**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-K**




þ  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
      the
      fiscal year ended December 31, 2006.





**OR**


** ̈** TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934


Commission
        file number 0-25286





**CASCADE
      FINANCIAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





Washington
            
            91-1661954(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer I.D. Number)2828
                Colby Avenue, Everett, Washington
            
            98201(Address
                of principal executive offices)
            
            (Zip
                Code)Registrant’s
                telephone number, including area code:
            
            (425)
                339-5500Securities
                registered pursuant to Section 12(b) of the Act:
            
            NoneSecurities
                registered pursuant to Section 12(g) of the Act:
            
            Common
                Stock, par value $0.01 per share





Indicate
      by
      check mark if
      the
      registrant is a well-known seasoned issuer as defined in Rule 405 of the
      Securities Act. YES  ̈  NO þ




Indicate
      by
      check mark if the registrant is not required to file reports pursuant to Section
      13 or Section 15(d) of the Act.  YES  ̈ NO þ




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding twelve months (or for such shorter period that the registrant was
      required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days. YES þ NO  ̈




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Act. (Check
      one): Large
      Accelerated Filer  ̈  Accelerated
      Filer þ  Non-Accelerated
      Filer  ̈




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


1




The
      aggregate market value of Common Stock held by non-affiliates of registrant
      at
      March 1, 2007 was $214.4 million (based on the last reported sale on such date).
      The number of shares of registrant’s Common Stock outstanding at March 1, 2007,
      was 12,112,560.




DOCUMENTS
      INCORPORATED BY REFERENCE





1.
            Portions
                of Annual Report to Stockholders for the year ended December 31,
                2006,
                including the Selected Financial Data and the Management Discussion
                and
                Analysis attached as Exhibit 13 (the “Annual Report”) (Part I, II &
                IV). 2.
            .Portions
                of registrant’s Definitive Proxy Statement for the Annual Meeting of
                Stockholders (the “Proxy Statement”) (Part
                III).




2


**Cascade
      Financial Corporation**


**FORM
      10-K**


**December
      31, 2006**





**TABLE
      OF CONTENTS**








**PART
                I**
            PageItem
                1.
            Business
            4Item
                1A.
            Risk
                Factors
            25Item
                1B.
            Unresolved
                Staff Comments
            26Item
                2.
            Properties
            27Item
                3.
            Legal
                Proceedings
            27Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            27**PART
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer of
                Purchases of Equity Securities
            28Item
                6.
            Selected
                Financial Data
            29Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation
            29Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            29Item
                8.
            Financial
                Statements and Supplementary Data
            29Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            30Item
                9A.
            Controls
                and Procedures
            30Item
                9B.
            Other
                Information
            31**PART
                III**Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            32Item
                11.
            Executive
                Compensation
            33Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            33Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            33Item
                14.
            Principal
                Accountant Fees and Services
            33**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            34


3


**FORWARD
      LOOKING STATEMENTS**




*In
      addition to historical information, this Form 10-K contains certain
      "forward-looking statements" within the meaning of the Private Securities
      Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the
      express purpose of availing Cascade Financial Corporation of the protections
      of
      the safe harbor provisions of the PSLRA. The forward-looking statements
      contained herein are subject to factors, risks and uncertainties that may cause
      actual results to differ materially from those projected.*




*The
      following items are among the factors that could cause actual results to differ
      materially from the forward-looking statements: higher than expected loan
      delinquency rates; general economic conditions, including their impact on
      capital expenditures; business conditions in the banking industry; recent world
      events and their impact on interest rates, businesses and customers; the
      regulatory environment; new legislation; vendor quality and efficiency; employee
      retention factors; rapidly changing technology and evolving banking industry
      standards; competitive standards; competitive factors, including increased
      competition with community, regional, and national financial institutions;
      fluctuating interest rate environments; and similar matters. Readers are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      reflect management's analysis only at the date of the statement. The Corporation
      undertakes no obligation to publicly revise or update these*  *forward-looking
      statements to reflect events or circumstances that arise after the date of
      this
      report. Readers should carefully review the risk factors described in this
      and
      other documents the Corporation files from time to time with the Securities
      and
      Exchange Commission. There can be no assurance that any of the strategies
      described in this Form 10-K will be implemented, or if implemented, achieve
      the
      amounts described or within the time periods currently estimated. Sentences
      containing words such as “may,” “will,” “expect,” “anticipate,” “believe,”
“estimate,” “should,” “projected,” or similar words may constitute such
      forward-looking statements.*




**Item
      1. Business**





General




Cascade
      Financial Corporation (the “Corporation”) is a bank holding company incorporated
      in the state of Washington that was formed in 1994. The consolidated entity
      includes the Corporation and its wholly owned subsidiaries. At December 31,
      2006, the Corporation’s wholly owned subsidiaries were Cascade Bank (“Cascade”
or the “Bank”), Cascade Capital Trust I, II, and III. The executive offices of
      the Corporation are located at 2828 Colby Avenue, Everett, Washington 98201.
      The
      telephone number is (425) 339-5500 and the website is www.cascadebank.com .
      Information on the website is not part of this Report.




The
      Bank
      has been serving the people of Snohomish and King Counties since 1916 when
      it
      was organized as a mutual savings and loan association. On September 15, 1992,
      the Bank completed its conversion from a federal mutual to a federal stock
      savings bank. In July 2001, the Bank converted from a federal stock savings
      bank
      to a Washington state commercial bank.




The
      Corporation was organized on August 18, 1994, for the purpose of becoming the
      holding company for Cascade Bank. The reorganization was completed on November
      30, 1994, on which date the Bank became the wholly-owned subsidiary of the
      Corporation, and the stockholders of the Bank became stockholders of the
      Corporation. Subsequent to the acquisition of Cascade, the primary activity
      of
      the Corporation has been holding the stock of the Bank. Accordingly, the
      information set forth in this report, including financial statements and related
      data, relates primarily to the Bank.




In
      July
      of 2001, the Corporation elected to be treated as a financial holding company
      under the supervision of the Federal Reserve Board. In May of 2003, the
      Corporation transferred its state of domicile from Delaware, which it had
      maintained since its formation as a holding company in 1994, to Washington.
      Following this conversion, the Corporation changed its fiscal year end from
      June
      30 to December 31 to align its reporting period with those of its commercial
      bank peers.




In
      June
      of 2004, the Corporation completed the acquisition of Issaquah Bancshares
      (“Issaquah”). Issaquah Bank, the only operating subsidiary of Issaquah, was
      merged into Cascade Bank.




The
      Corporation conducts its business from its main office in Everett, Washington,
      and eighteen other full-service offices in the greater Puget Sound Region.
      At
      December 31, 2006, the Corporation had total assets of $1.3 billion, total
      deposits of $855.4 million and stockholders’ equity of $115.2
      million.




The
      Bank,
      a full-service commercial bank, offers a wide range of products and services.
      The deposits of the Bank are insured by the Federal Deposit Insurance
      Corporation (“FDIC”), up to the limits specified by law.




4


Market
      Area




Headquartered
      in Everett, Washington, the Corporation serves its customers from nineteen
      full-service offices, twelve in Snohomish County and seven in King County.
      Located in the center of the western Washington region, Snohomish and King
      counties have experienced significant growth in recent years. The rebound in
      commercial aircraft orders and the success of Boeing’s new 787 has helped fuel
      an increase in economic activity in Snohomish County.




Our
      market area in King County includes the growing cities east of Seattle and
      Lake
      Washington. This area’s economy has been dominated by Microsoft and the Boeing
      Company, with other high technology companies playing an important role. The
      housing market has been particularly strong due to population growth in the
      region and the lack of affordable housing within Seattle itself.




Everett
      is the homeport of the Navy’s carrier battle ship, the USS Abraham Lincoln. The
      contribution that the Navy makes to the economy is not as dependent on other
      trends. The economy in the Corporation’s market area has become more dependent
      upon the health care and biotechnology industries. Snohomish County and
      Northeast King County are home to numerous biotechnology companies.




As
      a
      gateway to Asia, the Bank’s market area has also benefited from the expansion of
      world trade. Economic weakness in either the United States or Asia could reduce
      that trade. Such slowdowns in the international flow of goods and services
      could
      prove detrimental to the economy of the market area and potentially the quality
      of our loan portfolios.




Business
      Strategy




The
      Corporation’s business plan is to increase the Bank’s emphasis on commercial
      banking. The Corporation is pursuing the following strategies:




·
            Increasing
                the percentage of its assets consisting of business, construction,
                and
                commercial real estate loans with higher risk-adjusted returns, shorter
                maturities and rates more sensitive to interest rate
                fluctuations




·
            Increasing
                deposits by attracting lower cost transaction accounts (such as checking,
                savings and money market accounts) through an enhanced branch network,
                customer service center and online
                banking




·
            Maintaining
                cost-effective operations by efficiently offering products and
                services




·
            Maintaining
                its capital position at or above the “well-capitalized” (as defined for
                regulatory purposes) level




·
            Exploring
                prudent means to grow the business internally and through
                acquisitions




·
            Searching
                for additional sources of fee-based
                revenue




The
      primary objectives of these strategies are to: enhance shareholder value
      measured through increasing returns, and to increase the opportunity for quality
      earning asset growth, deposit generation, and fee-based income activities.
      However, the shift in emphasis to commercial banking does inherently contain
      additional risks (See “LOAN PORTFOLIO” below).




Competition




The
      Bank
      competes for both loans and deposits. The Puget Sound metropolitan area has
      a
      high density of financial institutions, including major national banks, several
      local community banks, and credit unions.




The
      Bank’s primary focus for loans is small to medium sized businesses, builders and
      developers, and real estate investors in the Puget Sound area. The major
      competitors for the Bank in these loan markets are large commercial and
      community banks. The large banks often compete on the basis of competitive
      pricing, while the community banks compete on the basis of local decision
      making, loan structuring flexibility, and promises of a higher level of service.
      The general pricing remains very intense as financial institutions scramble
      to
      meet their growth goals.




The
      Bank’s competitors for retail loans, which include residential real estate and
      consumer loans, are numerous, including banks, mortgage bankers, captive finance
      subsidiaries of automobile companies, etc. Cascade has made a conscious decision
      to de-emphasize consumer lending in that intense competition has led to very
      low
      margins combined with relatively high credit risk.




