**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 ENDEDSeptember
                  30, 2005
 
 OR
 
  ̈
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR TRANSITION PERIOD FROM
                  ______________TO_________________
 
 Commission
        file number 0-25286
 
 **CASCADE
        FINANCIAL CORPORATION**
 (Exact
        name of registrant as specified in its charter)
 
 Washington
              91-1661954(State
                  or other jurisdiction of
              (IRS
                  Employerincorporation
                  or organization)
              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 a check mark whether the registrant (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding twelve months (or for such shorter periods that the registrant
        was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past ninety days. Yes þ No p
 
 Indicate
        by a check mark whether the registrant is an accelerated filer (as defined
        in
        Rule 12b-2 of the Act).  Yes þ No p
 
 Indicate
        by a check mark whether the registrant is a shell company (as defined in
        Rule
        12b-2 of the Exchange Act). Yes p No þ
 
 Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        stock, as of the latest practicable date.
 
 Class
              Outstanding
                  as of October 25, 2005Common
                  Stock ($.01 par value)
              9,588,987
 1
 **CASCADE
          FINANCIAL CORPORATION**
 
 **FORM
        10-Q**
 **For
        the Quarter Ended**  **September
        30, 2005**
 
 
 
 INDEX
 PART
                  I — Financial Information:PAGEItem
                  1
              —
                  Financial Statements:—
                  Condensed Consolidated Balance Sheets
              3—
                  Condensed Consolidated Statements of Income
              4—
                  Consolidated Statements of Comprehensive Income (Loss)
              5—
                  Condensed Consolidated Statements of Cash Flows
              6—
                  Notes to Condensed Consolidated Financial Statements
              8Item
                  2
              —
                  Management’s Discussion and Analysis of Financial Condition and
                  Resultsof
                  Operations
              10Item
                  3
              —
                  Quantitative and Qualitative Disclosures about Market Risk
              22Item
                  4
              —
                  Controls and Procedures
              23PART
                  II — Other Information
              25
  2
 **PART
          I -- FINANCIAL INFORMATION**
 
 **CASCADE
        FINANCIAL CORPORATION AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (dollars
        in thousands)
 
 September
                  30,
              
              December
                  31,ASSETS
              
              
              2005
              
              
              2004(unaudited)Cash
                  on hand and in banks
              
              $
              19,303
              
              $
              11,692Interest-bearing
                  deposits in other institutions
              
              
              22,475
              
              
              1,337Securities
                  available-for-sale
              
              
              111,097
              
              
              112,405Securities
                  held-to-maturity
              
              
              91,346
              
              
              91,339FHLB
                  Stock
              
              
              11,920
              
              
              11,872Loans
              
              
              875,871
              
              
              804,029Allowance
                  for loan losses
              
              
              (10,081
              )
              
              (9,563
              )Loans,
                  net
              
              
              865,790
              
              
              794,466Goodwill
                  and intangibles, net
              
              
              26,095
              
              
              26,292Premises
                  and equipment, net
              
              
              12,656
              
              
              12,824Cash
                  surrender value of bank-owned life insurance
              
              
              17,148
              
              
              16,650Accrued
                  interest receivable and other assets
              
              
              9,272
              
              
              10,079TOTAL
                  ASSETS
              
              $
              1,187,102
              
              $
              1,088,955LIABILITIES
                  AND STOCKHOLDERS’ EQUITYLiabilities:Deposits
              
              $
              799,969
              
              $
              721,908Federal
                  Home Loan Bank advances
              
              
              241,000
              
              
              228,000Securities
                  sold under agreements to repurchase
              
              
              20,513
              
              
              20,902Junior
                  subordinated debentures payable
              
              
              15,367
              
              
              15,454Advance
                  payments by borrowers for taxes and insurance
              
              
              1,106
              
              
              677Dividends
                  payable
              
              
              863
              
              
              765Accrued
                  interest payable, expenses and other liabilities
              
              
              5,325
              
              
              4,959Deferred
                  federal income taxes
              
              
              217
              
              
              40TOTAL
                  LIABILITIES
              
              
              1,084,360
              
              
              992,705Stockholders’
                  Equity:Preferred
                  stock, $.01 par value, Authorized 500,000 shares;no
                  shares issued or outstanding
              
              
              -
              
              
              -Common
                  stock, $.01 par value, Authorized 25,000,000 shares;issued
                  and outstanding 9,588,987 shares at September 30,2005
                  and 9,559,822 shares at December 31, 2004
              
              
              96
              
              
              96Additional
                  paid-in capital
              
              
              37,946
              
              
              37,326Retained
                  earnings, substantially restricted
              
              
              66,420
              
              
              59,975Accumulated
                  other comprehensive income (loss)
              
              
              (1,720
              )
              
              (1,147
              )TOTAL
                  STOCKHOLDERS’ EQUITY
              
              
              102,742
              
              
              96,250TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              1,187,102
              
              $
              1,088,955
  See
        notes
        to condensed consolidated financial statements
 3
 **CASCADE
          FINANCIAL CORPORATION AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF INCOME**
 (dollars
        in thousands, except per share amounts)
 (unaudited)
 Three
                  Months Ended
                September
                  30,
              
              Nine
                  Months Ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Interest
                  income:Loans
              
              $
              14,949
              
              $
              11,895
              
              $
              42,253
              
              $
              31,376Securities
                  available-for-sale
              
              
              1,310
              
              
              1,383
              
              
              4,003
              
              
              5,124Securities
                  held-to-maturity
              
              
              1,061
              
              
              1,084
              
              
              3,228
              
              
              3,236FHLB
                  stock dividends
              
              
              -
              
              
              138
              
              
              49
              
              
              436Interest-earning
                  deposits
              
              
              71
              
              
              18
              
              
              124
              
              
              51Total
                  interest income
              
              
              17,391
              
              
              14,518
              
              
              49,657
              
              
              40,223Interest
                  expense:Deposits
              
              
              4,860
              
              
              2,978
              
              
              12,706
              
              
              7,884FHLB
                  advances and repurchase agreements
              
              
              2,890
              
              
              2,811
              
              
              8,817
              
              
              8,123Junior
                  subordinated debentures
              
              
              305
              
              
              178
              
              
              873
              
              
              518Total
                  interest expense
              
              
              8,055
              
              
              5,967
              
              
              22,396
              
              
              16,525Net
                  interest income
              
              
              9,336
              
              
              8,551
              
              
              27,261
              
              
              23,698Provision
                  for loan losses
              
              
              250
              
              
              150
              
              
              745
              
              
              525Net
                  interest income after provision for loan losses
              
              
              9,086
              
              
              8,401
              
              
              26,516
              
              
              23,173Other
                  income:Gain
                  on sale of loans
              
              
              241
              
              
              55
              
              
              705
              
              
              199Gain
                  on sale of securities available-for-sale
              
              
              -
              
              
              129
              
              
              13
              
              
              510Net
                  gain on sale of REO
              
              
              -
              
              
              -
              
              
              33
              
              
              99Checking
                  service fees
              
              
              801
              
              
              569
              
              
              2,344
              
              
              1,513Other
                  service fees
              
              
              252
              
              
              201
              
              
              672
              
              
              508BOLI
              
              
              194
              
              
              134
              
              
              572
              
              
              401Other
              
              
              76
              
              
              150
              
              
              492
              
              
              349Total
                  other income
              
              
              1,564
              
              
              1,238
              
              
              4,831
              
              
              3,579Other
                  expenses:Salaries
                  and employee benefits
              
              
              3,039
              
              
              3,083
              
              
              9,217
              
              
              8,390Occupancy
              
              
              823
              
              
              736
              
              
              2,453
              
              
              1,981Marketing
              
              
              193
              
              
              118
              
              
              546
              
              
              359Data
                  processing
              
              
              187
              
              
              135
              
              
              503
              
              
              311Prepayment
                  fees on FHLB advances
              
              
              37
              
              
              -
              
              
              110
              
              
              26Merger
                  related expenses
              
              
              -
              
              
              -
              
              
              -
              
              
              356Other
              
              
              1,393
              
              
              933
              
              
              4,172
              
              
              3,348Total
                  other expenses
              
              
              5,672
              
              
              5,005
              
              
              17,001
              
              
              14,771Income
                  before provision for federal income taxes
              
              
              4,978
              
              
              4,634
              
              
              14,346
              
              
              11,981Provision
                  for federal income taxes
              
              
              1,634
              
              
              1,531
              
              
              4,716
              
              
              4,020Net
                  income
              
              $
              3,344
              
              $
              3,103
              
              $
              9,630
              
              $
              7,961Net
                  income per common share, basic
              
              $
              0.35
              
              $
              0.33
              
              $
              1.01
              
              $
              0.91Weighted
                  average number of shares
              
              
              9,583,650
              
              
              9,540,663
              
              
              9,577,761
              
              
              8,770,054Net
                  income per share, diluted
              
              $
              0.34
              
              $
              0.32
              
              $
              0.98
              
              $
              0.87Weighted
                  average number of shares
              
              
              9,848,740
              
              
              9,835,923
              
              
              9,852,327
              
              
              9,098,496Dividends
                  declared per share
              
              $
              0.09
              
              $
              0.07
              
              $
              0.33
              
              $
              0.21
 See
        notes
        to condensed consolidated financial statements
 4
 **CASCADE
          FINANCIAL CORPORATION AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**
 (dollars
        in thousands)
 (unaudited)
 Three
                    Months Ended
                  September
                    30,
                
                Nine
                    Months Ended
                  September
                    30,2005
                
                
                2004
                
                
                
                2005
                
                
                2004Net
                    Income
                
                $
                3,344
                
                $
                3,103
                
                
                $
                9,630
                
                $
                7,961Increase
                    in unrealized gain (loss) on securitiesavailable-for-sale,
                    net of tax (benefit) expenseof
                    $(537) and $932 for the three monthsended
                    September 30, 2005 and 2004,respectively,and
                    $(322) and $(448) for the ninemonths
                    endedSeptember
                    30, 2005 and 2004,respectively.
                
