**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 ENDED June                30, 2006 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

**CASCADE      FINANCIAL CORPORATION**

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

| Class                                        | Outstanding                as of July 31, 2006 |
|----------------------------------------------|------------------------------------------------|
| Common                Stock ($.01 par value) | 12,076,793                                     |

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**CASCADE      FINANCIAL CORPORATION**

**FORM      10-Q**

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

**INDEX**

|                                                         |                                                                                                                                      | **PAGE** |
|--------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART                    I — Financial Information:** |
| Item                    1                                    | —                    Financial Statements:                                                                                          |     |
|                                                         | —                    Condensed Consolidated Balance Sheets                                                                          | 3        |
|                                                         | —                    Condensed Consolidated Statements of Income                                                                    | 4        |
|                                                         | —                    Consolidated Statements of Comprehensive Income                                                                | 5        |
|                                                         | —                    Condensed Consolidated Statements of Cash Flows                                                                | 6        |
|                                                         | —                    Notes to Condensed Consolidated Financial Statements                                                           | 8        |
| Item                    2                                    | —                    Management’s Discussion and Analysis of Financial condition                    and Results of Operations | 12       |
| Item                    3                                    | —                    Quantitative and Qualitative Disclosures about Market Risk                                                     | 22       |
| Item                    4                                    | —                    Controls and Procedures                                                                                        | 23       |
|                                                         |                                                                                                                                      |     |
| **PART                    II — Other Information**     |                                                                                                                                      |
| Item                    1                                    | —                    Legal Proceedings                                                                                              | 24       |
| Item                    1A                                   | —                    Risk Factors                                                                                                   | 24       |
| Item                    2                                    | —                    Unregistered Sales of Equity Securities and Use of                    Proceeds                                 | 24       |
| Item                    3                                    | —                    Defaults Upon Senior Securities                                                                                | 25       |
| Item                    4                                    | —                    Submission of Matters to a Vote of Security Holders                                                            | 25       |
| Item                    5                                    | —                    Other Information                                                                                              | 25       |
| Item                    6                                    | —                    Exhibits                                                                                                       | 25       |
|                                                         |   Signatures                                                                                                                    | 26       |

----

**PART      I -- FINANCIAL INFORMATION**

**Item      1 - Financial Statements**

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED BALANCE SHEETS**

|                                                                       |   | June                30, |      | December                31, |   |
|----------------------------------------------------------------------------|--------|-------------------------|-----------|-----------------------------|--------|
|                                                                       |   | 2006                    |      | 2005                        |   |
| **ASSETS**                                                                 |   |                    |      |                        |   |
|                                                                       |   |                    |      |                        |   |   |   |
| Cash                on hand and in banks                                   |   | $                       | 25,699    |                        | $      | 16,616 |   |
| Interest-bearing                deposits in other institutions             |   |                    | 11,057    |                        |   | 14,493 |   |
| Securities                available-for-sale                               |   |                    | 136,380   |                        |   | 140,596 |   |
| Securities                held-to-maturity                                 |   |                    | 97,858    |                        |   | 95,122 |   |
| Federal                Home Loan Bank (FHLB) Stock                         |   |                    | 11,920    |                        |   | 11,920 |   |
| Loans,                net                                                  |   |                    | 943,338   |                        |   | 867,049 |   |
| Goodwill                and intangibles, net                               |   |                    | 26,044    |                        |   | 26,121 |   |
| Premises                and equipment, net                                 |   |                    | 12,023    |                        |   | 12,270 |   |
| Cash                surrender value of bank-owned life insurance           |   |                    | 17,637    |                        |   | 17,313 |   |
| Deferred                tax asset                                          |   |                    | 1,619     |                        |   | 568 |   |
| Accrued                interest receivable and other assets                |   |                    | 10,794    |                        |   | 9,716 |   |
| TOTAL                ASSETS                                                |   | $                       | 1,294,369 |                        | $      | 1,211,784 |   |
|                                                                       |   |                    |      |                        |   |   |   |
| **LIABILITIES                AND STOCKHOLDERS’ EQUITY**              |   |                    |      |                        |   |   |   |
|                                                                       |   |                    |      |                        |   |   |   |
| **Liabilities:**                                                           |   |                    |      |                        |   |   |   |
| Deposits                                                                   |   | $                       | 845,711   |                        | $      | 795,768 |   |
| Federal                Home Loan Bank advances                             |   |                    | 233,000   |                        |   | 236,000 |   |
| Securities                sold under agreements to repurchase              |   |                    | 70,995    |                        |   | 51,058 |   |
| Junior                subordinated debentures payable                      |   |                    | 24,970    |                        |   | 15,212 |   |
| Advance                payments by borrowers for taxes and insurance       |   |                    | 949       |                        |   | 689 |   |
| Dividends                payable                                           |   |                    | 905       |                        |   | 864 |   |
| Accrued                interest payable, expenses and other liabilities    |   |                    | 9,317     |                        |   | 7,000 |   |
| TOTAL                LIABILITIES                                           |   |                    | 1,185,847 |                        |   | 1,106,591 |   |
|                                                                       |   |                    |      |                        |   |   |   |
| **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 12,068,200 shares at June 30,        |   |                    |      |                        |   |   |   |
| 2006,                and 9,603,787 shares at December 31, 2005             |   |                    | 121       |                        |   | 96 |   |
| Additional                paid-in capital                                  |   |                    | 38,773    |                        |   | 38,149 |   |
| Retained                earnings, substantially restricted                 |   |                    | 73,529    |                        |   | 68,945 |   |
| Accumulated                other comprehensive (loss)                      |   |                    | (3,901    | )                           |   | (1,997 | ) |
| TOTAL                STOCKHOLDERS’ EQUITY                            |   |                    | 108,522   |                        |   | 105,193 |   |
| TOTAL                LIABILITIES AND STOCKHOLDERS’ EQUITY            |   | $                       | 1,294,369 |                        | $      | 1,211,784 |   |

