**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





þ
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934 FOR THE QUARTERLY PERIOD ENDEDSeptember
                30, 2006




OR




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




Commission
      file number 0-25286





**CASCADE
      FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





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





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




Indicate
      by a check mark whether the registrant is large accelerated filer, an
      accelerated filer, or a non-accelerated filer, (as defined in Rule 12b-2 of
      the
      Act).




Large
      Accelerated Filer  ̈ Accelerated Filer þ Non-Accelerated Filer  ̈




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




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




Class
            Outstanding
                as of October 31, 2006Common
                Stock ($.01 par value)
            12,087,202


1


**CASCADE
      FINANCIAL CORPORATION**





**FORM
      10-Q**


**For
      the Quarter Ended**  **September
      30, 2006**




**INDEX**


**PAGE****PART
                    I — Financial Information:**Item
                    1
                —
                    Financial Statements:—
                    Condensed Consolidated Balance Sheets
                3—
                    Condensed Consolidated Statements of Income
                4—
                    Consolidated Statements of Comprehensive Income
                5—
                    Condensed Consolidated Statements of Cash Flows
                6—
                    Notes to Condensed Consolidated Financial Statements
                8Item
                    2
                —
                    Management’s Discussion and Analysis of Financial Condition and
                    Resultsof
                    Operations
                12Item
                    3
                —
                    Quantitative and Qualitative Disclosures about Market Risk
                24Item
                    4
                —
                    Controls and Procedures
                25**PART
                    II — Other Information**Item
                    1
                —
                    Legal Proceedings
                25Item
                    1A
                —
                    Risk Factors
                25Item
                    2
                —
                    Unregistered Sales of Equity Securities and Use of
                    Proceeds
                26Item
                    3
                —
                    Defaults Upon Senior Securities
                26Item
                    4
                —
                    Submission of Matters to a Vote of Security Holders
                26Item
                    5
                —
                    Other Information
                26Item
                    6
                —
                    Exhibits
                26Signatures
                27




2


**PART
      I -- FINANCIAL INFORMATION**





**Item
      1 - Financial Statements**





**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(dollars
      in thousands)


(unaudited)





September
                30,
            
            December
                31,2006
            
            2005**ASSETS**Cash
                on hand and in banks
            
            $
            15,004
            
            $
            16,616Interest-bearing
                deposits in other institutions
            
            
            12,808
            
            
            14,493Securities
                available-for-sale
            
            
            133,747
            
            
            140,596Securities
                held-to-maturity
            
            
            97,317
            
            
            95,122Federal
                Home Loan Bank (FHLB) Stock
            
            
            11,920
            
            
            11,920Loans,
                net
            
            
            977,413
            
            
            867,049Goodwill
                and intangibles, net
            
            
            26,008
            
            
            26,121Premises
                and equipment, net
            
            
            12,016
            
            
            12,270Cash
                surrender value of bank-owned life insurance
            
            
            17,805
            
            
            17,313Deferred
                tax asset
            
            
            773
            
            
            568Accrued
                interest receivable and other assets
            
            
            10,339
            
            
            9,716**TOTAL
                ASSETS**
            
            $
            1,315,150
            
            $
            1,211,784**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Liabilities:Deposits
            
            $
            840,106
            
            $
            795,768Federal
                Home Loan Bank advances
            
            
            233,000
            
            
            236,000Securities
                sold under agreements to repurchase
            
            
            95,700
            
            
            51,058Junior
                subordinated debentures payable
            
            
            25,353
            
            
            15,212Advance
                payments by borrowers for taxes and insurance
            
            
            957
            
            
            689Dividends
                payable
            
            
            967
            
            
            864Accrued
                interest payable, expenses and other liabilities
            
            
            6,580
            
            
            7,000**TOTAL
                LIABILITIES**
            
            
            1,202,663
            
            
            1,106,591Stockholders’
                Equity:Preferred
                stock, $.01 par value, Authorized 500,000 shares;no
                shares issued or outstanding
            
            
            -
            
            
            -Common
                stock, $.01 par value, Authorized 25,000,000 shares;issued
                and outstanding 12,086,890 shares at September 30,2006,
                and 12,004,734 shares at December 31, 2005
            
            
            121
            
            
            120Additional
                paid-in capital
            
            
            39,294
            
            
            38,125Retained
                earnings, substantially restricted
            
            
            75,377
            
            
            68,945Accumulated
                other comprehensive (loss), net of tax
            
            
            (2,305
            )
            
            (1,997
            )**TOTAL
                STOCKHOLDERS’ EQUITY**
            
            
            112,487
            
            
            105,193**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            1,315,150
            
            $
            1,211,784





See
      notes
      to condensed consolidated financial statements


3


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


(dollars
      in thousands, except per share amounts)


(unaudited)


Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005**Interest
                income:**Loans
            
            $
            18,532
            
            $
            14,949
            
            $
            51,735
            
            $
            42,253Securities
                available-for-sale
            
            
            1,675
            
            
            1,310
            
            
            5,099
            
            
            4,003Securities
                held-to-maturity
            
            
            1,151
            
            
            1,061
            
            
            3,418
            
            
            3,228FHLB
                stock dividends
            
            
            -
            
            
            -
            
            
            -
            
            
            49Interest-earning
                deposits
            
            
            38
            
            
            71
            
            
            179
            
            
            124**Total
                interest income**
            
            
            21,396
            
            
            17,391
            
            
            60,431
            
            
            49,657**Interest
                expense:**Deposits
            
            
            7,683
            
            
            4,860
            
            
            20,465
            
            
            12,706FHLB
                advances and repurchase agreements
            
            
            3,238
            
            
            2,890
            
            
            9,447
            
            
            8,817Junior
                subordinated debentures
            
            
            519
            
            
            305
            
            
            1,355
            
            
            873**Total
                interest expense**
            
            
            11,440
            
            
            8,055
            
            
            31,267
            
            
            22,396Net
                interest income
            
            
            9,956
            
            
            9,336
            
            
            29,164
            
            
            27,261Provision
                for loan losses
            
            
            300
            
            
            250
            
            
            850
            
            
            745Net
                interest income after provision for loan losses
            
            
            9,656
            
            
            9,086
            
            
            28,314
            
            
            26,516**Other
                income:**Gain
                on sale of loans
            
            
            97
            
            
            241
            
            
            177
            
            
            705Gain
                on sale of securities available-for-sale
            
            
            -
            
            
            -
            
            
            -
            
            
            13Net
                (loss) gain on sale of REO
            
            
            -
            
            
            -
            
            
            (27
            )
            
            33Checking
                service fees
            
            
            911
            
            
            801
            
            
            2,529
            
            
            2,344Other
                service fees
            
            
            281
            
            
            252
            
            
            898
            
            
            672BOLI
            
            
            195
            
            
            194
            
            
            572
            
            
            572Other
            
            
            132
            
            
            76
            
            
            365
            
            
            492**Total
                other income**
            
            
            1,616
            
            
            1,564
            
            
            4,514
            
            
            4,831**Other
                expenses:**Salaries
                and employee benefits
            
            
            3,275
            
            
            3,039
            
            
            9,525
            
            
            9,217Option
                expense
            
            
            73
            
            
            -
            
            
            212
            
            
            -Occupancy
            
            
            866
            
            
            823
            
            
            2,607
            
            
            2,453Marketing
            
            
            263
            
            
            193
            
            
            789
            
            
            546Data
                processing
            
            
            99
            
            
            187
            
            
            305
            
            
            503Prepayment
                fees on FHLB advances
            
            
            -
            
            
            37
            
            
            -
            
            
            110Other
            
            
            1,773
            
            
            1,393
            
            
            4,822
            
            
            4,172**Total
                other expenses**
            
            
            6,349
            
            
            5,672
            
            
            18,260
            
            
            17,001Income
                before provision for federal income taxes
            
            
            4,923
            
            
            4,978
            
            
            14,568
            
            
            14,346Provision
                for federal income taxes
            
            
            1,609
            
            
            1,634
            
            
            4,755
            
            
            4,716**Net
                income**
            
            $
            3,314
            
            $
            3,344
            
            $
            9,813
            
            $
            9,630Net
                income per common share, basic
            
            $
            0.27
            
            $
            0.28
            
            $
            0.81
            
            $
            0.80Weighted
                average number of shares outstanding, basic
            
            
            12,078,088
            
            
            11,979,563
            
            
            12,051,238
            
            
            11,972,201Net
                income per share, diluted
            
            $
            0.27
            
            $
            0.27
            
            $
            0.79
            
            $
            0.78Weighted
                average number of shares outstanding, diluted
            
            
            12,366,497
            
            
            12,310,925
            
            
            12,358,862
            
            
            12,315,409Dividends
                declared per share
            
            $
            0.08
            
            $
            0.072
            
            $
            0.23
            
            $
            0.20





See
      notes
      to condensed consolidated financial statements


4


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME**


(dollars
      in thousands)


(unaudited)





Three
                Months Ended
            
            
            
            Nine
                Months EndedSeptember
                30,
            
            
            
            September
                30,2006
            
            2005
            
            
            
            2006
            
            2005**Net
                Income**
            
            $
            3,314
            
            $
            3,344
            
            
            
            
            $
            9,813
            
            $
            9,630Increase
                in unrealized gain (loss) on securitiesavailable-for-sale,
                net of tax expense (benefit)of
                $859 and $(537) for the three monthsended
                September 30, 2006, and 2005, respectively,and
                $(166) and $(322) for the nine monthsended
                September 30, 2006, and 2005, respectively.
            