5


On
      the
      deposit side, geographic location is still the primary factor in choosing a
      bank
      for the checking account relationship. As a result, the Bank’s competition for
      checking deposits comes primarily from the large institutions with a broad
      network of locations. Online Banking continues to be an important convenience
      service to attract checking customers from larger banks. In addition, Cascade
      has made an arrangement with US Bank to allow customers to use US Bank ATMs
      without a surcharge. Community banks, savings institutions, as well as other
      non-banking financial institutions, provide the greatest competition for the
      various savings vehicles such as money market deposit accounts and certificates
      of deposit. Two de novo banks opened in Everett in the past year, which has
      added to an already intense level of pricing pressure for deposits.




In
      addition to competition from other banking institutions, the Bank continues
      to
      experience increased competition from non-banking companies such as credit
      unions, financial services companies and brokerage firms. Many credit unions,
      including a large one in Cascade’s market area, have expanded their eligible
      membership by amending their charters.




LOAN
      PORTFOLIO




*General.* The
      Bank
      originates business, real estate and consumer loans. Total loans, which are
      net
      of loans in process, equaled $1.0 billion at December 31, 2006. Total loans
      were adjusted by deferred loan fees and the allowance for loan losses for a
      net
      loan balance of $996.0 million. At December 31, 2006, $442.4 million or 43.8%
      of
      total loans consisted of business banking loans; $290.0 million or 28.7% were
      real estate construction loans; $119.3 million or 11.8% of loans consisted
      of
      commercial real estate; $27.7 million or 2.7% were consumer loans; $96.4 million
      or 9.5% of the Bank’s loans consisted of loans secured by one-to-four family
      residential properties; and $34.7 million or 3.5% consisted of multifamily
      loans. Total loans secured by first liens on residential real estate were $131.1
      million or 13.0% of total loans. The Bank sells almost all its 30 year
      fixed-rate loans and the vast majority of its 15 year fixed-rate loans in the
      secondary mortgage market. The Bank had non-mandatory forward commitments
      totaling $364,000 and $157,000 to sell loans into the secondary market at
      December 31, 2006, and December 31, 2005, respectively.




6


*Loan
      Portfolio Analysis.* The
      following table sets forth the Bank’s loan portfolio by type of loan and by type
      of collateral at the dates indicated.




At
                December 31,2006
            
            2005
            
            2004Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            Percent*(Dollars
                in thousands)*Type
                of LoanReal
                estate mortgageResidential(1)
            
            $
            96,350
            
            
            9.53
            %
            $
            95,429
            
            
            10.83
            %
            $
            105,975
            
            
            13.14
            %Multifamily
            
            
            34,719
            
            
            3.44
            
            
            52,057
            
            
            5.91
            
            
            92,372
            
            
            11.45Commercial
                real estate
            
            
            119,298
            
            
            11.81
            
            
            141,109
            
            
            16.02
            
            
            178,704
            
            
            22.15Construction
            
            
            289,993
            
            
            28.70
            
            
            165,957
            
            
            18.84
            
            
            107,431
            
            
            13.32Business
                banking
            
            
            442,391
            
            
            43.78
            
            
            394,034
            
            
            44.75
            
            
            292,117
            
            
            36.21Consumer(2)
            
            
            27,686
            
            
            2.74
            
            
            32,160
            
            
            3.65
            
            
            30,125
            
            
            3.73Total
                loans
            
            $
            1,010,437
            
            
            100.00
            %
            $
            880,746
            
            
            100.00
            %
            $
            806,724
            
            
            100.00
            %Less:Deferred
                loan fees, net
            
            
            3,434
            
            
            
            
            
            3,443
            
            
            
            
            
            2,695Allowance
                for loan losses
            
            
            10,988
            
            
            
            
            
            10,254
            
            
            
            
            
            9,563Total
                loans, net
            
            $
            996,015
            
            
            
            
            $
            867,049
            
            
            
            
            $
            794,466Type
                of CollateralReal
                estate mortgageOne-to-four
                family(3)
            
            $
            402,415
            
            
            39.83
            %
            $
            279,652
            
            
            31.76
            %
            $
            231,504
            
            
            28.70
            %Multifamily
            
            
            34,719
            
            
            3.44
            
            
            52,057
            
            
            5.91
            
            
            92,372
            
            
            11.45Commercial
                real estate
            
            
            119,298
            
            
            11.81
            
            
            141,109
            
            
            16.02
            
            
            178,704
            
            
            22.15Land
                loans
            
            
            5,094
            
            
            0.50
            
            
            6,007
            
            
            0.68
            
            
            3,546
            
            
            0.44Other
            
            
            448,911
            
            
            44.42
            
            
            401,921
            
            
            45.63
            
            
            300,598
            
            
            37.26Total
                loans
            
            $
            1,010,437
            
            
            100.00
            %
            $
            880,746
            
            
            100.00
            %
            $
            806,724
            
            
            100.00
            %Less:Deferred
                loan fees, net
            
            
            3,434
            
            
            
            
            
            3,443
            
            
            
            
            
            2,695Allowance
                for loan losses
            
            
            10,988
            
            
            
            
            
            10,254
            
            
            
            
            
            9,563Total
                loans, net
            
            $
            996,015
            
            
            
            
            $
            867,049
            
            
            
            
            $
            794,466At
                December 31,2003
            2002Percent
            
            
            Amount
            
            
            Amount
            
            
            PercentType
                of Loan
            
            *(Dollars
                in thousands)*Real
                estate mortgageResidential(1)
            
            $
            105,565
            
            
            18.30
            %
            $
            122,561
            
            
            22.04
            %Multifamily
            
            
            87,212
            
            
            15.12
            
            
            94,245
            
            
            16.96Commercial
                real estate
            
            
            83,856
            
            
            14.53
            
            
            63,108
            
            
            11.36Construction
            
            
            62,742
            
            
            10.87
            
            
            84,229
            
            
            15.16Business
                banking
            
            
            204,446
            
            
            35.43
            
            
            142,273
            
            
            25.60Consumer(2)
            
            
            33,163
            
            
            5.75
            
            
            49,331
            
            
            8.88Total
                loans
            
            $
            576,984
            
            
            100.00
            %
            $
            555,747
            
            
            100.00
            %Less:Deferred
                loan fees, net
            
            
            2,179
            
            
            
            
            
            2,198Allowance
                for loan losses
            
            
            7,711
            
            
            
            
            
            6,872Total
                loans, net
            
            $
            567,094
            
            
            
            
            $
            546,677




7




At
                December 31,2003
            
            2002Amount
            
            Percent
            
            Amount
            
            Percent*(Dollars
                in thousands)*Type
                of CollateralReal
                estate mortgageOne-to-four
                family(3)
            
            $
            190,168
            
            
            32.96
            %
            $
            241,805
            
            
            43.50
            %Multifamily
            
            
            87,212
            
            
            15.12
            
            
            94,245
            
            
            16.96Commercial
                real estate
            
            
            83,856
            
            
            14.53
            
            
            63,108
            
            
            11.36Land
                loans
            
            
            1,786
            
            
            0.31
            
            
            1,720
            
            
            0.31Other
            
            
            213,962
            
            
            37.08
            
            
            154,869
            
            
            27.87Total
                loans
            
            $
            576,984
            
            
            100.00
            %
            $
            555,747
            
            
            100.00
            %Less:Deferred
                loan fees, net
            
            
            2,179
            
            
            
            
            
            2,198Allowance
                for loan losses
            
            
            7,711
            
            
            
            
            
            6,872Total
                loans, net
            
            $
            567,094
            
            
            
            
            $
            546,677




*(1)*  *Includes
      construction loans converted to permanent loans and land loans*


*(2)*  *Includes
      home equity loans and home equity lines of credit (“HELOC”)*


*(3)*  *Includes
      residential home equity loans, HELOC’s and construction loans*







At
      December 31, 2006, deferred fees were $3.4 million and the allowance for loan
      losses was $11.0 million.




*Business
      Banking Loans.* Business
      banking loans increased from $394.0 million at December 31, 2005, to $442.4
      million at December 31, 2006. Unsecured business banking loans totaled $22.3
      million at December 31, 2006, compared to $13.2 million as of December 31,
      2005.
      The Bank’s business banking loan portfolio consists primarily of commercial
      business loans to small and medium sized businesses operating in Snohomish
      and
      King counties. These loans are generally secured by real estate, receivables,
      equipment, other assets of the business and personal property, and the personal
      guarantee of the borrower. These loans typically have variable-rate terms or
      fixed-rates with maturities of up to five years. The Bank also offers secured
      and unsecured operating Lines of Credit. Business banking loans are underwritten
      by the Bank on the basis of the borrower's cash flow, ability to service debt
      from earnings, and the underlying collateral value. The borrower is generally
      required to provide the Bank with financial statements, tax returns, current
      financial information on any and all guarantors, and other reports that show
      trends in their financial condition; and to update this information annually.
      Business banking loans also include owner occupied real estate loans with terms
      comparable to the Bank’s commercial real estate loans. In addition, as the
      business banking activity increases, the Bank expects to expand its lower cost
      deposit franchise through the growth of commercial checking as a source of
      funding.




Business
      banking loans are inherently sensitive to conditions in the economy. The
      collateral securing these loans may depreciate over time, may be difficult
      to
      appraise and may fluctuate in value based on the success of the business. In
      the
      case of loans secured by accounts receivable, the availability of funds for
      the
      repayment of such loans may be substantially dependent on the ability of the
      borrower to collect amounts due from its customers. Accordingly, the repayment
      of a business loan depends primarily on the successful operation of the
      borrower's business and creditworthiness of the borrower (and any guarantors),
      while liquidation of collateral is a secondary and potentially insufficient
      source of repayment.




