UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549








FORM
10-K





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





For the fiscal year ended December 31,
2007.





OR





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








Commission
file number 0-25286





CASCADE
FINANCIAL CORPORATION


(Exact
name of registrant as specified in its charter)





Washington
            
            91-1661954(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer I.D. Number)2828
      Colby Avenue, Everett, Washington
            
            98201(Address
      of principal executive offices)
            
            (Zip
      Code)Registrant’s
      telephone number, including area code:
            
            (425)
      339-5500Securities
      registered pursuant to Section 12(b) of the Act:
            
            NoneSecurities
      registered pursuant to Section 12(g) of the Act:
            
            Common
      Stock, par value $0.01 per share








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


YES  ̈NO þ




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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  YES þ  NO
 ̈




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




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




Large
Accelerated Filer  ̈                                                Accelerated
Filer þ                                           Non-Accelerated
Filer  ̈




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


YES   ̈     NO
þ









The
aggregate market value of Common Stock held by non-affiliates of registrant at
February 29, 2008 was $152.5 million (based on the last reported sale on such
date). The number of shares of registrant’s Common Stock outstanding at February
29, 2008, was 12,047,927.




DOCUMENTS
INCORPORATED BY REFERENCE





1.
            Portions
      of Annual Report to Stockholders for the year ended December 31, 2007,
      including the Selected Financial Data and the Management Discussion and
      Analysis attached as Exhibit 13 (the “Annual Report”) (Part I, II &
      IV).




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




- 2
-


Cascade
      Financial Corporation


FORM
      10-K


December
      31, 2007





TABLE
      OF CONTENTS








PART
      I
            PageItem
      1.
            Business
            4Item
      1A.
            Risk
      Factors
            25Item
      1B.
            Unresolved
      Staff Comments
            27Item
      2.
            Properties
            27Item
      3.
            Legal
      Proceedings
            27Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            27PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            28Item
      6.
            Selected
      Financial Data
            29Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
            29Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            29Item
      8.
            Financial
      Statements and Supplementary Data
            29Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            30Item
      9A.
            Controls
      and Procedures
            30Item
      9B.
            Other
      Information
            31PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            32Item
      11.
            Executive
      Compensation
            33Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            33Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            33Item
      14.
            Principal
      Accountant Fees and Services
            33PART
      IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            34


- 3
-


FORWARD
LOOKING STATEMENTS




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




The following items are among
the factors that could cause actual results to differ materially from the
forward-looking statements: higher than expected loan delinquency rates; general
economic conditions, including their impact on capital expenditures; business
conditions in the banking industry; recent world events and their impact on
interest rates, businesses and customers; the regulatory environment; new
legislation; vendor quality and efficiency; employee retention factors; rapidly
changing technology and evolving banking industry standards; competitive
standards; competitive factors, including increased competition with community,
regional, and national financial institutions; fluctuating interest rate
environments; and similar matters. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only at the date of the statement. The Corporation undertakes no
obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this report.
Readers should carefully review the risk factors described in this and other
documents the Corporation files from time to time with the Securities and
Exchange Commission.  There can be no assurance that any of the
strategies described in this Form 10-K will be implemented, or if implemented,
achieve the amounts described or within the time periods currently
estimated.  Sentences containing words such as “may,” “will,”
“expect,” “anticipate,” “believe,” “estimate,” “should,” “projected,” or similar
words may constitute such forward-looking statements.




Item
1.  Business





General




Cascade
Financial Corporation (the “Corporation”) is a bank holding company incorporated
in the state of Washington that was formed in 1994.  The consolidated
entity includes the Corporation and its wholly owned subsidiaries.  At
December 31, 2007, the Corporation’s wholly owned subsidiaries were Cascade Bank
(“Cascade” or the “Bank”), Cascade Capital Trust I, II, and III. The executive
offices of the Corporation are located at 2828 Colby Avenue, Everett, Washington
98201.  The telephone number is (425) 339-5500 and the website is
www.cascadebank.com.
Information on the website is not part of this Report.




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




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




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




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




The
Corporation conducts its business from its main office in Everett, Washington,
and nineteen other full-service offices in the greater Puget Sound Region. At
December 31, 2007, the Corporation had total assets of $1.4 billion, total
deposits of $904.9 million and stockholders’ equity of $122.1
million.


- 4
-


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




Market
Area




Headquartered
in Everett, Washington, the Corporation serves its customers from twenty
full-service offices, twelve in Snohomish County and eight in King County. In
2007, the Bank opened a loan production office in Burlington, Washington, in
Skagit County. The Bank will open a full service branch in Burlington in the
second quarter of 2008. Located in the center of the western Washington region,
Snohomish and King counties have experienced significant growth in recent years.
The rebound in commercial aircraft orders and the success of Boeing’s new 787
has helped fuel an increase in economic activity in Snohomish
County.




Our
market area in King County includes the growing cities east of Seattle and Lake
Washington. This area’s economy has been dominated by Microsoft and the Boeing
Company, with other high technology companies also playing an important role.
The housing market has been particularly strong due to population growth in the
region and the lack of affordable housing within Seattle itself.




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




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




Business
Strategy




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




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




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




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




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




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




·
            Searching
      for additional sources of fee-based
revenue.




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




Competition




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




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


- 5
-


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




On the
deposit side, geographic location is still the primary factor in choosing a bank
for the checking account relationship.  As a result, the Bank’s
competition for checking deposits comes primarily from the large institutions
with a broad network of locations.  Online Banking continues to be an
important convenience service to attract checking customers from larger
banks.  In addition, Cascade has made an arrangement with US Bank to
allow customers to use US Bank ATMs without a surcharge.  Community
banks, savings institutions, as well as other non-banking financial
institutions, provide the greatest competition for the various savings vehicles
such as money market deposit accounts and certificates of deposit. Two de novo
banks opened in Everett in the past two years, which has added to an already
intense level of pricing pressure for deposits.




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




LOAN
PORTFOLIO




General.The Bank
originates business, real estate and consumer loans.  Total loans,
which are net of construction loans in process, equaled $1.11 billion at
December 31, 2007. Total loans were adjusted by deferred loan fees and the
allowance for loan losses for a net loan balance of $1.09 billion. At December
31, 2007, $468.5 million or 42.3% of total loans consisted of business banking
loans; $381.8 million or 34.4% were real estate construction loans; $120.4
million or 10.9% of loans consisted of commercial real estate; $27.7 million or
2.5% were consumer loans; $98.4 million or 8.9% of the Bank’s loans consisted of
loans secured by one-to-four family residential properties; and $11.4 million or
1.0% consisted of multifamily loans.  Total loans secured by first
liens on residential real estate were $109.8 million or 9.9% of total
loans.  The Bank sells almost all its 30 year fixed-rate loans and the
vast majority of its 15 year fixed-rate loans in the secondary mortgage
market.  The Bank had non-mandatory forward commitments totaling $0
and $364,000 to sell loans into the secondary market at December 31, 2007, and
December 31, 2006, respectively.  - 6
-


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




At
      December 31,2007
            
            
            2006
            
            
            2005Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in thousands)Type
      of LoanReal
      estate mortgageResidential
      (1)
            
            $
            98,384
            
            
            
            8.88
            %
            
            $
            91,256
            
            
            
            9.03
            %
            
            $
            89,422
            
            
            
            10.15
            %Multifamily
            
            
            11,397
            
            
            
            1.03
            
            
            
            34,719
            
            
            
            3.44
            
            
            
            52,057
            
            
            
            5.91Commercial
      real estate
            
            
            120,421
            
            
            
            10.87
            
            
            
            119,298
            
            
            
            11.81
            
            
            
            141,109
            
            
            
            16.02Construction
      (2)
            
            
            381,810
            
            
            
            34.44
            
            
            
            295,087
            
            
            
            29.20
            
            
            
            171,964
            
            
            
            19.52Business
      banking
            
            
            468,453
            
            
            
            42.28
            
            
            
            442,391
            
            
            
            43.78
            
            
            
            394,034
            
            
            
            44.75Consumer
      (3)
            
            
            27,688
            
            
            
            2.50
            
            
            
            27,686
            
            
            
            2.74
            
            
            
            32,160
            
            
            
            3.65Total
      loans
            
            $
            1,108,153
            
            
            
            100.00
            %
            
            $
            1,010,437
            
            
            
            100.00
            %
            
            $
            880,746
            
            
            
            100.00
            %Less:Deferred
      loan fees, net
            
            
            3,724
            
            
            
            
            
            
            
            3,434
            
            
            
            
            
            
            
            3,443Allowance
      for loan losses
            
            
            11,653
            
            
            
            
            
            
            
            10,988
            
            
            
            
            
            
            
            10,254Total
      loans, net
            
            $
            1,092,776
            
            
            
            
            
            
            $
            996,015
            
            
            
            
            
            
            $
            867,049Type
      of CollateralReal
      estate mortgageOne-to-four
      family (4)
            
            $
            501,762
            
            
            
            45.28
            %
            
            $
            402,415
            
            
            
            39.83
            %
            
            $
            279,652
            
            
            
            31.76
            %Multifamily
            
            
            11,397
            
            
            
            1.03
            
            
            
            34,719
            
            
            
            3.44
            
            
            
            52,057
            
            
            
            5.91Commercial
      real estate
            
            
            120,421
            
            
            
            10.87
            
            
            
            119,298
            
            
            
            11.81
            
            
            
            141,109
            
            
            
            16.02Land
      loans
            
            
            3,984
            
            
            
            0.36
            
            
            
            5,094
            
            
            
            0.50
            
            
            
            6,007
            
            
            
            0.68Other
            
            
            470,589
            
            
            
            42.46
            
            
            
            448,911
            
            
            
            44.42
            
            
            
            401,921
            
            
            
            45.63Total
      loans
            
            $
            1,108,153
            
            
            