            
            1,596
            
            
            (998
            )
            
            
            
            
            (308
            )
            
            (598
            )Increase
                in unrealized gain on swapsAvailable-for-sale,
                net of tax expenseof
                $0 and $0 for the three months endedSeptember
                30, 2006, and 2005, respectively,and
                $0 and $114 for the nine monthsended
                September 30, 2006, and 2005, respectively.
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            212Less
                reclassification adjustment for (loss) onsecurities
                included in net income, net of tax (benefit)of
                $0 and $0 for the three months endedSeptember
                30, 2006, and 2005, respectively,and
                $0 and $(4) for the nine months endedSeptember
                30, 2006, and 2005, respectively.
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            (8
            )Less
                reclassification adjustment for (loss) on swapsincluded
                in net income, net of tax (benefit)of
                $0 and $0 for the three months endedSeptember
                30, 2006, and 2005, respectively, and$0
                and $(96) for the nine months endedSeptember
                30, 2006, and 2005, respectively.
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (179
            )**Comprehensive
                Income**
            
            $
            4,910
            
            $
            2,346
            
            
            
            
            $
            9,505
            
            $
            9,057





See
      notes
      to condensed consolidated financial statements


5


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(dollars
      in thousands, unaudited)





Nine
                Months Ended
              September
                30,2006
            
            2005**Cash
                flows from operating activities:**Net
                income
            
            $
            9,813
            
            $
            9,630Adjustments
                to reconcile net income to net cash provided by(used
                in) operating activities:Depreciation
                and amortization of premises and equipment
            
            
            1,468
            
            
            1,384Provision
                for losses on loans
            
            
            850
            
            
            745Increase
                in cash surrender value of bank-owned life insurance
            
            
            (492
            )
            
            (498
            )Amortization
                of retained servicing rights
            
            
            7
            
            
            -Amortization
                of core deposit intangible
            
            
            106
            
            
            197Deferred
                federal income taxes
            
            
            (39
            )
            
            468Deferred
                loan fees, net of amortization
            
            
            (4
            )
            
            382Stock-based
                compensation
            
            
            163
            
            
            -Net
                gain on sales of securities available-for-sale
            
            
            -
            
            
            (13
            )Net
                (loss) gain on sales of real estate owned, investment property
                andother
                repossessed assets
            
            
            -
            
            
            (33
            )Federal
                Home Loan Bank stock dividend received
            
            
            -
            
            
            (49
            )Net
                (increase) decrease in accrued interest receivable and other
                assets
            
            
            (932
            )
            
            766Net
                increase in accrued interest payable, expenses and other
                liabilities
            
            
            (136
            )
            
            435**Net
                cash provided by operating activities**
            
            
            10,804
            
            
            13,414**Cash
                flows from investing activities:**Loans
                originated, net of principal repayments
            
            
            (110,922
            )
            
            (69,917
            )Purchases
                of securities held-to-maturity
            
            
            (3,744
            )
            
            (5,054
            )Principal
                repayments on securities held-to-maturity
            
            
            1,549
            
            
            5,046Principal
                repayments on securities available-for-sale
            
            
            12,091
            
            
            18,857Purchases
                of securities available-for-sale
            
            
            (5,716
            )
            
            (20,000
            )Proceeds
                from sales of securities available-for-sale
            
            
            -
            
            
            1,519Purchases
                of premises and equipment
            
            
            (1,407
            )
            
            (1,244
            )Proceeds
                from sales/retirements of premises and equipment
            
            
            191
            
            
            29Proceeds
                from loan participations sold
            
            
            (289
            )
            
            (2,536
            )**Net
                cash used in investing activities**
            
            
            (108,247
            )
            
            (73,300
            )**Subtotal,
                carried forward**
            
            $
            (97,443
            )
            $
            (59,886
            )





See
      notes
      to condensed consolidated financial statements


6


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(dollars
      in thousands, unaudited)





Nine
                Months EndedSeptember
                30,2006
            
            2005**Subtotal,
                brought forward**
            
            $
            (97,443
            )
            $
            (59,886
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of common stock
            
            
            754
            
            
            621Dividends
                paid
            
            
            (2,638
            )
            
            (2,299
            )Repurchase
                of common stock
            
            
            (528
            )
            
            (789
            )Net
                increase in deposits
            
            
            44,338
            
            
            78,061Net
                (decrease) increase in Federal Home Loan Bank advances
            
            
            (3,000
            )
            
            13,000Net
                increase (decrease) in securities sold under agreements to
                repurchase
            
            
            44,642
            
            
            (388
            )Proceeds
                from Trust Preferred Securities issued
            
            
            10,310
            
            
            -Net
                increase in advance payments by borrowers for taxes and
                insurance
            
            
            268
            
            
            429**Net
                cash provided by financing activities**
            
            
            94,146
            
            
            88,635Net
                (decrease) increase in cash and cash equivalents
            
            
            (3,297
            )
            
            28,749Cash
                and cash equivalents at beginning of period
            
            
            31,109
            
            
            13,029Cash
                and cash equivalents at end of period
            
            $
            27,812
            
            $
            41,778Supplemental
                disclosures of cash flow information—cash paid during the period
                for:Interest
            
            $
            32,694
            
            $
            26,074Federal
                income taxes
            
            
            5,200
            
            
            4,445Supplemental
                schedule of noncash investing activities:Mark-to-market
                on securities available-for-sale
            
            
            474
            
            
            882Tax
                benefit of non-qualified options exercised
            
            
            284
            
            
            201Retirement
                of common stock in retained earnings
            
            
            -
            
            
            (43
            )Dividends
                declared
            
            
            (2,739
            )
            
            (2,395
            )




See
      notes
      to condensed consolidated financial statements


7


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


**(unaudited)**





1.  Presentation
      of Financial Information




The
      accompanying financial information is unaudited and has been prepared from
      the
      consolidated financial statements of Cascade Financial Corporation (the
“Corporation”), and its subsidiary, Cascade Bank (the “Bank” or “Cascade). All
      significant intercompany balances have been eliminated in the consolidation.
      In
      the opinion of management, the financial information reflects all adjustments
      (consisting of normal recurring adjustments) necessary for a fair presentation
      of the financial condition, results of operations, and cash flows of the
      Corporation pursuant to the requirements of the SEC for interim reporting.
      Operating results for the nine months ended September 30, 2006, are not
      necessarily indicative of the results that may be expected for the year ended
      December 31, 2006.




Certain
      information and footnote disclosures included in the Corporation’s financial
      statements for the year ended December 31, 2005, have been condensed or omitted
      from this report. Accordingly, these statements should be read with the
      financial statements and notes thereto included in the Corporation’s December
      31, 2005 Annual Report on Form 10-K.





2. Commitments
      and Contingencies




In
      the normal
      course of business there are various commitments to fund loans. Management
      does
      not anticipate any material loss as a result of these commitments.




Periodically
      there have been various claims and lawsuits against the Corporation or the
      Bank,
      such as claims to enforce liens, condemnation proceedings on properties in
      which
      the Bank holds security interests, claims involving the making and servicing
      of
      real property loans and other issues incidental to the Corporation’s and the
      Bank’s business. In the opinion of management no material loss is expected from
      any such pending lawsuits.





3.  Trust
      Preferred Securities (Junior Subordinated Debentures)




On
      March 30,
      2006, Cascade Capital Trust III issued $10 million in par value trust preferred
      securities. These securities have a fixed coupon of 6.65% for the first 5 years
      and then float at 3-month LIBOR plus 1.40% for the remaining 25 years. In
      accordance with FIN 46R, the Trust is not consolidated in the Corporation’s
      financial statements. The Corporation fully and unconditionally guaranteed
      the
      trust preferred securities.


