**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 ENDEDMarch
                31, 2007




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 incorporation or organization)
            
            (IRS
                Employer 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 April 30, 2007**Common
                Stock ($.01 par value)
            12,057,685




1


CASCADE
      FINANCIAL
      CORPORATION


**FORM
      10-Q**


**For
      the Quarter Ended**  **March
      31, 2007**








**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
              13Item
                  3
              —
                  Quantitative and Qualitative Disclosures about Market Risk
              25Item
                  4
              —
                  Controls and Procedures
              26**PART
                  II — Other Information:**Item
                  1
              —
                  Legal Proceedings
              26Item
                  1A
              —
                  Risk Factors
              26Item
                  2
              —
                  Unregistered Sales of Equity Securities and Use of
                  Proceeds
              27Item
                  3
              —
                  Defaults Upon Senior Securities
              27Item
                  4
              —
                  Submission of Matters to a Vote of Security Holders
              27Item
                  5
              —
                  Other Information
              27Item
                  6
              —
                  Exhibits
              27—
                    Signatures
              28


2


**PART
      I -- FINANCIAL INFORMATION**





**Item
      1 - Financial Statements**





**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(unaudited)


*(Dollars
                in thousands)*
            
            **March
                31,**
            ****
            **December
                31,**
            ********
            ****
            **2007**
            ****
            **2006****ASSETS**Cash
                on hand and in banks
            
            $
            20,696
            
            $
            23,707Interest-earning
                deposits in other institutions
            
            
            22,451
            
            
            19,172Securities
                held-for-trading
            
            
            68,579
            
            
            -Securities
                available-for-sale
            
            
            76,569
            
            
            130,656Federal
                Home Loan Bank (FHLB) Stock
            
            
            11,920
            
            
            11,920Securities
                held-to-maturity
            
            
            84,424
            
            
            96,846Loans,
                net
            
            
            1,026,267
            
            
            996,015Goodwill
            
            
            24,585
            
            
            25,195Core
                deposit intangible, net
            
            
            740
            
            
            775Premises
                and equipment, net
            
            
            13,777
            
            
            12,003Cash
                surrender value of bank-owned life insurance
            
            
            18,139
            
            
            17,974Deferred
                tax asset
            
            
            2,513
            
            
            555Accrued
                interest receivable and other assets
            
            
            11,470
            
            
            10,436**TOTAL
                ASSETS**
            
            $
            1,382,130
            
            $
            1,345,254**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Liabilities:**Deposits
            
            $
            888,673
            
            $
            855,449Federal
                Home Loan Bank advances
            
            
            195,999
            
            
            198,000Federal
                Home Loan Bank advances, at fair value
            
            
            46,724
            
            
            45,000Securities
                sold under agreements to repurchase
            
            
            95,719
            
            
            95,710Junior
                subordinated debentures payable
            
            
            15,465
            
            
            15,465Junior
                subordinated debentures payable, at fair value
            
            
            12,012
            
            
            10,310Advance
                payments by borrowers for taxes and insurance
            
            
            821
            
            
            703Dividends
                payable
            
            
            969
            
            
            967Accrued
                interest payable, expenses and other liabilities
            
            
            10,781
            
            
            8,451**TOTAL
                LIABILITIES**
            
            
            1,267,163
            
            
            1,230,055**Stockholders’
                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 12,107,685 shares at March 31,2007,
                and 12,093,699 shares at December 31, 2006
            
            
            121
            
            
            121Additional
                paid-in capital
            
            
            39,798
            
            
            39,430Retained
                earnings, substantially restricted
            
            
            75,725
            
            
            77,952Accumulated
                other comprehensive (loss), net of tax
            
            
            (677
            )
            
            (2,304
            )**TOTAL
                STOCKHOLDERS’ EQUITY**
            
            
            114,967
            
            
            115,199**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            1,382,130
            
            $
            1,345,254





See
      notes
      to condensed consolidated financial statements


3


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


(unaudited)




*(Dollars
                  in thousands, except per share amounts)*
              
              **Three
                  Months Ended**
                **March
                  31,**
              ********
              ****
              **2007**
              ****
              **2006****Interest
                  income:**Loans
              
              $
              19,708
              
              $
              15,924Securities
                  held-for-trading
              
              
              753
              
              
              -Securities
                  available-for-sale
              
              
              1,008
              
              
              1,694FHLB
                  stock dividends
              
              
              12
              
              
              -Securities
                  held-to-maturity
              
              
              963
              
              
              1,112Interest-earning
                  deposits
              
              
              187
              
              
              57**Total
                  interest income**
              
              
              22,631
              
              
              18,787**Interest
                  expense:**Deposits
              
              
              8,408
              
              
              5,933FHLB
                  advances and repurchase agreements
              
              
              3,416
              
              
              3,007Junior
                  subordinated debentures
              
              
              530
              
              
              327**Total
                  interest expense**
              
              
              12,354
              
              
              9,267Net
                  interest income
              
              
              10,277
              
              
              9,520Provision
                  for loan losses
              
              
              250
              
              
              250Net
                  interest income after provision for loan losses
              
              
              10,027
              
              
              9,270**Other
                  income:**Gain
                  on sale of loans
              
              
              88
              
              
              39Net
                  gain on fair value of financial instruments
              
              
              515
              
              
              -Net
                  (loss) on sale of REO
              
              
              -
              
              
              (27
              )Checking
                  service fees
              
              
              874
              
              
              756Other
                  service fees
              
              
              254
              
              
              256Bank-owned
                  life insurance
              
              
              195
              
              
              187Other
              
              
              125
              
              
              114**Total
                  other income**
              
              
              2,051
              
              
              1,325**Other
                  expenses:**Salaries
                  and employee benefits
              
              
              3,373
              
              
              3,221Occupancy
              
              
              855
              
              
              888Marketing
              
              
              342
              
              
              253Data
                  processing
              
              
              116
              
              
              103Other
              
              
              1,737
              
              
              1,410**Total
                  other expenses**
              
              
              6,423
              
              
              5,875Income
                  before provision for federal income taxes
              
              
              5,655
              
              
              4,720Provision
                  for federal income taxes
              
              
              1,890
              
              
              1,548**Net
                  income**
              
              $
              3,765
              
              $
              3,172Net
                  income per common share, basic
              
              $
              0.31
              
              $
              0.26Weighted
                  average number of shares outstanding, basic
              
              
              12,103,616
              
              
              12,021,223Net
                  income per share, diluted
              
              $
              0.30
              
              $
              0.26Weighted
                  average number of shares outstanding, diluted
              
              
              12,388,245
              
              
              12,343,698Dividends
                  declared per share
              
              $
              0.080
              
              $
              0.072





See
      notes
      to condensed consolidated financial statements


4


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME**


(unaudited)





*(Dollars
                in thousands)*
            
            **Three
                Months Ended**
              **March
                31,****2007**
            ****
            **2006****Net
                Income**
            
            $
            3,765
            
            $
            3,172Increase
                (decrease) in unrealized (loss) onsecurities
                available-for-sale, net of tax expense(benefit)
                of $876 and $(501) for the three monthsended
                March 31, 2007 and 2006, respectively.
            