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED STATEMENTS OF INCOME**

|                                                                  |   | Three                months ended |       | Six                months ended |   |
|-----------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                                                  |   | June                30,           |       | June                30,         |   |
|                                                                  |   | 2006                              |       | 2005                            |   | 2006 |   | 2005 |   |
| Interest                income:                                       |   |                              |       |                            |   |   |   |   |   |
| Loans                                                                 |   | $                                 | 17,280     |                            | $      | 14,147 |   | $ | 33,203 |   | $ | 27,303 |   |
| Securities                available-for-sale                          |   |                              | 1,729      |                            |   | 1,391 |   |   | 3,424 |   |   | 2,693 |   |
| Securities                held-to-maturity                            |   |                              | 1,155      |                            |   | 1,092 |   |   | 2,268 |   |   | 2,167 |   |
| FHLB                stock dividends                                   |   |                              | -          |                            |   | - |   |   | - |   |   | 49 |   |
| Interest-earning                deposits                              |   |                              | 85         |                            |   | 36 |   |   | 141 |   |   | 54 |   |
| Total                interest income                                  |   |                              | 20,249     |                            |   | 16,666 |   |   | 39,036 |   |   | 32,266 |   |
| Interest                expense:                                      |   |                              |       |                            |   |   |   |   |   |   |   |   |   |
| Deposits                                                              |   |                              | 6,849      |                            |   | 4,302 |   |   | 12,782 |   |   | 7,846 |   |
| FHLB                advances and repurchase agreements                |   |                              | 3,203      |                            |   | 2,918 |   |   | 6,209 |   |   | 5,927 |   |
| Junior                subordinated debentures                         |   |                              | 509        |                            |   | 295 |   |   | 836 |   |   | 568 |   |
| Total                interest expense                                 |   |                              | 10,561     |                            |   | 7,515 |   |   | 19,827 |   |   | 14,341 |   |
| Net                interest income                                    |   |                              | 9,688      |                            |   | 9,151 |   |   | 19,209 |   |   | 17,925 |   |
| Provision                for loan losses                              |   |                              | 300        |                            |   | 250 |   |   | 550 |   |   | 495 |   |
| Net                interest income after provision for loan losses    |   |                              | 9,388      |                            |   | 8,901 |   |   | 18,659 |   |   | 17,430 |   |
| Other                income:                                          |   |                              |       |                            |   |   |   |   |   |   |   |   |   |
| Gain                on sale of loans                                  |   |                              | 42         |                            |   | 434 |   |   | 81 |   |   | 464 |   |
| Gain                on sale of securities available-for-sale          |   |                              | -          |                            |   | - |   |   | - |   |   | 13 |   |
| Net                (loss) gain on sale of REO                         |   |                              | -          |                            |   | - |   |   | (27 | ) |   | 33 |   |
| Checking                service fees                                  |   |                              | 862        |                            |   | 767 |   |   | 1,618 |   |   | 1,543 |   |
| Other                service fees                                     |   |                              | 360        |                            |   | 207 |   |   | 616 |   |   | 420 |   |
| BOLI                                                                  |   |                              | 191        |                            |   | 190 |   |   | 377 |   |   | 378 |   |
| Other                                                                 |   |                              | 118        |                            |   | 69 |   |   | 232 |   |   | 416 |   |
| Total                other income                                     |   |                              | 1,573      |                            |   | 1,667 |   |   | 2,897 |   |   | 3,267 |   |
| Other                expenses:                                        |   |                              |       |                            |   |   |   |   |   |   |   |   |   |
| Salaries                and employee benefits                         |   |                              | 3,092      |                            |   | 3,012 |   |   | 6,250 |   |   | 6,180 |   |
| Option                expense                                         |   |                              | 76         |                            |   | - |   |   | 139 |   |   | - |   |
| Occupancy                                                             |   |                              | 853        |                            |   | 823 |   |   | 1,742 |   |   | 1,630 |   |
| Marketing                                                             |   |                              | 272        |                            |   | 268 |   |   | 526 |   |   | 353 |   |
| Data                processing                                        |   |                              | 103        |                            |   | 172 |   |   | 206 |   |   | 317 |   |
| Prepayment                fees on FHLB advances                       |   |                              | -          |                            |   | 73 |   |   | - |   |   | 73 |   |
| Other                                                                 |   |                              | 1,640      |                            |   | 1,428 |   |   | 3,048 |   |   | 2,776 |   |
| Total                other expenses                                   |   |                              | 6,036      |                            |   | 5,776 |   |   | 11,911 |   |   | 11,329 |   |
| Income                before provision for federal income taxes       |   |                              | 4,925      |                            |   | 4,792 |   |   | 9,645 |   |   | 9,368 |   |
| Provision                for federal income taxes                     |   |                              | 1,598      |                            |   | 1,577 |   |   | 3,145 |   |   | 3,082 |   |
| Net                income                                             |   | $                                 | 3,327      |                            | $      | 3,215 |   | $ | 6,500 |   | $ | 6,286 |   |
|                                                                  |   |                              |       |                            |   |   |   |   |   |   |   |   |   |
| Net                income per common share, basic                     |   | $                                 | 0.28       |                            | $      | 0.27 |   | $ | 0.54 |   | $ | 0.53 |   |
| Weighted                average number of shares outstanding, basic   |   |                              | 12,058,708 |                            |   | 11,966,470 |   |   | 12,038,318 |   |   | 11,968,400 |   |
|                                                                  |   |                              |       |                            |   |   |   |   |   |   |   |   |   |
| Net                income per share, diluted                          |   | $                                 | 0.27       |                            | $      | 0.26 |   | $ | 0.53 |   | $ | 0.51 |   |
| Weighted                average number of shares outstanding, diluted |   |                              | 12,370,324 |                            |   | 12,288,856 |   |   | 12,355,573 |   |   | 12,317,831 |   |
|                                                                  |   |                              |       |                            |   |   |   |   |   |   |   |   |   |
| Dividends                declared per share                           |   | $                                 | 0.075      |                            | $      | 0.064 |   | $ | 0.147 |   | $ | 0.128 |   |

