**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, 2005.
 
 **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
 1
 DOCUMENTS
        INCORPORATED BY REFERENCE
 
 1.
              Portions
                  of Annual Report to Stockholders for the year ended December 31,
                  2005,
                  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, 2005**
 
 **TABLE
        OF CONTENTS**
 
 
 PART
                  I
              PageItem
                  1.
              Description
                  of Business
              4Loan
                  Portfolio
              6Asset
                  and Liability Management Activities
              14Investment
                  Portfolio
              16Deposits
              17Return
                  on Equity and Assets
              18Borrowings
              18Regulation
              19Taxation
              24Item
                  1A.
              Risk
                  Factors
              25Item
                  1B.
              Unresolved
                  Staff Comments
              26Item
                  2.
              Properties
              26Item
                  3.
              Legal
                  Proceedings
              27Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              27PART
                  IIItem
                  5.
              Market
                  for Registrant’s Common Equity and Related Stockholder
                  Matters
              28Item
                  6.
              Selected
                  Financial Data
              29Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              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
                  DisclosureItem
                  9A.
              Controls
                  and Procedures
              29Item
                  9B.
              Other
                  Information
              30PART
                  IIIItem
                  10.
              Directors
                  and Executive Officers of the Registrant
              31Item
                  11.
              Executive
                  Compensation
              32Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and related
                  Stockholder MattersItem
                  13.
              Certain
                  Relationships and Related Transactions
              32Item
                  14.
              Principal
                  Accountant Fees and Services
              32PART
                  IVItem
                  15.
              Exhibits
                  and Financial Statement Schedules
              33
  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. Description of 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,
        2005, the Corporation’s wholly-owned subsidiaries were Cascade Bank (“Cascade”
or the “Bank”), Cascade Capital Trust I and Capital Trust II. The executive
        offices of the Corporation are located at 2828 Colby Avenue, Everett, Washington
        98201. The telephone number is (425) 339-5500 and the web site 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 eighteen other full service offices in the greater Puget Sound region.
        At
        December 31, 2005, the Corporation had total assets of $1.2 billion, total
        deposits of $795.8 million and stockholders’ equity of $105.2
        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 nineteen
        full
        service offices, twelve in Snohomish County and seven in King County. 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 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 home port 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 and online
                  banking.
  ·
              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.
  ·
              Diligently
                  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 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.
  5
 The
        Bank’s competitors for residential loans and consumer business are numerous,
        including banks, mortgage bankers, captive finance subsidiaries of auto
        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.
  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.
  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. Recent amendments
        to
        the federal banking laws to eliminate certain barriers between banking and
        commercial firms are expected to result in even greater competition in the
        future.
  The
        Corporation anticipates continuing opportunities to arise from the effects
        of
        substantial consolidation among financial institutions in Washington that
        has
        occurred to date. Federal law allows mergers or other combinations, relocations
        of a bank’s main office and branching across state lines. Several other
        financial institutions, which have greater resources than the Bank, compete
        for
        banking business in the Bank’s market area. Among the advantages of some of
        these institutions are their ability to make larger loans, finance extensive
        advertising and promotion campaigns, access international money markets and
        allocate their investment assets to regions of highest yield and
        demand.
  LOAN
        PORTFOLIO
  *General.* The
        Bank
        originates business, real estate and consumer loans. Total loans, which are
        net
        of loan in process, equaled $880.7 million at December 31, 2005. Total
        loans were adjusted by deferred loan fees and the allowance for loan losses
        for
        a net loan balance of $867.0 million. At December 31, 2005, $394.0 million
        or
        44.8% of total loans consisted of business loans; $166.0 million or 18.8%
        were
        real estate construction loans; $141.1 million or 16.0% of loans consisted
        of
        commercial real estate; $32.2 million or 3.7% were consumer loans; $95.4
        million
        or 10.8% of the Bank’s loans consisted of loans secured by one-to-four family
        residential properties; and $52.1 million or 5.9% consisted of multifamily
        loans. Total loans secured by first liens on residential real estate was
        $147.5
        million or 16.8% 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 $157,000 and $784,000 to sell loans into the secondary market at
        December 31, 2005, and December 31, 2004, 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 31,2005
                
                2004
                
                2003Amount
                
                Percent
                
                Amount
                
                Percent
                
                Amount
                
                PercentType
                    of Loan
                
                
                
                
                
                *(Dollars
                    in thousands)*Real
                    estate mortgageOne-to-four
                    family(1)
                
                $
                95,429
                
                
                10.83
                %
                $
                105,975
                
                
                13.14
                %
                $
                105,565
                
                
                18.3
                %Multifamily
                
                
                52,057
                
                
                5.91
                
                
                92,372
                
                
                11.45
                
                
                87,212
                
                
                15.12Commercial
                
                
                141,109
                
                
                16.02
                
                
                178,704
                
                
                22.15
                
                
                83,856
                
                
                14.53Construction
                
                
                165,957
                
                
                18.84
                
                
                107,431
                
                
                13.32
                
                
                62,742
                
                
                10.87Business
                
                
                394,034
                
                
                44.75
                
                
                292,117
                
                
                36.21
                
                
                204,446
                
                
                35.43Consumer(2)
                
                
                32,160
                
                
                3.65
                
                
                30,125
                
                
                3.73
                
                
                33,163
                
                
                5.75Total
                    loans
                
                $
                880,746
                
                
                100.00
                %
                $
                806,724
                
                
                100.00
                %
                $
                576,984
                
                
                100.00
                %Less:Deferred
                    loan fees, net
                
                
                3,443
                
                
                
                
                
                2,695
                
                
                
                
                
                2,179Allowance
                    for loan losses
                
                
                10,254
                
                
                
                
                
                9,563
                
                
                
                
                
                7,711Total
                    loans, net
                
                $
                867,049
                
                
                
                
                $
                794,466
                
                
                
                
                $
                567,094Type
                    of CollateralReal
                    estate mortgageOne-to-four
                    family(2)
                