            
            1,627
            
            
            (931
            )**Comprehensive
                Income**
            
            $
            5,392
            
            $
            2,241








See
      notes
      to condensed consolidated financial statements


5


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(unaudited)


Three
                Months Ended
              March
                31,*(Dollars
                in thousands)*
            
            2007
            
            2006**Cash
                flows from operating activities:**Net
                income
            
            $
            3,765
            
            $
            3,172Adjustments
                to reconcile net income to net cash provided by (used
                in) operating activities:Depreciation
                and amortization of premises and equipment
            
            
            450
            
            
            500Provision
                for losses on loans
            
            
            250
            
            
            250Increase
                in cash surrender value of bank-owned life insurance
            
            
            (165
            )
            
            (160
            )Amortization
                of retained servicing rights
            
            
            -
            
            
            3Amortization
                of core deposit intangible
            
            
            35
            
            
            35Deferred
                federal income taxes
            
            
            99
            
            
            (13
            )Deferred
                loan fees, net of amortization
            
            
            91
            
            
            (64
            )Stock-based
                compensation
            
            
            68
            
            
            62Excess
                tax benefit from stock-based payments
            
            
            (113
            )
            
            (76
            )Net
                (loss) on sales of real estate owned, investment property and other
                repossessed assets
            
            
            -
            
            
            (27
            )Net
                change in fair value of financial instruments
            
            
            (515
            )
            
            -Net
                (increase) decrease in accrued interest receivable and other
                assets
            
            
            (1,682
            )
            
            (315
            )Net
                increase in accrued interest payable, expenses and other
                liabilities
            
            
            2,388
            
            
            3,149Net
                cash provided by operating activities
            
            
            4,671
            
            
            6,516**Cash
                flows from investing activities:**Loans
                originated, net of principal repayments
            
            
            (29,878
            )
            
            (43,273
            )Purchases
                of securities held-to-maturity
            
            
            (5,000
            )
            
            (3,744
            )Principal
                repayments on securities held-to-maturity
            
            
            1,128
            
            
            645Principal
                repayments on securities available-for-sale
            
            
            2,179
            
            
            2,851Purchases
                of securities available-for-sale
            
            
            -
            
            
            (5,716
            )Purchases
                of premises and equipment
            
            
            (2,224
            )
            
            (400
            )Proceeds
                from loan participations sold
            
            
            (714
            )
            
            83Net
                cash used in investing activities
            
            
            (34,509
            )
            
            (49,554
            )**Subtotal,
                carried forward**
            
            $
            (29,838
            )
            $
            (43,038
            )





See
      notes
      to condensed consolidated financial statements


6


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(unaudited)


Three
                Months EndedMarch
                31,*(Dollars
                in thousands)*
            
            2007
            
            2006**Subtotal,
                brought forward**
            
            $
            (29,838
            )
            $
            (43,038
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock
            
            
            197
            
            
            317Dividends
                paid
            
            
            (967
            )
            
            (864
            )Repurchase
                of common stock
            
            
            (274
            )
            
            (100
            )Excess
                tax benefits from stock-based payments
            
            
            113
            
            
            76Net
                increase (decrease) in deposits
            
            
            32,910
            
            
            (15,775
            )Net
                increase (decrease) in Federal Home Loan Bank advances
            
            
            (2,000
            )
            
            15,000Net
                increase in securities sold under agreements to repurchase
            
            
            9
            
            
            20,989Proceeds
                from Trust Preferred Securities issued
            
            
            -
            
            
            10,310Net
                increase (decrease) in advance payments by borrowers for taxesand
                insurance
            
            
            118
            
            
            (286
            )Net
                cash provided by financing activities
            
            
            30,106
            
            
            29,667Net
                increase (decrease) in cash and cash equivalents
            
            
            268
            
            
            (13,371
            )Cash
                and cash equivalents at beginning of period
            
            
            42,879
            
            
            31,109Cash
                and cash equivalents at end of period
            
            $
            43,147
            
            $
            17,738Supplemental
                disclosures of cash flow information—cash paid during the period
                for:Interest
            
            $
            11,534
            
            $
            9,395Federal
                income taxes
            
            
            -
            
            
            210Supplemental
                schedule of noncash investing activities:Mark-to-market
                on securities available-for-sale
            
            
            (741
            )
            
            1,432Retirement
                of common stock in retained earnings
            
            
            -
            
            
            95Dividends
                declared
            
            
            969
            
            
            867Cumulative
                adjustment of equity on adoption of SFAS 159
            
            
            (3,389
            )
            
            -




See
      notes
      to condensed consolidated financial statements


7


**CASCADE
      FINANCIAL CORPORATION AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**March
      31, 2007**


**(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 three months ended March 31, 2007, are not necessarily
        indicative of the results that may be expected for the year ended December
        31,
        2007.
  Certain
        information and footnote disclosures included in the Corporation’s financial
        statements for the year ended December 31, 2006, 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, 2006 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.  Recently
        Issued Accounting Standards
 *Adoption
        of
        SFAS No. 157 and 159:* The
        Corporation elected early adoption of Statement of Financial Accounting
        Standards (SFAS) No. 159, *The
        Fair Value Option for Financial Assets and Financial
        Liabilities* ,
        and
        SFAS No. 157, *Fair
        Value Measurements* ,
        effective January 1, 2007. SFAS No. 159, which was issued in February 2007,
        generally permits the measurement of selected eligible financial instruments
        at
        fair value at specified election dates. SFAS No. 157 defines fair value,
        establishes a framework for measuring fair value under generally accepted
        accounting principals (GAAP), and expands disclosures about fair value
        measurement. The Corporation made this election to allow more flexibility
        with
        respect to the management of investment securities, wholesale borrowings
        and
        interest rate risk position in future periods. (See Note 6).
  The
        Corporation adopted FIN 48, *Accounting
        for Uncertainty in Income Taxes,* on
        January 1, 2007. FIN 48 is an interpretation of SFAS No. 109, *Accounting
        for Income Taxes,* and it
        seeks to reduce the diversity in practice associated with certain aspects
        of
        measurement and recognition in accounting for income taxes. In addition,
        FIN 48
        provides guidance on derecognition, classification, interest and penalties,
        and
        accounting in interim periods and requires expanded disclosure with respect
        to
        uncertainty in income taxes. As a result of the implementation of FIN 48,
        the
        Company recognized no material adjustments in the asset for unrecognized
        income
        tax benefits, all of which would affect the Company’s effective income tax rate
        if recognized.
 8
 4. 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.
 5. Stockholders’
          Equity
 a) Earnings
          Per Share
  The
        following
        table presents the computation of basic and diluted net income per share
        for the
        three-month period ended March 31:


*(Dollars
                in thousands, except share and per share amounts)*
            
            **Three
                Months Ended March 31,**
            ********
            ****
            **2007**
            ****
            **2006****Numerator**:Net
                income
            
            $
            3,765
            
            $
            3,172**Denominator**:Denominator
                for basic net income per share - Weighted average shares
            
            
            12,103,616
            
            
            12,021,223Effect
                of dilutive securities:Stock
                options
            
            
            284,629
            
            
            322,475Denominator
                for diluted net income per share - Weightedaverage
                shares and assumed conversion of dilutive stock options
            
            
            12,388,245
            
            
            12,343,698Basic
                net income per share
            
            $
            0.31
            
            $
            0.26Diluted
                net income per share
            
            $
            0.30
            
            $
            0.26




For
      the
      quarters ended March 31, 2007, and 2006, there were anti-dilutive options to
      purchase shares of 105,866 and 111,496 respectively, excluded from the above
      calculation.




b) Dividends




On
      March 28,
      2007, the Corporation announced its nineteenth consecutive quarterly cash
      dividend payment. The dividend was $0.08 per share and was paid on April 25,
      2007, to shareholders of record as of April 11, 2007.




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.


9


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.




The
      adoption
      of SFAS No. 123(R) resulted in compensation expense of approximately $68,000
      for
      the three months ended March 31, 2007. There was no tax benefit recorded for
      the
      three months ended March 31, 2007.




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 three months ended March 31, 2007, are as
      follows:


**Options**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price
                per Share**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Term**
              **(in
                years)**
            ****
            **Aggregate**
              **Intrinsic**
              **Value****Outstanding
                on December 31, 2006**
            
            
            703,606
            
            $
            9.26
            
            
            5.76
            
            $
            5,511,642Granted
            
            
            1,000
            
            
            17.17Exercised
            
            
            29,553
            
            
            6.72Forfeited/Canceled
            
            
            5,389
            
            
            11.87**Outstanding
                on March 31, 2007**
            
            
            669,664
            
            $
            9.36
            
            
            5.63
            
            $
            5,388,055**Exercisable
                on March 31, 2007**
            
            
            431,824
            
            $
            7.17
            
            
            4.51
            
            $
            4,420,701




There
      were
      1,000 options granted during the three month period ended March 31, 2007. The
      unrecognized share-based compensation cost related to stock option expense
      at
      March 31, 2007, is $399,464, 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 three months ended March 31, 2007, 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 are 1,265,878. Options granted in this period were 1,000
      with
      a fair value of $4.28 per option. The total intrinsic value of options exercised
      during the three months ended March 31, 2007, was $329,057. The total intrinsic
      value of options exercised during the three months ended March 31, 2006 was
      $465,000.




Historical
      information is the primary basis for the selection of the expected volatility,
      projected 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 believes 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.




6. Fair
      Value Accounting




The
      Company
      elected early adoption of Statement of Financial Accounting Standards (SFAS)
      No.
      159, *The
      Fair Value Option for Financial*  *Assets
      and Financial Liabilities* ,
      and
      SFAS No. 157, *Fair
      Value Measurements* ,
      effective January 1, 2007. SFAS No. 159, which was issued in February 2007,
      generally permits the measurement of selected eligible financial instruments
      at
      fair value at specified election dates. Upon adoption of SFAS 159, the
      Corporation selected fair value measurement for certain available-for-sale
      and
      held-to-maturity  investment securities, Federal Home Loan Bank advances
      and junior subordinated debentures, which had fair values of approximately
      $68.1
      million, $46.7 million and $12.1 million, respectively, on January 1, 2007.
      The
      Corporation also selected fair value measurement for an interest rate swap
      on a
      CD with a notional value of $10 million and a fair value of $312,000 on January
      1, 2007.The initial fair value measurement of these instruments resulted
      in a $3.4 million adjustment for the cumulative effect, net of tax, as a result
      of the change in accounting, which was recorded as a reduction in retained
      earnings as of January 1, 2007, and which under SFAS No. 159 has not been
      recognized in current earnings. While the adjustment to retained earnings is
      permanent, approximately $1.4 million of the amount was previously reported
      as
      accumulated other comprehensive loss at December 31, 2006, so the reduction
      in
      total shareholders’ equity was only $3.4 million on January 1, 2007. Following
      the initial election, changes in the value of financial instruments recorded
      at
      fair value are recognized as gains or losses in subsequent financial reporting
      periods. As a result of the adoption of SFAS No. 159 and changes in the fair
      value measurement of the financial assets and liabilities noted above, the
      Corporation recorded a net gain of $515,000 ($345,000 after tax) in the quarter
      ended March 31, 2007.