8


4. Stockholders’
      Equity





a)  Earnings
      Per Share




The
      following
      table presents the computation of basic and diluted net income per share for
      the
      three and nine-month period ended September 30:





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005*(dollars
                in thousands, except share and per share amounts)***Numerator:**Net
                income
            
            $
            3,314
            
            $
            3,344
            
            $
            9,813
            
            $
            9,630**Denominator:**Denominator
                for basic net income per share-Weighted
                average shares
            
            
            12,078,088
            
            
            11,979,563
            
            
            12,051,238
            
            
            11,972,201Effect
                of dilutive securities:Stock
                options
            
            
            288,409
            
            
            331,362
            
            
            307,624
            
            
            343,208Denominator
                for diluted net income per share-Weighted
                average shares and assumedconversion
                of dilutive stock options
            
            
            12,366,497
            
            
            12,310,925
            
            
            12,358,862
            
            
            12,315,409Basic
                net income per share
            
            $
            0.27
            
            $
            0.28
            
            $
            0.81
            
            $
            0.80Diluted
                net income per share
            
            $
            0.27
            
            $
            0.27
            
            $
            0.79
            
            $
            0.78





For
      the
      quarters ended September 30, 2006, and 2005, there were anti-dilutive options
      to
      purchase shares of 216,569 and 142,226 respectively, excluded from the above
      calculation. For the nine-month periods ended September 30, 2006, and 2005,
      there were anti-dilutive options to purchase shares of 186,669 and 152,798
      respectively, excluded from the above calculation.




b)  Dividends




On
      September
      27, 2006, the Corporation announced its seventeenth consecutive quarterly cash
      dividend payment. The dividend was $0.08 per share and was paid on October
      25,
      2006, to shareholders of record as of October 11, 2006.




On
      April 25,
      2006, the Corporation declared a 5-for-4 stock split payable on May 19, 2006,
      to
      shareholders of record as of May 5, 2006. Certain share and per share amounts
      have been restated to reflect the 5-for-4 stock split.


c)  Stock-based
        Compensation


Effective
      January 1, 2006, the Corporation adopted Statement of Financial Accounting
      Standards No. 123 (revised 2004), *“Share-Based
      Payment,”* (“SFAS
      123(R)”) using the modified-prospective-transition method. Under this transition
      method, compensation cost in 2006 includes the cost for options granted prior
      to
      but not vested as of December 31, 2005, and options granted and vested in 2006.
      Therefore results for prior periods have not been restated.


9


The
      adoption
      of SFAS No. 123(R) resulted in compensation expense of approximately $212,000
      for the nine months ended September 30, 2006. There was no tax benefit recorded
      for the nine months ended September 30, 2005.




The
      Corporation previously accounted for its stock option plan in accordance with
      the provisions of APB No. 25, *“Accounting
      for Stock Issued to Employees,”* and
      related interpretations. As such, compensation expense was recorded on the
      date
      of grant only if the current market price of the underlying stock exceeded
      the
      exercise price. As none of the Corporation’s stock option grants have ever been
      granted at a price less than market value, no compensation cost has been
      recognized for its stock option plans.





Changes
      in
      total options outstanding for the nine months ended September 30, 2006, are
      as
      follows:


Options
            
            Weighted-
              Average
              Exercise
              Price
                per Share
            
            Weighted-
              Average
              Remaining
              Contractual
              Term
              (in
                years)
            
            Aggregate
              Intrinsic
              ValueOutstanding
                on December 31, 2005
            
            
            732,253
            
            $
            7.72
            
            
            5.85
            
            $
            -Granted
            
            
            96,037
            
            
            15.00
            
            
            9.99
            
            
            -Exercised
            
            
            (48,748
            )
            
            5.14
            
            
            -
            
            
            -Forfeited/Canceled
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                on March 31, 2006
            
            
            779,542
            
            $
            8.78
            
            
            6.21
            
            $
            5,054,421Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (19,739
            )
            
            4.87
            
            
            -
            
            
            -Forfeited/Canceled
            
            
            (6,233
            )
            
            9.04
            
            
            -
            
            
            -Outstanding
                on June 30, 2006
            
            
            753,570
            
            $
            8.88
            
            
            6.00
            
            $
            4,995,360Granted
            
            
            10,000
            
            
            16.15
            
            
            9.99Exercised
            
            
            (52,014
            )
            
            5.63
            
            
            -Forfeited/Canceled
            
            
            (263
            )
            
            15.92
            
            
            -Outstanding
                on September 30, 2006
            
            
            711,293
            
            
            9.22
            
            
            6.00
            
            $
            5,099,279Exercisable
                on September 30, 2006
            
            
            384,336
            
            $
            6.70
            
            
            4.64
            
            $
            3,724,305




All
      amounts
      have been adjusted retroactively to reflect the 5-for-4 stock split paid in
      May
      2006.




There
      were
      106,037 options granted during the nine month period ended September 30, 2006.
      The unrecognized share-based compensation cost related to stock option expense
      at September 30, 2006, is $541,265, which will be recognized over the estimated
      average life of the options of approximately five years.


10


Options
      are
      granted to certain employees and directors at prices equal to the market value
      of the stock on the dates the options were granted. The options granted have
      a
      term of 10 years from the grant date. Incentive stock options granted to
      employees vest over a five year period. Non-qualified options granted to
      directors vest over a four year period. Compensation expense is recorded as
      if
      each vesting portion of the award is a separate award. We have estimated the
      fair value of all stock option awards as of the date of the grant by applying
      a
      Black-Scholes pricing valuation model. The application of this valuation model
      involves assumptions that are judgmental and sensitive in the determination
      of
      compensation expense. Key assumptions used in determining the fair value of
      options granted during the nine months ended September 30, 2006, are as
      follows:





Expected
                price volatility
            
            
            24.0
            %Risk-free
                interest rate
            
            
            4.5
            %Dividend
                yield on underlying stock
            
            
            2.0
            %Weighted-average
                expected life in years
            
            
            5.1




The
      total
      options authorized were 1,303,493. There were 10,000 options granted during
      the
      three months ended September 30, 2006. The total intrinsic value of options
      exercised during the nine months ended September 30, 2006, was $1,205,200.
      The
      total intrinsic value of options exercised during the nine months ended
      September 30, 2005, was $857,300.




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




SFAS
      123(R)
      requires the recognition of stock-based compensation for the number of awards
      that are expected to vest. As a result, for most awards, recognized stock
      compensation expense was reduced by estimated forfeitures primarily based on
      historical forfeiture rates of 6.19%. Estimated forfeitures will be continually
      evaluated in subsequent periods and may change based on new facts and
      circumstances.




The
      following
      pro forma disclosures present the Corporation’s consolidated net income and
      diluted earnings per share, determined as if the Corporation had recognized
      compensation expense for its employee stock options based on the estimated
      fair
      value of the option at the date of grant amortized over the vesting period
      of
      options: **




Three
                  Months Ended
                September
                  30, 2005
              
              Nine
                  Months Ended
                September
                  30, 2005**Net
                  income**
              
              *(dollars
                  in thousands, except per share amounts)*As
                  reported
              
              $
              3,344
              
              $
              9,630Less
                  FAS 123 compensation costs
              
              
              35
              
              
              119Pro
                  forma
              
              $
              3,309
              
              $
              9,511**Net
                  income per common share**BasicAs
                  reported
              
              $
              0.28
              
              $
              0.80Pro
                  forma
              
              
              0.28
              
              
              0.79DilutedAs
                  reported
              
              $
              0.27
              
              $
              0.78Pro
                  forma
              
              
              0.27
              
              
              0.78





11


5.  Recently
      Issued Accounting Standards




In
      September 2006, the FASB
      issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and
      other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
      and 132(R)." This Statement improves financial reporting by requiring an
      employer to recognize the overfunded or underfunded status of a defined benefit
      postretirement plan as an asset or liability in its statement of financial
      position and to recognize changes in that funded status in the year in which
      the
      changes occur through comprehensive income of a business entity or changes
      in
      unrestricted net assets of a not-for-profit organization. This Statement also
      improves financial reporting by requiring an employer to measure the funded
      status of a plan as of the date of its year-end statement of financial position,
      with limited exceptions. An employer with publicly traded equity securities
      is
      required to initially recognize the funded status of a defined benefit
      postretirement plan and to provide the required disclosures as of the end of
      the
      fiscal year ending after December 15, 2006. The requirement to measure plan
      assets and benefit obligations as of the date of the employer's fiscal year-end
      statement of financial position is effective for fiscal years ending after
      December 15, 2008. SFAS No. 158 is not expected to have a material impact on
      the
      Company.




In
      September 2006, the FASB
      issued SFAS No. 157, "Fair Value Measurements." This Statement defines fair
      value, establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      This Statement applies under other accounting pronouncements that require or
      permit fair value measurements. Accordingly, this Statement does not require
      any
      new fair value measurements. This Statement is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. SFAS No. 157 is not expected to
      have
      a material impact on the Company.