                
                (998
                )
                
                1,809
                
                
                
                (598
                )
                
                (869
                )Increase
                    in unrealized gain (loss) on swapsavailable-for-sale,
                    net of tax (benefit) expenseof
                    $0 and $(157) for the three monthsended
                    September 30, 2005 and 2004,respectively,and
                    $(78) and $(201) for the ninemonths
                    endedSeptember
                    30, 2005 and 2004,respectively.
                
                
                -
                
                
                (305
                )
                
                
                (146
                )
                
                (389
                )Less
                    reclassification adjustment for gains onsecuritiesincluded
                    in net income, net oftax(benefit)
                    of $0and
                    $44 for the three monthsendedSeptember
                    30,2005
                    and 2004,respectively,
                    and $(4) and $173for
                    thenine
                    months ended September 30, 2005 and2004,
                    respectively.
                
                
                -
                
                
                85
                
                
                
                (8
                )
                
                337Less
                    reclassification adjustment for gains onswapsincluded
                    in net income, net of tax (benefit)of
                    $0 and $33 for the three months endedSeptember
                    30,2005
                    and 2004, respectively, and$96
                    and $77for
                    the nine monthsendedSeptember
                    30, 2005 and 2004, respectively.
                
                
                -
                
                
                64
                
                
                
                179
                
                
                148Comprehensive
                    Income
                
                $
                2,346
                
                $
                4,756
                
                
                $
                9,057
                
                $
                7,188
 
 See
        notes
        to condensed consolidated financial statements
 5
 **CASCADE
            FINANCIAL CORPORATION AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (dollars
        in thousands, unaudited)
 
 Nine
                  Months Ended
                September
                  30,2005
              
              
              2004Cash
                  flows from operating activities:Net
                  income
              
              $
              9,630
              
              $
              7,961Adjustments
                  to reconcile net income to net cash provided by(used
                  in) operating activities:Depreciation
                  and amortization of premises and equipment
              
              
              1,384
              
              
              1,135Provision
                  for losses on loans
              
              
              745
              
              
              525Increase
                  in cash surrender value of bank owned life insurance
              
              
              (498
              )
              
              (344
              )Amortization
                  of retained servicing rights
              
              
              -
              
              
              59Amortization
                  of core deposit intangible
              
              
              197
              
              
              35Deferred
                  federal income taxes
              
              
              468
              
              
              (929
              )Deferred
                  loan fees, net of amortization
              
              
              382
              
              
              691Net
                  gain on sales of securities available-for-sale
              
              
              (13
              )
              
              (510
              )Net
                  gain on sales of real estate owned, investment property
                  andother
                  repossessed assets
              
              
              (33
              )
              
              (99
              )Federal
                  Home Loan Bank stock dividend received
              
              
              (49
              )
              
              (436
              )Net
                  increase (decrease) in accrued interest receivable and
                  otherassets
                  (under) over accrued interest payable, expenses and other
                  liabilities
              
              
              1,201
              
              
              2,364Net
                  cash provided by operating activities
              
              
              13,414
              
              
              10,452Cash
                  flows from investing activities:Loans
                  originated, net of principal repayments
              
              
              (69,917
              )
              
              (205,435
              )Cash
                  (used for) acquisition
              
              
              -
              
              
              (9,546
              )Purchase
                  of securities held-to-maturity
              
              
              (5,054
              )
              
              (35,436
              )Proceeds
                  from sales/calls of securities held-to-maturity
              
              
              -
              
              
              23,238Principal
                  repayments on securities held-to-maturity
              
              
              5,046
              
              
              3,577Principal
                  repayments on securities available-for-sale
              
              
              18,857
              
              
              26,437Purchases
                  of securities available-for-sale
              
              
              (20,000
              )
              
              (93,166
              )Proceeds
                  from sales of securities available-for-sale
              
              
              1,519
              
              
              127,261Purchases
                  of premises and equipment
              
              
              (1,244
              )
              
              (5,483
              )Proceeds
                  from sales/retirements of premises and equipment
              
              
              29
              
              
              12Proceeds
                  from loan participations sold
              
              
              (2,536
              )
              
              (2,031
              )Net
                  cash used in investing activities
              
              
              (73,300
              )
              
              (170,572
              )Subtotal,
                  carried forward
              
              $
              (59,886
              )
              $
              (160,120
              )
 
 See
        notes
        to condensed consolidated financial statements
 6
 CASCADE FINANCIAL CORPORATION AND
          SUBSIDIARY  **CONDENSED
          CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (dollars
        in thousands, unaudited)
 
 Nine
                  Months Ended
                September
                  30,2005
              
              
              2004Subtotal,
                  brought forward
              
              $
              (59,886
              )
              $
              (160,120
              )Cash
                  flows from financing activities:Proceeds
                  from issuance of common stock
              
              
              621
              
              
              8,745Dividends
                  paid
              
              
              (2,299
              )
              
              (1,823
              )Repurchase
                  of common stock
              
              
              (789
              )
              
              (105
              )Net
                  increase in deposits
              
              
              78,061
              
              
              146,099Net
                  increase in Federal Home Loan Bank advances
              
              
              13,000
              
              
              30,000Net
                  increase (decrease) in securities sold under agreements to
                  repurchase
              
              
              (388
              )
              
              (19,025
              )Net
                  increase (decrease) in advance payments by borrowers for
                  taxes
                and
                  insurance
              
              
              429
              
              
              (642
              )Net
                  cash provided by financing activities
              
              
              88,635
              
              
              163,249Net
                  increase (decrease) in cash and cash equivalents
              
              
              28,749
              
              
              3,129Cash
                  and cash equivalents at beginning of period
              
              
              13,029
              
              
              14,071Cash
                  and cash equivalents at end of period
              
              $
              41,778
              
              $
              17,200Supplemental
                  disclosures of cash flow information—cash paid during the period
                  for:Interest
              
              $
              26,074
              
              $
              17,530Federal
                  income taxes
              
              
              4,445
              
              
              3,860Supplemental
                  schedule of noncash investing activities:Net
                  mortgage loans transferred to real estate owned
              
              
              -
              
              
              915Mark
                  to market on securities available-for-sale
              
              
              882
              
              
              1,171Retirement
                  of common stock in retained earnings
              
              
              (43
              )
              
              (7
              )Dividends
                  declared
              
              
              (2,395
              )
              
              (1,246
              )
 
 See
        notes
        to condensed consolidated financial statements.
 7
 **CASCADE
              FINANCIAL CORPORATION AND SUBSIDIARY**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **September
        30, 2005**
 **(unaudited)**
 
 1. Presentation
        of Financial Information
  The
        accompanying
        financial information is unaudited and has been prepared from the consolidated
        financial statements of Cascade Financial Corporation (the “Corporation”), its
        subsidiary, Cascade Bank (the “Bank” or “Cascade”), and the Bank’s subsidiary,
        Cascade Investment Services, Inc. All significant intercompany balances have
        been eliminated in the consolidation. In the opinion of management, the
        financial information reflects all adjustments (consisting of normal recurring
        adjustments) necessary for a fair presentation of the financial condition,
        results of operations, and cash flows of the Corporation pursuant to the
        requirements of the SEC for interim reporting. Operating results for the
        three
        months and nine months ended September 30, 2005, are not necessarily indicative
        of the results that may be expected for the year ended December 31,
        2005.
 
 Certain
        information and
        footnote disclosures included in the Corporation’s financial statements for the
        year ended December 31, 2004 have been condensed or omitted from this report.
        Accordingly, these statements should be read with the financial statements
        and
        notes thereto included in the Corporation’s December 31, 2004 Annual Report on
        Form 10-K.
 
 2.  Commitments
        and
        Contingencies
 
 In
        the normal course of
        business there are various commitments to fund loans. Management does not
        anticipate any material loss as a result of these commitments.
 
 Periodically
        there have
        been various claims and lawsuits against the Corporation or the Bank, such
        as
        claims to enforce liens, condemnation proceedings on properties in which
        the
        Bank holds security interests, claims involving the making and servicing
        of real
        property loans and other issues incidental to the Corporation’s and the Bank’s
        business. In the opinion of management no material loss is expected from
        any
        such pending lawsuits.
 