*Construction
      Loans.* The
      Bank
      originates construction loans to fund the building of one-to-four family homes
      either to borrowers as custom construction loans or to builders as speculative
      construction loans. Construction loans generally have maturities of 12-18
      months. The interest rates charged on construction loans are typically indexed
      to the prime rate and vary depending on the characteristics of the loan,
      particularly the credit risk inherent in the project and/or the financial
      strength of the borrower. All construction loans require approval by various
      levels of Bank personnel, depending on the size of the loan. The Bank has
      increased its construction loan portfolio because these loans have relatively
      high margins, floating interest rates and short-term maturities. The
      historically strong housing market in the Puget Sound Area has made construction
      lending attractive. At December 31, 2006, and December 31, 2005,  the
      Corporation’s construction loans were $290.0 million or 28.7% of the total loan
      portfolio and $166.0 million or 18.8% of the total loan portfolio, respectively.
      The construction loans are net of loans in process of $99.9 million at December
      31, 2006, and $86.7 million at December 31, 2005. Of the total net construction
      loans, $284.2 million was to builders and developers, including $64.0 million
      for land acquisition and development, and $5.8 million was to individuals for
      custom home construction. The strength of the local housing market led to a
      rapid turnover in this portfolio as builders were able to quickly sell new
      homes. The Bank’s maximum outstanding commitment to one builder at December 31,
      2006 totaled $16.5 million involving one construction project, which is
      performing in accordance with the loan terms.




8


Construction
      loans may involve higher credit risks because loan funds are advanced upon
      the
      security of the project under construction that is of uncertain value before
      completion. The Bank’s risk of loss on a construction loan is dependent largely
      upon the accuracy of the initial estimate of the property’s value at completion
      of construction or development and the estimated cost (including interest)
      of
      the construction. If the estimate of construction costs proves to be inaccurate,
      the Bank may be required to advance additional funds to complete the
      development. If upon completion of the project, the estimate of the
      marketability of the property is inaccurate, the borrower may be unable to
      sell
      the completed project in a timely manner or obtain adequate proceeds to repay
      the loan. Delays may arise from labor problems, material shortages and other
      unpredictable contingencies in completing the project. Furthermore, if the
      estimate of value of a completed project is inaccurate, the Bank may be
      confronted with a project with a value that is insufficient to assure full
      repayment.  As
      a
      result, these loans may involve the disbursement of substantial funds with
      repayment dependent, in part, on the success of the ultimate project rather
      than
      the ability of the borrower or guarantor to repay principal and
      interest.




*Commercial
      Real Estate Loans.* Commercial
      real estate loans totaled $119.3 million or 11.8% of the Bank’s total loans at
      December 31, 2006, compared to $141.1 million or 16.0% of the portfolio at
      December 31, 2005. All commercial real estate loans are secured by properties
      in
      western Washington, mainly in the Puget Sound Region. Improved property
      including office buildings and small commercial business properties, such as
      strip shopping centers, secure the Bank’s commercial real estate loans. These
      loans are primarily adjustable-rate with a maximum term until reset on the
      interest rate of five years. At December 31, 2006, the largest commercial real
      estate loan in the Bank’s portfolio was $8.5 million, which was performing
      according to its terms at that date.




Commercial
      real estate loans are also sensitive to local economic conditions. An economic
      recession can lead to increased vacancies that would lower the borrower’s
      ability to service the debt. Commercial real estate loans also have a degree
      of
      interest rate risk in that if rates fall, borrowers may refinance, and if rates
      rise, the Bank could experience a squeeze on net interest margin if the Bank
      does not properly fund these loans, which often have a fixed-rate for the
      initial five years of the loan.




*Multifamily
      Loans.* Multifamily
      loans totaled $34.7 million or 3.5% of the total loan portfolio at December
      31,
      2006. The multifamily portfolio is principally comprised of small to medium-size
      apartment projects with loan-to-value ratios usually up to 75%. All new loan
      originations are in the Puget Sound Region and have adjustable interest
      rates.




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




*One-to-Four
      Family Residential Loans.* At
      December 31, 2006, residential loans totaled $96.4 million or 9.5% of the total
      loan portfolio. Residential lending consists primarily of first mortgage loans
      secured by single-family residential properties located principally in Snohomish
      and King Counties. The Bank originates both fixed-rate and adjustable-rate
      mortgages (“ARMs”) with maturities up to 30 years. ARM loans are generally held
      in the Bank’s portfolio. Newly originated ARMs have interest rates that adjust
      based on the One Year Constant Maturity Treasury Index after an initial
      fixed-rate period. Borrower demand for ARMs versus fixed-rate mortgage loans
      is
      a function of the level of interest rates, the shape of the yield curve, and
      the
      differences between the interest rates and loan fees offered for fixed-rate
      mortgage loans and the rates and loan fees for ARMs.




Fixed-rate
      residential loans are generally sold and the servicing released to one of the
      Bank’s correspondents. The loans are sold on a “best efforts” basis. The Bank no
      longer packages its loans to sell as mortgage-backed securities. The Bank had
      $311,000 in loans held for sale at December 31, 2006, and $539,000 in loans
      held
      for sale at December 31, 2005. Loans held for sale are not material and
      therefore the Bank does not include them as a separate line item on the balance
      sheet. The Bank has greatly reduced its emphasis on mortgage banking and
      mortgage lending in the past five years.




The
      Bank’s conforming residential loans meet the Federal Home Loan Mortgage
      Corporation's underwriting standards with respect to credit, borrower debt
      ratios and documentation. The Bank’s nonconforming residential loans are those
      that do not conform to agency underwriting guidelines, due to the size of the
      loan, as a result of credit histories, debt-to-income ratios, reliance on the
      borrower's stated income, non-owner occupied property, rural property, or other
      exceptions from agency guidelines.




9


*Consumer
      Loans.* The
      Bank’s consumer loan activities take three forms: home equity loans or Lines of
      Credit, installment loans, and visa card loans. Home equity loans are secured
      by
      a junior lien in priority on the borrower's home. Such loans may have a combined
      loan-to-value ratio of up to 90% of the value of the home securing the loan.
      Home equity loans are fixed amount loans, which may have fixed or floating
      interest rates. Home equity Lines of Credit can be drawn upon at any time by
      the
      customer up to a specific amount. These loans are at a floating-rate with a
      floor on that rate. The balance outstanding for both types of home equity loans
      decreased to $21.2 million at December 31, 2006, as compared to $24.3 million
      at
      December 31, 2005. At December 31, 2006 and December 31, 2005, the total amount
      of unused Lines of Credit were $24.0 million and $22.6 million, respectively.
      The second category of consumer loans are installment loans in which boats,
      automobiles, and recreational vehicles serve as collateral. This portfolio
      was
      $6.5 million at December 31, 2006, as compared to $7.9 million outstanding
      at
      December 31, 2005. Although boat loans total $1.8 million of the Bank’s
      installment loans at December 31, 2006, the Bank has significantly reduced
      its
      origination of boat loans. Since installment loans are secured by depreciating
      assets, any repossessed collateral for a defaulted loan is unlikely to provide
      an adequate source of repayment of the outstanding loan balance. The remaining
      deficiency often does not warrant further substantial collection efforts against
      the borrower. Consumer loan collections are dependent on the borrower’s
      continuing financial ability, and are more likely to be adversely affected
      by
      job loss, divorce, illness or personal bankruptcy.




The
      Loan Maturity Table




The
      following table sets forth information at December 31, 2006 regarding the dollar
      amount of loans maturing in the Bank’s portfolio based on their contractual
      terms to maturity, but does not include scheduled payments or potential
      prepayments. Loan balances do not include deferred loan fees. Construction
      loans
      are net of loans in process.




Due
                in one
              year
                or less
            
            Due
                in one
              to
                five years
            
            Due
                after
              five
                years
            
            Total
            
            With
                variable or
              adjustable
                rate
              (formaturities
              of
                more than
              one
                year)
            
            With
                fixed rate
              (for
                maturities
              of
                more than
              one
                year)*(Dollars
                in thousands)*Business
                banking
            
            $
            83,755
            
            $
            122,607
            
            $
            236,029
            
            $
            442,391
            
            $
            144,182
            
            $
            214,454Construction
            
            
            149,162
            
            
            97,574
            
            
            43,257
            
            
            289,993
            
            
            139,893
            
            
            938Commercial
                Real Estate
            
            
            5,056
            
            
            8,791
            
            
            105,451
            
            
            119,298
            
            
            113,072
            
            
            1,170Multifamily
            
            
            -
            
            
            2,024
            
            
            32,695
            
            
            34,719
            
            
            30,678
            
            
            4,041Consumer
            
            
            591
            
            
            7,992
            
            
            19,103
            
            
            27,686
            
            
            18,498
            
            
            8,597Residential
            
            
            1,721
            
            
            4,324
            
            
            90,305
            
            
            96,350
            
            
            85,022
            
            
            9,607




Asset
      Quality




Banking
      regulations require that each insured institution review and classify its assets
      regularly. In addition, bank examiners have the authority to identify problem
      assets and, if appropriate, require them to be adversely classified. There
      are
      three classifications for problem assets: substandard, doubtful and loss.
      Substandard assets must have one or more defined weaknesses and are
      characterized by the distinct possibility that the insured institution will
      sustain some loss if the deficiencies are not corrected. Doubtful assets have
      sufficient weaknesses that make collection or payment in full, based on
      currently existing facts, conditions and values, questionable. There is a high
      possibility of loss. An asset classified “loss” is considered uncollectible and
      of such little value that its continuance as an asset of the institution is
      not
      warranted. Assets classified as “substandard” or “doubtful” require the
      institution to establish allowances for loan losses. If an asset, or portion
      thereof, is classified loss, the insured institution must either establish
      specific allowances for loan losses in the amount of 100% of the portion of
      the
      asset classified loss or charge-off such amounts. The Bank uses two other asset
      classification categories for potential problem loans. They are watch and
      special mention. Borrowers with declining earnings, strained cash flow,
      increasing leverage and/or weakening market fundamentals that indicate above
      average risk are classified as watch. Loans on special mention represent
      borrowers who exhibit potential credit weaknesses or trends deserving Bank
      management’s close attention.




10


Cascade
      established the Credit Administration Division in 2001, to help assure that
      the
      Bank maintains the quality of its loan portfolio. Management has comprehensive
      monthly and annual review procedures for identifying and classifying assets
      for
      weaknesses. Reserves are maintained for assets classified as substandard or
      doubtful. The objective of these review procedures is to identify any trends
      and
      determine the levels of loss exposure to evaluate the need for an adjustment
      to
      the reserve accounts.