**Item
      2 - Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





*The
      following discussion is intended to assist in understanding the financial
      condition and results of the Corporation. The information contained in this
      section should be read with the unaudited condensed consolidated financial
      statements and accompanying notes, and the December 31, 2005 audited
      consolidated financial statements and accompanying notes included in our recent
      Annual Report on Form 10-K.*





*This
      section contains forward-looking statements, within the meaning of Section
      27A
      of the Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended, and subject to the safe harbor created by
      the
      Private Securities Litigation Reform Act of 1995, that are subject to risks
      and
      uncertainties that could cause actual results to differ materially from those
      projected. Those factors include, but are not limited to: the impact of national
      and regional economic trends on small business loan demand in the Puget Sound
      area; loan delinquency rates; the Bank’s ability to continue to attract quality
      commercial business; interest rate movements; changes in the demographic make-up
      of the Bank’s market area; fluctuation in demand for the Bank’s products and
      services; the Corporation’s ability to attract and retain qualified people, and
      other factors. These factors should be considered in evaluating the
      forward-looking statements and undue reliance should not be placed on such
      statements. The Corporation shall not be responsible to update any such
      forward-looking statements. For a discussion of factors that could cause actual
      results to differ, and for certain mandated SEC guide 3 information that has
      not
      materially changed since the audited statements, please see the Corporation’s
      Annual Report on Form 10-K for the year ended December 31,
      2005.*





12
 Cascade
        Financial Corporation is a bank holding company incorporated in the state
        of
        Washington. The Corporation’s sole operating subsidiary is Cascade Bank, a
        Washington State chartered commercial bank. The Corporation and the Bank
        are
        headquartered in Everett, Washington. The Bank offers loan, deposit, and
        other
        financial services through its nineteen branches located in Snohomish and
        King
        Counties (Washington).





**Financial
      Statement Contingency**




In
      October
      2003, Cascade Financial Corporation initiated an interest rate swap with a
      notional amount of $10 million to hedge the fair value of $10 million of Junior
      Subordinated Debentures (Trust Preferred Securities), which the Company had
      issued in March 2000. The swap has been accounted for as a fair value hedge
      under Paragraph 68 of FAS 133 (commonly referred to as the “short cut
      method”).




The
      Company
      has become aware that, in light of recent informal technical interpretations,
      the short cut method may not be the proper method of accounting for interest
      rate swaps hedging such debt instruments. Due to the lack of definitive
      pronouncements on this issue, we have inquired of the SEC’s Office of Chief
      Accountant for guidance concerning the accounting treatment.




For
      the
      quarter ended September 30, 2006, we have continued to account for the interest
      rate swap as fair value hedge. For the quarter ended September 30, 2006, the
      fair value on the interest rate swap was a loss of $421,000 (pre-tax), which
      was
      an adjustment to the carrying value of the Junior Subordinated Debentures.
      We
      would have recognized the loss through our income statement if the interest
      rate
      swap did not meet the requirements of FAS 133’s short cut method of
      accounting.





**Selected
      Financial Data**




The
      following table sets forth
      certain selected financial data concerning the Corporation for the periods
      indicated:




At
                  or for the
                three
                  months ended
                September
                  30,
              
              At
                  or for the
                nine
                  months ended
                September
                  30,2006
              
              2005
              
              2006
              
              2005Return
                  on average assets
              
              
              1.02
              %
              
              1.15
              %
              
              1.04
              %
              
              1.13
              %Return
                  on average stockholders’ equity
              
              
              12.05
              
              
              13.12
              
              
              12.23
              
              
              13.09Average
                  stockholders’ equity to average assets
              
              
              8.45
              
              
              8.74
              
              
              8.52
              
              
              8.60Other
                  expenses to average assets
              
              
              1.97
              
              
              1.95
              
              
              1.93
              
              
              1.98Efficiency
                  ratio
              
              
              54.87
              
              
              52.04
              
              
              54.22
              
              
              52.98Average
                  interest-bearing assets toaverage
                  interest-bearing liabilities
              
              
              111.77
              
              
              112.31
              
              
              111.79
              
              
              111.94




13


**CHANGES
      IN FINANCIAL CONDITION**




Total
      assets
      increased 8.5% or $103.4 million to $1.32 billion at September 30, 2006,
      compared to $1.21 billion at December 31, 2005. Net loans, i.e. net of deferred
      loan fees and the allowance for loan losses, increased 12.7% or $110.4 million
      to $977.4 million at September 30, 2006, from $867.0 million at December 31,
      2005.




Total
      i nvestment
      securities decreased $4.6 million to $243.0 million at September 30, 2006,
      compared to $247.6 million at December 31, 2005. There has been limited activity
      in the portfolio. This decrease represents payments on the mortgage back
      securities (MBS) and collateralized mortgage obligations (CMO) portfolios.
      The
      investment portfolio is concentrated in the securities issued by Government
      Sponsored Enterprises (GSEs, e.g. FNMA or FHLMC) as well as mortgage-backed
      pass-through securities and collateralized mortgage obligations backed by pools
      of single family residential mortgages (known collectively as MBS). All
      investment purchases during the nine months ended September 30, 2006, were
      rated
      AAA in terms of credit quality by Moody’s and/or Standard & Poors. All MBS
      and GSE securities in the portfolio as of September 30, 2006, are rated
      AAA.


*(Dollars
                      in thousands)*
                  
                  **SEPTEMBER
                      30, 2006****Securities
                      available-for-sale**
                  
                  Amortized
                    Cost
                  
                  Gross
                    Unrealized
                    Gains
                    Less
                      Than
                    1
                      Year
                  
                  Gross
                    Unrealized
                    Gains
                    More
                      Than
                    1
                      Year
                  
                  Gross
                    Unrealized
                    Losses
                    Less
                      Than
                    1
                      Year
                  
                  Gross
                    Unrealized
                    Losses
                    More
                      Than
                    1
                      Year
                  
                  Fair
                    ValueMBS
                  
                  $
                  41,511
                  
                  $
                  33
                  
                  $
                  2
                  
                  $
                  (104
                  )
                  $
                  (693
                  )
                  $
                  40,749Agency
                      notes
                  
                  
                  95,783
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (65
                  )
                  
                  (2,720
                  )
                  
                  92,998$
                  137,294
                  
                  $
                  33
                  
                  $
                  2
                  
                  $
                  (169
                  )
                  $
                  (3,413
                  )
                  $
                  133,747**Securities
                      held-to-maturity**
                  
                  
                  Amortized
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gains
                    Less
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Gains
                    More
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Losses
                    Less
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Losses
                    More
                      Than
                    1
                      Year
                  
                  
                  Fair
                    ValueMBS
                  
                  $
                  25,692
                  
                  $
                  6
                  
                  $
                  -
                  
                  $
                  (23
                  )
                  $
                  (936
                  )
                  $
                  24,739Agency
                      notes
                  
                  
                  70,850
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (43
                  )
                  
                  (2,220
                  )
                  
                  68,587Corporate/other
                  
                  
                  775
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  775$
                  97,317
                  
                  $
                  6
                  
                  $
                  -
                  
                  $
                  (66
                  )
                  $
                  (3,156
                  )
                  $
                  94,101*(Dollars
                      in thousands)*
                  
                  **DECEMBER
                      31, 2005****Securities
                      available-for-sale**
                  
                  
                  Amortized
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gains
                    Less
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Gains
                    More
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Losses
                    Less
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Losses
                    More
                      Than
                    1
                      Year
                  
                  
                  Fair
                    ValueMBS
                  
                  $
                  47,847
                  
                  $
                  16
                  
                  $
                  14
                  
                  $
                  (71
                  )
                  $
                  (383
                  )
                  $
                  47,423Agency
                      notes
                  
                  
                  95,822
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,258
                  )
                  
                  (391
                  )
                  
                  93,173$
                  143,669
                  
                  $
                  16
                  
                  $
                  14
                  
                  $
                  (2,329
                  )
                  $
                  (774
                  )
                  $
                  140,596**Securities
                      held-to-maturity**
                  
                  
                  Amortized
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gains
                    Less
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Gains
                    More
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Losses
                    Less
                      Than
                    1
                      Year
                  
                  
                  Gross
                    Unrealized
                    Losses
                    More
                      Than
                    1
                      Year
                  
                  
                  Fair
                    ValueMBS
                  
                  $
                  23,830
                  
                  $
                  -
                  
                  $
                  8
                  
                  $
                  (188
                  )
                  $
                  (601
                  )
                  $
                  23,049Agency
                      notes
                  
                  
                  70,827
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (376
                  )
                  
                  (1,845
                  )
                  
                  68,606Corporate/other
                  
                  
                  465
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  465$
                  95,122
                  
                  $
                  -
                  
                  $
                  8
                  
                  $
                  (564
                  )
                  $
                  (2,446
                  )
                  $
                  92,120
  14
 We
            currently
            hold 28 securities in our available-for-sale portfolio and 20 securities
            in our
            held-to-maturity portfolio that have had an unrealized loss for more
            than one
            year. The losses are due to increases in interest rates and are not related
            to
            credit deterioration. If rates were to move downward in the future, the
            market
            value of these securities would rise accordingly. We have the ability
            to hold
            the investments for a period of time we believe to be sufficient for a market
            price recovery. Therefore, we do not consider any portion of these investments
            to be other-than-temporarily impaired.




At
      September
      30, 2006, the Bank held Federal Home Loan Bank (FHLB) of Seattle stock of $11.9
      million. In December 2004, the FHLB of Seattle suspended its practice of
      repurchasing stock that was not needed to support outstanding advances and
      announced it would not repurchase any stock until further notice. On April
      5,
      2005, the FHLB of Seattle submitted a proposed business and capital plan to
      its
      regulator, the Federal Housing Finance Board. In May 2005, the Finance Board
      accepted the Seattle bank’s three-year plan. To meet the Finance Board’s
      conditions under the three-year plan, the Seattle bank’s board adopted a
      resolution that suspends dividends on all classes of stock. Although the Seattle
      bank showed a modest profit for the first six months of 2006, it anticipates
      a
      period of low profitability or losses that may last up to three
      years.