                $
                279,652
                
                
                31.76
                %
                $
                231,504
                
                
                28.7
                %
                $
                190,168
                
                
                32.96
                %Multifamily
                
                
                52,057
                
                
                5.91
                
                
                92,372
                
                
                11.45
                
                
                87,212
                
                
                15.12Commercial
                
                
                141,109
                
                
                16.02
                
                
                178,704
                
                
                22.15
                
                
                83,856
                
                
                14.53Land
                    loans
                
                
                6,007
                
                
                0.68
                
                
                3,546
                
                
                0.44
                
                
                1,786
                
                
                0.31Other
                
                
                401,921
                
                
                45.63
                
                
                300,598
                
                
                37.26
                
                
                213,962
                
                
                37.08Total
                    loans
                
                $
                880,746
                
                
                100.00
                %
                
                806,724
                
                
                100.00
                %
                
                576,984
                
                
                100.00
                %Less:Deferred
                    loan fees, net
                
                
                3,443
                
                
                
                
                
                2,695
                
                
                
                
                
                2,179Allowance
                    for loan losses
                
                
                10,254
                
                
                
                
                
                9,563
                
                
                
                
                
                7,711Total
                    loans, net
                
                $
                867,049
                
                
                
                
                $
                794,466
                
                
                
                
                $
                567,094
  At
                      December 31,2002
                  
                  2001Amount
                  
                  Percent
                  
                  Amount
                  
                  Percent*(Dollars
                      in thousands)*Type
                      of LoanReal
                      estate mortgageOne-to-four
                      family(1)
                  
                  $
                  122,561
                  
                  
                  22.04
                  %
                  $
                  152,727
                  
                  
                  26.1
                  %Multifamily
                  
                  
                  94,245
                  
                  
                  16.96
                  
                  
                  109,733
                  
                  
                  18.76Commercial
                  
                  
                  63,108
                  
                  
                  11.36
                  
                  
                  62,938
                  
                  
                  10.76Construction
                  
                  
                  84,229
                  
                  
                  15.16
                  
                  
                  75,911
                  
                  
                  12.98Business
                  
                  
                  142,273
                  
                  
                  25.6
                  
                  
                  125,342
                  
                  
                  21.42Consumer(2)
                  
                  
                  49,331
                  
                  
                  8.88
                  
                  
                  58,381
                  
                  
                  9.98Total
                      loans
                  
                  $
                  555,747
                  
                  
                  100.00
                  %
                  $
                  585,032
                  
                  
                  100.00
                  %Less:Deferred
                      loan fees, net
                  
                  
                  2,198
                  
                  
                  
                  
                  
                  2,502Allowance
                      for loan losses
                  
                  
                  6,872
                  
                  
                  
                  
                  
                  6,304Total
                      loans, net
                  
                  $
                  546,677
                  
                  
                  
                  
                  $
                  576,226
  7
 At
                      December 31,2002
                  
                  
                  2001Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent*(Dollars
                      in thousands)*Type
                      of CollateralReal
                      estate mortgageOne-to-four
                      family(2)
                  
                  $
                  241,805
                  
                  
                  43.5
                  %
                  $
                  267,721
                  
                  
                  45.75
                  %Multifamily
                  
                  
                  94,245
                  
                  
                  16.96
                  
                  
                  109,733
                  
                  
                  18.76Commercial
                  
                  
                  63,108
                  
                  
                  11.36
                  
                  
                  62,938
                  
                  
                  10.76Land
                      loans
                  
                  
                  1,720
                  
                  
                  0.31
                  
                  
                  2,546
                  
                  
                  0.44Other
                  
                  
                  154,869
                  
                  
                  27.87
                  
                  
                  142,094
                  
                  
                  24.29Total
                      loans
                  
                  $
                  555,747
                  
                  
                  100.00
                  %
                  $
                  585,032
                  
                  
                  100.00
                  %Less:Deferred
                      loan fees, net
                  
                  
                  2,198
                  
                  
                  
                  
                  
                  2,502Allowance
                      for loan losses
                  
                  
                  6,872
                  
                  
                  
                  
                  
                  6,304Total
                      loans, net
                  
                  $
                  546,677
                  
                  
                  
                  
                  $
                  576,226
 
 (1)  Includes
        construction loans converted to permanent loans and land loans.
 (2)  Includes
        home equity loans and HELOCs.
  At
        December
        31, 2005, deferred fees were $3.4 million and the allowance for loan losses
        was
        $10.3 million.
  *Business
        Loans.* Business
        loans increased from $292.1 million at December 31, 2004, to $394.0 million
        at
        December 31, 2005. Unsecured business loans totaled $13.2 million at December
        31, 2005, compared to $11.5 million as of December 31, 2004. The Bank’s business
        loan portfolio consists primarily of commercial business loans to small and
        medium sized businesses operating in Snohomish and King counties. These loans
        are 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 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 loans also include owner occupied
        real estate loans with terms comparable to the Bank’s commercial real estate
        loans. In addition, as the 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
        loans are inherently sensitive to conditions in the economy. The collateral
        securing other 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 on 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. The historically strong housing market in
        the
        Puget Sound area has made construction lending attractive. At December 31,
        2005,
        and December 31, 2004,  the
        Corporation’s construction loans were $166.0 million or 18.8% of the total loan
        portfolio and $107.4 million or 13.3% of the total loan portfolio, respectively.
        The construction loans are net of loans in process of $86.7 million at December
        31, 2005 and $49.7 million at December 31, 2004. Of the total net construction
        loans, $161.0 million was to builders and developers, including $42.3 million
        for land acquisition and development, and $5.0 million was to individuals
        for
        custom home construction. The strength of the local housing market led to
        a
        rapid turnover in this portfolio as builders were able to quickly sell new
        homes. The Bank’s maximum outstanding commitment to one builder at December 31,
        2005 totaled $18.8 million involving five construction projects, all of which
        are performing in accordance with their respective loan terms.
  8
 Construction
        loans often 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 $141.1 million or 16.0% of the Bank’s total loans at
        December 31, 2005, compared to $178.7 million or 22.2% of the portfolio at
        December 31, 2004. A major reason for the drop in commercial real estate
        loans
        during the year was the reclassification of $35 million in loans acquired
        in the
        merger with Issaquah in June 2004. These loans were initially classified
        as
        commercial real estate but were reclassified as business banking loans. 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 fixed-rate
        with a maximum reset on the interest rate of five years. At December 31,
        2005,
        the largest commercial real estate loan in the Bank’s portfolio was $11.3
        million, which was performing according to its terms at that date.
  Commercial
        real estate loans are also sensitive to local economic conditions. An economic
        recession 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, 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 $52.1 million or 5.9% of the total loan portfolio at December
        31,
        2005. 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
        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.
        In addition, the low interest rate environment and robust housing market
        has
        induced many erstwhile renters to purchase houses. This has led to higher
        vacancy rates in some areas.
  *One-to-Four
        Family Residential Loans.* At
        December 31, 2005, residential loans totaled $95.5 million or 10.8% 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
        $539,000 in loans held for sale at December 31, 2005, and no loans held for
        sale
        at December 31, 2004. 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, debt-to-income ratios, reliance on
        the
        borrower's stated income, non-owner occupied property, rural property, or
        other
        exceptions from agency guidelines.
  9
 *Consumer
        Loans.* The
        Bank’s consumer loan activities take two forms: home equity loans or lines of
        credit, and installment 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
        $24.3
        million at December 31, 2005, as compared to $21.6 million at December 31,
        2004.
        At December 31, 2005 and December 31, 2004, the total amount of unused lines
        of
        credit were $22.6 million and $22.7 million, respectively. The second category
        of consumer loans are installment loans in which boats, automobiles, and
        recreational vehicles serve as collateral. This portfolio was $7.9 million
        at
        December 31, 2005, as compared to $8.5 million outstanding at December 31,
        2004.
        Although boat loans total $2.8 million of the Bank’s installment loans at
        December 31, 2005, the Bank has significantly decreased its origination of
        boat
        loans and expects this amount to decline further in the future. Since
        installment loans are secured by depreciating assets, any repossessed collateral
        for a defaulted loan may not 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, 2005 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
                morethan
                one
                  year)
              
