UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





þ
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE QUARTERLY PERIOD ENDED June 30,
      2009




OR




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




Commission
file number0-25286





CASCADE FINANCIAL
CORPORATION


(Exact
name of registrant as specified in its charter)





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





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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes þ    No
 ̈





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




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




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




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




Class
            Outstanding as of July 31,
    2009Common
      Stock ($.01 par value)
            12,110,434




1


CASCADE
FINANCIAL CORPORATION





FORM
10-Q


For the Quarter Ended June 30, 2009








INDEX





PAGEPART I — Financial
    Information:Item 1
              —
      Financial Statements:—
      Condensed Consolidated Balance Sheets
              3—
      Condensed Consolidated Statements of Operations
              4—
      Consolidated Statements of Comprehensive (Loss) Income
              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 Results of
      Operations
              20Item 3
              —
      Quantitative and Qualitative Disclosures about Market Risk
              40Item 4
              —
      Controls and Procedures
              41PART II — Other
Information:Item 1
              —
      Legal Proceedings
              41Item 1A
              —
      Risk Factors
              41Item 2
              —
      Unregistered Sales of Equity Securities and Use of
Proceeds
              42Item 3
              —
      Defaults Upon Senior Securities
              42Item 4
              —
      Submission of Matters to a Vote of Security Holders
              42Item 5
              —
      Other Information
              43Item 6
              —
      Exhibits
              43Signatures
              44







2




PART I –– FINANCIAL
INFORMATION


Item
1 – Financial Statements





CASCADE
FINANCIAL CORPORATION AND SUBSIDIARY


CONDENSED
CONSOLIDATED BALANCE SHEETS


(unaudited)


(Dollars
      in thousands, except share and per share amounts)
                
                June
      30,
                
                
                December
      31,2009
                
                
                2008ASSETSCash
      on hand and in banks
                
                $
                13,976
                
                
                $
                11,859Interest-earning
      deposits in other institutions
                
                
                26,403
                
                
                
                10,907Fed
      funds sold
                
                
                -
                
                
                
                30,700Securities
      available-for-sale, fair value
                
                
                227,924
                
                
                
                123,678Federal
      Home Loan Bank (FHLB) stock
                
                
                11,920
                
                
                
                11,920Securities
      held-to-maturity, amortized cost
                
                
                38,243
                
                
                
                120,594Loans,
      net of allowance for loan losses and deferred loan fees
                
                
                1,199,026
                
                
                
                1,238,733Goodwill
                
                
                12,885
                
                
                
                24,585Core
      deposit intangible, net
                
                
                423
                
                
                
                493Premises
      and equipment, net
                
                
                15,319
                
                
                
                15,463Cash
      surrender value of bank-owned life insurance (BOLI)
                
                
                24,052
                
                
                
                23,638Current
      tax asset
                
                
                11,768
                
                
                
                -Deferred
      tax asset
                
                
                7,167
                
                
                
                9,828Real
      estate owned (REO)
                
                
                7,872
                
                
                
                1,446Accrued
      interest receivable and other assets
                
                
                13,718
                
                
                
                13,475TOTAL
      ASSETS
                
                $
                1,610,696
                
                
                $
                1,637,319LIABILITIESDeposits
                
                $
                1,001,296
                
                
                $
                1,006,782FHLB
      advances
                
                
                239,000
                
                
                
                249,000Securities
      sold under agreements to repurchase
                
                
                146,600
                
                
                
                146,390Federal
      Reserve Bank (FRB) TAF borrowing
                
                
                60,000
                
                
                
                40,000Junior
      subordinated debentures payable
                
                
                15,465
                
                
                
                15,465Junior
      subordinated debentures payable, fair value
                
                
                8,708
                
                
                
                10,510Advance
      payments by borrowers for taxes and insurance
                
                
                448
                
                
                
                515Dividends
      payable
                
                
                244
                
                
                
                759Accrued
      interest payable, expenses and other liabilities
                
                
                6,615
                
                
                
                7,776TOTAL
      LIABILITIES
                
                
                1,478,376
                
                
                
                1,477,197STOCKHOLDERS’ EQUITYPreferred
      stock, no par value, authorized 38,970 shares;
                  Series
      A (liquidation preference $1,000 per share); issued and outstanding 38,970
      at June 30, 2009, and December 31, 2008
                
                
                36,826
                
                
                
                36,616Preferred
      stock, $.01 par value, authorized 500,000 shares; no shares issued or
      outstanding
                
                
                -
                
                
                
                -Common
      stock, $.01 par value, authorized 25,000,000 shares; issued and
      outstanding 12,110,434 shares at June 30, 2009, and 12,071,032 shares at
      December 31, 2008
                
                
                121
                
                
                
                121Additional
      paid-in capital
                
                
                40,933
                
                
                
                40,781Retained
      earnings, substantially restricted
                
                
                53,430
                
                
                
                80,875Warrants
      issued to US Treasury
                
                
                2,389
                
                
                
                2,389Accumulated
      other comprehensive loss, net of tax
                
                
                (1,379
                )
                
                
                (660
                )TOTAL
      STOCKHOLDERS’ EQUITY
                
                
                132,320
                
                
                
                160,122TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                1,610,696
                
                
                $
                1,637,319





See notes
to condensed consolidated financial statements


3


CASCADE
FINANCIAL CORPORATION AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS




(Dollars
      in thousands except share and per share amounts)
                        
                        Three
      months
                          ended
      June 30,
                        
                        
                        Six
      months ended
                          June
      30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Interest
      income:Loans
                        
                        $
                        17,333
                        
                        
                        $
                        19,038
                        
                        
                        $
                        35,548
                        
                        
                        $
                        38,346Securities
      available-for-sale
                        
                        
                        2,198
                        
                        
                        
                        1,680
                        
                        
                        
                        4,074
                        
                        
                        
                        3,206FHLB
      dividends
                        
                        
                        -
                        
                        
                        
                        42
                        
                        
                        
                        -
                        
                        
                        
                        72Securities
      held-to-maturity
                        
                        
                        674
                        
                        
                        
                        1,991
                        
                        
                        
                        1,984
                        
                        
                        
                        4,075Interest-earning
      deposits
                        
                        
                        10
                        
                        
                        
                        42
                        
                        
                        
                        20
                        
                        
                        
                        108Total
      interest income
                        
                        
                        20,215
                        
                        
                        
                        22,793
                        
                        
                        
                        41,626
                        
                        
                        
                        45,807Interest
      expense:Deposits
                        
                        
                        3,979
                        
                        
                        
                        6,591
                        
                        
                        
                        8,935
                        
                        
                        
                        14,557FHLB
      advances
                        
                        
                        2,684
                        
                        
                        
                        2,725
                        
                        
                        
                        5,340
                        
                        
                        
                        5,465Securities
      sold under agreements to repurchase
                        
                        
                        2,160
                        
                        
                        
                        1,387
                        
                        
                        
                        4,261
                        
                        
                        
                        2,651Federal
      Reserve Bank borrowings
                        
                        
                        39
                        
                        
                        
                        115
                        
                        
                        
                        87
                        
                        
                        
                        154Junior
      subordinated debentures
                        
                        
                        530
                        
                        
                        
                        530
                        
                        
                        
                        1,060
                        
                        
                        
                        1,060Total
      interest expense
                        
                        
                        9,392
                        
                        
                        
                        11,348
                        
                        
                        
                        19,683
                        
                        
                        
                        23,887Net
      interest income
                        
                        
                        10,823
                        
                        
                        
                        11,445
                        
                        
                        
                        21,943
                        
                        
                        
                        21,920Provision
      for loan losses
                        
                        
                        18,300
                        
                        
                        
                        1,200
                        
                        
                        
                        32,175
                        
                        
                        
                        3,590Net
      interest (loss) income after provision for loan losses
                        
                        
                        (7,477
                        )
                        
                        
                        10,245
                        
                        
                        
                        (10,232
                        )
                        
                        
                        18,330Other
      income:Checking
      fees
                        
                        
                        1,270
                        
                        
                        
                        1,277
                        
                        
                        
                        2,382
                        
                        
                        
                        2,312Service
      fees
                        
                        
                        286
                        
                        
                        
                        313
                        
                        
                        
                        535
                        
                        
                        
                        545Increase
      in cash surrender value of BOLI
                        
                        
                        208
                        
                        
                        
                        259
                        
                        
                        
                        448
                        
                        
                        
                        519Net
      gain on sales/calls of securities available-for-sale
                        
                        
                        198
                        
                        
                        
                        13
                        
                        
                        
                        198
                        
                        
                        
                        371Net
      gain on calls of securities held-to-maturity
                        
                        
                        28
                        
                        
                        
                        6
                        
                        
                        
                        146
                        
                        
                        
                        112Net
      gain on fair value of financial instruments
                        
                        
                        12
                        
                        
                        
                        193
                        
                        
                        
                        1,802
                        
                        
                        
                        498Other
                        
                        
                        218
                        
                        
                        
                        156
                        
                        
                        
                        374
                        
                        
                        
                        314Total
      other income
                        
                        
                        2,220
                        
                        
                        
                        2,217
                        
                        
                        
                        5,885
                        
                        
                        
                        4,671Other
      expenses:Compensation
      and employee benefits
                        
                        
                        3,587
                        
                        
                        
                        3,609
                        
                        
                        
                        7,195
                        
                        
                        
                        7,250Occupancy
                        
                        
                        1,062
                        
                        
                        
                        988
                        
                        
                        
                        2,112
                        
                        
                        
                        1,940Marketing
                        
                        
                        326
                        
                        
                        
                        325
                        
                        
                        
                        576
                        
                        
                        
                        562FDIC
      insurance and WPDPC assessment
                        
                        
                        1,241
                        
                        
                        
                        174
                        
                        
                        
                        2,000
                        
                        
                        
                        200Loss
      on REO
                        
                        
                        1,225
                        
                        
                        
                        -
                        
                        
                        
                        1,279
                        
                        
                        
                        -REO
      expense
                        
                        
                        356
                        
                        
                        
                        12
                        
                        
                        
                        365
                        
                        
                        
                        12Other
      than temporary impairment (OTTI) on investments
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        858
                        
                        
                        
                        -Other
                        
                        
                        2,198
                        
                        
                        
                        2,143
                        
                        
                        
                        4,237
                        
                        
                        
                        4,222Other
      expenses excluding goodwill impairment
                        
                        
                        9,995
                        
                        
                        
                        7,251
                        
                        
                        
                        18,622
                        
                        
                        
                        14,186Goodwill
      impairment
                        
                        
                        11,700
                        
                        
                        
                        -
                        
                        
                        
                        11,700
                        
                        
                        
                        -Total
      other expenses
                        
                        
                        21,695
                        
                        
                        
                        7,251
                        
                        
                        
                        30,322
                        
                        
                        
                        14,186(Loss)
      income before (benefit) provision for federal income taxes
                        
                        
                        (26,952
                        )
                        
                        
                        5,211
                        
                        
                        
                        (34,669
                        )
                        
                        
                        8,815(Benefit)
      provision for federal income taxes
                        
                        
                        (5,552
                        )
                        
                        
                        1,577
                        
                        
                        
                        (8,452
                        )
                        
                        
                        2,567Net
      (loss) income
                        
                        
                        (21,400
                        )
                        
                        
                        3,634
                        
                        
                        
                        (26,217
                        )
                        
                        
                        6,248Dividends/preferred
      stock
                        
                        
                        487
                        
                        
                        
                        -
                        
                        
                        
                        969
                        
                        
                        
                        -Net
      (loss) income available for common stockholders
                        
                        $
                        (21,887
                        )
                        
                        $
                        3,634
                        
                        
                        $
                        (27,186
                        )
                        
                        $
                        6,248





See notes
to condensed consolidated financial statements


4


CASCADE
FINANCIAL CORPORATION AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS







(Dollars
      in thousands except share and per share amounts)
                
                Three
      months ended June 30,
                
                
                Six
      months ended
                  June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      (loss) income per common share, basic
                
                $
                (1.81
                )
                
                $
                0.30
                
                
                $
                (2.25
                )
                
                $
                0.52Weighted
      average number of shares outstanding, basic
                
                
                12,110,434
                
                
                
                12,047,927
                
                
                
                12,104,805
                
                
                
                12,041,001Net
      (loss) income per share, diluted
                
                $
                (1.81
                )
                
                $
                0.30
                
                
                $
                (2.25
                )
                
                $
                0.51Weighted
      average number of shares outstanding, diluted
                
                
                12,110,434
                
                
                
                12,162,848
                
                
                
                12,104,805
                
                
                
                12,185,563Dividends
      declared per share
                
                $
                0.000
                
                
                $
                0.000
                
                
                $
                0.010
                
                
                $
                0.090








CASCADE
FINANCIAL CORPORATION AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


(unaudited)





Three
      months ended
                
                
                Six
      months ended(Dollars
      in thousands)
                
                June
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      (Loss) Income
                
                $
                (21,400
                )
                
                $
                3,634
                
                
                $
                (26,217
                )
                
                $
                6,248Unrealized
      (loss) gain on securities available-for-sale, net of tax (benefit) expense
      of $(1,139) and $(960) for the three months ended June 30, 2009, and 2008,
      respectively, and $(456) and $(1,186) for the six months ended June 30,
      2009, and 2008, respectively.
                
                
                (2,114
                )
                
                
                (1,782
                )
                
                
                (848
                )
                
                
                (2,203
                )Reclassification
      adjustment for gains on securities included in net income, net of tax
      provision of $69 and $5 for the three months ended June 30, 2009, and
      2008, respectively, and $69 and $130 for the six months ended June 30,
      2009, and 2008, respectively.
                
