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, 2010.

¨	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) 339-5500

Securities registered pursuant to Section 12(b) of the Act:		None

Securities 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 12 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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

YES ¨ NO þ

The aggregate market value of the voting and non-voting Common Stock held by non-affiliates computed by reference to the price at which the Common Stock was last sold, or the average bid and asked price of such Common Stock, as of the last business day of the registrant's most recently completed second fiscal quarter, was $5.8 million.

The aggregate market value of Common Stock held by non-affiliates of the registrant at March 22, 2011 was $5.3 million (based on the last reported sale on such date). The number of shares of the registrant’s Common Stock outstanding at March 22, 2011, was 12,271,529.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Cascade Financial Corporation

FORM 10-K

December 31, 2010

TABLE OF CONTENTS

	PART I
		Page
Item 1.	Business	4
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	28
Item 2.	Properties	28
Item 3.	Legal Proceedings	28
Item 4.	[Removed and Reserved]	-

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 8.	Financial Statements and Supplementary Data	64
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	65
Item 9A.	Controls and Procedures	65
Item 9B.	Other Information	66

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	66
Item 11.	Executive Compensation	72
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	78
Item 13.	Certain Relationships and Related Transactions, and Director Independence	79
Item 14.	Principal Accounting Fees and Services	80

	PART IV

Item 15.	Exhibits and Financial Statement Schedules	81
	Exhibit Index	127
Signatures		129

PART I

FORWARD LOOKING STATEMENTS

This annual report on Form 10-K includes forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative thereof or other variations thereon or comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed below under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations are:

·	management’s ability to raise capital to meet regulatory requirements and fund future operations;

·	management’s ability to effectively execute its business plan and strategy;

·	the credit risks of lending activities, including changes in the level and trend of loan delinquencies, collections and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;

·	changes in general economic conditions, either nationally or in our market areas;

·	the availability of and costs associated with sources of liquidity;

·	inflation, interest rates, market and monetary fluctuations;

·	legislative or regulatory changes or changes in accounting principles, policies or guidelines;

·	the possibility that we will be unable to comply with certain conditions imposed upon us in regulatory actions, which could result in the imposition of further restrictions on our operations, penalties or other regulatory actions;

·	the costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews;

·	our ability to attract and retain deposits;

·	further increases in premiums for deposit insurance;

·	the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

·	our success at managing the risks involved in the foregoing; and

·	other risks which may be described in the Corporation’s future filings with the SEC under the Securities Exchange Act of 1934.

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments. In addition, we may make certain statements in future Securities and Exchange Commission (SEC) filings, in press releases and in oral and written statements that are not statements of historical fact and may constitute forward-looking statements.

ITEM 1. BUSINESS

General

Cascade Financial Corporation (CFC or the Corporation) is a bank holding company incorporated in the state of Washington in 2003. At December 31, 2010, the Corporation’s wholly-owned subsidiaries were Cascade Bank (Cascade Bank or the Bank), and Cascade Capital Trusts I, II, and III, formed to hold trust preferred securities. Colby R.E., LLC, a subsidiary of the Bank, was incorporated in March 2009 and 2011 Yale Avenue East, LLC, a subsidiary of Colby R.E., LLC, was incorporated in May 2010. Both were formed to acquire, manage and sell properties taken in foreclosure (REO properties). The executive offices of the Corporation are located at 2828 Colby Avenue, Everett, Washington, 98201. The telephone number is (425)339-5500 and the website is www.cascadebank.com. Information on the website is not part of this Report.

The Bank has been serving the Puget Sound region 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 this date, 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.

The Corporation conducts its business from its main office in Everett, Washington, and 21 other full-service offices in the greater Puget Sound region. At December 31, 2010, the Corporation had total assets of $1.5 billion, total deposits of $1.1 billion and total equity of $58.5 million.

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.

Subsidiary Activity

The Corporation has four subsidiaries: Cascade Bank, Cascade Capital Trust I, II, and III. The activities of the Corporation are primarily conducted through the Bank. Accordingly, this Form 10-K principally discusses the Bank’s operations. The operations of the Bank include Colby R.E., LLC and 2011 Yale Avenue East, LLC, both of which were formed to (a) acquire, improve, manage, lease, operate, sell, transfer, exchange, encumber, pledge or dispose of any real or personal property acquired by the Bank; and (b) to engage in such other lawful acts or activities for which limited liability companies may be formed under the Washington Limited Liability Company Act.

Cascade Capital Trust I was formed for the exclusive purpose of issuing trust preferred securities underlying junior subordinated debentures issued by the Corporation, and engaging in only those other activities necessary, advisable or incidental to the above. The junior subordinated debentures total $10.3 million, have an interest rate of 11.0%, mature on March 1, 2030, and are the sole assets of Cascade Capital Trust I. The junior subordinated debentures became pre-payable, in whole or in part, at the Corporation’s option on or after March 1, 2010, at declining premiums to maturity. At December 31, 2010, the premium was 5.5%. Proceeds totaling approximately $9.3 million from the issuance of the junior subordinated debentures were used to increase the capital level of the Bank.

Cascade Capital Trust II incorporates the same structure for the same purposes as Cascade Capital Trust I. The junior subordinated debentures issued under Cascade Capital Trust II equal $5.2 million and had a rate of 5.82% for the first five years, and beginning January 7, 2010, float at the three-month LIBOR plus 1.90% for the remaining twenty-five years. The securities became callable at par on a quarterly basis beginning January 7, 2010.

Cascade Capital Trust III incorporates the same structure for the same purposes as Cascade Capital Trust I and II. The junior subordinated debentures issued under Cascade Capital Trust III equal $10.3 million and have a rate of 6.65% for the first five years, and beginning June, 2011, float at the three-month LIBOR plus 1.40% for the remaining twenty-five years. The securities are callable at par on a quarterly basis beginning June 15, 2011.

We have been deferring quarterly interest payments due on our trust preferred securities since the fourth quarter of 2009, as permitted by the terms of the indenture agreements, as a result of regulatory actions against us which prohibit us from making such payments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Junior Subordinated Debentures.” The balance of deferred interest was $2.6 million as of December 31, 2010, and is included in the Consolidated Balance Sheet under “Accrued interest payable, expenses and other liabilities.”

Proposed Merger

On March 4, 2011, the Corporation announced that the Corporation, the Bank and Opus Bank entered into a definitive agreement, providing for Opus Bank to acquire the Corporation and the Bank, and for the merger of the Bank into Opus Bank. Opus Bank is a California-chartered bank with its executive offices located in Irvine, California. According to the terms of the merger agreement, Opus Bank will pay approximately $16.25 million to retire the Corporation’s $39.0 million in preferred stock and associated warrants issued to the United States Department of the Treasury under the Treasury’s

Capital Purchase Program, and $5.5 million in cash to the holders of the Corporation’s common stock. The purchase price for the Corporation’s common stock represents approximately $0.45 cash per share outstanding. In addition, Opus Bank will assume all of the Corporation’s obligations with respect to the trust preferred securities issued by the Corporation’s trust subsidiaries. The proposed transaction is subject to the approval of the Corporation’s shareholders, the approval of federal and state regulatory authorities, and other customary conditions. The parties expect to close the transaction in the latter part of the second quarter of 2011. Notwithstanding this, there are no assurances that the Corporation, the Bank and Opus Bank will be able to successfully close the proposed merger.

Business Strategy

Our current business strategies are as follows:

·	Strengthening our capital position.

·	Proactively managing credit quality and loan collections and improving asset quality.

·	Diversifying our loan portfolio by emphasizing commercial and industrial lending through our existing branches.

·	Managing liquidity and improving our capital position in compliance with regulatory guidelines.

·	Continuing to seek out reasonable expense reduction measures.

·	Increasing core deposits to fund loan growth and maintaining net interest margin through an enhanced branch network and online banking.

The Corporation and its subsidiary, Cascade Bank, are subject to regulatory actions with respect to their operations, including the FDIC Order and FRB Agreement described in “Regulation and Supervision – Regulatory Actions” below. As a result of these regulatory actions, the significant operating losses incurred in 2010 and 2009 and our needs to raise additional capital, there is substantial doubt about our ability to continue as a going concern. The report of the Corporation’s independent registered public accounting firm on our financial statements for the year ended December 31, 2010, contains an explanatory paragraph with respect to our ability to continue as a going concern. The 2010 financial statements do not include any adjustments that might result from the outcome of this uncertainty, which could affect our ability to continue as a going concern.

Market Area

Headquartered in Everett, Washington, the Corporation serves its customers from 22 full-service offices - 13 in Snohomish County, eight in King County, and one in Skagit County. The primary geographic market area for most Cascade Bank business lines is in Snohomish, King, Pierce and Skagit Counties.

Our market area in King County includes the growing cities east of Seattle and Lake Washington. This area’s economy has been dominated by Microsoft and The Boeing Company, with other high technology companies also playing an important role.

Everett, the Snohomish County seat, is the homeport of the U.S. Navy’s carrier, 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 been enhanced by the growth of 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 continued 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 our market area and potentially the quality of our loan portfolios.

Competition

The competitive landscape for banking has changed significantly in the past three years. Three Washington state banks were closed by the FDIC during 2009, and 11 were closed in 2010. Additionally, many banks in the state, including Cascade Bank, are operating under formal regulatory orders. Competition for loans has therefore decreased in the community bank market due to limited capital, and competition for deposits has been reduced due to regulatory restrictions that cap the rates these banks may pay. Nevertheless, there continues to be competition from national banks, large regional banks, healthy community banks and credit unions.

The Bank’s primary focus for loans is small-to-medium sized businesses and consumers in the Puget Sound area. As noted above, major competitors for the Bank in these loan markets are national banks, large regional banks, community banks and credit unions. The large banks often compete on the basis of competitive pricing, while the community banks and credit unions compete on the basis of local decision making and promises of a higher level of service.

The Bank’s competitors for retail loans, which include residential real estate and consumer loans, are numerous, including banks, mortgage brokers, captive finance subsidiaries of automobile companies, etc. While not a major area of focus, the Bank provides consumer lending on a relationship basis to its retail customers and business owners and their employees.

On the deposit side, geographic location is still the primary factor in choosing a bank for a checking account relationship. As a result, the Bank’s competition for checking deposits comes primarily from large institutions with a broad network of locations. Online banking continues to be an important convenience service to attract checking customers from larger banks. Community banks and 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 competition from non-banking companies such as credit unions, financial services companies and brokerage firms. Many credit unions, including a large one in Cascade Bank’s market area, have expanded their eligible membership by amending their charters.

Regulation and Supervision

Regulatory Actions

FDIC Consent Order. On July 20, 2010, the Board of Directors of the Bank stipulated to the entry of a Consent Order with the Federal Deposit Insurance Corporation (FDIC) and the Washington State Department of Financial Institutions (DFI), effective July 21, 2010 (FDIC Order). Under the terms of the FDIC Order, the Bank cannot pay any cash dividends or make any payments to the Corporation without the prior written approval of the FDIC and the Washington State DFI. Other material provisions of the FDIC Order require the Bank to:

·	review the qualifications of the Bank’s management;

·	provide the FDIC with 30 days written notice prior to adding any individual to the Board of Directors of the Bank or employing any individual as a senior executive officer;

·	increase director participation and supervision of Bank affairs;

develop a capital plan and increase Tier 1 leverage capital to 10% of the Bank’s average total assets and increase total risk-based capital to 12% of the Bank’s risk-weighted assets by November 18, 2010, and maintain such capital levels, in addition to maintaining a fully funded allowance for loan losses satisfactory to the regulators;

eliminate from its books, by charge-off or collection, all loans classified as “loss” and all amounts in excess of the fair value of the underlying collateral for assets classified as “doubtful” in the Report of Visitation dated February 16, 2010 that have not been previously collected or charged-off, by July 30, 2010;

·	reduce the amount of loans classified “substandard” and “doubtful” in the Report of Visitation that have not previously been charged off to not more than 130% of the Bank’s Tier 1 capital and allowance for loan losses, within 180 days;

·	eventually reduce the total of all adversely classified loans by collection, charge-off or sufficiently improving the quality of adversely classified loans to warrant removing any adverse classification, as determined by the regulators;

·	formulate a written plan to reduce the Bank’s levels of nonperforming assets and/or assets listed for “special mention” by the Bank to an acceptable level and to reduce the Bank’s concentrations in commercial real estate and acquisition, development and construction loans;

·	develop a three-year strategic plan and budget with specific goals for total loans, total investment securities and total deposits, and improvements in profitability and net interest margin, and reduction of overhead expenses;

·	submit a written plan for eliminating the Bank’s reliance on brokered deposits, in compliance with FDIC’s rules;

·	eliminate and/or correct all violations of law set forth in the Report of Visitation and the Report of Examination dated May 18, 2009, and ensure future compliance with all applicable laws and regulations;

·	implement a comprehensive policy for determining the adequacy of the allowance for loan losses satisfactory to the regulators and remedy any deficiency in the allowance in the calendar quarter discovered by a charge to current operating earnings;

·	refrain from extending additional credit with respect to loans charged-off or classified as “loss” and uncollected;

·	refrain from extending additional credit with respect to other adversely classified loans, without the prior approval of a majority of the directors on the Bank Board or its loan committee, and without first collecting all past due interest;

·	implement a liquidity and funds management policy to reduce the Bank’s reliance on brokered deposits and other non-core funding sources; and

·	prepare and submit periodic progress reports to the FDIC and the Washington State DFI.

The FDIC Order will remain in effect until modified or terminated by the FDIC and the Washington State DFI. A complete copy of the FDIC Order was filed as Exhibit 10.1 to the Form 8-K filed by the Corporation with the SEC on July 21, 2010.

FRB Written Agreement. Additionally, based on an examination concluded on March 11, 2010, the Corporation entered into a Written Agreement (FRB Agreement) with the Federal Reserve Bank (FRB) of San Francisco on November 4, 2010. Under the FRB Agreement, the Corporation cannot do any of the following without prior written approval of the FRB:

·	declare or pay any dividends;

·	make any distributions of principal or interest on junior subordinated debentures or trust preferred securities;

·	incur, increase or guarantee any debt; or

·	redeem any outstanding stock.

The FRB Agreement also requires the Corporation to:

·	take steps to ensure that the Bank complies with the FDIC Order;

·	submit a written capital plan that provides for sufficient capitalization of both the Corporation and the Bank within 60 days, and notify the FRB no more than 45 days after the end of any quarter in which any of the Corporation’s capital ratios fall below the approved plan’s minimum ratios;

·	submit a written cash flow projection plan for 2011 within 60 days;

comply with FRB regulations governing affiliate transactions, as well as submit a written plan to reimburse the Bank for all payments made by the Bank in violation of sections 23A and 23B of the Federal Reserve Act or to collateralize the loan made by the Bank to the Corporation in accordance with the requirements of sections 23A and 23B of the Federal Reserve Act;

·	comply with notice and approval requirements of the Federal Deposit Insurance Act (FDI Act) related to the appointment of directors and senior executive officers or change in the responsibility of any current senior executive officer;

·	comply with restrictions on paying or agreeing to pay certain indemnification and severance payments without prior written approval; and

·	submit a quarterly process report to the FRB.

The FRB Agreement will remain in effect until modified or terminated by the FRB. A complete copy of the FRB Agreement is attached as Exhibit 10.1 to the Form 10-Q filed by the Corporation with the SEC on November 9, 2010.

The Board of Directors is committed to taking all actions necessary to meet each of the requirements of the FDIC Order and the FRB Agreement and believes that the Bank and the Corporation were in compliance with these regulatory actions as of December 31, 2010, except for the requirement in the FDIC Order to increase the Bank’s Tier 1 leverage capital to 10% and risk-based capital to 12% by November 18, 2010. The Board of Directors is working diligently to comply with the requirement to raise capital. On March 4, 2011, the Corporation announced that the Corporation, the Bank and Opus Bank entered into a definitive agreement, providing for Opus Bank to acquire the Corporation and the Bank, and for the merger of the Bank into Opus Bank. See “Proposed Merger.”

The requirements and restrictions of the FDIC Order and the FRB Agreement are judicially enforceable and the failure of the Corporation or Cascade Bank to comply with such requirements and restrictions may subject the Corporation and Cascade Bank to additional regulatory restrictions including: the imposition of civil monetary penalties; the issuance of directives to increase capital or enter into a strategic transaction, whether by merger or otherwise, with a third party; the appointment of a conservator or receiver for Cascade Bank; the liquidation or other closure of Cascade Bank and inability of the Corporation to continue as a going concern; the termination of insurance of deposits; the issuance of removal and prohibition orders against institution-affiliated parties; and the enforcement of such actions through injunctions or restraining orders. Generally, these enforcement actions will be lifted only after subsequent examinations substantiate complete correction of the underlying issues.

General

The following discussion is only intended to provide summaries of significant statutes and regulations that affect the banking industry and is therefore not complete. Changes in applicable laws or regulations, and in the policies of regulators, may have a material effect on our business and prospects. We cannot accurately predict the nature or extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state laws and regulations, may have in the future.

We are extensively regulated under federal and state law. These laws and regulations are primarily intended to protect depositors, not shareholders. The discussion below describes and summarizes certain statutes and regulations. These descriptions and summaries are qualified in their entirety by reference to the particular statute or regulation. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may also be affected by changes in the policies of banking and other government regulators. We cannot accurately predict the nature or extent of the possible future effects on our business and earnings of changes in fiscal or monetary policies, or new federal or state laws and regulations.

Compliance

In order to assure that we are in compliance with the laws and regulations that apply to our operations, including those summarized below, we employ a full-time compliance officer and also provide compliance training to our employees. We are regularly reviewed or audited by the Federal Reserve, the FDIC and the Washington State DFI, Division of Banks, during which examinations such agencies assess our compliance with applicable laws and regulations.

Federal Bank Holding Company Regulation

General: Cascade Financial Corporation is a registered bank holding company as defined in the Bank Holding Company Act of 1956, as amended, or the Bank Holding Company Act, and is therefore subject to regulation, supervision and examination by the Federal Reserve. In general, the Bank Holding Company Act limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to banking. CFC must file reports with the Federal Reserve and must provide it with such additional information as it may require.

The Federal Reserve may require CFC to terminate an activity or terminate control or liquidate or divest certain subsidiaries, affiliates or investments when the Federal Reserve believes the activity or the control of the subsidiary or affiliates constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries.

The Federal Reserve also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, CFC must file written notice and obtain Federal Reserve approval prior to purchasing or redeeming its equity securities. Additionally, CFC is required by the Federal Reserve to maintain certain levels of capital. See “Capital Adequacy” below for a discussion of the applicable federal capital requirements.

Acquisition of Banks: The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve Board’s prior approval before:

·	acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

·	acquiring all or substantially all of the assets of any bank; or

·	merging or consolidating with any other bank holding company.