**Loan
      Portfolio**




Virtually
      all
      of the Bank’s loans are to businesses or individuals in the Puget Sound area.
      Business loans are made to small and medium sized businesses within that area
      for a wide array of purposes. Included in the business loan total are loans
      secured by real estate where the borrower is the primary tenant of the property.
      Real estate construction loans are primarily extended to builders and developers
      of single family, residential real estate. The vast majority of these projects
      focus on entry-level homes and/or first trade-up homes. Commercial real estate
      loans fund small, non-owner occupied buildings.




Retail
      loans
      consist of residential, home equity and consumer loans. Residential loans,
      held
      in the Bank’s portfolio, are generally adjustable rate loans secured by single
      family residences. The Bank also originates longer term fixed rate residential
      loans, but sells almost all of those loans into the secondary market on a best
      efforts, servicing released basis. Home equity and consumer loans, which are
      primarily second mortgages on the borrower’s primary residence, comprise
      ---77.1% of the home equity and consumer portfolio. The balance of this category
      is non-residential, e.g. automobiles, credit cards, or boats. Multifamily loans
      are usually adjustable rate loans secured by mortgages on properties with five
      or more units.




Net
      loans
      increased by $110.4 million to $977.4 million as of September 30, 2006, compared
      to $867.0 million at December 31, 2005. In keeping with the Bank’s evolution to
      a commercial bank, loans more closely associated with a commercial bank, i.e.
      business, real estate construction, and commercial real estate loans, grew
      $125.8 million to $826.9 million as of September 30, 2006, compared to $701.1
      million as of December 31, 2005. The Company has emphasized construction lending
      as it provides the most favorable trade-off between risk and
      returns.




Retail
      loans
      decreased $3.7 million as consumer loans decreased $2.9 million to $29.2 million
      and residential loans decreased by $739,000 to $94.7 million. Multifamily loans
      decreased $11.0 million to $41.1 million. The intense pricing pressure and
      the
      commodity like nature of these loans have rendered them less attractive
      assets.


15


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




**Types
                  of Loans**
              
              September
                  30,
              
              %
                  of
              
              December
                  31,
              
              %
                  of*(Dollars
                  in thousands)*
              
              2006
              
              Portfolio
              
              2005
              
              PortfolioBusiness
              
              $
              440,586
              
              
              44.4
              %
              $
              394,034
              
              
              44.8
              %Real
                  estate construction(1)
              
              
              241,951
              
              
              24.4
              
              
              165,957
              
              
              18.8Commercial
                  real estate
              
              
              144,313
              
              
              14.5
              
              
              141,109
              
              
              16.0Retail(2)
              
              
              123,937
              
              
              12.5
              
              
              127,589
              
              
              14.5Multifamily
                  real estate
              
              
              41,070
              
              
              4.2
              
              
              52,057
              
              
              5.9Total
                  loans
              
              $
              991,857
              
              
              100.0
              %
              $
              880,746
              
              
              100.0
              %Deferred
                  loan fees
              
              
              (3,439
              )
              
              
              
              
              (3,443
              )Allowance
                  for loan losses
              
              
              (11,005
              )
              
              
              
              
              (10,254
              )Loans,
                  net
              
              $
              977,413
              
              
              
              
              $
              867,049 ___________________


*(1)*
            *Real
                estate construction loans are net of loans in
                process.*


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





**Deposits,
      Other Borrowings, and Shareholder Equity**




Checking
      account deposits increased a s
      the
      Bank continued to focus its branch activities on deposit generation in general
      and checking/transaction accounts in particular. In June 2005, the Bank launched
      its High Performance Checking (HPC) program to accelerate deposit growth. As
      of
      September 30, 2006, HPC accounts held $34.8 million of checking deposits. Total
      deposits increased by $44.3 million from $795.8 million at December 31, 2005,
      to
      $840.1 million at September 30, 2006. The increase occurred in Money Market
      Deposit Accounts (MMDA) and checking accounts as the Bank chose to let some
      CDs
      balances run off, rather than pay higher rates offered in the deposit
      market.




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





*(Dollars
                in thousands)*
            
            September
                30,
            
            %
                of
            
            December
                31,
            
            %
                of2006
            
            Deposits
            
            2005
            
            DepositsChecking
                accounts
            
            $
            137,466
            
            
            16.4
            %
            $
            120,468
            
            
            15.1
            %Savings
                & MMDA
            
            
            262,206
            
            
            31.2
            
            
            196,790
            
            
            24.8CDs
            
            
            440,434
            
            
            52.4
            
            
            478,510
            
            
            60.1$
            840,106
            
            
            100.0
            %
            $
            795,768
            
            
            100.0
            %




FHLB
      of
      Seattle advances decreased by $3.0 million from $236.0 million at December
      31,
      2005, to $233.0 million at September 30, 2006. Securities sold under agreements
      to repurchase increased $44.6 million to $95.7 million for the nine months
      ended
      September 30, 2006. The Bank used structured advances and repurchase agreements
      to obtain lower rates.




On
      March 30,
      2006, Cascade Financial Corporation issued $10 million in par value junior
      subordinated debentures (Trust Preferred Securities). The proceeds from the
      issuance were invested in Cascade Bank, which used the increased capital for
      general corporate purposes.


16


Stockholders’
      equity increased by $7.3 million from $105.2 million at December 31, 2005,
      to
      $112.5 million at September 30, 2006. The increase is primarily attributable
      to
      the retention of net income for the period less dividend payments. The
      Corporation’s seventeenth consecutive cash dividend, which was declared
      September 27, 2006, reduced stockholders’ equity by $967,000. Accumulated other
      comprehensive income decreased by $300,000 due to a mark-to-market adjustment
      of
      the available-for-sale securities portfolio, to a negative $2.3 million as
      of
      September 30, 2006.





**Asset
      Quality**




Non-performing
      assets (non-performing loans, real estate owned and other repossessed property)
      totaled $112,000 and $2.1 million at September 30, 2006, and December 31, 2005,
      respectively. Non-performing loans, which are those on non-accrual, those that
      are ninety days past due, and those that management otherwise has serious
      reservations about their collectibility, decreased to $112,000 at September
      30,
      2006, compared to $2.0 million at December 31, 2005. Of the $112,000, $79,000
      were business and construction loans, $24,000 were residential, and $9,000
      were
      consumer loans. There was no real estate owned (REO) and other repossessed
      assets as of September 30, 2006, compared to $101,000 at December 31,
      2005.




At
      September
      30, 2006, the Bank’s allowance for loan losses totaled $11.0 million compared to
      $10.3 million at December 31, 2005. The allowance for loan losses was 1.11%
      of
      total loans outstanding at September 30, 2006, compared to 1.16% at December
      31,
      2005. The allowance for loan losses was 9,826% of non-performing loans at
      September 30, 2006. The allowance for loan losses is maintained at a level
      sufficient to provide for losses based on management’s evaluation of known and
      inherent risks in the portfolio. This evaluation includes analyses of the
      financial condition of the borrower, the value of the collateral securing
      selected loans, consideration of historical loss experience and management’s
      projection of trends affecting credit quality. The increase in the allowance
      is
      primarily attributable to the continued emphasis on business and construction
      lending, and an increase in the portfolio of these loan types. Management
      believes that the allowance for losses on loans is adequate to provide for
      losses that may be incurred on non-performing loans.




During
      the
      quarter ended September 30, 2006, loan charge-offs equaled $96,000 while
      recoveries were $63,000 resulting in net charge-offs of $33,000. For the nine
      months ended September 30, 2006, net charge-offs equaled $99,000.




The
      following
      table provides summary information concerning asset quality as of and for the
      quarters ended September 30, 2006, and December 31, 2005,
      respectively:





September
                30, 2006
            
            December
                31, 2005Non-performing
                loans to total assets
            
            
            0.01
            %
            
            0.16
            %Non-performing
                loans to total loans outstanding
            
            
            0.01
            
            
            0.23Non-performing
                assets to total assets
            
            
            0.01
            
            
            0.17Allowance
                for loan losses to non-performing loans
            
            
            9,826
            
            
            516Allowance
                for loan losses to total loans
            
            
            1.11
            
            
            1.16Net
                charge-offs to total loans
            
            
            0.00
            
            
            0.00





17


**RESULTS
      OF OPERATIONS**





Comparison
      of the Three and Nine Months Ended September 30, 2006, and 2005





**General**




Net
      income was
      flat at $3.3 million for the three months ended September 30, 2006, compared
      to
      $3.3 million during the comparable period in 2005. Diluted net income per share
      was $0.27 for the quarter ended September 30, 2006, and $0.27 per share for
      the
      quarter ended September 30, 2005. Net interest income before provision for
      loan
      losses increased $700,000 to $10.0 million for the three months ended September
      30, 2006. Other income remained flat at $1.6 million for the quarter ended
      September 30, 2006. Other expense increased $600,000  to
      $6.3  million
      for the quarter ended September 30, 2006, as compared to the quarter ended
      September 30, 2005.