                
                129
                
                
                
                8
                
                
                
                129
                
                
                
                241Comprehensive
      (loss) income
                
                $
                (23,385
                )
                
                $
                1,860
                
                
                $
                (26,936
                )
                
                $
                4,286











See notes
to condensed consolidated financial statements


5


CASCADE
FINANCIAL CORPORATION AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)


Six
      Months Ended June 30,(Dollars
      in thousands)
                        
                        2009
                        
                        
                        2008Cash
      flows from operating activities:Net
      (loss) income
                        
                        $
                        (26,217
                        )
                        
                        $
                        6,248Adjustments
      to reconcile net (loss) income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization of premises and equipment
                        
                        
                        1,135
                        
                        
                        
                        1,020Provision
      for loans losses
                        
                        
                        32,175
                        
                        
                        
                        3,590REO
      write-downs
                        
                        
                        1,122
                        
                        
                        
                        -Goodwill
      impairment
                        
                        
                        11,700
                        
                        
                        
                        -Increase
      in cash surrender value of BOLI
                        
                        
                        (414
                        )
                        
                        
                        (475
                        )Amortization
      of retained servicing rights
                        
                        
                        15
                        
                        
                        
                        21Amortization
      of core deposit intangible
                        
                        
                        70
                        
                        
                        
                        70Deferred
      federal income taxes
                        
                        
                        3,049
                        
                        
                        
                        (385
                        )Deferred
      loan fees, net of amortization
                        
                        
                        (142
                        )
                        
                        
                        (252
                        )Gain
      on sale of loans
                        
                        
                        (138
                        )
                        
                        
                        (37
                        )Stock-based
      compensation
                        
                        
                        93
                        
                        
                        
                        101Excess
      tax benefit from stock-based payments
                        
                        
                        (4
                        )
                        
                        
                        (30
                        )Net
      gain on fair value of financial instruments
                        
                        
                        (1,802
                        )
                        
                        
                        (498
                        )Gain
      on sales/calls of securities available-for-sale
                        
                        
                        (198
                        )
                        
                        
                        (371
                        )Gain
      on calls of securities held-to-maturity
                        
                        
                        (146
                        )
                        
                        
                        (112
                        )Net
      loss on sale of REO
                        
                        
                        157
                        
                        
                        
                        -Net
      decrease (increase) in accrued interest receivable and other
      assets
                        
                        
                        (12,348
                        )
                        
                        
                        376Net
      decrease in accrued interest payable, expenses and other
      liabilities
                        
                        
                        (568
                        )
                        
                        
                        (1,490
                        )Other
      than temporary impairment on investments
                        
                        
                        858
                        
                        
                        
                        -Net
      cash provided by operating activities
                        
                        
                        8,397
                        
                        
                        
                        7,776Cash
      flows from investing activities:Loans
      originated, net of principal repayments
                        
                        
                        (1,266
                        )
                        
                        
                        (88,646
                        )Net
      purchases of securities available-for-sale
                        
                        
                        (223,788
                        )
                        
                        
                        (123,896
                        )Proceeds
      from sales/calls of securities available-for-sale
                        
                        
                        108,140
                        
                        
                        
                        78,851Principal
      repayments on securities available-for-sale
                        
                        
                        9,636
                        
                        
                        
                        1,627Net
      purchases of securities held-to-maturity
                        
                        
                        -
                        
                        
                        
                        (77,766
                        )Proceeds
      from calls of securities held-to-maturity
                        
                        
                        79,600
                        
                        
                        
                        77,050Principal
      repayments on securities held-to-maturity
                        
                        
                        2,897
                        
                        
                        
                        1,001Purchases
      of premises and equipment
                        
                        
                        (993
                        )
                        
                        
                        (2,636
                        )Proceeds
      from sales/retirements of premises and equipment
                        
                        
                        2
                        
                        
                        
                        -Proceeds
      from sales/retirements of REO
                        
                        
                        1,686
                        
                        
                        
                        -Net
      change in investment in Community Reinvestment Act (CRA) – low income
      housing
                        
                        
                        (585
                        )
                        
                        
                        215Net
      cash used in investing activities
                        
                        
                        (24,671
                        )
                        
                        
                        (134,200
                        )Subtotal,
      carried forward
                        
                        $
                        (16,274
                        )
                        
                        $
                        (126,424
                        )




See notes
to condensed consolidated financial statements


6


CASCADE
FINANCIAL CORPORATION AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)


Six
      Months Ended June 30,(Dollars
      in thousands)
                
                2009
                
                
                2008Subtotal,
      brought forward
                
                $
                (16,274
                )
                
                $
                (126,424
                )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                
                
                132
                
                
                
                221Dividends
      paid
                
                
                (1,606
                )
                
                
                (2,166
                )Excess
      tax benefits from stock-based payments
                
                
                4
                
                
                
                30Net
      (decrease) increase in deposits
                
                
                (5,486
                )
                
                
                85,665Net
      (decrease) increase in FHLB advances
                
                
                (10,000
                )
                
                
                19,000Net
      increase in securities sold under agreements to repurchase
                
                
                210
                
                
                
                16Net
      increase in Federal Reserve TAF borrowing
                
                
                20,000
                
                
                
                25,000Net
      decrease in advance payments by borrowers for taxes and
      insurance
                
                
                (67
                )
                
                
                (101
                )Net
      cash provided by financing activities
                
                
                3,187
                
                
                
                127,665Net
      (decrease) increase in cash and cash equivalents
                
                
                (13,087
                )
                
                
                1,241Cash
      and cash equivalents at beginning of period
                
                
                53,466
                
                
                
                14,530Cash
      and cash equivalents at end of period
                
                $
                40,379
                
                
                $
                15,771Supplemental
      disclosures of cash flow information—cash paid during the period
      for:Interest
                
                $
                20,819
                
                
                $
                28,564Federal
      income taxes
                
                
                50
                
                
                
                2,800Supplemental
      schedule of non-cash investing activities:Change
      in unrealized gain on securities available-for-sale, net of
      tax
                
                
                (719
                )
                
                
                (1,962
                )Dividends
      declared – Common stock
                
                
                121
                
                
                
                1,084Dividends
      declared – Preferred stock
                
                
                969
                
                
                
                -Loans
      transferred to REO and other repossessed assets
                
                
                9,384
                
                
                
                179





See notes
to condensed consolidated financial statements


7


CASCADE
FINANCIAL CORPORATION AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June
30, 2009


(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”), and its operating subsidiary, Cascade Bank (the “Bank” or
“Cascade”). All significant intercompany balances have been eliminated in the
consolidation. In the opinion of management, the financial information reflects
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial condition, results of operations, and cash
flows of the Corporation pursuant to the requirements of the SEC for interim
reporting. Operating results for the six months ended June 30, 2009, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2009.





Certain
information and footnote disclosures included in the Corporation’s financial
statements for the year ended December 31, 2008, have been condensed or omitted
from this report. Accordingly, these statements should be read in conjunction
with the financial statements and notes thereto included in the Corporation’s
December 31, 2008 Annual Report on Form 10-K.





In
preparing these financial statements, the Corporation has evaluated events and
transactions for potential recognition or disclosure through August 7,
2009, the date the financial statements were issued. In management’s opinion,
all accounting adjustments necessary to accurately reflect the financial
position and results of operations on the accompanying financial statements have
been made. These adjustments include normal and recurring accruals considered
necessary for a fair and accurate presentation. The results for interim periods
are not necessarily indicative of results for the full year or any other interim
period.





2.
            Commitments
      and Contingencies





In the
normal course of business there are various commitments to fund loans to meet
the financing needs of our customers. 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, claims involving the origination of real
property loans and other issues incidental to the Corporation’s and the Bank’s
business. In the opinion of management, no material loss is expected from any
such pending lawsuits.





3.
            Recently
      Issued Accounting Standards





In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.This FSP
provides additional guidance for estimating fair value in accordance with SFAS
No. 157, Fair Value
Measurements, when the volume and level of activity for the asset or
liability have decreased significantly.  FSP FAS 157-4 also provides
guidance on identifying circumstances that indicate a transaction is not


8
 orderly. 
FSP 157-4 requires the disclosure of the inputs and valuation technique(s)
used to measure fair value and a discussion of changes in valuation techniques
and related inputs, if any, during the period. The provisions of FSP FAS 157-4
are effective for the Corporation’s interim period ending on June 30,
2009.  The adoption of FSP 157-4 during the second quarter of 2009 did
not have an impact on the Corporation’s consolidated financial
statements.




In April
2009, The FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which requires disclosures about fair value of
financial instruments in interim reporting periods of publicly traded companies
that were previously only required to be disclosed in annual financial
statements.  The provisions of FSP FAS 107-1 and APB 28-1 are effective for
the Corporation’s interim period ending on June 30, 2009.  As FSP FAS
107-1 and APB 28-1 amends only the disclosure requirements about fair value of
financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB
28-1 did not have an effect the Corporation’s statement of operations and
balance sheet.




In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, which amends the other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. 
The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the
Corporation’s interim period ending on June 30, 2009.  The adoption of
FSP FAS 115-2 and FAS 124-2 did not have an effect on the Corporation’s
consolidated financial statements.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This statement is effective for the Corporation’s
interim period ending on June 30, 2009.  The adoption of SFAS No. 165
did not have an impact on the Corporation’s financial condition or results of
operation.





In
June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets — an amendment of FASB Statement No. 140.This
Statement amends SFAS 140 and removes the concept of a qualifying
special-purpose entity from Statement 140 and removes the exception from
applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities,on qualifying special-purpose entities. This Statement is
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter and is not anticipated to have any impact on the Corporation’s
consolidated financial statements.





In
June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R).This Statement amends FASB 46(R) to require an enterprise
to perform an analysis and ongoing reassessments to determine whether the
enterprises variable interest or interests give it a controlling financial
interest in a variable interest entity and amends certain guidance for
determining whether an entity is a variable interest entity. It also requires
enhanced disclosures that will provide users of financial statements with more
transparent


9
 information
about an enterprises involvement in a variable interest entity. This Statement
is effective as of the beginning of each reporting entity’s first annual
reporting period that begins
after November 15, 2009 and for all interim reporting periods after that
and is not anticipated to have any impact on the Corporation’s consolidated
financial statements as the Corporation has no interests in any variable
interest entities.





In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles — a
replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement establishes the Codification as the
source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. This Statement is effective for financial statements
issued for interim and annual periods ending after September 15, 2009 and
is not anticipated to have any impact on the Corporation’s consolidated
financial statements.




4.
            Other than temporary
      impairment (OTTI) on investments





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





5.
            Goodwill
      Impairment





In the
second quarter of 2009, the Corporation engaged an independent valuation
consultant to assist in determining whether, and to what extent, its goodwill
asset was impaired.  A goodwill impairment test includes two
steps.  Step one, used to identify potential impairment, compares the
estimated fair value of the Corporation with its carrying amount including
goodwill.  The key step one inputs used to determine the implied fair
value of the Corporation included the quoted market price of Cascade’s common
stock, market prices of common stocks of other banking organizations, common
stock trading multiples, discounted cash flows and inputs from comparable
transactions. If the estimated fair value exceeds its carrying amount, goodwill
is considered not impaired.  If the carrying amount exceeds its
estimated fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any.  Step two
of the goodwill impairment test compares the implied estimated fair value of
goodwill with the carrying amount of the currently recorded
goodwill.  If the carrying amount of goodwill exceeds the implied fair
value of the recorded goodwill, an impairment charge is taken in an amount equal
to that excess.  The goodwill impairment test showed that, as a result
of the significant decline in Cascade’s stock price and market capitalization
over the course of 2009, and in conjunction with similar declines in the value
of most financial institutions and the ongoing disruption in related financial
markets, the Corporation’s goodwill was deemed to be impaired.  As a
result of the impairment analysis and in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, we decided to reduce the carrying value of goodwill in our
Consolidated Balance Sheet by recording an $11.7 million write-down in the
second quarter.  The total $11.7 million write-down of goodwill was a
non-cash charge that did not affect the Corporation’s or the Bank’s


10
 liquidity
or operations. Also, since goodwill is excluded from regulatory capital
calculations, the impairment charge (which was not deductible for tax purposes)
did not have an adverse effect on the “well-capitalized” regulatory capital
ratios of the Corporation or the Bank. There are many assumptions and estimates
underlying the determination of whether goodwill has been impaired. Future
events could cause management to conclude that the Corporation’s goodwill has
become further impaired which would result in the Corporation recording an
additional impairment loss.




6.
            Loans, Allowance for
      Loan Losses and REO





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





(Dollars
      in thousands)
                      
                      June
      30, 2009
                      
                      
                      December
      31, 2008Business
                      
                      $
                      467,923
                      
                      
                      $
                      485,060R/E
      construction(1)
                      
                      
                      296,931
                      
                      
                      
                      406,505Commercial
      R/E
                      
                      
                      192,886
                      
                      
                      
                      122,951Multifamily
                      
                      
                      91,554
                      
                      
                      
                      86,864Home
      equity/consumer
                      
                      
                      30,919
                      
                      
                      
                      30,772Residential(2)
                      
                      
                      146,231
                      
                      
                      
                      126,089Total
      loans
                      
                      $
                      1,226,444
                      
                      
                      $
                      1,258,241Deferred
      loan fees
                      
                      
                      (2,928
                      )
                      
                      
                      (3,069
                      )Allowance
      for loan losses
                      
                      
                      (24,490
                      )
                      
                      
                      (16,439
                      )Loans,
      net
                      
                      $
                      1,199,026
                      
                      
                      $
                      1,238,733





(1)                 Real
estate construction loans exclude loans in process.


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





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





(Dollars
      in thousands)
                
                Three
      months ended
                  June
      30, 2009
                
                
                Six
      months
                  ended
                  June
      30, 2009Beginning
      allowance for loan losses
                
                $
                25,020
                
                
                $
                16,439Additions
                
                
                18,300
                
                
                
                32,175Transfer
      from off-balance sheet general valuation allowance (GVA)
                
                
                16
                
                
                
                21Net
      charge-offs
                
                
                (18,512
                )
                
                
                (23,811
                )Fair
      value charges
                
                
                (334
                )
                
                
                (334
                )Allowance
      for loan losses
                
                
                24,490
                
                
                
                24,490Off-balance
      sheet GVA
                
                
                72
                
                
                
                72Total
      allowance for loan losses
                
                $
                24,562
                
                
                $
                24,562








11




The
following table shows the nonperforming loans in each category: (6/30/09
compared to 12/31/08)





(Dollars
      in thousands)
                              
                              Nonperforming Loans
                            
                            Balance
      at
                              June
      30,2009
                            
                            
                            Balance
      at
                              December
      31, 2008Business
                            
                            $
                            550
                            
                            
                            $
                            1,150R/E
      constructionSpec
      construction
                            
                            
                            20,244
                            
                            
                            
                            11,735Land
      acquisition and development
                            
                            
                            60,084
                            
                            
                            
                            22,799Land
                            
                            
                            20,095
                            
                            
                            
                            4,437Total
      R/E construction
                            
                            
                            100,423
                            
                            
                            
                            38,971Commercial
      R/E
                            
                            
                            12,735
                            
                            
                            
                            -Multifamily
                            
                            
                            250
                            
                            
                            
                            -Home
      equity/consumer
                            
                            
                            216
                            
                            
                            
                            2Residential
                            
                            
                            275
                            
                            
                            
                            155Total
                            
                            $
                            114,449
                            
                            
                            $
                            40,278








The
following table presents REO for the periods presented:





(Dollars  in
      thousands)REO
                  
                  June
      30, 2009
                  
                  
                  December
      31, 2008Beginning
      balance
                  
                  $
                  1,446
                  
                  
                  $
                  -Loans
      transferred to REO
                  
                  
                  9,384
                  
                  
                  
                  5,821Loans
      transferred to other repossessed assets
                  
                  
                  -
                  
                  
                  
                  179Capitalized
      improvements
                  
                  
                  7
                  
                  
                  
                  -Sales
                  
                  
                  (1,686
                  )
                  
                  
                  (4,434
                  )Write-downs
                  
                  
                  (1,122
                  )
                  
                  
                  (117
                  )Loss
      on sales
                  
                  
                  (157
                  )
                  
                  
                  (3
                  )Ending
      balance
                  
                  $
                  7,872
                  
                  
                  $
                  1,446





12




7.
              Stockholders’
      Equity





a)
            Earnings
      per Share





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




Three
      Months Ended
                
                
                Six
      Months Ended(dollars
      in thousands,
                
                June
      30,
                
                
                June
      30,except
      share and per share amounts)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Numerator:Net
      (loss)  income
                
                $
                (21,400
                )
                
                $
                3,634
                
                
                $
                (26,217
                )
                
                $
                6,248Dividend
      on preferred stock
                
                
                487
                
                
                
                -
                
                
                
                969
                
                
                
                -Net
      (loss) income available for common stockholders
                
                $
                (21,887
                )
                
                $
                3,634
                
                
                $
                (27,186
                )
                
                $
                6,248Denominator:Denominator
      for basic net (loss) income per common share-Weighted average
      shares
                
                
                12,110,434
                
                
                
                12,047,927
                
                
                
                12,104,805
                
                
                
                12,041,001Effect
      of dilutive stock options
                
                
                -
                
                
                
                114,921
                
                
                
                -
                
                
                
                144,562Denominator
      for diluted net (loss) income per common share - Weighted average common
      shares and assumed conversion of dilutive stock options
                
                
                12,110,434
                
                
                
                12,162,848
                
                
                
                12,104,805
                
                
                
                12,185,563Basic
      net (loss) income per common share
                
                $
                (1.81
                )
                
                $
                0.30
                
                
                $
                (2.25
                )
                
                $
                0.52Diluted
      net (loss) income per common share
                
                $
                (1.81
                )
                
                $
                0.30
                
                
                $
                (2.25
                )
                
                $
                0.51





For the
quarters ended June 30, 2009, and 2008, there were anti-dilutive options to
purchase 655,983 and 420,709 shares, respectively, excluded from the above
calculation. For the six month periods ended June 30, 2009, and 2008, there were
anti-dilutive options to purchase 655,983 and 290,271 shares, respectively,
excluded from the above calculation.





b)
            Dividends





In June 2009, to preserve capital, the
Corporation announced that it would temporarily suspend its regular quarterly
cash dividend on common stock. Prior to that date the Corporation had paid a
quarterly dividend of $0.01 in April 2009 and $0.045 in January 2009. The
Corporation is a participant in the U.S. Treasury Department’s Capital Purchase
Program, and as long as the Corporation is a participant in that program, it is
not permitted to increase its quarterly common stock dividend above
$0.045.





c)
            Stock-based
      Compensation





Compensation
expense related to stock-based compensation was $30,000 for the three months
ended June 30, 2009, and $50,000 for the three months ended June 30, 2008. For
the six months ended June 30, 2009 and 2008, compensation expense related to
stock-based compensation was $93,000 and $101,000,
respectively.