              
              With
                  fixed
                rate(for
                maturities
                ofmore
                than
                  one
                year)*(Dollars
                  in thousands)*Business
              
              $
              70,241
              
              $
              133,360
              
              $
              190,433
              
              $
              394,034
              
              $
              130,642
              
              $
              193,151Construction
              
              
              63,861
              
              
              84,580
              
              
              17,516
              
              
              165,957
              
              
              101,873
              
              
              223Commercial
                  Real Estate
              
              
              1,166
              
              
              11,448
              
              
              128,495
              
              
              141,109
              
              
              126,451
              
              
              13,492Multifamily
              
              
              -
              
              
              2,199
              
              
              49,858
              
              
              52,057
              
              
              49,276
              
              
              2,781Home
                  Equity/Consumer
              
              
              3,243
              
              
              1,211
              
              
              27,706
              
              
              32,160
              
              
              20,964
              
              
              7,953Residential
              
              
              577
              
              
              5,252
              
              
              89,600
              
              
              95,429
              
              
              83,977
              
              
              10,786
  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. There is a
        high
        possibility of loss. 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 general 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.
  10
 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 15 to 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 any event, 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 collectibility 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, 2005 and December
        31,
        2004, the Bank had $2.0 million and $532,000, respectively, of loans accounted
        for on a non-accrual basis.
  Allowance
        for Loan Losses/Non-Performing Assets
  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, historical loss experience, the financial condition of
        borrowers, the level of non-performing loans, 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 may be 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 remained substantially unchanged during the
        period.
  11
 The
        following table presents
        information with respect to the Bank’s non-performing assets and restructured
        loans at the dates indicated.
  December
                  31,2005
              
              2004
              
              2003*(Dollars
                  in thousands)*Non-performing
                  loans:Commercial
                  loansBusiness
              
              $
              958
              
              $
              —
              
              $
              128Commercial
                  real estate
              
              
              842
              
              
              488
              
              
              —1,800
              
              
              488
              
              
              128Residential
              
              
              187
              
              
              34
              
              
              1,704Consumer
                  loans
              
              
              —
              
              
              10
              
              
              89Total
                  non-performing loans
              
              
              1,987
              
              
              532
              
              
              1,921Other
                  real estate and repossessed assets
              
              
              101
              
              
              868
              
              
              474Total
                  non-performing assets
              
              $
              2,088
              
              $
              1,400
              
              $
              2,395Restructured
                  loans
              
              $
              1,467
              
              $
              95
              
              $
              3,467Total
                  non-performing loans to net loans
              
              
              .23
              %
              
              .07
              %
              
              .34
              %Total
                  non-performing loans to total assets
              
              
              .16
              
              
              .05
              
              
              .22Total
                  non-performing assets to total assets
              
              
              .17
              
              
              .13
              
              
              .27
  The
        Bank’s non-performing assets at December 31, 2005, consisting of non-performing
        loans and other real estate, totaled $2.1 million or 0.17% of total assets.
        This
        is an increase from $1.4 million or 0.13% of total assets at December 31,
        2004,
        and a decrease from $2.4 million or 0.27% of total assets at December 31,
        2003.
  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.
  Non-performing
        loans increased to $2.0 million at December 31, 2005, compared to $532,000
        at
        December 31, 2004, and $1.9 million at December 31, 2003. The increase in
        non-performing loans from December 31, 2004, to December 31, 2005 is due
        to
        increases in non-performing commercial loans. Management believes that the
        allowance for losses on loans is adequate to provide for losses that may
        be
        incurred on non-performing 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. Non-performing other real estate
        was
        $0 at December 31, 2005, $868,000 at December 31, 2004, and $474,000 at December
        31, 2003. At December 31, 2005, the Bank owned two repossessed boats totaling
        $101,000.
  Interest
        income that would have been recognized for the years ended December 31, 2005,
        December 31, 2004, and December 31, 2003, had non-accrual loans been current
        in
        accordance with their contractual terms, amounted to $81,500, $2,000, and
        $90,000, respectively.
  12
 The
        following
        tables set forth information regarding changes in the Bank’s allowance for loan
        losses for the most recent three years (dollars in thousands).
  Years
                  Ended December 31,2005
              
              2004
              
              2003Balance
                  at beginning of period
              
              $
              9,563
              
              $
              7,711
              
              $
              6,872Issaquah
                  Bank balance at June 2004
              
              
              —
              
              
              1,395
              
              
              —Charge-OffsBusiness
              
              
              1
              
              
              310
              
              
              295Commercial
                  Real Estate
              
              
              —
              
              
              —
              
              
              95Single-Family
                  Residential
              
              
              116
              
              
              34
              
              
              59Consumer
                  and other
              
              
              403
              
              
              97
              
              
              302Recoveries:
              