 3.  Stockholders’
        Equity
 
 a)  Earnings
        Per Share
 
 The
        following
        table presents the computation of basic and diluted net income per share
        for the
        three and nine-month period ended September 30:
 Three
                    Months Ended
                
                Nine
                    Months EndedSeptember
                    30,
                
                September
                    30,2005
                
                
                2004
                
                
                2005
                
                
                2004(dollars
                    in thousands, except share and per share amounts)**Numerator**:Net
                    income
                
                $
                3,344
                
                $
                3,103
                
                $
                9,630
                
                $
                7,961
  8
 Three
                    Months Ended
                
                Nine
                    Months EndedSeptember
                    30,
                September
                    30,2005
                
                
                2004
                
                
                2005
                
                
                2004**Denominator**:Denominator
                    for basic net income per share-Weighted
                    average shares
                
                
                9,583,650
                
                
                9,540,663
                
                
                9,577,761
                
                
                8,770,054Effect
                    of dilutive securities:Stock
                    options
                
                
                265,090
                
                
                295,260
                
                
                274,566
                
                
                328,442Denominator
                    for diluted net income per share-Weighted
                    average shares and assumedconversion
                    of dilutive stock options
                
                
                9,848,740
                
                
                9,835,923
                
                
                9,852,327
                
                
                9,098,496Basic
                    net income per share
                
                $
                0.35
                
                $
                0.33
                
                $
                1.01
                
                $
                0.91Diluted
                    net income per share
                
                $
                0.34
                
                $
                0.32
                
                $
                0.98
                
                $
                0.87
 For
        the
        quarter ended September 30, 2005 and 2004, there were anti-dilutive options
        to
        purchase shares of 113,781 and 109,183 respectively, excluded from the above
        calculation. For the nine-month period ended September 30, 2005 and 2004,
        there
        were anti-dilutive options to purchase shares of 122,238 and 65,458
        respectively, excluded from the above calculation.
 
 b)  Cash
        Dividend Declared
 
 On
        September 28, 2005, the company announced its thirteenth consecutive quarterly
        cash dividend payment. The dividend was $0.09 per share and was paid on October
        26, 2005 to shareholders of record as of October 12, 2005.
  c)  Stock-based
        compensation
  The
        Corporation measures its employee stock-based compensation arrangements using
        the provisions outlined in Accounting Principles Board (APB) Opinion No.
        25,
        "Accounting for Stock Issued to Employees," which is an intrinsic value-based
        method of recognizing compensation costs. As none of the Corporation's stock
        options have an intrinsic value at grant date, no compensation cost has been
        recognized for its stock option plans.
 
 The
        Corporation applies Accounting Principles Board (APB) Opinion No. 25,
        "Accounting for Stock Issued to Employees," in accounting for its stock option
        plans. Had compensation cost on the fair value at the grant dates for the
        Corporation's stock option plan been determined to be consistent with the
        Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
        Stock Based Compensation," as amended, the Corporation's net income and earnings
        per share would have been reduced to the pro forma amounts indicated
        below:
  9
 Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,2005
              
              2004
              
              2005
              
              2004*(dollars
                  in thousands, except per share amounts)*Net
                  incomeAs
                  reported
              
              $
              3,344
              
              $
              3,103
              
              $
              9,630
              
              $
              7,961Less
                  FAS 123 compensation costs
              
              
              35
              
              
              61
              
              
              119
              
              
              128Pro
                  forma
              
              $
              3,309
              
              $
              3,042
              
              $
              9,511
              
              $
              7,833Net
                  income per common shareBasicAs
                  reported
              
              $
              0.35
              
              $
              0.33
              
              $
              1.01
              
              $
              0.91Pro
                  forma
              
              
              0.35
              
              
              0.32
              
              
              0.99
              
              
              0.89DilutedAs
                  reported
              
              $
              0.34
              
              $
              0.32
              
              $
              0.98
              
              $
              0.87Pro
                  forma
              
              
              0.34
              
              
              0.31
              
              
              0.97
              
              
              0.86
 
 4.  Recently
        Issued Accounting Standards
  In
        December 2004 the
        FASB issued No. 123(R), *Share
        Based Payment,* which is
        a revision of No. 123, *Accounting
        for Stock-Based Compensation.* Statement 123(R) supersedes APB Opinion 25, which the Corporation had used
        to
        report stock options granted to employees and directors. Statement 123(R)
        requires all share-based payments to employees, including stock options,
        be
        recognized in the income statement based on their fair values. The Corporation
        will adopt Statement 123(R) effective January 1, 2006.
  
 **Item
          2 - Management’s Discussion and Analysis of Financial Condition
          and**
 **Results
        of Operations**
 
 *The
        following discussion is intended to assist in understanding the financial
        condition and results of the Corporation. The information contained in this
        section should be read with the unaudited condensed consolidated financial
        statements and accompanying notes, and the December 31, 2004 audited
        consolidated financial statements and accompanying notes included in our
        recent
        Annual Report on Form 10-K.*
 
 *This
        section contains forward-looking statements, within the meaning of Section
        27A
        of the Securities Act of 1933, as amended, and Section 21E of the Securities
        Exchange Act of 1934, as amended, and subject to the safe harbor created
        by the
        Private Securities Litigation Reform Act of 1995, that are subject to risks
        and
        uncertainties that could cause actual results to differ materially from those
        projected. Those factors include, but are not limited to: the impact of national
        and regional economic trends on small business loan demand in the Puget Sound
        area; loan delinquency rates; the Bank’s ability to continue to attract quality
        commercial business; interest rate movements; changes in the demographic
        make-up
        of the company’s market area; fluctuation in demand for the Bank’s products and
        services; the Corporation’s ability to attract and retain qualified people, and
        other factors. These factors should be considered in evaluating the
        forward-looking statements and undue reliance should not be placed on such
        statements. The Corporation shall not be responsible to update any such
        forward-looking statements. For a discussion of factors that could cause
        actual
        results to differ, and for certain mandated SEC guide 3 information that
        has not
        materially changed since the audited statements, please see the Corporation’s
        Annual Report on Form 10-K for the year ended December 31,
        2004.*
  10
 Cascade
        Financial Corporation is a bank
        holding company incorporated in the state of Washington. The Corporation’s sole
        operating subsidiary is Cascade Bank, a Washington state chartered commercial
        bank. The Corporation and the Bank are headquartered in Everett, Washington.
        The
        Bank offers loan, deposit, and other financial services through its nineteen
        branches located in Snohomish and King Counties (Washington).
  **Acquisition**
  On
        June 3,
        2004, the Company completed its acquisition of Issaquah Bancshares, Inc.
        (“Issaquah”). The acquisition was accounted for using the purchase method of
        accounting and accordingly, the assets and liabilities were recorded based
        on
        their fair values at the acquisition date. The merger enhances Cascade’s
        commercial banking franchise by expanding Cascade’s presence in East King
        County, Washington. Total Issaquah assets on June 3, 2004 were approximately
        $131 million and the total value of the transaction, both cash and stock,
        was
        approximately $34.3 million as measured under the provisions of FAS 141,
        which
        used the value of Cascade stock offered as of February 2004, the time when
        the
        acquisition was announced. Cascade issued approximately 1.3 million shares
        and
        paid cash of $9.5 million in connection with the acquisition. The Bank booked
        $26.3 million in intangible assets associated with the transaction including
        $25.2 million in goodwill and a $1.1 million core deposit intangible (CDI).
        The
        CDI is amortized under the straight-line method over an eight-year period
        of
        time.
 
 **Selected
        Financial Data**
  The
        following
        table sets forth certain selected financial data concerning the Corporation
        for
        the periods indicated:
  At
                    or for the
                  three
                    months
                  ended
                    September 30,
                At
                    or for the
                  nine
                    months
                  ended
                    September 30,2005
                
                
                2004
                
                
                2005
                
                
                2004Return
                    on average assets
                
                
                1.15
                %
                
                1.19
                %
                
                1.13
                %
                
                1.11
                %Return
                    on average stockholders’ equity
                
                
                13.12
                
                
                13.53
                
                
                13.09
                
                
                13.77Average
                    stockholders’ equity to average assets
                
                
                8.74
                
                
                8.78
                
                
                8.60
                
                
                8.06Other
                    expenses to average assets
                
                
                1.95
                
                
                1.92
                
                
                1.98
                
                
                2.06Efficiency
                    ratio
                
                
                52.04
                
                
                51.13
                
                
                52.98
                
                
                54.15Average
                    interest-bearing assets toaverage
                    interest-bearing liabilities
                
                
                112.31
                
                
                111.98
                
                
                111.94
                
                
                111.55
 **CHANGES
        IN FINANCIAL CONDITION**
 
 Total
        assets
        increased 9.0% or $98.1 million to $1.19 billion at September 30, 2005, compared
        to $1.09 billion at December 31, 2004. Net loans, i.e. net of deferred loan
        fees
        and the allowance for loan losses, increased 9.0% or $71.3 million to $865.8
        million at September 30, 2005, from $794.5 million at December 31,
        2004.
  11
 Investment
        securities decreased $1.2 million to $214.4 million at September 30, 2005,
        compared to $215.6 million at December 31, 2004. The investment portfolio
        is
        concentrated in the securities of Government Sponsored Enterprises (GSEs,
        e.g
        FNMA or FHLMC) as well as mortgage-backed pass-through securities, and
        collateralized mortgage obligations (CMOs) backed by pools of single family
        residential mortgages (known collectively as MBS). All investment purchases
        during the nine months ended September 30, 2005, were rated AAA in terms
        of
        credit quality by Moody’s and/or Standard & Poors.
  (Dollars
                        in thousands)
                    