13




Changes
in total options outstanding for the six months ended June 30, 2009, are as
follows:


Options
              
              
              Weighted-
                Average
                Exercise
                Price
      per Share
              
              
              Weighted-
                Average
                Remaining
                Contractual
                Term
                (in
      years)
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      on December 31, 2008
              
              
              656,883
              
              
              $
              10.41
              
              
              
              5.07
              
              
              $
              153,385Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Forfeited/Canceled
              
              
              -
              
              
              
              -Outstanding
      on March 31, 2009
              
              
              656,883
              
              
              $
              10.41
              
              
              
              4.82
              
              
              $
              -Granted
              
              
              -Exercised
              
              
              -Forfeited/Canceled
              
              
              900Outstanding
      on June 30, 2009
              
              
              655,983
              
              
              $
              10.41
              
              
              
              4.56
              
              
              $
              -Exercisable
      on June 30, 2009
              
              
              499,565
              
              
              $
              9.41
              
              
              
              3.56
              
              
              $
              -





The
unrecognized share-based compensation cost on unvested options at June 30, 2009,
was $164,926, which will be recognized over the estimated average requisite
service period of the options of approximately five years.





Options are granted to certain
employees and directors at prices equal to the market value of the stock at the
close of trading on the dates the options are granted. The options granted have
a term of ten years from the grant date. Incentive stock options granted to
employees vest over a five-year period. Non-qualified options granted to
directors vest over a four-year period. Compensation expense is recorded as if
each vesting portion of the award is a separate award. We have estimated the
fair value of all stock option awards as of the date of the grant by applying a
Black-Scholes option pricing valuation model. The application of this valuation
model involves assumptions that are judgmental and sensitive in the
determination of compensation expense.





The total
options authorized at June 30, 2009, were 1,097,615. No options were granted or
exercised during the six months ended June 30, 2009.





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





SFAS No.
123(R) requires the recognition of stock-based compensation for the number of
awards that are expected to vest. As a result, for most awards, recognized stock
compensation expense was reduced by estimated forfeitures primarily based on
historical forfeiture rates of 6.19%. Estimated forfeitures will be continually
evaluated in subsequent periods and may change based on new facts and
circumstances.





During
the six month period ending June 30, 2009, each Board member received an award
of 3,582 shares of restricted stock worth approximately $12,000 on the day the
shares were granted.  These shares are part of the Board’s
compensation package and vest in one year.  Additionally, during the
quarter, the Board voted to reduce it cash compensation by 10% for the balance
of the year. Also during this time 3,425 shares of restricted stock were awarded
to other employees as part of the Bank’s Real Rewards program which awards 25


14
 shares of
restricted stock to tenured employees that achieve customer service requirements
and an exceeds or far exceeds on their annual employee performance
evaluation.  Restricted stock awards are expensed over a three year
vesting period.





d)        Emergency
Economic Stabilization Act of 2008 and Troubled Asset Relief
Program




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





On
November 21, 2008, the Corporation completed its $39 million capital raise as a
participant in the U.S. Treasury Department’s Capital Purchase
Program.  Under the terms of the transaction the Corporation issued
38,970 shares of Series A Fixed-Rate Cumulative Perpetual Preferred Stock and a
warrant to purchase 863,442 shares of the Corporation’s common stock at an
exercise price of $6.77 per share.The additional
capital has enhanced our capacity to support the communities we serve through
expanded lending activities.





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





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





The
preferred shares issued under the CPP carry a 5% dividend for the first five
years that increases to 9% thereafter. As a condition for participating in
the CPP, the Corporation has accepted limitations on executive compensation and
benefits. These limitations are explained in greater detail in the Corporation’s
most recent proxy statement on Schedule 14A filed with the SEC on March 23,
2009.


15




8.
            Non-Qualified
      Deferred Compensation Plan





The
Corporation has adopted the Cascade Bank Non-Qualified Deferred Compensation
Plan (the “Plan”) dated February 1, 2008.  The Plan is an unfunded,
non-qualified deferred compensation plan designed to provide directors and a
select group of management and highly compensated employees of the Bank an
opportunity to defer a portion of their salary and incentive payments. The
Bank may also, in its sole discretion, make contributions to accounts on behalf
of any and all eligible persons. For the quarter ended June 30, 2009, eligible
participants contributed $8,000 to the Plan. There have been no contributions
made by Cascade Bank as of June 30, 2009.





9.
            Fair
      Value Measurements





SFAS
No. 157, Fair Value
Measurements, defines fair value, establishes a framework for measuring
fair value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three
levels are defined as follows:





•  Level 1
      - Inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active markets.•  Level 2
      - Inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial instrument.•  Level 3
      - Inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.





Determination of fair market
values:





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





The
Corporation has issued $10 million (of the $25 million outstanding) of junior
subordinated debentures payable that are subject to fair value accounting. These
debentures are priced using discounted cash flows to a projected redemption date
on the date of valuation and based upon an estimated yield for similar
securities and an imputed rate, are considered a Level 3
measurement.





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





Fair
value adjustments to real estate owned (REO) and other repossessed assets are
recorded at the lower of carrying amount of the loan or fair value less selling
costs.  Any write-downs based on the asset’s fair value at the date of
acquisition are charged to the allowance for loan losses.  After
foreclosure, management periodically performs valuations such


16
 that the
real estate is carried at the lower of its new cost basis or fair value, net of
estimated costs to sell. Those adjustments are categorized as a loss on REO and
recognized in other expense.





The
following table presents the balances of assets and liabilities measured at fair
value on a recurring basis at June 30, 2009, and December 31, 2008.





(Dollars
      in thousands)
                        
                        Fair
      Value at June 30, 2009Assets
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3
                        
                        
                        TotalAvailable-for-sale
      securities
                        
                        $
                        -
                        
                        
                        $
                        227,924
                        
                        
                        $
                        -
                        
                        
                        $
                        227,924LiabilitiesJunior
      subordinated debentures payable
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        8,708
                        
                        
                        $
                        8,708





(Dollars
      in thousands)
                      
                      Fair
      Value at December 31, 2008Assets
                      
                      Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      TotalAvailable-for-sale
      securities
                      
                      $
                      454
                      
                      
                      $
                      123,224
                      
                      
                      $
                      -
                      
                      
                      $
                      123,678LiabilitiesJunior
      subordinated debentures payable
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      10,510
                      
                      
                      $
                      10,510




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





(Dollars
      in thousands)
                    
                    Three
      months ended
                      June
      30,
                    
                    
                    Six
      months ended
                      June
      30,Assets
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Available-for-sale
      securities
                    
                    $
                    198
                    
                    
                    $
                    13
                    
                    
                    $
                    198
                    
                    
                    $
                    371LiabilitiesJunior
      subordinated debentures payable
                    
                    $
                    12
                    
                    
                    $
                    193
                    
                    
                    $
                    1,802
                    
                    
                    $
                    498





The
change in fair market value of the junior subordinated debentures payable is
recorded as a component of other income. For the quarter ended June 30, 2009,
the Corporation opted to use a different approach to determine the fair value
for Cascade Capital Trust I. In an attempt to triangulate on a fair value,
the Corporation opted to average the yields on the bond previously used and the
implied yield from a broker quotation to determine the benchmark yield.
Previously, the Corporation had used a reference security to determine a fair
value for Capital Trust I. That security had a substantial decline in its yield
at a time when the yield on small bank trust preferred issues were flat or
declined in value.





The
following table presents the fair value adjustments for the junior subordinated
debentures payable which use significant unobservable inputs (Level 3) for the
quarter ended June 30, 2009.


(Dollars
      in thousands)
                  
                  Fair
      value measurements using
                    significant
      unobservable inputs
                    (Level
      3)Three
      months ended
                    June
      30, 2009
                  
                  
                  Six
      months ended June 30, 2009Beginning
      balance
                  
                  $
                  8,720
                  
                  
                  $
                  10,510Total
      gains recognized
                  
                  
                  (12
                  )
                  
                  
                  (1,802
                  )Ending
      balance
                  
                  $
                  8,708
                  
                  
                  $
                  8,708





The
Corporation conducts an impairment analysis on any loan exceeding $1.0 million
when the borrower’s ability to make all contractual payments on a timely basis
is in question. At June 30, 2009,
$195.4 million of loans were subjected to impairment analysis and the estimated
impairment was $4.7 million. No impairment charges were taken and/or


17
 reserves
established for $178.0 million of the analyzed loans. However, according to SFAS
No. 114, the Bank is still required to report these loans as impaired since an
impairment analysis was performed.





The
following table presents the balance of assets measured at fair value on a
nonrecurring basis at June 30, 2009, and December 31, 2008.





(Dollars
      in thousands)
                
                Fair
      Value at June 30, 2009Description
                
                Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                TotalImpaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                190,710
                
                
                $
                190,710REO
                
                
                -
                
                
                
                -
                
                
                
                7,872
                
                
                
                7,872Total
                
                $
                -
                
                
                $
                -
                
                
                $
                198,582
                
                
                $
                198,582





(Dollars
      in thousands)
                
                Fair
      Value at December 31, 2008Description
                
                Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                TotalImpaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                83,368
                
                
                $
                83,368REO
                
                
                -
                
                
                
                -
                
                
                
                1,446
                
                
                
                1,446Total
                
                $
                -
                
                
                $
                -
                
                
                $
                84,814
                
                
                $
                84,814





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





(Dollars
      in thousands)
                  
                  Six
      months ended June 30,Description
                  
                  2009
                  
                  
                  2008Impaired
      loans
                  
                  $
                  23,260
                  
                  
                  $
                  2,265REO
                  
                  
                  2,770
                  
                  
                  
                  -Total
                  
                  $
                  26,030
                  
                  
                  $
                  2,265





The fair
value estimates presented below are subjective in nature, involve uncertainties
and matters of significant judgment and, therefore, are not necessarily
indicative of the amounts the Corporation could realize in a current market
exchange. The Corporation has not included certain material items in its
disclosure, such as the value of the long-term relationships with the
Corporation’s lending and deposit customers, since this is an intangible and not
a financial instrument. Additionally, the estimates do not include any tax
ramifications. There may be inherent weaknesses in any calculation technique,
and changes in the underlying assumptions used, including discount rates and
estimates of future cash flows, that could materially affect the results. For
all of these reasons, the aggregation of the fair value calculations presented
herein do not represent, and should not be construed to represent, the
underlying value of the Corporation.


18


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




June
      30, 2009
                
                
                December
      31, 2008(Dollars
      in thousands)
                
                Carrying
                  Value
                
                
                Estimated
                  Fair
      Value
                
                
                Carrying
                  Value
                
                
                Estimated
                  Fair
      ValueFinancial
      assets:Cash
      and cashequivalents
                
                $
                40,379
                
                
                $
                40,379
                
                
                $
                53,466
                
                
                $
                53,466Securities
      available-for-sale
                
                
                227,924
                
                
                
                227,924
                
                
                
                123,678
                
                
                
                123,678Securities
      held-to-maturity
                
                
                38,243
                
                
                
                38,660
                
                
                
                120,594
                
                
                
                120,701FHLB
      stock
                
                
                11,920
                
                
                
                11,920
                
                
                
                11,920
                
                
                
                11,920Loans,
      net
                
                
                1,199,026
                
                
                
                1,217,243
                
                
                
                1,238,733
                
                
                
                1,260,455Financial
      liabilities:Deposit
      accounts
                
                $
                1,001,296
                
                
                $
                979,542
                
                
                $
                1,006,782
                
                
                $
                997,826Borrowings
                
                
                445,600
                
                
                
                482,190
                
                
                
                435,390
                
                
                
                458,911Junior
      subordinated debentures payable
                
                
                15,465
                
                
                
                12,991
                
                
                
                15,465
                
                
                
                11,569Junior
      subordinated debentures payable, at fair value
                
                
                8,708
                
                
                
                8,708
                
                
                
                10,510
                
                
                
                10,510





Cash
and Cash Equivalents


The
carrying amount represents fair value.




Securities
including mortgage backed securities and FHLB stock


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




Loans


Fair
values are estimated using current market interest rates to discount future cash
flows for each of the different loan types. Interest rates used to discount the
cash flows are based on U.S. Treasury yields or other market interest rates with
appropriate spreads for each segment. The spread over the Treasury yields or
other market rates is used to account for liquidity, credit quality and higher
servicing costs. Prepayment rates are based on expected future prepayment rates,
or, where appropriate and available, market prepayment rates.




Deposit
Accounts


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




Borrowings
(FHLB advances and securities sold under agreements to repurchase)


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




Junior
Subordinated Debentures Payable (Trust Preferred Securities)


The fair
value is calculated based on the amounts required to settle the contracts,
adjusted for market interest rates and terms to maturity.


19


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 included in this Quarterly Report, and the
December 31, 2008 audited consolidated financial statements and accompanying
notes included in our recent Annual Report on Form 10-K.