Additionally, the Bank Holding Company Act provides that the Federal Reserve Board may not approve any of these transactions if it would result in or tend to create a monopoly, substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve Board’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Restrictions on Ownership of CFC: The Bank Holding Company Act requires any “bank holding company” (as defined in that Act) to obtain the approval of the Board of Governors of the Federal Reserve System prior to acquiring more than 5% of our outstanding common stock. Any person other than a bank holding company is required to obtain prior approval of the Federal Reserve Board to acquire 10% or more of our outstanding common stock under the Change in Bank Control Act. Any holder of 25% or more of our outstanding common stock, other than an individual, is subject to regulation as a bank holding company under the Bank Holding Company Act.

Holding Company Control of Nonbanks: With some exceptions, the Bank Holding Company Act also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

Transactions with Affiliates: Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including funds for payment of future dividends, interest and operational expenses.

Tying Arrangements: We 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 CFC nor the Bank may condition an extension of credit to a customer on either: (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.

Support of Subsidiary Banks: Under Federal Reserve policy, CFC is expected to act as a source of financial and managerial strength to the Bank. This means that CFC is required to commit, as necessary, resources to support the Bank. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.

Federal and State Regulation of Cascade Bank

General: Cascade Bank is a Washington chartered commercial bank with deposits insured by the FDIC. As a result, the Bank is subject to supervision and regulation by the Washington State DFI and the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe or unsound banking practices.

Lending Limits: Washington banking law generally limits the amount of funds that a bank may lend to a single borrower, including related entities, to 20% of shareholders’ equity. As of December 31, 2010, the Bank had not made any loans with balances in excess of the loans-to-one-borrower limit.

Control of Financial Institutions: The acquisition of 25% or more of a state chartered bank’s voting power by any individual, group or entity, is deemed a change in control under Washington banking law, requiring notice and application and prior approval of the DFI.

Community Reinvestment: The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their jurisdiction, the FDIC evaluate the record of the financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Cascade Bank received an “outstanding” CRA rating at the last examination.

Insider Credit Transactions: Banks are also subject to certain FDIC restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons (i.e., insiders). Extensions of credit: (i) must be made on substantially the same terms and pursuant to the same credit underwriting procedures as those for comparable transactions with persons who are neither insiders nor employees; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in regulatory sanctions on the bank or its insiders.

Regulation of Management: Federal law sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency. Federal law also prohibits management personnel of a bank from serving as a director or in a management position of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards: Federal law imposes upon banks certain non-capital safety and soundness standards. These standards cover internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation and benefits. Additional standards apply to asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to its regulators, 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. Under Washington state law, if the shareholders’ equity of a Washington state-chartered bank becomes impaired, the Commissioner of the Washington State DFI will require the bank to make the impairment good. Failure to make the impairment good may result in the Commissioner’s taking possession of the bank and liquidating it.

Dividends: The principal source of CFC cash reserves is dividends received from the Bank. Washington law limits the Bank’s ability to pay cash dividends. Under these restrictions, a bank may not declare or pay any dividend greater than its retained earnings without approval of the Washington State DFI. The Washington State DFI has the power to require any state-chartered bank to suspend the payment of any and all dividends. In addition, a bank may not pay cash dividends if doing so would reduce its capital below minimum applicable federal capital requirements. See “Capital Adequacy” below for a discussion of the applicable federal capital requirements.

In June 2009, the Corporation announced that it would temporarily suspend its regular quarterly cash dividend on common stock to preserve capital. We are prohibited by the pending regulatory actions described above (see “Regulatory Actions”), from paying any cash dividend or any other form of payment or distribution representing a reduction in the Bank’s capital.

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.

Other Regulations: The loan operations of the Bank are subject to state usury laws and federal laws concerning interest rates.

Federal Laws Applicable to Credit Transactions: The Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:

·	Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

·	Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

·	Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

·	Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

·	Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies;

·	Service Members Civil Relief Act, which amended the Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and

·	Rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Federal Laws Applicable to Deposit Operations: The Bank’s deposit operations are subject to:

·	the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Federal Home Loan Bank System: The Federal Home Loan Bank system, of which the Bank is a member, consists of 12 regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board (FHFB). The Federal Home Loan Banks serve as reserve or credit facilities for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e. advances) to members in accordance with policies and procedures established by the FHLB and the boards of directors of each regional FHLB.

As a system member, the Bank is entitled to borrow from the FHLB of its region and is required to own a certain amount of capital stock in the FHLB. The Bank is in compliance with the stock ownership rules described above with respect to such advances, commitments and letters of credit and residential one-to-four family loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a portion of the loan portfolio, certain other investments and the capital stock of the FHLB held by the Bank.

Mortgage Banking Operations: The Bank is subject to the rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to VA loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs.

Commercial Real Estate Guidance: The FDIC and the Federal Reserve Board issued joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices on December 6, 2006. The Guidance provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (1) commercial real estate loans exceed 300% of capital and increased 50% or more in the preceding three years; or (2) construction and land development loans exceed 100% of capital. The Guidance does not limit banks’ levels of commercial real estate lending activities. The Guidance applies to the Bank, based on our current loan portfolio. We believe that our loan portfolio has been subject to rigorous examination by banking regulators and our own credit review function and that we are taking appropriate precautions to address the risks associated with our concentrations in commercial real estate lending. We do not expect the Guidance to adversely affect our operations or our ability to execute our business strategy.

Regulation E

In November 2009, the Federal Reserve issued amendments to Regulation E, which implemented the Electronic Fund Transfer Act (Regulation E). These amendments change, among other things, the way we and other banks may charge overdraft fees; by limiting our ability to charge an overdraft fee for ATM and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively consents to the Bank’s payment of overdrafts for those transactions. On December 16, 2010, the Federal Reserve Board proposed an interchange fee cap of twelve cents per transaction. Changes to our overdraft practices will likely negatively impact future service charge revenues.

Privacy

Federal banking rules limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third-parties. Pursuant to these rules, financial institutions must provide:

·	initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third-parties and affiliates;

·	annual notices of their privacy policies to current customers; and

·	a reasonable method for customers to “opt out” of disclosures to nonaffiliated third-parties.

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We have implemented privacy policies to comply with these requirements.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (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 these 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 under the legislation. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.

FDIC regulations prohibit banks from using their interstate branches primarily for deposit production. The FDIC has implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Washington enacted “opting in” legislation in accordance with the Interstate Act, allowing banks to engage in interstate merger transactions, subject to certain “aging” requirements. Until recently, Washington restricted out-of-state banks from opening de novo branches; however, in 2005, Washington interstate branching laws were amended so that an out-of-state bank may, subject to the DFI’s approval, open de novo branches in Washington or acquire an in-state branch so long as the home state of the out-of-state bank has reciprocal laws with respect to de novo branching or branch acquisitions. Once an out-of-state bank has acquired a bank within Washington, either through merger or acquisition of all or substantially all of the bank’s assets or through authorized de novo branching, the out-of-state bank may open additional branches within the state.

Deposit Insurance

Deposit Insurance. Under the Dodd-Frank Act, the maximum amount of federal deposit insurance coverage has been permanently increased from $100,000 to $250,000 per depositor, per institution. Due to the significant number of bank failures and the current balance of the Deposit Insurance Fund (DIF), we anticipate continued increases in our FDIC premiums going forward. The Dodd-Frank Act also temporarily increases the maximum amount of federal deposit insurance coverage for non-interest bearing accounts to an unlimited amount from December 31, 2010 until January 1, 2013. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. This could result in an increase in deposit insurance assessments to be paid by us.

Capital Adequacy

Regulatory Capital Guidelines: Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies.

Tier I and Tier II Capital: Under the guidelines, an institution’s capital is divided into two broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common shareholders’ equity, surplus and undivided profits. Tier II capital generally consists of the allowance for loan losses, hybrid capital instruments and subordinated debt. The sum of Tier I capital and Tier II capital represents an institution’s total capital. The guidelines require that at least 50% of an institution’s total capital consist of Tier I capital.

Risk-based Capital Ratio: The adequacy of an institution’s capital is gauged primarily with reference to the institution’s risk weighted assets. The guidelines assign risk weightings to an institution’s assets in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support that risk. An institution’s risk weighted assets are then compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a total risk-based ratio, respectively. The guidelines provide that an institution must have a minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%.

Leverage Ratio: The guidelines also employ 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 minimum leverage ratio is 3%; however, for all but the most highly rated bank holding companies and for bank holding companies seeking to expand, regulators generally expect an additional cushion of at least 1% to 2%.

Prompt Corrective Action (PCA): Under the guidelines, 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. The categories range from “well capitalized” to “critically undercapitalized.” Institutions that are deemed to be undercapitalized, depending on the category to which they are assigned, are subject to certain mandatory supervisory corrective actions.

In order to be adequately capitalized, an institution must generally 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 that 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Regulatory Capital” for additional discussion.

As of December 31, 2010, Cascade Bank was categorized by the FDIC as “undercapitalized” for purposes of PCA. Under the Federal Deposit Insurance (FDI) Act’s PCA capital requirements (12 U.S.C. § 1831o), depository institutions that are “undercapitalized”, in addition to being subject to a number of additional restrictions, the bank is required to submit a capital restoration plan to the FDIC. Pursuant to Federal Deposit Insurance Corporation Improvement Act, an undercapitalized bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the FDIC of a capital restoration plan for the bank. If a bank is classified as significantly undercapitalized, the FDIC would be required to take one or more prompt corrective actions. These actions would include, among other things, requiring sales of new securities to bolster capital; improvements in management; limits on interest rates paid; prohibitions on transactions with affiliates; termination of certain risky activities and restrictions on compensation paid to executive officers. These actions may also be taken by the FDIC at any time on an undercapitalized bank if it determines those restrictions are necessary. If a bank is classified as critically undercapitalized, in addition to the foregoing restrictions, the Federal Deposit Insurance Corporation Improvement Act prohibits payment on any subordinated debt and requires the bank to be placed into conservatorship or receivership within 90 days, unless the FDIC determines that other action would better achieve the purposes of the Federal Deposit Insurance Corporation Improvement Act regarding prompt corrective action with respect to undercapitalized banks. The capital classification of a bank also affects the frequency of examinations of the bank. If our capital levels further decline, we may become subject to additional regulatory restrictions, which could adversely affect our earnings, business and operations.

State Corporate Law Restrictions

As a Washington corporation, we are subject to certain limitations and restrictions under applicable Washington corporate law. For example, state law restrictions in Washington include limitations and restrictions relating to indemnification of directors; distributions to shareholders; transactions involving directors, officers, or interested shareholders; maintenance of books, records, and minutes; and observance of certain corporate formalities.

Corporate Governance and Accounting Legislation

Sarbanes-Oxley Act of 2002: On July 30, 2002, the Sarbanes-Oxley Act of 2002, or SOX, was signed into law to address corporate and accounting fraud. SOX established a new accounting oversight board that enforces auditing standards and restricts the scope of services that accounting firms may provide to their public company audit clients. Among other things, SOX also: (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC; (ii) imposes new disclosure requirements regarding internal controls, off-balance-sheet transactions, and pro forma (non GAAP) disclosures; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; and (iv) requires companies to disclose whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert.”

Under SOX, the SEC is required to regularly and systematically review corporate filings, based on certain enumerated factors. To deter wrongdoing, SOX: (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

As a public reporting company, we are subject to the requirements of SOX and related rules and regulations issued by the SEC and NASDAQ. The Corporation is currently listed on the Nasdaq Capital Market. As such, it is subject to the listing and reporting requirements of NASDAQ. We are currently not in compliance with the $1.00 minimum bid requirement of NASDAQ. Failure to meet these requirements could lead to a delisting of the Corporation’s stock. See “Risk Factors.”

Anti-terrorism Legislation

USA Patriot Act of 2001: Among other things, the Patriot Act: (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also increased governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Patriot Act.

Effects of Government Monetary Policy

Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating recession. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

Employees

At December 31, 2010, we had 200 full-time equivalent employees. The employees are not represented by a collective bargaining unit. We believe we have a good relationship with our employees.

Corporate Information

We make available through our Internet website, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission (SEC). These filings can be accessed under “Shareholder Information” found on the homepage of our website at www.Cascadebank.com. These filings are also accessible on the SEC’s website at www.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The Board has adopted Standards of Conduct for employees, officers and directors, which include a “code of ethics” as defined by Item 406 of the Regulation S-K. These Standards of Conduct apply to the members of the Board of Directors and all of the Corporation’s employees, including the Corporation’s Chief Executive Officer and Chief Financial Officer.

Each of the documents referred to above is also available in print (at no charge) to any shareholder upon request, addressed to:

Cascade Financial Corporation

Attention: Corporate Secretary

2828 Colby Avenue

Everett, WA 98201

Our website and the information contained therein or connected thereto are not incorporated by reference into this Form 10-K.

Capital Purchase Program Requirements. As an issuer of preferred stock to the U.S. Treasury under its Capital Purchase Program, which itself was a component of the Troubled Asset Relief Program, the Corporation agreed to certain terms and conditions. The issuance agreements established limitations on executive pay, requirements that the Corporation’s incentive/bonus programs do not encourage senior executive officers to take unnecessary and excessive risk, and provides for a claw back of previously paid bonuses if such payments are found to be based on materially inaccurate financial statements. In addition, participation in the program required a modification of existing employment and/or change of control agreements with senior executive officers.

ITEM 1A. RISK FACTORS

In the course of conducting our business operations, the Corporation and the Bank are exposed to a variety of risks that are inherent to the financial services industry. The following discusses some of the key inherent risk factors that could affect our business and operations as well as other risk factors, which are particularly relevant to us in the current period of significant economic and market disruptions. Other factors, besides those discussed below or elsewhere in this report or other reports filed with or furnished to the SEC, also could adversely affect our business and operations, and these risk factors should not be considered a complete list of potential risks that may affect the Corporation and the Bank. These risk factors also serve to describe factors which may cause our results to differ materially from those described in forward-looking statements included herein or in other documents or statements that make reference to this report. See “Forward-Looking Statements.”

Risks Related to Our Business and Markets

Our capital position has deteriorated and we are now categorized by the FDIC as undercapitalized, and subject to an FDIC Order to raise additional capital, and we may become subject to further adverse regulatory actions.

The Corporation’s and the Bank’s capital positions have deteriorated and the Bank is now considered to be “undercapitalized” under the prompt corrective action provision of the FDI Act and related regulations, and we are subject to regulatory actions, including an FDIC Order requiring us to raise at least $68.0 million of additional capital by November 18, 2010. We have not been able to raise additional capital to date, and therefore, risk further regulatory actions and penalties. Our ability to raise additional capital depends on the current capital markets and on our financial performance. See Item 1 of this report captioned “Regulation and Supervision” for further discussion.

If our capital levels further decline, we may become subject to additional regulatory restrictions, which could adversely affect our earnings, business and operations.

Our auditor’s opinion on our 2010 financial statements includes a “going concern” qualification to our financials.

As a result of the FDIC Order, the significant operating losses incurred in 2010 and 2009, and our need to raise additional capital, there is substantial doubt about our ability to continue as a going concern. The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2010, contains an explanatory paragraph with respect to our ability to continue as a going concern. See Item 15: Note 2 to the Consolidated Financial Statements. The 2010 financial statements do not include any adjustments that might result from the outcome of these uncertainties, which could affect our ability to continue as a going concern. The going concern qualification to our financials could make it even more difficult for us to raise additional capital.

Restrictions imposed by regulatory actions could have an adverse effect on us and failure to comply with these regulatory actions could result in further regulatory action or restrictions.

The business and operations of the Corporation and our subsidiary, Cascade Bank, are currently subject to regulatory actions, which for example, generally prohibit us from paying dividends, repurchasing stock, retaining new directors or senior managers or changing the duties of senior management, paying management or consulting fees or other funds to the Corporation, and extending additional credit with respect to nonperforming and adversely classified loans, which management believes complicates the workout of troubled loans. We are also required to raise additional capital. These and other regulatory actions are described in more detail in Item 1 of this report under “Regulation and Supervision.” Management believes that it is in compliance with all the requirements of these regulatory actions, other than the requirement to raise additional capital. These regulatory actions and any future actions could continue to adversely affect our earnings, business and operations. In addition, failure to comply with these regulatory actions or any future actions could result in further regulatory actions or restrictions, including monetary penalties and the potential closure of Cascade Bank.

The downturn in the real estate market and weakness in the economy continue to adversely affect our financial condition and profitability.

We continue to operate in a challenging and uncertain economic environment, both nationally and in our western Washington market. Like many other financial institutions, we are being affected by sharp declines in residential and commercial real estate values, with rising foreclosures and high unemployment. Continued declines in residential and commercial real estate values and home sales and financial stress on borrowers as a result of the uncertain economic environment and job losses, could have an adverse effect on our borrowers or their customers and demand for our products and services, which could adversely affect our financial condition and earnings, increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.

We have been experiencing significant deterioration in our loan portfolio, centered in our residential construction and land development loans.

As of December 31, 2010, approximately 86.4% of our loan portfolio was comprised of loans secured by real estate, made up of 44.6% commercial real estate loans, 25.3% one-to-four family residential loans, 9.6% multifamily loans, 6.9% land acquisition and development/land loans. Despite some recent signs of stabilization or improvement, the deterioration in our loan portfolio which began in 2008 and has been centered in our residential construction and land development loans, continues to be a significant challenge for us, although the pace of charge-offs and provisions for loan losses slowed in the latter half of 2010. The contraction or expansion of our nonaccrual loan portfolio and other real estate owned (REO) properties in future periods will depend upon our ongoing collection efforts and changes in market conditions. We have a dedicated team of 6 employees focused on the management of problem loans, but there is no guarantee that this team will be able to effectively manage the amount of problem loans we may encounter in the future. Additional information regarding credit risk is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Loans.”

Due to unforeseen circumstances and/or changes in estimates, our allowance for loan losses may not be adequate to cover future losses.

An essential element of our business is to make loans. We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan portfolio. Our loan portfolio and allowance for loan losses are assessed each quarter by management, reviewed by our audit committee and external auditors, and were subject to recent examinations by our federal and state regulators. As of December 31, 2010, our allowance for loan losses increased to $26.1 million, or 2.62% of our total loans of $997.7 million, as a result of significant additional provisions for loan losses and charge-offs in 2010. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Loan Losses.” The determination of the appropriate level of loan loss allowance as well as the appropriate amount of loan charge-offs (net of loan recoveries) is an inherently difficult process and is based on numerous assumptions and there may be a range of potential estimates. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in real estate values in our markets and interest rates that are beyond our control. Our underwriting policies, credit monitoring processes and risk management systems and controls may not prevent unexpected losses. In addition, bank regulators periodically review our allowance for loan losses, and may require us to increase our provision for loan losses or recognize further loan charge-offs. Due to our “undercapitalized” status and the regulatory actions against us, we are also subject to additional examinations. Any such additional loan losses, should they occur, would adversely affect our financial condition and profitability.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.

Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we may continue to incur additional losses relating to nonperforming loans. We do not record interest income on non-accrual loans, thereby adversely affecting our income, and increasing loan administration costs. When we receive collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts, and restructurings to manage our problem

assets, although there are no assurances that such techniques will succeed. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to performance of their other responsibilities. There can be no assurance we will not experience further increases in nonperforming loans in the future.

If Cascade Bank’s foreclosed assets are not properly valued or sufficiently reserved to cover actual losses, or if the Bank is required to increase its valuation reserves, it could suffer additional losses.

Cascade Bank obtains updated collateral valuations when a loan has been foreclosed and the property taken in as real estate or real property owned and at certain other times. The net book value in the loan at the time of foreclosure and thereafter is compared to the updated market value, or fair value, of the foreclosed property less estimated selling costs. A writedown is recorded for any excess in the asset’s net book value over its fair value. If property values decline, the fair value of the foreclosed assets may not be sufficient to recover the carrying value in such assets, resulting in the need for additional charge-offs. Significant charge-offs to the foreclosed assets could have a material adverse effect on our financial condition and results of operations. In addition, bank regulators periodically review the foreclosed assets and may require us to recognize further charge-offs. Due to our undercapitalized status and various regulatory orders and agreements in place, we are subject to additional examinations, including the review of foreclosed properties. Any increase in the charge-offs, as required by the bank regulators, may have a material adverse effect on our financial condition and results of operations.

Market and other constraints on our construction and development loan origination volume have decreased our interest and fee income which have not been fully offset by reductions in our noninterest expenses.

Due to existing conditions in housing markets in the areas where we operate, general market conditions and other factors, our construction and development loan originations have been materially constrained in 2010 and we expect this to continue for the foreseeable future. Additionally, management’s revised business plan has de-emphasized the origination of construction loans. This has lowered interest income and fees generated from this part of our business. We have not succeeded in finding new revenue sources in the near term to completely offset declines in our interest income and origination of all new loans has decreased significantly. As a result, our total revenues have declined relative to our total noninterest expenses, and management cannot assure you that our total loans or assets will not continue to decline in the future.

We may be required to repurchase mortgage loans in some circumstances, which could harm our liquidity, results of operations and financial condition.

When we sell mortgage loans we are required to make certain representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Our whole loan sale agreements require us to repurchase or substitute mortgage loans in the event we breach any of these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower fraud or in the event of early payment default of the borrower on a mortgage loan. If repurchase and indemnity demands increase, our liquidity, results of operations and financial condition will be adversely affected.

Defaults and related losses in our residential construction and land development loan portfolio could result in a significant increase in REO balances and the number of properties to be disposed of, which would adversely affect our financial results.

As part of our collection process for all nonperforming real estate loans, we may foreclose on and take title to the property serving as collateral for the loan. Real estate owned by us and not used in the ordinary course of our operations is referred to as other real estate owned (REO) property. We expect to take additional properties into REO. Increased REO balances lead to greater expenses as we incurs costs to manage and dispose of the properties and, in certain cases, complete construction of improvements prior to sale. Any decrease in sale prices on properties may lead to REO write-downs with a corresponding expense in our statement of operations. Our management expects that earnings over the next several quarters could be negatively affected by various expenses associated with REO, including personnel costs, insurance and taxes, completion and repair costs, and other costs associated with property ownership, as well as by the funding costs associated with assets that are tied up in real estate during the period they are held in REO. The management and oversight of REO is time consuming and can be complex and can require significant resources of our management and employees.

We will also be at risk of further declines in real estate prices in the market areas in which we conduct our lending business.

Our future earnings may be adversely affected by legal and regulatory actions taken against us, as well as those legal actions that Cascade Financial Corporation has and may pursue.

Cascade Financial Corporation and Cascade Bank are involved in the regulatory, collection and potential foreclosure actions and proceedings referenced in “Item 3: Legal Proceedings,” which, if adversely determined, could have a material adverse effect on our consolidated financial position, results of operations or cash flows and our ability to raise capital. Moreover, the expenses of pending legal proceedings will adversely affect our results of operations until they are resolved.

Our profitability and the value of shareholders’ investments may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.

We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels in the financial services area. Recently enacted, proposed and future legislation and regulations have had, and will continue to have, or may have a significant impact on the financial services industry. These regulations, which are generally intended to protect depositors and not stockholders, and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and unpredictably and can be expected to influence earnings and growth. For example, the FDIC and the Federal Reserve recently issued joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices that sets forth supervisory criteria to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny.

The Guidance applies to Cascade Bank, based on our current loan portfolio, and our management expects that our business and operations will be subject to enhanced regulatory review for the foreseeable future. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and determination of the level of allowance for loan losses. Our success depends on our continued ability to maintain compliance with these regulations. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities and on terms which are acceptable to us, could be impaired by factors that affect us specifically or the financial services industry or economy in general.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we utilize and maintain a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. We may become more dependent on these sources, which include advances from the Federal Home Loan Bank of Seattle and the Federal Reserve Bank of San Francisco, and securities sold under agreements to repurchase. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs, and our profitability would be adversely affected.

Certain repurchase agreements we entered into include substantial termination fees.

We also use repurchase agreements for funding needs. The Bank has $50.0 million in repurchase agreements that have provisions allowing the agreements to be terminated by its counterparty. While we have received no indication that these repurchase agreements will be terminated prior to maturity, and the transactions are well secured by securities pledged to the counterparty, management believes that the likelihood of termination of the agreements is reasonably possible. If these repurchase agreements had been terminated as of December 31, 2010, the termination fee would have been approximately $13.7 million. An additional $75.0 million in repurchase agreements have provisions allowing termination by its counterparty with a termination fee, but these agreements cannot be terminated prior to December 2012, provided the Bank offers the lender additional securities in November and December 2011. Repurchase agreements with this lender totaling $25 million and $50 million

could be terminated in December 2012 and November 2013 respectively. The termination fee related to these agreements cannot be estimated. An additional $20.0 million in repurchase agreements do not include a termination fee provision, but can be terminated by its counterparty at par.

The FDIC Order limits the types of funding sources on which we may rely and may have a negative impact on our liquidity.

Pursuant to the terms of the FDIC Order, we may not accept, renew or roll over any brokered deposits, and are required to submit a plan that eliminates our reliance on brokered deposits. In addition, certain interest-rate limits apply to our brokered and solicited deposits. The reduction in the level of brokered deposits, even according to their regular maturity dates, may have a negative impact on our liquidity in the near term. Our financial flexibility could be severely constrained if we are unable to renew our wholesale funding or if adequate financing is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan originations, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature. Furthermore, we are now required to provide a higher level of collateral for any funds that we borrow from the Federal Reserve, and we may be required to provide additional collateral to our other funding sources as well. Any additional collateral requirements or limitations on our ability to access additional funding sources are expected to have a negative impact on our liquidity.

Fluctuations in interest rates could reduce our profitability and affect the value of our assets.

Like other financial institutions, we are subject to interest rate risk, which is the primary market risk affecting our financial performance. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa. In addition, the individual market interest rates underlying our loan and deposit products (e.g., prime) may not change to the same degree over a given time period. Loan volume and quality and deposit volume and mix can be affected by market interest rates. Changes in market interest rates could materially and adversely affect our net interest spread, asset quality, origination volume and overall profitability.

We principally manage interest rate risk by managing the volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.

Changes in the level of interest rates also may negatively affect our ability to originate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.

Interest rate volatility and credit risk adjusted rate spreads may impact our financial assets and liabilities measured at fair value, particularly the fair value of our junior subordinated debentures.

The widening of market interest rate spreads on junior subordinated debentures to levels above the contractual spreads on our outstanding debentures, combined with recent reductions in three month LIBOR rates, has contributed to positive fair value adjustments in our junior subordinated debentures carried at fair value over the last three years. Tightening of these spreads may result in recognizing fair value adjustments that negatively impact our earnings in the future.

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

Approximately 86.4% of our outstanding loan portfolio at December 31, 2010, was secured by real estate. In the course of our business and as a result of current market conditions, we have foreclosed and taken title to real estate which could subject us to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Because of our participation in the Troubled Asset Relief Program (TARP), we are subject to restrictions on compensation paid to our executives, which may make it difficult to attract and retain key members of management.

Pursuant to the terms of the TARP Capital Purchase Program, we adopted certain standards for executive compensation and corporate governance for the period during which the Treasury owns our Series A Preferred Stock. These standards generally apply to our five most highly compensated senior executive officers, including our Chief Executive Officer and Chief Financial Officer, and certain of these restrictions also apply up to the next 20 most highly compensated senior executives. The standards include, among other things:

·	ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;

·	a required clawback of any bonus or incentive compensation paid to a senior executive officer or one of the next twenty most highly compensated employees based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate;

·	a prohibition on making golden parachute payments to senior executive officers;

·	an agreement not to deduct, for tax purposes, annual compensation in excess of $500,000 for each senior executive officer; and

·	limitations on bonuses and incentive compensation.

We depend on the services of existing management to carry out our business and investment strategies. In order for us to implement our strategy to emphasize relationship banking, we will need to continue to attract and retain additional management and other qualified staff. Competition for such personnel is significant in our geographic market areas. The loss of the services of any management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our results of operations, financial condition and prospects. In particular, the change to the deductibility limit on executive compensation may increase the overall cost of our compensation programs in future periods and may make it more difficult to attract suitable candidates to serve as executive officers.

Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is harmed.

Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. Our actual or perceived failure to address various issues could give rise to reputational risk that could cause harm to us and our business prospects, including failure to properly address operational risks. These issues include, but are not limited to, legal and regulatory requirements; privacy; properly maintaining customer and associate personal information; record keeping; money-laundering; sales and trading practices; ethical issues; appropriately addressing potential conflicts of interest; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products.

We are also facing enhanced public and regulatory scrutiny resulting from the financial crisis and the regulatory orders and agreement currently in place. Failure to appropriately address the requirements stemming from regulatory actions could also give rise to additional regulatory restrictions, reputational harm and legal risks, which could among other consequences increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.

Our ability to use some or all of our net operating loss carryforwards may be impaired.

There is a significant likelihood that if we complete a capital raise involving equity financing, we will experience an “ownership change,” which would cause a reduction in the value of our net operating loss carryforwards (NOLs) realizable for income tax purposes. Section 382 of the Internal Revenue Code imposes restrictions on the use of a corporation’s NOLs, as well as certain recognized built-in losses and other carryforwards, after an “ownership change” occurs. A Section 382 “ownership change” occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of pre-change NOLs and other losses we can use to reduce our tax liability generally equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” and the applicable federal long-term tax-exempt interest rate for the month of the “ownership change."

Our investment in Federal Home Loan Bank stock may become impaired.

At December 31, 2010, Cascade Bank held Federal Home Loan Bank (FHLB) of Seattle stock with a par value of $11.9 million. As a condition of membership at the FHLB, we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. Our FHLB stock has a par value of $100, is carried at cost, and is subject to recoverability testing per accounting guidance for the impairment of long-lived assets. The FHLB currently has a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (the FHFA), its primary regulator, and has suspended future dividends and the repurchase and redemption of outstanding common stock. The FHLB has communicated that it believes the calculation of risk-based capital under the current rules of the FHFA significantly overstates the market risk of the FHLB’s private-label mortgage-backed securities in the current market environment and that it has enough capital to cover the risks reflected in its balance sheet. As a result, we have not recorded an other-than-temporary impairment on our investment in FHLB stock. However, continued deterioration in the FHLB’s financial position may result in impairment in the value of those securities. We will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of our investment.

We utilize the Federal Home Loan Bank as an additional source of liquidity.

We are members of the Federal Home Loan Bank (FHLB) of Seattle, which is one of the twelve regional banks comprising the FHLB System. The FHLB provides credit for member financial institutions. As a member of the FHLB, Cascade Bank is authorized to apply for advances from the FHLB, which are collateralized in the aggregate by loans, securities, FHLB stock, and by deposits with the FHLB. At December 31, 2010, we had $159.0 million in FHLB advances and a $40.0 million letter of credit outstanding. FHLB advances are only available to borrowers that meet certain conditions. If we were to cease meeting these conditions, our access to FHLB advances could be significantly reduced or eliminated, or future financial problems at the FHLBs may impact the collateral necessary to secure borrowings and limit the borrowings extended to member banks, as well as require additional capital contributions by member banks. Should this occur, our short term liquidity needs could be negatively impacted. Should we be restricted from using FHLB advances due to weakness in the FHLB System or with the FHLB of Seattle, we may be forced to find alternative funding sources. These alternative funding sources may include seeking lines of credit with third party banks or the Federal Reserve Bank, borrowing under repurchase agreement lines, increasing deposit rates to attract additional funds, or selling certain investment securities categorized as available-for-sale in order to maintain adequate levels of liquidity.

Our investment portfolio includes securities that are sensitive to interest rates and variations in interest rates may adversely impact our profitability.

Our securities portfolio includes securities which are insured or guaranteed by U.S. government agencies or government-sponsored enterprises and other securities which are sensitive to interest rate fluctuations. The unrealized gains or losses in our available-for-sale portfolio are reported as a separate component of stockholders’ equity until realized upon sale. As a result, future interest rate fluctuations may impact stockholders’ equity, causing material fluctuations from quarter to quarter. Failure to hold our securities until maturity or until market conditions are favorable for a sale could adversely affect our financial condition, profitability and prospects.

The value of the securities in our investment securities portfolio may be negatively affected by continued disruptions in the securities markets. The market for some of the investment securities held in our portfolio has become extremely volatile over the past two years. Volatile market conditions or deteriorating financial performance of the issuer or obligor may detrimentally affect the value of these securities. There can be no assurance that the declines in market value associated with these disruptions will not result in other-than-temporary or permanent impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

Further increases in Federal Deposit Insurance Corporation (FDIC) insurance premiums or special assessments could adversely impact our earnings.

During the year ended December 31, 2010, the Bank paid $4.1 million in deposit insurance. Under the Federal Deposit Insurance Act, the FDIC, absent extraordinary circumstances, must establish and implement a plan to restore the deposit insurance reserve ratio to 1.15% of insured deposits, over a five-year period, at any time that the reserve ratio falls below 1.15%. The escalating pace of bank failures that began in 2008 has significantly increased the Deposit Insurance Fund’s loss provisions, resulting in a decline in the reserve ratio. The FDIC expects continued insured institution failures in the next few years, which likely will result in a continued decline in the reserve ratio.

On November 12, 2009, the FDIC adopted regulations that require insured depository institutions to prepay on December 30, 2009, their estimated assessments for the fourth calendar quarter of 2009, and for all of 2010, 2011 and 2012. We were required to make a payment of $7.3 million to the FDIC on December 31, 2009, and to record the payment as a prepaid expense, which will be amortized to expense over three years.

The FDIC indicated that with the proceeds of the prepayment, additional special assessments were not necessary in 2010; however, the prepayment requirement does not necessarily preclude the FDIC from imposing a special assessment, from changing assessment rates or from revising the risk-based assessment system, pursuant to the existing notice-and-comment rulemaking framework. Should the FDIC find it necessary to impose any further special assessments or further increase assessment rates, our FDIC general insurance premium expense will further increase compared to prior periods.

Concern of customers over the safety of their deposits may cause a decrease in deposits.

With recent increased concerns about bank failures, customers increasingly are concerned about the safety of their deposits and the extent to which their deposits are insured by the FDIC. Customers may not believe Cascade Bank is a safe place to keep their deposit accounts and they may remove their deposit accounts. Additionally, customers may withdraw deposits from Cascade Bank in an effort to ensure that the amount they have on deposit at Cascade Bank is fully insured. Decreases in deposits may adversely affect our funding costs, liquidity and net income.

Strong competition within our market areas may limit our growth and adversely affect our operating results.

The banking and financial services industry is highly competitive. We compete in our market areas with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of these competitors have substantially greater resources and lending limits than we do, have greater name recognition and market presence that benefit them in attracting business and deposits, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our results of operations depend upon our continued ability to successfully compete in our market area. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase or maintain our interest earning assets. In that regard, the adverse economic conditions that began in 2007 and that have continued into 2011 have significantly reduced our origination of new loans, and there is no assurance that our total loans or assets will increase or not decline in 2011.

Our controls and procedures may fail to detect certain events or be circumvented.

We are subject to certain operations risks, including but not limited to data processing system failures and errors and customer or employee fraud. Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s financial condition and results of operations.

We may not succeed in keeping up with technological changes in our industry.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The future success of the Corporation and Cascade Bank depends, in part, upon our ability to address the needs of the Bank’s customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the operations of the Corporation and Cascade Bank. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to the Bank’s customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our financial condition and results of operations.

The network and computer systems on which we depend could fail or experience a security breach.

Our computer systems could be vulnerable to unforeseen problems. Because we conduct part of our business over the Internet and outsource several critical functions to third parties, operations will depend on our ability, as well as the ability of third-party service providers, to protect computer systems and network infrastructure against damage from fire, power loss, telecommunications failure, physical break-ins or similar catastrophic events. Any damage or failure that causes interruptions in operations could have a material adverse effect on our business, financial condition and results of operations.

In addition, a significant barrier to online financial transactions is the secure transmission of confidential information over public networks. Our Internet banking system relies on encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms our third-party service providers use to protect customer transaction data. If any such compromise of security were to occur, it could have a material adverse effect on our business, financial condition and results of operations.

Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.

We depend, and will continue to depend, to a significant extent, on a number of relationships with third-party service providers. Specifically, we receive core systems processing, essential web hosting and other Internet systems and deposit and other processing services from third-party service providers. If these third-party service providers experience difficulties or terminate their services, and we are unable to replace them with other service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be materially adversely affected.

Risks Associated With Our Securities

The price of our common stock may be volatile or may decline further and the value of our other securities may decline as a result of adverse changes in our financial performance, the economy, market conditions and other factors.

The trading price of our common stock has declined significantly and may decline further. The trading price also may fluctuate widely because of a number of factors, many of which are outside of our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies, especially financial institutions. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are:

·	our ability to raise capital to meet regulatory requirements and fund our business growth;

·	actual or anticipated quarterly fluctuations in our operating results and financial condition;

·	changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;

·	failure to meet analysts’ revenue or earnings estimates;

·	speculation in the press or investment community;

·	strategic actions by us or our competitors, such as acquisitions or restructurings;

·	actions by institutional stockholders;

·	fluctuations in the stock price and operating results of our competitors;

·	general market conditions and, in particular, developments related to market conditions for the financial services industry;

·	proposed or adopted legislative or regulatory changes or developments;

·	anticipated or pending investigations, proceedings or litigation that involve or affect us; or

·	domestic and international economic factors unrelated to our performance.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility in recent years. As a result, the market price of our common shares may be volatile. In addition, the trading volume in our common shares may fluctuate and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our

equity or equity-related securities, and other factors, including those identified above in “Forward-Looking Statements.” Further declines in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.