Net
      income for
      the nine months ended September 30, 2006, was $9.8 million compared with $9.6
      million during the comparable period in 2005. Net income per diluted share
      was
      $0.79 for the nine months ended September 30, 2006, compared with $0.78 in
      2005 .




**Net
      Interest Income**




Net
      interest
      income increased 6.6% or $700,000 to $10.0 million for the three months ended
      September 30, 2006, compared to $9.3 million for the three months ended
      September 30, 2005. Net interest income for the nine months ended September
      30,
      2006 and 2005 was $29.2 and $27.3 million, respectively. Average interest
      earning assets increased $128.0 million or 11.0% to $1.29 billion for the three
      months ended September 30, 2006, compared to the same periods in 2005. Average
      total loans (including loans held for sale) increased $106.5 million to $974.8
      million and average investment securities increased $22.1 million to $242.5
      million for the three months ended September 30, 2006, compared to the same
      quarter of the prior year.





At
                or for the
            
            At
                or for thethree
                months ended
            
            nine
                months endedSeptember
                30,
            
            September
                30,*(dollars
                in thousands)*
            
            2006
            
            2005
            
            2006
            
            2005Average
                interest earning assets
            
            $
            1,220,900
            
            $
            1,094,529
            
            $
            1,190,362
            
            $
            1,076,419Average
                interest bearing liabilities
            
            
            1,092,375
            
            
            974,559
            
            
            1,064,794
            
            
            961,628Yield
                on interest earning assets
            
            
            6.95
            %
            
            6.33
            %
            
            6.79
            %
            
            6.16
            %Cost
                of interest bearing liabilities
            
            
            4.15
            
            
            3.28
            
            
            3.93
            
            
            3.11Net
                interest spread
            
            
            2.80
            
            
            3.05
            
            
            2.86
            
            
            3.05Net
                interest margin
            
            
            3.24
            
            
            3.41
            
            
            3.28
            
            
            3.38




The
      net
      interest margin decreased 17 basis points to 3.24% for the three months ended
      September 30, 2006, compared to the same quarter the prior year. The yield
      on
      interest earning assets increased 62 basis points to 6.95% for the three months
      ended September 30, 2006, compared to 6.33% for the three months ended September
      30, 2005. The cost of funds increased 87 basis points to 4.15% for the three
      months ended September 30, 2006, compared to 3.28% for the same period in 2005.
      For the nine months ended September 30, 2006, the net interest margin decreased
      10 basis points from 3.38% to 3.28%.


18


The
      yield on
      assets increased as the rates rose and loans increased as a percentage of
      earning assets and prime based loans repriced upward as short-term rates
      continued to increase. Funding costs also rose as the rates paid on deposits
      rose with the level of short-term interest rates. Most of our deposit growth
      occurred in a MMDA product, which is offered to municipalities and is subject
      to
      weekly repricing based upon money market rates.





**Provision
      for Loan Losses**




Cascade’s
      provision for loan losses was $300,000  for
      the
      three months and $850,000  for
      the
      nine months ended September 30, 2006. The provision was $250,000 and $745,000
      for the same periods in 2005, respectively. The provision is based on the size
      and composition of the portfolio, and management’s evaluation of known and
      inherent risks in the portfolio, as well as Cascade’s loss experience. The
      provision was larger in 2006 due to the overall growth in the
      portfolio.





**Other
      Income**




Other
      income
      remained flat at $1.6 million for the three months ended September 30, 2006,
      and
      2005. Other income was $4.5 million and $4.8 million for the nine months ended
      September 30, 2006, and September 30, 2005, respectively. For the three months
      ended September 30, 2006, checking fee income grew to $911,000 compared to
      $801,000 for the same period in the prior year. Gain on sale of loans decreased
      $144,000 from $241,000 to $97,000 for the three months ended September 30,
      2006.
      Other service fee income increased $29,000 to $281,000 for the quarter. There
      was no gain on the sale of investment securities for the quarter ended September
      30, 2006, and September 30, 2005.




While
      the
      Corporation is pursuing many avenues to augment its other (non-interest) income,
      it will continue to focus on replacing the gain on sale of securities and loans,
      which enhanced earnings in prior years, with additional service fees and net
      interest income.





**Other
      Expense**




Other
      expense
      was $6.3 million for the three months and $18.3 million for the nine months
      ended September 30, 2006, compared with $5.7 million for the three months and
      $17.0 million for the nine months ended September 30, 2005.




Salary
      and
      employee benefit expenses and option expenses increased $309,000 to $3.3
      million during
      the three months ended September 30, 2006, compared to the same quarter last
      year .
      A large
      portion of that increase can be attributed to the expensing of employee stock
      options, which is required beginning this year. Option expense was $73,000
      and
      $212,000 for the three and nine months ended September 30, 2006. Salary and
      employee benefit expenses were $9.5 million for the
      nine months ended September 30, 2006, and $9.2 million for the nine month period
      in 2005. The
      remaining other operating expense categories totaled $3.0 million for the three
      months ended and $8.5 for the nine months ended September 30, 2006. For the
      same
      period in 2005, other operating expenses were $2.6 million and $7.8 million,
      respectively.


19


Federal
      income
      tax expenses decreased by $25,000 to $1.6 million, a decrease of
      1.5% during
      the three months ended September 30, 2006, compared to the same period last
      year .
      For the
      three months ended September 30, 2006, the Corporation’s effective tax rate was
      33%. For the nine months ended September 30, 2006, income tax expense was $4.8
      million compared to $4.7 million in 2005, with an effective tax rate of 33%.
      Tax
      benefits related to bank-owned life insurance and interest on tax-exempt loans
      accounted for the difference from the “expected” Federal income tax rate of 35%
      during each of the periods.





**Segment
      Results**




The
      following
      is a summary of selected operating segment information for the three and nine
      month periods ended September 30, 2006, and 2005. The Corporation manages its
      operations and prepares management reports with a primary focus on its various
      business units. The accounting policies of the individual units are the same
      as
      those of the Corporation. The Corporation allocates centrally provided services
      to the business units based upon estimated usage of those services. The income
      property category includes commercial real estate and multifamily lending.
      All
      amounts are in thousands.





**For
      the three months ended September 30, 2006**


BUSINESS
            
            CONS-TRUCTION
            
            INCOMEPROPERTY
            
            RETAIL
            
            ADMIN-ISTRATION
            
            TOTALCondensed
                Income StatementNet
                interest income after
              provision
                for loan losses
            
            $
            3,853
            
            $
            3,870
            
            $
            1,124
            
            $
            340
            
            $
            469
            
            $
            9,656Other
                income
            
            
            88
            
            
            9
            
            
            -
            
            
            1,193
            
            
            326
            
            
            1,616Other
                expense
            
            
            387
            
            
            82
            
            
            82
            
            
            581
            
            
            5,217
            
            
            6,349Contribution
                before overhead
            
            
            3,554
            
            
            3,797
            
            
            1,042
            
            
            952
            
            
            (4,422
            )
            
            4,923Support
                transfer
            
            
            1,865
            
            
            1,148
            
            
            835
            
            
            574
            
            
            (4,422
            )
            
            —Income
                before provision for
              federal
                income tax
            
            
            1,689
            
            
            2,649
            
            
            207
            
            
            378
            
            
            —
            
            
            4,923Provision
                for federalincome taxes
            
            
            552
            
            
            866
            
            
            68
            
            
            123
            
            
            —
            
            
            1,609Net
                income
            
            $
            1,137
            
            $
            1,783
            
            $
            139
            
            $
            255
            
            $
            —
            
            $
            3,314





**For
      the three months ended September 30, 2005**


BUSINESS
            
            CONS-TRUCTION
            
            INCOMEPROPERTY
            
            RETAIL
            
            ADMIN-ISTRATION
            
            TOTALCondensed
                Income StatementNet
                interest income after
              provision
                for loan losses
            
            $
            3,858
            
            $
            2,420
            
            $
            1,718
            
            $
            432
            
            $
            658
            
            $
            9,086Other
                income
            
            
            16
            
            
            3
            
            
            231
            
            
            1,031
            
            
            283
            
            
            1,564Other
                expense
            
            
            381
            
            
            94
            
            
            170
            
            
            544
            
            
            4,483
            
            
            5,672Contribution
                before overhead
            
            
            3,493
            
            
            2,329
            
            
            1,779
            
            
            919
            
            
            (3,542
            )
            
            4,978Support
                transfer
            
            
            1,571
            
            
            572
            
            
            855
            
            
            544
            
            
            (3,542
            )
            
            —Income
                before provision for
              federal
                income tax
            