11





**Cumulative
                Adjustment on Adoption of SFAS 159****January
                1, 2007**
            ********
            ****
            ****
            ****
            **Fair
                Market**
            ****
            ****
            ****
            ****Related****
            ****
            **Cumulative**
            *****(Dollars
              in thousands)*****
            ****
            **Amoritzed**
            ****
            **Valuation**
            ****
            **Basis
                at**
            ****
            **Deferred**
            ****
            **Effect
                of**
            ********
            ****
            **Cost**
            ****
            **Adjustment**
            ****
            **FMV**
            ****
            **Taxes**
            ****
            **Adoption****Assets**Securities
                available-for-sale reclassified to fair value
            
            $
            54,721
            
            $
            (2,056
            )
            $
            52,665
            
            $
            720
            
            $
            (1,336
            )Securities
                held-to-maturity reclassified to fair value
            
            
            15,984
            
            
            (554
            )
            
            15,430
            
            
            194
            
            
            (360
            )Deferred
                origination costs on junior subordinateddebentures
            
            
            654
            
            
            (654
            )
            
            -
            
            
            -
            
            
            (654
            )$
            71,359
            
            $
            (3,264
            )
            $
            68,095
            
            $
            914
            
            $
            (2,350
            )**Liabilities**FHLB
                advances
            
            $
            45,000
            
            $
            1,654
            
            $
            46,654
            
            $
            (579
            )
            $
            1,075Junior
                subordinated debentures payable
            
            
            10,310
            
            
            1,740
            
            
            12,050
            
            
            (609
            )
            
            1,131SWAP
                on CD
            
            
            -
            
            
            312
            
            
            312
            
            
            (109
            )
            
            203$
            55,310
            
            $
            3,706
            
            $
            59,016
            
            $
            (1,297
            )
            $
            2,409Total
                adjustment
            
            
            
            
            
            
            
            
            
            
            $
            2,211
            
            $
            (4,759
            )Less
                transfer from other comprehensive loss toretained
                earnings
            
            
            
            
            
            
            
            
            
            
            $
            (738
            )
            $
            1,370Cumulative
                adjustment of deferred tax asset and equity on
              adoption
                ofSFAS
                159
            
            
            
            
            
            
            
            
            
            
            $
            1,473
            
            $
            (3,389
            )





**March
                31, 2007**
            ********
            ****
            ****
            ****
            **Fair
                Market**
            ****
            ****
            ****
            ****
            ********
            ****
            **Amoritzed**
            ****
            **Valuation**
            ****
            **Basis
                at**
            ****
            **Change**
            ********
            ****
            **Cost**
            ****
            **Adjustment**
            ****
            **FMV**
            ****
            **in
                FMV****Assets**Securities
                available-for-sale reclassified to fair value
            
            $
            54,713
            
            $
            (1,711
            )
            $
            53,002
            
            $
            345Securities
                held-to-maturity reclassified to fair value
            
            
            15,986
            
            
            (409
            )
            
            15,577
            
            
            145Deferred
                origination costs on junior subordinated debentures
            
            
            654
            
            
            (654
            )
            
            -
            
            
            -$
            71,353
            
            $
            (2,774
            )
            $
            68,579
            
            $
            490**Liabilities**FHLB
                advances
            
            $
            45,000
            
            $
            1,724
            
            $
            46,724
            
            $
            70Junior
                subordinated debentures payable
            
            
            10,310
            
            
            1,702
            
            
            12,012
            
            
            (38
            )SWAP
                on CD
            
            
            -
            
            
            255
            
            
            255
            
            
            (57
            )$
            55,310
            
            $
            3,681
            
            $
            58,991
            
            $
            (25
            )Total
                adjustment
            
            
            
            
            
            
            
            
            
            
            $
            515





The
      Company
      has elected to continue to recognize the interest income and dividends from
      the
      securities reclassified as trading as a component of interest income as was
      done
      in prior years when they were classified as available-for-sale and
      held-to-maturity. The same treatment will be elected for the recording of
      interest expense related to the FHLB advances and junior subordinated
      debentures. The change in fair market value of these financial instruments
      will
      be recorded as a component of non-operating income.


12


Determination
      of fair market values:





·
            Securities
                at fair value are priced using matrix pricing based on the securities’
                relationship to other benchmark quoted prices, and under the provisions
                of
                SFAS No. 157, is considered a Level 2 input method.


·
            Advances
                from FHLB are priced using discounted cash flows to the date of maturity
                based on the Seattle FHLB’s current rate sheet for member bank advances on
                the date of valuation and is considered a Level 2 input
                method.


·
            Junior
                subordinated debentures are priced using discounted cash flows to
                the next
                available redemption date on the date of valuation based on recent
                issuances or quotes from brokers, for comparable bank holding companies
                and is considered a Level 2 input method. ·
            The
                CD swap is priced using information obtained from the Bank’s counterparty
                in the transaction.





**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, 2006 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,
      2006.*




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).


13


**Adoption
      of SFAS 157 - Fair Value Measurements and SFAS 159 - Fair Value
      Option**


In
      April
      2007, the Audit and Finance Committee of the Board approved the early adoption
      of SFAS 159 and SFAS 157 by Cascade Financial Corporation to
      reduce potential volatility in earnings, enhance liquidity, streamline
      accounting, improve net interest margin and reduce interest rate risk exposure.
      As a result of this action, the Bank made the following elections relative
      to
      its assets and liabilities:


1.  Apply
        fair value accounting to the notional value of a $10 million interest rate
        swap
        that was hedging a long term CD previously accounted for using the short
        cut
        method of applying hedge effectiveness under SFAS 133 to fair value. The
        swap
        was terminated effective April 13, 2007, at a loss of $308,000.
 
 2.  Cascade
        has elected to apply the fair value accounting option to $45 million in FHLB
        advances with an average coupon of 5.83%. These advances were replaced in
        April
        2007 resulting in a gain of $623,000. The new advances have an average rate
        of
        4.66%. These transactions reduced interest rate expense by 117 basis points
        and
        reduced the Bank’s interest rate risk exposure. Cascade did not choose the fair
        value accounting option for other lower rate FHLB advances.
 
 3.  The
        Company has elected the fair value option for certain securities held as
        available-for-sale and held-to-maturity. These securities, totaling
        approximately $70 million, were designated as trading and sold in April 2007
        at
        a loss of $482,000. There are three groups of investment securities that
        were
        sold. The first group consisted of $26 million of intermediate term agency
        callable notes in the available-for-sale (AFS) portfolio that carried premiums
        due to adjustments mandated by SFAS 133 accounting. The second group of
        securities was $28 million of low coupon, agency notes with remaining maturities
        of two to three years that were in the AFS portfolio. The final group of
        securities is $16 million of step-up bonds, which are held in the
        held-to-maturity (HTM) portfolio. These long-term securities have low current
        coupons that increase in defined intervals over time. However, currently,
        their
        coupons were among the lowest and their maturities the longest in the
        portfolio.
 
 Of
        the
        $70 million in securities sold, $42 million had final maturities of greater
        than
        5 years. The weighted average maturity of securities sold was 5.8 years and
        would be projected to lose approximately $6 million in market value in a
        +200 bp
        interest rate shock environment. Therefore, selling these securities
        meaningfully reduced the Corporation’s exposure to rising interest
        rates.
 