Forward-Looking
Statements


Certain
of the statements contained herein that are not historical facts are
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.  The Corporation’s actual results may differ materially
from those included in the forward-looking
statements.  Forward-looking statements are typically identified by
words or phrases such as “believe,” “expect,” “intend,” “may increase,” “may
fluctuate,” and similar expressions or future or conditional verbs such as
“will,” “should,” “would,” and “could.”  These forward-looking
statements involve risks and uncertainties including, but not limited to,
economic conditions, portfolio growth, the credit performance of the portfolios,
including bankruptcies, and seasonal factors; changes in general economic
conditions including the performance of financial markets, prevailing inflation
and interest rates, realized gains from sales of investments, gains from asset
sales, and losses on commercial lending activities; results of various
investment activities; the effects of competitors’ pricing policies, of changes
in laws and regulations on competition and of demographic changes on target
market populations’ savings and financial planning needs; industry changes in
information technology systems on which we are highly dependent; failure of
acquisitions to produce revenue enhancements or cost savings at levels or within
the time frames originally anticipated or unforeseen integration difficulties;
the adoption of the Corporation of an FFIEC policy that provides guidance on the
reporting of delinquent consumer loans and the timing of associated credit
charge-offs for financial institution subsidiaries; and the resolution of legal
proceedings and related matters.  In addition, the banking industry in
general is subject to various monetary and fiscal policies and regulations,
which include those determined by the Federal Reserve Board, the Federal Deposit
Insurance Corporation, and state regulators, whose policies and regulations
could affect the Corporation’s results.  These and other important
factors, including those discussed in our December 31, 2008 Form 10-K, filed
with the Securities and Exchange Commission, under the headings “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Business,” and those discussed in this Form 10-Q under Part II,
Item 1A "Risk Factors" below, may cause our actual results, performance or
achievements to differ materially from any future results, performance or
achievements expressed or implied by these forward-looking
statements.  These statements are representative only on the date
hereof, and the Corporation undertakes no obligation to update any
forward-looking statements made.





Cascade
Financial Corporation is a bank holding company incorporated in the state of
Washington. The Corporation’s sole operating subsidiary is Cascade Bank, a
Washington State chartered commercial bank. The Corporation and the Bank are
headquartered in Everett, Washington. The Bank offers loan, deposit, and other
financial services through its twenty-two branches located in Snohomish, King
and Skagit Counties (Washington).


20


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
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Return
      on average assets (2)
                
                
                (5.33
                )%
                
                
                0.96
                %
                
                
                (3.26
                )%
                
                
                0.84
                %Return
      on average equity (2)
                
                
                (60.08
                )
                
                
                11.57
                
                
                
                (34.78
                )
                
                
                10.01Average
      stockholders’ equity to average assets
                
                
                8.86
                
                
                
                8.27
                
                
                
                9.37
                
                
                
                8.37Other
      expenses to average assets (1)
      (2)
                
                
                2.49
                
                
                
                1.90
                
                
                
                2.21
                
                
                
                1.89Efficiency
      ratio
                
                
                166.33
                
                
                
                53.07
                
                
                
                108.96
                
                
                
                53.35Efficiency
      ratio (excluding goodwill charge)
                
                
                76.63
                
                
                
                53.07
                
                
                
                66.92
                
                
                
                53.35Average
      interest-bearing assets to averageinterest-bearing
      liabilities
                
                
                104.77
                
                
                
                111.60
                
                
                
                106.27
                
                
                
                111.67(1)Excludes
      an $11.7 million goodwill impairment charge.
                  (2)Annualized.






CHANGES
IN FINANCIAL CONDITION





Total
assets decreased 1.6% or $26.6 million to $1.61 billion at June 30, 2009,
compared to $1.64 billion at December 31, 2008. Net loans, i.e. net of deferred
loan fees and the allowance for loan losses, decreased 3.2% or $39.7 million to
$1.20 billion at June 30, 2009, from $1.24 billion at December 31,
2008.





Total investment
securities increased $21.9 million to $278.1 million at June 30, 2009, compared
to $256.2 million at December 31, 2008. The investment portfolio is concentrated
in securities issued by Government Sponsored Enterprises (GSEs, e.g. FNMA or
FHLMC) as well as mortgage-backed pass-through securities and collateralized
mortgage obligations backed by pools of single family residential mortgages
(known collectively as MBS). All investment purchases during the six months
ended June 30, 2009, were rated AAA in terms of credit quality by Moody’s and/or
Standard & Poors. All MBS and GSE debt securities in the portfolio as of
June 30, 2009, were also rated AAA.





During
the quarter the available-for-sale portfolio grew by $31.5 million and the
held-to-maturity portfolio declined by $38.0 million. $36.1 million of the
decline was a result of calls of agency notes and $1.9 million represented pay
downs on MBS. Purchases resulting from the proceeds from calls, in addition to
the incremental purchases, were all designated available-for-sale to increase
flexibility in managing the portfolio.





(Dollars
      in thousands)
                                
                                
                                June
      30, 2009Amortized
                                  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
                                  valueSecurities
      available-for-saleMBS
                                
                                
                                $
                                48,502
                                
                                
                                $
                                529
                                
                                
                                $
                                -
                                
                                
                                $
                                (532
                                )
                                
                                $
                                (182
                                )
                                
                                $
                                48,317Agency
      notes
                                
                                
                                
                                171,465
                                
                                
                                
                                529
                                
                                
                                
                                -
                                
                                
                                
                                (2,560
                                )
                                
                                
                                -
                                
                                
                                
                                169,434US
      Treasury note
                                
                                
                                
                                10,079
                                
                                
                                
                                94
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                10,173Total
                                
                                
                                $
                                230,046
                                
                                
                                $
                                1,152
                                
                                
                                $
                                -
                                
                                
                                $
                                (3,092
                                )
                                
                                $
                                (182
                                )
                                
                                $
                                227,924


21


(Dollars
      in thousands)
                          
                          June
      30, 2009Amortized
                            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
                            valueSecurities
      held-to-maturityMBS
                          
                          $
                          17,581
                          
                          
                          $
                          394
                          
                          
                          $
                          20
                          
                          
                          $
                          -
                          
                          
                          $
                          (41
                          )
                          
                          $
                          17,954Agency
      notes
                          
                          
                          19,887
                          
                          
                          
                          45
                          
                          
                          
                          -
                          
                          
                          
                          (1
                          )
                          
                          
                          -
                          
                          
                          
                          19,931Corporate/other
                          
                          
                          775
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          775Total
                          
                          $
                          38,243
                          
                          
                          $
                          439
                          
                          
                          $
                          20
                          
                          
                          $
                          (1
                          )
                          
                          $
                          (41
                          )
                          
                          $
                          38,660


December
      31, 2008Amortized
                  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
                  valueSecurities
      available-for-saleMBS
                
                $
                42,250
                
                
                $
                288
                
                
                $
                -
                
                
                $
                (281
                )
                
                $
                (405
                )
                
                $
                41,852Agency
      notes
                
                
                81,149
                
                
                
                368
                
                
                
                -
                
                
                
                (145
                )
                
                
                -
                
                
                
                81,372Corporate/other
                
                
                1,294
                
                
                
                -
                
                
                
                -
                
                
                
                (840
                )
                
                
                -
                
                
                
                454Total
                
                $
                124,693
                
                
                $
                656
                
                
                $
                -
                
                
                $
                (1,266
                )
                
                $
                (405
                )
                
                $
                123,678





December
      31, 2008Amortized
                      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
                      valueSecurities
      held-to-maturityMBS
                    
                    $
                    20,484
                    
                    
                    $
                    195
                    
                    
                    $
                    14
                    
                    
                    $
                    (139
                    )
                    
                    $
                    (9
                    )
                    
                    $
                    20,545Agency
      notes
                    
                    
                    99,335
                    
                    
                    
                    442
                    
                    
                    
                    -
                    
                    
                    
                    (396
                    )
                    
                    
                    -
                    
                    
                    
                    99,381Corporate/other
                    
                    
                    775
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    775Total
                    
                    $
                    120,594
                    
                    
                    $
                    637
                    
                    
                    $
                    14
                    
                    
                    $
                    (535
                    )
                    
                    $
                    (9
                    )
                    
                    $
                    120,701


In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments.  This FSP amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities. The
goal is to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities.





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





Management
evaluates securities and FHLB stock for other-than-temporary impairment at least
on an annual basis, and more frequently when economic or market concerns warrant
such evaluation.  Consideration is given to: (1) whether we expect to
recover the amortized cost basis of the security, (2) the timely payment of
principle and interest as due, (3) the financial condition and near term
prospects of the issuer, (4) the length of time and extent to which the fair
value has been less than cost, (5) our intent and ability to retain a security


22
 for a
period of time sufficient to allow for any anticipated recovery in fair value
and.  We recognized $858,000 other-than-temporary impairment losses
for the six months ended June 30, 2009 and no OTTI for the six months ended June
30, 2008. The Corporation had no OTTI losses for the three month periods ended
June 30, 2009 or 2008.





As of
June 30, 2009, the Bank held five securities in its available-for-sale portfolio
and one in its held-to-maturity portfolio that have had an unrealized loss for
more than one year. We have the intent and ability to hold the investments below
market value for the period of time management believes to be sufficient for a
market price recovery. All securities held in the portfolio are currently rated
AAA. We hold no securities that are backed by sub-prime loans or collateralized
debt obligations.





At June
30, 2009, the Bank held FHLB of Seattle stock with a par value of $11.9 million.
The Corporation does not anticipate any impairment charges associated with these
instruments. According to the AICPA Audit Guide, FHLB stock does not have
readily determinable fair value for purposes of FASB Statement of Position 01-6,
Accounting by Certain Entities
(Including Entities with Trade Receivables) that Lend to or Finance the
Activities of Others, and the equity ownership rights are more limited
than would be the case for a public company because of the FHFA’s oversight role
in budgeting and approving dividends. FHLB stock is generally viewed as a
long-term investment and as a restricted investment security, which is carried
at cost. Thus, when evaluating FHLB stock for impairment, its value should be
determined based on the ultimate recoverability of the par value rather than by
recognizing temporary declines in value.





Under
Federal Housing Finance Agency Regulations, a Federal Home Loan Bank that fails
to meet any regulatory capital requirement may not declare a dividend or redeem
or repurchase capital stock in excess of what is required for members’ current
loans.  Moody’s Investors Service’s (Moody’s) current assessment of the
FHLB’s portfolios indicates that the true economic losses embedded in these
securities are significantly less than the accounting impairments would suggest
and are manageable given the FHLB’s capital levels.  According to Moody’s,
the large difference between the expected economic losses and the mark-to-market
impairment losses for accounting purposes is attributed to market illiquidity,
de-leveraging and stress in the credit market in general. Furthermore, Moody’s
believes that the FHLBs have the ability to hold the securities until
maturity.  The FHLBs have access to the U.S. Government-Sponsored
Enterprise Credit Facility, a secured lending facility that serves as a
liquidity backstop, substantially reducing the likelihood that the FHLBs would
need to sell securities to raise liquidity and, thereby, cause the realization
of large economic losses.  In addition, the Federal Reserve has begun to
purchase direct debt obligations of Freddie Mac, Fannie Mae and the FHLBs.
Moody’s has stated that their AAA senior debt rating and Prime-1 short-term debt
rating are likely to remain unchanged based on expectations that the FHLBs have
a very high degree of government support.  Based on the above, the
Corporation has determined there is not an other-than-temporary impairment on
the FHLB stock investment as of June 30, 2009.





Loan
Portfolio





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


23


Residential
loans held in the Bank’s portfolio are secured by single family residences. The
Bank also originates longer term fixed rate residential loans, but sells most of
those loans into the secondary market on a best efforts, servicing released
basis. Beginning in 2009, the Bank has originated and holds loans generated by
its Builder Loan Program, which offers attractive terms to buyers of houses from
builders financed by the Bank. As of June 30, 2009, the Bank held $17.5 million
of these loans.





Home
equity loans are primarily second mortgages on the borrower’s primary residence.
Consumer loans are non-residential, i.e. automobiles, credit cards or
boats.





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





(Dollars
      in thousands)
                    
                    June
      30, 2009
                    
                    
                    %
      of Portfolio
                    
                    
                    December
      31, 2008
                    
                    
                    %
      of PortfolioBusiness
                    
                    $
                    467,923
                    
                    
                    
                    38.2
                    %
                    
                    $
                    485,060
                    
                    
                    
                    38.6
                    %R/E
      construction(1)
                    
                    
                    296,931
                    
                    
                    
                    24.2
                    
                    
                    
                    406,505
                    
                    
                    
                    32.3Commercial
      R/E
                    
                    
                    192,886
                    
                    
                    
                    15.7
                    
                    
                    
                    122,951
                    
                    
                    
                    9.8Multifamily
                    
                    
                    91,554
                    
                    
                    
                    7.5
                    
                    
                    
                    86,864
                    
                    
                    
                    6.9Home
      equity/consumer
                    
                    
                    30,919
                    
                    
                    
                    2.5
                    
                    
                    
                    30,772
                    
                    
                    
                    2.4Residential(2)
                    
                    
                    146,231
                    
                    
                    
                    11.9
                    
                    
                    
                    126,089
                    
                    
                    
                    10.0Total
      loans
                    
                    $
                    1,226,444
                    
                    
                    
                    100.0
                    %
                    
                    $
                    1,258,241
                    
                    
                    
                    100.0
                    %Deferred
      loan fees
                    
                    
                    (2,928
                    )
                    
                    
                    
                    
                    
                    
                    (3,069
                    )Allowance
      for loan losses
                    
                    
                    (24,490
                    )
                    
                    
                    
                    
                    
                    
                    (16,439
                    )Loans,
      net
                    
                    $
                    1,199,026
                    
                    
                    
                    
                    
                    
                    $
                    1,238,733





(1)
            Real
      estate construction loans exclude loans in
  process.


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





Net loans
decreased by $39.7 million to $1.20 billion as of June 30, 2009, compared to
$1.24 billion at December 31, 2008. Total originations exceeded payoffs by $1.0
million. However, the transfer from the loan portfolio of $9.4 million to REO,
charge-offs of $23.8 million and an increase in the allowance for loan losses of
$8.1 million resulted in the lower net loan total.





Within
the portfolio, reclassifications from the construction portfolio to commercial
real estate of $60.1 million, multifamily of $6.8 million and residential of
$3.3 million combined with charge-offs of $23.8 million, transfers of $9.4
million to REO, and payoffs of $7.0 million, reduced the construction portfolio
by $109.6 million. In those cases, the reclassified loans were secured by
projects that had been completed and began to generate sufficient cash flow to
justify the move.