            100.00
            %
            
            $
            1,010,437
            
            
            
            100.00
            %
            
            $
            880,746
            
            
            
            100.00
            %Less:Deferred
      loan fees, net
            
            
            3,724
            
            
            
            
            
            
            
            3,434
            
            
            
            
            
            
            
            3,443Allowance
      for loan losses
            
            
            11,653
            
            
            
            
            
            
            
            10,988
            
            
            
            
            
            
            
            10,254Total
      loans, net
            
            $
            1,092,776
            
            
            
            
            
            
            $
            996,015
            
            
            
            
            
            
            $
            867,049At
      December 31,2004
            
            
            2003Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentType
      of Loan
            
            (Dollars in
      thousands)Real
      estate mortgageResidential
      (1)
            
            $
            102,429
            
            
            
            12.70
            %
            
            $
            103,779
            
            
            
            17.99
            %Multifamily
            
            
            92,372
            
            
            
            11.45
            
            
            
            87,212
            
            
            
            15.12Commercial
      real estate
            
            
            178,704
            
            
            
            22.15
            
            
            
            83,856
            
            
            
            14.53Construction
      (2)
            
            
            110,977
            
            
            
            13.76
            
            
            
            64,528
            
            
            
            11.18Business
      banking
            
            
            292,117
            
            
            
            36.21
            
            
            
            204,446
            
            
            
            35.43Consumer
      (3)
            
            
            30,125
            
            
            
            3.73
            
            
            
            33,163
            
            
            
            5.75Total
      loans
            
            $
            806,724
            
            
            
            100.00
            %
            
            $
            576,984
            
            
            
            100.00
            %Less:Deferred
      loan fees, net
            
            
            2,695
            
            
            
            
            
            
            
            2,179Allowance
      for loan losses
            
            
            9,563
            
            
            
            
            
            
            
            7,711Total
      loans, net
            
            $
            794,466
            
            
            
            
            
            
            $
            567,094




- 7
-




At
      December 31,2004
            
            
            2003Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in thousands)Type
      of CollateralReal
      estate mortgageOne-to-four
      family (4)
            
            $
            231,504
            
            
            
            28.70
            %
            
            $
            190,168
            
            
            
            32.96
            %Multifamily
            
            
            92,372
            
            
            
            11.45
            
            
            
            87,212
            
            
            
            15.12Commercial
      real estate
            
            
            178,704
            
            
            
            22.15
            
            
            
            83,856
            
            
            
            14.53Land
      loans
            
            
            3,546
            
            
            
            0.44
            
            
            
            1,786
            
            
            
            0.31Other
            
            
            300,598
            
            
            
            37.26
            
            
            
            213,962
            
            
            
            37.08Total
      loans
            
            $
            806,724
            
            
            
            100.00
            %
            
            $
            576,984
            
            
            
            100.00
            %Less:Deferred
      loan fees, net
            
            
            2,695
            
            
            
            
            
            
            
            2,179Allowance
      for loan losses
            
            
            9,563
            
            
            
            
            
            
            
            7,711Total
      loans, net
            
            $
            794,466
            
            
            
            
            
            
            $
            567,094







(1)      Includes
construction loans converted to permanent loans


(2)      Includes
land loans


(3)      Includes
home equity loans and home equity lines of credit (“HELOC”)


(4)      Includes
residential home equity loans, HELOC’s and construction loans







At
December 31, 2007, deferred fees were $3.7 million and the allowance for loan
losses was $11.7 million.




Business Banking Loans.Business banking loans increased from $442.4 million at December 31,
2006, to $468.5 million at December 31, 2007. Unsecured business banking loans
totaled $25.3 million at December 31, 2007, compared to $22.3 million as of
December 31, 2006. The Bank’s business banking loan portfolio consists primarily
of commercial business loans to small and medium sized businesses operating in
Snohomish and King Counties. These loans are generally secured by real estate,
receivables, equipment, other assets of the business and personal property, and
the personal guarantee of the borrower. These loans typically have variable-rate
terms or fixed-rates with maturities of up to five years. The Bank also offers
secured and unsecured operating Lines of Credit. Business banking loans are
underwritten by the Bank on the basis of the borrower's cash flow, ability to
service debt from earnings, and the underlying collateral value. The borrower is
generally required to provide the Bank with financial statements, tax returns,
current financial information on any and all guarantors, and other reports that
show trends in their financial condition; and to update this information
annually. Business banking loans also include owner occupied real estate loans
with terms comparable to the Bank’s commercial real estate loans. In addition,
as business banking activity increases, the Bank expects to expand its lower
cost deposit franchise through the growth of commercial checking as a source of
funding.




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




Construction
Loans.The Bank originates construction loans to fund the
building of one-to-four family homes either to borrowers as custom construction
loans or to builders as speculative construction loans. Construction loans
generally have maturities of 12-18 months.  The interest rates charged
on construction loans are typically indexed to the prime rate and vary depending
on the characteristics of the loan, particularly the credit risk inherent in the
project and/or the financial strength of the borrower. All construction loans
require approval by various levels of Bank personnel, depending on the size of
the loan. The Bank has increased its construction loan portfolio because these
loans have relatively high margins, floating interest rates and short-term
maturities. At December 31, 2007, and December 31, 2006, the Corporation’s
construction loans were $381.8 million or 34.4% of the total loan portfolio and
$295.1 million or 29.2% of the total loan portfolio, respectively. The
construction loans are net of loans in process of $151.4 million at December 31,
2007, and $99.9


- 8
-
 million
at December 31, 2006. Of the total net construction loans, $367.9 million was to
builders and developers, including $129.0 million for land acquisition and
development.  An additional $9.9 million was to individuals for custom
home construction and $4.0 million was for lot purchases. The Bank’s maximum
outstanding commitment to one builder at December 31, 2007, totaled $20.4
million involving one construction project, which is performing in accordance
with the loan terms.




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




Commercial Real Estate
Loans.Commercial real estate loans totaled $120.4 million or
10.9% of the Bank’s total loans at December 31, 2007, compared to $119.3 million
or 11.8% of the portfolio at December 31, 2006. All commercial real estate loans
are secured by properties in western Washington, mainly in the Puget Sound
Region. Improved property including office buildings and small commercial
business properties, such as strip shopping centers, secure the Bank’s
commercial real estate loans. These loans are primarily adjustable-rate with a
maximum term until reset on the interest rate of five years. At December 31,
2007, the largest commercial real estate loan in the Bank’s portfolio was $6.9
million, which is performing according to its terms.




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




Multifamily Loans.Multifamily loans totaled $11.4 million or 1.0% of the total loan
portfolio at December 31, 2007. The multifamily portfolio is principally
comprised of small to medium-size apartment projects with loan-to-value ratios
usually up to 75%. All new loan originations are in the Puget Sound Region and
have adjustable interest rates.




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




One-to-Four Family Residential
Loans.At December 31, 2007, residential loans totaled $98.4
million or 8.9% of the total loan portfolio. Residential lending consists
primarily of first mortgage loans secured by single-family residential
properties located principally in Snohomish and King Counties. The Bank
originates both fixed-rate and adjustable-rate mortgages (“ARMs”) with
maturities up to 30 years. ARM loans are generally held in the Bank’s
portfolio.  Newly originated ARMs have interest rates that adjust
based on the One Year Constant Maturity Treasury Index after an initial
fixed-rate period. Borrower demand for ARMs versus fixed-rate mortgage loans is
a function of the level of interest rates, the shape of the yield curve, and the
differences between the interest rates and loan fees offered for fixed-rate
mortgage loans and the rates and loan fees for ARMs.




Fixed-rate
residential loans are generally sold and the servicing released to one of the
Bank’s correspondents.  The loans are sold on a “best efforts”
basis.  The Bank no longer packages its loans to sell as
mortgage-backed securities.  The Bank had $129,000 in loans held for
sale at December 31, 2007, and $311,000 in loans held for sale at December 31,
2006. Loans held for sale are not material and therefore the Bank does not
include them as a separate line item on the balance sheet. The Bank has greatly
reduced its emphasis on mortgage banking and mortgage lending in the past five
years.




The
Bank’s conforming residential loans meet the Federal Home Loan Mortgage
Corporation's underwriting standards with respect to credit, borrower debt
ratios and documentation. The Bank’s nonconforming residential loans are those
that do not conform to agency underwriting guidelines, due to the size of the
loan, as a result of credit histories,


- 9
-
 debt-to-income
ratios, reliance on the borrower's stated income, non-owner occupied property,
rural property, or other exceptions from agency guidelines. The Bank does not
offer subprime loans.




Consumer
Loans.The Bank’s consumer loan activities take three forms:
home equity loans or Lines of Credit, installment loans, and Visa card loans.
Home equity loans are secured by a junior lien in priority on the borrower's
home. Such loans may have a combined loan-to-value ratio of up to 90% of the
value of the home securing the loan. Home equity loans are fixed amount loans,
which may have fixed or floating interest rates. Home equity Lines of Credit can
be drawn upon at any time by the customer up to a specific
amount.  These loans are at a floating-rate with a floor on that rate.
The balance outstanding for both types of home equity loans increased to $21.6
million at December 31, 2007, as compared to $21.2 million at December 31, 2006.
At December 31, 2007 and December 31, 2006, the total amount of unused Lines of
Credit were $20.4 million and $24.0 million, respectively.  The second
category of consumer loans are installment loans in which boats, automobiles,
and recreational vehicles serve as collateral.  This portfolio was
$6.1 million at December 31, 2007, as compared to $6.5 million outstanding at
December 31, 2006. Since installment loans are secured by depreciating assets,
any repossessed collateral for a defaulted loan is unlikely to provide an
adequate source of repayment of the outstanding loan balance. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. Consumer loan collections are dependent on the borrower’s
continuing financial ability, and are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy.