              
              (266
              )
              
              (223
              )
              
              (315
              )Net
                  charge-offs (recoveries):
              
              
              254
              
              
              218
              
              
              436Provision
                  for loan losses
              
              
              945
              
              
              675
              
              
              1,275Balance
                  at end of period
              
              
              10,254
              
              
              9,563
              
              
              7,711Average
                  loans outstanding
              
              $
              854,684
              
              $
              691,372
              
              $
              565,453Ratio
                  of net charge-offs during the period to average
                loans
                  outstanding
              
              
              .03
              %
              
              .03
              %
              
              .08
              %Ratio
                  of allowance for loan losses to average loans
                outstanding
              
              
              1.20
              
              
              1.38
              
              
              1.36
 
 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 by category at the
        dates
        indicated (dollars in thousands).
 December
                    31,2005
                
                2004
                
                2003Amount
                
                %*
                
                Amount
                
                %*
                
                Amount
                
                %*Business
                
                $
                5,773
                
                
                44.75
                %
                $
                4,181
                
                
                36.21
                %
                $
                2,833
                
                
                35.43
                %Commercial
                    Real Estate
                
                
                3,020
                
                
                16.02
                
                
                583
                
                
                22.15
                
                
                787
                
                
                14.53Single-Family
                    Residential
                
                
                337
                
                
                10.83
                
                
                432
                
                
                13.14
                
                
                745
                
                
                18.3Multifamily
                
                
                275
                
                
                5.91
                
                
                616
                
                
                11.45
                
                
                245
                
                
                15.12Real
                    Estate Construction
                
                
                543
                
                
                18.84
                
                
                1,295
                
                
                13.32
                
                
                642
                
                
                10.87Consumer
                    and Other
                
                
                306
                
                
                3.65
                
                
                513
                
                
                3.73
                
                
                444
                
                
                5.75Unallocated
                
                
                —
                
                
                —
                
                
                1,943
                
                
                —
                
                
                2,015
                
                
                —Total
                    allowance for loan losses
                
                $
                10,254
                
                
                100.00
                %
                $
                9,563
                
                
                100.00
                %
                $
                7,711
                
                
                100.00
                %
  *  Percent
        of loans in each category to total loans.
  13
 The
        provision for loan losses for the year ended December 31, 2005, totaled $945,000
        compared to $675,000 for the year ended December 31, 2004, and $1,275,000
        for
        the year ended December 31, 2003. The
        increase in the provision for loan losses for the twelve month period ended
        December 31, 2005, was due to the increase in actual adversely classified
        loans
        (which includes the substandard and doubtful categories) under the Bank’s loan
        classification system. Adversely classified loans increased to $18.0 million
        at
        December 31, 2005, from $9.3 million at December 31, 2004.
  ASSET
        AND LIABILITY MANAGEMENT ACTIVITIES
  The
        Bank’s asset/liability management activity is the responsibility of the
        Asset/Liability Management Committee (ALCO) to measure and monitor interest
        rate
        risk, liquidity, 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 appropriate. The Bank’s net interest income and the
        fair value of its capital are measured under different interest rate scenarios.
        The Board, through the Asset/Liability Management Policy, has established
        targets for 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 floating-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
        20.8% in an up 200 bp shock scenario and decreases 5.0% in a down 200 bp
        shock,
        within the established guideline of a maximum 30% decline. The adjusted
        capital/asset ratio is 8.4% in the up 200 bp scenario and 9.6% in the down
        200
        bp scenario, both above the 5% minimum established guideline. The net interest
        income decreases 1.0% in the up 200 bp scenario. In the down 200 bp shock
        scenario, the Bank’s net income increases 0.4%, 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 (CMOs)). 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, 2005, $231 million
        of
        the $236 million in advances had original maturities greater than one year
        and
        $213 million have remaining maturities greater than one year.
  The
        Bank
        has used interest rate swaps and has used caps and floors in the past to
        control
        the amount of its interest rate risk. During the third quarter of 2004, the
        Bank
        implemented two $25 million interest rate swaps to reduce its exposure to
        increasing interest rates. The first of these swaps was a 5 year pay-fixed
        instrument used as a cash flow hedge to offset increases in LIBOR in a $25
        million FHLB advance. The second swap was a 10 year, pay-fixed instrument,
        originally accounted for as a fair value hedge to offset changes in value
        of $26
        million of the Bank’s available-for-sale investment portfolio. Both of these
        swaps were terminated in March 2005 as the Bank sought less costly vehicles
        to
        mitigate its interest rate risk.
  Another
        major component of asset/liability management is liquidity management. The
        Board
        of Directors has also established liquidity parameters that seek to assure
        that
        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 Bank. 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 31,2005
                  Compared to Year Ended
                December
                  31, 2004
                Increase
                  (Decrease) Due to
              
              2004
                  Compared to Year Ended
                December
                  31, 2003
                Increase
                  (Decrease) Due to*(Dollars
                  in thousands)*Rate
              
              Volume
              
              Mix
              
              Net
              
              Rate
              
              Volume
              
              Mix
              
              NetInterest-earning
                  assetsSingle-family
                  loans(1)
              
              $
              (258
              )
              $
              (82
              )
              $
              3
              
              $
              (337
              )
              $
              (873
              )
              $
              (406
              )
              $
              48
              
              $
              (1,231
              )Multifamily
                  loans(1)
              
              
              172
              
              
              (1,071
              )
              
              (31
              )
              
              (930
              )
              
              (733
              )
              
              317
              
              
              (37
              )
              
              (453
              )Commercial
                  real estate loans(1)
              
              
              193
              
              
              2,808
              
              
              69
              
              
              3,070
              
              
              (521
              )
              
              3,456
              
              
              (340
              )
              
              2,595Construction
                  loans(1)
              
              
              1,168
              
              
              2,854
              
              
              598
              
              
              4,620
              
              
              393
              
              
              632
              
              
              55
              
              
              1,080Consumer
                  loans(1)
              
              
              4
              
              
              (47
              )
              
              —
              
              
              (43
              )
              
              —
              
              
              (533
              )
              