We do not meet the minimum bid price for continued listing on Nasdaq.

We do not meet the minimum bid price requirement for continued listing on the Nasdaq Capital Market as set forth in Nasdaq’s Marketplace Rule 5450(a)(1), as a result of the bid price of our common stock closing below the required minimum $1.00 per share for 30 consecutive business days. We have been granted an extension by the NASDAQ staff to August 1, 2011, to regain compliance with the minimum $1.00 bid price per share requirement. The extension was based on the Corporation meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Capital Market with the exception of the bid price requirement, and the Corporation’s written notice of its intention to meet the $1.00 per share requirement by August 1, 2011, by effecting a reverse stock split if necessary.

We intend to actively monitor the bid price and minimum market value for our common stock between now and the compliance date, and intend, if necessary, to pursue available options to regain compliance with the Nasdaq requirements. If we are unable to regain compliance with Nasdaq requirements and are delisted, market liquidity for our common stock could be severely affected, and our stockholders’ ability to sell securities in the secondary market could be more limited. Delisting from Nasdaq could also negatively affect the value of our common stock. Delisting could also have other negative results, including, but not limited to, the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.

We have continuing losses and continuing volatility in quarterly results.

The Corporation reported a net loss of $70.3 million for the year ended December 31, 2010. Losses resulted primarily from the high level of non-performing assets and the related reduction in interest income and increased provision for loan losses. In addition, several other factors affecting the business can cause significant variations in the quarterly results of operations. In particular, variations in the volume of loan originations and sales, the differences between the cost of funds and the average interest rate on earning assets, and other-than-temporary impairment charges in the Corporation’s investment securities portfolio could have a material adverse effect on the results of operations and financial condition. We can provide no assurance that we will not have continuing losses in our operations.

Shareholders interests may be diluted by future equity offerings or transactions.

In the future, we may attempt to increase our capital resources or, we could be forced to raise additional capital by making additional offerings of common stock, debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. In the event of liquidation, holders of our debt securities and shares of preferred stock, including the $25.8 million of trust preferred securities and the $39.0 million of preferred shares held by the U.S. Treasury, and lenders with respect to other borrowings would receive distributions of our available assets prior to the holders of our common shares. In any equity financing, we believe our stockholders would experience substantial dilution and the securities issued could have rights, preferences and privileges that are senior to those of our current stockholders, depending on the terms of any shares we were to issue. Holders of our common shares are not entitled to preemptive rights or other protections against dilution. Any debt financing also could negatively affect future earnings due to interest charges.

Shareholders may not receive any dividends on Cascade Financial Corporation common shares.

In June of 2009, we announced that we had suspended payment of cash dividends on our common stock to preserve capital. Commencing with the interest payments due in November of 2009, we exercised our right to defer regularly scheduled interest payments on our $25.8 million of outstanding junior subordinated debentures related to trust preferred securities and dividends on our outstanding $39.0 million of preferred stock issued to the Treasury. We may not pay any cash dividends on our common stock until we are current on interest payments on our outstanding junior subordinated debentures and dividends on our preferred stock. We continue to accrue for these payments. In addition, cash dividends from the Bank are the primary source of funds for payment of cash dividends to our shareholders, and under the regulatory actions against us, the Bank is currently prohibited from paying cash dividends without the prior consent of the regulators.

Our ability to service our debt, pay dividends and otherwise pay our obligations as they come due is substantially dependent on capital distributions from Cascade Bank, and these distributions are subject to regulatory limits and other restrictions.

The Corporation is a separate and distinct legal entity from Cascade Bank. However, substantially all of our activities are conducted through Cascade Bank, and, consequently, as the parent company of the Bank, the principal source of funds from which we service debt and pay our obligations and dividends is the receipt of dividends from the Bank. There are legal limitations on the extent to which Cascade Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, us. If Cascade Bank is unable to pay dividends to us for a prolonged period, we may not be able to service our debt or pay our obligations and, as a result, our business, financial condition, results of operations and prospects would be materially adversely effected.

Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system.

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (EESA) in response to the crisis in the financial sector. The U.S. Department of the Treasury and banking regulators have and continue to implement a number of programs under this legislation to address capital and liquidity issues in the banking system. On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act (ARRA) which, among other things, amended the executive compensation provisions of EESA. On July 21, 2010, President Obama signed the Dodd-Frank Reform Act which, among other things, imposes additional restrictions on banking activities. There can be no assurance, however, that any of the legislations will ease the current market volatility and limited credit availability. The failure of this legislation to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the value of our securities.

Compliance with the recently enacted financial reform legislation may increase our costs of operations and adversely impact financial results.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Reform Act) into law. The Dodd-Frank Reform Act will change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Reform Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Reform Act may not be known for many months or years. Significant changes will include:

·	the establishment of the Financial Stability Oversight Counsel, which will be responsible for identifying and monitoring systemic risks posed by financial firms, activities, and practices;

the establishment of a Bureau of Consumer Financial Protection, within the Federal Reserve, to serve as a dedicated consumer-protection regulatory body with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators;

·	amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations;

·	elimination of federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on the Bank’s interest expense;

·	broadened base for FDIC insurance assessments, with assessments now based on the average consolidated total assets less tangible equity capital of a financial institution;

·	permanent increase to the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013;

requirement that publicly traded companies provide stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorization for the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not;

·	enhanced supervision of large bank holding companies (i.e., those with over $50 billion in total consolidated assets), with more stringent supervisory standards to be applied to them;

·	the creation of a special regime to allow for the orderly liquidation of systemically important financial companies, including the establishment of an orderly liquidation fund;

·	the development of regulations to address derivatives markets, including clearing and exchange trading requirements and a framework for regulating derivatives-market participants;

·	enhanced supervision of credit-rating agencies through the Office of Credit Ratings within the SEC; and

·	increased regulation of asset-backed securities, including a requirement that issuers of asset-backed securities retain at least 5% of the risk of the asset-backed securities.

Many provisions in the Dodd-Frank Reform Act are aimed at financial institutions that are significantly larger than us. Nonetheless, there are provisions that apply to us and we must begin to comply with them immediately. In addition, federal agencies will promulgate rules and regulations to implement and enforce provisions in the Dodd-Frank Reform Act. We will have to apply resources to ensure that we are in compliance with all applicable provisions, which may adversely impact financial results. The precise nature, extent and timing of many of these reforms and the impact on us is still uncertain.

The Corporation’s issuance of securities to the United States Treasury may limit our ability to return capital to stockholders and is dilutive to the holders of our common stock.

In connection with our sale of Series A Preferred Stock to the U.S. Treasury, the Corporation also issued to the Treasury a warrant to purchase approximately 863,442 shares of our common stock. The terms of the transaction with the Treasury limits our ability to pay dividends and repurchase our shares. Until November 21, 2011 or until the Treasury no longer holds any shares of the Series A Preferred Stock, the Corporation will not be able to increase dividends above levels in effect when the warrant was issued ($0.045 per share of common stock on a quarterly basis) nor repurchase any of our shares without Treasury approval, with limited exceptions, most significantly purchases in connection with benefit plans. In addition, we are not able to pay any dividends on our common stock unless we are current on our dividend payments on the Series A Preferred Stock. Moreover, we are prohibited from paying any dividends on our common stock due to the regulatory orders and agreements in place. These restrictions, as well as the dilutive impact of the warrant, may have a negative effect on the market price of our common stock.

Unless the Corporation is able to redeem the Series A Preferred Stock prior to February 15, 2014, the cost of this capital will increase substantially on that date, from 5.00% (approximately $1.95 million annually) to 9.00% (approximately $3.16 million annually). Depending on our financial condition at the time, this increase in dividends on the Series A Preferred Stock could have a negative effect on our liquidity.

Holders of our junior subordinated debentures have rights that are senior to those of our stockholders.

As of December 31, 2010, we had outstanding $25.8 million of junior subordinated debentures. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us. The junior subordinated debentures associated with the trust preferred securities are senior to our common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made to our common stockholders. We have the right to defer distributions on the junior subordinated debentures (and the related trust preferred securities) under specified circumstances, during which time no dividends may be paid on our common stock. Starting in the fourth quarter of 2009, Cascade Bank has been prohibited from making dividend payments to us, which in turn led us to defer the payment of interest on the junior subordinated debentures and stop payment of dividends on our common stock. There are no assurances about if or when payment of interest on our junior subordinated debentures, and payment of dividends on our common stock, will resume.

Changes in accounting standards may impact how we report our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board changes the financial accounting and reporting standards that govern the preparation of financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in a restatement of prior period financial statements.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

The Corporation owns nine full-service branch locations and leases 13 full-service locations. Owned offices range in size from 1,300 to 52,000 square feet and have a total net book value at December 31, 2010, including leasehold improvements, furniture and fixtures, of $13.3 million. The Corporation leases approximately 40% of its Marysville office, and approximately 78% of its Issaquah office is leased or is available for lease. See Note 7 of the Notes to the Consolidated Financial Statements, which is listed in Item 15, for additional information on premises and equipment. The Corporation’s management believes that all facilities occupied by the Corporation are adequate for present requirements.

ITEM 3. LEGAL PROCEEDINGS

We are periodically a party to or otherwise involved in legal proceedings arising in the normal and ordinary course of business, such as claims to enforce liens, foreclose on loan defaults, and other issues incident to its business. As of December 31, 2010, Cascade Bank had commenced collection proceedings on approximately 11 real estate loans, and there may be additional lawsuits or claims arising out of or related to the impaired loans.

We are unable to predict the outcome of these matters. Our cash expenditures, including legal fees, associated with the pending litigation described above, and the regulatory proceedings described in Item 1 of this report under the caption “Regulation and Supervision,” cannot be reasonably predicted at this time. Litigation and any potential regulatory actions or proceedings can be time-consuming and expensive and could divert management time and attention from our business, which could have a material adverse affect on our business, results of operations and financial condition.

Other than the proceedings described or referenced above and the anticipated institution of additional lawsuits or claims arising out of or related to the impaired loans, including lender liability claims and counterclaims, management does not believe that there are any proceedings threatened or pending against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

Quarter Ended	High		Low
March 31, 2009	$	5.13	$	1.60
June 30, 2009		4.35		2.15
September 30, 2009		2.30		1.60
December 31, 2009		2.75		1.54

March 31, 2010	$	3.20	$	1.80
June 30, 2010		3.20		0.45
September 30, 2010		0.70		0.26
December 31, 2010*		1.04		0.30

* The Corporation transferred the listing of its securities from the Nasdaq Global Market to the Nasdaq Capital Market on December 8, 2010.

(b)

On November 24, 2008, the Corporation issued 38,970 shares of Series A Fixed-Rate Cumulative Perpetual Preferred Stock to the U.S. Treasury under its Capital Purchase Program. These preferred shares provide for cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. During 2009, we paid dividends on these preferred shares of $454,650, $487,125 and $487,125 in the first, second and third quarters. As a result of the regulatory actions against us, we began deferring dividends on our preferred shares in fourth quarter of 2009. Accrued dividends on these shares as of December 31, 2010, was $2.8 million. Under the terms of the preferred stock, deferral of dividend payment is permitted without triggering an event of default.

(c)	At December 31, 2010, there were 12,271,529 common shares outstanding, which were held by approximately 3,300 shareholders.

(d)	The Table below indicates the cash dividends paid on each share of its common stock for the periods noted:

Quarter Ended	Dividend Declared		Record Date	Payment Date
December 2008	$	0.045	01/06/09	01/20/09
March 2009		0.010	04/15/09	04/29/09

In June 2009, to preserve capital, the Corporation announced that it would temporarily suspend its regular quarterly cash dividend on common stock. For the foreseeable future, we do not intend to declare cash dividends. Additionally, the FDIC Order and the FRB Agreement prohibit the Corporation from paying dividends without the prior written approval of the regulators.

(e)

In May 2008, the Corporation announced a new stock repurchase plan to purchase up to 300,000 shares of the Corporation’s stock. The Stock Repurchase Plan expired on May 31, 2009. There were no stock repurchases in the fourth quarter of 2009 or for the year ended December 31, 2009. Given the restrictions of the U.S. Treasury’s Capital Purchase Program, which precludes share repurchases by participants, the program was not reauthorized.

(f)	As of December 31, 2010, options to purchase a total of 537,151 shares remain available for issuance under the option plans. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the equity compensation plans as of December 31, 2010.

Plan Category	Number of Shares to be Issued Upon Exercise of Outstanding Options (in thousands)		Weighted Average Exercise Price of Outstanding Options		Number of Shares Remaining Available for Future Issuance (in thousands)
Equity compensation plans approved by shareholders – 1997 Plan		171	$	4.97		-
Equity compensation plans approved by shareholders – 2003 Plan		325		13.40		537
Equity compensation plans not approved by shareholders		-		-		-
Total		496	$	10.49		537

Shareholder Return Performance Graph

The following graph compares the Corporation's cumulative shareholder return on its common stock with the return on the Nasdaq Bank Index, the S&P Banking Index and the KBW Bank Index. Total return assumes (i) the reinvestment of all dividends and (ii) the value of the investment in the Corporation's common stock and each index was $100 at the close of trading on December 31, 2005.

	12/31/05		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
Cascade Financial Corporation		100.00		120.21		95.77		38.31		15.56		3.24
Nasdaq Bank Index		100.00		111.01		86.51		65.81		53.63		60.01
S&P Banking Index		100.00		112.27		75.74		37.91		34.56		41.02
KBW Bank Index		100.00		113.17		85.32		42.68		41.13		50.28

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in thousands, except share and per share amounts)	Years Ended December 31,
Results of Operations	2010			2009			2008		2007		2006
Interest income	$	71,395		$	81,828		$	92,571	$	93,935	$	82,658
Interest expense		34,956			38,540			46,686		50,540		43,268
Net interest income		36,439			43,288			45,885		43,395		39,390
Provision for loan losses		56,515			44,175			7,240		1,350		1,000
Other income		18,744			16,629			8,812		7,447		5,917
Other expense (excluding OTTI & goodwill impairment)		52,204			34,262			28,468		26,563		24,477
Other-than-temporary impairment (OTTI)		-			858			17,338		-		-
Goodwill impairment charge		12,885			11,700			-		-		-
(Loss) income before provision (benefit) for income taxes		(66,421	)		(31,078	)		1,651		22,929		19,830
Net (loss) income		(70,286	)		(23,468	)		2,090		15,546		13,355
Dividends and accretion of issuance discount on preferred stock		2,476			2,365			251		-		-
Net (loss) income attributable to common stockholders		(72,762	)		(25,833	)		1,839		15,546		13,355
(Loss) earnings per common share, basic (1)		(5.95	)		(2.13	)		0.15		1.29		1.11
(Loss) earnings per common share, diluted (1)		(5.95	)		(2.13	)		0.15		1.27		1.08
Book value per common share (1)		1.71			8.02			10.23		10.15		9.53

ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)

(Dollars in thousands, except share and per share amounts)	December 31,
Financial Condition	2010			2009			2008			2007			2006
Total assets	$	1,498,334		$	1,704,628		$	1,637,319		$	1,417,588		$	1,345,254
Cash and cash equivalents		131,335			145,595			53,466			14,530			42,879
Securities		300,438			275,902			256,192			232,018			239,422
Total loans		997,701			1,202,688			1,258,241			1,108,153			1,010,437
Loans, net		967,661			1,173,213			1,238,733			1,092,776			996,015
Deposits		1,107,554			1,139,774			1,006,782			904,896			855,449
FHLB advances		159,000			239,000			249,000			231,000			243,000
Other borrowings		161,965			184,216			212,365			147,512			121,485
Preferred stock		37,488			37,038			36,616			-			-
Total stockholders’ equity		58,452			134,450			160,122			122,096			115,199

	December 31,
Averages		2010			2009			2008			2007			2006
Average assets	$	1,645,980		$	1,640,201		$	1,534,458		$	1,370,309		$	1,275,526
Average earning assets		1,478,085			1,461,198			1,435,055			1,297,462			1,206,569
Average total loans		1,113,891			1,242,588			1,183,072			1,046,093			955,692
Average deposits		1,158,437			1,017,348			966,316			881,136			816,469
Average stockholders’ equity		94,099			143,534			129,083			117,534			109,103
Average common stockholder’s equity		56,852			106,716			125,400			117,534			109,103
Average tangible common stockholders’ equity		53,399			90,523			100,251			92,095			83,063

	Years Ended December 31,
Financial Ratios		2010			2009			2008			2007			2006
Return on average assets		(4.42	)%		(1.57	)%		0.21	%		1.13	%		1.05	%
Return on average common stockholders’ equity		(127.98	)		(24.21	)		1.47			13.23			12.24
Return on average tangible common stockholders’ equity (2)		(112.13	)		(15.61	)		1.83			16.88			16.08
Net interest margin		2.47			2.96			3.20			3.34			3.26
Efficiency ratio		117.95			78.14			83.74			52.25			54.02
Efficiency ratio (excluding OTTI & goodwill impairment) (2)		94.60			57.18			52.05			52.25			54.02
Dividend payout ratio		-			-			175.19			25.98			28.43
Average common stockholders’ equity to average assets		3.45			6.51			8.17			8.58			8.55
Total risk-based capital to risk-weighted assets		9.98			12.82			13.26			10.80			11.22
Tier 1 capital to average total assets		5.55			8.62			10.30			8.90			8.99

	December 31,
Asset Quality		2010			2009			2008			2007			2006
Nonperforming (nonaccruing) loans	$	48,098		$	106,096		$	40,278		$	1,523		$	851
Real estate owned (REO)		34,412			18,842			1,446			-			-
Nonperforming assets		82,510			124,938			41,724			1,523			851
Allowance for loan losses		26,106			25,900			16,439			11,653			10,988
Nonperforming loans to total loans		4.82	%		8.82	%		3.20	%		0.14	%		0.08	%
Nonperforming assets to total assets		5.51			7.33			2.55			0.11			0.06
Allowance for loan losses to total loans		2.62			2.15			1.31			1.05			1.09

(1)	Per common share data is retroactively adjusted to reflect all stock splits and stock dividends.

(2)

These financial statements contain certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (GAAP). These measures include average tangible common equity, and efficiency ratio (excluding OTTI and goodwill impairment charges). These measures should not be construed as a substitute for GAAP measures; they should be read and used in conjunction with the Corporation’s GAAP financial information. A reconciliation of the included non-GAAP financial measures to GAAP measures is included in these financial statements.