                    **SEPTEMBER
                        30, 2005**Gross
                    
                    Gross
                    
                    Gross
                    
                    GrossUnrealized
                    
                    Unrealized
                    
                    Unrealized
                    
                    UnrealizedGains
                    
                    Gains
                    
                    Losses
                    
                    LossesAmortized
                    
                    Less
                        Than
                    
                    More
                        Than
                    
                    Less
                        Than
                    
                    More
                        Than
                    
                    FairCost
                    
                    1
                        Year
                    
                    1
                        Year
                    
                    1
                        Year
                    
                    1
                        Year
                    
                    Value**Securities
                        available-for-sale**MBS
                    
                    $
                    27,893
                    
                    
                    -
                    
                    $
                    19
                    
                    $
                    257
                    
                    $
                    365
                    
                    $
                    27,290Agency
                        notes
                    
                    
                    85,850
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,808
                    
                    
                    235
                    
                    
                    83,807FHLB
                        Stock
                    
                    
                    11,920
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    11,920$
                    125,663
                    
                    
                    -
                    
                    $
                    19
                    
                    $
                    2,065
                    
                    $
                    600
                    
                    $
                    123,017
 
 Gross
                  
                  Gross
                  
                  Gross
                  
                  GrossUnrealized
                  
                  Unrealized
                  
                  Unrealized
                  
                  UnrealizedGains
                  
                  Gains
                  
                  Losses
                  
                  LossesAmortized
                  
                  Less
                      Than
                  
                  More
                      Than
                  
                  Less
                      Than
                  
                  More
                      Than
                  
                  FairCost
                  
                  1
                      Year
                  
                  1
                      Year
                  
                  1
                      Year
                  
                  1
                      Year
                  
                  Value**Securities
                      held-to-maturity**MBS
                  
                  $
                  25,064
                  
                  
                  -
                  
                  $
                  15
                  
                  $
                  182
                  
                  $
                  323
                  
                  $
                  24,574Agency
                      notes
                  
                  
                  65,817
                  
                  
                  -
                  
                  
                  1
                  
                  
                  205
                  
                  
                  1,017
                  
                  
                  64,596Corporate/other
                  
                  
                  465
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  465$
                  91,346
                  
                  
                  -
                  
                  $
                  16
                  
                  $
                  387
                  
                  $
                  1,340
                  
                  $
                  89,635
  (Dollars
                          in thousands)
                      
                      **DECEMBER
                          31, 2004**Gross
                      
                      Gross
                      
                      Gross
                      
                      GrossUnrealized
                      
                      Unrealized
                      
                      Unrealized
                      
                      UnrealizedGains
                      
                      Gains
                      
                      Losses
                      
                      LossesAmortized
                      
                      Less
                          Than
                      
                      More
                          Than
                      
                      Less
                          Than
                      
                      More
                          Than
                      
                      FairCost
                      
                      1
                          Year
                      
                      1
                          Year
                      
                      1
                          Year
                      
                      1
                          Year
                      
                      Value**Securities
                          available-for-sale**MBS
                      
                      $
                      43,208
                      
                      $
                      50
                      
                      $
                      20
                      
                      $
                      544
                      
                      $
                      212
                      
                      $
                      42,522Agency
                          notes
                      
                      
                      70,910
                      
                      
                      18
                      
                      
                      -
                      
                      
                      652
                      
                      
                      394
                      
                      
                      69,882FHLB
                          Stock
                      
                      
                      11,872
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      11,872$
                      125,990
                      
                      $
                      68
                      
                      $
                      20
                      
                      $
                      1,196
                      
                      $
                      606
                      
                      $
                      124,276
 
 Gross
                      
                      Gross
                      
                      Gross
                      
                      GrossUnrealized
                      
                      Unrealized
                      
                      Unrealized
                      
                      UnrealizedGains
                      
                      Gains
                      
                      Losses
                      
                      LossesAmortized
                      
                      Less
                          Than
                      
                      More
                          Than
                      
                      Less
                          Than
                      
                      More
                          Than
                      
                      FairCost
                      
                      1
                          Year
                      
                      1
                          Year
                      
                      1
                          Year
                      
                      1
                          Year
                      
                      Value**Securities
                          held-to-maturity**MBS
                      
                      $
                      25,083
                      
                      $
                      -
                      
                      $
                      30
                      
                      $
                      345
                      
                      $
                      184
                      
                      $
                      24,584Agency
                          notes
                      
                      
                      65,791
                      
                      
                      21
                      
                      
                      -
                      
                      
                      367
                      
                      
                      939
                      
                      
                      64,506Corporate/other
                      
                      
                      465
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      465$
                      91,339
                      
                      $
                      21
                      
                      $
                      30
                      
                      $
                      712
                      
                      $
                      1,123
                      
                      $
                      89,555
  12
 We
        currently
        hold seven securities in our available-for-sale portfolio and ten securities
        in
        our held-to-maturity portfolio that have had an unrealized loss for more
        than
        one year. The losses are due to increases in interest rates and are not related
        to credit deterioration. If rates were to move downward in the future, the
        market value of these securities would rise accordingly. We have the ability
        to
        hold the investments for a period of time sufficient for a market price
        recovery. Therefore, we do not consider any portion of these investments
        to be
        other-than-temporarily impaired.
 
 At
        September
        30, 2005, the Bank held Federal Home Loan Bank (FHLB) of Seattle stock of
        $11.9
        million. In December 2004, the FHLB of Seattle abandoned its practice of
        repurchasing stock that was not needed to support outstanding advances and
        announced it would not repurchase any stock until further notice. On April
        5,
        2005, the FHLB of Seattle submitted a proposed business and capital plan
        to its
        regulator, the Federal Housing Finance Board. In May 2005, the Finance Board
        accepted the Seattle bank’s three-year plan. To meet the Finance Board’s
        conditions under the three-year plan, the Seattle bank’s board adopted a
        resolution that suspends dividends on all classes of stock. The Seattle bank
        anticipates a period of low or negative profitability that may last up to
        three
        years. Since December 2004, the Seattle bank board has suspended all Class
        B(1)
        stock repurchases and allowed limited Class B(2) stock repurchases.
  **Loan
        Portfolio**
  Virtually
        all
        the Bank’s loans are to businesses or individuals in the Puget Sound area.
        Business loans are made to small and medium sized businesses within that
        area
        for a wide array of purposes. Included in the business loan total are loans
        secured by real estate where the borrower is the primary tenant of the property.
        Real estate construction loans are primarily extended to builders and developers
        of single family, residential real estate. The vast majority of these projects
        focus on entry-level homes and/or first trade-up homes. Commercial real estate
        loans fund small, non-owner occupied buildings. Home equity and consumer
        loans
        are primarily second mortgages on the borrower’s primary residence. These loans
        comprise 75% of the home equity and consumer portfolio. The balance of this
        category is non-residential, e.g. automobiles, credit cards, or
        boats.
  Residential
        loans, held in the Bank’s portfolio, are generally adjustable rate loans secured
        by single family residences. The Bank also originates longer term fixed rate
        residential loans, but sells almost all of those loans into the secondary
        market
        on a best efforts, servicing released basis. Multifamily loans are usually
        adjustable rate loans secured by mortgages on properties with five or more
        units.
  As
        displayed
        in the following table, total loans increased by $72.2 million to $878.9
        million
        as of September 30, 2005, compared to $806.7 million at December 31, 2004.
        In
        keeping with the Bank’s evolution to a commercial bank, loans more closely
        associated with a commercial bank, i.e. business, real estate construction,
        and
        commercial real estate loans grew $107.9 million to $686.2 million as of
        September 30, 2005, compared to $578.3 million as of December 31, 2004.
        Commercial real estate loans declined by $35 million and business loans
        increased by a like amount as we reclassified loans previously held at the
        Issaquah Bank division to conform with Cascade’s reporting of loans by business
        lines.
  13
 Residential
        lending
        balances grew very modestly. Residential loans increased by $664,000 to $106.6
        million. Multifamily loans decreased $39.0 million to $53.4 million primarily
        due to the sale of $22.0 million in the second quarter and $12.7 million
        in the
        third quarter of 2005. Cascade sold the multifamily loans to diversify risk
        by
        lowering our concentration of commercial real estate loans. Selling these
        hybrid
        adjustable rate mortgages with an average duration of 2.5 years helped to
        reduce
        our exposure to higher short-term rates as we have sought to replace them
        with
        prime-based loans and higher yielding commercial real estate loans. Home
        equity
        loans and other consumer loans increased $2.6 million to $32.8
        million.
  The
        following
        summary reflects the Bank’s loan portfolio as of the dates
        indicated:
 
 **Types
                  of Loans**
              
              September
                  30,
              
              %
                  of
              
              December
                  31,
              
              %
                  of*($
                  in thousands)*
              
              2005
              
              Portfolio
              
              2004
              
              PortfolioBusiness
                  banking
              
              $
              393,880
              
              
              44.8
              %
              $
              292,117
              
              
              36.3
              %Real
                  estate construction (net)
              
              
              151,875
              
              
              17.3
              
              
              107,431
              
              
              13.2Commercial
                  real estate
              
              
              140,413
              
              
              16.0
              
              
              178,704
              
              
              22.2Home
                  equity and consumer
              
              
              32,752
              
              
              3.7
              
              
              30,125
              
              
              3.7Residential
                  real estate
              
              
              106,639
              
              
              12.1
              
              
              105,975
              
              
              13.1Multifamily
                  real estate
              
              
              53,389
              
              
              6.1
              
              
              92,372
              
              
              11.5Total
                  loans
              
              $
              878,948
              
              
              100.0
              %
              $
              806,724
              
              
              100.0
              %Deferred
                  loan fees
              
              
              (3,077
              )
              
              
              
              
              (2,695
              )Loans
              
              $
              875,871
              
              
              
              
              $
              804,029
 
 (Loans
        held for sale are included in residential loans, and at less than 1% of total
        loans, are not considered material.)
 