              —
              
              
              (533
              )Business
                  loans(1)
              
              
              641
              
              
              6,115
              
              
              238
              
              
              6,994
              
              
              48
              
              
              4,958
              
              
              21
              
              
              5,027Total
                  loans
              
              
              1,920
              
              
              10,577
              
              
              877
              
              
              13,374
              
              
              (1,686
              )
              
              8,424
              
              
              (253
              )
              
              6,485Securities
                  available-for-sale
              
              
              (219
              )
              
              (921
              )
              
              30
              
              
              (1,110
              )
              
              (1,243
              )
              
              (1,442
              )
              
              195
              
              
              (2,490
              )Securities
                  held-to-maturity
              
              
              (81
              )
              
              62
              
              
              (1
              )
              
              (20
              )
              
              (217
              )
              
              1,301
              
              
              (85
              )
              
              999Daily
                  interest-earning deposits
              
              
              117
              
              
              48
              
              
              79
              
              
              244
              
              
              33
              
              
              (58
              )
              
              (17
              )
              
              (42
              )Total
                  net change in income on
                interest-earning
                  assets
              
              $
              1,737
              
              $
              9,766
              
              $
              985
              
              $
              12,488
              
              $
              (3,113
              )
              $
              8,225
              
              $
              (160
              )
              $
              4,952Interest-bearing
                  liabilitiesInterest-bearing
                  deposits
              
              $
              1,128
              
              $
              482
              
              $
              5,545
              
              $
              7,155
              
              $
              (1,258
              )
              $
              1,616
              
              $
              (172
              )
              $
              186FHLB
                  advances
              
              
              (238
              )
              
              380
              
              
              288
              
              
              430
              
              
              (504
              )
              
              838
              
              
              (41
              )
              
              293Other
                  borrowings
              
              
              219
              
              
              (14
              )
              
              567
              
              
              772
              
              
              (205
              )
              
              (125
              )
              
              17
              
              
              (313
              )Total
                  net change in expenses on
                interest-bearing
                  liabilities
              
              $
              1,109
              
              $
              848
              
              $
              6,400
              
              $
              8,357
              
              $
              (1,967
              )
              $
              2,329
              
              $
              (196
              )
              $
              166Net
                  increase in net interestincome
              
              
              
              
              
              
              
              
              
              
              $
              4,131
              
              
              
              
              
              
              
              
              
              
              $
              4,786*(1)**D**oes
                  not include interest on loans 90 days or more past due.*Year
                  Ended December 31,2003
                  Compared to Year Ended
                December
                  31, 2002
                (unaudited)
                Increase
                  (Decrease) Due to*(Dollars
                  in thousands)*Rate
              
              
              Volume
              
              
              Mix
              
              
              NetInterest-earning
                  assetsSingle-family
                  loans(1)
              
              $
              (1,396
              )
              $
              (1,742
              )
              $
              235
              
              $
              (2,903
              )Multifamily
                  loans
              
              
              (491
              )
              
              (1,115
              )
              
              70
              
              
              (1,536
              )Commercial
                  real estate loans
              
              
              (508
              )
              
              813
              
              
              (82
              )
              
              223Construction
                  loans
              
              
              (484
              )
              
              (150
              )
              
              14
              
              
              (620
              )Consumer
                  loans(1)
              
              
              (157
              )
              
              (1,203
              )
              
              46
              
              
              (1,314
              )Business
                  loans(1)
              
              
              (912
              )
              
              3,251
              
              
              (316
              )
              
              2,023Total
                  loans
              
              
              (3,948
              )
              
              (146
              )
              
              (33
              )
              
              (4,127
              )Securities
                  available-for-sale
              
              
              (1,595
              )
              
              2,237
              
              
              (399
              )
              
              243Securities
                  held-to-maturity
              
              
              (156
              )
              
              2,426
              
              
              (281
              )
              
              1,989Daily
                  interest-earning deposits
              
              
              (83
              )
              
              (173
              )
              
              44
              
              
              (212
              )Total
                  net change in income on
                interest-earning
                  assets
              
              $
              (5,782
              )
              $
              4,344
              
              $
              (669
              )
              $
              (2,107
              )Interest-bearing
                  liabilitiesInterest-bearing
                  deposits
              
              $
              (3,056
              )
              $
              1,984
              
              $
              (484
              )
              $
              (1,556
              )FHLB
                  advances
              
              
              (1,364
              )
              
              (530
              )
              
              60
              
              
              (1,834
              )Other
                  borrowings
              
              
              (334
              )
              
              38
              
              
              (7
              )
              
              (303
              )Total
                  net change in expenses on
                interest-bearing
                  liabilities
              
              $
              (4,754
              )
              $
              1,492
              
              $
              (431
              )
              $
              (3,693
              )Net
                  increase in net interestincome
              
              
              
              
              
              
              
              
              
              
              $
              1,586*(1)**D**oes
                  not include interest on loans 90 days or more past due*.
 
 15
 INVESTMENT
        PORTFOLIO
  The
        Board
        of Directors sets the investment policy of the Bank. This policy dictates
        that
        investments will be made based on the safety of the principal amount, interest
        rate risk, liquidity requirements of the Bank, as well as 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, MBS including 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 increased to $247.6 million at December 31, 2005, from $215.6
        million
        at December 31, 2004, a 15% increase. The investment portfolio increased
        at the
        end of the year to assist in the profitable risk-adjusted leveraging of our
        capital base. The investment portfolio represented 20% of total assets at
        December 31, 2005 compared to 20% at December 31, 2004. MBS
        (including CMOs) available-for-sale increased from $42.5 million to $47.4
        million as of December 31, 2005. Agency notes available-for-sale also increased
        from $69.9 million to $93.2 million. Agency notes held-to-maturity increased
        from $65.8 million to $70.8 million for the year ended December 31,
        2005.
  The
        following tables set forth the
        Bank ’s
        securities available-for-sale at the dates indicated.
  December
                  31, 2005
              