The following table presents selected unaudited quarterly financial data for 2010, 2009 and 2008:

	Quarter Ended
(Dollars in thousands, except share and per share amounts)	Mar 31, 2010			Jun 30, 2010			Sept 30, 2010			Dec 31, 2010
Interest income	$	19,131		$	18,627		$	17,394		$	16,242
Interest expense		9,444			9,162			8,867			7,482
Net interest income		9,687			9,465			8,527			8,760
Provision for loan losses		31,290			11,725			8,000			5,500
Other income		1,912			3,838			5,199			7,795
Other expense		9,237			12,865			11,698			18,404
Goodwill impairment		-			12,885			-			-
Loss before provision for income taxes		(28,928	)		(24,172	)		(5,972	)		(7,349	)
Provision for income taxes		3,211			-			-			654
Net loss	$	(32,139	)	$	(24,172	)	$	(5,972	)	$	(8,003	)
Dividends and accretion of issuance discount on preferred stock		611			615			620			629
Loss attributable to common stockholders	$	(32,750	)	$	(24,787	)	$	(6,592	)	$	(8,632	)
Loss per common share, basic	$	(2.69	)	$	(2.02	)	$	(0.54	)	$	(0.70	)
Loss per common share, diluted		(2.69	)		(2.02	)		(0.54	)		(0.70	)

	Quarter Ended
	Mar 31, 2009			Jun 30, 2009			Sept 30, 2009			Dec 31, 2009
Interest income	$	21,410		$	20,215		$	20,189		$	20,014
Interest expense		10,291			9,392			9,271			9,586
Net interest income		11,119			10,823			10,918			10,428
Provision for loan losses		13,875			18,300			4,000			8,000
Other income		3,648			2,203			3,150			7,628
Other expense		7,753			9,978			7,928			8,603
OTTI		858			-			-			-
Goodwill impairment		-			11,700			-			-
(Loss) income before provision for income taxes		(7,719	)		(26,952	)		2,140			1,453
(Benefit) provision for income taxes		(2,902	)		(5,552	)		507			338
Net (loss) income	$	(4,817	)	$	(21,400	)	$	1,633		$	1,115
Dividends and accretion of issuance discount on preferred stock		587			592			592			594
(Loss) income attributable to common stockholders	$	(5,404	)	$	(21,992	)	$	1,041		$	521
(Loss) earnings per common share, basic	$	(0.45	)	$	(1.82	)	$	0.09		$	0.04
(Loss) earnings per common share, diluted		(0.45	)		(1.82	)		0.09			0.04

	Quarter Ended
	Mar 31, 2008		Jun 30, 2008		Sept 30, 2008			Dec 31, 2008
Interest income	$	23,014	$	22,793	$	24,345		$	22,419
Interest expense		12,539		11,348		11,508			11,291
Net interest income		10,475		11,445		12,837			11,128
Provision for loan losses		2,390		1,200		1,250			2,400
Other income		2,436		2,199		2,305			1,872
Other expense		6,917		7,233		7,144			7,175
OTTI		-		-		17,338			-
Income (loss) before provision for income taxes		3,604		5,211		(10,590	)		3,425
Provision (benefit) for income taxes		990		1,577		(3,971	)		964
Net income (loss)	$	2,614	$	3,634	$	(6,619	)	$	2,461
Dividends and accretion of issuance discount on preferred stock		-		-		-			251
Income (loss) attributable to common stockholders	$	2,614	$	3,634	$	(6,619	)	$	2,210
Earnings (loss) per common share, basic	$	0.22	$	0.30	$	(0.55	)	$	0.18
Earnings (loss) per common share, diluted		0.21		0.30		(0.55	)		0.18

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is provided for the consolidated operations of Cascade Financial Corporation (CFC or the Corporation) as of December 31, 2010 and 2009, and for the three years ending December 31, 2010, 2009 and 2008. The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries: Cascade Bank (Cascade Bank or the Bank), and Cascade Capital Trusts I, II, and III, formed in 2000, 2004, and 2006, respectively, for the exclusive purpose of issuing trust preferred securities and using the proceeds from the issuance to acquire junior subordinated debentures issued by the Corporation. The Corporation used the proceeds from the issuance to fund future asset growth. The Trusts are not consolidated by Cascade Financial Corporation. Colby R.E., LLC, a subsidiary under the Bank, was incorporated in March 2009 and 2011 Yale Avenue East, LLC, a subsidiary of Colby R.E., LLC, was incorporated in May 2010. Both were formed to acquire, manage and sell foreclosed properties.

The purpose of this discussion is to focus on significant factors concerning the Corporation’s financial condition and results of operations, and to provide a more comprehensive review of the Corporation’s operating results and financial condition than can be obtained from reading the consolidated financial statements alone. This discussion should be read with the consolidated financial statements and the notes thereto.

Cascade Financial Corporation, a Washington corporation, is a bank holding company owning all of the equity of its wholly owned subsidiary, Cascade Bank.

Recent Events

Regulatory Actions and Capital Raising Efforts

On July 20, 2010, the Board of Directors of the Bank stipulated to the entry of a Consent Order with the Federal Deposit Insurance Corporation (FDIC) and the Washington State Department of Financial Institutions (DFI), effective July 21, 2010 (FDIC Order). The FDIC identified deficiencies in the management and supervision of Cascade Bank that primarily relate to loan underwriting, procedures and monitoring, excessive concentrations in construction and land development loans, and related concerns about Cascade Bank’s capital and liquidity.

On November 4, 2010, the Corporation entered into a Written Agreement (FRB Agreement) with the Federal Reserve Bank of San Francisco (FRB).

See Item 1 of this report captioned “Regulation and Supervision” for further discussion.

As of December 31, 2010, Cascade Bank required approximately $68.0 million in new capital to meet the minimum Tier 1 leverage ratio requirement of 10% under the FDIC Order. Since late 2009, CFC’s Board of Directors and management team have been reviewing alternatives to improve the bank’s capital position with the assistance of its financial advisor, Sandler O’Neill + Partners LP, a nationally recognized investment banking firm and expert in the banking industry. As part of its review, the Board considered a range of alternatives including potential capital infusions from private investors and financial institutions, strategic combinations and private equity transactions, and actively solicited offers from potential investors and acquirers.

Proposed Merger

On March 4, 2011, the Corporation announced that it had entered into an agreement and plan of reorganization with Opus Bank (Opus), a California state-chartered bank. The terms of this agreement provide for Opus Bank to acquire the Corporation and the Bank, and for the merger of the Bank into Opus Bank. The merger agreement with Opus Bank was unanimously approved by the Boards of Directors of the Corporation, the Bank and Opus Bank

Under the terms of the merger agreement, the Corporation’s common stockholders will receive an amount in cash equal to $0.45 per share, which values the transaction at approximately $5.5 million. In addition, Opus Bank has offered to purchase the $39.0 million of the Corporation’s preferred stock and the associated warrant issued to the U.S. Department of the Treasury (the Treasury) under the Capital Purchase Program for $16.25 million in cash. The Treasury has indicated its willingness to agree to sell the Corporation’s preferred stock and warrant for such cash consideration subject to the entry into definitive documentation acceptable to the Treasury in its sole discretion. Opus also agreed to assume our $25.8 million of obligations with respect to trust preferred securities issued by Cascade Financial Corporation’s trust subsidiaries.

Consummation of the merger is subject to approval by regulatory authorities, approval by the shareholders of CFC and certain other conditions set forth in the agreement. The merger is expected to close in the latter part of the second quarter of 2011.

Financial Overview

For the year ended December 31, 2010, we had a net loss attributable to common stockholders of $72.8 million, or $5.95 per diluted common share, compared to a net loss attributable to common stockholders of $25.8 million, or $2.13 per diluted common share for the year ended December 31, 2009, and net income attributable to common stockholders of $1.8 million, or $0.15 per diluted common share for the year ended December 31, 2008.

The results for 2010 reflect continued pressure from an uncertain economy and the negative impact of the regional housing market. The impact of the economic downturn resulted in:

·	Allowance for loan losses of $26.1 million, or 2.62%, of total loans outstanding at December 31, 2010, compared to $25.9 million, or 2.15%, at December 31, 2009, and $16.4 million, or 1.31%, at December 31, 2008.

·	Net charge-offs of $56.3 million for 2010, compared to $34.7 million and $2.5 million for 2009 and 2008, respectively.

·	Nonperforming assets totaling $82.5 million, or 5.51% of total assets at December 31, 2010, compared to $124.9 million, or 7.33% of total assets at December 31, 2009.

Despite these challenging times, the Board of Directors and management continue to take important steps to strengthen the Corporation. During the year, we:

·	Reduced our level of nonperforming assets, by $20.8 million, or 20.0%.

·	Reduced our concentrations in real estate construction and land development loans by $175.1 million, or 68.2%.

·	Continued to closely monitor and manage our liquidity position and at December 31, 2010, on-balance sheet total liquidity, as a percentage of assets was 12.6%.

Net interest income in 2010 was $36.4 million, compared to $43.3 million in 2009. Other income was $18.7 million for the year compared to $16.6 million in 2009. For the year, total other expenses (excluding the second quarter 2010 goodwill impairment charge) increased to $52.2 million compared to $35.1 million (excluding the second quarter 2009 goodwill impairment charge) in 2009. The increase was largely due to a $9.9 million increase in write-downs/losses on sales of REO, $4.8 million in FHLB prepayment penalties associated with balance sheet restructuring transactions in the fourth quarter of 2010, a $1.4 million increase in FDIC insurance premiums and a $1.3 million increase in business insurance premiums. The second quarter 2010 and 2009 goodwill impairment charges were $12.9 million and $11.7 million, respectively.

Outlook for 2011

We face a variety of significant financial and operating challenges in 2011. These include taking all necessary actions to comply with the regulatory orders we are operating under, specifically raising capital, improving credit quality, and returning to profitability. We continue to take an aggressive stance in addressing credit issues in our loan portfolio to minimize future risks. Since 2008 we have had a Special Assets team in place to focus on managing and reducing nonperforming loans and REO properties. While we have seen progress in reducing the level of nonperforming assets, credit quality will remain an issue as long as current economic trends, including high unemployment rates and depressed real estate prices, continue.

We expect our loan portfolio balance to level off during the first quarter of 2011. However, we must still face the challenges of the current economic environment and flat loan demand, which will make it difficult for us to maintain our current loan portfolio balance as our existing credits pay down. Currently, we expect that interest rates will remain flat for the remainder of 2011. We based our 2011 projections, budgets and goals on these expectations. If these trends move differently than expected in either direction or speed, they could have a material impact on our financial condition and results of operations. The areas of our operations most directly impacted would be the net interest margin, loan and deposit growth and the provision for loan losses.

We will also continue our efforts to control noninterest expenses by working to achieve maximum efficiencies within our franchise. However, our noninterest expenses for 2011 will continue to be negatively affected by costs associated with higher business insurance expense, REO expense associated with the management and disposition of real estate properties acquired through foreclosure and increased FDIC insurance premiums.

The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements in Item 15 of this report.

Critical Accounting Policies and Estimates

The Corporation’s significant accounting policies and estimates are essential to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, which affect the reported amounts and disclosures. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. The following policies involve a higher degree of judgment than do our other significant accounting policies detailed in Note 1 of the Notes to Consolidated Financial Statements listed in Item 15.

Material estimates particularly susceptible to significant change relate to the assessment of impaired assets, the determination of the allowance for loan losses, deferred income taxes, fair value measurements and valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties.

Investment Securities

Debt and equity securities, including mortgage-backed securities (MBS), may be classified as available-for-sale or held-to-maturity. Securities available-for-sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive (loss) income. Investment securities held-to-maturity are carried at amortized cost or principal balance, adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are calculated using a method that approximates the level yield method. The Bank has the ability, and it is management’s positive intention, to hold held-to-maturity securities until maturity. Investments with fair values that are less than the amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. Management reviews investment securities on an ongoing basis for the presence of other-than-temporary-impairment (OTTI) or permanent impairment, taking into consideration current market conditions; fair value in relationship to cost; extent and nature of the change in fair value; issuer rating changes and trends; whether management intends to sell a security or if it is likely that the Bank will be required to sell the security before recovery of the amortized cost basis of the investment, which may be upon maturity; and other factors. For debt securities, if management intends to sell the security or it is likely that the Bank will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If management does not intend to sell the security and it is not likely that the Bank will be required to sell the security, but management does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors (i.e. the difference between the present value of the cash flows expected to be collected and fair value) is recognized as a charge to other comprehensive income. Impairment losses related to all other factors are presented as separate categories within other comprehensive income. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Allowance for Loan Losses

The allowance for loan losses is the amount which, in the opinion of management, is necessary to absorb future probable loan losses. Management’s determination of the level of the provision for loan losses is based on various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, the evaluation of credit risk related to specific credits and market segments and monitoring results from our ongoing internal credit review staff. Subsequent recoveries, if any, are credited to the allowance.

Management and the Board review policies and procedures at least annually, and changes are made to reflect the current operating environment integrated with regulatory requirements. Partly out of these policies has evolved an internal credit risk review process. During this process, the quality grades of loans are reviewed and loans are assigned a dollar value of the loan loss reserve by degree of risk. This analysis is performed quarterly and reviewed by senior management who makes the determination if the risk is reasonable and if the reserve is adequate. This quarterly analysis is then reviewed by the Board of Directors.

Management determines the amount of the allowance for loan losses by utilizing a loan quality grading system to determine risk in the loan portfolio. The allowance consists of general and specific components. When loans are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the Bank’s credit review process. The Bank’s loan quality grading methodology assigns a loan quality grade from 1 to 10, where a higher numerical rating represents higher risk. These loan quality-rating categories are a primary factor in determining an appropriate amount for the allowance for loan losses. The loan portfolio is separated by loan type and then by risk rating. Loans not considered impaired are evaluated as a group, by loan type, with a loss rate based on average historical losses and adjusted for qualitative (Q) factors. The Q factors include regional/local economic trends, the health of the real estate market, loan and collateral concentrations, size of borrowing relationships, trends in loan delinquencies and charge-offs and changes in loan classifications and are included in the Bank’s analysis of the allowance for loan losses. Allocations for Q factors are based upon management’s review of each of the factors and are applied to all loans included in the general valuation component of the allowance. The Q factors augment the historical loss factors utilized in assessing the allowance to reflect the potential losses embedded in the loan portfolio as real estate property values have declined and sales have slowed. After reviewing all historical and qualitative factors by loan type, management may add a management judgment factor to certain loan types if there are additional concerns in these portfolios that were not identified by using historical or other qualitative factors. Management may also include a negative adjustment to the allowance factor for certain loan types if analysis shows that the historical allowance factor overstates the allocated reserve due to the financial strength of the borrowers/guarantors, the collateral position or other factors in the related portfolio.

Management believes that the allowance for loan losses was adequate as of December 31, 2010. There is, however, no assurance that future loan losses will not exceed the levels provided for in the allowance for loan losses and could possibly result in additional charges to the provision for loan losses. See Item 1A. Risk Factors, of this report for further discussion.

Real Estate Owned (REO)

Real estate owned includes real estate acquired in settlement of loans. Real estate owned is recorded at the lower of carrying amount or fair value, based upon an appraisal, less estimated costs to sell. Developments and improvements related to the property are capitalized. Any losses recorded at the time a foreclosure occurs are classified as a charge-off against the allowance for loan losses. Losses that result from the ongoing periodic valuation of these properties, are charged to expense in the period identified. Revenue and expenses from operations and subsequent adjustments to the carrying amount of the property are included in noninterest expense in the statement of operations.

Income Taxes

The Corporation accounts for income taxes as required by FASB ASC Topic 740, Accounting for Income Taxes, under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the Consolidated Financial Statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is required on deferred tax assets if it is “more likely than not” that the deferred tax asset will not be realized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements (ASU 10-06) establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. In determining fair value, the Bank maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s estimates for market assumptions.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from a source independent of the Bank. Unobservable inputs are assumptions based on the Bank’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy that gives the highest ranking to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or a combination of the following factors: (i) quoted prices for similar assets; (ii) observable inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived principally from, or corroborated by, observable market data.

Goodwill Impairment

Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition. Identifiable intangibles are amortized on an accelerated basis over the period benefited and also considered for impairment. Goodwill is not amortized but is reviewed for potential impairment. Impairment analysis of the fair value of goodwill involves a substantial amount of judgment. During the second quarter of 2010, the Corporation analyzed its goodwill to determine whether, and to what extent, its goodwill asset was impaired. The goodwill impairment test includes two steps. Step 1, used to identify potential impairment, compares the estimated fair value of the Corporation with its carrying amount including goodwill. Step 1 inputs used to determine the implied fair value of the Corporation include the quoted market price of the Corporation’s common stock, market prices of common stocks of other banking organizations, common stock trading multiples, and inputs from comparable transactions. In the Step 1 analysis, the carrying amount exceeded its estimated fair value and the second step of the goodwill impairment test was performed to measure the amount of impairment loss, if any. Step 2 of the goodwill impairment test compared the implied estimated fair value of goodwill with the carrying amount of the currently recorded goodwill. The Step 2 analysis indicated that the implied fair value of the goodwill was less than the carrying value of goodwill. As a result of the analysis, the Corporation wrote-off the remaining balance of its goodwill at June 30, 2010.

Financial Condition

Assets

The Corporation’s total assets at December 31, 2010, were $1.5 billion, compared to $1.7 billion at December 31, 2009, a decrease of 12.1%. This decrease was primarily due to a decline in the loan portfolio. The Corporation’s total assets at December 31, 2008, were $1.6 billion.

Investment Securities

Total securities, including FHLB stock, increased by $24.5 million to $300.4 million as of December 31, 2010. Securities designated as available-for-sale increased to $234.6 million at December 31, 2010, versus $227.8 million at December 31, 2009. Securities designated as held-to-maturity increased to $53.9 million at December 31, 2010, from $36.2 million a year earlier. The securities in both portfolios consist of notes issued by Government Sponsored Enterprises (i.e. Federal Home Loan Bank (FHLB), Fannie Mae (FNMA), Freddie Mac (FHLMC) or mortgage-backed securities issued by FNMA,

FHLMC, or Ginnie Mae). There were no investment securities that were backed by subprime loans and all investments received the highest credit rating from at least one of the major rating agencies except for the FNMA and FHLMC preferred stock, included in securities available-for-sale as corporate/other in the table below, which held the highest credit rating when purchased. For a discussion on the impact of FNMA and FHLMC preferred stock on the Corporation’s results, see the details of the OTTI of these securities under Results of Operations – Other Expenses in the Management Discussion and Analysis and under Securities, Note 4 of the Notes to the Consolidated Financial Statements listed in Item 15.