The Loan Maturity
Table




The
following table sets forth information at December 31, 2007 regarding the dollar
amount of loans maturing in the Bank’s portfolio based on their contractual
terms to maturity, but does not include scheduled payments or potential
prepayments. Loan balances do not include deferred loan
fees.  Construction loans are net of loans in process.




Due
      in one
              year
      or less
            
            
            Due
      in one
              to
      five years
            
            
            Due
      after
              five
      years
            
            
            Total
            
            
            With
      variable or adjustable rate (for maturities
              of
      more than
              one
      year)
            
            
            With
      fixed rate
              (for
      maturities
              of
      more than
              one
      year)(Dollars
      in thousands)Business
      banking
            
            $
            103,051
            
            
            $
            123,797
            
            
            $
            241,605
            
            
            $
            468,453
            
            
            $
            155,994
            
            
            $
            209,408Construction
            
            
            232,777
            
            
            
            104,527
            
            
            
            44,506
            
            
            
            381,810
            
            
            
            141,575
            
            
            
            7,458Commercial
      real estate
            
            
            3,310
            
            
            
            23,102
            
            
            
            94,009
            
            
            
            120,421
            
            
            
            110,783
            
            
            
            6,328Multifamily
            
            
            —
            
            
            
            3,931
            
            
            
            7,466
            
            
            
            11,397
            
            
            
            7,787
            
            
            
            3,610Consumer
            
            
            1,577
            
            
            
            4,288
            
            
            
            21,823
            
            
            
            27,688
            
            
            
            17,908
            
            
            
            8,203Residential
            
            
            10,951
            
            
            
            951
            
            
            
            86,482
            
            
            
            98,384
            
            
            
            81,279
            
            
            
            6,154




Asset
Quality




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




At
December 31, 2007, the Bank had three land acquisition loans to a single
borrower that were more than 90 days past due and classified substandard,
although the Bank is continuing to accrue interest on these loans because it
expects to eventually collect all principal and interest due. These loans, which
total $11.6 million, are secured by deeds of trust on tracts of land intended to
be used for single family residential developments in Snohomish County,
Washington. The Bank recently had the properties reappraised and based on such


- 10
-
 appraisals,
believes the loans are fully collateralized. The Bank is working with the
borrower to collect these loans, and the borrower has agreed to sell the
properties to third parties; however, there can be no assurance the sales will
close. The Bank's management will continue to carefully monitor these
loans.




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





Delinquencies.A
report containing delinquencies of all loans is reviewed monthly by the Asset
Review Committee and periodically by the Board of
Directors.  Procedures taken with respect to delinquent loans differ
depending on the particular circumstances of each loan.  The Bank’s
general procedures provide that when a loan becomes delinquent, the borrower is
contacted, usually by phone, within 30 days.  When the loan is over 30
days delinquent, the borrower is usually contacted in
writing.  Typically, the Bank will initiate foreclosure or other
corrective action against the borrower when principal and interest become 90
days or more delinquent.  In most cases, interest income is reduced by
the full amount of accrued and uncollected interest on loans once they become 90
days delinquent, go into foreclosure or are otherwise determined to be
uncollectible. Once interest has been paid to date or management considers the
loan fully collectable, it is returned to accrual status.  An
allowance for loss is established when, in the opinion of management, the fair
value less sales costs of the property collateralizing the loan is less than the
outstanding principal and the collectability of the loan’s principal becomes
uncertain. It is intended that the Bank’s allowance for loan losses be adequate
to cover known potential and reasonably estimated unknown losses. At December
31, 2007, and December 31, 2006, the Bank had $1.5 million and $851,000,
respectively, of loans held on a non-accrual basis.




Allowance for Loan
Losses/Nonperforming Loans




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




Management
measures the reasonableness of the allowance for loan losses by utilizing a loan
grading system to determine risk in the loan portfolio and by considering the
results of credit reviews. The loan portfolio is separated by quality and then
by loan type. Loans of acceptable quality are evaluated as a group, by loan
type, with a loss rate assigned to the total loans in each type, but unallocated
to any individual loan. Adversely classified loans in excess of $1.0 million are
individually analyzed to determine an estimated loss amount. A loss rate is also
assigned to these adversely classified loans, but at a higher rate due to the
greater risk of loss.  Past due and impaired loans are actively
managed to minimize the potential loss. Although management has allocated a
portion of the allowance to the loan categories using the method described
above, the adequacy of the allowance must be considered as a whole. Loan
concentrations, quality, terms, and basic underlying assumptions remain
substantially unchanged except that the Bank projects a slow down in the economy
and the pace of financial activity.  - 11
-


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




December
      31,2007
            
            
            
            2006
            
            
            
            2005(Dollars
      in thousands)Nonperforming
      loans:Commercial
      loansBusiness
      banking
            
            $
            1,522
            
            
            
            $
            731
            
            
            
            $
            958Commercial
      real estate
            
            
            —
            
            
            
            
            —
            
            
            
            
            8421,522
            
            
            
            
            731
            
            
            
            
            1,800Residential
            
            
            —
            
            
            
            
            —
            
            
            
            
            187Consumer
      loans
            
            
            1
            
            
            
            
            120
            
            
            
            
            —Total
      nonperforming loans
            
            
            1,523
            
            
            
            
            851
            
            
            
            
            1,987Other
      real estate and repossessed assets
            
            
            —
            
            
            
            
            —
            
            
            
            
            101Total
      nonperforming assets
            
            $
            1,523
            
            
            
            $
            851
            
            
            
            $
            2,088Restructured
      loans
            
            $
            334
            
            
            
            $
            115
            
            
            
            $
            1,467Total
      nonperforming loans to net loans
            
            
            0.14
            
            %
            
            
            0.08
            
            %
            
            
            0.23
            %Total
      nonperforming loans to total assets
            
            
            0.11
            
            
            
            
            0.06
            
            
            
            
            0.16Total
      nonperforming assets to total assets
            
            
            0.11
            
            
            
            
            0.06
            
            
            
            
            0.17




The
Bank’s nonperforming assets at December 31, 2007, consisting of nonperforming
loans and other real estate owned, totaled $1.5 million or 0.11% of total
assets. This is an increase from $851,000 or 0.06% of total assets at December
31, 2006, and a decrease from $2.1 million or 0.17% of total assets at December
31, 2005.




Loans are
generally placed on non-accrual when they become past due over 90 days or when
the collection of interest or principal is considered unlikely.  Loans
past due over 90 or 120 days, that are not on non-accrual status, must be well
secured by tangible collateral and in the process of collection. The Bank does
not return a loan to accrual status until it is brought current with respect to
both principal and interest and future principal and interest payments are no
longer in doubt.




Nonperforming
loans increased to $1.5 million at December 31, 2007, compared to $851,000 at
December 31, 2006, and $2.0 million at December 31, 2005. The increase in
nonperforming loans from December 31, 2006 to December 31, 2007, is due to
increases in nonperforming commercial loans. Management believes that the
allowance for losses on loans is adequate to provide for losses that may be
incurred on nonperforming loans.




Other
real estate owned includes property acquired by the Bank through
foreclosure.  Other real estate is carried at the lower of the
estimated fair value or the principal balance of the foreclosed
loans.  Nonperforming other real estate and repossessed assets was $0
at December 31, 2007, $0 at December 31, 2006, and $101,000 at December 31,
2005.




Interest
income that would have been recognized for the years ended December 31, 2007,
December 31, 2006, and December 31, 2005, had non-accrual loans been current in
accordance with their contractual terms, amounted to $111,249, $27,175, and
$81,500, respectively.


- 12
-


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




(Dollars in
      thousands)
            
            Years
      Ended December 31,2007
            
            
            
            2006
            
            
            
            2005
            
            
            
            2004
            
            
            
            2003Balance
      at beginning of period
            
            $
            10,988
            
            
            $
            10,254
            
            
            $
            9,563
            
            
            $
            7,711
            
            
            $
            6,872Issaquah
      Bank balance at June 2004
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,395
            
            
            
            —Charge-OffsBusiness
      banking
            
            
            288
            
            
            
            47
            
            
            
            1
            
            
            
            310
            
            
            
            295Commercial
      real estate
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            95Residential
            
            
            —
            
            
            
            —
            
            
            
            116
            
            
            
            34
            
            
            
            59Consumer
      and other
            
            
            390
            
            
            
            367
            
            
            
            403
            
            
            
            97
            
            
            
            302Recoveries:
            
            
            (135
            )
            
            
            (148
            )
            
            
            (266
            )
            
            
            (223
            )
            
            
            (315
            )Net
      charge-offs (recoveries):
            
            
            543
            
            
            
            266
            
            
            
            254
            
            
            
            218
            
            
            
            436Provision
      for loan losses
            
            
            1,350
            
            
            
            1,000
            
            
            
            945
            
            
            
            675
            
            
            
            1,275Less
      off-balance sheet commitments
            
            
            142
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Balance
      at end of period
            
            
            11,653
            
            
            
            10,988
            
            
            
            10,254
            
            
            
            9,563
            
            
            
            7,711Average
      total loans outstanding
            
            $
            1,046,093
            
            
            $
            955,692
            
            
            $
            854,684
            
            
            $
            691,372
            
            
            $
            565,453Ratio
      of net charge-offs during the period to average loans
      outstanding
            
            
            0.05
            %
            
            
            0.03
            %
            
            
            0.03
            %
            
            
            0.03
            %
            
            
            0.08
            %Ratio
      of allowance for loan losses to average loans outstanding
            
            
            1.11
            
            
            
            1.15
            
            
            
            1.20
            
            
            
            1.38
            
            
            
            1.36Ratio
      of allowance for loan losses to total loans outstanding
            
            
            1.05
            
            
            
            1.09
            
            
            
            1.16
            
            
            
            1.19
            
            
            