              December
                  31, 2004
              
              December
                  31, 2003*(Dollars
                  in thousands)*
              
              Estimated
                Fair
                  Value
              
              Percent
                  ofPortfolio
              
              Estimated
                Fair
                  Value
              
              Percent
                  of
                Portfolio
              
              EstimatedFair
                  Value
              
              Percent
                  of
                PortfolioMBS
              
              $
              47,423
              
              
              31.09
              %
              $
              42,522
              
              
              34.22
              %
              $
              70,523
              
              
              37.17
              %Agency
                  notes
              
              
              93,173
              
              
              61.09
              
              
              69,882
              
              
              56.23
              
              
              99,240
              
              
              52.30FHLB
                  stock
              
              
              11,920
              
              
              7.82
              
              
              11,872
              
              
              9.55
              
              
              14,741
              
              
              7.77Corporate/other
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,243
              
              
              2.76Total
              
              $
              152,516
              
              
              100.00
              %
              $
              124,276
              
              
              100.00
              %
              $
              189,747
              
              
              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, 2005.
        Securities with no stated maturity dates are reported as due within one
        year.
  Less
                  Than One Year
              
              One
                  to Five Years
              
              Five
                  to Ten Years
              
              Over
                  Ten Years*(Dollars
                  in thousands)*
              
              Estimated
                Fair
                  Value
              
              Yield
              
              Estimated
                Fair
                  Value
              
              Yield
              
              Estimated
                  Fair Value
              
              Yield
              
              Estimated
                  Fair Value
              
              YieldMBS
              
              $
              -
              
              
              -
              %
              $
              40,620
              
              
              5.08
              %
              $
              6,803
              
              
              5.13
              %
              $
              -
              
              
              -
              %Agency
                  notes
              
              
              87
              
              
              1.00
              
              
              47,111
              
              
              4.47
              
              
              30,523
              
              
              4.91
              
              
              15,452
              
              
              5.20FHLB
                  stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              11,920
              
              
              -Corporate/other
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              87
              
              
              
              
              $
              87,731
              
              
              
              
              $
              37,326
              
              
              
              
              $
              27,372
 
 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, 2005
                
                December
                    31, 2004
                
                December
                    31, 2003*(Dollars
                    in thousands)*
                
                Amortized
                    Cost
                
                Fair
                    Value
                
                %
                    of
                    Portfolio
                
                Amortized
                    Cost
                
                Fair
                    Value
                
                %
                    of
                    Portfolio
                
                Amortized
                    Cost
                
                Fair
                    Value
                
                %
                    of
                    PortfolioMBS
                
                $
                23,830
                
                $
                23,049
                
                
                25.02
                %
                $
                25,083
                
                $
                24,584
                
                
                27.45
                %
                $
                12,587
                
                $
                12,328
                
                
                0.14
                %Agency
                    notes
                
                
                70,827
                
                
                68,606
                
                
                74.47
                
                
                65,791
                
                
                64,506
                
                
                72.03
                
                
                73,822
                
                
                72,709
                
                
                85.20Corporate/other
                
                
                465
                
                
                465
                
                
                0.51
                
                
                465
                
                
                465
                
                
                0.52
                
                
                310
                
                
                307
                
                
                0.36Total
                
                $
                95,122
                
                $
                92,120
                
                
                100.00
                %
                $
                91,339
                
                $
                89,555
                
                
                100.00
                %
                $
                86,719
                
                $
                85,344
                
                
                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, 2005.
        Securities with no stated maturity dates are reported as due within one
        year.
 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
                
                **$**
                **-**
                
                
                -
                %
                $
                15,065
                
                
                4.63
                %
                $
                7,984
                
                
                5.14
                %
                $
                -
                
                
                -
                %Agency
                    notes
                
                
                -
                
                
                -
                
                
                15,712
                
                
                4.52
                
                
                17,422
                
                
                4.62
                
                
                35,472
                
                
                4.97Corporate/other
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                465
                
                
                -Total
                
                $
                -
                
                
                
                
                $
                30,777
                
                
                
                
                $
                25,406
                
                
                
                
                $
                35,937
  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 $795.8 million at December 31, 2005, from $721.9 million at
        December 31, 2004, an increase of 10.2% during this period. Deposits at December
        31, 2003 were $564.3 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
        deposit and the weighted average interest rate paid for deposits during the
        years ended December 31, 2005, 2004, and 2003 (dollars in
        thousands).
  The
        following table indicates the amount of the Bank’s jumbo certificates of deposit
        by time remaining until maturity at December 31, 2005. Jumbo certificates
        of
        deposit require minimum deposits of $100,000 and rates paid on such accounts
        are
        negotiable.
  Average
                  Deposits by TypeDecember
                  31, 2005
              
              December
                  31, 2004
              
              December
                  31, 2003Amount
              
              Rate
              
              Amount
              
              Rate
              
              Amount
              
              RateNoninterest-bearing
                  demand deposits
              
              $
              77,226
              
              
              —
              %
              $
              59,050
              
              
              —
              %
              $
              38,243
              
              
              —
              %Interest-bearing
                  demand deposits
              
              
              39,618
              
              
              0.62
              
              
              29,562
              
              
              0.31
              
              
              21,854
              
              
              0.48Money
                  market deposit
              
              
              170,641
              
              
              1.91
              
              
              145,626
              
              
              1.29
              
              
              113,263
              
              
              1.32Savings
              
              
              15,465
              
              
              0.44
              
              
              14,895
              
              
              0.29
              
              
              11,828
              
              
              0.46Time
                  certificates
              
              
              467,388
              
              
              3.16
              
              
              401,620
              
              
              2.28
              
              
              357,955
              
              
              2.60$
              770,338
              
              
              
              
              $
              650,753
              
              
              
              
              $
              543,143


The
        following table
        indicates the amount of the Bank’s jumbo certificates of deposit by time
        remaining until maturity at December 31, 2005. 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
            
            $
            100,387Over
                three through six months
            
            
            68,304Over
                six through twelve months
            
            
            88,283Over
                twelve months
            
            
            37,176Total
            
            $
            294,150




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 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 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.




17


RETURN
      ON EQUITY AND ASSETS




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




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 $236.0 million at December 31, 2005, compared to $228.0 million
      at
      December 31, 2004, a 4.0% increase. FHLB advances were $200.0 million at
      December 31, 2003.




The
      Bank
      enters into repurchase agreements with its correspondent banks. 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 $51.1 million at December 31, 2005, from $20.9 million
      at December 31, 2004.