The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity securities at the dates indicated:

	December 31, 2010				December 31, 2009				December 31, 2008
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available-for-sale
Mortgage-backed securities	$	70,270	$	67,203	$	40,997	$	41,280	$	42,250	$	41,852
Agency notes & bonds		116,632		111,119		188,585		186,525		81,149		81,372
US Treasury notes		56,346		56,284		-		-		-		-
Corporate/other		-		-		-		-		1,294		454
Total	$	243,248	$	234,606	$	229,582	$	227,805	$	124,693	$	123,678

	December 31, 2010				December 31, 2009				December 31, 2008
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities held-to-maturity
Mortgage-backed securities	$	25,137	$	25,509	$	15,405	$	15,909	$	20,484	$	20,545
Agency notes & bonds		28,000		26,784		19,997		19,810		99,335		99,381
Corporate/other		775		775		775		775		775		775
Total	$	53,912	$	53,068	$	36,177	$	36,494	$	120,594	$	120,701

Certain securities at December 31, 2010 shown above currently have fair values less than amortized cost, and therefore, contain unrealized losses. Available-for-sale securities had unrealized losses of $8.7 million and held-to-maturity securities had unrealized losses of $1.6 million. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates and/or the widening of market spreads subsequent to the initial purchase of the securities or to disruptions to credit markets. Since all these securities are rated AAA, this temporary impairment is not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

Federal Home Loan Bank Stock. The Bank’s investment in Federal Home Loan Bank (FHLB) of Seattle stock is carried at par value ($100 per share) and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to FHLB member institutions and can only be purchased and redeemed at par. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock, based on specified percentages of its outstanding FHLB advances. The Bank may request redemption at par value of any stock in excess of the amount the Bank is required to hold. Stock redemptions are at the discretion of the FHLB. At December 31, 2010, the Bank had 119,203 shares of FHLB stock.

The Bank evaluates FHLB stock for impairment. The determination of whether FHLB stock is impaired is based on an assessment of the ultimate recoverability of cost rather than declines in the book value of the shares. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB and (4) the liquidity position of the FHLB.

Based upon an analysis by Standard and Poors regarding the Federal Home Loan Banks, they stated that the FHLB System has a special public status (organized under the Federal Home Loan Bank Act of 1932) and because of the extraordinary support offered to it by the U.S. Treasury in a crisis, (though not used), the FHLB System can be considered an extension of the government. The U.S. government would almost certainly support the credit obligations of the FHLB System. The Bank has determined there is no impairment of the FHLB stock investment as of December 31, 2010.

In October 2010, the FHLB of Seattle entered into a Stipulation and Consent to the Issuance of a Consent Order with the Federal Housing Finance Agency (FHFA). The Stipulation and Consent provides that the FHLB agrees to a Consent Order issued by the FHFA, which requires the FHLB to take certain specified actions related to its business and operations (the Stipulation and Consent and the Consent Order are collectively referred to as the Consents). The Consents and related understandings with the FHFA constitute the FHLB's capital restoration plan and fulfill the FHFA's April 19, 2010, request of the FHLB for a business plan.

The Consents provide that, following a stabilization period (from the date of the Consent Order through the filing of the FHLB's second quarter 2011 quarterly report on Form 10-Q with the Securities and Exchange Commission) and once the FHLB reaches and maintains certain thresholds, it may begin repurchasing member capital stock at par.

For further information concerning the Bank’s securities portfolio, see Note 4 of the Notes to the Consolidated Financial Statements listed in Item 15.

Loans

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,
(Dollars in thousands)	2010					2009					2008					2007					2006
Type of Loan	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Business	$	400,047		40.10	%	$	469,196		39.01	%	$	485,060		38.55	%	$	468,453		42.28	%	$	442,391		43.78	%
R/E Construction (1)		81,778		8.20			256,917		21.36			406,505		32.31			381,810		34.44			295,087		29.20
Commercial R/E		201,885		20.23			183,286		15.24			122,951		9.77			120,421		10.87			119,298		11.81
Multifamily		89,350		8.96			82,418		6.85			86,864		6.90			11,397		1.03			34,719		3.44
Home equity/consumer		29,964		3.00			31,738		2.64			30,772		2.45			27,688		2.50			27,686		2.74
Residential		194,677		19.51			179,133		14.90			126,089		10.02			98,384		8.88			91,256		9.03
Total loans		997,701		100.00	%		1,202,688		100.00	%		1,258,241		100.00	%		1,108,153		100.00	%		1,010,437		100.00	%
Less:
Deferred loan fees, net		3,934					3,575					3,069					3,724					3,434
Allowance for loan losses		26,106					25,900					16,439					11,653					10,988
Total loans, net	$	967,661				$	1,173,213				$	1,238,733				$	1,092,776				$	996,015

(1) Includes land loans

Business Loans. Business loans decreased from $469.2 million at December 31, 2009, to $400.0 million at December 31, 2010. Unsecured business banking loans totaled $9.4 million at December 31, 2010, compared to $25.9 million as of December 31, 2009. 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 generally secured by real estate, receivables, equipment, other assets of the business, 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 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 these loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. In the case of loans secured by accounts receivable, the availability of funds for the repayment of such loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Accordingly, the repayment of a business loan depends primarily on the successful operation of the borrower's business and creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and potentially insufficient source of repayment.

Real Estate Construction Loans. Due to existing conditions in housing markets in the areas where we operate, the recession and other factors, the Bank projects real estate construction loan originations to be materially constrained in 2011 and beyond. Management’s revised business plan, of diversifying our loan portfolio, de-emphasizes the origination of construction loans. For the most

part, the Bank is not currently originating real estate construction, land development or completed lot loans. In prior years, the Bank had originated real estate construction loans to fund the building of one-to-four family homes either to borrowers as custom construction loans or to builders as speculative (spec) construction loans, including land acquisition and development and land loans. To a lesser extent, the Bank also originated real estate construction loans for multifamily and commercial real estate properties. Real estate 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. At December 31, 2010, the Bank’s real estate construction loans were $81.8 million or 8.2% of the total loan portfolio as compared to $256.9 million or 21.4% at December 31, 2009. Real estate construction loans are net of loans in process of $15,000 at December 31, 2010, and $1.4 million at December 31, 2009. Of the $81.8 million in real estate construction loans at December 31, 2010, $25.3 million were spec construction loans, $54.1 million were land acquisition and development/land loans and $2.3 million were commercial real estate construction loans. The Bank’s largest construction loan outstanding totaled $8.3 million and is included in the Bank’s nonperforming loans at December 31, 2010.

Construction loans 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 $201.9 million or 20.2% of the Bank’s total loans at December 31, 2010, compared to $183.3 million or 15.2% of the portfolio at December 31, 2009. All commercial real estate loans are secured by properties in western Washington, mainly in the Puget Sound region. Improved property including office buildings and small commercial business properties, such as strip shopping centers, secure the Bank’s commercial real estate loans. These loans are primarily adjustable-rate with a maximum term until reset on the interest rate of five years. At December 31, 2010, the largest commercial real estate loan in the Bank’s portfolio was $17.2 million, which is performing according to its terms.

Commercial real estate loans are also sensitive to local economic conditions. An economic slowdown can lead to increased vacancies that would lower the borrower’s ability to service the debt. Commercial real estate loans also have a degree of interest rate risk in that if rates fall, borrowers may refinance, and if rates rise, the Bank could experience a squeeze in its 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 $89.4 million or 9.0% of the total loan portfolio at December 31, 2010, compared to $82.4 million or 6.9% of the total loan portfolio at December 31, 2009. The multifamily portfolio is principally comprised of small to medium-size apartment projects with loan-to-value ratios usually up to 75%. All new loan originations are in the Puget Sound region and have adjustable interest rates.

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

Consumer Loans. The Bank’s consumer loan activities take three forms: home equity loans or lines of credit, installment loans/lines of credit, and Visa card loans. Home equity loans are secured by a junior lien in priority on the borrower's home. Such loans may have a combined loan-to-value ratio of up to 90% of the value of the home securing the loan. Home equity loans are fixed amount loans, which may have fixed or floating interest rates. Home equity lines of credit can be drawn upon at any time by the customer up to a specific amount. These loans are at a floating rate with a floor on that rate.

The balance outstanding for both types of home equity loans slightly decreased to $24.5 million at December 31, 2010, as compared to $25.3 million at December 31, 2009. At December 31, 2010 and December 31, 2009, the total amount of unused lines of credit were $15.2 million and $17.9 million, respectively. The second category of consumer loans are installment loans or lines of credit that are either secured by boats, automobiles, or recreational vehicles or are unsecured. This portfolio was $1.6 million at December 31, 2010, as compared to $2.7 million outstanding at December 31, 2009. Since many of the installment loans are secured by depreciating assets, any repossessed collateral for a defaulted loan is unlikely to provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections are dependent on the borrower’s continuing financial ability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Visa card loans totaled $3.9 million at December 31, 2010 compared to $3.7 million at December 31, 2009.

Residential Loans. At December 31, 2010, residential loans totaled $194.7 million or 19.5% of the total loan portfolio compared to $179.1 million or 14.9% of the total loan portfolio at December 31, 2009. Residential lending consists 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, except for loans generated under its Builder Sales program. The loans are sold on a “best efforts” basis. The Bank had no conforming loans held for sale at December 31, 2010, and $250,000 at December 31, 2009. Loans held for sale are not material and, therefore, the Bank does not include them as a separate line item on the balance sheet.

Beginning in 2009, the Bank has originated and holds loans generated under its Builder Sales program, which offers attractive terms to qualified buyers of houses from builders financed by the Bank. The Bank is required to discount these loans because of the special terms offered to the borrowers. Discounts recorded in 2010 associated with the program totaled $856,000 for the year ended December 31, 2010. The discount reduces the Bank’s allowance for loan losses. As of December 31, 2010, the Bank held $82.5 million of these loans.

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, loan-to-value, or other exceptions from agency guidelines. The Bank does not offer subprime loans.

Total loans decreased by $205.0 million to $997.7 million from December 31, 2009 to December 31, 2010. Payments and payoffs totaled $367.1 million for the year ended December 31, 2010 and offset $268.7 million in additional loan growth, most of which was due to advances on existing business loans as well as an increase in residential loans due to our Builder Sales program. Total loans were further reduced by charge-offs of $57.1 million and $47.3 million in transfers to real estate owned (REO) for the year ended December 31, 2010.

The following table presents the change in the Bank’s loan portfolio from December 31, 2009 to December 31, 2010:

(Dollars in thousands) Loans	Balance at December 31, 2010			Net (Paydowns) Additions			Reclassifi -cations (1)			Charge-Offs (2)			Transfers to REO			Transfers to Notes Receivable			Balance at December 31, 2009
Business	$	400,047		$	(51,334	)	$	(1,346	)	$	(10,993	)	$	(3,251	)	$	(2,225	)	$	469,196
R/E construction																	-
Spec construction		25,303			(17,121	)		(8,616	)		(4,569	)		(3,751	)		-			59,360
Land acquisition & development/land		54,142			(18,299	)		(454	)		(38,024	)		(35,245	)		-			146,164
Multifamily/custom construction		-			193			(19,116	)		-			-			-			18,923
Commercial R/E construction		2,333			336			(23,976	)		(1,752	)		(4,745	)		-			32,470
Total R/E Construction		81,778			(34,891	)		(52,162	)		(44,345	)		(43,741	)		-			256,917
Commercial R/E		201,885			(5,148	)		24,530			(783	)		-			-			183,286
Multifamily		89,350			(18,302	)		25,234			-			-			-			82,418
Home equity/consumer		29,964			(1,343	)		(52	)		(379	)		-			-			31,738
Residential		194,677			12,602			3,796			(574	)		(280	)		-			179,133
Total loans	$	997,701		$	(98,416	)	$	-		$	(57,074	)	$	(47,272	)	$	(2,225	)	$	1,202,688
Deferred loan fees		(3,934	)		(359	)		-			-			-			-			(3,575	)
Allowance for loan losses		(26,106	)		(56,515	)		(19	)		56,328			-			-			(25,900	)
Loans, net	$	967,661		$	(155,290	)	$	(19	)	$	(746	)	$	(47,272	)	$	(2,225	)	$	1,173,213

(1)	Includes $19 related to the change in off-balance sheet allowance for loan losses.

(2)	Excludes $267 related to overdrawn checking accounts, a write-down of $33, and recoveries of $1,046.

The following table sets forth information at December 31, 2010 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.

(Dollars in thousands)	Due in One Year or Less		Due in One to Five Years		Due After Five Years		Total		With Variable or Adjustable Rate (For Maturities of More Than One Year)		With Fixed Rate (For Maturities of More Than One Year)
Business	$	67,383	$	174,054	$	154,264	$	395,701	$	152,901	$	175,417
R/E construction		39,052		27,583		2,590		69,225		12,138		18,035
Commercial R/E		14,790		87,350		71,393		173,533		151,185		7,558
Multifamily		17,178		42,237		29,935		89,350		45,032		27,140
Home equity/consumer		1,180		8,776		18,960		28,916		19,598		8,138
Residential		2,433		11,074		179,372		192,879		103,253		87,193

Allowance for Loan Losses

Management provides for potential future loan losses by maintaining an allowance for loan losses. The allowance for loan losses reflects management’s best estimate of probable losses as of a particular balance sheet date. The allowance for loan losses is maintained at levels based on management’s assessment of various factors affecting the loan portfolio, including analysis of adversely classified loans, delinquencies, trends in credit quality, local economic conditions, growth of the loan portfolio, past loss experience, and the portfolio’s composition. Increases in the allowance for loan losses made through provisions primarily reflect loan loss risks inherent in lending and the impact of the economic climate on the loan portfolio.

At December 31, 2010, the allowance for loan losses was $26.1 million (2.62% of total loans) compared to $25.9 million (2.15% of total loans) at December 31, 2009. The valuation reserve for off-balance sheet commitments was $50,000 at December 31, 2010 and $69,000 at December 31, 2009. The total allowance for loan losses, which includes the allowance for off-balance sheet commitments, was $26.2 million (2.62% of total loans) as of December 31, 2010, compared to $26.0 million (2.16% of total loans) as of December 31, 2009.

Activity in the allowance for loan losses during the year ended December 31, 2010 included a provision expense of $56.5 million and net charge-offs of $56.3 million. Charge-offs were primarily related to business and real estate construction, including land acquisition and development/land loans, which accounted for $55.4 million in charge-offs.

The following table sets forth information regarding changes in the Bank’s allowance for loan losses for the periods presented:

(Dollars in thousands)	Years Ended December 31,
Allowance for Loan Losses	2010			2009			2008			2007			2006
Balance at beginning of period	$	25,900		$	16,439		$	11,653		$	10,988		$	10,254
Charge-Offs
Business		(11,026	)		(3,628	)		(1,212	)		(288	)		(46	)
R/E construction		(44,345	)		(30,135	)		(1,941	)		-			-
Commercial R/E		(783	)		-			-			-			-
Multifamily		-			(246	)		-			-			-
Home equity/consumer		(645	)		(637	)		(632	)		(390	)		(368	)
Residential		(574	)		(367	)		-			-			-
Recoveries		1,045			275			1,282			135			148
Net charge-offs		(56,328	)		(34,738	)		(2,503	)		(543	)		(266	)
Provision for loan losses		56,515			44,175			7,240			1,350			1,000
Transfers from (to) off-balance commitments		19			24			49			(142	)		-
Balance at end of period	$	26,106		$	25,900		$	16,439		$	11,653		$	10,988

Average total loans	$	1,113,891		$	1,242,588		$	1,183,072		$	1,046,093		$	955,692
Nonperforming (nonaccruing) loans		48,098			106,096			40,278			1,523			851

Ratio of net charge-offs during the period to average total loans		5.06	%		2.80	%		0.21	%		0.05	%		0.03	%
Ratio of allowance for loan losses to average total loans		2.34			2.08			1.39			1.11			1.15
Ratio of allowance for loan losses to total loans		2.62			2.15			1.31			1.05			1.09
Coverage ratio		54.28			24.41			40.81			765.13			1,291.19

Historical net charge-offs are not necessarily accurate indicators of future losses since net charge-offs vary from period to period due to economic conditions and other factors that cannot be accurately predicted. Thus, an evaluation based on historical loss experience within individual loan categories is only one of many factors considered by management in evaluating the adequacy of the overall allowance.

Management believes that the allowance for losses on loans is adequate to provide for losses that may be incurred on loans; however, there is no guarantee that management’s estimate will be sufficient to cover actual loan losses.

At December 31, 2010, the allowance for loan losses was 54.28% of total nonperforming loans (coverage ratio) compared to 24.41% at December 31, 2009. The increase in the coverage ratio for the current period was due to the decrease in nonperforming loans. Nonperforming loans decreased 54.7% from $106.1 million at December 31, 2009 to $48.1 million at December 31, 2010. During the same period the allowance for loan losses increased 0.8% from $25.9 million to $26.1 million.

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 have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have sufficient weaknesses that make collection or payment in full, based on currently existing facts, conditions and values, questionable. An asset classified as loss is considered uncollectible and of such little value that its continuance as an asset of the institution is not warranted. If an asset, or portion thereof, is classified as loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified as

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 identified as special mention represent borrowers who exhibit potential credit weaknesses or trends deserving Bank management’s close attention.

In order to proactively address credit quality issues within its loan portfolios, Cascade Bank maintains fully staffed Credit Administration and Special Assets departments to address the increased volume of classified assets. Generally, when a loan becomes classified, the relationship is transferred to the Special Assets department. Cascade Bank actively engages the borrower and guarantor to determine a course of action. Current financial information is requested from the borrower(s) and guarantor(s) and updated collateral values are requested. If the loan is secured by real estate, updated title information is obtained to determine the status of encumbrances on the collateral. When possible, Cascade Bank requires the borrower to provide additional collateral or capital. In conjunction with the receipt of additional collateral, Cascade Bank will sometimes modify the terms of the loan. Often the new modified terms of the loan are consistent with terms that Cascade Bank would offer a new borrower. If the modification of terms is considered concessionary and the borrower is having financial difficulty for economic or legal reasons, the loan is classified as a troubled debt restructuring (TDR). All TDR loans are considered impaired and are reviewed for impairment using fair market methodology or discounted cash flow techniques.

Cascade Bank also may consider allowing a borrower to sell the underlying collateral for less than the outstanding balance on the loan if the current collateral evaluation supports the offer price. In such situations, Cascade Bank often requires the borrower to sign a new note for the resulting deficiency or to bring cash to closing. In some situations, Cascade Bank releases the collateral only in a sale transaction, preserving its right to seek monetary judgments against the borrowers and guarantors.

A report containing delinquencies of all loans is reviewed frequently by management and the Board of Directors. Actions on delinquent loans are taken based upon the particular circumstance of each loan. The Bank’s general procedures provide that when a loan becomes delinquent, the borrower is contacted, usually by phone, within 30 days. When the loan is over 30 days delinquent, the borrower is typically contacted in writing. Generally, the Bank will initiate foreclosure or other corrective action against the borrower when principal and interest become 90 days or more delinquent. In most cases, interest income is reduced by the full amount of accrued and uncollected interest on loans once they become 90 days delinquent, go into foreclosure or are otherwise determined to be uncollectible. Once interest has been paid to date, the borrower establishes six months of timely repayment performance, and management considers the loan fully collectible, it is returned to accrual status.

Nonperforming (Nonaccrual) Loans

It is the Bank's practice to discontinue accruing interest on virtually all loans that are delinquent in excess of 90 days regardless of risk of loss, collateral, etc. Some problem loans, which are less than 90 days delinquent, are also placed into nonaccrual status if the success of collecting full principal and interest in a timely manner is in doubt. Some loans will remain in nonaccrual status even after improved performance until a consistent timely repayment pattern is exhibited and/or timely performance is considered reliable.