            1.34


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




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




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




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




December
      31,(Dollars
      in thousands)
              
              2007
              
              
              2006
              
              
              2005Amount
              
              
              %
              
              
              Amount
              
              
              %
              
              
              Amount
              
              
              %Business
      banking
              
              $
              3,824
              
              
              
              42.28
              %
              
              $
              7,221
              
              
              
              43.78
              %
              
              $
              5,773
              
              
              
              44.75
              %Commercial
      real estate
              
              
              605
              
              
              
              10.87
              
              
              
              2,159
              
              
              
              11.81
              
              
              
              3,020
              
              
              
              16.02Residential
              
              
              205
              
              
              
              8.88
              
              
              
              255
              
              
              
              9.03
              
              
              
              337
              
              
              
              10.15Multifamily
              
              
              16
              
              
              
              1.03
              
              
              
              271
              
              
              
              3.44
              
              
              
              275
              
              
              
              5.91Real
      estate construction
              
              
              2,050
              
              
              
              34.44
              
              
              
              194
              
              
              
              29.20
              
              
              
              543
              
              
              
              19.52Consumer
      and other
              
              
              326
              
              
              
              2.50
              
              
              
              605
              
              
              
              2.74
              
              
              
              306
              
              
              
              3.65Unallocated
              
              
              4,627
              
              
              
              —
              
              
              
              283
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      allowance for loan losses
              
              $
              11,653
              
              
              
              100.00
              %
              
              $
              10,988
              
              
              
              100.00
              %
              
              $
              10,254
              
              
              
              100.00
              %
  - 13
-


The
provision for loan losses for the year ended December 31, 2007, totaled $1.4
million compared to $1.0 million for the year ended December 31, 2006, and
$945,000 for the year ended December 31, 2005. The increase in the provision for
loan losses for the twelve-month period ended December 31, 2007, was due to the
increase in total loans and net charge-offs. Adversely classified loans
increased to $29.1 million at December 31, 2007, from $9.4 million at December
31, 2006.




ASSET AND LIABILITY
MANAGEMENT ACTIVITIES




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




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




To manage
the rate risk in the investment portfolio, limits have been established on the
final maturity of securities and limits have been initiated on the price
volatility of mortgage-backed securities (“MBS”) (including collateralized
mortgage obligations (“CMO”)). Additionally, the Bank extends the maturities of
its liabilities by offering long-term deposit products to customers, and
obtaining longer term FHLB advances. As of December 31, 2007, all of the $231.0
million in advances had original maturities greater than one year and $229.0
million have remaining maturities greater than one year.




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




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




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




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


- 14
-


Year
      Ended December 31,
            
            
            Year
      Ended December 31,2007
      Compared to Year Ended
              December
      31, 2006
              Increase
      (Decrease) Due to
            
            
            2006
      Compared to Year Ended
              December
      31, 2005
              Increase
      (Decrease) Due to(Dollars
      in thousands)Rate
            
            
            Volume
            
            
            Mix
            
            
            Net
            
            
            Rate
            
            
            Volume
            
            
            Mix
            
            
            NetInterest-earning
      assetsResidential
      loans
            
            $
            406
            
            
            $
            (219
            )
            
            $
            (16
            )
            
            $
            171
            
            
            $
            58
            
            
            $
            (354
            )
            
            $
            (4
            )
            
            $
            (300
            )Multifamily
      loans
            
            
            401
            
            
            
            (1,621
            )
            
            
            (227
            )
            
            
            (1,447
            )
            
            
            111
            
            
            
            (2,110
            )
            
            
            (47
            )
            
            
            (2,046
            )Commercial
      real estate loan
            
            
            268
            
            
            
            (1,781
            )
            
            
            (49
            )
            
            
            (1,562
            )
            
            
            407
            
            
            
            (1,488
            )
            
            
            (55
            )
            
            
            (1,136
            )Construction
      loans
            
            
            21
            
            
            
            10,685
            
            
            
            12
            
            
            
            10,718
            
            
            
            1,915
            
            
            
            6,114
            
            
            
            1,148
            
            
            
            9,177Consumer
      loans
            
            
            16
            
            
            
            (191
            )
            
            
            (1
            )
            
            
            (176
            )
            
            
            192
            
            
            
            (91
            )
            
            
            (7
            )
            
            
            94Business
      banking loans
            
            
            602
            
            
            
            2,107
            
            
            
            41
            
            
            
            2,750
            
            
            
            1,648
            
            
            
            5,670
            
            
            
            399
            
            
            
            7,717Total
      loans
            
            
            1,714
            
            
            
            8,980
            
            
            
            (240
            )
            
            
            10,454
            
            
            
            4,331
            
            
            
            7,741
            
            
            
            1,434
            
            
            
            13,506Securities
      held-for-trading
            
            
            —
            
            
            
            1,884
            
            
            
            —
            
            
            
            1,884Securities
      available-for-sale
            
            
            272
            
            
            
            (2,094
            )
            
            
            (85
            )
            
            
            (1,907
            )
            
            
            486
            
            
            
            614
            
            
            
            53
            
            
            
            1,153Securities
      held-to-maturity
            
            
            380
            
            
            
            (384
            )
            
            
            (32
            )
            
            
            (36
            )
            
            
            87
            
            
            
            167
            
            
            
            2
            
            
            
            256Daily
      interest-earning deposits
            
            
            26
            
            
            
            777
            
            
            
            79
            
            
            
            882
            
            
            
            15
            
            
            
            (71
            )
            
            
            (3
            )
            
            
            (59
            )Total
      net change in income on
              interest-earning
      assets
            
            $
            2,392
            
            
            $
            9,163
            
            
            $
            (278
            )
            
            $
            11,277
            
            
            $
            4,919
            
            
            $
            8,451
            
            
            $
            1,486
            
            
            $
            14,856Interest-bearing
      liabilitiesInterest-bearing
      deposits
            
            $
            4,269
            
            
            $
            2,043
            
            
            $
            332
            
            
            $
            6,644
            
            
            $
            8,905
            
            
            $
            497
            
            
            $
            860
            
            
            $
            10,262FHLB
      advances
            
            
            (420
            )
            
            
            (554
            )
            
            
            21
            
            
            
            (953
            )
            
            
            257
            
            
            
            (92
            )
            
            
            (3
            )
            
            
            162Other
      borrowings
            
            
            435
            
            
            
            1,019
            
            
            
            127
            
            
            
            1,581
            
            
            
            (603
            )
            
            
            3,158
            
            
            
            (987
            )
            
            
            1,568Total
      net change in expenses on
              interest-bearing
      liabilities
            
            $
            4,284
            
            
            $
            2,508
            
            
            $
            480
            
            
            $
            7,272
            
            
            $
            8,559
            
            
            $
            3,563
            
            
            $
            (130
            )
            
            $
            11,992Net
      increase in net interest
              income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            4,005
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,864Year
      Ended December 31,2005
      Compared to Year Ended
              December
      31, 2004
              Increase
      (Decrease) Due to(Dollars
      in thousands)Rate
            
            
            Volume
            
            
            Mix
            
            
            NetInterest-earning
      assetsResidential
      loans
            
            $
            (258
            )
            
            $
            (82
            )
            
            $
            3
            
            
            $
            (337
            )Multifamily
      loans
            
            
            172
            
            
            
            (1,071
            )
            
            
            (31
            )
            
            
            (930
            )Commercial
      real estate loans
            
            
            193
            
            
            
            2,808
            
            
            
            69
            
            
            
            3,070Construction
      loans
            
            
            1,168
            
            
            
            2,854
            
            
            
            598
            
            
            
            4,620Consumer
      loans
            
            
            4
            
            
            
            (47
            )
            
            
            —
            
            
            
            (43
            )Business
      banking loans
            
            
            641
            
            
            
            6,115
            
            
            
            238
            
            
            
            6,994Total
      loans
            
            
            1,920
            
            
            
            10,577
            
            
            
            877
            
            
            
            13,374Securities
      available-for-sale
            
            
            (219
            )
            
            
            (921
            )
            
            
            30
            
            
            
            (1,110
            )Securities
      held-to-maturity
            
            
            (81
            )
            
            
            62
            
            
            
            (1
            )
            
            
            (20
            )Daily
      interest-earning deposits
            
            
            117
            
            
            
            48
            
            
            
            79
            
            
            
            244Total
      net change in income on
              interest-earning
      assets
            
            $
            1,737
            
            
            $
            9,766
            
            
            $
            985
            
            
            $
            12,488Interest-bearing
      liabilitiesInterest-bearing
      deposits
            
            $
            4,538
            
            
            $
            1,853
            
            
            $
            764
            
            
            $
            7,155FHLB
      advances
            
            
            (944
            )
            
            
            1,508
            
            
            
            (134
            )
            
            
            430Other
      borrowings
            
            
            871
            
            
            
            (56
            )
            
            
            (43
            )
            
            
            772Total
      net change in expenses on
              interest-bearing
      liabilities
            
            $
            4,465
            
            
            $
            3,305
            
            
            $
            587
            
            
            $
            8,357Net
      increase in net interest
              income
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            4,131




There was
approximately $420,000 in interest on loans that were 90 days or more past due
and still accruing as of December 31, 2007. There was no interest on loans 90
days or more past due as of December 31, 2006 or 2005.


- 15
-


INVESTMENT
PORTFOLIO




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




Investment
securities decreased 3.1% to $232.0 million at December 31, 2007, from $239.4
million at December 31, 2006. The proceeds from the repayment of securities were
used to fund loan growth. MBS (including CMOs) available-for-sale decreased from
$38.0 million to $25.4 million as of December 31, 2007. Agency notes
available-for-sale also decreased from $93.0 million to $57.4 million. MBS
(including CMOs) held-to-maturity decreased from $25.2 million to $22.5 million
as of December 31, 2007. Agency notes held-to-maturity increased from $70.9
million to $114.0 million for the year ended December 31, 2007.