Cascade
      Bank has established Fed funds borrowing lines with three
      of
      its correspondent banks. Cascade used two of these lines during the year, one
      of
      which was to test the operational aspects of the facility as part of our
      liquidity planning process. The Bank also opened a line of credit with the
      Federal Reserve Bank of San Francisco. As of December 31, 2005, 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.




At
                or for the years ended
              December
                31,2005
            
            2004
            
            2003(Dollars
                in thousands)Weighted
                average rate on:Securities
                sold under agreements to repurchase
            
            
            2.35
            %
            
            2.23
            %
            
            1.17
            %FHLB
                advances
            
            
            4.42
            
            
            4.59
            
            
            4.85Maximum
                amount of borrowings outstanding at any month end:Securities
                sold under agreements to repurchase
            
            $
            51,058
            
            $
            40,251
            
            $
            40,587FHLB
                advances
            
            
            251,000
            
            
            237,500
            
            
            211,750Approximate
                average borrowings outstanding with respect to:Securities
                sold under agreements to repurchase
            
            $
            24,051
            
            $
            31,085
            
            $
            35,334FHLB
                advances
            
            
            239,896
            
            
            210,023
            
            
            194,229Approximate
                weighted average rate paid on:Other
                interest-bearing liabilities*
            
            
            4.89
            %
            
            2.79
            %
            
            3.39
            %FHLB
                advances
            
            
            4.60
            
            
            5.05
            
            
            5.31*
                Including Trust Preferred Securities.







*Junior
      Subordinated Debentures Payable (Trust Preferred Securities).* On
      March
      1, 2000, $10 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.


18


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 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.





Subsidiary
      Activity




The
      Corporation has three subsidiaries: Cascade Bank, Cascade Capital Trust I and
      Capital Trust II. 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 prepayable, 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
      Capital Trust I. The junior subordinated debentures issued under Capital Trust
      II equals $5.2 million and has 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
      debentures are callable at par on a quarterly basis beginning January 7,
      2010.




Personnel




At
      December 31, 2005, the Corporation had 206 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 which 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 is 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.




19


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, as amended (“BHCA”)
      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. 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.




*Tie-In
      Arrangements.* The
      Corporation and its subsidiaries are prohibited from engaging in certain tie-in
      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.




20


*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 statements, 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 as a NASDAQ/Capital 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.




21


*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, 2005, 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 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.




22


*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 except as described above. At
      December 31, 2005, the Bank had Tier 1 capital equal to $95.1 million or 8.15%
      of average total assets, which is $48.4 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 percent. 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 13 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, 2005, the Bank had total risk-based capital of approximately $105.4
      million, including $95.1 million in Tier I capital and $10.3 million in
      qualifying supplementary capital (the allowance for loan losses), and
      risk-weighted assets of $978.5 million, or total capital of 10.77% of
      risk-weighted assets. This amount was $27.1 million above the 8% requirement
      in
      effect on that date.




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.




23


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, 2005, 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.




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.




24


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 has issued a tax
      billing for approximately $148,000 of which the Corporation has accrued $104,000
      and paid $16,000. The Corporation has filed an appeal with the Department of
      Revenue. A determination has been issued reversing two of the three billing
      issues in the audit. The Corporation has filed another appeal regarding the
      final issue.




Availability
      of Filings




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





1)
            Annual
                Reports on Form 10-K; and 2)
            Quarterly
              Reports on Form 10-Q; and


3)
            Current
                Reports on Form 8-K.





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.





The
      Bank
      measures, monitors, and manages interest rate through a variety of tools
      including simulation modeling. There is a chance that the Bank’s efforts will
      not effectively capture the asset/liability relationships and thereby not
      effectively mitigating 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.





25


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.





**Item
      1B. Unresolved Staff Comments**




None





26


**Item
      2. Properties**




The
      Corporation owns eight full service branch locations and leases eleven 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, 2005, including leasehold
      improvements, furniture and fixtures, of $12.3 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 and Related Stockholder
      Matters**




(a)
            Cascade
                Financial Corporation’s common stock is traded on the NASDAQ/Capital
                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, 2004
            
            $
            20.63
            
            $
            16.52June
                30, 2004
            
            
            21.28
            
            
            15.30September
                30, 2004
            
            
            17.98
            
            
            15.25December
                31, 2004
            
            
            19.72
            
            
            16.62March
                31, 2005
            
            $
            20.00
            
            $
            17.46June
                30, 2005
            
            
            18.75
            
            
            15.75September
                30, 2005
            
            
            18.60
            
            
            16.02December
                31, 2005
            
            
            19.75
            
            
            17.00





(b)
            Cascade
                Financial Corporation has only one class of stock outstanding, which
                is
                common stock. At December 31, 2005, there were 9,603,787 shares
                outstanding which were held of record by approximately 1,014
                shareholders.





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




Quarter
                Ended
            
            Dividend
                Declared
            
            Record
                Date
            
            Payment
                DateDecember
                2004
            
            $
            .08
            
            
            01/13/05
            
            
            01/27/05March
                2005
            
            
            .08
            
            
            04/06/05
            
            
            04/20/05June
                2005
            
            
            .08
            
            
            07/06/05
            
            
            07/20/05September
                2005
            
            
            .09
            
            
            10/12/05
            
            
            10/26/05




Issuer
                  Purchases of Equity Securities**2005
                  PLAN**Period
                Beginning
              Ending
              Total
                Number
                of
                  Shares
                Purchased(1)
              Average
                Price
                  Paid
                per
                  Share
              Total
                  Number
                of
                  Shares Purchased
                as
                  Part of
                Publily
                  Announced
                Plan
              Maximum
                Number
                  of
                Shares
                  that
                May
                  Yet be
                Purchased
                Under
                  the
                Plan
                  (2)June
                  1, 2005
              June
                  30, 2005
              -
              $         -
              -
              200,000July
                  1, 2005
              July
                  31, 2005
              -
              -
              -
              200,000August
                  1, 2005
              August
                  31, 2005
              -
              -
              -
              200,000September
                  1, 2005
              September
                  30, 2005
              638
              16.93
              638
              199,362October
                  1, 2005
              October
                  31, 2005
              -
              -
              -
              199,362November
                  1, 2005
              November
                  30, 2005
              -
              -
              -
              199,362December
                  1, 2005
              December
                  31, 2005
              1,476
              18.99
              -
              199,362Total
              
              2,114
              $
                  17.96
              638
              199,3621)
                  During the period presented, there were 1,476 shares purchased,
                  which were
                  acquired at current market values as consideration for the
                exercise
                  of fully vested options.2)
                  In May, 2005, the Corporation announced a new stock repurchase
                  plan to
                  purchase up to 200,000 shares of the Corporation’s stock. The
                Plan
                  will expire on May 31, 2006.
 28
  **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.