 4.  Apply
        fair value accounting to Cascade Capital Trust I (CCTI). Upon adoption of
        SFAS
        159 and 157, the Corporation established a fair value for Cascade Capital
        Trust
        I of approximately 117 or $11.17 million for our $10 million in trust preferred
        securities (Junior Subordinated Debentures). This resulted in charging off
        the
        unamortized issuance costs to retained earnings of $654,000 as required under
        SFAS 159. The $1.17 million fair value premium is the result of the 11% coupon
        and the 5.5% call premium. This fair value premium should be effectively
        written
        down to the $550,000 premium to call the security on March 1, 2010, which
        is
        embedded in the fair value of the security. The fair value option was not
        selected for variable rate junior subordinated debentures totaling $15
        million.


14
 
 The
        initial
        fair value measurement of these instruments resulted in a $3.4 million
        adjustment for the cumulative effect, net of tax, as a result of the change
        in
        accounting, which was recorded as a reduction in retained earnings as of
        January
        1, 2007. Approximately $1.4 million was already recognized in other
        comprehensive income (OCI) as the difference between the book value and fair
        value, net of tax, of the $54 million securities that were held in the
        available-for-sale category of the investment portfolio. The change in fair
        value for these designated assets/liabilities between January 1 and March
        31,
        2007 was recognized in the income statement. Net income was increased by
        $515,000 or by $345,000 after tax - 2.8 cents per diluted share.


In
      April
      2007, the designated securities were sold and the FHLB advances restructured.
      The net result of the gains and losses of those transactions will be a net
      gain
      of approximately $88,000 before tax and $59,000 after tax to be recognized
      in
      2Q07 as the fee for restructuring the advances more than offset the loss on
      the
      sale of investments and the loss on the termination of the swap attributable
      to
      2Q07.




The
      Company did not
      select the fair value measurement for any loans. As a result, no valuation
      allowances were removed.




The
      combined
      impact of these transactions is projected to increase the Bank’s net interest
      margin by 8 to 12 basis points over where it would be otherwise.





**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 March 31,**
            ********
            ****
            **2007**
            ****
            **2006**Return
                on average assets
            
            
            1.13
            %
            
            1.04
            %Return
                on average stockholders’ equity
            
            
            13.31
            
            
            12.03Average
                stockholders’ equity to average assets
            
            
            8.49
            
            
            8.65Other
                expenses to average assets
            
            
            1.90
            
            
            1.93Efficiency
                ratio
            
            
            51.91
            
            
            54.17Average
                interest-earning assets to average interest-bearing
                liabilities
            
            
            111.96
            
            
            111.91




**CHANGES
      IN FINANCIAL CONDITION**




Total
      assets
      increased 2.7% or $36.9 million to $1.4 billion at March 31, 2007, compared
      to
      $1.3 billion at December 31, 2006. Net loans, i.e. net of deferred loan fees
      and
      the allowance for loan losses, increased 3.0% or $30.3 million to $1.0 billion
      at March 31, 2007, from $996.0 million at December 31, 2006.




Total
      i nvestment
      securities increased $2.1 million to $241.5 million at March 31, 2007, compared
      to $239.4 million at December 31, 2006. There has been limited activity in
      the
      portfolio. This increase represents the purchase of mortgage-backed securities
      eligible for Community Reinvestment Act purposes which exceeded the repayments
      on the mortgage-backed 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 three months ended March 31, 2007,
      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 March 31, 2007, were
      rated AAA.


15


*(Dollars
                in thousands)*
            
            **MARCH
                31, 2007****Securities
                held-for-trading**
            
            **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**
              **Value**Agency
                notes
            
            $
            68,218
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            68,218Corporate/Other
            
            
            361
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            361$
            68,579
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            68,579**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**
              **Value**MBS
            
            $
            36,250
            
            $
            30
            
            $
            3
            
            $
            (36
            )
            $
            (533
            )
            $
            35,714Agency
                notes
            
            
            41,361
            
            
            -
            
            
            -
            
            
            -
            
            
            (506
            )
            
            40,855$
            77,611
            
            $
            30
            
            $
            3
            
            $
            (36
            )
            $
            (1,039
            )
            $
            76,569**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**
              **Value**MBS
            
            $
            24,089
            
            $
            7
            
            $
            -
            
            $
            (8
            )
            $
            (752
            )
            $
            23,336Agency
                notes
            
            
            59,870
            
            
            -
            
            
            -
            
            
            (14
            )
            
            (1,383
            )
            
            58,473Corporate/other
            
            
            465
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            465$
            84,424
            
            $
            7
            
            $
            -
            
            $
            (22
            )
            $
            (2,135
            )
            $
            82,274**DECEMBER
                31, 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**
              **Value**MBS
            
            $
            38,427
            
            $
            48
            
            $
            3
            
            $
            (18
            )
            $
            (713
            )
            $
            37,747Agency
                notes
            
            
            95,772
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,863
            )
            
            92,909$
            134,199
            
            $
            48
            
            $
            3
            
            $
            (18
            )
            $
            (3,576
            )
            $
            130,656**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**
              **Value**MBS
            
            $
            25,218
            
            $
            7
            
            $
            1
            
            $
            (14
            )
            $
            (873
            )
            $
            24,339Agency
                notes
            
            
            70,853
            
            
            -
            
            
            -
            
            
            (25
            )
            
            (2,406
            )
            
            68,422Corporate/other
            
            
            775
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            775$
            96,846
            
            $
            7
            
            $
            1
            
            $
            (39
            )
            $
            (3,279
            )
            $
            93,536




16


As
      of March
      31, 2007, we hold 21 securities in our available-for-sale portfolio and 13
      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
      March 31, 2007,
      the Bank held Federal Home Loan Bank (FHLB) of Seattle stock of $11.9 million.
      On May 1, 2007, the FHLB declared a $.15 per share cash dividend. The dividend
      payment is approximately $18,000 and will be recognized in 2Q07.





**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 loans are primarily second
      mortgages on the borrower’s primary residence. Consumer loans are
      non-residential, e.g. automobiles, credit cards, or boats.




Net
      loans
      increased by $30.3 million to $1.0 billion as of March 31, 2007, compared to
      $996.0 million at December 31, 2006. 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
      $36.7
      million to $888.4 million as of March 31, 2007, compared to $851.7 million
      as of
      December 31, 2006. The Company has emphasized construction lending as it
      provides what Management believes to be the most favorable trade-off between
      risk and returns.