24





(Dollars
      in thousands)
                    
                    Loans
                  
                  Balance
      at
                    June
      30,
                    2009
                  
                  
                  Net
      new
                    loans
      -
                    payments
                  
                  
                  Reclassifi-cations(2)
                  
                  
                  Transfers
                    to
      REO
                  
                  
                  Charge-offs(1)
                  
                  
                  Balance
      at December 31, 2008
                  
                  
                  ChangeBusiness
                  
                  $
                  467,923
                  
                  
                  $
                  (16,541
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (596
                  )
                  
                  $
                  485,060
                  
                  
                  
                  -4
                  %R/E
      construction
                  
                  
                  296,931
                  
                  
                  
                  (6,969
                  )
                  
                  
                  (70,261
                  )
                  
                  
                  (9,384
                  )
                  
                  
                  (22,960
                  )
                  
                  
                  406,505
                  
                  
                  
                  -27
                  %Commercial
      R/E
                  
                  
                  192,886
                  
                  
                  
                  9,793
                  
                  
                  
                  60,142
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  122,951
                  
                  
                  
                  57
                  %Multifamily
                  
                  
                  91,554
                  
                  
                  
                  (2,121
                  )
                  
                  
                  6,811
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  86,864
                  
                  
                  
                  5
                  %Home
      equity/consumer
                  
                  
                  30,919
                  
                  
                  
                  393
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (246
                  )
                  
                  
                  30,772
                  
                  
                  
                  0
                  %Residential
                  
                  
                  146,231
                  
                  
                  
                  16,834
                  
                  
                  
                  3,308
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  126,089
                  
                  
                  
                  16
                  %Total
      loans
                  
                  $
                  1,226,444
                  
                  
                  $
                  1,389
                  
                  
                  $
                  -
                  
                  
                  $
                  (9,384
                  )
                  
                  $
                  (23,802
                  )
                  
                  $
                  1,258,241
                  
                  
                  
                  -3
                  %Deferred
      loan fees
                  
                  
                  (2,928
                  )
                  
                  
                  475
                  
                  
                  
                  (334
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,069
                  )
                  
                  
                  -5
                  %Allowance
      for loan losses
                  
                  
                  (24,490
                  )
                  
                  
                  (32,175
                  )
                  
                  
                  313
                  
                  
                  
                  -
                  
                  
                  
                  23,811
                  
                  
                  
                  (16,439
                  )
                  
                  
                  49
                  %Loans,
      net
                  
                  $
                  1,199,026
                  
                  
                  $
                  (30,311
                  )
                  
                  $
                  (21
                  )
                  
                  $
                  (9,384
                  )
                  
                  $
                  9
                  
                  
                  $
                  1,238,733
                  
                  
                  
                  -3
                  %





(1)
            Excludes
      negative now accounts totaling $132,000 and recoveries of
      $123,000.


(2)
            Transferred
      $21,000 to off-balance sheet general valuation
  allowance.





Deposits,
Other Borrowings, and Stockholders’ Equity





Total
deposits decreased by $5.5 million to $1.0 billion at June 30, 2009 compared to
December 31, 2008. However, the mix shifted to a greater percentage of checking
account balances. Savings and money market accounts (MMDA) decreased $71.3
million. Municipalities reduced their balances by $56.1 million as the Bank
sought to reduce and realign its level of public deposits in light of the
$368,000 assessment paid by the Bank in the first quarter. This assessment by
the Washington Public Deposit Protection Commission was used to cover the
uninsured deposits associated with the failure of the Bank of Clark County. CDs
decreased $34.0 million to $581.9 million as the balance on brokered CDs
declined $62.1 million to $189.9 million.





Checking account deposits
increased as the Bank continued to focus its sales activities on deposit
generation in general and checking/transaction accounts in particular. Total
checking account balances increased by $99.8 million between December 31, 2008
and June 30, 2009. Of that increase, approximately $39.0 million represented the
migration of municipal deposits to FDIC insured accounts from CDs and MMDAs that
had exceeded the FDIC’s insurance limit.





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





(Dollars
      in thousands)
                    
                    June
      30, 2009
                    
                    
                    %
      of Deposits
                    
                    
                    December
      31, 2008
                    
                    
                    %
      of DepositsChecking
      accounts
                    
                    $
                    286,655
                    
                    
                    
                    28.6
                    %
                    
                    $
                    186,843
                    
                    
                    
                    18.5
                    %Savings
      & MMDA
                    
                    
                    132,704
                    
                    
                    
                    13.3
                    
                    
                    
                    204,035
                    
                    
                    
                    20.3CDs
                    
                    
                    581,937
                    
                    
                    
                    58.1
                    
                    
                    
                    615,904
                    
                    
                    
                    61.2Total
                    
                    $
                    1,001,296
                    
                    
                    
                    100.0
                    %
                    
                    $
                    1,006,782
                    
                    
                    
                    100.0
                    %





FHLB
advances were $249.0 million at December 31, 2008 and $239.0 million at June 30,
2009. Securities sold under agreements to repurchase were $146.4 million at
December 31, 2008, and $146.6 at June 30, 2009. Cascade participates in the
Federal Reserve’s term auction facility (TAF) and had a balance of $40.0 million
at December 31, 2008 and $60.0 million at June 30, 2009. The Bank uses FHLB
advances, repurchase agreements and Federal Reserve borrowings tomeet the cash flow and
interest rate risk management needs of the Bank.


25


Total
stockholders’ equity decreased $27.8 million from $160.1 million at December 31,
2008, to $132.3 million at June 30, 2009. The decrease in equity was due to the
net loss for the period. The quarterly loss was primarily due to the $18.3
million loan loss provision that the Bank recorded during the period and a $11.7
million goodwill impairment charge.





During
the six months ended June 30, 2009, no Cascade common stock was repurchased
under the Board approved stock repurchase plan, which expired May 31, 2009 and
was not reauthorized. Accumulated other comprehensive loss increased to $1.4
million compared to a $660,000 loss at December 31, 2008, due to a general
increase in interest rates.





Asset
Quality




Nonperforming
assets (nonperforming loans, REO and other repossessed assets) totaled $122.3
million and $41.7 million at June 30, 2009, and December 31, 2008, respectively.
Nonperforming loans (NPLs) increased to $114.4 million at June 30, 2009,
compared to $40.3 million at December 31, 2008. NPLs consist of loans on
non-accrual, which includes most loans that are ninety days past due, and loans
that management otherwise has serious reservations about the collectibility of
all principal and interest owed within the time frame of the underlying notes.
Of the $114.4 million, $100.4 million were real estate construction and land
development loans, $12.7 million were commercial real estate, $550,000 were
business loans, $275,000 were residential loans, $250,000 were multifamily, and
$216,000 were consumer loans. The Bank had two loans totaling $10.0 million at
June 30, 2009, which were 90 days or more past due and still accruing. These
loans are both in the process of being assumed by qualified
borrowers.





The
increase in nonperforming loans during 2009 was primarily due to the
deterioration in real estate construction portfolio, including land acquisition
and development loans and land loans. The loans were made for land acquisition
and development and/or residential real estate construction projects located in
the Puget Sound region of Washington State. All loans are collateralized by the
property which the loan was used to develop. Nonperforming spec construction
loans increased by $8.5 million. Additions for the six months of $30.1 million
were offset by $9.5 million in paydowns, $7.2 million in charge-offs and $4.8
million in transfers to REO. Included in the additions were two loans totaling
$10.9 million. Nonperforming land acquisition and development loans increased by
$37.3 million.  Four loans added to this category during the period
totaled $47.0 million. The totals were decreased by $5.8 million in charge-offs
and $4.6 million in transfers to REO.  Nonperforming land loans
increased $15.7 million as five loans added in this category accounted for $13.6
million of the change.  One loan for $12.7 million accounted for all
the increase in the commercial real estate category.  The loans were
placed on non-accrual when the Corporation determined that the borrowers would
not be able to make the principal and interest payments in a timely manner as
required in the underlying promissory notes.





Ranging
from $2.7 million to $19.6 million, the eleven loans noted above totaled $74.5
million, and accounted for most of the increase in nonperforming
loans.  Of the $114.4 million of nonperforming loans as of June 30,
2009, construction loans represented 87.7% percent, while commercial R/E loans
accounted for 11%.  The other designated loan categories had no
significant amounts of nonperforming loans.





The
Corporation conducts an ongoing evaluation of its adversely classified credits
including monthly loan reviews, monitors sales activities on the properties
collateralizing these loans and the real estate market in general, obtains
updated appraisals regarding the property in question when deemed appropriate,
obtains current financial statements from the


26
 borrowers
and any guarantors when a loan is in question, assesses economic trends, and
prepares an impairment analysis of the loan and relationship on at least a
quarterly basis.  From this analysis, the Corporation determines the
amount of charge-offs and/or impairment for any particular loan or
relationship.





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





(Dollars
      in thousands)
                  
                  LOAN
      PORTFOLIO ($ in 000's)
                
                Balance
      at
                  06/30/2009
                
                
                Nonperforming
                  Loans
      (NPL)
                
                
                NPL
      as a %
                  of
      LoansBusiness
                
                $
                467,923
                
                
                $
                550
                
                
                
                0.12
                %R/E
      constructionSpec
      construction
                
                
                81,169
                
                
                
                20,244
                
                
                
                24.94
                %Land
      acquisition and development
                
                
                134,082
                
                
                
                60,084
                
                
                
                44.81
                %Land
                
                
                37,146
                
                
                
                20,095
                
                
                
                54.10
                %Multifamily
      construction
                
                
                14,795
                
                
                
                -
                
                
                
                0.00
                %Commercial
      construction
                
                
                29,739
                
                
                
                -
                
                
                
                0.00
                %Total
      R/E construction
                
                
                296,931
                
                
                
                100,423
                
                
                
                33.82
                %Commercial
      R/E
                
                
                192,886
                
                
                
                12,735
                
                
                
                6.60
                %Multifamily
                
                
                91,554
                
                
                
                250
                
                
                
                0.27
                %Home
      equity/consumer
                
                
                30,919
                
                
                
                216
                
                
                
                0.70
                %Residential
                
                
                146,231
                
                
                
                275
                
                
                
                0.19
                %Total
                
                $
                1,226,444
                
                
                $
                114,449
                
                
                
                9.33
                %





The
following table shows the migration of nonperforming loans through the portfolio
in each category: (6/30/09 compared to 12/31/08)





On
      loans designated NPLs as of 6/30/09(Dollars
      in thousands)
                      
                      Nonperforming
      Loans
                    
                    Balance
      at
                      June
      30,
                      2009
                    
                    
                    Additions
                    
                    
                    Paydowns
                    
                    
                    Charge-offs
                    
                    
                    Transfers
                      to
      REO
                    
                    
                    Balance
      at December 31, 2008Business
                    
                    $
                    550
                    
                    
                    $
                    43
                    
                    
                    $
                    (59
                    )
                    
                    $
                    (584
                    )
                    
                    $
                    -
                    
                    
                    $
                    1,150R/E
      constructionSpec
      construction
                    
                    
                    20,244
                    
                    
                    
                    30,080
                    
                    
                    
                    (9,541
                    )
                    
                    
                    (7,233
                    )
                    
                    
                    (4,797
                    )
                    
                    
                    11,735Land
      acquisition and development
                    
                    
                    60,084
                    
                    
                    
                    49,781
                    
                    
                    
                    (2,086
                    )
                    
                    
                    (5,830
                    )
                    
                    
                    (4,580
                    )
                    
                    
                    22,799Land
                    
                    
                    20,095
                    
                    
                    
                    26,321
                    
                    
                    
                    (766
                    )
                    
                    
                    (9,897
                    )
                    
                    
                    -
                    
                    
                    
                    4,437Total
      R/E construction
                    
                    
                    100,423
                    
                    
                    
                    106,182
                    
                    
                    
                    (12,393
                    )
                    
                    
                    (22,960
                    )
                    
                    
                    (9,377
                    )
                    
                    
                    38,971Commercial
      R/E
                    
                    
                    12,735
                    
                    
                    
                    12,735
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Multifamily
                    
                    
                    250
                    
                    
                    
                    250
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Home
      equity/consumer
                    
                    
                    216
                    
                    
                    
                    474
                    
                    
                    
                    (2
                    )
                    
                    
                    (258
                    )
                    
                    
                    -
                    
                    
                    
                    2Residential
                    
                    
                    275
                    
                    
                    
                    275
                    
                    
                    
                    (155
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    155Total
                    
                    $
                    114,449
                    
                    
                    $
                    119,959
                    
                    
                    $
                    (12,609
                    )
                    
                    $
                    (23,802
                    )
                    
                    $
                    (9,377
                    )
                    
                    $
                    40,278





There was
$7.9 million of real estate owned (REO) at June 30, 2009 compared to $1.4
million at December 31, 2008. The REO consists of six partially completed
houses, 104 developed single family lots and one 15-lot unfinished plot. There
were no other repossessed assets at June 30, 2009 or December 31,
2008.


27


The
following table presents REO for the periods presented:





(Dollars  in
      thousands)REO
                  
                  June
      30, 2009
                  
                  
                  December
      31, 2008Beginning
      balance
                  
                  $
                  1,446
                  
                  
                  $
                  -Loans
      transferred to REO
                  
                  
                  9,384
                  
                  
                  
                  5,821Loans
      transferred to other repossessed assets
                  
                  
                  -
                  
                  
                  
                  179Capitalized
      improvements
                  
                  
                  7
                  
                  
                  
                  -Sales
                  
                  
                  (1,686
                  )
                  
                  
                  (4,434
                  )Write-downs
                  
                  
                  (1,122
                  )
                  
                  
                  (117
                  )Loss
      on sales
                  
                  
                  (157
                  )
                  
                  
                  (3
                  )Ending
      balance
                  
                  $
                  7,872
                  
                  
                  $
                  1,446





At June
30, 2009, the Bank’s allowance for loan losses was $24.5 million compared to
$16.4 million at December 31, 2008. Additionally, at June 30, 2009, $72,000 was
recorded in a general valuation allowance allocated to off-balance sheet
commitments, i.e. lines of credit and construction loans in process. This
reserve is recorded as an “other liability” on the Corporation’s balance sheet.
During the six months ended June 30, 2009, this account was reduced by $21,000
to $72,000 compared to $93,000 at December 31, 2008, as the level of commitments
declined. Total allowance for loan losses, which includes the allowance for
off-balance sheet commitments, was 2.00% of total loans outstanding at June 30,
2009, compared to 1.31% at December 31, 2008. Total allowance for loan losses
was 21% of nonperforming loans at June 30, 2009, compared to 41% at December 31,
2008. As a result of FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan, management has performed extensive analyses on the
impaired loans, including obtaining and evaluating updated appraisals, to
determine the adequacy of the allowance for loan losses, as well as recording
appropriate charge-offs.





During
the six months ended June 30, 2009, loan charge-offs equaled $23.9 million while
recoveries were $124,000, resulting in net charge-offs of $23.8million
or 1.94 % of total loans (3.88% annualized). Of the loans charged-off, $5.8million
came from of land acquisition and development loans, $7.2 million came from spec
construction loans, $9.9 million came from interest only land loans and $584,000
came from five business loans. The balance of the write downs came from consumer
and deposit related charge-offs, i.e. overdrafts.





(Dollars in
      thousands)
                
                Three
      months ended
                  June
      30, 2009
                
                
                Six
      months
                  ended
                  June
      30, 2009Beginning
      allowance for loan losses
                
                $
                25,020
                
                
                $
                16,439Additions
                
                
                18,300
                
                
                
                32,175Transfer
      from off-balance sheet general valuation allowance (GVA)
                
                
                16
                
                
                
                21Net
      charge-offs
                
                
                (18,512
                )
                
                
                (23,811
                )Fair
      value charges
                
                
                (334
                )
                
                
                (334
                )Allowance
      for loan losses
                
                
                24,490
                
                
                
                24,490Off-balance
      sheet GVA
                
                
                72
                
                
                
                72Total
      allowance for loan losses
                
                $
                24,562
                
                
                $
                24,562





The
Corporation also charged $334,000 into the allowance for loan losses during the
quarter ended June 30, 2009, to record a fair value adjustment to residential
mortgages originated under the Builder Loan Program. This adjustment is
primarily based on the difference between the rates offered to purchasers of new
homes from the Corporation’s builder/developer borrowers and the rate available
on a conforming loan with similar terms.