            
            1,922
            
            
            1,757
            
            
            924
            
            
            375
            
            
            —
            
            
            4,978Provision
                for federalincome taxes
            
            
            631
            
            
            577
            
            
            303
            
            
            123
            
            
            —
            
            
            1,634Net
                income
            
            $
            1,291
            
            $
            1,180
            
            $
            621
            
            $
            252
            
            $
            —
            
            $
            3,344


20


**For
      the nine months ended September 30, 2006**


BUSINESS
            
            CONS-TRUCTION
            
            INCOMEPROPERTY
            
            RETAIL
            
            ADMIN-ISTRATION
            
            TOTALCondensed
                Income StatementNet
                interest income after
              provision
                for loan losses
            
            $
            11,235
            
            $
            10,230
            
            $
            3,437
            
            $
            1,330
            
            $
            2,082
            
            $
            28,314Other
                income
            
            
            253
            
            
            49
            
            
            —
            
            
            3,272
            
            
            940
            
            
            4,514Other
                expense
            
            
            1,017
            
            
            271
            
            
            271
            
            
            1,687
            
            
            15,014
            
            
            18,260Contribution
                before overhead
            
            
            10,471
            
            
            10,008
            
            
            3,166
            
            
            2,915
            
            
            (11,992
            )
            
            14,568Support
                transfer
            
            
            5,115
            
            
            2,822
            
            
            2,403
            
            
            1,652
            
            
            (11,992
            )
            
            —Income
                before provision for
              federal
                income tax
            
            
            5,356
            
            
            7,186
            
            
            763
            
            
            1,263
            
            
            —
            
            
            14,568Provision
                for federalincome taxes
            
            
            1,478
            
            
            2,345
            
            
            248
            
            
            414
            
            
            —
            
            
            4,755Net
                income
            
            $
            3,608
            
            $
            4,841
            
            $
            515
            
            $
            849
            
            $
            —
            
            $
            9,813





**For
      the nine months ended September 30, 2005**


BUSINESS
            
            CONS-TRUCTION
            
            INCOMEPROPERTY
            
            RETAIL
            
            ADMIN-ISTRATION
            
            TOTALCondensed
                Income StatementNet
                interest income after
              provision
                for loan losses
            
            $
            11,023
            
            $
            5,947
            
            $
            6,145
            
            $
            1,334
            
            $
            2,067
            
            $
            26,516Other
                income
            
            
            54
            
            
            12
            
            
            623
            
            
            2,998
            
            
            1,144
            
            
            4,831Other
                expense
            
            
            1,150
            
            
            322
            
            
            698
            
            
            1,703
            
            
            13,128
            
            
            17,001Contribution
                before overhead
            
            
            9,927
            
            
            5,637
            
            
            6,070
            
            
            2,629
            
            
            (9,917
            )
            
            14,346Support
                transfer
            
            
            3,894
            
            
            1,470
            
            
            2,978
            
            
            1,575
            
            
            (9,917
            )
            
            —Income
                before provision for
              federal
                income tax
            
            
            6,033
            
            
            4,167
            
            
            3,092
            
            
            1,054
            
            
            —
            
            
            14,346Provision
                for federalincome taxes
            
            
            1,983
            
            
            1,369
            
            
            1,016
            
            
            348
            
            
            —
            
            
            4,716Net
                income
            
            $
            4,050
            
            $
            2,798
            
            $
            2,076
            
            $
            706
            
            $
            —
            
            $
            9,630




Interest
      income is assigned based upon the loans held by that line of business.
      Investment income is assigned to Administration. Interest expense is allocated
      based upon the Corporation’s cost of funds and the average maturity of the line
      of business’s assets. Overhead is allocated on the basis of average total
      assets.





**Liquidity
      and Sources of Funds**




The
      Bank
      monitors its liquidity position to assure that it will have adequate resources
      to meet its customers’ needs. Potential uses of funds are new loans; the
      disbursement of construction loans in process; draws on unused business lines
      of
      credit and unused consumer lines of credit; the purchase of investment
      securities; deposit withdrawals; and repayment of FHLB advances. As of September
      30, 2006, Cascade had $119.7 million of construction loans in process, $67.8
      million in unused business lines of credit, $37.2 million in unused consumer
      lines of credit including credit cards and $17.7 million in other undisbursed
      commitments. Recent history indicates construction lines will be funded at
      67%
      of commitments at any point in time. Historically, the Bank’s business customers
      use 50% of their lines at any given time. About 45% of the home equity lines
      of
      credit are drawn upon at any point in time. Cash flows from operations
      contribute to liquidity as well as proceeds from maturities of securities and
      customer deposits. As indicated on the Corporation’s condensed Consolidated
      Statement of Cash Flows, net cash from operating activities for the nine months
      ended September 30, 2006, contributed $10.5 million to liquidity compared to
      $13.4 million for the nine months ended September 30, 2005.


21


Funding
      needs
      are met through existing liquidity balances, deposit growth, FHLB-Seattle
      advances and other borrowings, as well as the repayment of existing loans and
      the sale of loans. Cascade maintains balances in FHLB deposits, which equaled
      $12.8 million as of September 30, 2006, and $22.5 million at September 30,
      2005.




Subject
      to the
      availability of eligible collateral and certain requirements, the Bank’s credit
      line with the FHLB-Seattle is 35% of total assets or up to approximately $459.9
      million at current asset levels. At September 30, 2006, the Bank had $233.0
      million in advances and an unused line of credit from the FHLB-Seattle of
      approximately $226.9 million. The Bank also uses reverse repurchase agreements
      (securities sold under agreements to repurchase) to provide a flexible source
      of
      funding. At September 30, 2006, the Bank had $96.0 million in reverse repurchase
      agreements outstanding. Securities that could be pledged to secure additional
      funding at the FHLB-Seattle or the repurchase market were $37.1 million at
      the
      end of the quarter and $45.4 million as of December 31, 2005. Commercial real
      estate loans totaling $357.6 million are being used as a source of collateral
      at
      the FHLB. The Bank also has a total of $33.0 million in Fed funds lines with
      its
      correspondent banks and a $16.0 million line of credit at the Federal Reserve
      Bank of San Francisco, none of which were used during the quarter.





**Capital
      Resources**




The
      Corporation’s usual main source of capital is the retention of its net income.
      The Corporation also receives capital through the exercise of stock options
      granted to employees and directors. The Corporation permits employees and
      directors to tender shares of Cascade’s stock, which they have held for a
      minimum of six months, to exercise options.




The
      Board of
      Directors authorized a stock repurchase program of up to 375,000 shares of
      the
      Corporation’s stock at its May 2006 meeting. The repurchase program does not
      obligate the Corporation to acquire any specific number of shares. The main
      focus of the program is to attempt to offset the dilution created by the
      exercise of stock options and other stock grants; see Part II - Other
      Information, Item 2 - Unregistered Sales of Equity Securities and Use of
      Proceeds.




On
      March 30,
      2006, Cascade Capital Trust III issued $10 million in par value junior
      subordinated debentures (Trust Preferred Securities). These securities have
      a
      fixed coupon of 6.65% for the first 5 years and then float at 3-month LIBOR
      plus
      1.40% for the remaining 25 years. Cascade Capital Trust III is a statutory
      business trust created for the exclusive purposes of issuing and selling capital
      securities and utilizing sale proceeds to acquire junior subordinated debt
      issued by Cascade Financial Corporation. Accordingly, the junior subordinated
      debentures are the sole assets of the Trust, and payments under the junior
      subordinated debentures will be the sole revenues of the Trust. All of the
      common securities of the Trust are owned by the Corporation.




On
      December
      15, 2004, Cascade Capital Trust II issued $5 million in par value junior
      subordinated debentures. These securities have a fixed coupon of 5.82% for
      the
      first 5 years and then float at 3-month LIBOR plus 1.90% for the remaining
      25
      years. The structure of Cascade Capital Trust II is identical to Cascade Capital
      Trust III.


22


On
      March 1,
      2000, Cascade Capital Trust I issued $10 million par value trust preferred
      securities. The structure of Cascade Capital Trust I is identical to Cascade
      Capital Trust III. In keeping with the adoption of FIN 46R, the Corporation’s
      balance sheet has replaced “trust preferred securities” with “junior
      subordinated debentures payable,” although there have been no changes in terms
      of the underlying obligations. The Trust has been deconsolidated upon adoption
      of FIN 46R at December 31, 2003, and did not have a significant impact on the
      Corporation’s financial condition or results of operations.