Retail
      loans
      decreased $1.1 million as consumer loans decreased $538,000 to $27.1 million
      and
      residential loans decreased by $554,000 to $95.8 million. Multifamily loans
      decreased $5.1 million to $29.6 million. The intense pricing pressure and the
      commodity-like nature of these loans have rendered them less attractive
      assets.


17


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





**Types
                of Loans**
            
            **March
                31,**
            ****
            **%
                of**
            ****
            **December
                31,**
            ****
            **%
                of***(Dollars
                in thousands)*
            
            **2007**
            ****
            **Portfolio**
            ****
            **2006**
            ****
            **Portfolio**Business
            
            $
            456,234
            
            
            43.9
            %
            $
            442,391
            
            
            43.8
            %Real
                estate construction(1)
            
            
            314,613
            
            
            30.2
            
            
            289,993
            
            
            28.7Commercial
                real estate
            
            
            117,524
            
            
            11.3
            
            
            119,298
            
            
            11.8Retail(2)
            
            
            122,944
            
            
            11.8
            
            
            124,036
            
            
            12.3Multifamily
                real estate
            
            
            29,646
            
            
            2.8
            
            
            34,719
            
            
            3.4Total
                loans
            
            $
            1,040,961
            
            
            100.0
            %
            $
            1,010,437
            
            
            100.0
            %Deferred
                loan fees
            
            
            (3,524
            )
            
            
            
            
            (3,434
            )Allowance
                for loan losses
            
            
            (11,170
            )
            
            
            
            
            (10,988
            )Loans,
                net
            
            $
            1,026,267
            
            
            
            
            $
            996,015


___________________


*(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
      March 31, 2007, HPC accounts held $49.0 million of checking deposits. Total
      deposits increased by $33.3 million from $855.4 million at December 31, 2006,
      to
      $888.7 million at March 31, 2007. The majority of the increase occurred in
      certificate of deposit accounts (CDs). In January 2007, the Bank launched its
      Business High Performance Checking (BHPC) program to continue to improve our
      funding mix.





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





*(Dollars
                in thousands)*
            
            **March
                31,**
            ****
            **%
                of**
            ****
            **December
                31,**
            ****
            **%
                of**
            ********
            ****
            **2007**
            ****
            **Deposits**
            ****
            **2006**
            ****
            **Deposits**Checking
                accounts
            
            $
            134,915
            
            
            15.2
            %
            $
            139,507
            
            
            16.3
            %Savings
                & MMDA
            
            
            292,726
            
            
            33.0
            
            
            290,444
            
            
            34.0CDs
            
            
            461,032
            
            
            51.8
            
            
            425,498
            
            
            49.7$
            888,673
            
            
            100.0
            %
            $
            855,449
            
            
            100.0
            %




FHLB
      of
      Seattle advances decreased by $300,000 from $243.0 million at December 31,
      2006,
      to $242.7 million at March 31, 2007. Securities sold under agreements to
      repurchase increased $9,000 to $95.7 million for the three months ended March
      31, 2007. 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.




Stockholders’
      equity decreased by $200,000 from $115.2 million at December 31, 2006, to $115.0
      million at March 31, 2007. The decrease is primarily attributable to the
      Corporation’s adoption of SFAS 159, which reduced equity by $3.4 million and the
      Corporation’s nineteenth consecutive cash dividend, which was declared March 28,
      2007, which reduced stockholders’ equity by $969,000. Accumulated other
      comprehensive income increased by $1.6 million with most of the increase
      attributable to the Corporation’s adoption of SFAS 159.


18


**Asset
      Quality**




Non-performing
      assets
      (non-performing loans, real estate owned and other repossessed property) totaled
      $953,000 and $851,000 at March 31, 2007, and December 31, 2006, 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, increased to $953,000 at March 31, 2007, compared to
      $851,000 at December 31, 2006. Of the $953,000, $801,000 were business and
      construction loans and $152,000 were consumer loans. There was no real estate
      owned (REO) and other repossessed assets as of March 31, 2007, and at December
      31, 2006.




At
      March 31,
      2007, the Bank’s allowance for loan losses totaled $11.2 million compared to
      $11.0 million at December 31, 2006. The allowance for loan losses was 1.07%
      of
      total loans outstanding at March 31, 2007, compared to 1.09% at December 31,
      2006. The allowance for loan losses was 1,172% of non-performing loans at March
      31, 2007. 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 March 31, 2007, loan charge-offs equaled $96,000 while recoveries
      were $28,000 resulting in net charge-offs of $68,000.




The
      following
      table provides summary information concerning asset quality as of and for the
      quarters ended March 31, 2007, and December 31, 2006, respectively:





**March
                31, 2007**
            ****
            **December
                31, 2006**Non-performing
                loans to total assets
            
            
            0.07
            %
            
            0.06
            %Non-performing
                loans to total loans outstanding
            
            
            0.09
            
            
            0.08Non-performing
                assets to total assets
            
            
            0.07
            
            
            0.06Allowance
                for loan losses to non-performing loans
            
            
            1,172
            
            
            1,291Allowance
                for loan losses to total loans
            
            
            1.07
            
            
            1.09Net
                charge-offs to total loans
            
            
            0.01
            
            
            0.02




19


**RESULTS
      OF OPERATIONS**





**Comparison
      of the Three Months Ended March 31, 2007 and 2006**





**General**




Net
      income
      increased 19.0% to $3.8 million for the three months ended March 31, 2007
      compared to $3.2 million during the comparable period in 2006. Diluted net
      income per share was $0.304 for the quarter ended March 31, 2007 and $0.257
      per
      share for the quarter ended March 31, 2006, an increase of 18.3%. All per share
      data has been adjusted to reflect the 5-for-4 stock split paid in May 2006.
      Net
      interest income before provision for loan losses increased $757,000 to $10.3
      million for the quarter ended March 31, 2007. Other income increased by $726,000
      to $2.1 million for the quarter ended March 31, 2007. Other expense increased
      $548,000  to
      $6.4  million
      for the quarter ended March 31, 2007 as compared to the quarter ended March
      31,
      2006.