28


The
following table provides summary information concerning asset quality as of June
30, 2009, and December 31, 2008, respectively:





(Dollars in
      thousands)
                  
                  June
      30, 2009
                  
                  
                  December
      31, 2008Nonperforming
      loans
                  
                  $
                  114,449
                  
                  
                  $
                  40,278Total
      loans
                  
                  $
                  1,226,444
                  
                  
                  $
                  1,258,241Nonperforming
      loans/total loans
                  
                  
                  9.33
                  %
                  
                  
                  3.20
                  %Nonperforming
      loans/total assets
                  
                  
                  7.11
                  %
                  
                  
                  2.46
                  %Total
      allowance for loan losses/total loans (1)
                  
                  
                  2.00
                  %
                  
                  
                  1.31
                  %Total
      allowance for loan losses/nonperforming loans (1)
                  
                  
                  21.00
                  %
                  
                  
                  41.00
                  %REO
                  
                  $
                  7,872
                  
                  
                  $
                  1,446Total
      nonperforming assets
                  
                  $
                  122,321
                  
                  
                  $
                  41,724Nonperforming
      assets/total assets
                  
                  
                  7.59
                  %
                  
                  
                  2.55
                  %Nonperforming
      assets/total loans
                  
                  
                  9.97
                  %
                  
                  
                  3.32
                  %(1) Total
      allowance for loan losses includes off-balance sheet loan commitments of
      $72,000 at June
      30, 2009, and $93,000 at December 31,
      2008.





The
economy in our market area is dependent to a significant degree on real estate
and related industries (i.e. construction, housing).  Although we
maintain a diversified loan portfolio, the present downturn in real estate,
including construction, has had an adverse effect on borrowers’ ability to repay
all types of loans and has affected our results of operations and financial
condition, and these changes are taken into account when we evaluate our
allowance for loan losses.  We frequently review and update our
underwriting guidelines and monitor our delinquency levels for any negative or
adverse trends and adjust projected loan concentration limits and credit
standards when necessary.





Management
remains concerned about the residential housing slowdown and the effect it has
had on credit quality. While there has been an increase in home sales in the
Corporation’s market area during the second quarter of 2009, the slowing of the
overall economy only increases these concerns. Management has increased
monitoring of construction and land acquisition loans and has dramatically
reduced originations in these portfolios.





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 analysis of the financial condition of the
borrower, the value of the collateral securing selected loans, consideration of
potential loss experience and management’s projection of trends affecting credit
quality. The allowance for loan losses represents management’s best estimate of
the probable credit losses inherent in the loan portfolio and management
believes it will be adequate to provide for losses that may be incurred. Because
future events affecting borrowers and collateral as well as the rate of
deterioration cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above.


29


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




(Dollars
      in thousands)
                                  
                                  June
      30, 2009
                                  
                                  
                                  December
      31, 2008Amount
                                  
                                  %
                                  
                                  
                                  Amount
                                  
                                  %Business
                                  
                                  $
                                  7,972
                                  
                                  
                                  32.55
                                  %
                                  
                                  $
                                  3,193
                                  
                                  
                                  19.42
                                  %Construction
                                  
                                  
                                  7,692
                                  
                                  
                                  31.41
                                  
                                  
                                  
                                  4,341
                                  
                                  
                                  26.40Commercial
      real estate
                                  
                                  
                                  2,043
                                  
                                  
                                  8.34
                                  
                                  
                                  
                                  610
                                  
                                  
                                  3.71Multifamily
                                  
                                  
                                  235
                                  
                                  
                                  0.96
                                  
                                  
                                  
                                  149
                                  
                                  
                                  0.91Consumer
                                  
                                  
                                  326
                                  
                                  
                                  1.33
                                  
                                  
                                  
                                  333
                                  
                                  
                                  2.03Residential
                                  
                                  
                                  232
                                  
                                  
                                  0.95
                                  
                                  
                                  
                                  253
                                  
                                  
                                  1.54Unallocated
                                  
                                  
                                  5,990
                                  
                                  
                                  24.46
                                  
                                  
                                  
                                  7,560
                                  
                                  
                                  45.99Total
      allowance for loan losses
                                  
                                  $
                                  24,490
                                  
                                  
                                  100.00
                                  %
                                  
                                  $
                                  16,439
                                  
                                  
                                  100.00
                                  %





The
migration of the percentage of the allowance assigned to the unallocated portion
to other loan categories reflects the higher levels of nonperforming and
adversely classified loans. The increase in the allocation for business loans is
due to the impairment of one credit for $4.0 million.


30


Average
Balances and an Analysis of Average Rates Earned and Paid





The
following table shows average balances and interest income or interest expense,
with the resulting average yield or rate by category or average earning asset or
interest-bearing liability.


Three
      months ended June 30,2009
                
                
                2008(Dollars
      in thousands)
                
                Average
                  Balance
                
                
                Interest
                  and
                  Dividend
                
                
                Yield/
                  Cost
                
                
                Average
                  Balance
                
                
                Interest
                  and
                  Dividend
                
                
                Yield/
                  CostASSETSInterest-earning assetsResidential loans
                
                $
                133,078
                
                
                $
                1,953
                
                
                
                5.89
                %
                
                $
                106,274
                
                
                $
                1,607
                
                
                
                6.05
                %Multifamily loans
                
                
                93,671
                
                
                
                1,470
                
                
                
                6.29
                
                
                
                34,860
                
                
                
                654
                
                
                
                7.55Commercial real estate
      loans
                
                
                174,728
                
                
                
                2,792
                
                
                
                6.41
                
                
                
                113,467
                
                
                
                1,922
                
                
                
                6.81Construction loans
                
                
                254,998
                
                
                
                2,869
                
                
                
                4.51
                
                
                
                412,826
                
                
                
                6,213
                
                
                
                6.05Consumer loans
                
                
                30,875
                
                
                
                495
                
                
                
                6.43
                
                
                
                28,801
                
                
                
                472
                
                
                
                6.59Business banking
    loans
                
                
                471,564
                
                
                
                7,754
                
                
                
                6.60
                
                
                
                477,552
                
                
                
                8,169
                
                
                
                6.88Total loans(1)
                
                
                1,158,914
                
                
                
                17,333
                
                
                
                6.00
                
                
                
                1,173,780
                
                
                
                19,037
                
                
                
                6.52Securities
      available-for-sale
                
                
                201,399
                
                
                
                2,198
                
                
                
                4.38
                
                
                
                133,309
                
                
                
                1,721
                
                
                
                5.19Securities
      held-to-maturity
                
                
                55,105
                
                
                
                674
                
                
                
                4.91
                
                
                
                136,336
                
                
                
                1,991
                
                
                
                5.87Daily interest-earning
      deposits
                
                
                24,898
                
                
                
                10
                
                
                
                0.16
                
                
                
                9,632
                
                
                
                44
                
                
                
                1.84Total securities and
      interest-earning deposits
                
                
                281,402
                
                
                
                2,882
                
                
                
                4.11
                
                
                
                279,277
                
                
                
                3,756
                
                
                
                5.39Total interest-earning
      assets
                
                
                1,440,316
                
                
                
                20,215
                
                
                
                5.63
                
                
                
                1,453,057
                
                
                
                22,793
                
                
                
                6.31Noninterest-earning assetsOffice properties and equipment,
      net
                
                
                15,412
                
                
                
                
                
                
                
                
                
                
                
                15,573REO, net
                
                
                9,146
                
                
                
                
                
                
                
                
                
                
                
                -Other noninterest-earning
      assets
                
                
                146,847
                
                
                
                
                
                
                
                
                
                
                
                59,317Total assets
                
                $
                1,611,721
                
                
                
                
                
                
                
                
                
                
                $
                1,527,947LIABILITIES
      AND EQUITYInterest-bearing
liabilitiesSavings accounts
                
                $
                9,949
                
                
                $
                6
                
                
                
                0.24
                %
                
                $
                11,003
                
                
                $
                14
                
                
                
                0.51
                %Checking accounts
                
                
                185,477
                
                
                
                526
                
                
                
                1.14
                
                
                
                65,075
                
                
                
                244
                
                
                
                1.51Money market
    accounts
                
                
                127,833
                
                
                
                303
                
                
                
                0.95
                
                
                
                336,208
                
                
                
                1,941
                
                
                
                2.32Certificates of
      deposit
                
                
                575,722
                
                
                
                3,144
                
                
                
                2.19
                
                
                
                467,345
                
                
                
                4,393
                
                
                
                3.78Total interest-bearing
      deposits
                
                
                898,981
                
                
                
                3,979
                
                
                
                1.78
                
                
                
                879,631
                
                
                
                6,592
                
                
                
                3.01Other interest-bearing
      liabilitiesFHLB advances
                
                
                248,780
                
                
                
                2,684
                
                
                
                4.33
                
                
                
                255,140
                
                
                
                2,725
                
                
                
                4.30Securities sold under agreements
      to repurchase
                
                
                151,041
                
                
                
                2,160
                
                
                
                5.74
                
                
                
                120,839
                
                
                
                1,387
                
                
                
                4.62Junior subordinated debentures
      payable
                
                
                24,185
                
                
                
                530
                
                
                
                8.79
                
                
                
                26,549
                
                
                
                530
                
                
                
                8.03Other borrowings
                
                
                51,758
                
                
                
                39
                
                
                
                0.30
                
                
                
                19,890
                
                
                
                114
                
                
                
                2.39Total interest-bearing
      liabilities
                
                
                1,374,745
                
                
                
                9,392
                
                
                
                2.74
                
                
                
                1,302,049
                
                
                
                11,348
                
                
                
                3.51Other liabilities
                
                
                94,115
                
                
                
                
                
                
                
                
                
                
                
                99,514Total
    liabilities
                
                
                1,468,860
                
                
                
                
                
                
                
                
                
                
                
                1,401,563Stockholders’
    equity
                
                
                142,861
                
                
                
                
                
                
                
                
                
                
                
                126,384Total liabilities and
      stockholders’ equity
                
                $
                1,611,721
                
                
                
                
                
                
                
                
                
                
                $
                1,527,947Net
      interest income (2)
                
                
                
                
                
                $
                10,823
                
                
                
                
                
                
                
                
                
                
                $
                11,445Interest
      rate spread (3)
                
                
                
                
                
                
                
                
                
                
                2.89
                %
                
                
                
                
                
                
                
                
                
                
                2.80
                %Net
      interest margin (4)
                
                
                
                
                
                
                3.01
                %
                
                
                
                
                
                
                
                
                
                
                3.17
                %Average
      interest-earning assets to average
                  interest-bearing
      liabilities
                
                
                104.77
                %
                
                
                
                
                
                
                
                
                
                
                111.60
                %





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


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


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


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


31





Six
      months ended June 30,2009
                
                
                2008(Dollars
      in thousands)
                
                Average
                  Balance
                
                
                Interest
                  and
                  Dividend
                
                
                Yield/
                  Cost
                
                
                Average
                  Balance
                
                
                Interest
                  and
                  Dividend
                
                
                Yield/
                  CostASSETSInterest-earning assetsResidential loans
                
                $
                130,031
                
                
                $
                3,810
                
                
                
                5.91
                %
                
                $
                102,633
                
                
                $
                3,102
                
                
                
                6.08
                %Multifamily loans
                
                
                90,751
                
                
                
                2,826
                
                
                
                6.28
                
                
                
                26,138
                
                
                
                958
                
                
                
                7.37Commercial real estate
      loans
                
                
                156,394
                
                
                
                5,086
                
                
                
                6.56
                
                
                
                115,379
                
                
                
                3,882
                
                
                
                6.77Construction loans
                
                
                301,067
                
                
                
                7,244
                
                
                
                4.85
                
                
                
                405,761
                
                
                
                12,852
                
                
                
                6.37Consumer loans
                
                
                30,881
                
                
                
                996
                
                
                
                6.50
                
                
                
                28,358
                
                
                
                955
                
                
                
                6.77Business banking
    loans
                
                
                474,877
                
                
                
                15,586
                
                
                
                6.62
                
                
                
                473,627
                
                
                
                16,597
                
                
                
                7.05Total loans(1)
                
                
                1,184,001
                
                
                
                35,548
                
                
                
                6.05
                
                
                
                1,151,896
                
                
                
                38,346
                
                
                
                6.69Securities
      available-for-sale
                
                
                178,469
                
                
                
                4,074
                
                
                
                4.60
                
                
                
                123,135
                
                
                
                3,278
                
                
                
                5.35Securities
      held-to-maturity
                
                
                75,949
                
                
                
                1,984
                
                
                
                5.27
                
                
                
                141,168
                
                
                
                4,075
                
                
                
                5.80Daily interest-earning
      deposits
                
                
                26,949
                
                
                
                20
                
                
                
                0.15
                
                
                
                8,920
                
                
                
                108
                
                
                
                2.43Total securities and
      interest-earning deposits
                
                
                281,367
                
                
                
                6,078
                
                
                
                4.36
                
                
                
                273,223
                
                
                
                7,461
                
                
                
                5.51Total interest-earning
      assets
                
                
                1,465,368
                
                
                
                41,626
                
                
                
                5.73
                
                
                
                1,425,119
                
                
                
                45,807
                
                
                
                6.46Noninterest-earning assetsOffice properties and equipment,
      net
                
                
                15,490
                
                
                
                
                
                
                
                
                
                
                
                15,149REO, net
                
                
                5,345
                
                
                
                
                
                
                
                
                
                
                
                -Other noninterest-earning
      assets
                
                
                136,752
                
                
                
                
                
                
                
                
                
                
                
                59,749Total assets
                
                $
                1,622,955
                
                
                
                
                
                
                
                
                
                
                $
                1,500,017LIABILITIES
      AND EQUITYInterest-bearing
liabilitiesSavings accounts
                
                $
                10,097
                
                
                $
                12
                
                
                
                0.24
                %
                
                $
                11,078
                
                
                $
                28
                
                
                
                0.51
                %Checking accounts
                
                
                157,402
                
                
                
                978
                
                
                
                1.25
                
                
                
                59,171
                
                
                
                436
                
                
                
                1.48Money market
    accounts
                
                
                150,664
                
                
                
                792
                
                
                
                1.06
                
                
                
                335,121
                
                
                
                4,720
                
                
                
                2.83Certificates of
      deposit
                
                
                576,680
                
                
                
                7,153
                
                
                
                2.50
                
                
                
                454,968
                
                
                
                9,373
                
                
                
                4.14Total interest-bearing
      deposits
                
                
                894,843
                
                
                
                8,935
                
                
                
                2.01
                
                
                
                860,338
                
                
                
                14,557
                
                
                
                3.40Other interest-bearing
      liabilitiesFHLB advances
                
                
                248,889
                
                
                
                5,340
                
                
                
                4.33
                
                
                
                256,303
                
                
                
                5,465
                
                
                
                4.29Securities sold under agreements
      to repurchase
                
                
                149,684
                
                
                
                4,261
                
                
                
                5.74
                
                
                
                120,735
                
                
                
                2,651
                
                
                
                4.42Junior subordinated debentures
      payable
                
                
                25,065
                
                
                
                1,060
                
                
                
                8.53
                
                
                