 **Deposits,
        Other Borrowings, and Shareholder Equity**
  Checking
        account deposits increased a s
        the
        Bank continued to focus its branch activities on deposit generation in general
        and checking/transaction accounts in particular. In June 2005, the Bank launched
        its High Performance Checking (HPC) program to accelerate deposit growth.
        As of
        September 30, 2005, HPC accounts held $16.0 million of deposits. Total deposits
        increased by $78.1 million from $721.9 million at December 31, 2004 to $800.0
        million at September 30, 2005.
 
 The
        following
        table reflects the Bank’s deposit mix as of the dates indicated:
 
 September
                  30,
              
              %
                  of
              
              December
                  31,
              
              %
                  of2005
              
              Deposits
              
              2004
              
              DepositsChecking
                  accounts
              
              $
              122,135
              
              
              15.3
              %
              $
              112,564
              
              
              15.6
              %Savings
                  & MMD
              
              
              174,835
              
              
              21.8
              
              
              172,584
              
              
              23.9CD's
              
              
              502,999
              
              
              62.9
              
              
              436,760
              
              
              60.5$
              799,969
              
              
              100.0
              %
              $
              721,908
              
              
              100.0
              %
  FHLB
        of
        Seattle advances increased by $13.0 million from $228.0 million at December
        31,
        2004 to $241.0 million at September 30, 2005. The primary reason for the
        increase was to pre-fund an advance that was maturing on October 13, 2005.
        Securities sold under agreements to repurchase decreased $388,000 to $20.5
        million during the quarter.
 14
 Stockholders’
          equity
          increased by $6.4 million from $96.3 million at December 31, 2004 to $102.7
          million at September 30, 2005. The increase is primarily attributable to
          the
          retention of net income for the period less dividend payments. The Corporation’s
          thirteenth consecutive cash dividend, which was declared September 28,
          2005,
          reduced stockholders’ equity by $863,000. Accumulated other comprehensive loss
          decreased by $573,000 to a negative $1.7 million as of September 30,
          2005.
 
 **Asset
          Quality**
  Non-performing
        assets
        (non-performing loans and real estate owned) totaled $1.3 million and $1.4
        million at September 30, 2005 and December 31, 2004, respectively.
        Non-performing loans, those on non-accrual, those that are ninety days past
        due,
        and those that management otherwise has serious reservations about their
        collectibility, increased to $910,000 at September 30, 2005, compared to
        $532,000 at December 31, 2004. Of the $910,000, $625,000 were business and
        construction loans, $193,000 were residential, and $92,000 were home equity
        and
        consumer loans. Real estate owned (REO) was $386,000 as of September 30,
        2005
        compared to $868,000 at December 31, 2004. The $482,000 decrease in REO was
        primarily due to the sale of two residential properties, which resulted in
        a
        gain of $33,000.
  At
        September
        30, 2005, the Bank’s allowance for loan losses totaled $10.1 million compared to
        $9.6 million at December 31, 2004. The allowance for loan losses was 1.15%
        of
        total loans outstanding at September 30, 2005 compared to 1.19% at December
        31,
        2004. The allowance for loan losses was 1,108% of non-performing loans at
        September 30, 2005. The allowance for loan losses is maintained at a level
        sufficient to provide for losses based on management’s evaluation of known and
        inherent risks in the portfolio. This evaluation includes analyses of the
        financial condition of the borrower, the value of the collateral securing
        selected loans, consideration of historical loss experience and management’s
        projection of trends affecting credit quality. The increase in the allowance
        is
        primarily attributable to the continued emphasis on business and construction
        lending, and an increase in the portfolio of these loan types. Management
        believes that the allowance for losses on loans is adequate to provide for
        losses that may be incurred on non-performing loans.
  During
        the
        quarter ended September 30, 2005, loan charge-offs equaled $128,000 while
        recoveries were $68,000 resulting in net charge-offs of $60,000. Of those
        charge-offs, $34,000 represents losses sustained on checking accounts, which
        prior to 2005 were charged to checking fees instead of the loan loss
        reserve.
  The
        following
        table provides summary information concerning asset quality as of and for
        the
        three months ended September 30, 2005 and December 31, 2004
        respectively:
 
 September
                  30,
              
              December
                  31,2005
              
              2004Non-performing
                  loans to total assets
              
              
              0.08
              %
              
              0.05
              %Non-performing
                  loans to total loans outstanding
              
              
              0.10
              
              
              0.07Non-performing
                  assets to total assets
              
              
              0.11
              
              
              0.13Allowance
                  for loan losses to non-performing loans
              
              
              1,108
              
              
              1,798Allowance
                  for loan losses to total loans
              
              
              1.15
              
              
              1.19Net
                  charge-offs to total loans
              
              
              0.01
              
              
              0.00
  15
 **RESULTS
          OF OPERATIONS**
 
 Comparison
        of the Three and Nine Months Ended September 30, 2005 and 2004
 
 **General**
  Net
        income
        increased 7.8% to $3.3 million for the three months ended September 30, 2005
        compared to $3.1 million during the comparable period in 2004. Diluted net
        income per share was $0.34 for the quarter ended September 30, 2005 and $0.32
        per share for the quarter ended September 30, 2004, an increase of 7.6%.
        Net
        interest income before provision for loan losses increased $785,000 to $9.3
        million for the quarter ended September 30, 2005. Other income increased
        by
        $326,000 to $1.6 million for the quarter ended September 30, 2005. Other
        expense
        increased $667,000 to $5.7 million for the quarter ended September 30, 2005
        as
        compared to the quarter ended September 30, 2004. The Bank paid $37,000 in
        prepayment fees on Federal Home Loan Bank (FHLB) advances during the quarter
        ended September 30, 2005 and no prepayment fees were incurred for the quarter
        ended September 30, 2004.
  Net
        income
        for the nine months ended September 30, 2005 increased 21.0% to $9.6 million
        compared with $8.0 million during the comparable period in 2004. Net income
        per
        diluted share was $0.98 for the nine months ended September 30, 2005, compared
        with $0.87 in 2004. The $3.6 million increase in net interest income more
        than
        offset the $2.2 million increase in other expense. Operating results for
        the
        nine months ended September 30, 2004 had only four months of income and expense
        from Issaquah Bancshares.
 
 **Net
        Interest Income**
  Net
        interest
        income increased 9.2% or $785,000 to $9.3 million for the three months ended
        September 30, 2005 compared to $8.6 million for the three months ended September
        30, 2004. Net interest income for the nine months ended September 30, 2005
        and
        2004 was $27.3 million and $23.7 million respectively. Average interest earning
        assets increased $111.0 million or 11.3% to $1.1 billion for the three months
        ended September 30, 2005 and $159.5 million or 17.4% to $1.1 billion for
        the
        nine months ended September 30, 2005 compared to the same periods in 2004.
        Average total loans (including loans held for sale) increased $124.1 million
        to
        $868.3 million and average investment securities decreased $36.0 million
        to
        $220.3 million for the three months September 30, 2005 compared to the same
        quarter of the prior year.
 
 At
                  or for the
              
              At
                  or for thethree
                  months ended
              
              nine
                  months endedSeptember
                  30,
              
              September
                  30,2005
              
              2004
              
              2005
              
              2004(dollars
                  in thousands)Average
                  interest earning assets
              
              $
              1,094,529
              
              $
              983,528
              
              $
              1,076,419
              
              $
              916,902Average
                  interest bearing liabilities
              
              
              974,559
              
              
              878,307
              
              
              961,628
              
              
              821,952Yield
                  on interest earning assets
              
              
              6.33
              %
              
              5.89
              %
              
              6.16
              %
              
              5.85
              %Cost
                  of interest bearing liabilities
              
              
              3.28
              
              
              2.70
              
              
              3.11
              
              
              2.68Net
                  interest spread
              
              
              3.05
              
              
              3.19
              
              
              3.05
              
              
              3.17Net
                  interest margin
              
              
              3.41
              
              
              3.48
              
              
              3.38
              
              
              3.45
  16
 The
          net interest
          margin decreased 7 basis points to 3.41% for the three months ended September
          30, 2005 compared to the same quarter the prior year. The yield on interest
          earning assets increased 44 basis points to 6.33% for the three months
          ended
          September 30, 2005, compared to 5.89% for the three months ended September
          30,
          2004. The cost of funds increased 58 basis points to 3.28% for the three
          months
          ended September 30, 2005 compared to 2.70% for the same period in 2004.
          For the
          nine months ended September 30, 2005, the net interest margin decreased
          7 basis
          points from 3.45% to 3.38%. Despite the decrease in the net interest margin
          compared to 2004, Cascade's net interest margin margin for 2005 has improved
          from 3.34 for the quarter ended March 31, to 3.38 for the quarter ended
          June 30,
          to 3.41 for the quarter ended September 30.
 The
        yield on
        assets increased as the rates rose and loans increased as a percentage of
        earning assets. Funding costs also rose as the cost of liabilities increased
        and
        the rates paid on deposits rose with the general level of interest rates.
        Deposits continued to reprice to higher rates throughout the quarter.
 