*Delinquencies.* A
      report
      containing delinquencies of all loans is reviewed monthly by the Asset Review
      Committee and periodically by the Board of Directors. Procedures taken with
      respect to delinquent loans differ depending on the particular circumstances
      of
      each loan. The Bank’s general procedures provide that when a loan becomes
      delinquent, the borrower is contacted, usually by phone, within 15 to 30 days.
      When the loan is over 30 days delinquent, the borrower is usually contacted
      in
      writing. Typically, the Bank will initiate foreclosure or other corrective
      action against the borrower when principal and interest become 90 days or more
      delinquent. In any event, interest income is reduced by the full amount of
      accrued and uncollected interest on loans once they become 90 days delinquent,
      go into foreclosure or are otherwise determined to be uncollectible. Once
      interest has been paid to date or management considers the loan fully
      collectable, it is returned to accrual status. An allowance for loss is
      established when, in the opinion of management, the fair value less sales costs
      of the property collateralizing the loan is less than the outstanding principal
      and the collectibility of the loan’s principal becomes uncertain. It is intended
      that the Bank’s allowance for loan losses be adequate to cover known potential
      and reasonably estimated unknown losses. At December 31, 2006 and December
      31,
      2005, the Bank had $851,000 and $2.0 million, respectively, of loans accounted
      for on a non-accrual basis.




Allowance
      for Loan Losses/Nonperforming Loans




Management
      provides for possible loan losses by maintaining an allowance. The level of
      the
      allowance is determined based upon judgments regarding the size and nature
      of
      the loan portfolio, historical loss experience, the financial condition of
      borrowers, the level of nonperforming loans, and anticipated general economic
      conditions. Additions to the allowance are charged to expense. Loans are charged
      against the allowance when management believes the collection of principal
      is
      unlikely. Increases in the allowance for loan losses made through provisions
      were primarily a result of loan growth, awareness of the greater risk inherent
      in business lending and the impact of the economic climate on the loan
      portfolio.




Management
      measures the reasonableness of the allowance for loan losses by utilizing a
      loan
      grading system to determine risk in the loan portfolio and by considering the
      results of credit reviews. The loan portfolio is separated by quality and then
      by loan type. Loans of acceptable quality are evaluated as a group, by loan
      type, with a loss rate assigned to the total loans in each type, but unallocated
      to any individual loan. Adversely classified loans may be individually analyzed
      to determine an estimated loss amount. A loss rate is also assigned to these
      adversely classified loans, but at a higher rate due to the greater risk of
      loss. Past due and impaired loans are actively managed to minimize the potential
      loss. Although management has allocated a portion of the allowance to the loan
      categories using the method described above, the adequacy of the allowance
      must
      be considered as a whole. Loan concentrations, quality, terms, and basic
      underlying assumptions remained substantially unchanged during the
      period.


11


The
      following table presents information with respect to the Bank’s nonperforming
      assets and restructured loans at the dates indicated.




December
                31,2006
            
            2005
            
            2004*(Dollars
                in thousands)*Nonperforming
                loans:Commercial
                loansBusiness
                banking
            
            $
            731
            
            $
            958
            
            $
            —Commercial
                real
                estate
            
            
            —
            
            
            842
            
            
            488731
            
            
            1,800
            
            
            488Residential
            
            
            —
            
            
            187
            
            
            34Consumer
                loans
            
            
            120
            
            
            —
            
            
            10Total
                nonperforming loans
            
            
            851
            
            
            1,987
            
            
            532Other
                real estate and repossessed assets
            
            
            —
            
            
            101
            
            
            868Total
                nonperforming assets
            
            $
            851
            
            $
            2,088
            
            $
            1,400Restructured
                loans
            
            $
            115
            
            $
            1,467
            
            $
            95Total
                nonperforming loans to net loans
            
            
            0.08
            %
            
            0.23
            %
            
            0.07
            %Total
                nonperforming loans to total assets
            
            
            0.06
            
            
            0.16
            
            
            0.05Total
                nonperforming assets to total assets
            
            
            0.06
            
            
            0.17
            
            
            0.13




The
      Bank’s nonperforming assets at December 31, 2006, consisting of nonperforming
      loans and other real estate owned, totaled $851,000 or 0.06% of total assets.
      This is a decrease from $2.1 million or 0.17% of total assets at December 31,
      2005, and a decrease from $1.4 million or 0.13% of total assets at December
      31,
      2004.




Loans
      are
      generally placed on non-accrual when they become past due over 90 days or when
      the collection of interest or principal is considered unlikely. Loans past
      due
      over 90 or 120 days, that are not on non-accrual status, must be well secured
      by
      tangible collateral and in the process of collection. The Bank does not return
      a
      loan to accrual status until it is brought current with respect to both
      principal and interest and future principal and interest payments are no longer
      in doubt.




Nonperforming
      loans decreased to $851,000 at December 31, 2006, compared to $2.0 million
      at
      December 31, 2005, and $532,000 at December 31, 2004. The decrease in
      nonperforming loans from December 31, 2005, to December 31, 2006, is due to
      decreases in nonperforming commercial loans. Management believes that the
      allowance for losses on loans is adequate to provide for losses that may be
      incurred on nonperforming loans.




Other
      real estate owned includes property acquired by the Bank through foreclosure.
      Other real estate is carried at the lower of the estimated fair value or the
      principal balance of the foreclosed loans. Nonperforming other real estate
      and
      repossessed assets was $0 at December 31, 2006, $101,000 at December 31, 2005,
      and $868,000 at December 31, 2004.




Interest
      income that would have been recognized for the years ended December 31, 2006,
      December 31, 2005, and December 31, 2004, had non-accrual loans been current
      in
      accordance with their contractual terms, amounted to $27,175, $81,500, and
      $2,000, respectively.




12


The
      following
      tables set forth information regarding changes in the Bank’s allowance for loan
      losses for the most recent five years.


Years
                  Ended December 31,*(Dollars
                  in thousands)*
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003
              
              
              2002Balance
                  at beginning of period
              
              $
              10,254
              
              $
              9,563
              
              $
              7,711
              
              $
              6,872
              
              $
              6,304Issaquah
                  Bank balance at June 2004
              
              
              -
              
              
              -
              
              
              1,395
              
              
              -
              
              
              -Charge-OffsBusiness
                  banking
              
              
              47
              
              
              1
              
              
              310
              
              
              295
              
              
              1,028Commercial
                  real estate
              
              
              -
              
              
              -
              
              
              -
              
              
              95
              
              
              -Residential
              
              
              -
              
              
              116
              
              
              34
              
              
              59
              
              
              249Consumer
                  and other
              
              
              367
              
              
              403
              
              
              97
              
              
              302
              
              
              164Recoveries:
              
              
              (148
              )
              
              (266
              )
              
              (223
              )
              
              (315
              )
              
              (114
              )Net
                  charge-offs (recoveries):
              
              
              266
              
              
              254
              
              
              218
              
              
              436
              
              
              1,327Provision
                  for loan losses
              
              
              1,000
              
              
              945
              
              
              675
              
              
              1,275
              
              
              1,895Balance
                  at end of period
              
              
              10,988
              
              
              10,254
              
              
              9,563
              
              
              7,711
              
              
              6,872Average
                  total loans outstanding
              
              $
              955,692
              
              $
              854,684
              
              $
              691,372
              
              $
              565,453
              
              $
              566,302Ratio
                  of net charge-offs during the period to average loans
                  outstanding
              
              
              0.03
              %
              
              0.03
              %
              
              0.03
              %
              
              0.08
              %
              
              0.23
              %Ratio
                  of allowance for loan losses to average loans outstanding
              
              
              1.15
              
              
              1.2
              
              
              1.38
              
              
              1.36
              
              
              1.21Ratio
                  of all to total loans outstanding
              
              
              1.09
              
              
              1.16
              
              
              1.19
              
              
              1.34
              
              
              1.24




A
      material estimate that is particularly susceptible to significant change relates
      to the determination of the allowance for losses on loans and the valuation
      of
      real estate acquired in connection with foreclosures or in satisfaction of
      loans. In connection with the determination of the estimated losses on loans
      and
      foreclosed assets held for sale, management obtains independent appraisals
      for
      significant properties.




While
      management uses available information to recognize losses on loans, further
      reductions in the carrying amounts of loans may be necessary based on changes
      in
      local economic conditions. In addition, regulatory agencies, as an integral
      part
      of their examination process, periodically review the estimated losses on loans.
      Such agencies may require the Bank to recognize additional losses based on
      their
      judgment about information available to them at the time of their examination.




Certain
      loans may meet the criteria of troubled debt restructuring as defined in
      Statement of Financial Accounting Standards (“SFAS”) No. 114 and No. 118,
“ *Accounting
      by Creditors for Impairment of a Loan,”* and
“ *Accounting
      by Creditors for Impairment of a Loan-Income Recognition and
      Disclosures,”* respectively.




The
      following tables set forth information concerning the Bank’s allocation of the
      allowance for loan losses and the percentage of loans by category at the dates
      indicated.


December
                  31,2006
              
              2005
              
              2004*(Dollars
                  in thousands)*
              
              Amount
              
              %*
              
              Amount
              
              %*
              
              Amount
              
              %*Business
                  banking
              
              $
              7,221
              
              
              43.78
              %
              $
              5,773
              
              
              44.75
              %
              $
              4,181
              
              
              36.21
              %Commercial
                  real estate
              
              
              2,159
              
              
              11.81
              
              
              3,020
              
              
              16.02
              
              
              583
              
              
              22.15Residential
              
              
              255
              
              
              9.53
              
              
              337
              
              
              10.83
              
              
              432
              
              
              13.14Multifamily
              
              
              271
              
              
              3.44
              
              
              275
              
              
              5.91
              
              
              616
              
              
              11.45Real
                  estate construction
              
              
              194
              
              
              28.7
              
              
              543
              
              
              18.84
              
              
              1,295
              
              
              13.32Consumer
                  and other
              
              
              605
              
              
              2.74
              
              
              306
              
              
              3.65
              
              
              513
              
              
              3.73Unallocated
              
              
              283
              
              
              -
              
              
              -
              
              
              -
              
              
              1,943
              
              
              -Total
                  allowance for loan losses
              
              $
              10,988
              
              
              100.00
              %
              $
              10,254
              
              
              100.00
              %
              $
              9,563
              
              
              100.00
              %




**
      Percent of loans in each category to total loans.*




13


The
      provision for loan losses for the year ended December 31, 2006, totaled $1.0
      million compared to $945,000 for the year ended December 31, 2005, and $675,000
      for the year ended December 31, 2004. The
      increase in the provision for loan losses for the twelve-month period ended
      December 31, 2006, was due to the increase in total loans and an equal amount
      of
      net charge-offs during the two years. Adversely classified loans decreased
      to
      $ 9.4 million
      at December 31, 2006, from $18.0 million at December 31, 2005.