**Net
      Interest Income**




Net
      interest
      income, before provision for loan losses, increased 8.0% or $757,000 to $10.3
      million for the three months ended March 31, 2007 compared to $9.5 million
      for
      the three months ended March 31, 2006. Average interest earning assets increased
      $128.0 million or 11.1% to $1.3 billion for the three months ended March 31,
      2007 compared to the same period in 2006. Average total loans (including loans
      held-for-sale) increased $129.0 million to $1.0 billion and average investment
      securities decreased $10.8 million to $237.7 million for the three months March
      31, 2007 compared to the same quarter of the prior year.




**At
                  or for the three****months
                  ended March 31,***(Dollars
                  in millions)*
              
              **2007**
              
              **2006**Average
                  interest earning assets
              
              $
              1,280
              
              $
              1,152Average
                  interest bearing liabilities
              
              
              1,143
              
              
              1,029Yield
                  on interest earning assets
              
              
              7.17
              %
              
              6.53
              %Cost
                  of interest bearing liabilities
              
              
              4.38
              
              
              3.60Net
                  interest spread
              
              
              2.79
              
              
              2.93Net
                  interest margin
              
              
              3.26
              
              
              3.31


The
      net
      interest margin decreased 5 basis points to 3.26% for the three months ended
      March 31, 2007 compared to the same quarter the prior year. The yield on
      interest earning assets increased 64 basis points to 7.17% for the three months
      ended March 31, 2007, compared to 6.53% for the three months ended March 31,
      2006. The cost of funds increased 78 basis points to 4.38% for the three months
      ended March 31, 2007 compared to 3.60% for the same period in 2006.




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 CDs and resulted from the Bank's promotion of a nine-month CD
      product.


20


**Provision
      for Loan Losses**




Cascade’s
      provision for loan losses was $250,000 for the three months ended March 31,
      2007
      and March 31, 2006. The provision is based on the size, composition and growth
      of the portfolio, and management’s evaluation of known and inherent risks in the
      portfolio, as well as Cascade’s loss experience.





**Other
      Income**




Other
      income
      increased $726,000 or 54.8% to $2.1 million for the three months ended March
      31,
      2007 as compared to $1.3 million for the three months ended March 31, 2006.
      Other income for the first quarter of 2007 benefited from a $515,000 gain
      resulting from the early adoption of SFAS 159. For the three months ended March
      31, 2007, checking fee income increased to $874,000 compared to $756,000 for
      the
      same period in the prior year. Gain on sale of loans increased $49,000 from
      $39,000 to $88,000 for the three months ended March 31, 2007. Other service
      fee
      income decreased $2,000 to $254,000 for the quarter.




**Other
      Expense**




Other
      expense
      was $6.4 million for the three months ended March 31, 2007 compared with $5.9
      million for the three months ended March 31, 2006.




Salary
      and
      employee benefit expenses increased $152,000 to $3.4 million during the three
      months ended March 31, 2007 compared to the same quarter last year.
      Approximately $100,000 of that increase was due to increased Directors’ fees as
      two new Directors of the Corporation took office and 2006’s expenses were
      lowered when the Board voted not to pay a bonus to Directors. The remaining
      other operating expense categories totaled $3.1 million for the three months
      ended March 31, 2007. For the same period in 2006, other operating expenses
      were
      $2.7 million. The increase in other operating expense was led by an increase
      in
      marketing expense which was associated with the roll out of High Performance
      Checking for business customers and increased business and occupation
      taxes.





Federal
      income tax expenses increased $342,000 to $1.9 million, an increase of
      22.1% during
      the three months ended March 31, 2007 compared to the same period last
      year .
      For the
      three months ended March 31, 2007, the Corporation’s effective tax rate was 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-months
      ended March 31, 2007 and 2006. 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.


21


**For
      the three months ended March 31, 2007**


*(Dollars
              in thousands)*
            
            **BUSINESS**
            
            **CONSTRUCTION**
            
            **INCOME**
              **PROPERTY**
            
            **RETAIL**
            
            **ADMINISTRATION**
            
            **TOTAL**Condensed
                Income StatementNet
                interest income afterprovision
                for loan losses
            
            $
            3,206
            
            $
            5,092
            
            $
            923
            
            $
            379
            
            $
            427
            
            $
            10,027Other
                income
            
            
            45
            
            
            12
            
            
            -
            
            
            1,181
            
            
            813
            
            
            2,051Other
                expense
            
            
            371
            
            
            97
            
            
            32
            
            
            591
            
            
            5,332
            
            
            6,423Contribution
                before overhead
            
            
            2,880
            
            
            5,007
            
            
            891
            
            
            969
            
            
            (4,092
            )
            
            5,655Support
                transfer
            
            
            1,766
            
            
            1,221
            
            
            608
            
            
            497
            
            
            (4,092
            )
            
            -Income
                before provision forincome
                tax
            
            
            1,114
            
            
            3,786
            
            
            283
            
            
            472
            
            
            -
            
            
            5,655Provision
                forincome
                taxes
            
            
            373
            
            
            1,264
            
            
            95
            
            
            158
            
            
            -
            
            
            1,890Net
                income
            
            $
            741
            
            $
            2,522
            
            $
            188
            
            $
            314
            
            $
            -
            
            $
            3,765








**For
      the three months ended March 31, 2006**


*(Dollars
              in thousands)*
            
            **BUSINESS**
            
            **CONSTRUCTION**
            
            **INCOME**
              **PROPERTY**
            
            **RETAIL**
            
            **ADMINISTRATION**
            
            **TOTAL**Condensed
                Income StatementNet
                interest income afterprovision
                for loan losses
            
            $
            3,680
            
            $
            2,987
            
            $
            1,171
            
            $
            530
            
            $
            902
            
            $
            9,270Other
                income
            
            
            44
            
            
            7
            
            
            -
            
            
            971
            
            
            303
            
            
            1,325Other
                expense
            
            
            322
            
            
            86
            
            
            85
            
            
            552
            
            
            4,830
            
            
            5,875Contribution
                before overhead
            
            
            3,402
            
            
            2,908
            
            
            1,086
            
            
            949
            
            
            (3,625
            )
            
            4,720Support
                transfer
            
            
            1,563
            
            
            754
            
            
            782
            
            
            526
            
            
            (3,625
            )
            
            -Income
                before provision forincome
                tax
            
            
            1,839
            
            
            2,154
            
            
            304
            
            
            423
            
            
            -
            
            
            4,720Provision
                forincome
                taxes
            
            
            604
            
            
            706
            
            
            99
            
            
            139
            
            
            -
            
            
            1,548Net
                income
            
            $
            1,235
            
            $
            1,448
            
            $
            205
            
            $
            284
            
            $
            -
            
            $
            3,172







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 lines
      of business 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 March
      31,
      2007, Cascade had $136.2 million of construction loans in process, $85.8 million
      in unused business lines of credit, $37.7 million in unused consumer lines
      of
      credit including credit cards and $38.8 million in other undisbursed
      commitments. Recent history indicates construction lines will be funded at
      69%
      of commitments at any point in time. Historically, the Bank’s business customers
      use approximately 50% of their lines at any given time. About 44% 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
      three months ended March 31, 2007 contributed $4.7 million to liquidity compared
      to $6.5 million for the three months ended March 31, 2006.