At December 31, 2010, nonperforming loans totaled $48.1 million, compared to $106.1 million at December 31, 2009, and $40.3 million at December 31, 2008. The level of nonperforming loans is primarily attributable to the slow down in the housing market and general economy, which significantly impacted our real estate construction portfolio and, to a lessor extent, our commercial real estate portfolio. Of the total nonperforming loans at December 31, 2010, 26.1% relate to our real estate construction, land development and completed lot portfolios and 58.9% is related to our commercial real estate portfolio.

Loans are generally placed on nonaccrual status when they become past due over 90 days or when the collection of interest or principal is considered unlikely. Loans past due over 90 days that are not on nonaccrual status must be well secured by tangible collateral and in the process of collection. The Bank had no loans that were 90 days or more past due and still accruing interest at December 31, 2010.

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

(Dollars in thousands)	Balance at December 31, 2010		Nonperforming Loans (NPL)		NPL as a % of Loan Category
Business	$	400,047	$	4,347		1.1	%
R/E Construction
Spec construction		25,303		9,705		38.4
Land acquisition & development/land		54,142		2,848		5.3
Commercial R/E construction		2,333		-		-
Total R/E construction		81,778		12,553		15.4
Commercial R/E		201,885		28,352		14.0
Multifamily		89,350		-		-
Home equity/consumer		29,964		1,048		3.5
Residential		194,677		1,798		0.9
Total	$	997,701	$	48,098		4.8	%

Nonperforming loans decreased to $48.1 million at December 31, 2010, compared to $106.1 million at December 31, 2009. The decline is largely the result of a net decrease of $62.3 million in nonperforming land acquisition and development/land loans, which decreased to $2.8 million at December 31, 2010, as compared to $65.1 million at December 31, 2009.

As of December 31, 2010, 15.4% of total real estate construction loans and 14.0% of commercial real estate loans were nonperforming. The other designated loan categories had no significant amounts of nonperforming loans compared to total loans outstanding in the respective categories.

Additions to nonperforming loans were $88.1 million for the year ended December 31, 2010, including two spec construction loans totaling $13.4 million, three land acquisition and development/land loans totaling $17.4 million and two commercial real estate loans totaling $18.7 million. These seven loans accounted for approximately 56.2% of the additions that occurred during the year ended December 31, 2010. One of the commercial real estate loans is secured by a 31,000 square foot office building and commercially zoned land, and the other is secured by a shopping center. The construction and land acquisition and development loans are secured by mostly completed residentially developed lots and/or finished houses. All seven loans have been individually reviewed for impairment. Additions to nonperforming loans during the period were offset by $39.5 million in paydowns, $57.1 million in charge-offs, $47.3 million in transfers to REO and $2.2 million in transfers to notes receivable. Charge-offs were largely for land acquisition and development/land loans, which accounted for $38.0 million and business loans, which accounted for $11.0 million of the total charge-offs.

The following table shows the migration of nonperforming loans (NPLs) through the portfolio in each category as of December 31, 2010, compared to December 31, 2009:

(Dollars in thousands) Nonperforming Loans	Balance at December 31, 2010		Additions		Paydowns			Charge- Offs(1)			Transfers to REO			Transfers to Notes Receivable			Balance at December 31, 2009
Business	$	4,347	$	18,094	$	(4,266	)	$	(10,993	)	$	(3,251	)	$	(2,225	)	$	6,988
R/E construction
Spec construction		9,705		26,336		(22,098	)		(4,569	)		(3,751	)		-			13,787
Land acquisition & development/land		2,848		20,951		(9,954	)		(38,024	)		(35,245	)		-			65,120
Commercial R/E construction		-		20		-			(1,752	)		(4,745	)		-			6,477
Total R/E construction		12,553		47,307		(32,052	)		(44,345	)		(43,741	)		-			85,384
Commercial R/E		28,352		18,954		(2,400	)		(783	)		-			-			12,581
Home equity/consumer		1,048		1,168		(227	)		(379	)		-			-			486
Residential		1,798		2,587		(592	)		(574	)		(280	)		-			657
Total nonperforming loans	$	48,098	$	88,110	$	(39,537	)	$	(57,074	)	$	(47,272	)	$	(2,225	)	$	106,096

(1)	Excludes $267 related to overdrawn checking accounts, a write-down of $33, and recoveries of $1,046.

Impaired Loans

A loan is considered impaired when, based on current information and events, the Bank determines that it is probable it will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When the Bank identifies a loan as impaired, it measures the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, the Bank uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If the Bank determines that the value of the impaired loan is less than the recorded investment in the loan, it either recognizes an impairment reserve as a specific component to be provided for in the allowance for loan losses or charges-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. The combination of the general allowance calculation and the specific reserve on impaired loans result in the total allowance for loan losses.

See Note 5 to Item 15: Notes to Consolidated Financial Statements, for a breakdown of our impaired loans at December 31, 2010 and 2009, by loan category and reserves.

When loans are identified as impaired they are typically transferred to the Bank’s Special Assets department. When the Bank identifies a loan as impaired, it measures the loan for potential impairment using discounted cash flows, except when the loan is collateral dependent. In these cases, the Bank uses the current fair value of collateral, less selling costs. The current fair value of collateral is generally determined through obtaining external appraisals. External appraisals are updated on a periodic basis as determined by the Chief Credit Officer. The Bank obtains appraisals from a pre-approved list of independent, third party, local appraisal firms. Larger appraisals are reviewed by the Bank’s Chief Appraiser, or a qualified third party reviewer to ensure the quality of the appraisal and the expertise and independence of the appraiser. Smaller appraisals are reviewed by a Bank underwriter. Although an external appraisal is the primary source used to value collateral dependent loans, the Bank may also utilize values obtained through executed purchase and sale agreements, negotiated short sales, broker price opinions, historical sales activity, or internal evaluations. These alternative sources of value are used for interim periods between appraisals and only if deemed to be more representative of current value. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Based on these processes, the Bank does not believe there are significant time lapses for the recognition of additional loan loss provisions or charge-offs from the date they become known.

At December 31, 2010, the recorded investment in loans classified as impaired totaled $144.0 million. Included in this total are $40.0 million in impaired loans with a corresponding specific reserve (included in the allowance for loan losses) of $5.8 million. The remaining $104.0 million in impaired loans are considered collateral dependent and have been written-down to their estimated net realizable value. At December 31, 2009, the total recorded investment in impaired loans was $183.7 million, with a corresponding specific reserve of $6.4 million.

Impaired loans include $94.2 million and $51.9 million in loans that have been designated as troubled debt restructured (TDR) loans at December 31, 2010 and December 31, 2009, respectively. Of the total TDR loans, $63.8 million and $26.6 million are performing as agreed under the restructured notes at December 31, 2010 and December 31, 2009, respectively.

Troubled Debt Restructured (TDR) Loans

Loans are classified as TDR when a modification of terms is processed by the Bank, for economic or legal reasons related to the debtor’s financial difficulty, at terms and conditions that the Bank would not otherwise consider. In some cases, the Bank has extended the interest-only period of a loan or allowed a borrower to make interest-only payments to assist the borrower while trying to sell the collateral securing the loan.

The following table shows TDR loans outstanding as of the date indicated:

(Dollars in thousands)	December 31,
Troubled Debt Restructured Loans	2010		2009		2008		2007		2006
Business	$	19,614	$	3,626	$	47	$	261	$	115
R/E construction						-		-		-
Spec construction		14,329		11,783		-		-		-
Land acquisition and development/land		16,044		14,118		-		-		-
Total R/E construction		30,373		25,901		-		-		-
Commercial R/E		32,238		20,441		-		-		-
Multifamily		8,619		-		-		-		-
Home equity/consumer		244		-		-		73		-
Residential		3,084		1,896		863		-		-
Total	$	94,172	$	51,864	$	910	$	334	$	115

Real Estate Owned (REO)

REO consists of property acquired by the Bank through foreclosure and is carried at the lower of the estimated fair value less expected selling costs, or the principal balance of the foreclosed loans. The costs related to repair, maintenance, or other costs of such properties, are generally expensed with any gains or shortfalls from the ultimate sale of REO being shown as other income or other expense. REO totaled $34.4 million at December 31, 2010, compared to $18.8 million at December 31, 2009. REO as of December 31, 2010 consisted of $239,000 in residential construction, $23.7 million in land acquisition and development/land, $1.7 million in multifamily, $5.0 million in commercial real estate, and $3.8 million in completed single-family residences. An $11.0 million nonperforming commercial real estate loan on a retail center was transferred to REO after year-end and was included among nonperforming loans as of December 31, 2010.

Additions to REO were $47.6 million for the year ended December 31, 2010, including 22 land acquisition and development loans/land loans totaling $35.3 million. These loans accounted for approximately 74.1% of the additions that occurred during the period. Capitalized costs for the year ended December 31, 2010 were $6.3 million. Additions and capitalized costs for REO during the period were partially offset by $27.0 million in paydowns/sales and $11.4 million in write-downs/losses.

The following table presents the activity related to REO for the year ended December 31, 2010:

(Dollars in thousands) REO	Balance at December 31, 2010		Additions (1)			Capitalized Costs		Paydowns/Sales			Write-downs/ Losses			Balance at December 31, 2009
R/E construction
Residential construction	$	239	$	2,644		$	2,803	$	(7,850	)	$	(483	)	$	3,125
Land acquisition & development/land		23,706		35,276			2,615		(15,888	)		(10,030	)		11,733
Condominium construction		-		(2,027	)		781		(410	)		(432	)		2,088
Total R/E construction		23,945		35,893			6,199		(24,148	)		(10,945	)		16,946
Commercial R/E		4,974		5,559			92		(573	)		(104	)		-
Multifamily		1,718		2,027			-		(218	)		(91	)		-
Residential		3,775		4,143			38		(2,017	)		(285	)		1,896
Total	$	34,412	$	47,622		$	6,329	$	(26,956	)	$	(11,425	)	$	18,842

(1)

Includes a $287 addition to REO related to the pay-off of a first lien, $63 related to a single-family residence received in partial satisfaction of a loan and $2.0 million transferred from a completed condominium construction project to multifamily.

The following table presents information with respect to the Bank’s nonperforming assets at the dates indicated:

(Dollars in thousands)	December 31,
Nonperforming assets	2010			2009			2008			2007			2006
Business	$	4,347		$	6,988		$	1,149		$	1,522		$	731
R/E construction
Spec construction		9,705			13,787			11,736			-			-
Land acquisition & development/land		2,848			65,120			27,236			-			-
Commercial R/E construction		-			6,477			-			-			-
Total R/E construction		12,553			85,384			38,972			-			-
Commercial R/E		28,352			12,581			-			-			-
Home equity/consumer		1,048			486			2			1			120
Residential		1,798			657			155			-			-
Total nonperforming loans		48,098			106,096			40,278			1,523			851
REO		34,412			18,842			1,446			-			-
Total nonperforming assets	$	82,510		$	124,938		$	41,724		$	1,523		$	851

Total nonperforming loans to total loans		4.82	%		8.82	%		3.20	%		0.14	%		0.08	%
Total nonperforming loans to total assets		3.21			6.22			2.46			0.11			0.06
Total nonperforming assets to total assets		5.51			7.33			2.55			0.11			0.06

At December 31 2010, nonperforming assets consisting of nonperforming (nonaccruing) loans and REO, totaled $82.5 million or 5.51% of total assets. Nonperforming assets totaled $124.9 million or 7.33% of total assets at December 31, 2009.

Certain other loans, currently in nonaccrual, are in the process of foreclosure and potentially could become REO. Efforts, however, are constantly underway to reduce and minimize such nonperforming assets. During 2008 and 2009, we expanded our special assets group to focus on reducing nonperforming assets.

The decision to begin a foreclosure action generally occurs after all other reasonable collection efforts have been found ineffective. We comply with all applicable state statues regarding foreclosure proceedings. Loans in foreclosure are always categorized as nonperforming assets, and as such, have been assigned a specific loan loss reserve based on the most current property valuations available, discounted to reflect foreclosure expense, holding time and sales costs. Assuming no other legal actions, the statutory processing period for a so-called nonjudicial foreclosure in the state of Washington is a minimum of 120 days or 190 days after the date of default. The first step is a notice of default that is mailed to the borrower and posted at the property or the notice is delivered to the borrower in person. The borrower is given 30 days to respond to the notice of default. If the borrower does not stop the foreclosure within 30 days after receiving the notice of default, we record a notice of sale with the appropriate county recorder. The notice of sale is recorded at least 90 days before the sale date and is mailed to the borrower and any other lien holders. The notice of sale is also published twice in a local newspaper. A notice of foreclosure is also required to be sent to the borrower and/or guarantors if we want to retain the right to a deficiency. We are required to publish the notice of sale once between the 32nd and 28th days prior to the sale, and once between the 11th and 7th days before the sale. Foreclosure sales are by public auction with the property going to the highest bidder.

We will bid up to the amount of our loan balance. If we do not have a buyer for the collateral by the sale date, and there is no other or higher bidder, then we acquire ownership of the property for the amount of our credit bid, and the property becomes an REO property of the Bank. The obligations of the guarantors (but not the borrower) of a commercial loan for any deficiency (the amount by which the loan balance exceeds the foreclosure sale price), generally survives the sale and we may bring a lawsuit against the guarantors to collect the deficiency if we determine a judgment against the guarantors may be collectible and cost-effective.

A judicial foreclosure action may also be brought to collect a real estate loan in the state of Washington, and is used by Cascade Bank in certain cases; however, nonjudicial foreclosure is usually the preferred remedy because it is normally faster and less expensive than litigation, which can take from 6 months for summary judgment, to 2 years for trial.

In addition, where appropriate, instead of foreclosure, we may negotiate a settlement agreement with the borrower, with a deed in lieu of foreclosure conveying the property to the Bank, to enable the Bank to acquire possession of the property faster than pursuing the normal foreclosure process.

The transition of loans from performing to nonperforming status may result in the assignment of a specific reserve or charge-off, if the loan is collateral dependent, that adjusts the net book value of the loan’s principal balance to reflect the estimated fair value of supporting collateral or result in no assignment of a specific reserve or charge-off if the loan’s collateral value is in excess of its book value. Subsequent write-downs, requiring additional loan loss provisioning, could occur as a loan moves through the foreclosure process into REO based on recurring impairment analysis up to and until a property becomes an REO.

Deposits

Total deposits decreased by $32.2 million to $1.11 billion at December 31, 2010, compared to December 31, 2009. Retail deposits increased by $140.9 million, compared to December 31, 2009, which was offset by a planned runoff in public, brokered and internet-based deposits of $103.1 million, $57.6 million and $12.4 million, respectively. Included in total deposits at December 31, 2010, were $914.5 million in retail deposits, $35.5 million in public deposits, $105.4 million in brokered deposits and $52.2 million in internet-based deposits.

Total checking account balances decreased $107.4 million to $337.6 million at December 31, 2010, compared to $444.9 million at December 31, 2009, mostly due to a planned reduction in public funds checking accounts that require 100% collateralization and the cross-sale and conversion of checking balances to money market accounts (MMDA) and certificates of deposit (CDs).

Savings and MMDA increased $43.8 million to $176.9 million at December 31, 2010, compared to $133.1 million at December 31, 2009.

CDs increased $31.3 million to $593.0 million at December 31, 2010, compared to $561.7 million at December 31, 2009.

The market for deposits has remained very competitive. It remains a key objective of the Bank to increase its demand deposit account balances and other low rate accounts.

The following table sets forth the balances for each major category of deposits at December 31, 2010, 2009, and 2008:

(Dollars in thousands)	December 31,
Deposits by Type	2010		2009		2008
Noninterest-bearing demand deposits	$	110,042	$	99,724	$	84,033
Interest-bearing demand deposits		227,524		345,198		102,810
Money market deposits		164,944		123,129		193,448
Savings		12,001		10,001		10,587
Certificates of deposit		593,043		561,722		615,904
Total	$	1,107,554	$	1,139,774	$	1,006,782

See Note 9 of the Notes to Consolidated Financial Statements listed in Item 15 for additional information about deposits.

FHLB Advances

The Bank uses FHLB advances to provide intermediate and longer term funding. At December 31, 2010, the Bank had $159.0 million in FHLB advances compared to $239.0 million at December 31, 2009. During 2010, the Bank transitioned from a blanket pledge collateral agreement with the FHLB of Seattle to a custodial agreement. Under the terms of this agreement, the Bank's future borrowings from the FHLB of Seattle currently are limited to overnight cash management advances (CMA), or short term advances with maturities of 90 days or less.

See Note 10 of the Notes to Consolidated Financial Statements listed in Item 15 for additional information about FHLB advances.

Securities Sold Under Agreements to Repurchase

The Bank also uses repurchase agreements for funding needs. The Bank had repurchase agreements outstanding totaling $145.0 million at December 31, 2010, and $145.4 million at December 31, 2009. Interest rates paid on the repurchase agreements ranged from 4.6% to 7.0 % at December 31, 2010. The repurchase agreements consist of a series of transactions with maturity dates ranging from 2017 to 2022. The agreements have provisions that allow the lenders to periodically terminate the agreements. Termination dates typically occur once each quarter; however, a portion of the agreements may not be terminated prior to December 2012, provided the Bank offers the lender additional securities in November and December 2011. Repurchase agreements with this lender totaling $25.0 million and $50.0 million could be terminated in December 2012 and November 2013, respectively. The termination fee related to these agreements cannot be estimated. Other repurchase agreements totaling $50.0 million have provisions allowing the repurchase agreements to be terminated quarterly (in January, April, July and October) upon providing 2 days notice. While the Bank has received no indication that these repurchase agreements will be terminated prior to maturity, and the transactions are well secured by securities pledged to the counterparty, management believes that the likelihood of termination of the agreements is reasonably possible. If these repurchase agreements had been terminated as of December 31, 2010, the termination fee would have been approximately $13.7 million.

See Note 11 of the Notes to Consolidated Financial Statements listed in Item 15 for additional information about securities sold under agreements to repurchase.