ASSET
      AND LIABILITY MANAGEMENT ACTIVITIES




The
      Bank’s Asset/Liability Management Committee (ALCO) has the responsibility to
      measure and monitor interest rate risk, liquidity, and capital adequacy. The
      Bank uses a variety of tools to measure, monitor, and manage interest rate
      risk.
      The Audit and Finance Committee of the Board of Directors reviews the interest
      rate risk management activities of the Bank on a regular basis and has
      established policies and guidelines on the amount of risk deemed appropriate.
      The Bank’s net interest income and the fair value of its capital are measured
      under different interest rate scenarios. The Board, through the Asset/Liability
      Management Policy, has established targets for the maximum negative impact
      that
      changes in interest rates have on the Bank’s net interest income, the fair value
      of equity and adjusted capital/asset ratios under certain interest rate shock
      scenarios. Cascade uses a simulation model to measure rate risk and the impact
      on net interest income, the fair value of equity, and the fair value
      capital/asset ratio. In general, the Bank seeks to manage its rate risk through
      its balance sheet. The Bank focuses on originating more interest rate sensitive
      assets, such as variable-rate loans, while reducing its long-term, fixed-rate
      assets through the sale of long-term residential mortgages in the secondary
      market. The vast majority of the loans that the Bank keeps in its portfolio
      have
      rate repricing periods of five years or less. The Bank often uses FHLB advances
      to fund its intermediate term assets. Cascade also uses repurchase agreements
      to
      provide inexpensive funding.




Using
      standard interest rate shock methodology (an instantaneous uniform change in
      interest rates at all maturities), the Bank is well within the guidelines
      established by the Board of Directors for the changes in fair value of equity
      and the adjusted capital/asset ratios. The Bank’s fair value of equity decreases
      16.6% in an up 200 bp shock scenario and 5.3% in a down 200 bp shock, within
      the
      established guideline of a maximum 30% decline. The adjusted capital/asset
      ratio
      is 10.1% in the up 200 bp scenario and 10.95% in the down 200 bp scenario,
      both
      above the 5% minimum established guideline. The net interest income decreases
      5.3% in the up 200 bp scenario and 1.6% in the down 200 bp shock scenario well
      within the guideline of a 10% decline.




To
      manage
      the rate risk in the investment portfolio, limits have been established on
      the
      final maturity of securities and limits have been initiated on the price
      volatility of mortgage-backed securities (MBS) (including collateralized
      mortgage obligations (CMOs)). Additionally, the Bank extends the maturities
      of
      its liabilities by offering long-term deposit products to customers, and
      obtaining longer term FHLB advances. As of December 31, 2006, all of the $243.0
      million in advances had original maturities greater than one year and $211.0
      million have remaining maturities greater than one year.




The
      Bank
      has used interest rate swaps to control the amount of its interest rate risk.
      Currently, the Bank has $10.0 million in notional principal swaps used to hedge
      certificates of deposit. In December 2006, the Bank terminated its $10.0 million
      swap used to hedge its initial issuance of Trust Preferred Securities when
      it
      became likely that the changes in the fair value of the swap would need to
      be
      marked to market through the income statement due to a change in the accounting
      interpretation.




Another
      major component of asset/liability management is liquidity management. The
      Board
      of Directors has also established liquidity parameters that seek to assure
      the
      Bank will have sufficient liquidity to meet all its customer needs for funding
      and/or deposit withdrawals. Liquidity levels are monitored by the ALCO with
      liquidity analysis reports presented to the Board on a regular basis. The ALCO
      also monitors and reports to the Board on the capital position of the Bank
      and
      the Corporation. Both seek to remain “well-capitalized” under FDIC and Federal
      Reserve guidelines.




The
      balance sheets and the section of Management’s Discussion and Analysis titled
“ Average
      Balances and an Analysis of Average Rates Earned and Paid” contained
      in the Annual Report are incorporated herein by reference.




*Rate/Volume
      Analysis.* The
      following table sets forth the effects of changing rates and volumes on net
      interest income of the Corporation. Information is provided with respect to
      (i)
      effects on interest income attributable to changes in volume (changes in volume
      multiplied by prior rate); (ii) effects on interest income attributable to
      changes in rate (changes in rate multiplied by prior volume); and (iii) changes
      in rate/volume mix (change in rate multiplied by change in volume).


14







Year
                Ended December 31,
            
            Year
                Ended December 31,2006
                Compared to Year Ended
              December
                31, 2005
              Increase
                (Decrease) Due to
            
            2005
                Compared to Year Ended
              December
                31, 2004
              Increase
                (Decrease) Due to*(Dollars
                in thousands)*Rate
            
            Volume
            
            Mix
            
            Net
            
            Rate
            
            Volume
            
            Mix
            
            NetInterest-earning
                assetsResidential
                loans(1)
            
            $
            58
            
            $
            (354
            )
            $
            (4
            )
            $
            (300
            )
            $
            (258
            )
            $
            (82
            )
            $
            3
            
            $
            (337
            )Multifamily
                loans(1)
            
            
            111
            
            
            (2,110
            )
            
            (47
            )
            
            (2,046
            )
            
            172
            
            
            (1,071
            )
            
            (31
            )
            
            (930
            )Commercial
                real estate loans(1)
            
            
            407
            
            
            (1,488
            )
            
            (55
            )
            
            (1,136
            )
            
            193
            
            
            2,808
            
            
            69
            
            
            3,070Construction
                loans(1)
            
            
            1,915
            
            
            6,114
            
            
            1,148
            
            
            9,177
            
            
            1,168
            
            
            2,854
            
            
            598
            
            
            4,620Consumer
                loans(1)
            
            
            192
            
            
            (91
            )
            
            (7
            )
            
            94
            
            
            4
            
            
            (47
            )
            
            —
            
            
            (43
            )Business
                banking loans(1)
            
            
            1,648
            
            
            5,670
            
            
            399
            
            
            7,717
            
            
            641
            
            
            6,115
            
            
            238
            
            
            6,994Total
                loans
            
            
            4,331
            
            
            7,741
            
            
            1,434
            
            
            13,506
            
            
            1,920
            
            
            10,577
            
            
            877
            
            
            13,374Securities
                available-for-sale
            
            
            486
            
            
            614
            
            
            53
            
            
            1,153
            
            
            (219
            )
            
            (921
            )
            
            30
            
            
            (1,110
            )Securities
                held-to-maturity
            
            
            87
            
            
            167
            
            
            2
            
            
            256
            
            
            (81
            )
            
            62
            
            
            (1
            )
            
            (20
            )Daily
                interest-earning deposits
            
            
            15
            
            
            (71
            )
            
            (3
            )
            
            (59
            )
            
            117
            
            
            48
            
            
            79
            
            
            244Total
                net change in income oninterest-earning
                assets
            
            $
            4,919
            
            $
            8,451
            
            $
            1,486
            
            $
            14,856
            
            $
            1,737
            
            $
            9,766
            
            $
            985
            
            $
            12,488Interest-bearing
                liabilitiesInterest-bearing
                deposits
            
            $
            8,905
            
            $
            497
            
            $
            860
            
            $
            10,262
            
            $
            4,538
            
            $
            1,853
            
            $
            764
            
            $
            7,155FHLB
                advances
            
            
            257
            
            
            (92
            )
            
            (3
            )
            
            162
            
            
            (944
            )
            
            1,508
            
            
            (134
            )
            
            430Other
                borrowings
            
            
            (603
            )
            
            3,158
            
            
            (987
            )
            
            1,568
            
            
            871
            
            
            (56
            )
            
            (43
            )
            
            772Total
                net change in expenses oninterest-bearing
                liabilities
            
            $
            8,559
            
            $
            3,563
            
            $
            (130
            )
            $
            11,992
            
            $
            4,465
            
            $
            3,305
            
            $
            587
            
            $
            8,357Net
                increase in net interestincome
            
            
            
            
            
            
            
            
            
            
            $
            2,864
            
            
            
            
            
            
            
            
            
            
            $
            4,131*(1)**D**oes
                not include interest on loans 90 days or more past due.*Year
                Ended December 31,2004
                Compared to Year Ended
              December
                31, 2003
              Increase
                (Decrease) Due toRate
            
            
            Volume
            
            
            Mix
            
            
            Net*(Dollars
                in thousands)*Interest-earning
                assetsResidential
                loans(1)
            
            $
            (873
            )
            $
            (406
            )
            $
            48
            
            $
            (1,231
            )Multifamily
                loans
            
            
            (733
            )
            
            317
            
            
            (37
            )
            
            (453
            )Commercial
                real estate loans
            
            
            (521
            )
            
            3,456
            
            
            (340
            )
            
            2,595Construction
                loans
            
            
            393
            
            
            632
            
            
            55
            
            
            1,080Consumer
                loans(1)
            
            
            —
            
            
            (533
            )
            
            —
            
            
            (533
            )Business
                banking loans(1)
            
            
            48
            
            
            4,958
            
            
            21
            
            
            5,027Total
                loans
            
            
            (1,686
            )
            
            8,424
            
            
            (253
            )
            
            6,485Securities
                available-for-sale
            
            
            (1,243
            )
            
            (1,442
            )
            
            195
            
            
            (2,490
            )Securities
                held-to-maturity
            
            
            (217
            )
            
            1,301
            
            
            (85
            )
            
            999Daily
                interest-earning deposits
            
            
            33
            
            
            (58
            )
            
            (17
            )
            
            (42
            )Total
                net change in income oninterest-earning
                assets
            
            $
            (3,113
            )
            $
            8,225
            
            $
            (160
            )
            $
            4,952Interest-bearing
                liabilitiesInterest-bearing
                deposits
            
            $
            (1,258
            )
            $
            1,616
            
            $
            (172
            )
            $
            186FHLB
                advances
            
            
            (504
            )
            
            838
            
            
            (41
            )
            
            293Other
                borrowings
            
            
            (205
            )
            
            (125
            )
            
            17
            
            
            (313
            )Total
                net change in expenses oninterest-bearing
                liabilities
            
            $
            (1,967
            )
            $
            2,329
            
            $
            (196
            )
            $
            166Net
                increase in net interestincome
            
            
            
            
            
            
            
            
            
            
            $
            4,786*(1)**D**oes
                not include interest on loans 90 days or more past due*.