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONSOLIDATED      STATEMENTS OF COMPREHENSIVE INCOME **

|                                                                     |   | Three                months ended |   | Six                months Ended |   |
|--------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                     |   | June                30,           |   | June                30,         |   |
|                                                                     |   | 2006                              |   | 2005                            |   | 2006 |   | 2005 |   |
| Net                Income                                                |   | $                                 | 3,327  |                            | $      | 3,215 |   | $ | 6,500 |   | $ | 6,286 |   |
| Increase                in unrealized (loss) gain on securities          |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| available-for-sale,                net of tax (benefit) expense          |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| of                $(524) and $874 for the three months                   |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| ended                June 30, 2006, and 2005, respectively,              |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| and                $(1,025) and $233 for the six months                  |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| June                30, 2006, and 2005, respectively                     |   |                              | (973   | )                               |   | 1,623 |   |   | (1,904 | ) |   | 399 |   |
| Increase                in unrealized gain on swaps                      |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| Available-for-sale,                net of tax expense                    |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| of                $0 and $0 for the three months                         |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| ended                June 30, 2006, and 2005, respectively,              |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| and                $0 and $114 for the six months                        |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| June                30, 2006, and 2005, respectively                     |   |                              | -      |                            |   | - |   |   | - |   |   | 212 |   |
| Less                reclassification adjustment for (loss) on securities |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| included                in net income, net of tax (benefit) of $0        |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| and                $0 for the three months ended June 30, 2006,          |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| and                2005, respectively, and $0 and $(4)                   |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| for                the six months ended June 30, 2006, and               |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| 2005,                respectively.                                       |   |                              | -      |                            |   | - |   |   | - |   |   | (8 | ) |
| Less                reclassification adjustment for (loss) on swaps      |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| included                in net income, net of tax (benefit) of           |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| $0                and $0 for the three months ended June 30,             |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| 2006,                and 2005, respectively, and $0 and $(96)            |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| for                the six months ended June 30, 2006, and               |   |                              |   |                            |   |   |   |   |   |   |   |   |   |
| 2005,                respectively.                                       |   |                              | -      |                            |   | - |   |   | - |   |   | (179 | ) |
| Comprehensive                Income                                      |   | $                                 | 2,354  |                            | $      | 4,838 |   | $ | 4,596 |   | $ | 6,710 |   |

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED STATEMENTS OF CASH FLOWS**

| Six                Months EndedJune                30,                                                 |   |
|--------------------------------------------------------------------------------------------------------|--------|
|                                                                                                   |   | 2006 |   | 2005 |   |
| Cash                flows from operating activities:                                                   |   |   |   |   |   |   |   |
| Net                income                                                                              |   | $ | 6,500 |   | $ | 6,286 |   |
| Adjustments                to reconcile net income to net cash provided by                             |   |   |   |   |   |   |   |
| (used                in) operating activities:                                                         |   |   |   |   |   |   |   |
| Depreciation                and amortization of premises and equipment                                 |   |   | 990 |   |   | 922 |   |
| Provision                for losses on loans                                                           |   |   | 550 |   |   | 495 |   |
| Increase                in cash surrender value of bank-owned life insurance                           |   |   | (324 | ) |   | (329 | ) |
| Amortization                of retained servicing rights                                               |   |   | 6 |   |   | - |   |
| Amortization                of core deposit intangible                                                 |   |   | 71 |   |   | 88 |   |
| Deferred                federal income taxes                                                           |   |   | (26 | ) |   | (17 | ) |
| Deferred                loan fees, net of amortization                                                 |   |   | (2 | ) |   | 411 |   |
| Stock-based                compensation                                                                |   |   | 139 |   |   | - |   |
| Net                gain on sales of securities available-for-sale                                      |   |   | - |   |   | (13 | ) |
| Net                (loss) gain on sales of real estate owned, investment property                and   |   |   |   |   |   |   |   |
| other                repossessed assets                                                                |   |   | (27 | ) |   | (33 | ) |
| Federal                Home Loan Bank stock dividend received                                          |   |   | - |   |   | (49 | ) |
| Excess                tax benefits from share-based payment arrangements                               |   |   | (104 | ) |   | - |   |
| Net                (increase) decrease in accrued interest receivable and other                assets  |   |   | (1,604 | ) |   | 1,333 |   |
| Net                increase in accrued interest payable, expenses and other                liabilities |   |   | 2,421 |   |   | 308 |   |
| Net                cash provided by operating activities                                               |   |   | 8,590 |   |   | 9,402 |   |
|                                                                                                   |   |   |   |   |   |   |   |
| Cash                flows from investing activities:                                                   |   |   |   |   |   |   |   |
| Loans                originated, net of principal repayments                                           |   |   | (76,964 | ) |   | (52,871 | ) |
| Purchases                of securities held-to-maturity                                                |   |   | (3,744 | ) |   | (5,054 | ) |
| Principal                repayments on securities held-to-maturity                                     |   |   | 1,008 |   |   | 2,659 |   |
| Principal                repayments on securities available-for-sale                                   |   |   | 7,004 |   |   | 11,693 |   |
| Purchases                of securities available-for-sale                                              |   |   | (5,716 | ) |   | (20,000 | ) |
| Proceeds                from sales of securities available-for-sale                                    |   |   | - |   |   | 1,532 |   |
| Purchases                of premises and equipment                                                     |   |   | (925 | ) |   | (1,031 | ) |
| Proceeds                from sales/retirements of premises and equipment                               |   |   | 183 |   |   | 26 |   |
| Proceeds                from loan participations sold                                                  |   |   | 125 |   |   | (1,268 | ) |
| Net                cash used in investing activities                                                   |   |   | (79,029 | ) |   | (64,314 | ) |
|                                                                                                   |   |   |   |   |   |   |   |
| Subtotal,                carried forward                                                               |   | $ | (70,439 | ) | $ | (54,912 | ) |

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**CONDENSED      CONSOLIDATED STATEMENTS OF CASH FLOWS**

|                                                                                                                   |   | Six                Months Ended |    |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                                                                   |   | June                30,         |    |
|                                                                                                                   |   | 2006                            |    | 2005 |   |
|                                                                                                                   |   |                            |    |   |   |
| Subtotal,                brought forward                                                                               |   | $                               | (70,439 | ) | $ | (54,912 | ) |
|                                                                                                                   |   |                            |    |   |   |   |   |
| Cash                flows from financing activities:                                                                   |   |                            |    |   |   |   |   |
| Proceeds                from issuance of common stock                                                                  |   |                            | 414     |   |   | 613 |   |
| Excess                tax benefits from share-based payment arrangements                                               |   |                            | 104     |   |   | - |   |
| Dividends                paid                                                                                          |   |                            | (1,732  | ) |   | (1,530 | ) |
| Repurchase                of common stock                                                                              |   |                            | (150    | ) |   | (827 | ) |
| Net                increase in deposits                                                                                |   |                            | 49,943  |   |   | 68,709 |   |
| Net                decrease in Federal Home Loan Bank advances                                                         |   |                            | (3,000  | ) |   | (5,000 | ) |
| Net                increase in securities sold under agreements to repurchase                                          |   |                            | 19,937  |   |   | 144 |   |
| Proceeds                from Trust Preferred Securities issued                                                         |   |                            | 10,310  |   |   | - |   |
| Net                increase in advance payments by borrowers for taxes and                insurance                    |   |                            | 260     |   |   | 338 |   |
| Net                cash provided by financing activities                                                               |   |                            | 76,086  |   |   | 62,447 |   |
| Net                increase in cash and cash equivalents                                                               |   |                            | 5,647   |   |   | 7,535 |   |
|                                                                                                                   |   |                            |    |   |   |   |   |
| Cash                and cash equivalents at beginning of period                                                        |   |                            | 31,109  |   |   | 13,029 |   |
| Cash                and cash equivalents at end of period                                                              |   | $                               | 36,756  |   | $ | 20,564 |   |
|                                                                                                                   |   |                            |    |   |   |   |   |
| Supplemental                disclosures of cash flow information—cash paid during the period                for: |   |                            |    |   |   |   |   |
| Interest                                                                                                               |   | $                               | 25,032  |   | $ | 17,302 |   |
| Federal                income taxes                                                                                    |   |                            | 3,600   |   |   | 3,245 |   |
|                                                                                                                   |   |                            |    |   |   |   |   |
| Supplemental                schedule of noncash investing activities:                                                  |   |                            |    |   |   |   |   |
| Mark-to-market                on securities available-for-sale                                                         |   |                            | 2,929   |   |   | 1,111 |   |
| Tax                benefit of non-qualified options exercised                                                          |   |                            | 104     |   |   | - |   |
| Retirement                of common stock in retained earnings                                                         |   |                            | 142     |   |   | - |   |
| Dividends                declared                                                                                      |   |                            | 1,772   |   |   | 1,532 |   |