**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, 2005.
                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, 2005, 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.





29


**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.





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, 2005. 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, 2005, 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 2005 with the designated
      laws and regulations.





Management’s
      assessment of the effectiveness of the Corporation’s internal control over
      financial reporting as of December 31, 2005, has been audited by Moss Adams
      LLP,
      the Corporation’s independent registered public accounting firm who audits the
      Corporation’s consolidated financial statements. The attestation report of Moss
      Adams LLP expresses unqualified opinions on management’s assessment and on the
      effectiveness of the Corporation’s internal control over financial reporting as
      of December 31, 2005.








**Item
      9B. Other Information**




None.




30





**PART
      III**




**Item
      10. Directors and Executive Officers of the Registrant**




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)
            49
            President,
                Chief Executive Officer and Director of Cascade Bank and Cascade
                Financial
                CorporationRobert
                G. Disotell
            51
            Executive
                Vice President, Chief Credit OfficerSteven
                R. Erickson(b)
            50
            Executive
                Vice President, Real Estate LendingLars
                H. Johnson(b)
            52
            Executive
                Vice President, Chief Financial OfficerLeAnne
                M. Frank
            36
            Executive
                Vice President, Chief Administrative OfficerRobert
                F. Wojcik
            56
            Executive
                Vice President, Business BankingDebbie
                E. McLeod
            40
            Executive
                Vice President, Retail Banking






(a)  At
      December 31, 2005.


(b)  Officer
      of the Corporation and Bank.





The
      principal occupation of each executive officer of the Corporation and 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 is a
      past
      Chair of the Board of United Way of Snohomish County and chaired the 1999
      Community Campaign. She serves on the Board of Directors of the Boys and Girls
      Club of Snohomish County, Washington Bankers Association, the Washington
      Roundtable, the Washington State Major League Baseball Stadium Public Facilities
      District, and the Executive Advisory Board of the Albers School of Business
      and
      Economics at Seattle University. She is a past President of the Puget Sound
      Council of Camp Fire Boys and Girls. Ms. Nelson also serves as Vice Chair of
      the
      Company’s Executive Committee and as a member of the Bank’s Loan Committee. Ms.
      Nelson is a resident of Edmonds, Washington.




ROBERT
      G.
      DISOTELL has been employed by Cascade Bank since 1977 and currently serves
      as
      Executive Vice President of Credit Administration. He is responsible for
      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, Loan Servicing, 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,
      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.




31


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 31 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.
      FRANK is the
      Executive Vice President and Chief Administrative Officer for the Bank. She
      has
      19 years of consumer banking experience starting with Rainier Bank and Bank
      of
      America, where she served as Vice President and Region Service Manager. Ms.
      Frank joined Cascade in February 2001. She is a 2002 graduate of Leadership
      Snohomish County and a member of the Board for the Snohomish County Red Cross.
      Ms. Frank 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
      27 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 18 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 Director 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 Owners




Information
      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 Management





The
      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 Control





The
      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**




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.”




32




**PART
      IV**




**Item
      15. Exhibits, Financial Statement Schedules, and Reports on Form
      8-K**




(a)  (1)(2)  Reports
      of Independent Registered Public Accounting Firms


Consolidated
      Financial Statements


(a)
            Consolidated Balance Sheets at December 31, 2005,
              and
              December 31, 2004. (b)
            Consolidated
                Statements of Income for the year ended December 31, 2005, 2004 and
                2003.


(c)
            Consolidated
                Statements of Stockholders’ Equity and Comprehensive Income for the year
                ended December 31, 2005, 2004 and
                2003.


(d)
            Consolidated
                Statements of Cash Flows for the year ended December 31, 2005, 2004
                and
                2003. (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)  Exhibits




3.1
                (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
            Form
                of Change of Control Agreement entered into between the Bank and
                its
                executive officers.


(Incorporated
      by reference to Exhibit 10.6 of the Corporation’s Form 10-K for the period
      ending December 31, 2001).


10.6
            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).


10.7
            Employment
                Agreement Extension with Carol K. Nelson dated July 12, 2005 (Incorporated
                by reference to Exhibit 10.6 of the Corporation’s Form 10-Q for the period
                ending September 30, 2005).


13
            Cascade
                Financial Corporation December 31, 2005 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


23.1
            Consent of Independent Registered Public Accounting
              Firm
              - KPMG 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
      January 25, 2006, the Corporation filed a Form 8-K reporting an attached press
      release announcing earnings information for the fourth quarter ended December
      31, 2005, under Items 2.02 and 9.01 of Form 8-K .





33





**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 CORPORATION**





Date:March
              13, 2006
            
            By:/s/
              Carol K NelsonCarol
                K. NelsonPresident
                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, 2006
            
            Date:
            March
                13, 2006By:
            /s/
                David W. Duce
            
            By:
            /s/
                Ronald E ThompsonDavid
                W. Duce
              Chairman
            
            
            Ronald
                E. Thompson
              DirectorDate:
            March
                13, 2006
            
            Date:
            March
                13, 2006By:
            /s/
                Janice Halladay
            
            By:
            /s/
                G. Brandt WestoverJanice
                Halladay
              Director
            
            
            G.
                Brandt Westover
              DirectorDate:
            March
                13, 2006
            
            Date:
            March
                13, 2006By:
            /s/
                Craig Skotdal
            
            By:
            /s/
                Dwayne LaneCraig
                Skotdal
              Director
            
            
            Dwayne
                Lane
              DirectorDate:
            March
                13, 2006
            
            Date:
            March
                13, 2006By:
            /s/
                David O’Connor
            
            By:
            /s/
                Richard AndersonDavid
                O’Connor
              Director
            
            
            Richard
                Anderson
              DirectorDate:
            March
                13, 2006
            
            Date:
            March
                13, 2006






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