15


INVESTMENT
      PORTFOLIO




The
      Board
      of Directors, through the Asset/Liability Management Policy, sets the investment
      policy of the Bank. This policy mandates that investments will be made based
      on
      the safety of the principal amount, interest rate risk, liquidity requirements
      of the Bank, and the return on the investment. The Bank’s policy does not permit
      the purchase of non-investment grade bonds. The policy permits the investment
      in
      various types of assets permissible under FDIC regulation including: United
      States Treasury obligations, securities of government sponsored enterprises,
      mortgage-backed securities (“MBS”) including collateralized mortgage obligations
      (“CMOs”), state and municipal government bonds, deposits at the FHLB-Seattle,
      certificates of deposit of federally insured institutions, investment grade
      corporate bonds, certain bankers’ acceptances and federal funds. Subject to
      various restrictions, the Bank may also invest part of its assets in commercial
      paper and mutual funds, if those assets conform to FDIC regulations.




Investment
      securities decreased 3% to $239.4 million at December 31, 2006, from $247.6
      million at December 31, 2005. The proceeds from the repayment of securities
      were
      put into loans. MBS
      (including CMOs) available-for-sale decreased from $47.4 million to $38.0
      million as of December 31, 2006. Agency notes available-for-sale also decreased
      from $93.2 million to $93.0 million. MBS (including CMOs) held-to-maturity
      increased from $23.8 million to $25.2 million as of December 31, 2006. Agency
      notes held-to-maturity increased from $70.8 million to $70.9 million for the
      year ended December 31, 2006.




The
      following tables set forth the
      Bank ’s
      securities available-for-sale at the dates indicated.




December
                31, 2006
            
            December
                31, 2005
            
            December
                31, 2004Estimated
            
            Percent
                of
            
            Estimated
            
            Percent
                of
            
            Estimated
            
            Percent
                of*(Dollars
                in thousands)*
            
            Fair
                Value
            
            Portfolio
            
            Fair
                Value
            
            Portfolio
            
            Fair
                Value
            
            PortfolioMBS
            
            $
            37,747
            
            
            26.48
            %
            $
            47,423
            
            
            31.09
            %
            $
            42,522
            
            
            34.22
            %Agency
                notes
            
            
            92,909
            
            
            65.16
            
            
            93,173
            
            
            61.09
            
            
            69,882
            
            
            56.23FHLB
                stock
            
            
            11,920
            
            
            8.36
            
            
            11,920
            
            
            7.82
            
            
            11,872
            
            
            9.55Corporate/other
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            142,576
            
            
            100.00
            %
            $
            152,516
            
            
            100.00
            %
            $
            124,276
            
            
            100.00
            %







The
      following table sets forth the contractual or expected maturities and weighted
      average yields of the Bank’s securities available-for-sale at December 31,
      2006.




Less
                Than One Year
            
            One
                to Five Years
            
            Five
                to Ten Years
            
            Over
                Ten YearsEstimated
            
            
            
            Estimated
            
            
            
            Estimated
            
            
            
            Estimated*(Dollars
                in thousands)*
            
            Fair
                Value
            
            Yield
            
            Fair
                Value
            
            Yield
            
            Fair
                Value
            
            Yield
            
            Fair
                Value
            
            YieldMBS
            
            $
            1,462
            
            
            6.25
            %
            $
            28,630
            
            
            5.68
            %
            $
            5,841
            
            
            5.14
            %
            $
            1,814
            
            
            5.41
            %Agency
                notes
            
            
            -
            
            
            -
            
            
            47,125
            
            
            4.47
            
            
            45,729
            
            
            5.03
            
            
            55
            
            
            -FHLB
                stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            11,920
            
            
            -Corporate/other
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            1,462
            
            
            
            
            $
            75,755
            
            
            
            
            $
            51,570
            
            
            
            
            $
            13,789







The
      following table sets forth amortized cost and estimated fair values for the
      Bank’s securities held-to-maturity at the dates indicated.




December
                31, 2006
            
            December
                31, 2005
            
            December
                31, 2004Amortized
            
            Fair
            
            %
                of
            
            Amortized
            
            Fair
            
            %
                of
            
            Amortized
            
            Fair
            
            %
                of*(Dollars
                in thousands)*
            
            Cost
            
            Value
            
            Portfolio
            
            Cost
            
            Value
            
            Portfolio
            
            Cost
            
            Value
            
            PortfolioMBS
            
            $
            25,218
            
            $
            24,338
            
            
            26.04
            %
            $
            23,830
            
            $
            23,049
            
            
            25.02
            %
            $
            25,083
            
            $
            24,584
            
            
            27.45
            %Agency
                notes
            
            
            70,853
            
            
            68,423
            
            
            73.16
            
            
            70,827
            
            
            68,606
            
            
            74.47
            
            
            65,791
            
            
            64,506
            
            
            72.03Corporate/other
            
            
            775
            
            
            775
            
            
            00.80
            
            
            465
            
            
            465
            
            
            00.51
            
            
            465
            
            
            465
            
            
            00.52Total
            
            $
            96,846
            
            $
            93,536
            
            
            100.00
            %
            $
            95,122
            
            $
            92,120
            
            
            100.00
            %
            $
            91,339
            
            $
            89,555
            
            
            100.00
            %





16




The
      following table sets forth the contractual or expected maturities and weighted
      average yields of the Bank’s securities held-to-maturity at December 31,
      2006.




Less
                Than One Year
            
            One
                to Five Years
            
            Five
                to Ten Years
            
            Over
                Ten YearsEstimated
            
            
            
            Estimated
            
            
            
            Estimated
            
            
            
            Estimated*(Dollars
                in thousands)*
            
            Fair
                Value
            
            Yield
            
            Fair
                Value
            
            Yield
            
            Fair
                Value
            
            Yield
            
            Fair
                Value
            
            YieldMBS
            
            $
            -
            
            
            -
            %
            $
            -
            
            
            -
            %
            $
            24,338
            
            
            4.95
            %
            $
            -
            
            
            -
            %Agency
                notes
            
            
            -
            
            
            -
            
            
            15,717
            
            
            4.52
            
            
            17,390
            
            
            4.63
            
            
            35,316
            
            
            5.07Corporate/other
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            775
            
            
            8.22Total
            
            $
            -
            
            
            
            
            $
            15,717
            
            
            
            
            $
            41,728
            
            
            
            
            $
            36,091




For
      further information concerning the Bank’s securities portfolio, see Note 3 of
      the Notes to the Consolidated Financial Statements contained in the Annual
      Report listed in Item 15.




DEPOSITS




The
      Bank’s primary source of funds is customer deposits. In addition to checking
      accounts, the Bank offers a variety of interest-bearing accounts designed to
      attract both short-term and longer-term deposits from customers.
      Interest-bearing accounts earn interest at rates established by Bank management
      based on competitive market factors and the Bank’s need for funds.




Deposits
      increased to $855.4 million at December 31, 2006, from $795.8 million at
      December 31, 2005, an increase of 7.5% during this period. Deposits at December
      31, 2004 were $721.9 million. The market for retail deposits remains fiercely
      competitive. Previously, the Bank paid rates at the higher end of the
      competitive range of financial institutions in its market area. In an attempt
      to
      lower the absolute and relative cost of funds, the Bank modified its deposit
      pricing strategy by pricing its deposits in the middle of that
      range.




The
      following table sets forth the average balances for each major category of
      deposits and the weighted average interest rate paid for deposits during the
      years ended December 31, 2006, 2005, and 2004.




Average
                Deposits by TypeDecember
                31, 2006
            
            December
                31, 2005
            
            December
                31, 2004*(Dollars
                in thousands)*
            
            Amount
            
            Rate
            
            Amount
            
            Rate
            
            Amount
            
            RateNoninterest-bearing
                demand deposits
            
            $
            80,457
            
            
            —
            %
            $
            77,226
            
            
            —
            %
            $
            59,050
            
            
            —
            %Interest-bearing
                demand deposits
            
            
            45,039
            
            
            1.46
            
            
            39,618
            
            
            0.62
            
            
            29,562
            
            
            0.31Money
                market deposit
            
            
            229,788
            
            
            3.70
            
            
            170,641
            
            
            1.91
            
            
            145,626
            
            
            1.29Savings
            
            
            14,748
            
            
            0.51
            
            
            15,465
            
            
            0.44
            
            
            14,895
            
            
            0.29Time
                certificates
            
            
            446,437
            
            
            4.33
            
            
            467,388
            
            
            3.16
            
            
            401,620
            
            
            2.28$
            816,469
            
            
            
            
            $
            770,338
            
            
            
            
            $
            650,753







The
      following table indicates the amount of the Bank’s jumbo certificates of deposit
      by time remaining until maturity at December 31, 2006. Jumbo certificates of
      deposit require minimum deposits of $100,000 and rates paid on such accounts
      are
      negotiable.




Maturity
                Period
            
            Jumbo
                Certificates of Deposit*(Dollars
                in thousands)*Three
                months or less
            
            $
            69,797Over
                three through six months
            
            
            84,891Over
                six through twelve months
            
            
            74,864Over
                twelve months
            
            
            27,420Total
            
            $
            256,972




The
      flow
      of deposits is influenced significantly by general economic conditions, changes
      in the money market and prevailing interest rates. In addition, there is strong
      competition for customer dollars from other financial institutions, mutual
      funds
      and non-bank corporations, such as securities brokerage companies and other
      diversified companies. The Bank’s deposits are obtained primarily from the areas
      in which its branches are located. The Bank relies primarily on customer service
      and longstanding relationships with customers to attract and retain these
      deposits. In the coming year, the Bank will focus on its deposit gathering
      activities, especially the growth in demand deposits through its High
      Performance Checking program, which will also be offered to business customers
      beginning in 2007. In the event the Bank were liquidated, certain depositors
      would be entitled to full payment of their deposit accounts prior to any payment
      being made to the shareholders.