22


Funding
      needs
      are met through existing liquidity balances, deposit growth, FHLB-Seattle
      advances and other borrowings, as well as the repayment of existing loans and
      the sale of loans. Cascade maintains balances in FHLB deposits, which equaled
      $22.5 million as of March 31, 2007, and $2.0 million at March 31,
      2006.





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
      $483.3 million at current asset levels. At March 31, 2007, the Bank had $242.7
      million in advances and an unused line of credit from the FHLB-Seattle of
      approximately $242.2 million. The Bank also uses reverse repurchase agreements
      (securities sold under agreements to repurchase) to provide a flexible source
      of
      funding. At March 31, 2007, the Bank had $95.7 million in reverse repurchase
      agreements outstanding. Securities that could be pledged to secure additional
      funding at the FHLB-Seattle or the repurchase market were $19.1 million at
      the
      end of the quarter and $12.0 million as of December 31, 2006. Commercial real
      estate loans totaling $309.7 million and home equity and 2 nd lien
      residential loans totaling $19.7 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 $20.7 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 main source of capital is typically 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.


23


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 March 31, 2007, for the purposes of this
      calculation, the Bank’s average total assets and total risk-weighted assets were
      $1.30 billion and $1.17 billion respectively. The related excess capital amounts
      as of March 31, 2007, are presented in the following table (dollars in
      thousands):





**Adequately
                Capitalized**
            ****
            **Well
                Capitalized****Core
                capital**
            
            **Amount**
            
            **Percentage**
            
            **Amount**
            
            **Percentage**Tier
                1 (Core) capital
            
            $
            115,480
            
            
            8.73
            %
            $
            115,480
            
            
            8.73
            %Less:
                Minimum requirement
            
            
            52,928
            
            
            4.00
            
            
            79,392
            
            
            6.00Excess
            
            $
            62,552
            
            
            4.73
            %
            $
            36,088
            
            
            2.73
            %**Risk-based
                capital**
            
            
            Amount
            
            
            Percentage
            
            
            Amount
            
            
            PercentageRisk-based
                capital
            
            $
            126,650
            
            
            10.85
            %
            $
            126,650
            
            
            10.85
            %Less:
                Minimum requirement(1)
            
            
            93,370
            
            
            8.00
            
            
            116,713
            
            
            10.00Excess
            
            $
            33,280
            
            
            2.85
            %
            $
            9,937
            
            
            0.85
            %*(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 March 31, 2007, 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 March 31, 2007, the Corporation is “well capitalized” under Federal Reserve
      guidelines with a Tier 1 ratio of 8.71% and a risk-based ratio of
      10.84%.


24


**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 March 31, 2007, the Bank is within all
      the
      guidelines established by the Board for the changes in net interest income,
      fair
      value of equity, and adjusted capital/asset ratios. As of March 31, 2007, the
      Bank’s fair value of equity decreases 15.7% in the up 200 basis point scenario
      and 7.4% 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 9.8% in the up 200 basis point scenario and 10.3% 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 4.8%
      in
      the down 200 basis point scenario, both 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 March 31, 2007.





**Type**
            **Percentage**Variable
            34%Adjustable
            39%Fixed
            27%




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 March
      31, 2007, the entire portfolio of $241.0 million in long-term advances had
      original maturities greater than one year, none had original maturities of
      less
      than one year. This portfolio consists of $25.0 million 3-month LIBOR
      adjustable, $2.0 million are fixed rate, $119.0 million have provisions that
      allow the FHLB to convert the advance to a LIBOR based, adjustable rate
      borrowing and $95.0 million begin as LIBOR based advances but convert to a
      fixed
      rate borrowing after a specified time.


25


**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 March 31, 2007. 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 March 31, 2007, 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,
      2006.


26


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




**Issuer
                Purchases of Equity Securities****2006
                PLAN**
            
            **Total
                Number**
            ****
            **Maximum**
            ********
            ****
            ****
            ****
            ****
            ****
            **of
                Shares**
              **Purchased**
            ****
            **Number
                of**
              **Shares
                that**
            ******Period**
            ****
            **Total**
              **Number**
            ****
            **Average**
              **Price**
            ****
            **as
                Part of**
              **Publicly**
            ****
            **May
                Yet be Purchased**
            ******Beginning**
            ****
            **Ending**
            ****
            **of
                Shares**
              **Purchased(1)**
            ****
            **Paid
                per**
              **Share**
            ****
            **Announced**
              **Plan**
            ****
            **Under
                the**
              **Plan(2)**January
                1, 2007
            
            
            January
                31, 2007
            
            
            -
            
            $
            -
            
            
            -
            
            
            341,700February
                1, 2007
            
            
            February
                28, 2007
            
            
            8,567
            
            
            17.67
            
            
            
            
            
            341,700March
                1, 2007
            
            
            March
                31, 2007
            
            
            7,000
            
            
            17.60
            
            
            7,000
            
            
            334,700Total
            
            
            
            
            
            15,567
            
            $
            17.63
            
            
            7,000
            
            
            334,7001)
                During the period presented there were 8,567 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




31.1
            Certifications
              of the Chief Executive Officer pursuant to Section 302 of the
              Sarbanes-Oxley Act 31.2
            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
      January
      23, 2007, the Corporation filed a Form 8-K reporting an attached press release
      announcing earnings information for the quarter ended December 31, 2006, under
      Items 2.02 and 9.01 of Form 8-K.




On
      April
      24, 2007, reporting an attached press release announcing earnings information
      for the quarter ended March 31, 2007, under Items 2.02 and 9.01 of Form
      8-K.


27


**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**May
              10, 2007
            /s/
              Lars H. JohnsonBy:Lars
              H. Johnson,
              Executive
                Vice
                President
              (Chief
                Financial Officer)




28