----

**CASCADE      FINANCIAL CORPORATION AND SUBSIDIARY**

**NOTES      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June      30, 2006**

**(unaudited)**

----

|                                                         |   | Three                Months Ended                                           |       | Six                Months Ended |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------------------|------------|---------------------------------|--------|
|                                                         |   | June                30,                                                     |       | June                30,         |   |
|                                                         |   | 2006                                                                        |       | 2005                            |   | 2006 |   | 2005 |   |
|                                                         |   | *(dollars                in thousands, except share and per share amounts)* |       |
| **Numerator:**                                               |   |                                                                        |       |                            |   |   |   |   |   |   |   |   |   |
| Net                income                                    |   | $                                                                           | 3,327      |                            | $      | 3,215 |   | $ | 6,500 |   | $ | 6,286 |   |
|                                                         |   |                                                                        |       |                            |   |   |   |   |   |   |   |   |   |
| **Denominator:**                                             |   |                                                                        |       |                            |   |   |   |   |   |   |   |   |   |
| Denominator                for basic net income per share-   |   |                                                                        |       |                            |   |   |   |   |   |   |   |   |   |
| Weighted                average shares                       |   |                                                                        | 12,058,708 |                            |   | 11,966,470 |   |   | 12,038,318 |   |   | 11,968,400 |   |
| Effect                of dilutive securities:                |   |                                                                        |       |                            |   |   |   |   |   |   |   |   |   |
| Stock                options                                 |   |                                                                        | 311,616    |                            |   | 322,386 |   |   | 317,255 |   |   | 349,431 |   |
| Denominator                for diluted net income per share- |   |                                                                        |       |                            |   |   |   |   |   |   |   |   |   |
| Weighted                average shares and assumed           |   |                                                                        |       |                            |   |   |   |   |   |   |   |   |   |
| conversion                of dilutive stock options          |   |                                                                        | 12,370,324 |                            |   | 12,288,856 |   |   | 12,355,573 |   |   | 12,317,831 |   |
|                                                         |   |                                                                        |       |                            |   |   |   |   |   |   |   |   |   |
| Basic                net income per share                    |   | $                                                                           | 0.28       |                            | $      | 0.27 |   | $ | 0.54 |   | $ | 0.53 |   |
| Diluted                net income per share                  |   | $                                                                           | 0.27       |                            | $      | 0.26 |   | $ | 0.53 |   | $ | 0.51 |   |

*“Share-Based      Payment,”*

----

*“Accounting      for Stock Issued to Employees,”*

|                                            |   |     Options |    |  Weighted-AverageExercisePrice                perShare |   | Weighted-AverageRemainingContractualTerm(in                years) |   |   AggregateIntrinsicValue |   |
|-------------------------------------------------|--------|---------------------------------|---------|-------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|-------------------------------------|--------|
| Outstanding                on December 31, 2005 |   |                            | 732,253 |                                                        | $      | 7.72                                                              |   |                                | 5.85   |   | $ | - |   |
| Granted                                         |   |                            | 96,037  |                                                        |   | 15.00                                                             |   |                                | 9.99   |   |   | - |   |
| Exercised                                       |   |                            | (48,748 | )                                                           |   | 5.14                                                              |   |                                | -      |   |   | - |   |
| Forfeited/Canceled                              |   |                            | -       |                                                        |   | -                                                                 |   |                                | -      |   |   | - |   |
| Outstanding                on March 31, 2006    |   |                            | 779,542 |                                                        | $      | 8.78                                                              |   |                                | 6.21   |   | $ | 5,054,421 |   |
| Granted                                         |   |                            | -       |                                                        |   | -                                                                 |   |                                | -      |   |   | - |   |
| Exercised                                       |   |                            | (19,739 | )                                                           |   | 4.87                                                              |   |                                | -      |   |   | - |   |
| Forfeited/Canceled                              |   |                            | (6,233  | )                                                           |   | 9.04                                                              |   |                                | -      |   |   | - |   |
| Outstanding                on June 30, 2006     |   |                            | 753,570 |                                                        | $      | 8.88                                                              |   |                                | 6.00   |   | $ | 4,995,360 |   |
|                                            |   |                            |    |                                                        |   |                                                              |   |                                |   |   |   |   |   |
| Exercisable                on June 30, 2006     |   |                            | 403,900 |                                                        | $      | 6.35                                                              |   |                                | 4.53   |   | $ | 3,695,187 |   |

----

| 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  |   |

* *

|                                           |   | Three                Months EndedJune                30,          |   | Six                Months EndedJune                30, |   |
|------------------------------------------------|--------|-------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                           |   | 2005                                                              |   | 2005                                                   |   |
| Net                income                      |   | *(dollars                in thousands, except per share amounts)* |
| As                reported                     |   | $                                                                 | 3,215  |                                                   | $      | 6,286 |   |
| Less                FAS 123 compensation costs |   |                                                              | 30     |                                                   |   | 84 |   |
| Pro                forma                       |   | $                                                                 | 3,185  |                                                   | $      | 6,202 |   |
|                                           |   |                                                              |   |                                                   |   |   |   |
| Net                income per common share     |   |                                                              |   |                                                   |   |   |   |
| Basic                                          |   |                                                              |   |                                                   |   |   |   |
| As                reported                     |   | $                                                                 | 0.27   |                                                   | $      | 0.53 |   |
| Pro                forma                       |   |                                                              | 0.26   |                                                   |   | 0.52 |   |
| Diluted                                        |   |                                                              |   |                                                   |   |   |   |
| As                reported                     |   | $                                                                 | 0.26   |                                                   | $      | 0.51 |   |
| Pro                forma                       |   |                                                              | 0.26   |                                                   |   | 0.50 |   |