17


BORROWINGS




The
      Bank
      relies on advances from the Federal Home Loan Bank of Seattle (FHLB-Seattle)
      to
      supplement its supply of funds and to meet deposit withdrawal requirements.
      Advances from the FHLB-Seattle are typically secured by the Bank’s first
      mortgage residential loans, investment securities and other eligible mortgages
      secured by real estate. **** FHLB
      advances were $243.0 million at December 31, 2006, compared to $236.0 million
      at
      December 31, 2005, a 3.0% increase. FHLB advances were $228.0 million at
      December 31, 2004.




The
      Bank
      enters into repurchase agreements with its authorized dealers. Repurchase
      agreements are accounted for as borrowings by the Bank and are secured by
      designated investments, primarily the notes of federal agencies and
      mortgage-backed securities guaranteed by those agencies. The proceeds of these
      transactions are used to meet the cash flow and interest rate risk management
      needs of the Bank. Repurchase
      agreements increased to $95.7 million at December 31, 2006, from $51.1 million
      at December 31, 2005.




Cascade
      Bank has established Fed funds borrowing lines with three
      of
      its correspondent banks. Cascade used each of these lines during the year.
      The
      Bank also opened a line of credit with the Federal Reserve Bank of San
      Francisco. As of December 31, 2006, there were no outstanding balances in any
      of
      these lines.




The
      following table sets forth certain information regarding borrowings by the
      Bank
      at the end of, and during, the periods indicated.




December
                31,2006
            
            2005
            
            2004*(Dollars
                in thousands)*Weighted
                average rate on:Securities
                sold under agreements to repurchase
            
            
            1.49
            %
            
            2.35
            %
            
            2.23
            %FHLB
                advances
            
            
            4.76
            
            
            4.42
            
            
            4.59Year
                ended December 31,2006
            
            
            2005
            
            
            2004Maximum
                amount of borrowings outstanding at any month end:Securities
                sold under agreements to repurchase
            
            $
            96,007
            
            $
            51,058
            
            $
            40,251FHLB
                advances
            
            
            256,000
            
            
            251,000
            
            
            237,500Approximate
                average borrowings outstanding with respect to:Securities
                sold under agreements to repurchase
            
            $
            81,289
            
            $
            24,051
            
            $
            31,085FHLB
                advances
            
            
            237,888
            
            
            239,896
            
            
            210,024Approximate
                weighted average rate paid on:Other
                interest-bearing liabilities*
            
            
            3.36
            %
            
            4.89
            %
            
            2.80
            %FHLB
                advances
            
            
            4.71
            
            
            4.60
            
            
            4.79*
                Including Trust Preferred Securities.







*Junior
      Subordinated Debentures Payable (Trust Preferred Securities).* On
      March
      1, 2000, $10.3 million of 11% Capital Securities due March 1, 2030, were issued
      by a wholly owned business Trust whose common equity is 100% owned by Cascade
      Financial Corporation. The Trust exists for the exclusive purposes of issuing
      and selling the capital securities, using the proceeds from the sale of the
      capital securities to acquire junior subordinated debentures issued by Cascade
      Financial Corporation, and engaging in only those other activities necessary,
      advisable, or incidental to the above. The Corporation used the proceeds for
      general corporate purposes including stock repurchases and investment in its
      subsidiary bank. At December 31, 2003, as a result of the adoption of FIN 46R,
      the Trust was deconsolidated and all periods in the consolidated financial
      statements have been restated to reflect this change. The $10.3 million of
      junior subordinated debentures issued by the Corporation to the Trust were
      reflected as junior subordinated debentures payable in the consolidated balance
      sheet at December 31, 2004. The Trust will redeem the trust preferred securities
      when the junior subordinated debentures are paid at maturity or upon any earlier
      redemption of the junior subordinated debentures.


18


Prior
      to
      December 31, 2003, the Trust was consolidated and was included in liabilities
      in
      the consolidated balance sheet, as “Trust Preferred Securities.” The common
      securities and debentures, along with the related income effects were eliminated
      in the consolidated financial statements.





On
      December 15, 2004, Cascade Financial Corporation issued $5.2 million of 5.82%
      Capital Securities due January 7, 2035. The proceeds from the issuance were
      invested in Cascade Bank, which used the increased capital for general corporate
      purposes.





On
      March
      30, 2006, Cascade Financial Corporation issued $10.3 million of 6.50% Capital
      Securities due June 15, 2036. The proceeds from the issuance were invested
      in
      Cascade Bank, which used the increased capital for general corporate
      purposes.





Subsidiary
      Activity




The
      Corporation has four subsidiaries: Cascade Bank, Cascade Capital Trust I, II,
      and III. The activities of the Corporation are primarily conducted through
      the
      Bank. Accordingly, this Form 10-K principally discusses the Bank’s
      operations.




Cascade
      Capital Trust I was formed for the exclusive purpose of issuing Trust Preferred
      Securities and common securities and using the proceeds to acquire junior
      subordinated debentures issued by the Corporation. The junior subordinated
      debentures total $10.2 million, have an interest rate of 11.00%, mature on
      March
      1, 2030, and are the sole assets of Cascade Capital Trust I. The junior
      subordinated debentures are pre-payable, in whole or in part, at the
      Corporation’s option on or after March 1, 2010, at declining premiums to
      maturity. Proceeds totaling approximately $9.2 million from the issuance of
      the
      junior subordinated debentures were used to increase the capital level of the
      Bank.




Cascade
      Capital Trust II incorporates the same structure for the same purposes as
      Cascade Capital Trust I. The junior subordinated debentures issued under Cascade
      Capital Trust II equal $5.2 million and have a rate of 5.82% for the first
      5
      years of the security, and floats at the three-month LIBOR plus 190 bp
      thereafter. The debentures are callable at par on a quarterly basis beginning
      January 7, 2010.




Cascade
      Capital Trust III incorporates the same structure for the same purposes as
      Cascade Capital Trust I and II. The junior subordinated debentures issued under
      Cascade Capital Trust III equal $10.3 million and have a rate of 6.50% for
      the
      first 5 years of the security, and floats at the three-month LIBOR plus 140
      bp
      thereafter. The debentures are callable at par on a quarterly basis beginning
      June 15, 2011.




Personnel




At
      December 31, 2006, the Corporation had 212 full-time equivalent employees.
      The
      Corporation believes that employees play a vital role in the success of a
      service company and that the Corporation’s relationship with its employees is
      good. The employees are not represented by a collective bargaining
      unit.




REGULATION




Introduction/General




The
      following generally refers to certain statutes and regulations affecting the
      Corporation and the Bank. This provides only a brief summary of the regulations
      impacting the Corporation and is not complete. This discussion is qualified
      in
      its entirety by the statutes and regulations. In addition, some statutes and
      regulations exist which impact the Corporation but are not referenced
      below.




The
      Corporation is subject to extensive regulation, supervision and examination.
      Such regulation and supervision govern the activities in which the institution
      can engage and is intended primarily for the protection of the insurance fund
      and depositors. Regulatory authorities have been granted extensive discretion
      in
      connection with their supervisory and enforcement activities, which are intended
      to strengthen the financial condition of the banking industry, including the
      imposition of restrictions on the operation of an institution, the
      classification of assets by the institution and the adequacy of an institution’s
      allowance for loan losses. Any change in such regulation and oversight could
      have an adverse material impact on the Corporation, Cascade and their respective
      operations.


19


The
      Corporation




The
      Corporation is a bank holding company that has elected to be treated as a
      financial holding company with the Board of Governors of the Federal Reserve
      Board (the “FRB”). The Bank Holding Company Act of 1956, as amended (“BHCA”)
      subjects the Corporation and its subsidiaries to supervision and examination
      by
      the FRB. The Corporation files quarterly and annual reports of operations with
      the FRB.




*Bank
      Holding Company Regulation.* In
      general, the BHCA limits bank holding company business to owning or controlling
      banks and engaging in other banking-related activities. Bank holding companies
      must obtain the FRB's approval before they: (1) acquire direct or indirect
      ownership or control of any voting shares of any bank that results in total
      ownership or control, directly or indirectly, of more than 5 percent of the
      voting shares of such bank; (2) merge or consolidate with another bank holding
      company; or (3) acquire substantially all of the assets of any additional banks.
      Subject to certain state laws, such as age and contingency restrictions, a
      bank
      holding company that is adequately capitalized and adequately managed may
      acquire the assets of both in-state and out-of-state banks. With certain
      exceptions, the BHCA prohibits bank holding companies from acquiring direct
      or
      indirect ownership or control of voting shares in any company that is not a
      bank
      or a bank holding company unless the FRB determines that the activities of
      such
      company are incidental or closely related to the business of banking. If a
      bank
      holding company is well-capitalized and meets certain criteria specified by
      the
      FRB, it may engage de novo in certain permissible non-banking activities without
      prior FRB approval.




The
      Change in Bank Control Act of 1978, as amended, requires a person (or group
      of
      persons acting in concert) acquiring "control" of a bank holding company to
      provide the FRB with 60 days prior written notice of the proposed acquisition.
      Following receipt of this notice, the FRB has 60 days within which to issue
      a
      notice disapproving the proposed acquisition, but the FRB may extend this time
      period for up to another 30 days. An acquisition may be completed before
      expiration of the disapproval period if the FRB issues written notice of its
      intent not to disapprove the transaction. In addition, any "company" must obtain
      the FRB's approval before acquiring 25% (5% if the "company" is a bank holding
      company) or more of the outstanding shares or otherwise obtaining control over
      the Corporation.




*Financial
      Holding Company Election/Affiliations.* In 2001,
      the Corporation elected to be treated as a financial holding company with the
      FRB, as permitted under the Gramm-Leach-Bliley Financial Services Modernization
      Act (the “GLB”). This election allows the Corporation to conduct activities that
      previously were unavailable to bank holding companies, provided that notice
      requirements are generally required before engaging in any such activities.