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




December
      31, 2007
            
            December
      31, 2006
            
            December
      31, 2005Estimated
            
            
            Percent
      of
            
            Estimated
            
            
            Percent
      of
            
            Estimated
            
            
            Percent
      of(Dollars
      in thousands)
            
            Fair
      Value
            
            
            Portfolio
            
            Fair
      Value
            
            
            Portfolio
            
            Fair
      Value
            
            
            PortfolioMBS
            
            $
            25,427
            
            
            
            26.83
            %
            
            $
            37,747
            
            
            
            26.48
            %
            
            $
            47,423
            
            
            
            31.09
            %Agency
      notes
            
            
            57,433
            
            
            
            60.60
            
            
            
            92,909
            
            
            
            65.16
            
            
            
            93,173
            
            
            
            61.09FHLB
      stock
            
            
            11,920
            
            
            
            12.57
            
            
            
            11,920
            
            
            
            8.36
            
            
            
            11,920
            
            
            
            7.82Corporate/other
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            94,780
            
            
            
            100.00
            %
            
            $
            142,576
            
            
            
            100.00
            %
            
            $
            152,516
            
            
            
            100.00
            %







The
following table sets forth the contractual or expected maturities and weighted
average yields of the Bank’s securities available-for-sale at December 31,
2007.




Less
      Than One Year
            
            
            One
      to Five Years
            
            
            Five
      to Ten Years
            
            
            Over
      Ten YearsEstimated
            
            
            
            
            
            Estimated
            
            
            
            
            
            Estimated
            
            
            
            
            
            Estimated(Dollars
      in thousands)
            
            Fair
      Value
            
            
            Yield
            
            
            Fair
      Value
            
            
            Yield
            
            
            Fair
      Value
            
            
            Yield
            
            
            Fair
      Value
            
            
            YieldMBS
            
            $
            —
            
            
            
            —
            %
            
            $
            10,891
            
            
            
            5.02
            %
            
            $
            12,746
            
            
            
            5.73
            %
            
            $
            1,790
            
            
            
            5.48
            %Agency
      notes
            
            
            5,006
            
            
            
            5.24
            
            
            
            21,012
            
            
            
            5.03
            
            
            
            31,360
            
            
            
            5.42
            
            
            
            55
            
            
            
            —FHLB
      stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            11,920
            
            
            
            —Corporate/other
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            5,006
            
            
            
            
            
            
            $
            31,903
            
            
            
            
            
            
            $
            44,106
            
            
            
            
            
            
            $
            13,765







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




December
      31, 2007
              
              
              December
      31, 2006
              
              
              December
      31, 2005Amortized
              
              
              Fair
              
              
              %
      of
              
              
              Amortized
              
              
              Fair
              
              
              %
      of
              
              
              Amortized
              
              
              Fair
              
              
              %
      of(Dollars
      in thousands)
              
              Cost
              
              
              Value
              
              
              Portfolio
              
              
              Cost
              
              
              Value
              
              
              Portfolio
              
              
              Cost
              
              
              Value
              
              
              PortfolioMBS
              
              $
              22,556
              
              
              $
              21,941
              
              
              
              16.44
              %
              
              $
              25,218
              
              
              $
              24,338
              
              
              
              26.04
              %
              
              $
              23,830
              
              
              $
              23,049
              
              
              
              25.05
              %Agency
      notes
              
              
              113,907
              
              
              
              113,579
              
              
              
              83.00
              
              
              
              70,853
              
              
              
              68,423
              
              
              
              73.16
              
              
              
              70,827
              
              
              
              68,606
              
              
              
              74.46Corporate/other
              
              
              775
              
              
              
              775
              
              
              
              00.56
              
              
              
              775
              
              
              
              775
              
              
              
              00.80
              
              
              
              465
              
              
              
              465
              
              
              
              00.49Total
              
              $
              137,238
              
              
              $
              136,295
              
              
              
              100.00
              %
              
              $
              96,846
              
              
              $
              93,536
              
              
              
              100.00
              %
              
              $
              95,122
              
              
              $
              92,120
              
              
              
              100.00
              %
  - 16
-


The
following table sets forth the contractual or expected maturities and weighted
average yields of the Bank’s securities held-to-maturity at December 31,
2007.




Less
      Than One Year
            
            
            One
      to Five Years
            
            
            Five
      to Ten Years
            
            
            Over
      Ten YearsEstimated
            
            
            
            
            
            Estimated
            
            
            
            
            
            Estimated
            
            
            
            
            
            Estimated(Dollars
      in thousands)
            
            Fair
      Value
            
            
            Yield
            
            
            Fair
      Value
            
            
            Yield
            
            
            Fair
      Value
            
            
            Yield
            
            
            Fair
      Value
            
            
            YieldMBS
            
            $
            —
            
            
            
            —
            %
            
            $
            —
            
            
            
            —
            %
            
            $
            —
            
            
            
            —
            %
            
            $
            21,941
            
            
            
            4.91
            %Agency
      notes
            
            
            —
            
            
            
            —
            
            
            
            12,905
            
            
            
            4.35
            
            
            
            32,904
            
            
            
            5.99
            
            
            
            67,770
            
            
            
            6.13Corporate/other
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            775
            
            
            
            —Total
            
            $
            —
            
            
            
            
            
            
            $
            12,905
            
            
            
            
            
            
            $
            32,904
            
            
            
            
            
            
            $
            90,486




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




DEPOSITS




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




Deposits
increased to $904.9 million at December 31, 2007, from $855.4 million at
December 31, 2006, an increase of 5.8% during this period. Deposits at December
31, 2005, were $795.8 million. The market for retail deposits remains fiercely
competitive. Previously, the Bank paid rates at the higher end of the
competitive range of financial institutions in its market area. In an attempt to
lower the absolute and relative cost of funds, the Bank modified its deposit
pricing strategy by pricing its deposits in the middle of that
range.




The
following table sets forth the average balances for each major category of
deposits and the weighted average interest rate paid for deposits during the
years ended December 31, 2006, 2005, and 2004.




Average
      Deposits by TypeDecember
      31, 2007
            
            
            December
      31, 2006
            
            
            December
      31, 2005(Dollars
      in thousands)
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            RateNoninterest-bearing
      demand deposits
            
            $
            87,284
            
            
            
            —
            %
            
            $
            80,457
            
            
            
            —
            %
            
            $
            77,226
            
            
            
            —
            %Interest-bearing
      demand deposits
            
            
            51,021
            
            
            
            1.46
            
            
            
            45,039
            
            
            
            1.46
            
            
            
            39,618
            
            
            
            0.62Money
      market deposit
            
            
            284,843
            
            
            
            4.32
            
            
            
            229,788
            
            
            
            3.70
            
            
            
            170,641
            
            
            
            1.91Savings
            
            
            13,261
            
            
            
            0.50
            
            
            
            14,748
            
            
            
            0.51
            
            
            
            15,465
            
            
            
            0.44Time
      certificates
            
            
            444,726
            
            
            
            4.97
            
            
            
            446,437
            
            
            
            4.33
            
            
            
            467,388
            
            
            
            3.16$
            881,135
            
            
            
            
            
            
            $
            816,469
            
            
            
            
            
            
            $
            770,338







The
following table indicates the amount of the Bank’s jumbo certificates of deposit
by time remaining until maturity at December 31, 2007. Jumbo certificates of
deposit require minimum deposits of $100,000 and rates paid on such accounts are
negotiable.




Maturity
      Period
            
            Jumbo
      Certificates of Deposit(Dollars
      in thousands)Three
      months or less
            
            $
            148,270Over
      three through six months
            
            
            46,605Over
      six through twelve months
            
            
            55,135Over
      twelve months
            
            
            21,469Total
            
            $
            271,479




The flow
of deposits is influenced significantly by general economic conditions, changes
in the money market and prevailing interest rates. In addition, there is strong
competition for customer dollars from other financial institutions, mutual funds
and non-bank corporations, such as securities brokerage companies and other
diversified companies.  The Bank’s deposits are obtained primarily
from the areas in which its branches are located.  The Bank relies
primarily on customer service and longstanding relationships with customers to
attract


- 17
-
 and
retain these deposits. In the coming year, the Bank will focus on its deposit
gathering activities, especially the growth in demand deposits through its High
Performance Checking program. In January 2007 the Bank launched its Business
High Performance Checking Program to accelerate deposit growth. In the event the
Bank were liquidated, certain depositors would be entitled to full payment of
their deposit accounts prior to any payment being made to the
shareholders.




BORROWINGS




The Bank
relies on advances from the Federal Home Loan Bank of Seattle (FHLB-Seattle) to
supplement its supply of funds and to meet deposit withdrawal requirements.
Advances from the FHLB-Seattle are typically secured by the Bank’s first
mortgage residential loans, investment securities and other eligible mortgages
secured by real estate.FHLB advances were
$231.0 million at December 31, 2007, compared to $243.0 million at December 31,
2006, a 4.9% decrease. FHLB advances were $236.0 million at December 31,
2005.




The Bank
enters into repurchase agreements with its authorized dealers. Repurchase
agreements are accounted for as borrowings by the Bank and are secured by
designated investments, primarily the notes of federal agencies and
mortgage-backed securities guaranteed by those agencies. The proceeds of these
transactions are used to meet the cash flow and interest rate risk management
needs of the Bank.  Repurchase agreements increased to $120.6 million
at December 31, 2007, from $95.7 million at December 31, 2006.




Cascade
Bank has established Fed funds borrowing lines with three of its correspondent
banks. Cascade used each of these lines during the year. The Bank also opened a
line of credit with the Federal Reserve Bank of San Francisco. As of December
31, 2007, there were no outstanding balances in any of these lines.