----

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

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

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

**Selected      Financial Data**

|                                                                |   | At                or for thethree                monthsended                June 30, |   | At                or for the six                  months ended                    June 30, |   |
|---------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|
|                                                                |   | 2006                                                                                 |   | 2005                                                                                       |   | 2006 |   | 2005 |   |
| Return                on average assets                             |   |                                                                                 | 1.05   | %                                                                                          |   | 1.12 | % |   | 1.05 | % |   | 1.11 | % |
| Return                on average stockholders’ equity         |   |                                                                                 | 12.42  |                                                                                       |   | 13.27 |   |   | 12.23 |   |   | 13.04 |   |
| Average                stockholders’ equity to average assets |   |                                                                                 | 8.46   |                                                                                       |   | 8.45 |   |   | 8.55 |   |   | 8.52 |   |
| Other                expenses to average assets                     |   |                                                                                 | 1.91   |                                                                                       |   | 2.01 |   |   | 1.92 |   |   | 2.00 |   |
| Efficiency                ratio                                     |   |                                                                                 | 53.60  |                                                                                       |   | 53.39 |   |   | 53.89 |   |   | 53.46 |   |
| Average                interest-bearing assets to                   |   |                                                                                 |   |                                                                                       |   |   |   |   |   |   |   |   |   |
| average                interest-bearing liabilities                 |   |                                                                                 | 111.71 |                                                                                       |   | 111.71 |   |   | 111.81 |   |   | 111.75 |   |

----

**CHANGES      IN FINANCIAL CONDITION**

| *(Dollars                  in thousands)*                            |   | **JUNE                  30, 2006** |          |
|----------------------------------------------------------------------|--------|------------------------------------|---------------|
|    **Securities                  available-for-sale** |   |                               | AmortizedCost |   |   | Gross                  Unrealized                  GainsLess                  Than1                  Year |   |   | Gross                  Unrealized                  GainsMore                  Than1                  Year |   |   | Gross                  Unrealized                  LossesLess                  Than1                  Year |   |   | Gross                  Unrealized                  Losses                  More                  Than 1                  Year |   |   | Fair                  Value |   |
| MBS                                                                  |   | $                                  | 46,588        |   | $ | - |   | $ | 6 |   | $ | 239 |   | $ | 1,097 |   | $ | 45,258 |   |
| Agency                  notes                                        |   |                               | 95,793        |   |   | - |   |   | - |   |   | 933 |   |   | 3,738 |   |   | 91,122 |   |
|                                                                 |   | $                                  | 142,381       |   | $ | - |   | $ | 6 |   | $ | 1,172 |   | $ | 4,835 |   | $ | 136,380 |   |

|    **Securities                held-to-maturity** |   |    AmortizedCost |   | Gross                Unrealized                GainsLess                Than1                Year |   | Gross                Unrealized                GainsMore                Than1                Year |   | Gross                Unrealized                LossesLess                Than1                Year |   | Gross                Unrealized                Losses                More                Than 1                Year |   |    FairValue |   |
|------------------------------------------------------------------|--------|---------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
| MBS                                                              |   | $                               | 26,238 |                                                                                              | $      | -                                                                                                 |   | $                                                                                                  | 1      |                                                                                                                | $      | 114                         |   | $ | 1,563 |   | $ | 24,562 |   |
| Agency                notes                                      |   |                            | 70,845 |                                                                                              |   | -                                                                                                 |   |                                                                                               | -      |                                                                                                                |   | 556                         |   |   | 3,494 |   |   | 66,795 |   |
| Corporate/other                                                  |   |                            | 775    |                                                                                              |   | -                                                                                                 |   |                                                                                               | -      |                                                                                                                |   | -                           |   |   | - |   |   | 775 |   |
|                                                             |   | $                               | 97,858 |                                                                                              | $      | -                                                                                                 |   | $                                                                                                  | 1      |                                                                                                                | $      | 670                         |   | $ | 5,057 |   | $ | 92,132 |   |

| *(Dollars                  in thousands)*                            |   | **DECEMBER                  31, 2005** |          |
|----------------------------------------------------------------------|--------|----------------------------------------|---------------|
|    **Securities                  available-for-sale** |   |                                   | AmortizedCost |   |   | Gross                  Unrealized                  GainsLess                  Than1                  Year |   |   | Gross                  Unrealized                  GainsMore                  Than1                  Year |   |   | Gross                  Unrealized                  LossesLess                  Than1                  Year |   |   | Gross                  Unrealized                  Losses                  More                  Than 1                  Year |   |   | Fair                  Value |   |
| MBS                                                                  |   | $                                      | 47,847        |   | $ | 16 |   | $ | 14 |   | $ | 71 |   | $ | 383 |   | $ | 47,423 |   |
| Agency                  notes                                        |   |                                   | 95,822        |   |   | - |   |   | - |   |   | 2,258 |   |   | 391 |   |   | 93,173 |   |
|                                                                 |   | $                                      | 143,669       |   | $ | 16 |   | $ | 14 |   | $ | 2,329 |   | $ | 774 |   | $ | 140,596 |   |

|    **Securities                  held-to-maturity** |   |   | Amortized                  Cost |   |   | Gross                  Unrealized                  GainsLess                  Than1                  Year |   |   | Gross                  Unrealized                  GainsMore                  Than1                  Year |   |   | Gross                  Unrealized                  LossesLess                  Than1                  Year |   |   | Gross                  Unrealized                  Losses                  More                  Than 1                  Year |   |   | Fair                  Value |   |
|--------------------------------------------------------------------|--------|--------|---------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|------------------------------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------|--------|
| MBS                                                                |   | $      | 23,830                          |   | $      | -                                                                                                         |   | $      | 8                                                                                                         |   | $      | 188                                                                                                        |   | $      | 601                                                                                                                           |   | $      | 23,049                      |   |
| Agency                  notes                                      |   |   | 70,827                          |   |   | -                                                                                                         |   |   | -                                                                                                         |   |   | 376                                                                                                        |   |   | 1,845                                                                                                                         |   |   | 68,606                      |   |
| Corporate/other                                                    |   |   | 465                             |   |   | -                                                                                                         |   |   | -                                                                                                         |   |   | -                                                                                                          |   |   | -                                                                                                                             |   |   | 465                         |   |
|                                                               |   | $      | 95,122                          |   | $      | -                                                                                                         |   | $      | 8                                                                                                         |   | $      | 564                                                                                                        |   | $      | 2,446                                                                                                                         |   | $      | 92,120                      |   |