**Capital
      Requirements**




Cascade
      Bank
      is subject to regulatory capital requirements. Cascade Bank is in full
      compliance with all capital requirements established by the FDIC and the
      Washington State Department of Financial Institutions. The Bank’s regulatory
      capital requirements are expressed as a percentage of assets. To be adequately
      capitalized, the Bank must hold capital equal to 4% of its assets and 8% of
      its
      risk-weighted assets. As of September 30, 2006, for the purposes of this
      calculation, the Bank’s average total assets and total risk-weighted assets were
      $1.26 billion and $1.11 billion respectively. The related excess capital amounts
      as of September 30, 2006, are presented in the following table (dollars in
      thousands):





Adequately
                Capitalized
            
            Well
                CapitalizedCore
                capital
            
            Amount
            
            Percentage
            
            Amount
            
            PercentageTier
                1 (Core) capital
            
            $
            112,780
            
            
            8.92
            %
            $
            112,780
            
            
            8.92
            %Less:
                Minimum requirement
            
            
            50,548
            
            
            4.00
            
            
            75,600
            
            
            6.00Excess
            
            $
            62,232
            
            
            4.92
            %
            $
            37,180
            
            
            2.92
            %Risk-based
                capital
            
            
            Amount
            
            
            Percentage
            
            
            Amount
            
            
            PercentageRisk-based
                capital
            
            $
            123,785
            
            
            11.18
            %
            $
            123,785
            
            
            11.18
            %Less:
                Minimum requirement(1)
            
            
            88,568
            
            
            8.00
            
            
            111,000
            
            
            10.00Excess
            
            $
            35,217
            
            
            3.18
            %
            $
            12,785
            
            
            1.18
            %*(1)**Based
                on risk-weighted assets.*




The
      Federal
      Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) was signed into
      law on December 19, 1991. Among other things, the FDICIA provides the FDIC,
      effective December 19, 1992, with broad powers to take “prompt corrective
      action” to resolve problems of insured depository institutions. The actions the
      FDIC can take depend upon whether the institution in question is “well
      capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
      undercapitalized” or “critically undercapitalized.” Under FDIC guidelines,
      Cascade Bank is a “well capitalized” institution as of September 30, 2006, which
      requires a core capital to assets of at least 6% and a risk-based capital to
      assets of at least 10%.




The
      Corporation, as a bank holding company regulated by the Federal Reserve, is
      also
      subject to capital requirements that are similar to those for Cascade Bank.
      As
      of September 30, 2006, the Corporation is “well capitalized” under Federal
      Reserve guidelines with a Tier 1 ratio of 9.00% and a risk-based ratio of
      11.26%.


23


**Item
      3 - Quantitative and Qualitative Disclosures about Market
      Risk**





**ASSET/LIABILITY
      MANAGEMENT**




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




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




Using
      standard
      interest rate shock (an instantaneous uniform change in interest rates at all
      maturities) methodology, as of September 30, 2006, the Bank is within all the
      guidelines established by the Board for the changes in net interest income,
      fair
      value of equity, and the adjusted capital/asset ratios. As of September 30,
      2006, the Bank’s fair value of equity decreases 18.2% in the up 200 basis point
      scenario and 9.8% in the down 200 basis point scenario, within the established
      guideline of a maximum 30% decline. Using the same methodology, the adjusted
      capital/asset ratio is 9.4% in the up 200 basis point scenario and 9.9% in
      the
      down 200 basis point scenario, both above the 5% minimum established guideline.
      The net interest income decreases 4.7% in the up 200 basis point scenario and
      5.1% in the down 200 basis point scenario, both are within the guideline of
      a
      10% decline.




The
      Bank has
      sought to manage its interest rate exposure through the structure of its balance
      sheet. To limit its interest rate risk, the Bank has sought to emphasize its
      loan mix toward prime based business and construction loans. In addition to
      selling virtually all 15 and 30 year fixed rate loans, it also sells many of
      its
      hybrid ARM residential loans. The table below summarizes the Bank’s loan
      portfolio by rate type at September 30, 2006.





**Type**
            **Percentage**Variable
            31%Adjustable
            40%Fixed
            29%




The
      Bank
      extends the maturity of its liabilities by offering long-term deposit products
      to customers, and by obtaining longer term FHLB-Seattle advances. As of
      September 30, 2006, the entire portfolio of $233.0 million ($25 million of
      which
      is a 3-month LIBOR adjustable) in long-term advances had original maturities
      greater than one year, none had original maturities of less than one year.
      Of
      the remaining $208.0 million, $4.0 million are fixed rate, $139.0 million have
      provisions that allow the FHLB to convert the advance to a LIBOR based,
      adjustable rate borrowing and $65.0 million begin as LIBOR based advances but
      converted to a fixed rate borrowing after a specified time.


24


**Item
      4 - Controls and Procedures**





**EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES**




An
      evaluation
      of the Registrant's disclosure controls and procedures (as defined in section
      13(a) - 14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried
      out under the supervision and with the participation of the Registrant's Chief
      Executive Officer, Chief Financial Officer, and several other members of the
      registrant's senior management as of September 30, 2006. The Registrant's Chief
      Executive Officer and Chief Financial Officer concluded that the Registrant's
      disclosure controls and procedures as then in effect were effective in ensuring
      that the information required to be disclosed by the Registrant in the reports
      it files or submits under the Act is (i) accumulated and communicated to the
      Registrant's management (including the Chief Executive Officer and Chief
      Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
      and reported within the time periods specified in the SEC's rules and
      forms.





**CHANGES
      IN INTERNAL CONTROLS**




In
      the quarter
      ended September 30, 2006, the Registrant did not make any significant changes
      in, nor take any corrective actions regarding, its internal controls, or other
      factors that have materially affected or are reasonably likely to materially
      affect these controls.





**PART
      II** **--** **OTHER
      INFORMATION**





**Item
      1. Legal Proceedings**




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





**Item
      1A. Risk Factors**




There
      have
      been no material changes to the risk factors disclosed in Item 1A. Risk Factors
      in our Annual Report on Form 10-K for the period ended December 31, 2005, except
      as set forth below.




On
      September
      18, 2006, the Company converted its core processing system. The goal of the
      conversion was to enhance the Company’s level of customer service and internal
      efficiency. The Company will need to affirm that the new system will meet all
      the business requirements for which it was purchased and institute sufficient
      internal controls to assure compliance with the mandates of Sarbanes-Oxley
      Section 404.


25


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




Issuer
                Purchases of Equity Securities**2006
                PLAN**
            
            Total
                Number
            
            Maximumof
                Shares
              Purchased
            
            Number
                of
              Shares
                thatPeriod
            
            Total
              Number
            
            Average
              Price
            
            as
                Part of
              Publicly
            
            May
                Yet be PurchasedBeginning
            Ending
            
            of
                Shares
              Purchased(1)
            
            Paid
                per
              Share
            
            Announced
              Plan
            
            Under
                the
              Plan(2)July
                1, 2006
            July
                31, 2006
            
            -
            
            $-
            
            -
            
            375,000August
                1, 2006
            August
                31, 2006
            
            33,300
            
            15.58
            
            33,300
            
            341,700September
                1, 2006
            September
                30, 2006
            
            -
            
            -
            
            -
            
            341,700Total
            
            
            33,300
            
            $15.58
            
            33,300
            
            341,7001)
                During the period presented there were no shares purchased, which
                would be
                acquired at current market values as consideration for the exercise
                of
                fully vested options.2)
                In May 2006, the Corporation announced a new stock repurchase plan
                to
                purchase up to 375,000 shares of the Corporation’s stock. The Plan will
                expire on May 31, 2007.





**Item
      3. Defaults upon Senior Securities**




Not
      applicable




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




Not
      applicable




**Item
      5. Other information**




Not
      applicable




**Item
      6. Exhibits**




(a)
      Exhibits


3.1
                    (i)
                Bylaws of Cascade Financial Corporation
                  (Incorporated by reference to the Corporation’s Registration Statement on
                  Form S-4 (File No. 33-83200)).3.2
                    (ii)
                Amendment to the Bylaws of Cascade
                  Financial
                  Corporation (Incorporated by reference to the Corporation’s Form 8-K filed
                  September 27, 2005 (File No. 0-25286)).3.3
                    (ii)
                Amended and restated Bylaws of Cascade
                  Financial Corporation (Incorporated by reference to the Corporation’s Form
                  8-K filed March 29, 2006 (File No. 0-25286)).31.1
                Certifications of the Chief Executive
                  Officer
                  pursuant to Section 302 of the Sarbanes-Oxley Act.31
                Certifications of the Chief Financial
                  Officer
                  pursuant to Section 302 of the Sarbanes-Oxley Act.32
                Certification pursuant to Section 906 of
                  the Sarbanes-Oxley Act.




(b) Reports
      on Form 8-K




On
      July 25,
      2006, the Corporation filed a Form 8-K reporting an attached press release
      announcing financial results for the three and six months ended June 30, 2006,
      under Items 2.02 and 9.01 of Form 8-K.


26


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




On
      September
      29, 2006, the Corporation filed a Form 8-K announcing the election of two new
      members to the Board of Directors of the Company, under Item 5.02 and 9.01
      of
      Form 8-K.




On
      October 24,
      2006, The Corporation filed a Form 8-K reporting an attached press release
      announcing financial results for the three and nine months ended September
      30,
      2006, under Items 2.02 and 9.01 of Form 8-K.







**SIGNATURES**




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





**CASCADE FINANCIAL
                CORPORATION**November
              7, 2006
            /s/ Lars H. JohnsonBy:Lars
              H. Johnson,Executive
                Vice President
              (Chief
                Financial Officer)




27