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




December
      31,2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)Weighted
      average rate on:Securities
      sold under agreements to repurchase
            
            
            3.36
            %
            
            
            1.49
            %
            
            
            2.35
            %FHLB
      advances
            
            
            4.27
            
            
            
            4.76
            
            
            
            4.42Year
      ended December 31,2007
            
            
            2006
            
            
            2005Maximum
      amount of borrowings outstanding at any month end:Securities
      sold under agreements to repurchase
            
            $
            120,625
            
            
            $
            96,007
            
            
            $
            51,058FHLB
      advances
            
            
            264,790
            
            
            
            256,000
            
            
            
            251,000Approximate
      average borrowings outstanding with respect to:Securities
      sold under agreements to repurchase
            
            $
            107,516
            
            
            $
            81,284
            
            
            $
            24,051FHLB
      advances
            
            
            226,124
            
            
            
            237,888
            
            
            
            239,896Approximate
      weighted average rate paid on:Other
      interest-bearing liabilities*
            
            
            3.77
            %
            
            
            3.36
            %
            
            
            4.89
            %FHLB
      advances
            
            
            4.53
            
            
            
            4.71
            
            
            
            4.60*
      Including Trust Preferred Securities.







Junior Subordinated Debentures
Payable (Trust Preferred Securities).On March 1, 2000, $10.3
million of 11% Capital Securities due March 1, 2030, were issued by a wholly
owned business Trust whose common equity is 100% owned by Cascade Financial
Corporation. The Trust exists for the exclusive purposes of issuing and selling
the capital securities, using the proceeds from the sale of the capital
securities to acquire junior subordinated debentures issued by Cascade Financial
Corporation, and engaging in only those other activities necessary, advisable,
or incidental to the above. The Corporation used the proceeds for general
corporate purposes including stock repurchases and investment in its subsidiary
bank.  At December 31, 2003, as a result of the adoption of FIN 46R,
the Trust was deconsolidated and all periods in the consolidated financial
statements have been restated to reflect this change. The $10.3 million of
junior subordinated debentures issued by the Corporation to the Trust were
reflected as junior subordinated debentures payable in the consolidated balance
sheet at December 31, 2004. The Trust will redeem the trust preferred securities
when the junior subordinated debentures are paid at maturity or upon any earlier
redemption of the junior subordinated debentures.


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





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





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





Subsidiary
Activity




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




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




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




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




Personnel




At
December 31, 2007, the Corporation had 211 full-time equivalent
employees.  The Corporation believes that employees play a vital role
in the success of a service company and that the Corporation’s relationship with
its employees is good.  The employees are not represented by a
collective bargaining unit.




REGULATION




Introduction/General




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




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


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The
Corporation




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




Bank Holding Company
Regulation.In general, the BHCA limits bank holding company
business to owning or controlling banks and engaging in other banking-related
activities. Bank holding companies must obtain the FRB's approval before they:
(1) acquire direct or indirect ownership or control of any voting shares of any
bank that results in total ownership or control, directly or indirectly, of more
than 5 percent of the voting shares of such bank; (2) merge or consolidate with
another bank holding company; or (3) acquire substantially all of the assets of
any additional banks. Subject to certain state laws, such as age and contingency
restrictions, a bank holding company that is adequately capitalized and
adequately managed may acquire the assets of both in-state and out-of-state
banks. With certain exceptions, the BHCA prohibits bank holding companies from
acquiring direct or indirect ownership or control of voting shares in any
company that is not a bank or a bank holding company unless the FRB determines
that the activities of such company are incidental or closely related to the
business of banking. If a bank holding company is well-capitalized and meets
certain criteria specified by the FRB, it may engage de novo in certain
permissible non-banking activities without prior FRB approval.




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




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




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




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




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




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


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




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




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




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




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




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




Cascade
Bank




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




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


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Standards for Safety and
Soundness.  The federal banking regulatory agencies have
prescribed, by regulation, standards for all insured depository institutions and
depository institution holding companies relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth;
(vi) asset quality; (vii) earnings; and (viii) compensation, fees and
benefits (“Guidelines”).  The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired.  If a federal banking agency determines that a financial
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the bank to submit to the agency an acceptable plan to achieve
compliance with the standard.  Management is not aware of any
conditions relating to these safety and soundness standards which would require
the submission of a plan of compliance.




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




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




Loans to One
Borrower.  Cascade Bank is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans to one borrower
to 20% of unimpaired capital and surplus. At December 31, 2007, the Bank had no
borrowers with balances in excess of the loans-to-one-borrower
limit.




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




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


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Dividends.  The
principal source of the Corporation's revenue is dividends received from Cascade
Bank. The payment of dividends is subject to government regulation, in that
regulatory authorities may prohibit banks and bank holding companies from paying
dividends that would constitute an unsafe or unsound banking practice. In
addition, a bank may not pay cash dividends if that payment could reduce the
amount of its capital below that necessary to meet minimum applicable regulatory
capital requirements. Other than the laws and regulations noted above, which
apply to all banks and bank holding companies, neither the Corporation nor
Cascade Bank is currently subject to any regulatory restrictions on its
dividends.




Capital
Adequacy.  Federal bank regulatory agencies use capital
adequacy guidelines in the examination and regulation of bank holding companies
and banks. If capital falls below minimum guideline levels, the holding company
or bank may be denied approval to acquire or establish additional banks or
non-bank businesses or to open new facilities. The FDIC and FRB use risk-based
capital guidelines for banks and bank holding companies. These are designed to
make such capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the FRB has noted that bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of the
minimum. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier I capital. Tier I capital for
bank holding companies includes common shareholders' equity, certain qualifying
perpetual preferred stock and minority interests in equity accounts of
consolidated subsidiaries, less intangibles. At December 31, 2007, the
Corporation had Tier 1 capital equal to $122.4 million or 8.90% of average total
assets, which is $67.3 million above the minimum leverage requirement of 4% as
in effect on that date.




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




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




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




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




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




On
December 31, 2007, the Bank had total risk-based capital of approximately $135.3
million, including $123.5 million in Tier I capital and $11.8 million in
qualifying supplementary capital (the allowance for loan losses), and
risk-weighted assets of $1.24 billion, or total capital of 10.91% of
risk-weighted assets. This amount was $36.1 million above the 8% requirement in
effect on that date.


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




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




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




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




At
December 31, 2007, Cascade was a “well-capitalized” institution under the prompt
corrective action regulations of the FDIC and the Federal Reserve
Board.




TAXATION




Federal
Taxation




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




Tax Bad Debt
Reserves




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




Distributions




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


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Dividends-Received Deduction
and Other Matters




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




Washington
Tax




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




Availability of
Filings




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




1) Annual
Reports on Form 10-K; and















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




Item 1A.  Risk
Factors




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


Credit
Risk





Credit
risk, the possibility that our borrowers will be unwilling or unable to repay
their obligations when due, is the most important risk in that credit losses
will most likely have the most profound impact on the bank’s earnings and
financial health.   The ability of our customers to repay their
obligations will be impacted by the general economic conditions impacting our
market area and factors specific to the borrowers’ businesses, as well as the
underlying financial strength of the borrower and any other
guarantors.





While the
Bank has successfully lent on commercial real estate in the Puget Sound Area of
Washington state for a number of years, it is exposed to credit losses if that
market experiences a significant and prolonged downturn.





Interest Rate
Risk





The Bank
is subject to fluctuations in interest rates in that its interest-bearing
liabilities reprice on different terms than its interest-earning assets. Such
asymmetrical changes can have a major impact on the Bank’s net interest income,
which is its primary source of earnings.


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The Bank
measures, monitors, and manages interest rates through a variety of tools
including simulation modeling. There is a risk that the Bank’s efforts will not
effectively capture the asset/liability relationships and thereby not
effectively mitigate changes in interest rates on the Bank’s
income.





Further,
the Bank has used derivatives, including interest rate swaps, in the management
of interest rate risk. However, given the complicated nature of the accounting
for derivatives, such instruments may lead to volatility in GAAP earnings even
when successfully hedging the Bank’s balance sheet from changes in
rates.





Liquidity
Risk





As a
financial intermediary, the Bank must have adequate liquidity (cash and/or
borrowing capacity) to meet its customers’ needs for loans and conversely, have
adequate funds to meet any demands for their deposits.  Inadequate
liquidity could lead to a loss of business and revenue if the Bank were
precluded from pursuing potential borrowers due to a lack of lendable
funds.


The Bank
establishes guidelines as to various measures of liquidity, including the
sources and uses of funds, eligible collateral for pledging for secured
borrowings, and the ability to borrow against its FHLB Line of Credit. However,
the inability to tap these sources of funds, for whatever reason, would have a
profoundly negative effect on the Bank’s ability to meet its customer’s
needs.





Transaction
Risk





The Bank
is in the business of processing financial transactions for its customers. In
the course of that business, it may be subject to fraud, embezzlement, or even
honest mistakes in processing transactions.  Such incidents expose the
Bank to financial loss. In addition, improper processing of transactions could
lead to regulatory sanctions and have a negative impact on Cascade’s reputation
and relationships with its customers.





Compliance/Regulatory
Risk





As a
commercial bank, Cascade is subject to extensive examination and regulation at
both the bank and holding company level. Failure to comply with any of the
relevant statutes and regulations could lead to severe restrictions on our
ability to conduct business and/or lead to material fines and penalties. The
level of regulation has increased dramatically in recent years due to the Bank
Secrecy Act and the privacy requirements of Gramm-Leach-Bliley Act. Assuring
that the Bank has adequate resources to meet its new regulatory requirements
could increase the Bank’s operating expenses.





Strategic
Risk





Financial
services, in general, and banking, in particular, are mature, highly competitive
businesses. There is fierce competition for both loans and deposits from a wide
array of providers.  Many providers are seeking to penetrate the
Bank’s existing market. The result has been margin compression as the relative
price of lending has been pushed down and the relative price of deposits has
been bid up.