                26,701
                
                
                
                1,060
                
                
                
                7.98Other borrowings
                
                
                60,443
                
                
                
                87
                
                
                
                0.29
                
                
                
                12,086
                
                
                
                154
                
                
                
                2.56Total interest-bearing
      liabilities
                
                
                1,378,924
                
                
                
                19,683
                
                
                
                2.88
                
                
                
                1,276,163
                
                
                
                23,887
                
                
                
                3.76Other liabilities
                
                
                92,025
                
                
                
                
                
                
                
                
                
                
                
                98,277Total
    liabilities
                
                
                1,470,949
                
                
                
                
                
                
                
                
                
                
                
                1,374,440Stockholders’
    equity
                
                
                152,006
                
                
                
                
                
                
                
                
                
                
                
                125,577Total liabilities and
      stockholders’ equity
                
                $
                1,622,955
                
                
                
                
                
                
                
                
                
                
                $
                1,500,017Net
      interest income (2)
                
                
                
                
                
                $
                21,943
                
                
                
                
                
                
                
                
                
                
                $
                21,920Interest
      rate spread (3)
                
                
                
                
                
                
                
                
                
                
                2.85
                %
                
                
                
                
                
                
                
                
                
                
                2.70
                %Net
      interest margin (4)
                
                
                
                
                
                
                3.02
                %
                
                
                
                
                
                
                
                
                
                
                3.09
                %Average
      interest-earning assets to average
                  interest-bearing
      liabilities
                
                
                106.27
                %
                
                
                
                
                
                
                
                
                
                
                111.67
                %





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


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


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


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


32


Rate/Volume
Analysis





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





(Dollars
      in thousands)
                      
                      Three
      months ended June 30, 2009
                        compared
      to
                        three
      months ended June 30, 2008
                        Increase
      (Decrease) Due toRate
                      
                      
                      Volume
                      
                      
                      Mix
                      
                      NetInterest-earning assetsResidential
      loans
                      
                      $
                      (43
                      )
                      
                      $
                      405
                      
                      
                      $
                      (16
                      )
                      $
                      346Multifamily
      loans
                      
                      
                      (109
                      )
                      
                      
                      1,110
                      
                      
                      
                      (185
                      )
                      
                      816Commercial
      real estate
                      
                      
                      (115
                      )
                      
                      
                      1,044
                      
                      
                      
                      (59
                      )
                      
                      870Construction
      loans
                      
                      
                      (1,589
                      )
                      
                      
                      (2,388
                      )
                      
                      
                      633
                      
                      
                      (3,344
                      )Consumer
      loans
                      
                      
                      (12
                      )
                      
                      
                      34
                      
                      
                      
                      1
                      
                      
                      23Business
      banking loans
                      
                      
                      (341
                      )
                      
                      
                      (103
                      )
                      
                      
                      29
                      
                      
                      (415
                      )Total
      loans
                      
                      
                      (2,209
                      )
                      
                      
                      102
                      
                      
                      
                      403
                      
                      
                      (1,704
                      )Securities
      available-for-sale
                      
                      
                      (271
                      )
                      
                      
                      884
                      
                      
                      
                      (136
                      )
                      
                      477Securities
      held-to-maturity
                      
                      
                      (330
                      )
                      
                      
                      (1,193
                      )
                      
                      
                      206
                      
                      
                      (1,317
                      )Daily
      interest-earning deposits
                      
                      
                      (39
                      )
                      
                      
                      67
                      
                      
                      
                      (62
                      )
                      
                      (34
                      )Total
      net change in income on interest-earning assets
                      
                      $
                      (2,849
                      )
                      
                      $
                      (140
                      )
                      
                      $
                      411
                      
                      $
                      (2,578
                      )Interest-bearing
liabilitiesInterest-bearing
      depositsSavings
accounts
                      
                      $
                      (7
                      )
                      
                      $
                      (1
                      )
                      
                      $
                      -
                      
                      $
                      (8
                      )Checking
    accounts
                      
                      
                      (60
                      )
                      
                      
                      454
                      
                      
                      
                      (112
                      )
                      
                      282Money market
      accounts
                      
                      
                      (1,151
                      )
                      
                      
                      (1,209
                      )
                      
                      
                      722
                      
                      
                      (1,638
                      )Certificates of
      Deposit
                      
                      
                      (1,858
                      )
                      
                      
                      1,024
                      
                      
                      
                      (415
                      )
                      
                      (1,249
                      )Total deposits
                      
                      
                      (3,076
                      )
                      
                      
                      268
                      
                      
                      
                      195
                      
                      
                      (2,613
                      )FHLB advances
                      
                      
                      (1
                      )
                      
                      
                      (47
                      )
                      
                      
                      7
                      
                      
                      (41
                      )Securities sold under agreements
      to repurchase
                      
                      
                      338
                      
                      
                      
                      349
                      
                      
                      
                      86
                      
                      
                      773Junior subordinated debentures
      payable
                      
                      
                      50
                      
                      
                      
                      (47
                      )
                      
                      
                      (3
                      )
                      
                      -Other borrowings
                      
                      
                      (104
                      )
                      
                      
                      190
                      
                      
                      
                      (161
                      )
                      
                      (75
                      )Total
      net change in expenses on interest-bearing liabilities
                      
                      $
                      (2,793
                      )
                      
                      $
                      713
                      
                      
                      $
                      124
                      
                      $
                      (1,956
                      )Net
      increase in net interest income
                      
                      $
                      (56
                      )
                      
                      $
                      (853
                      )
                      
                      $
                      287
                      
                      $
                      (622
                      )




33




(Dollars
      in thousands)
                    
                    Six
      months ended June 30, 2009
                      compared
      to
                      Six
      months ended June 30, 2008
                      Increase
      (Decrease) Due toRate
                    
                    
                    Volume
                    
                    
                    Mix
                    
                    NetInterest-earning assetsResidential
      loans
                    
                    $
                    (87
                    )
                    
                    $
                    833
                    
                    
                    $
                    (38
                    )
                    $
                    708Multifamily
      loans
                    
                    
                    (143
                    )
                    
                    
                    2,381
                    
                    
                    
                    (370
                    )
                    
                    1,868Commercial
      real estate
                    
                    
                    (120
                    )
                    
                    
                    1,388
                    
                    
                    
                    (64
                    )
                    
                    1,204Construction
      loans
                    
                    
                    (3,079
                    )
                    
                    
                    (3,334
                    )
                    
                    
                    805
                    
                    
                    (5,608
                    )Consumer
      loans
                    
                    
                    (38
                    )
                    
                    
                    85
                    
                    
                    
                    (6
                    )
                    
                    41Business
      banking loans
                    
                    
                    (1,014
                    )
                    
                    
                    44
                    
                    
                    
                    (41
                    )
                    
                    (1,011
                    )Total
      loans
                    
                    
                    (4,481
                    )
                    
                    
                    1,397
                    
                    
                    
                    286
                    
                    
                    (2,798
                    )Securities
      available-for-sale
                    
                    
                    (462
                    )
                    
                    
                    1,481
                    
                    
                    
                    (223
                    )
                    
                    796Securities
      held-to-maturity
                    
                    
                    (379
                    )
                    
                    
                    (1,893
                    )
                    
                    
                    181
                    
                    
                    (2,091
                    )Daily
      interest-earning deposits
                    
                    
                    (101
                    )
                    
                    
                    219
                    
                    
                    
                    (206
                    )
                    
                    (88
                    )Total
      net change in income on interest-earning assets
                    
                    $
                    (5,423
                    )
                    
                    $
                    1,204
                    
                    
                    $
                    38
                    
                    $
                    (4,181
                    )Interest-bearing
liabilitiesInterest-bearing
      depositsSavings
accounts
                    
                    $
                    (15
                    )
                    
                    $
                    (3
                    )
                    
                    $
                    2
                    
                    $
                    (16
                    )Checking
    accounts
                    
                    
                    (68
                    )
                    
                    
                    728
                    
                    
                    
                    (118
                    )
                    
                    542Money market
      accounts
                    
                    
                    (2,970
                    )
                    
                    
                    (2,612
                    )
                    
                    
                    1,654
                    
                    
                    (3,928
                    )Certificates of
      Deposit
                    
                    
                    (3,734
                    )
                    
                    
                    2,521
                    
                    
                    
                    (1,007
                    )
                    
                    (2,220
                    )Total deposits
                    
                    
                    (6,787
                    )
                    
                    
                    634
                    
                    
                    
                    531
                    
                    
                    (5,622
                    )FHLB advances
                    
                    
                    49
                    
                    
                    
                    (159
                    )
                    
                    
                    (15
                    )
                    
                    (125
                    )Securities sold under agreements
      to repurchase
                    
                    
                    800
                    
                    
                    
                    639
                    
                    
                    
                    171
                    
                    
                    1,610Junior subordinated debentures
      payable
                    
                    
                    73
                    
                    
                    
                    (65
                    )
                    
                    
                    (8
                    )
                    
                    -Other borrowings
                    
                    
                    (137
                    )
                    
                    
                    620
                    
                    
                    
                    (550
                    )
                    
                    (67
                    )Total
      net change in expenses on interest-bearing liabilities
                    
                    $
                    (6,002
                    )
                    
                    $
                    1,669
                    
                    
                    $
                    129
                    
                    $
                    (4,204
                    )Net
      increase in net interest income
                    
                    $
                    579
                    
                    
                    $
                    (465
                    )
                    
                    $
                    (91
                    )
                    $
                    23








RESULTS
OF OPERATIONS





Comparison
of the Three and Six Months Ended June 30, 2009 and 2008





General





The
Corporation had a net loss of $21.4 million for the three months ended June 30,
2009, compared to net income of $3.6 million during the comparable period in
2008. An $18.3 million loan loss provision and an $11.7 million goodwill
impairment charge accounted for most of the difference in results. The Bank
reversed approximately $773,000 of interest on loans placed on non-accrual
status during the quarter. Loss available for common stockholders, which adjusts
for the dividends on preferred stock paid to the U.S. Treasury, was $21.9
million or $1.81 per diluted share compared to income available for common
stockholders of $3.6 million, or $0.30 per diluted share, in the second quarter
of 2008.





Net
interest income before provision for loan losses decreased to $10.8 million for
the quarter ended June 30, 2009, as compared to $11.4 for the same quarter last
year. Total other income was flat at $2.2 million for the quarter ended June 30,
2009. Other expenses excluding the goodwill impairment charge increased $2.7
million to $10.0 million for the quarter


34
 ended
June 30, 2009, as compared to the quarter ended June 30, 2008. The primary
contributors to this increase were the $1.1 million REO write-down, $740,000
FDIC special assessment (based upon five basis points of total assets, less Tier
1 capital as of June 30, 2009), higher legal expenses associated with loan
workouts, and an increase in REO expense.





Net loss
for the six months ended June 30, 2009, was $26.2 million compared with net
income of $6.2 million during the comparable period in 2008. Loss available for
common stockholders was $27.2 million or $2.25 per diluted share compared to
income available for common stockholders of $6.3 million or $0.51 per diluted
share. The increase in provision for loan losses and the goodwill impairment
charge are primarily responsible for the decrease in earnings.





Net
Interest Income





Net
interest income before provision for loan losses decreased 5.5% or $600,000 to
$10.8 million for the three months ended June 30, 2009, compared to $11.4
million for the three months ended June 30, 2008. Due to the increase in
nonperforming loans, average interest-earning assets decreased by $12.7 million
or 0.9% to $1.4 billion for the three months ended June 30, 2009, compared to
the same period in 2008. Average total interest-earning loans decreased $14.9
million to $1.16 billion and average investment securities decreased $13.1
million to $256.5 million for the three months ended June 30, 2009, compared to
the same quarter of the prior year. Average daily interest-bearing deposits
increased $15.3 million to $24.9 million for the three months ended June 30,
2009, compared to the same quarter of the prior year.





Net
interest income before provision for loan losses remained flat at $21.9 million
for the six months ended June 30, 2009, compared to the six months ended June
30, 2008. Average interest-earning assets increased by $40.2 million or 2.8% to
$1.47 billion for the six months ended June 30, 2009, compared to the same
period in 2008. Average total interest-earning loans increased $32.1 million to
$1.18 billion and average investment securities decreased $9.9 million to $254.4
million for the six months ended June 30, 2009, compared to the same period in
2008. Average daily interest-bearing deposits increased $18.0 million to $26.9
million for the six months ended June 30, 2009, compared to the same period in
2008.





At
      or for the three
                  months
      ended June 30,
                
                
                At
      or for the six
                  months
      ended June 30,(Dollars
      in millions)
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Average
      interest-earning assets
                
                $
                1,440
                
                
                $
                1,453
                
                
                $
                1,465
                
                
                $
                1,425Average
      interest-bearing liabilities
                
                
                1,375
                
                
                
                1,302
                
                
                
                1,379
                
                
                
                1,276Yield
      on interest-earning assets
                
                
                5.63
                %
                
                
                6.31
                %
                
                
                5.73
                %
                
                
                6.46
                %Cost
      of interest-bearing liabilities
                
                
                2.74
                
                
                
                3.51
                
                
                
                2.88
                
                
                
                3.76Net
      interest spread
                
                
                2.89
                
                
                
                2.80
                
                
                
                2.85
                
                
                
                2.70Net
      interest margin
                
                
                3.01
                
                
                
                3.17
                
                
                
                3.02
                
                
                
                3.09





Despite a
9 basis point increase in the net interest spread, the net interest margin
decreased 16 basis point to 3.01% for the three months ended June 30, 2009,
compared to the same quarter the prior year. The yield on interest-earning
assets decreased 68 basis points to 5.63% for the three months ended June 30,
2009, compared to 6.31% for the three months ended June 30, 2008. The yield on
interest-earning assets and net interest margin were impacted by 22 basis points
by the reversal of approximately $773,000 in interest income related to


35
 loans
that were placed on non-accrual. The cost of interest-bearing liabilities
decreased 77 basis points to 2.74% for the three months ended June 30, 2009,
compared to 3.51% for the same period in 2008, primarily due to decreased costs
for deposits. The increase in non-earning assets was responsible for the lower
margin.





Provision
for Loan Losses





Cascade’s
provision for loan losses was $18.3 million for the three months ended and $32.2
million for the six months ended June 30, 2009. The provision for loan losses
was $1.2 million and $3.6 million for the same periods in 2008, respectively.
The increase in the provision was due to an increase in charge-offs as well as
and increase in nonperforming and adversely classified loans. The provision for
loan losses is based on the size, composition and growth of the portfolio, and
management’s evaluation of known and inherent risks in the portfolio, as well as
Cascade’s loss experience. See "Asset Quality" above for further discussion of
the Corporation's provision for loan losses.





Other
Income





Total
other income was flat at $2.2 million for the three months ended June 30, 2009,
as compared to the three months ended June 30, 2008. Gains on called securities
in the held-to-maturity portfolio were $28,000 for the quarter ended June 30,
2009, compared to $6,000 for the same quarter last year. Gains on sold/called
securities in the available-for-sale portfolio were $198,000 for the quarter
ended June 30, 2009 and $13,000 in the prior year. All gains in each quarter
were due to calls of agency notes at par that the Corporation had carried on its
books at a discount. For the three months ended June 30, 2009, checking service
fees remained unchanged at $1.3 million compared to the same period in the prior
year.