----

**Loan      Portfolio**

----

| **Types                  of Loans**             |   | June                  30, |    | %                  of |   | December                  31, |   | %                  of |    |
|-------------------------------------------------|--------|---------------------------|---------|-----------------------|--------|-------------------------------|--------|-----------------------|---------|
| *(Dollars                  in thousands)*       |   | 2006                      |    | Portfolio             |   | 2005                          |   | Portfolio             |    |
|                                            |   |                      |    |                  |   |                          |   |                  |    |
| Business                                        |   | $                         | 433,679 |                  |   | 45.3                          | %      | $                     | 394,034 |   |   | 44.8 | % |
| Real                  estate construction (net) |   |                      | 213,614 |                  |   | 22.3                          |   |                  | 165,957 |   |   | 18.8 |   |
| Commercial                  real estate         |   |                      | 139,178 |                  |   | 14.5                          |   |                  | 141,109 |   |   | 16.0 |   |
| Retail                                          |   |                      | 131,040 |                  |   | 13.7                          |   |                  | 127,589 |   |   | 14.5 |   |
| Multifamily                  real estate        |   |                      | 40,007  |                  |   | 4.2                           |   |                  | 52,057  |   |   | 5.9 |   |
| Total                  loans                    |   | $                         | 957,518 |                  |   | 100.0                         | %      | $                     | 880,746 |   |   | 100.0 | % |
| Deferred                  loan fees             |   |                      | (3,442  | )                     |   |                          |   |                  | (3,443  | ) |   |   |   |
| Loans                                           |   | $                         | 954,076 |                  |   |                          |   | $                     | 877,303 |   |   |   |   |

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

| *(Dollars                in thousands)* |   | June                30, |    | %                of |   | December                31, |   | %                of |    |
|-----------------------------------------|--------|-------------------------|---------|---------------------|--------|-----------------------------|--------|---------------------|---------|
|                                    |   | 2006                    |    | Deposits            |   | 2005                        |   | Deposits            |    |
| Checking                accounts        |   | $                       | 123,680 |                |   | 14.6                        | %      | $                   | 120,468 |   |   | 15.1 | % |
| Savings                & MMDA       |   |                    | 268,321 |                |   | 31.7                        |   |                | 196,790 |   |   | 24.8 |   |
| CDs                                     |   |                    | 453,710 |                |   | 53.7                        |   |                | 478,510 |   |   | 60.1 |   |
|                                    |   | $                       | 845,711 |                |   | 100.0                       | %      | $                   | 795,768 |   |   | 100.0 | % |

----

**Asset      Quality**

|                                                             |   | June                30, |   | December                31, |   |
|------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                             |   | 2006                    |   | 2005                        |   |
| Non-performing                loans to total assets              |   |                    | 0.03   | %                           |   | 0.16 | % |
| Non-performing                loans to total loans outstanding   |   |                    | 0.04   |                        |   | 0.23 |   |
| Non-performing                assets to total assets             |   |                    | 0.03   |                        |   | 0.17 |   |
| Allowance                for loan losses to non-performing loans |   |                    | 2,739  |                        |   | 516 |   |
| Allowance                for loan losses to total loans          |   |                    | 1.12   |                        |   | 1.16 |   |
| Net                charge-offs to total loans                    |   |                    | 0.01   |                        |   | 0.00 |   |

----

**RESULTS      OF OPERATIONS**

**General**

**Net      Interest Income**

|                                                  |   | At                  or for the         |   |
|-------------------------------------------------------|--------|----------------------------------------|--------|
|                                                  |   | three                  months ended    |   |
|                                                  |   | June                  30,              |   |
|                                                  |   | 2006                                   |   | 2005 |   |
|                                                  |   | (dollars                  in millions) |   |
| Average                  interest earning assets      |   | $                                      | 1,198  |   | $ | 1,082 |   |
| Average                  interest bearing liabilities |   |                                   | 1,072  |   |   | 968 |   |
| Yield                  on interest earning assets     |   |                                   | 6.76   | % |   | 6.17 | % |
| Cost                  of interest bearing liabilities |   |                                   | 3.94   |   |   | 3.11 |   |
| Net                  interest spread                  |   |                                   | 2.82   |   |   | 3.06 |   |
| Net                  interest margin                  |   |                                   | 3.24   |   |   | 3.38 |   |

----

**Provision        for Loan Losses**

**Other      Income**

**Other      Expense**

----

**Segment      Results **

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

|                                                                             |   |  BUSINESS |   | CONS-                TRUCTION |   | INCOME                PROPERTY |   |  RETAIL |   | ADMIN-                ISTRATION |   |  TOTAL |   |
|----------------------------------------------------------------------------------|--------|----------------|--------|-------------------------------|--------|--------------------------------|--------|--------------|--------|---------------------------------|--------|-------------|--------|
| Condensed                Income Statement                                        |   |           |   |                          |   |                           |   |         |   |                            |   |        |   |   |   |   |   |   |   |
| Net                interest income afterprovision                for loan losses |   | $              | 3,703  |                          | $      | 3,373                          |   | $            | 1,143  |                            | $      | 459         |   | $ | 710 |   | $ | 9,388 |   |
| Other                income                                                      |   |           | 121    |                          |   | 34                             |   |         | -      |                            |   | 1,108       |   |   | 310 |   |   | 1,573 |   |
| Other                expense                                                     |   |           | 309    |                          |   | 103                            |   |         | 104    |                            |   | 555         |   |   | 4,965 |   |   | 6,036 |   |
| Contribution                before overhead                                      |   |           | 3,515  |                          |   | 3,304                          |   |         | 1,039  |                            |   | 1,012       |   |   | (3,945 | ) |   | 4,925 |   |
| Support                transfer                                                  |   |           | 1,687  |                          |   | 920                            |   |         | 786    |                            |   | 552         |   |   | (3,945 | ) |   | — |   |
| Income                before provision forfederal                income tax      |   |           | 1,828  |                          |   | 2,384                          |   |         | 253    |                            |   | 460         |   |   | — |   |   | 4,925 |   |
| Provision                for federal                income taxes                 |   |           | 593    |                          |   | 774                            |   |         | 82     |                            |   | 149         |   |   | — |   |   | 1,598 |   |
| Net                income (loss)                                                 |   | $              | 1,235  |                          | $      | 1,610                          |   | $            | 171    |                            | $      | 311         |   | $ | — |   | $ | 3,327 |   |