Reputation
Risk





As a
provider of services to the public, the reputation of the Bank for competence,
honesty, and integrity is of great importance. The loss of that reputation
through poor customer service, misfeasance or malfeasance on the part of the
Bank’s staff could have a profoundly negative impact on Cascade’s ability to
successfully implement its business plan.





Business Continuity
Risk





Like all
businesses, Cascade is exposed to earthquakes, floods, and other natural or
man-made disasters that can cause an interruption in its operations. The Bank
has established a Business Continuity Plan to guide the restoration of business
process departments in similar disruptions and tests the Plan on an annual
basis. However, a major event could have a material impact on the Bank’s
business and its earnings.





The Bank
also runs the risk that it is not adequately insured against such events. Again,
a lack of insurance or being under-insured would have an impact on the Bank’s
profitability.


- 26
-


Item
1B.  Unresolved Staff Comments




None




Item
2.  Properties




The
Corporation owns eight full service branch locations and leases twelve full
service locations. Owned offices range in size from 3,500 to 52,000 square feet
and have a total net book value at December 31, 2007, including leasehold
improvements, furniture and fixtures, of $14.2 million. The Corporation leases
approximately 5% of its main office, approximately 25% of its Marysville office,
and 50% of its Issaquah West office to non-affiliated parties.  See
Note 5 of the Notes to the Consolidated Financial Statements contained in the
Annual Report which is listed in Item 15.




Item 3.  Legal
Proceedings




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




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




None.  - 27
-


PART
II




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





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






Quarter
      Ended
            
            High
            
            
            LowMarch
      31, 2006
            
            $
            15.38
            
            
            $
            14.00June
      30, 2006
            
            
            16.20
            
            
            
            14.56September
      30, 2006
            
            
            16.55
            
            
            
            15.00December
      31, 2006
            
            
            17.85
            
            
            
            16.00March
      31, 2007
            
            $
            18.25
            
            
            $
            16.61June
      30, 2007
            
            
            17.54
            
            
            
            15.65September
      30, 2007
            
            
            16.75
            
            
            
            14.33December
      31, 2007
            
            
            16.32
            
            
            
            12.80





(b)
            Cascade
      Financial Corporation has only one class of stock outstanding, which is
      common stock.  At December 31, 2007, there were 12,023,685
      shares outstanding which were held of record by approximately 2,400
      shareholders.





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





Quarter
      Ended
            
            Dividend
      Declared
            
            Record
      Date
            Payment
      DateSeptember
      2007
            
            $
            0.090
            
            10/10/07
            10/24/07June
      2007
            
            
            0.080
            
            7/11/07
            7/25/07March
      2007
            
            
            0.080
            
            4/11/07
            4/25/07December
      2006
            
            
            0.080
            
            1/11/07
            1/25/07





September
      2006
            
            $
            0.080
            
            10/11/06
            10/25/06June
      2006
            
            
            0.075
            
            07/12/06
            07/26/06March
      2006
            
            
            0.072
            
            04/12/06
            04/26/06December
      2005
            
            
            0.072
            
            01/12/06
            01/26/06





Issuer Purchases of Equity
      Securities2007 PLAN
            
            
            Total
              Number
            
            
            Maximum
              Numberof Shares
      Purchased
            
            
            of
      Shares
              that
      mayPeriod
            
            Total
              Number
            
            
            Average
              Price
            
            
            as
      Part of
              Publicly
            
            
            Yet
      be
              PurchasedBeginning
            Ending
            
            of Shares
      Purchased
            
            
            Paid
              per
      Share
            
            
            Announced
              Plan
            
            
            Under
              the
      Plan (2)June
      1, 2007
            June
      30, 2007
            
            
            24,918
            
            
            $
            16.00
            
            
            
            24,918
            
            
            
            350,082July
      1, 2007
            July
      31, 2007
            
            
            21,375
            
            
            
            15.98
            
            
            
            21,375
            
            
            
            328,707August
      1, 2007
            August
      31, 2007
            
            
            6,000
            
            
            
            15.08
            
            
            
            6,000
            
            
            
            322,707September
      1, 2007
            September
      30, 2007
            
            
            4,880
            (1)
            
            
            16.14
            
            
            
            —
            
            
            
            322,707October
      1, 2007
            October
      31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            322,707November
      1, 2007
            November
      30, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            322,707December
      1, 2007
            December
      31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            322,707Total
            
            
            
            57,173
            
            
            $
            15.80
            
            
            
            52,293
            
            
            
            322,7071) During
      the period presented there were 4,880 shares purchased, which were
      acquired at current market values as consideration for the exercise of
      fully vested options.2) In
      May 2007, the Corporation announced a new stock repurchase plan to
      purchase up to 375,000 shares of the Corporation’s stock. The Plan
      will expire on May 31, 2008.




- 28
-


Shareholder Return
Performance Graph




The
following graph compares the Company's cumulative shareholder return on its
common stock with the return on the NASDAQ Composite Index and a peer group of
the NASDAQ's OTC Bank Index. Total return assumes (i) the reinvestment of all
dividends and (ii) the value of the investment in the Company's common stock and
each index was $100 at the close of trading on December 31, 2002.











12/31/02
            12/31/03
            12/31/04
            12/31/05
            12/31/06
            12/31/07Cascade
      Financial Corporation
            100.00
            202.89
            196.82
            185.82
            223.38
            177.97NASDAQ
      Composite Index
            100.00
            149.95
            162.80
            165.07
            180.79
            198.52NASDAQ
      Bank Index
            100.00
            129.54
            143.78
            137.55
            153.31
            118.99





*Assumes that the value of the
investment in the Company’s common stock and each index was $100 on December 31,
2002.





Item 6.  Selected
Financial Data




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




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




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




Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk




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




Item 8.  Financial
Statements and Supplementary Data




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


- 29
-


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




None.




Item 9A.  Controls
and Procedures




(a)
            Evaluation
      of Disclosure Controls and Procedures:  An evaluation of the
      Corporation's disclosure controls and procedures (as defined in section
      13(a) - 14(c) of the Securities Exchange Act of 1934 (the "Act")) was
      carried out under the supervision and with the participation of the
      Corporation's Chief Executive Officer, Chief Financial Officer and several
      other members of the Corporation's senior management effective December
      31, 2007. The Corporation's Chief Executive Officer and Chief Financial
      Officer concluded that the Corporation's disclosure controls and
      procedures as currently in effect are effective in ensuring that the
      information required to be disclosed by the Corporation in the reports it
      files or submits under the Act is (i) accumulated and communicated to the
      Corporation's management (including the Chief Executive Officer and Chief
      Financial Officer) in a timely manner, and (ii) recorded, processed,
      summarized and reported within the time periods specified in the Security
      and Exchange Commission’s (“the SEC’s”) rules and
  forms.





(b)
            Changes
      in Internal Controls: In the year ended December 31, 2007, the Corporation
      did not make any significant changes in, nor take any corrective actions
      regarding, its internal controls or other factors that could significantly
      affect these controls.





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





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





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





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


- 30
-


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





Management
assessed the Corporation’s internal control over financial reporting presented
in conformity with both U.S. generally accepted accounting principles and call
report instructions as of December 31, 2007. This assessment was based on
criteria for effective internal control over financial reporting described in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that, as of
December 31, 2007, the Corporation maintained effective internal control over
financial reporting presented in conformity with both accounting principles
generally accepted in the United States of America and call report
instructions.  Management also believes that there was satisfactory
compliance during 2007 with the designated laws and regulations.





The
Company’s registered public accounting firm has audited the Company’s
consolidated financial statements as of and for the year ended December 31,
2007 that are included in this annual report and issued their Report of
Independent Registered Public Accounting Firm, listed in Item 15, which includes
an attestation report on the Company’s internal control over financial
reporting. The attestation report expresses an unqualified opinion on the
effectiveness of the Company’s internal controls over financial reporting as of
December 31, 2007.





Item 9B.  Other
Information




None.  - 31
-


PART
III




Item
10.  Directors, Executive Officers and Corporate
Governance




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




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




Name
            Age
      (a)
            PositionCarol
      K. Nelson (b)
            51
            President,
      Chief Executive Officer and Director of Cascade Bank and Cascade Financial
      CorporationRobert
      G. Disotell
            53
            Executive
      Vice President, Chief Credit OfficerSteven
      R. Erickson(b)
            52
            Executive
      Vice President, Real Estate LendingLars
      H. Johnson(b)
            54
            Executive
      Vice President, Chief Financial OfficerLeAnne
      M. Harrington
            38
            Executive
      Vice President, Chief Administrative OfficerRobert
      F. Wojcik
            58
            Executive
      Vice President, Business BankingDebbie
      E. McLeod
            42
            Executive
      Vice President, Retail Banking





(a)      At
December 31, 2007.


(b)      Officer
of the Corporation and Bank.




The
principal occupation of each executive officer of the Corporation and the Bank
is set forth in the Proxy Statement or below. There are no family relationships
among or between the executive officers listed above.
  CAROL K.
NELSON was appointed Chief Executive Officer of the Company commencing May 1,
2002.  She has served as President of the Company and President and
Chief Executive Officer of the Bank since February 2001.  She was
previously Senior Vice President and Northern Region Executive of Bank of
America from 1996 to 2001.  Ms. Nelson holds a Bachelor’s degree in
Business Finance and a Master’s degree in Business Administration from Seattle
University.  Ms. Nelson serves on the Board of Directors of the
Seattle Branch of the Federal Reserve Bank of San Francisco, the Washington
Roundtable, the Washington State Major League Baseball Stadium Public Facilities
District, Premera Blue Cross and the Washington Bankers Association were she
recently concluded a successful year as 2007 chair.  She also serves
as a Trustee for Seattle University.  In 2007, Ms. Nelson was
appointed to chair the Governor’s Task Force on Homeowner
Security.  Ms. Nelson serves as Vice Chair of the Company’s Executive
Committee and as a member of the Bank’s Loan Committee.  She is a
resident of Edmonds, Washington.