Junior Subordinated Debentures

In March 2000, the Corporation issued $10.3 million of 11.0% junior subordinated debentures. In turn, Cascade Capital Trust I, a wholly owned business trust whose common equity is 100% owned by the Corporation, issued trust preferred securities underlying the debentures. These junior subordinated debentures have a fixed rate of 11.0% and mature on March 1, 2030, but are callable at a premium beginning on March 1, 2010. At December 31, 2010, the premium was 5.5%. The Corporation applies fair value accounting to the junior subordinated debentures issued by Cascade Capital Trust I. The change in fair market value of the junior subordinated debentures is recorded as a component of other income. The fair value was $1.5 million at December 31, 2010 compared to $3.3 million at December 31, 2009. In December 2004, the Corporation issued an additional $5.2 million in junior subordinated debentures. In turn, Cascade Capital Trust II, a wholly owned business trust whose common equity is 100% owned by the Corporation, issued trust preferred securities underlying the debentures. These debentures had a fixed rate of 5.82% for the first five years and as of January 7, 2010, float at the three-month LIBOR plus 1.90% for the remaining twenty-five years. The rate payable on these debentures as of December 31, 2010 was 2.19%. The debentures are callable by the Corporation at par after the first five years. On March 30, 2006, the Corporation issued an additional $10.3 million in junior subordinated debentures. In turn, Cascade Capital Trust III, a wholly owned business trust whose common equity is 100% owned by the Corporation, issued trust preferred securities underlying the debentures. These debentures have an initial rate of 6.65% set for five years and then convert to a three-month LIBOR plus 1.40% for the remaining twenty-five years. The debentures are callable at par after five years. Subject to certain restrictions, the Corporation’s junior subordinated debentures are considered Tier 1 capital by financial institution regulators. All three trusts exist for the exclusive purpose of issuing the trust preferred securities underlying the junior subordinated debentures issued by the Corporation, and engaging in only those other activities necessary, advisable or incidental to the above.

During the fourth quarter of 2009, FDIC restrictions prohibited dividend payments from the Bank to the holding company, which in turn led the Corporation to defer the payment of interest on the trust preferred securities. Under the terms of each instrument, deferral of payments is permitted without triggering an event of default. Generally, during any deferral period, the Corporation is prohibited from paying any dividends or distributions on, or redeem, purchase or acquire, or make a liquidation payment with respect to the Corporation’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Corporation that rank pari passu in all respects with, or junior to, the specific instrument. In addition, during any deferral period, interest on the trust preferred securities is compounded from the date such interest would have been payable. The balance of deferred interest was $2.6 million as of December 31, 2010.

See Note 12 of the Notes to Consolidated Financial Statements listed in Item 15 for additional information about junior subordinated debentures.

Derivatives and Hedging

In the fourth quarter of 2010, the Bank entered into derivative contracts to add stability to interest income and to manage its exposure to changes in interest rates. The Bank sought to minimize the volatility that changes in interest rates have on its variable-rate debt by entering into interest rate cap agreements. The Bank purchased a series of interest rate caps from two different major financial institutions based on their credit rating and other factors. Both counterparties provide cash collateral to the Bank on the majority of the fair value of the cap to significantly mitigate credit risk of these transactions. The Bank purchased interest rate caps designated as cash flow hedges to protect against movements in interest rates above the caps’ strike rate, which is tied to three month LIBOR. The interest rate caps have an aggregate notional amount of $159.0 million, strike rates of 1.29% and a maturity date of October 20, 2015. The Bank formally documented the relationship between the hedging instruments and hedged items, as well as its risk management objective and strategy before initiating the hedge. The caps were used to hedge the variable cash flows associated with variable rate FHLB advances that reprice based upon three month LIBOR on the same day that the rate caps reprice. The fair value of our interest rate caps, is based on derivative valuation models using market data inputs as of the valuation date that can generally be verified and do not typically involve significant management judgments. (Level 2 inputs). The valuation was performed on December 31, 2010 and will be performed each reporting date to determine if the hedge was effective over the reporting period, using the hypothetical derivative method, by comparing the actual changes in the hedged item to a “perfectly effective” hypothetical interest rate cap. If the ratio of the change in fair value of the actual cap to the change in fair value of the hypothetical cap falls between the effectiveness parameters the hedge will be considered to have been effective. The December 31, 2010 valuations showed the hedge to be “perfectly effective” and resulted in a mark-to-market gain on the interest rate caps totaling $3.5 million, which is included in accumulated other comprehensive loss. The Bank expects approximately $50,000 in expense to be reclassified into earnings within the next 12 months as the Bank begins to amortize the cost of the interest rate caps.

The following table presents the notional value, strike rate, fair value and collateral held for derivative instruments accounted for as a cash flow hedge at December 31, 2010.

(Dollars in thousands) Derivatives	December 31, 2010
Notional Value	$	159,000
Strike Rate		1.29	%
Fair Value	$	8,732
Cash Collateral		7,620

Income Taxes

The Corporation recorded a $3.9 million federal income tax provision for the year ended December 31, 2010, and a benefit of $7.6 million for the year ended December 31, 2009. The effective tax rates were (5.8)% and 24.5% respectively, for the year ended December 31, 2010 and 2009. At March 31, 2010, the Corporation assessed whether it was more likely than not that it would realize the benefits of its deferred tax asset. The Corporation determined that the negative evidence associated with cumulative losses, the expectation of entering into a FDIC Order with its regulators, and credit deterioration in its loan portfolio outweighed the positive evidence. Therefore, during the first quarter of 2010, the Corporation established a full valuation allowance on its deferred tax asset. The Corporation will not be able to recognize the tax benefits on current and future losses until it can show that it is more likely than not that it will generate enough taxable income in future periods to realize the benefits of its deferred tax asset and loss carryforwards.

Stockholders’ Equity and Regulatory Matters

Total stockholders’ equity decreased $76.0 million from $134.5 million at December 31, 2009, to $58.5 million at December 31, 2010. The decrease in equity was largely due to the net loss for the period. The loss was primarily due to the $56.5 million loan loss provision and the $12.9 million goodwill impairment charge that the Bank recorded during the year ended December 31, 2010.

In 2008, the Board of Directors of Cascade Financial Corporation chose to participate in the U.S. Treasury's voluntary Capital Purchase Program. On November 21, 2008, the Corporation completed its $39.0 million capital raise as a participant in the U.S. Treasury Department’s Capital Purchase Program. Under the terms of the transaction, the Corporation issued 38,970 shares of Series A Fixed-Rate Cumulative Perpetual Preferred Stock, and a warrant to purchase 863,442 shares of the Corporation’s common stock at an exercise price of $6.77 per share. During the fourth quarter of

2009, FDIC restrictions prohibited dividend payments from the Bank to the holding company, which in turn led the Corporation to defer the payment of dividends on the preferred stock. Under the terms of the preferred stock, deferral of payment is permitted without triggering an event of default. Generally, during any deferral period, the Corporation is prohibited from paying any dividends or distributions on, and may not redeem, purchase or acquire, or make a liquidation payment with respect to the Corporation’s capital stock, or make any payment of principal or interest on, or repay, repurchase or redeem any debt securities of the Corporation that rank pari passu in all respects with, or junior to, the specific instrument. In addition, during any deferral period, dividends on the preferred stock are compounded from the date such dividends would have been payable. The balance of deferred dividends was $2.8 million as of December 31, 2010.

The primary reason for the Corporation’s participation was the addition of cost-effective capital, which served to expand our ability to provide increased credit to businesses and consumers in our market area and added flexibility in considering strategic opportunities for growth. The Corporation monitors its activities to determine how its participation in the program has assisted the Bank in supporting prudent lending and/or supporting efforts to work with existing borrowers to avoid unnecessary foreclosures.

As a condition for participating in the CPP, the Corporation accepted limitations on executive compensation and benefits. These limitations include restrictions on bonuses and incentive compensation to senior executive officers, a prohibition on making golden parachute payments to senior executive officers, and requiring clawback of any bonus or incentive compensation paid to a senior executive officer or one of the next twenty most highly compensated employees based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate.

The Corporation is committed to managing capital for maximum stockholder benefit and maintaining protection for depositors and creditors. The Corporation manages various capital levels at both the holding company and subsidiary bank level to attempt to maintain adequate capital ratios and levels in accordance with external regulations and capital guidelines established by the Board of Directors. The Corporation had a risk-based capital ratio of 9.98% and a Tier 1 capital ratio of 5.55% at December 31, 2010. The Bank had a risk-based capital ratio of 9.60% and a Tier 1 capital ratio of 5.56% at December 31, 2010.

The Corporation had paid its stockholders a cash dividend on a quarterly basis since 2002. In June 2009, the Corporation suspended its regular quarterly cash dividend on common stock to preserve capital.

Accumulated other comprehensive loss increased to $5.1 million at December 31, 2010, compared to a $1.2 million deficit at December 31, 2009.

On July 20, 2010, the Board of Directors of the Bank stipulated to the entry of a Consent Order with the Federal Deposit Insurance Corporation (FDIC) and the Washington State Department of Financial Institutions (DFI), effective July 21, 2010 (FDIC Order). Under the terms of the FDIC Order, the Bank cannot pay any cash dividends or make any payments to the Corporation without the prior written approval of the FDIC and the Washington State DFI. Other material provisions of the FDIC Order require the Bank to:

·	review the qualifications of the Bank’s management;

·	provide the FDIC with 30 days written notice prior to adding any individual to the Board of Directors of the Bank or employing any individual as a senior executive officer;

·	increase director participation and supervision of Bank affairs;

·	reduce the amount of loans classified “substandard” and “doubtful” in the Report of Visitation that have not previously been charged off to not more than 130% of the Bank’s Tier 1 capital and allowance for loan losses, within 180 days;

·	eventually reduce the total of all adversely classified loans by collection, charge-off or sufficiently improving the quality of adversely classified loans to warrant removing any adverse classification, as determined by the regulators;

·	formulate a written plan to reduce the Bank’s levels of nonperforming assets and/or assets listed for “special mention” by the Bank to an acceptable level and to reduce the Bank’s concentrations in commercial real estate and acquisition, development and construction loans;

·	develop a three-year strategic plan and budget with specific goals for total loans, total investment securities and total deposits, and improvements in profitability and net interest margin, and reduction of overhead expenses;

·	submit a written plan for eliminating the Bank’s reliance on brokered deposits, in compliance with FDIC’s rules;

·	eliminate and/or correct all violations of law set forth in the Report of Visitation and the Report of Examination dated May 18, 2009, and ensure future compliance with all applicable laws and regulations;

·	implement a comprehensive policy for determining the adequacy of the allowance for loan losses satisfactory to the regulators and remedy any deficiency in the allowance in the calendar quarter discovered by a charge to current operating earnings;

·	refrain from extending additional credit with respect to loans charged-off or classified as “loss” and uncollected;

·	refrain from extending additional credit with respect to other adversely classified loans, without the prior approval of a majority of the directors on the Bank Board or its loan committee, and without first collecting all past due interest;

·	implement a liquidity and funds management policy to reduce the Bank’s reliance on brokered deposits and other non-core funding sources; and

·	prepare and submit periodic progress reports to the FDIC and the Washington State DFI.

Additionally, based on an examination concluded on March 11, 2010, the Corporation entered into a Written Agreement (FRB Agreement) with the Federal Reserve Bank (FRB) of San Francisco on November 4, 2010. Under the FRB Agreement, the Corporation cannot do any of the following without prior written approval of the FRB:

·	declare or pay any dividends;

·	make any distributions of principal or interest on junior subordinated debentures or trust preferred securities;

·	incur, increase or guarantee any debt; or

·	redeem any outstanding stock.

The FRB Agreement also requires the Corporation to:

·	take steps to ensure that the Bank complies with the FDIC Order;

·	submit a written capital plan that provides for sufficient capitalization of both the Corporation and the Bank within 60 days, and notify the FRB no more than 45 days after the end of any quarter in which any of the Corporation’s capital ratios fall below the approved plan’s minimum ratios;

·	submit a written cash flow projection plan for 2011 within 60 days;

·	comply with notice and approval requirements of the Federal Deposit Insurance Act (FDI Act) related to the appointment of directors and senior executive officers or change in the responsibility of any current senior executive officer;

·	comply with restrictions on paying or agreeing to pay certain indemnification and severance payments without prior written approval; and

·	submit a quarterly process report to the FRB.

Proposed Merger

On March 4, 2011, the Corporation announced that the Corporation, the Bank and Opus Bank entered into a definitive agreement, providing for Opus Bank to acquire the Corporation and the Bank, and for the merger of the Bank into Opus Bank. See “Recent Events – Proposed Merger.” The parties expect to close the transaction in the latter part of the second quarter of 2011. Not withstanding this, there are no assurances that the Corporation and the Bank will be able to successfully close the proposed transaction and that the Corporation and the Bank would not be subject to additional restrictions or sanctions imposed by its regulators if the Bank does not increase its capital ratios as required by the FDIC Order.

Results of Operations

Net (Loss) Income

Cascade Financial Corporation had a net loss of $70.3 million for the year ended December 31, 2010, compared to $23.5 million for the year ended December 31, 2009. After adjustments for preferred stock dividends and accretion of the issuance discount on preferred stock issued to the U.S. Treasury, net loss attributable to common stockholders for the year ended December 31, 2010, was $72.8 million as compared to $25.8 million for the year ended December 31, 2009. The primary factors contributing to the loss in 2010 were a $56.5 million provision for loan losses and a $12.9 million goodwill impairment charge. Net interest income decreased $6.8 million to $36.4 million in 2010 primarily due to a decline in the loan portfolio. Other income increased $2.1 million to $18.7 million compared to $16.6 million for the year ended December 31, 2009. The increase was mostly due to an increase in gain on sale of securities, which was up $6.9 million in 2010 to $8.8 million, but was mostly offset by a decline in fair value gain on junior subordinated debentures, which was down $5.3 million in 2010 to $1.8 million. The Corporation earned net income of $2.1 million and $1.8 million attributable to common stockholders’ for the fiscal year ended December 31, 2008.

Return on Average Common Stockholders’ Equity

Return on average common stockholders’ equity (average stockholders’ equity excluding preferred stock) was (127.98)% for the year ended December 31, 2010, compared to (24.21)% for the year ended December 31, 2009 and 1.47% for 2008. The decline in return on average equity from 2009 to 2010 was driven by a substantial increase in the Corporation’s provision for loan losses and the goodwill impairment charge.

Non-GAAP Financial Measure - Return on Average Tangible Common Stockholders’ Equity

Return on average tangible common stockholders’ equity (average stockholders’ equity less average goodwill and intangibles, and preferred stock), was (112.13)% for the year ended December 31, 2010, compared to (15.61)% in 2009 and 1.83% in 2008. The June 2004 acquisition of Issaquah Bancshares, Inc. (Issaquah) generated $26.3 million in goodwill and intangible assets and a like amount of capital. Eliminating the average intangible asset and reducing the capital by the same amount produces average tangible stockholders’ equity.

Return on average tangible common stockholders’ equity is determined by methods other than those in accordance with accounting principles generally accepted in the United States of America (GAAP). This measure excludes the average balance of acquisition-related goodwill and intangibles and preferred stock in determining average tangible common stockholders’ equity. Management believes the presentation of this financial measure, excluding the impact of these items, provides useful supplemental information that is necessary for a proper understanding of the financial results of Cascade Financial Corporation. This disclosure should not be viewed as a substitute for results determined to be in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

A summary of return on average tangible common stockholder’s equity follows:

	Years Ended December 31,
(Dollars in thousands)	2010			2009			2008
Net (loss) income attributable to common stockholders	$	(72,762	)	$	(25,833	)	$	1,839
Goodwill impairment		12,885			11,700			-
Net (loss) income attributable to common stockholders (excluding goodwill impairment charge)		(59,877	)		(14,133	)		1,839

Average total equity	$	94,099		$	143,534		$	129,083
Average preferred stock		37,247			36,818			3,683
Average common equity		56,852			106,716			125,400
Average goodwill and intangibles		3,453			16,193			25,149
Average tangible common equity	$	53,399		$	90,523		$	100,251

Return on average tangible common equity		(112.13	)%		(15.61	)%		1.83	%

Net Interest Income

The largest component of the Corporation’s earnings is net interest income. Net interest income is the difference between interest-earning assets (primarily loans, interest-earning deposits with banks, and investment securities) and the interest expense associated with interest-earning liabilities (deposits and borrowings). Interest earned and interest paid is affected by general economic conditions, including the demand for loans, cost of deposits, market rates of interest and government policies. The Corporation’s operations may be sensitive to changes in interest rates and the resulting impact on net interest income.

Net interest income for the year ended December 31, 2010, decreased by 15.8%, or $6.8 million, to $36.4 million from $43.3 million for the year ended December 31, 2009. The decrease was primarily due to a decline in the loan portfolio. Net interest income for the year ended December 31, 2008, was $45.9 million.

Average earning assets remained unchanged at $1.5 billion for the year ended December 31, 2010, compared to the year ended December 31, 2009. Average earning assets were $1.4 billion for the year ended December 31, 2008.

Net interest margin is net interest income expressed as a percent of average earning assets. The net interest margin for the year ended December 31, 2010, was 2.47%, compared to 2.96% for the year ended December 31, 2009. The decline in the net interest margin was largely due to the decline in the loan portfolio, lower yields earned on the securities portfolio, and an increase in average low yielding interest-earning deposits. The yield on earning assets decreased 77 basis points to 4.83% in 2010. The cost of interest-bearing liabilities decreased 32 basis points to 2.44% for the year.

Average Balances and an Analysis of Average Rates Earned and Paid

The following table shows average balances and interest income or interest expense, with the resulting average yield or cost by category.

	2010							2009							2008
(Dollars in thousands)	Average Balance		Interest and Dividend		Yield/ Cost			Average Balance		Interest and Dividend		Yield/ Cost			Average Balance		Interest and Dividend		Yield/ Cost
Assets
Interest-earning assets
Residential loans	$	193,046	$	9,387		4.86	%	$	145,970	$	8,027		5.50	%	$	107,912	$	6,478		6.00	%
Multifamily loans		91,408		5,625		6.15			89,399		5,783		6.47			48,272		3,367		6.98
Commercial R/E loans		164,252		10,406		6.33			169,029		10,872		6.43			117,510		7,857		6.69
R/E construction loans		124,993		6,653		5.32			244,129		12,105		4.96			384,410		25,427		6.61
Home equity/consumer loans		30,665		1,991		6.49			30,933		2,016		6.52			29,111		1,931		6.63
Business loans		429,391		28,251		6.58			469,156		31,036		6.62			475,716		32,881		6.91
Total loans (1)		1,033,755		62,312		6.03			1,148,616		69,839		6.08			1,162,931		77,941		6.70
Securities available-for-sale		265,773		7,408		2.79			209,736		9,137		4.36			123,177		6,280		5.10
Securities held-to-maturity		32,161		1,327		4.13			54,053		2,759		5.10			140,008		8,213		5.87
Interest-earning deposits in other institutions		146,396		348		0.24			48,793		93		0.19			8,939		137		1.53
Total securities and interest-earning deposits		444,330		9,083		2.04			312,582		11,989		3.84			272,124		14,630		5.38
Total interest-earning assets		1,478,085		71,395		4.83			1,461,198		81,828		5.60			1,435,055		92,571		6.45

Noninterest-earning assets
Premises and equipment, net		13,890							15,223							15,420
REO and other repossessed assets, net		32,937							6,556							1,090
Nonperforming loans		80,136							93,972							20,141
Other noninterest-earning assets		40,932

CASCADE FINANCIAL CORP 10-K