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

|                                                                             |   |  BUSINESS |   | CONS-                TRUCTION |   | INCOME                PROPERTY |   |  RETAIL |   | ADMIN-                ISTRATION |   |  TOTAL |   |
|----------------------------------------------------------------------------------|--------|----------------|--------|-------------------------------|--------|--------------------------------|--------|--------------|--------|---------------------------------|--------|-------------|--------|
| Condensed                Income Statement                                        |   |           |   |                          |   |                           |   |         |   |                            |   |        |   |   |   |   |   |   |   |
| Net                interest income afterprovision                for loan losses |   | $              | 3,357  |                          | $      | 1,894                          |   | $            | 2,420  |                            | $      | 498         |   | $ | 732 |   | $ | 8,901 |   |
| Other                income                                                      |   |           | 2      |                          |   | 6                              |   |         | 391    |                            |   | 997         |   |   | 271 |   |   | 1,667 |   |
| Other                expense                                                     |   |           | 377    |                          |   | 112                            |   |         | 282    |                            |   | 588         |   |   | 4,417 |   |   | 5,776 |   |
| Contribution                before overhead                                      |   |           | 2,982  |                          |   | 1,788                          |   |         | 2,529  |                            |   | 907         |   |   | (3,414 | ) |   | 4,792 |   |
| Support                transfer                                                  |   |           | 1,258  |                          |   | 499                            |   |         | 1,111  |                            |   | 546         |   |   | (3,414 | ) |   | — |   |
| Income                before provision forfederal                income tax      |   |           | 1,724  |                          |   | 1,289                          |   |         | 1,418  |                            |   | 361         |   |   | — |   |   | 4,792 |   |
| Provision                for federal                income taxes                 |   |           | 567    |                          |   | 424                            |   |         | 467    |                            |   | 119         |   |   | — |   |   | 1,577 |   |
| Net                income (loss)                                                 |   | $              | 1,157  |                          | $      | 865                            |   | $            | 951    |                            | $      | 242         |   | $ | — |   | $ | 3,215 |   |

----

**For      the six months ended June 30, 2006**

|                                                                             |   |  BUSINESS |   | CONS-                TRUCTION |   | INCOME                PROPERTY |   |  RETAIL |   | ADMIN-                ISTRATION |   |  TOTAL |   |
|----------------------------------------------------------------------------------|--------|----------------|--------|-------------------------------|--------|--------------------------------|--------|--------------|--------|---------------------------------|--------|-------------|--------|
| Condensed                Income Statement                                        |   |           |   |                          |   |                           |   |         |   |                            |   |        |   |   |   |   |   |   |   |
| Net                interest income afterprovision                for loan losses |   | $              | 7,383  |                          | $      | 6,360                          |   | $            | 2,313  |                            | $      | 991         |   | $ | 1,612 |   | $ | 18,659 |   |
| Other                income                                                      |   |           | 165    |                          |   | 41                             |   |         | -      |                            |   | 2,078       |   |   | 613 |   |   | 2,897 |   |
| Other                expense                                                     |   |           | 631    |                          |   | 189                            |   |         | 189    |                            |   | 1,106       |   |   | 9,796 |   |   | 11,911 |   |
| Contribution                before overhead                                      |   |           | 6,917  |                          |   | 6,212                          |   |         | 2,124  |                            |   | 1,963       |   |   | (7,571 | ) |   | 9,645 |   |
| Support                transfer                                                  |   |           | 3,250  |                          |   | 1,674                          |   |         | 1,568  |                            |   | 1,079       |   |   | (7,571 | ) |   | — |   |
| Income                before provision forfederal                income tax      |   |           | 3,667  |                          |   | 4,538                          |   |         | 556    |                            |   | 884         |   |   | — |   |   | 9,645 |   |
| Provision                for federal                income taxes                 |   |           | 1,196  |                          |   | 1,480                          |   |         | 180    |                            |   | 289         |   |   | — |   |   | 3,145 |   |
| Net                income (loss)                                                 |   | $              | 2,471  |                          | $      | 3,058                          |   | $            | 376    |                            | $      | 595         |   | $ | — |   | $ | 6,500 |   |

**For      the six months ended June 30, 2005**

|                                                                             |   |  BUSINESS |   | CONS-                TRUCTION |   | INCOME                PROPERTY |   |  RETAIL |   | ADMIN-                ISTRATION |   |  TOTAL |   |
|----------------------------------------------------------------------------------|--------|----------------|--------|-------------------------------|--------|--------------------------------|--------|--------------|--------|---------------------------------|--------|-------------|--------|
| Condensed                Income Statement                                        |   |           |   |                          |   |                           |   |         |   |                            |   |        |   |   |   |   |   |   |   |
| Net                interest income afterprovision                for loan losses |   | $              | 7,164  |                          | $      | 3,527                          |   | $            | 4,426  |                            | $      | 903         |   | $ | 1,410 |   | $ | 17,430 |   |
| Other                income                                                      |   |           | 38     |                          |   | 10                             |   |         | 391    |                            |   | 1,967       |   |   | 861 |   |   | 3,267 |   |
| Other                expense                                                     |   |           | 769    |                          |   | 229                            |   |         | 528    |                            |   | 1,158       |   |   | 8,645 |   |   | 11,329 |   |
| Contribution                before overhead                                      |   |           | 6,433  |                          |   | 3,308                          |   |         | 4,289  |                            |   | 1,712       |   |   | (6,374 | ) |   | 9,368 |   |
| Support                transfer                                                  |   |           | 2,323  |                          |   | 897                            |   |         | 2,123  |                            |   | 1,031       |   |   | (6,374 | ) |   | — |   |
| Income                before provision forfederal                income tax      |   |           | 4,110  |                          |   | 2,411                          |   |         | 2,166  |                            |   | 681         |   |   | — |   |   | 9,368 |   |
| Provision                for federal                income taxes                 |   |           | 1,352  |                          |   | 793                            |   |         | 713    |                            |   | 224         |   |   | — |   |   | 3,082 |   |
| Net                income (loss)                                                 |   | $              | 2,758  |                          | $      | 1,618                          |   | $            | 1,453  |                            | $      | 457         |   | $ | — |   | $ | 6,286 |   |