 **Provision
        for Loan Losses**
  Cascade’s
        provision for loan losses was $250,000 for the three months and $745,000
        for the
        nine months ended September 30, 2005. The provision was $150,000 and $525,000
        for the same periods in 2004, respectively. The provision is based on the
        size
        and composition of the portfolio, and management’s evaluation of known and
        inherent risks in the portfolio, as well as Cascade’s loss experience. The
        provision was larger in 2005 due to the overall growth in the
        portfolio.
 
 **Other
        Income**
  Other
        income
        increased $326,000 or 26.3% to $1.6 million for the three months ended September
        30, 2005 as compared to $1.2 million for the three months ended September
        30,
        2004. Other income was $4.8 million and $3.6 million for the nine months
        ended
        September 30, 2005 and September 30, 2004 respectively. For the three months
        ended September 30, 2005, checking fee income rose to $801,000 compared to
        $569,000 for the same period in the prior year. The gain on checking fees
        reflected more checking accounts mainly as a result of the HPC program. Gain
        on
        sale of loans increased $186,000 from $55,000 to $241,000 for the three months
        ended September 30, 2005, primarily due to the sale of multifamily loans.
        Other
        service fee income increased $51,000 to $252,000 for the quarter. There was
        no
        gain on the sale of investment securities compared to $129,000 for the same
        quarter in 2004.
 
 While
        the
        Corporation is pursuing many avenues to augment its other (non-interest)
        income,
        it will continue to focus on replacing the gain on sale of securities and
        loans
        with higher service fees and net interest income in the near
        future.
 
 **Other
        Expense**
  Other
        expense
        was $5.7 million for the three months and $17.0 million for the nine months
        ended September 30, 2005 compared with $5.0 million for the three months
        and
        $14.8 million for the nine months ended September 30, 2004. The increase
        in
        other expense was primarily the result of a full quarter of operation of
        a new
        branch and expenses related to the HPC deposit generation program. Further,
        non-interest expense was lower than usual for the quarter ended September
        30,
        2004, as Cascade was able to reverse $235,000 of a termination fee for data
        processing services associated with the acquisition of Issaquah Bancshares
        in
        June 2004.
  17
  Salary
          and employee
          benefit expenses decreased $44,000 to $3.0 million during
          the three months ended September 30, 2005 compared to the same quarter
          last
          year .
          Salary
          and employee benefit expenses were $9.2 million for the nine month period
          ended
          September 30, 2005 and $8.4 million in the same period for 2004. The remaining
          other operating expense categories totaled $2.6 million for the three months
          ended September 30, 2005 and $7.8 million for the nine months period as
          of the
          same date. For the same periods in 2004, other operating expenses, excluding
          merger expenses, were $1.9 million and $6.0 million respectively.
 Federal
          income tax
          expenses increased $103,000 to $1.6 million, an increase of 6.7% during
          the three months ended September 30, 2005 compared to the same period last
          year .
          For the
          three months ended September 30, 2005, the Corporation’s effective tax rate was
          33%. For the nine months ended September 30, 2005, income tax expense was
          $4.7
          million compared to $4.0 million in 2004, with an effective tax rate of
          33%. Tax
          benefits related to bank owned life insurance and interest on tax-exempt
          loans
          accounted for the difference from the “expected” Federal income tax rate of 35%
          during each of the periods.
 
 **Segment
        Results**
  The
        following
        is a summary of selected operating segment information for the three month
        and
        nine month periods ended September 30, 2005 and 2004. The Corporation manages
        its operations and prepares management reports with a primary focus on its
        various business units. The accounting policies of the individual units are
        the
        same as those of the Corporation. The Corporation allocates centrally provided
        services to the business units based upon estimated usage of those services.
        All
        amounts are in thousands.
 
 **For
        the three months ended September 30, 2005**
 Business
                
                Residential
                
                Construction
                
                Income
                  Property
                
                Consumer
                
                Administration/
                  Treasury
                
                Total(dollars
                    in thousands)Condensed
                    Income StatementNet
                    interest income afterprovision
                    for loan losses
                
                $
                3,858
                
                $
                204
                
                $
                2,420
                
                $
                1,718
                
                $
                228
                
                $
                658
                
                $
                9,086Other
                    income
                
                
                16
                
                
                65
                
                
                3
                
                
                231
                
                
                966
                
                
                283
                
                
                1,564Other
                    expense
                
                
                381
                
                
                103
                
                
                94
                
                
                170
                
                
                441
                
                
                4,483
                
                
                5,672Contribution
                    before overhead
                
                
                3,493
                
                
                166
                
                
                2,329
                
                
                1,779
                
                
                753
                
                
                (3,542
                )
                
                4,978Support
                    transfer
                
                
                1,571
                
                
                416
                
                
                572
                
                
                855
                
                
                128
                
                
                (3,542
                )
                
                -Income
                    before provision forincome
                    tax
                
                
                1,922
                
                
                (250
                )
                
                1,757
                
                
                924
                
                
                625
                
                
                -
                
                
                4,978Provision
                    for income tax
                
                
                631
                
                
                (82
                )
                
                577
                
                
                303
                
                
                205
                
                
                
                
                
                1,634Net
                    Income (loss)
                
                $
                1,291
                
                $
                (168
                )
                $
                1,180
                
                $
                621
                
                $
                420
                
                $
                -
                
                $
                3,344
 18
 **For
        the three months ended September 30, 2004**
 Business
                
                Residential
                
                Construction
                
                Income
                  Property
                
                Consumer
                
                Administration/
                  Treasury
                
                Total(dollars
                    in thousands)Condensed
                    Income StatementNet
                    interest income afterprovision
                    for loan losses
                
                $
                3,480
                
                $
                149
                
                $
                1,358
                
                $
                2,181
                
                $
                444
                
                $
                789
                
                $
                8,401Other
                    income
                
                
                31
                
                
                84
                
                
                2
                
                
                -
                
                
                698
                
                
                423
                
                
                1,238Other
                    expense
                
                
                394
                
                
                211
                
                
                110
                
                
                239
                
                
                432
                
                
                3,619
                
                
                5,005Contribution
                    before overhead
                
                
                3,117
                
                
                22
                
                
                1,250
                
                
                1,942
                
                
                710
                
                
                (2,407
                )
                
                4,634Support
                    transfer
                
                
                1,001
                
                
                386
                
                
                344
                
                
                833
                
                
                121
                
                
                (2,685
                )
                
                -Income
                    before provision forincome
                    tax
                
                
                2,116
                
                
                (364
                )
                
                906
                
                
                1,109
                
                
                589
                
                
                278
                
                
                4,634Provision
                    for income tax
                
                
                700
                
                
                (120
                )
                
                299
                
                
                366
                
                
                194
                
                
                92
                
                
                1,531Net
                    Income (loss)
                
                $
                1,416
                
                $
                (244
                )
                $
                607
                
                $
                743
                
                $
                395
                
                $
                186
                
                $
                3,103
 **For
        the nine months ended September 30, 2005**
 Business
                
                Residential
                
                Construction
                
                Income
                  Property
                
                Consumer
                
                Administration/
                  Treasury
                
                Total(dollars
                    in thousands)Condensed
                    Income StatementNet
                    interest income afterprovision
                    for loan losses
                
                $
                11,023
                
                $
                563
                
                $
                5,947
                
                $
                6,145
                
                $
                771
                
                $
                2,067
                
                $
                26,516Other
                    income
                
                
                54
                
                
                205
                
                
                12
                
                
                623
                
                
                2,793
                
                
                1,144
                
                
                4,831Other
                    expense
                
                
                1,150
                
                
                346
                
                
                322
                
                
                698
                
                
                1,357
                
                
                13,128
                
                
                17,001Contribution
                    before overhead
                
                
                9,927
                
                
                422
                
                
                5,637
                
                
                6,070
                
                
                2,207
                
                
                (9,917
                )
                
                14,346Support
                    transfer
                
                
                3,894
                
                
                1,217
                
                
                1,470
                
                
                2,978
                
                
                358
                
                
                (9,917
                )
                
                -Income
                    before provision forincome
                    tax
                
                
                6,033
                
                
                (795
                )
                
                4,167
                
                
                3,092
                
                
                1,849
                
                
                -
                
                
                14,346Provision
                    for income tax
                
                
                1,983
                
                
                (261
                )
                
                1,369
                
                
                1,016
                
                
                609
                
                
                
                
                
                4,716Net
                    Income (loss)
                
                $
                4,050
                
                $
                (534
                )
                $
                2,798
                
                $
                2,076
                
                $
                1,240
                
                $
                -
                
                $
                9,630
  **For
        the nine months ended September 30, 2004**
 Business
                
                Residential
                
                Construction
                
                Income
                  Property
                
                Consumer
                
                Administration/
                  Treasury
                
                Total(dollars
                    in thousands)Condensed
                    Income StatementNet
                    interest income afterprovision
                    for loan losses
                