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




STEVEN R.
ERICKSON is the Executive Vice President of Real Estate Lending for the Bank, a
position held since November 1992. He is responsible for managing commercial and
income property lending and serves as the Assistant Secretary for the
Corporation. Mr. Erickson joined Cascade in 1978. He is a member of the Board
for Big Brothers and Big Sisters of Snohomish County, Advisory Board Member for
Snohomish County’s Pre-Diversion Program, and Trustee of the Boys and Girls Club
of Snohomish County.  He is a resident of Marysville,
Washington.


- 32
-


LARS H.
JOHNSON is the Executive Vice President, Chief Financial Officer of the Bank and
Corporation and also serves as the corporate secretary.  Mr. Johnson
joined Cascade in April 2000.  Mr. Johnson has 32 years of financial
management experience, including 16 years with the Federal Home Loan Bank of
Seattle. He serves as Treasurer of the Downtown Everett Association. Mr. Johnson
is a resident of Edmonds, Washington.


LEANNE M.
HARRINGTON is the Executive Vice President and Chief Administrative Officer for
the Bank.  She has 21 years of consumer banking experience starting
with Rainier Bank and Bank of America, where she served as Vice President and
Region Service Manager. Ms. Harrington joined Cascade in February 2001. She is a
2006 graduate of Pacific Coast Banking School and a member of the Board for the
Snohomish County Red Cross. Ms. Harrington is a resident of Everett,
Washington.




ROBERT F.
WOJCIK is the Executive Vice President of Business Banking for the Bank,
responsible for managing business relationships consisting of business loans,
business deposits, Lines of Credit, owner occupied commercial real estate and
other business services.  Mr. Wojcik joined Cascade Bank in August
2004.  He has 28 years of commercial banking experience, recently
retiring from Bank of America after 25 years in commercial banking. Mr. Wojcik
is a member of the Board for the Snohomish County Junior Achievement and a
Trustee for the Snohomish County YMCA. He has been involved in numerous other
community organizations as a board member, coach and volunteer. Mr. Wojcik
resides in Lake Stevens, Washington.




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




Item
11.  Executive Compensation




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




Item 12.  Security
Ownership of Certain Beneficial Owners and Management


(a)
            Security
      Ownership of Certain Beneficial OwnersInformation required
      by this Item is incorporated herein by reference to the section
      captioned “Security Ownership of Certain Beneficial Owners and
      Management” in the Proxy Statement.(b)
            Security
      Ownership of ManagementThe
      information required by this Item is incorporated herein by reference to
      the section captioned “Security Ownership of Certain Beneficial
      Owners and Management” of the Proxy Statement.(c)
            Changes
      in ControlThe
      Corporation is not aware of any arrangements, including any pledge by any
      person of securities of the Corporation, the operation of which may at a
      subsequent date result in a change in control of the
      Corporation.






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




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




Item
14.  Principal Accountant Fees and Services




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


- 33
-


PART
IV




Item
15.  Exhibits, Financial Statement Schedules





(a)
            (1)(2)
            Reports
      of Independent Registered Public Accounting FirmConsolidated
      Financial Statements(a)
            Consolidated
      Balance Sheets at December 31, 2007, and December 31, 2006.(b)
            Consolidated
      Statements of Income for the years ended December 31, 2007, 2006 and
      2005.


(c)
            Consolidated
      Statements of Stockholders’ Equity and Comprehensive Income for the years
      ended December 31, 2007, 2006 and
2005.


(d)
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2006 and
      2005.(e)
            Notes
      to Consolidated Financial Statements.





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










(3)
            Exhibits3.1
      (i)
            Certificate
      of Incorporation of Cascade Financial Corporation (Incorporated by
      reference to the Corporation’s Proxy statement on Form S-4 (File No.
      33-83200)).3.2
      (ii)
            Bylaws
      of Cascade Financial Corporation (Incorporated by reference to the
      Corporation’s Registration Statement on Form S-4 (File No.
      33-83200)).3.3
      (ii)
            Amendment
      to the Bylaws of Cascade Financial Corporation (Incorporated by reference
      to the Corporation’s Form 8-K filed September 27, 2005 (File No.
      0-25286)).10.1
            Cascade
      Financial Corporation 1994 Employee Stock Purchase Plan (Incorporated by
      reference to the Corporation’s Registration Statement on Form S-4 (File
      No. 33-83200)).


10.2
            Cascade
      Financial Corporation 1992 Stock Option and Incentive Plan (Incorporated
      by reference to the Corporation’s Form 10-KSB for the period ending June
      30, 1995).


10.3
            Cascade
      Financial Corporation Employee Stock Ownership Plan (Incorporated by
      reference to the Corporation’s Annual Report on Form 10-KSB for the period
      ending June 30, 1995).


10.4
            Cascade
      Financial Corporation 1997 Stock Option Plan (Incorporated by reference to
      Appendix E to the Prospectus included in the Corporation’s Registration
      Statement on Form S-4 (File No.
333-24203)).


10.5
            Cascade
      Financial Corporation 1997 Elective Equity Plan. (Incorporated by
      reference to Exhibit 10.7 of the Corporation’s Form 10-K for the period
      ending December 31, 2001).


10.6
            Employment
      Agreement with Carol K. Nelson dated November 27, 2007. (Incorporated by
      reference to Exhibit 10.1 of the Corporation’s Form 8-K filed November 30,
      2007 (File No. 000-25286)).


10.7
            Form
      of Change of Control Agreement with other Executive Officers (Incorporated
      by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed November
      30, 2007 (File No. 000-25286)).


10.8
            Cascade
      Bank Non-Qualified Deferred Compensation Plan dated February 1, 2008
      (Incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K
      filed January 16, 2008 (File No.
000-25286)).


10.9
            Amended
      and Restated Change of Control/Severance Agreement with Robert G.
      Disotell.


10.10
            Amended
      and Restated Change of Control/Severance Agreement with Steven R.
      Erickson.


10.11
            Amended
      and Restated Change of Control/Severance Agreement with Lars H.
      Johnson.


10.12
            Amended
      and Restated Change of Control/Severance Agreement with LeAnne M.
      Harrington.


10.13
            Amended
      and Restated Change of Control/Severance Agreement with Robert F.
      Wojcik.


10.14
            Amended
      and Restated Change of Control/Severance Agreement with Debbie E.
      McLeod.


13
              Cascade
      Financial Corporation December 31, 2007 Annual Report to Stockholders,
      including the Selected Financial Data and Management Discussion and
      Analysis.21
              Subsidiaries.23
              Consent
      of Independent Registered Public Accounting Firm – Moss Adams
      LLP.31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32
              Certification
      of Annual Report on Form 10-K pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.




(b)           Reports
on Form 8-K




On October 24,
2007, the Corporation filed a Form 8-K reporting an attached press release
announcing earnings information for the third quarter ended December 31, 2007,
under Items 2.02 and 9.01 of Form 8-K.


- 34
-


(b)        Reports
on Form 8-K (continued)




On November 27, 2007,
the Corporation filed a Form 8-K amending the employment agreement between
Cascade Financial Corporation and Carol K. Nelson, the President and Chief
Executive Officer, and the change in control agreements with Cascade’s six other
executive officers, under Items 1.01 and 9.01 of Form 8-K.




On January 16, 2008,
the Corporation filed a Form 8-K adopting Cascade Bank’s Non-Qualified Deferred
Compensation Plan, under Items 1.01 and 1.02 of Form 8-K.




On January 22, 2008, the Corporation
filed a Form 8-K reporting an attached press release announcing earnings
information for the fourth quarter ended December 31, 2007, under Items 2.02 and
9.01 of Form 8-K.  - 35
-


SIGNATURES




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




CASCADE
      FINANCIAL CORPORATIONDate:     March
      13, 2008
            By:
            /s/ Carol K
      Nelson
              Carol K. Nelson
              President and Chief Executive
  Officer







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




By:
            /s/ Lars H. Johnson
            
            By:
            /s/ D. R. MurphyLars
      H. Johnson
              Executive
      Vice President
              (Chief
      Financial Officer)
            
            
            D.
      R. Murphy
              DirectorDate:
            March
      13, 2008
            
            Date:
            March
      13, 2008By:
            /s/ David W. Duce
            
            By:
            /s/ Ronald E ThompsonDavid
      W. Duce
              Chairman
            
            
            Ronald
      E. Thompson
              DirectorDate:
            March
      13, 2008
            
            Date:
            March
      13, 2008By:
            /s/ Janice Halladay
            
            By:
            /s/ G. Brandt WestoverJanice
      Halladay
              Director
            
            
            G.
      Brandt Westover
              DirectorDate:
            March
      13, 2008
            
            Date:
            March
      13, 2008By:
            /s/ Craig Skotdal
            
            By:
            /s/ Dwayne LaneCraig
      Skotdal
              Director
            
            
            Dwayne
      Lane
              DirectorDate:
            March
      13, 2008
            
            Date:
            March
      13, 2008By:
            /s/ David O’Connor
            
            By:
            /s/ Richard AndersonDavid
      O’Connor
              Director
            
            
            Richard
      Anderson
              DirectorDate:
            March
      13, 2008
            
            Date:
            March
      13, 2008By:
            /s/ Katherine M. Lombardo
            
            By:
            /s/ Jim GaffneyKatherine
      M. Lombardo
              Director
            
            
            Jim
      Gaffney
              DirectorDate:
            March
      13, 2008
            
            Date:
            March
      13, 2008


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