**Liquidity      and Sources of Funds**

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**Capital      Resources**

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**Capital      Requirements**

| Core                capital                          |   | Amount |    | Percentage |   |
|------------------------------------------------------|--------|--------|---------|------------|--------|
| Tier                1 (Core) capital                 |   | $      | 110,476 |       |   | 8.91 | % |
| Less:                Minimum requirement             |   |   | 49,592  |       |   | 4.00 |   |
| Excess                                               |   | $      | 60,884  |       |   | 4.91 | % |
|                                                 |   |   |    |       |   |   |   |
| Risk-based                capital                    |   |   | Amount  |       |   | Percentage |   |
| Risk-based                capital                    |   | $      | 121,214 |       |   | 11.35 | % |
| Less:                Minimum requirement(1)          |   |   | 85,472  |       |   | 8.00 |   |
| Excess                                               |   | $      | 35,742  |       |   | 3.35 | % |
| *(1)**Based                on risk-weighted assets.* |   |   |    |       |   |   |   |

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

**ASSET/LIABILITY      MANAGEMENT**

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| **Type**   | **Percentage** |
|------------|----------------|
| Variable   | 30%            |
| Adjustable | 43%            |
| Fixed      | 27%            |

**Item      4 - Controls and Procedures**

**EVALUATION      OF DISCLOSURE CONTROLS AND PROCEDURES**

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**CHANGES      IN INTERNAL CONTROLS**

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

**Item      1. Legal Proceedings**

**Item      1A. Risk Factors**

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

| Issuer                Purchases of Equity Securities                                                                                                                                                                                                  |                          |                        |                                   |         |                                               |                               |                               |                                |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|-----------------------------|----------------------------------------|--------------|----------------------------------------------------|------------------------------------|------------------------------------|-------------------------------------|
|                                                                                                                                                                                                                                                  |                          |                        | **2005                PLAN**           |         | Total                Number                        |                               | Maximum                            |
|                                                                                                                                                                                                                                                  |                          |                        |                                   |         |                                               |                               | of                Shares Purchased |                                | Number                ofShares                that |
| Period                                                                                                                                                                                                                                                |                          | Total                Number |                                   | AveragePrice |                                               | as                Part of Publicly |                               | May                Yet be Purchased |
| Beginning                                                                                                                                                                                                                                             | Ending                        |                        | of                Shares Purchased (1) |         | Paid                per Share                 |                               | Announced Plan                |                                | Under                thePlan                (2) |
| April                1, 2006                                                                                                                                                                                                                          | April                30, 2006 |                        | -                                      |         | $        - |                               | -                                  |                                | 199,362 |
| May                1, 2006                                                                                                                                                                                                                            | May                31, 2006   |                        | 3,125                                  |         | $15.95                                             |                               | -                                  |                                | 199,362 |
| Total                                                                                                                                                                                                                                                 |                          |                        | 3,125                                  |         | $15.95                                             |                               | -                                  |                                | 199,362 |
|                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                  |
| 1)                During the period presented, there were 3,125 shares purchased, which                were                acquired at current market values as consideration for the exercise                of                fully vested options. |
| 2)                The 2005 Plan, announced in May 2005, ended on May 31, 2006.                                                                                                                                                                        |

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| Issuer                  Purchases of Equity Securities (continued)                                                                                                                                                                                               |                           |                           |                                     |                          |                                         |                                 |          |                                                   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|--------------------------------|------------------------------------------|-------------------------------|----------------------------------------------|--------------------------------------|---------------|--------------------------------------------------------|
|                                                                                                                                                                                                                                                             |                           | **2006                  PLAN** |                                     | Total                  Number |                                         | Maximum                              |
|                                                                                                                                                                                                                                                             |                           |                           |                                     |                          |                                         | of                  Shares Purchased |          | Number                  ofShares                  that |
| Period                                                                                                                                                                                                                                                           |                           | TotalNumber                    |                                     | AveragePrice                  |                                         | as                  Part of Publicly |          | May                  Yet be Purchased                  |
| Beginning                                                                                                                                                                                                                                                        | Ending                         |                           | of                  Shares Purchased (1) |                          | Paid                  perShare               |                                 | AnnouncedPlan |                                                   | Under                  thePlan                  (2) |
| June                  1, 2006                                                                                                                                                                                                                                    | June                  30, 2006 |                           | -                                        |                          | $                      - |                                 | -             |                                                   | 375,000 |
| Total                                                                                                                                                                                                                                                            |                           |                           | -                                        |                          | $                      - |                                 | -             |                                                   | 375,000 |
|                                                                                                                                                                                                                                                             |                           |                           |                                     |                          |                                         |                                 |          |                                                   |   |
| 1)                  During the period presented there were not 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**

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

| NOMINEE                           | FOR       | AGAINST/WITHHELD |
|-----------------------------------|-----------|------------------|
| Dwayne                R. Lane     | 8,035,129 | 164,454          |
| Dennis                R. Murphy   | 7,927,247 | 380,218          |
| Ronald                E. Thompson | 8,003,102 | 228,508          |
| G.                Brandt Westover | 8,044,036 | 146,640          |

**Item      5. Other information**

**Item      6. Exhibits**

| 3.1                  (i)   | Bylaws                  of Cascade Financial Corporation (Incorporated by reference to                  the                  Corporation’s Registration Statement on Form S-4 (File No.                  33-83200)).           |
|---------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2                  (ii)       | Amendment                  to the Bylaws of Cascade Financial Corporation (Incorporated by                  reference                  to the Corporation’s Form 8-K filed September 27, 2005 (File No.                  0-25286)). |
| 3.3                  (ii)  | Amended                  and restated Bylaws of Cascade Financial Corporation (Incorporated                  by                  reference to the Corporation’s Form 8-K filed March 29, 2006 (File No.                  0-25286)). |
| 31.1                            | Certifications                  of the Chief Executive Officer pursuant to Section 302 of the                  Sarbanes-Oxley Act                                                                                                    |
| 31.2                            | 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                                                                                                                                    |

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

**SIGNATURES**

|                                    |  **CASCADE FINANCIAL              CORPORATION** |
|-----------------------------------------|------------------------------------------------------|
|                                    |                                                 |
|                                    |                                                 |
|  August              4, 2006  | /s/              Lars H. Johnson                     |
|                                    | By:  Lars              H. Johnson,              |
|                                    |  Executive                Vice President        |
|                                    |  (Chief                Financial Officer)       |

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