                $
                8,824
                
                $
                749
                
                $
                3,298
                
                $
                6,064
                
                $
                1,210
                
                $
                3,028
                
                $
                23,173Other
                    income
                
                
                56
                
                
                281
                
                
                5
                
                
                -
                
                
                1,843
                
                
                1,394
                
                
                3,579Other
                    expense
                
                
                1,080
                
                
                534
                
                
                286
                
                
                452
                
                
                1,114
                
                
                11,305
                
                
                14,771Contribution
                    before overhead
                
                
                7,800
                
                
                496
                
                
                3,017
                
                
                5,612
                
                
                1,939
                
                
                (6,883
                )
                
                11,981Support
                    transfer
                
                
                2,381
                
                
                1,054
                
                
                801
                
                
                1,971
                
                
                321
                
                
                (6,528
                )
                
                -Income
                    before provision forincome
                    tax
                
                
                5,419
                
                
                (558
                )
                
                2,216
                
                
                3,641
                
                
                1,618
                
                
                (355
                )
                
                11,981Provision
                    for income tax
                
                
                1,766
                
                
                (184
                )
                
                721
                
                
                1,182
                
                
                526
                
                
                9
                
                
                4,020Net
                    Income (loss)
                
                $
                3,653
                
                $
                (374
                )
                $
                1,495
                
                $
                2,459
                
                $
                1,092
                
                $
                (364
                )
                $
                7,961
  Income
        Property includes Commercial Real Estate and Multifamily lending.
 19
 Interest
                income is assigned based upon the loans held by that line of business.
                Investment income is assigned to Administration. Interest expense
                is allocated
                based upon the Corporation’s cost of funds and the average maturity of the line
                of business’s assets. Overhead is allocated on the basis of average total
                assets.
 
 **Liquidity
        and Sources of Funds**
  The
        Bank
        monitors its liquidity position to assure that it will have adequate resources
        to meet its customer’s needs. Potential uses of funds are new loans; the
        disbursement of construction loans in process; draws on unused business lines
        of
        credit and unused consumer lines of credit; the purchase of investment
        securities; and deposit withdrawals. As of September 30, 2005, Cascade had
        $74.5
        million of construction loans in process, $80.8 million in unused business
        lines
        of credit and $36.1 million in unused consumer lines of credit including
        credit
        cards and $26.0 million in other un-disbursed commitments. Recent history
        indicates construction lines will be funded at 66% of commitments at any
        point
        in time. Historically, the Bank’s business customers use 42% of their lines at
        any given time. About 47% of the home equity lines of credit are drawn upon
        at
        any point in time. Cash flows from operations contribute to liquidity as
        well as
        proceeds from maturities of securities and customer deposits. As indicated
        on
        the Company’s condensed Consolidated Statement of Cash Flows, net cash from
        operating activities for the nine months ended September 30, 2005 contributed
        $13.4 million to liquidity compared to $10.5 million for the nine months
        ended
        September 30, 2004.
  Funding
        needs
        are met through existing liquidity balances, deposit growth, FHLB-Seattle
        advances, and other borrowings, as well as the repayment of existing loans
        and
        the sale of loans. Cascade maintains balances in FHLB deposits, which equaled
        $22.5 million as of September 30, 2005 and $1.3 million at December 31, 2004.
        Liquidity is also provided by the Bank’s unencumbered securities portfolio.
        Securities that could be pledged to secure additional funding at the
        FHLB-Seattle or the repurchase market were $59.4 million at the end of the
        quarter and $46.0 million as of December 31, 2004. Commercial real estate
        loans
        totaling $54.0 million are being used as an alternative source of
        collateral.
  Subject
        to
        the availability of eligible collateral, the Bank’s credit line with the
        FHLB-Seattle is 35% of total assets or up to approximately $415.5 million
        at
        current asset levels, subject to certain requirements. At September 30, 2005,
        the Bank had $241.0 million in advances and an unused line of credit from
        the
        FHLB-Seattle of approximately $174.5 million. The Bank also uses reverse
        repurchase agreements to provide a flexible source of funding. At September
        30,
        2005 the Bank had $20.5 million in reverse repurchase agreements outstanding.
        The Bank also has a total of $33 million in Fed funds lines with its
        correspondent banks and an $18 million line of credit at the Federal Reserve
        Bank of San Francisco, none of which were used during the quarter.
 
 **Capital
        Resources**
  The
        Corporation’s usual main source of capital is the retention of its net income.
        The Corporation also receives capital through the exercise of options granted
        to
        employees and directors. The Corporation permits employees and directors
        to
        tender shares of Cascade’s stock, which they have held for a minimum of six
        months to exercise options.
  20
 At
          its June
          2004 meeting, the Board of Directors authorized a stock repurchase program
          of up
          to 200,000 shares of the Corporation’s stock. As of May 31, 2005, the expiration
          date of the program, 41,791 shares had been repurchased during the year.
          The
          Board of Directors authorized a new stock repurchase program of up to 200,000
          shares of the Corporation’s stock at its May 2005 meeting. As of September 30,
          2005, there were 263 shares repurchased under this program. The repurchase
          program does not obligate the Corporation to acquire any specific number
          of
          shares. The main focus of the program is to attempt to offset the dilution
          created by the exercise of stock options and other stock grants; see Part
          II -
          Other Information, Item 2 - Unregistered Sales of Equity Securities and
          Use of
          Proceeds.
  On
        December
        15, 2004, Cascade Capital Trust II issued $5 million in par value junior
        subordinated debentures. Cascade Capital Trust II is a statutory business
        trust
        created for the exclusive purposes of issuing and selling capital securities
        and
        utilizing sale proceeds to acquire junior subordinated debt issued by Cascade
        Financial Corporation. Accordingly, the junior subordinated debentures are
        the
        sole assets of the Trust, and payments under the junior subordinated debentures
        will be the sole revenues of the Trust. All of the common securities of the
        Trust are owned by the Corporation. On March 1, 2000, Cascade Capital Trust
        I
        issued $10.0 million par value trust preferred securities. The structure
        of
        Cascade Capital Trust I is identical to Cascade Capital Trust II. In keeping
        with the recently adopted FIN 46R, the Corporation’s balance sheet has replaced
“trust preferred securities” with “junior subordinated debentures payable”,
        although there have been no changes in terms of the underlying obligations.
        The
        Trust has been deconsolidated upon adoption of FIN 46R at December 31, 2003
        and
        did not have a significant impact on the Corporation’s financial condition or
        results of operations
 
 **Capital
        Requirements**
  Cascade
        Bank
        is subject to regulatory capital requirements. Cascade Bank is in full
        compliance with all capital requirements established by the FDIC and the
        Washington State Department of Financial Institutions. The Bank’s regulatory
        capital requirements are expressed as a percentage of assets. To be adequately
        capitalized, the Bank must hold capital equal to 4% of its assets and 8%
        of its
        risk-weighted assets. As of September 30, 2005, for the purposes of this
        calculation, the Bank’s average total assets and total risk-weighted assets were
        $1.14 billion and $9.49 million respectively. The related excess capital
        amounts
        as of September 30, 2005 are presented in the following table (dollars in
        thousands):
 Core
                  capital
              
              
              Amount
              
              
              PercentageTier
                  1 (Core) capital
              
              $
              92,514
              
              
              8.14
              %Less:
                  Minimum requirement
              
              
              45,462
              
              
              4.00Excess
              
              $
              47,052
              
              
              4.14
              %Risk-based
                  capital
              
              
              Amount
              
              
              PercentageRisk-based
                  capital
              
              $
              102,595
              
              
              10.81
              %Less:
                  Minimum requirement(1)
              
              
              75,940
              
              
              8.00Excess
              
              $
              26,655
              
              
              2.81
              %(1)Based
                  on risk-weighted assets.
  21
 The
          Federal
          Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) was signed into
          law on December 19, 1991. Among other things, the FDICIA provides the FDIC,
          effective December 19, 1992, with broad powers to take “prompt corrective
          action” to resolve problems of insured depository institutions. The actions the
          FDIC can take depend upon whether the institution in question is “well
          capitalized,”“adequately capitalized,”“undercapitalized,”“significantly
          undercapitalized” or “critically undercapitalized.” Under FDIC guidelines,
          Cascade Bank is a “well capitalized” institution as of September 30, 2005, which
          requires a core capital to assets of at least 6% and a risk-based capital
          to
          assets of at least 10%.
  The
        Corporation, as a bank holding company regulated by the Federal Reserve,
        is also
        subject to capital requirements that are similar to those for Cascade Bank.
        As
        of September 30, 2005, the Corporation is well capitalized under Federal
        Reserve
        guidelines with a Tier 1 ratio of 8.22% and a risk-based ratio of
        10.89%.
  **Item
        3 - Quantitative and Qualitative Disclosures about Market
        Risk**
 