Total
other income was $5.9 million and $4.7 million for the six months ended June 30,
2009, and June 30, 2008, respectively. Other income was positively impacted by
the FAS 159 gain on our junior subordinated debentures of $1.8 million for the
first six months of 2009. This relatively large fair value gain was the result
of a change to our approach to applying a fair value to this liability.
Previously, we had valued the junior subordinated debentures as if the
Corporation was going to call the bonds on March 1, 2010 at a call price of
105.5%, which is the first time the bonds are callable. However, under the TARP
agreement, we are precluded from calling an instrument that is considered Tier 1
Capital for at least three years. Therefore, the expected life of the junior
subordinated debentures increased significantly. The extension of the effective
maturity and the increasing interest rates on Bank debt securities lowered the
value.





Other
Expense





Total
other expenses, excluding the goodwill impairment charge, were $10.0 million for
the three months and $18.6 million for the six months ended June 30, 2009,
compared to $7.3 million for the three months and $14.2 million for the six
months ended June 30, 2008.





The
increase in other expenses for the quarter ended June 30, 2009, was primarily
due to a $1.1 million write-down in the carrying value of REO, an FDIC special
assessment of $740,000, an increase in the FDIC regular assessment of $327,000
to $501,000 and a $344,000 increase in REO expenses.


36


Compensation
and employee benefit expenses decreased $22,000 to $3.6 million during the three
months ended June 30, 2009, compared to the same quarter last year. Compensation
and employee benefit expense was $7.2 million for the six months ended June 30,
2009 and $7.3 million for the same period in 2008. The decreased compensation
and personnel expense was primarily due to the reduction of employee incentive
payments in spite of the fact that the Corporation added personnel for a new
branch opened in May. The remaining other expense categories totaled $5.2
million for the three months and $10.1 for the six months ended June 30, 2009,
and $3.6 million for the three months and $6.9 million for the six months ended
June 30, 2008.





The
provision for federal income taxes was a tax benefit of $5.6 million as a result
of the quarterly loss. The effective tax rate for the first half of 2009 was 24%
compared to a tax rate of 30% the prior year.





Segment
Results





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





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





Liquidity
and Sources of Funds





The Bank
monitors its liquidity position to assure that it will have adequate resources
to meet its customers’ needs. Potential uses of funds are new loan originations;
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; deposit withdrawals; and repayment of other borrowings. In terms of
commitments, as of June 30, 2009, Cascade had $31.9 million of construction
loans in process, $80.4 million in unused business lines of credit and future
business commitments, $35.5 million in unused consumer lines of credit including
credit cards, and $15.0 million in other undisbursed commitments. Recent history
indicates construction lines will be funded at 81% of commitments at any point
in time. Historically, the Bank’s business customers use approximately 52% of
their credit lines at any given time. About 50% 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
incremental customer deposits. As indicated on the Corporation’s Condensed
Consolidated Statement of Cash Flows, net cash from operating activities for the
six months ended June 30, 2009, contributed $8.4 million to liquidity compared
to $7.8 million for the six months ended June 30, 2008.





Funding
needs are met through existing liquidity balances, deposit growth, FHLB advances
and other borrowings including the Federal Reserve Bank (FRB), as well as the
repayment of existing loans and the sale of loans. Cascade maintains balances in
FHLB and FRB deposits, which equaled $26.7 million as of June 30, 2009, and $1.9
million at June 30, 2008.


37


Subject
to the availability of eligible collateral and certain requirements, the Bank’s
credit line with the FHLB-Seattle is 35% of total assets or up to approximately
$563.4 million at current asset levels. At June 30, 2009, the Bank had $239.0
million in advances, an $85.0 million Letter of Credit that is being used to
secure public funds, and an unused line of credit from the FHLB-Seattle of
approximately $239.4 million subject to the ability to pledge eligible
collateral. The Bank also uses reverse repurchase agreements (securities sold
under agreements to repurchase) to provide a source of funding. At June 30,
2009, the Bank had $146.6 million in reverse repurchase agreements outstanding.
Securities that could be pledged to secure additional funding at the
FHLB-Seattle or in the repurchase market were $49.0 million at the end of the
quarter and $11.0 million as of December 31, 2008. Loans secured by commercial
real estate totaling $314.1 million and home equity and second lien residential
loans totaling $39.4 million are being used as a source of collateral at the
FHLB. The Bank also has a total of $10.0 million in Fed funds lines with one
correspondent bank. Cascade did not draw on this line during the quarter. The Bank also has
collateral to borrow $193.6 million at the Federal Reserve Bank of San
Francisco and did borrow overnight during the quarter.As of June
30, 2009, the Bank had an outstanding balance of $60.0 million in short-term
borrowings with the Federal Reserve under the Term Auction Facility (TAF)
program.





Capital
Resources





The
Corporation’s main source of capital is typically the retention of its net
income that is not paid in dividends. The Corporation also receives capital
through the exercise of stock 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.





The Board
of Directors authorized a stock repurchase program of up to 300,000 shares of
the Corporation’s stock at its May 2008 meeting. 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. Given the restrictions of the U.S. Treasury’s Capital Purchase
Program, which precludes share repurchases by participants, the program expired
May 31, 2009 and was not reauthorized.





On March
30, 2006, Cascade Capital Trust III issued $10 million in par value junior
subordinated debentures payable (Trust Preferred Securities). These securities
have a fixed rate of 6.65% for the first 5 years and then float at 3-month LIBOR
plus 1.40% for the remaining 25 years. Cascade Capital Trust III 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
December 15, 2004, Cascade Capital Trust II issued $5 million in par value
junior subordinated debentures payable. These securities have a fixed rate of
5.82% for the first 5 years and then float at 3-month LIBOR plus 1.90% for the
remaining 25 years. The structure of Cascade Capital Trust II is identical to
Cascade Capital Trust III.


38


On March
1, 2000, Cascade Capital Trust I issued $10 million par value junior
subordinated debentures payable. These securities have a fixed rate of 11% and
mature on March 1, 2030, but are callable at a premium beginning March 1, 2010
and semi-annually thereafter. The structure of Cascade Capital Trust I is
identical to Cascade Capital Trust III.




In
keeping with the adoption of FIN 46R, the Corporation’s balance sheet has
replaced the title of “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.





Capital
Requirements





Cascade
Bank is subject to regulatory capital requirements. Cascade Bank is in full
compliance with all capital requirements established by the FDIC and the
Washington State Department of Financial Institutions. The Bank’s regulatory
capital requirements are expressed as a percentage of assets. To be adequately
capitalized, the Bank must hold adjusted capital levels equal to 4% of its
assets and 8% of its risk-weighted assets. As of June 30, 2009, for the purposes
of this calculation, the Bank’s average total assets and total risk-weighted
assets were $1.6 billion and $1.3 billion respectively. The related excess
capital amounts as of June 30, 2009, are presented in the following
table:





(Dollars in
      thousands)
                        Adequately
      Capitalized
                        
                        
                        Well
      CapitalizedCascade Bank core capital
                        Amount
                        
                        Percentage
                        
                        
                        Amount
                        
                        PercentageTier
      1 (Core) capital
                        $
                        143,984
                        
                        
                        9.01
                        %
                        
                        $
                        143,984
                        
                        
                        9.01
                        %Minimum
      requirement
                        
                        63,912
                        
                        
                        4.00
                        
                        
                        
                        95,867
                        
                        
                        6.00Excess
                        $
                        80,072
                        
                        
                        5.01
                        %
                        
                        $
                        48,117
                        
                        
                        3.01
                        %Cascade Bank risk-based
    capital
                        Amount
                        
                        Percentage
                        
                        
                        Amount
                        
                        PercentageRisk-based
      capital
                        $
                        160,070
                        
                        
                        12.52
                        %
                        
                        $
                        160,070
                        
                        
                        12.52
                        %Minimum
      requirement(1)
                        
                        102,271
                        
                        
                        8.00
                        
                        
                        
                        127,838
                        
                        
                        10.00Excess
                        $
                        57,799
                        
                        
                        4.52
                        %
                        
                        $
                        32,232
                        
                        
                        2.52
                        %(1)Based on risk-weighted assets.





The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) provides
the FDIC with broad powers to take “prompt corrective action” to resolve
problems of insured depository institutions. The actions the FDIC can take
depend upon whether the institution in question is “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized”
or “critically undercapitalized.” Under FDIC guidelines, Cascade Bank is a “well
capitalized” institution as of June 30, 2009, which requires a core capital to
assets ratio of at least 6% and a risk-based capital to assets ratio of at least
10%.





The
Corporation, as a bank holding company regulated by the Federal Reserve, is
subject to capital requirements that are similar to those for Cascade Bank. As
of June 30, 2009, the Corporation is “well capitalized” under Federal Reserve
guidelines with a Tier 1 ratio of 9.10% and a risk-based ratio of
12.62%.


39




Item
3 – Quantitative and Qualitative Disclosures about Market Risk





ASSET/LIABILITY
MANAGEMENT





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


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





Using
standard interest rate shock (an instantaneous uniform change in interest rates
at all maturities) methodology, as of June 30, 2009, the Bank is within all the
guidelines established by the Board for the changes in net interest income, fair
value of equity, and adjusted capital/asset ratios. As of June 30, 2009, the
Bank’s fair value of equity decreases 10.2% in the up 200 basis point scenario
and decreases 2.3% in the down 200 basis point scenario, within the established
guideline of a maximum 30% decline. Using the same methodology, the adjusted
capital/asset ratio is 9.2% in the up 200 basis point scenario and 9.4% in the
down 200 basis point scenario, both above the 5% minimum established guideline.
The net interest income decreases 2.7% in the up 200 basis point scenario and
0.6% in the down 200 basis point scenario, both within the guideline of a 10%
decline.





The Bank
has sought to manage its interest rate exposure through the structure of its
balance sheet. To limit its interest rate risk, the Bank has sought to emphasize
its loan mix toward prime based business and construction loans with rate
floors. In addition to selling most 15 and 30 year fixed rate residential loans,
it also sells many of its hybrid ARM residential loans. The table below
summarizes the Bank’s loan portfolio by rate type at June 30, 2009.





Type
                    
                    %
      of PortfolioVariable
                    
                    
                    37
                    %Adjustable
                    
                    
                    39
                    %Fixed
                    
                    
                    24
                    %100
                    %





The Bank
extends the maturity of its liabilities by offering long-term deposit products
to customers, and by obtaining longer term FHLB advances. As of June 30, 2009,
the entire portfolio of $239.0 million in long-term advances had original
maturities greater than one year. This portfolio consists entirely of advances
with put provisions that allow the FHLB to convert the advance to a LIBOR based,
adjustable rate borrowing under certain rate conditions and on specific
dates.


40


In
addition to writing embedded options in some of its liabilities, the Bank
invests in mortgage backed securities and callable GSE (agency) securities. The
Bank receives higher yields in return by writing call options. The Bank models
this optionality in measuring, monitoring, and managing its interest rate
exposure. As of June 30, 2009, the Bank did not use any interest rate swap
agreements, including caps, floors or collars.





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, 2009. The Registrant's Chief
Executive Officer and Chief Financial Officer concluded that the Registrant's
disclosure controls and procedures as then in effect were effective in ensuring
that the information required to be disclosed by the Registrant in the reports
it files or submits under the Act is (i) accumulated and communicated to the
Registrant's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
forms.





CHANGES
IN INTERNAL CONTROLS





In the
quarter ended June 30, 2009, the Registrant did not make any significant changes
in, nor take any corrective actions regarding, its internal controls, or other
factors that have materially affected or are reasonably likely to materially
affect these controls.





PART II––OTHER
INFORMATION





Item
1.  Legal Proceedings




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





Item
1A.  Risk Factors





There have been no material changes in
the risk factors previously disclosed in Part 1, Item 1A. – Risk Factors of our
Annual Report on Form 10-K for the year ended December 31,
2008.


41





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




Issuer
      Purchases of Equity Securities2008 PLAN
                
                
                Total
      Number
                  of Shares
      Purchased
                  as
      Part of Publicly
                  Announced
      Plan
                
                
                Maximum
                  Number
      of
                  Shares
      that
                  May
      Yet be Purchased
                  Under
      the Plan (1)Period
                
                Total
                  Number
                  of Shares
      Purchased
                
                
                Average
                  Price
                  Paid
      per ShareBeginning
                EndingApril
      1, 2009
                April
      30, 2009
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                
                300,000May
      1, 2009
                May
      31, 2009
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                300,000Total
                
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                
                300,000During
      the period presented there were no shares purchased.1) The
      Plan expired on May 31, 2009, and given the restrictions of the U.S.
      Treasury’s Capital Purchase Program, which precludes share repurchases by
      participants, the program was not reauthorized.







The
Corporation entered into an agreement with the Treasury to participate in the
TARP Capital Purchase Program on November 21, 2008.  Prior to that
date the Corporation had paid a quarterly dividend of $0.045.  The
Corporation’s ability to increase its quarterly common dividend above $0.045 in
future periods is restricted as long as the Corporation is a participant in the
TARP Capital Purchase Program.





Item
3.  Defaults upon Senior Securities




None




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




The Annual Shareholders Meeting of
the Corporation was held on April 28, 2009. The shareholders re-elected four
incumbent directors. Dwayne R. Lane, Dennis R. Murphy, Ronald E. Thompson, and
G. Brandt Westover were re-elected for a term ending in 2012.





Nominee
              For
              Against/WithheldDwayne
      R. Lane
              9,927,849
              269,327Dennis
      R. Murphy
              9,936,333
              260,843Ronald
      E. Thompson
              9,889,548
              307,628G.
      Brandt Westover
              9,941,057
              256,119




The proposal to approve, in an advisory
(non-binding) vote, the compensation of executives disclosed in the proxy
statement, received the following votes. The proposal was approved.


Votes
              
              
              %
      of For/
                Against/
                AbstainFor
              
              
              9,144,820
              
              
              
              89.68
              %Against
              
              
              353,537
              
              
              
              3.47Abstain
              
              
              698,818
              
              
              
              6.85Not
      voted
              
              
              1,913,257
              
              
              
              -




42





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
      Act32
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley
Act





(b)
            Reports
      on Form 8-K




On April
21, 2009, the Corporation filed a Form 8-K reporting an attached press release
announcing earnings information for the quarter ended March 31, 2009, under
Items 2.02 and 9.01 of Form 8-K.




On June
25, 2009, the Corporation filed a Form 8-K announcing an increased loan loss
provision, suspension of their quarterly common stock cash dividend and expected
financial results for the quarter ended June 30, 2009, under Items 2.02 and 9.01
of Form 8-K.




On July
28, 2009, the Corporation filed a Form 8-K reporting an attached press release
announcing earnings information for the quarter ended June 30, 2009, under Items
2.02 and 9.01 of Form 8-K.


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SIGNATURES







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








CASCADE
      FINANCIAL CORPORATIONAugust
      7, 2009
            /s/
      Carol K. NelsonBy:     Carol
      K. Nelson,
              President and Chief Executive
      Officer
              (Principal Executive
      Officer)August
      7, 2009
            /s/
      Lars H. JohnsonBy:     Lars
      H. Johnson,
              Executive Vice President and
      Chief Financial Officer
              (Principal Financial and
      Accounting Officer)





44