      directors.




NOMINEE
            FOR
            AGAINST/WITHELDRichard
                L. Anderson
            7,771,188
            124,784David
                W. Duce
            7,753,493
            142,479Carol
                K. Nelson
            7,771,205
            124,767David
                R. O’Connor
            7,755,124
            140,848





Item
      5. Other information.




Not
      applicable




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 Chief 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
      April
      20, 2005, the Corporation filed a Form 8-K reporting and attached press release
      announcing earnings information for the first quarter ended March 31, 2005,
      under Item 2.02 of Form 8-K.




On
      July
      15, 2005, the Corporation filed a Form 8-K reporting its entry into a new
      employment agreement dated July 12, 2005 with its President and CEO, Carol
      K.
      Nelson, under Item 1.01 of Form 8-K.




On
      July
      20, 2005, the Corporation filed a Form 8-K reporting an attached press release
      announcing earnings information for the second quarter ended June 30, 2005,
      under item 2.02 of Form 8-K.


27
 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**








August
      5,
      2005/s/
      Lars H.
      Johnson


By:  Lars
      H.
      Johnson,


Executive
      Vice
      President


(Chief
      Financial Officer)




28