 **ASSET/LIABILITY
        MANAGEMENT**
  The
        Bank,
        like other financial institutions, is subject to fluctuations in interest
        rates
        because its interest-bearing liabilities reprice on different terms than
        its
        interest-earning assets. Cascade actively monitors the inherent interest
        rate
        risk for the potential impact of changes in rates on the Bank.
  The
        Bank uses
        a simulation model as its primary tool to measure its interest rate risk.
        A
        major focus of the Bank’s asset/liability management process is to preserve and
        enhance net interest income in likely interest rate scenarios. Further,
        Cascade’s Board of Directors has enacted policies that establish targets for
        maximum negative impact that changes in interest rates may have on the Bank’s
        net interest income, the fair value of equity and adjusted capital/asset
        ratios
        under certain interest rate shock scenarios. Key assumptions are made to
        evaluate the change to Cascade’s income and capital to changes in interest
        rates. These assumptions, while deemed reasonable by management, are inherently
        uncertain. As a result, the estimated effects of changes in interest rates
        from
        the simulation model could likely be different than actual
        experience.
  Using
        standard interest rate shock (an instantaneous uniform change in interest
        rates
        at all maturities) methodology, as of September 30, 2005, the Bank is within
        all
        the guidelines established by the Board for the changes in net interest income,
        fair value of equity, and the adjusted capital/asset ratios. As of September
        30,
        2005, the Bank’s fair value of equity decreases 20.2% in the up 200 basis point
        scenario and 4.5% in the down 200 basis point scenario, within the established
        guideline of a maximum 30% decline. Using the same methodology, the adjusted
        capital/asset ratio is 8.4% in the up 200 basis point scenario, and 9.5%
        in the
        down 200 basis point scenario, both above the 5% minimum established guideline.
        The net interest income increases 2.8% in the up 200 basis point scenario
        and
        decreases 5.8% in the down 200 basis point scenario, both are within the
        guideline of a 10% decline.
  The
          Bank has
          sought to manage its interest rate exposure through the structure of its
          balance
          sheet. To limit its interest rate risk, the Bank has sought to emphasize
          its
          loan mix toward prime based business and construction loans. In addition
          to
          selling virtually all new 15 and 30 year fixed rate loans, it has begun
          selling
          some of its hybrid ARM residential loans as well.
 22
 The
        Bank
        extends the maturity of its liabilities by offering long-term deposit products
        to customers, and by obtaining longer term FHLB-Seattle advances. As of
        September 30, 2005, $241.0 million ($25 million of which is a 3-month LIBOR
        adjustable) in advances had original maturities greater than one year, none
        had
        original maturities of less than one year. Currently, $38.0 million have
        remaining maturities less than one year. Of the total amount, $205.0 million
        of
        these advances have provisions that allow the FHLB to convert the advance
        to a
        LIBOR based, adjustable rate borrowing. The FHLB would exercise this option
        if
        interest rates rise.
 
 **Item
        4 - Controls and Procedures**
 
 **EVALUATION
        OF DISCLOSURE CONTROLS AND PROCEDURES**
  An
        evaluation
        of the Registrant's disclosure controls and procedures (as defined in section
        13(a) - 14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried
        out under the supervision and with the participation of the Registrant's
        Chief
        Executive Officer, Chief Financial Officer, and several other members of
        the
        registrant's senior management as of September 30, 2005. The Registrant's
        Chief
        Executive Officer and Chief Financial Officer concluded that the Registrant's
        disclosure controls and procedures as then in effect were effective in ensuring
        that the information required to be disclosed by the Registrant in the reports
        it files or submits under the Act is (i) accumulated and communicated to
        the
        Registrant's management (including the Chief Executive Officer and Chief
        Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
        and reported within the time periods specified in the SEC's rules and
        forms.
 
 **CHANGES
        IN INTERNAL CONTROLS**
  In
        the
        quarter ended September 30, 2005, the Registrant did not make any significant
        changes in, nor take any corrective actions regarding, its internal controls,
        or
        other factors that have materially affected or are reasonably likely to
        materially affect these controls.
 
 **DISCLOSURE
        CONTROLS AND INTERNAL CONTROLS**
  Disclosure
        controls are procedures that are designed with the objective of ensuring
        that
        information required to be disclosed in Cascade Financial Corporation’s reports
        filed under the Exchange Act is recorded, processed, summarized, and reported
        within the time periods specified in the Securities and Exchange Commission's
        (SEC) rules and forms. Disclosure controls are also designed with the objective
        of ensuring that such information is accumulated and communicated to management,
        as appropriate to allow timely decisions regarding required disclosure. Internal
        controls are procedures which are designed with the objective of providing
        reasonable assurance regarding the reliability of financial reporting, including
        that (1) transactions are properly authorized; (2) assets are safeguarded
        against unauthorized or improper use; and (3) transactions are properly recorded
        and reported, all to permit the preparation of financial statements in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 23
 **LIMITATIONS
          ON THE EFFECTIVENESS OF CONTROLS**
  Cascade
        Financial
        Corporation’s management does not expect that our disclosure controls or our
        internal controls will prevent all errors and all fraud. A control system,
        no
        matter how well conceived and operated, can provide only reasonable, not
        absolute, assurance that the objectives of the control system are met. Further,
        the design of the control system must reflect the fact that there are resource
        constraints, and the benefits of controls must be considered relative to
        their
        costs. Because of the inherent limitations in all control systems, no evaluation
        of controls can provide absolute assurance that all control issues and instances
        of fraud, if any, within Cascade Financial Corporation have been detected,
        but
        can only provide a reasonable level of assurance. These inherent limitations
        include the realities that judgments in decision-making can be faulty, and
        that
        breakdowns can occur because of simple error or mistake. Additionally, controls
        can be circumvented by the individual acts of some persons, by collusion
        of two
        or more people, or by management override of the control. The design of any
        system of controls also is based in part upon certain assumptions about the
        likelihood of future events, and there can be no assurance that any design
        will
        succeed in achieving its stated goals under all potential future conditions;
        over time, controls may become inadequate because of changes in conditions,
        or
        the degree of compliance with the policies or procedures may deteriorate.
        Because of the inherent limitations in a cost-effective control system,
        misstatements due to error or fraud may occur and not be detected.
  24
 **PART
          II-OTHER INFORMATION**
 
 Item
        1. Legal Proceedings.
  The
        Corporation and the Bank are involved in litigation and have negotiations
        in
        progress resulting from activities arising from normal operations. In the
        opinion of management, none of these matters is likely to have a materially
        adverse effect on the Corporation’s financial position.
 
 Item
        2. Unregistered Sales of Equity Securities and Use of Proceeds.
  Issuer
                  Purchases of Equity Securities**2005
                  PLAN**
              
              Total
                  Number
              
              Maximumof
                  Shares
                Purchased
              
              Number
                  of
                Shares
                  thatPeriod
              
              Total
                Number
              
              Average
                Price
              
              as
                  Part of
                Publicly
              
              May
                  Yet be PurchasedBeginning
              
              Ending
              
              of
                  Shares
                Purchased(1)
              
              Paid
                  per
                Share
              
              Announced
                Plan
              
              Under
                  the
                Plan(2)July
                  1, 2005
              
              
              July
                  31, 2005
              
              
              -
              
              $
              -
              
              
              -
              
              
              200,000August
                  1, 2005
              
              
              August
                  31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              200,000September
                  1, 2005
              
              
              September
                  30, 2005
              
              
              263
              
              
              17.10
              
              
              -
              
              
              200,000Total
              
              
              
              
              
              263
              
              $
              17.10
              
              
              -
              
              
              200,0001)
                  During the period presented, there were 263 shares purchased, which
                  were
                  acquired at current market values as consideration for the exercise
                  of
                  fully vested options.
                
                2)
                  In May, 2005, the Corporation announced a new stock repurchase
                  plan to
                  purchase up to 200,000 shares of the Corporation’s stock. The Plan will
                  expire on May 31, 2006.
 
 Item
        3. Defaults upon Senior Securities.
  Not
        applicable
  Item
        4. Submission of Matters to a Vote of Security Holders.
  Not
        applicable
  Item
        5. Other information.
  Not
        applicable
  Item
        6. Exhibits.
  (a)
        Exhibits
 10.1 Employment
        Agreement
        with Carol K. Nelson dated July 12, 2005
 31.1 Certificationsof
        the
        Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
        Act
 31.2 Certifications
        of the
        Chief Finanial Officer pursuant to Section 302 of the Sarbanes-Oxley
        Act
 32    Certification
        pursuant to Section 906 of the Sarbanes-Oxley Act
 ________________
 1 Incorporated
        by reference to the Corporation’s Form 8-K filed on July 15, 2005.
  25
 (b)
              Reports
                  on Form 8-K
  On
        September 20, 2005, the Corporation filed a Form 8-K reporting the resignation
        of Henry M. Robinett from the Board of Directors of both Cascade Financial
        Corporation and its banking subsidiary, Cascade Bank, effective September
        20,
        2005, under Item 5.02(b) of Form 8-K.
  On
        September 28, 2005, the Corporation filed a Form 8-K reporting an amendment
        to
        Cascade’s Bylaws, under Item 5.03 and 9.01 of Form 8-K.
  On
        October 18, 2005, the Corporation filed a Form 8-K reporting an attached
        press
        release announcing earnings information for the third quarter ended September
        30, 2005, under Items 2.02 and 9.01 of Form 8-K.
  26
 Signatures
  Pursuant
        to
        the requirements of the Securities Exchange Act of 1934, the registrant has
        duly
        caused this report to be signed on its behalf by the undersigned thereunto
        duly
        authorized.
 
 **CASCADE
        FINANCIAL CORPORATION**
 
 November 7, 2005
                /s/ Lars H. JohnsonBy:   
                    Lars H. Johnson,
                  Executive
                    Vice President
                  (Chief
                    Financial Officer)


27