In
      a
      change from previous law, bank holding companies are in a position to be owned,
      controlled or acquired by any company engaged in financially related activities,
      so long as such company meets certain regulatory requirements. To the extent
      the
      legislation permits banks, securities firms and insurance companies to
      affiliate, the financial services industry may experience further consolidation.
      This consolidation could result in a growing number of larger financial
      institutions that offer a wider variety of financial services than the
      Corporation currently offers and that can aggressively compete in the markets
      currently served by the Corporation.




*Transactions
      with Affiliates.* The
      Corporation and its subsidiaries are deemed affiliates within the meaning of
      the
      Federal Reserve Act, and transactions between affiliates are subject to certain
      restrictions. Accordingly, the Corporation and its subsidiaries must comply
      with
      Sections 23A and 23B of the Federal Reserve Act (Reg W). Generally, Sections
      23A
      and 23B (1) limit the extent to which a financial institution or its
      subsidiaries may engage in "covered transactions" with an affiliate, as defined,
      to an amount equal to 10% of such institution's capital and surplus and an
      aggregate limit on all such transactions with all affiliates to an amount equal
      to 20% of such capital and surplus, and (2) require all transactions with an
      affiliate, whether or not "covered transactions," to be on terms substantially
      the same, or at least as favorable to the institution or subsidiary, as those
      provided to a non-affiliate. The term "covered transaction" includes the making
      of loans, purchase of assets, issuance of a guarantee and other similar types
      of
      transactions.




*Tying
      Arrangements.* The
      Corporation and its subsidiaries are prohibited from engaging in certain tying
      arrangements in connection with any extension of credit, sale or lease of
      property or furnishing of services. For example, with certain exceptions,
      neither the Corporation nor its subsidiaries may condition an extension of
      credit on either a requirement that the customer obtain additional services
      provided by it or an agreement by the customer to refrain from obtaining other
      services from a competitor.




*State
      Law Restrictions.* As
      a
      Washington corporation, the Corporation is subject to certain limitations and
      restrictions as provided under applicable Washington corporate laws.


20


*Securities
      Registration and Reporting.* The
      Corporation’s common stock is registered as a class with the SEC under the
      Securities Exchange Act of 1934 and thus the Corporation is subject to the
      periodic reporting and proxy solicitation requirements and the insider-trading
      restrictions of that Act. The periodic reports, proxy statement, and other
      information filed by the Corporation under that Act, can be inspected and copied
      at, or obtained from, the Washington, D.C. office of the SEC. In addition,
      the
      securities issued by the Corporation are subject to the registration
      requirements of the Securities Act of 1933 and applicable state securities
      laws
      unless exemptions are available.




The
      Corporation is listed on the NASDAQ/Global Select Market. As such, it is subject
      to the listing and reporting requirements of NASDAQ. Failure to meet these
      requirements could lead to a delisting of the Corporation’s stock.




*Disclosure
      Controls and Procedures.* The
      Sarbanes-Oxley Act of 2002 and related rulemaking by the SEC, which affect
      corporate disclosure and financial reporting reform, generally require public
      companies to focus on their disclosure controls and procedures. As a result,
      public companies such as the Corporation now must have disclosure controls
      and
      procedures in place and make certain disclosures about them in their periodic
      SEC reports ( *i.e.,* Forms
      10-K and 10-Q) and their chief executive and chief financial officers must
      certify in these filings that they are responsible for developing and evaluating
      disclosure controls and procedures and disclose the results of an evaluation
      conducted by them within the 90-day period preceding the filing of the relevant
      report, among other things.




*Dividends.* The FRB
      has issued a policy statement on the payment of cash dividends by bank holding
      companies which expresses the FRB’s view that a bank holding company should pay
      cash dividends only to the extent that the Corporation’s net income for the past
      year is sufficient to cover both the cash dividend and a rate of retention
      consistent with the Corporation’s capital needs. The FRB also indicated that it
      would be inappropriate for a company experiencing serious financial problems
      to
      borrow to pay dividends.




*Capital
      Requirements.* The FRB
      has established capital adequacy guidelines for bank holding companies that
      generally parallel the capital requirements the FDIC has for the Bank. The
      FRB
      regulations provided that capital standards will be applied on a consolidated
      basis in the case of a bank holding company with more than $150 million in
      total
      consolidated assets. The Corporation’s total risk-based capital must equal 8% of
      risk-weighted assets and 4% must consist of Tier 1 capital.




*Stock
      Repurchases.* Bank
      holding companies, except for certain “well-capitalized” and highly rated
      companies, are required to give the FRB prior written notice of any purchase
      or
      redemption of its outstanding equity securities if the gross consideration
      for
      the purchase or redemption is equal to or greater than 10% of consolidated
      net
      worth during the preceding twelve months. The FRB may disapprove any such
      purchase or redemption if it determines that the proposal would constitute
      an
      unsafe or unsound practice.




Cascade
      Bank




*General.* Applicable federal and state statutes and regulations governing a bank's
      operations relate, among other matters, to capital requirements, investments,
      loans, legal lending limits, mergers and consolidations, borrowings, issuance
      of
      securities, payment of dividends, establishment of branches, and dealings with
      affiliated persons. The Federal Deposit Insurance Corporation ("FDIC") has
      authority to prohibit banks under its supervision from engaging in what it
      considers to be unsafe or unsound practices in conducting their business.
      Cascade Bank is a state-charted commercial bank subject to extensive regulation
      and supervision by both the Washington Department of Financial Institutions
      (“DFI”) and the FDIC. The federal laws that apply to Cascade Bank regulate,
      among other things, the scope of its business, its investments, the timing
      of
      the availability of deposited funds and the nature and amount of collateral
      for
      loans. The laws and regulations governing Cascade Bank generally have been
      promulgated to protect depositors and not to protect shareholders of such
      institutions or their holding companies.




*CRA.* The
      Community Reinvestment Act requires that, in connection with examinations of
      financial institutions within their jurisdiction, the FRB or the FDIC evaluates
      the record of the financial institutions in meeting the credit needs of their
      local communities, including low and moderate income neighborhoods, consistent
      with the safe and sound operation of those banks. These factors are also
      considered in evaluating mergers, acquisitions, and applications to open a
      branch or facility. The four possible ratings of meeting community credit needs
      are outstanding, satisfactory, needs to improve and substantial noncompliance.
      Cascade Bank received a “satisfactory” CRA rating at the last
      examination.




*Standards
      for Safety and Soundness* .
      The
      federal banking regulatory agencies have prescribed, by regulation, standards
      for all insured depository institutions and depository institution holding
      companies relating to: (i) internal controls, information systems and internal
      audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
      rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings;
      and (viii) compensation, fees and benefits (“Guidelines”). The Guidelines
      set forth the safety and soundness standards that the federal banking agencies
      use to identify and address problems at insured depository institutions before
      capital becomes impaired. If a federal banking agency determines that a
      financial institution fails to meet any standard prescribed by the Guidelines,
      the agency may require the bank to submit to the agency an acceptable plan
      to
      achieve compliance with the standard. Management is not aware of any conditions
      relating to these safety and soundness standards which would require the
      submission of a plan of compliance.


21


*Insider
      Credit Transactions* .
      Cascade
      Bank is also subject to certain restrictions imposed by the Federal Reserve
      Act
      on extensions of credit to executive officers, directors, principal
      shareholders, or any related interests of such persons. Extensions of credit
      (i)
      must be made on substantially the same terms, including interest rates and
      collateral, and follow credit underwriting procedures that are not less
      stringent than those prevailing at the time for comparable transactions with
      persons not covered above and who are not employees; and (ii) must not involve
      more than the normal risk of repayment or present other unfavorable features.
      Cascade Bank is also subject to certain lending limits and restrictions on
      overdrafts to such persons. A violation of these restrictions may result in
      the
      assessment of substantial civil monetary penalties on the affected bank or
      any
      officer, director, employee, agent, or other person participating in the conduct
      of the affairs of Cascade Bank, the imposition of a cease and desist order,
      and
      other regulatory sanctions.




*FDICIA* .
      Under
      the Federal Deposit Insurance Corporation Improvement Act of 1991 (the
      "FDICIA"), each federal banking agency has prescribed, by regulation,
      non-capital safety and soundness standards for institutions under its authority.
      These standards cover internal controls, information systems, internal audit
      systems, loan documentation, credit underwriting, interest rate exposure, asset
      growth, compensation, fees and benefits, such other operational and managerial
      standards as the agency determines to be appropriate, and standards for asset
      quality, earnings and stock valuation. An institution that fails to meet these
      standards must develop a plan acceptable to the agency, specifying the steps
      that the institution will take to meet the standards. Failure to submit or
      implement such a plan may subject the institution to regulatory sanctions.
      Management of the Corporation believes that Cascade Bank meets all such
      standards, and therefore, does not believe that these regulatory standards
      materially affect the Corporation's business operations currently.




*Loans
      to One Borrower* .
      Cascade
      Bank is subject to limitations on the aggregate amount of loans that it can
      make
      to any one borrower, including related entities. Applicable regulations
      generally limit loans to one borrower to 20% of unimpaired capital and surplus.
      At December 31, 2006, the Bank had no borrowers with balances in excess of
      the
      loans-to-one-borrower limit.




*Interstate
      Banking and Branching* .
      The
      Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
      "Interstate Act") permits nationwide interstate banking and branching under
      certain circumstances. This legislation generally authorizes interstate
      branching and relaxes federal law restrictions on interstate banking. Currently,
      bank holding companies may purchase banks in any state, and states may not
      prohibit such purchases. Additionally, banks are permitted to merge with banks
      in other states as long as the home state of neither merging bank has "opted
      out." The Interstate Act requires regulators to consult with community
      organizations before permitting an interstate institution to close a branch
      in a
      low-income area. With regard to interstate bank mergers, Washington has "opted
      in" to the Interstate Act and allows in-state banks to merge with out-of-state
      banks subject to certain aging requirements. Washington law generally authorizes
      the acquisition of an in-state bank by an out-of-state bank or bank holding
      company through the acquisition of or a merger with a financial institution
      that
      has been in existence for at least 5 years prior to the
      acquisition.




*Deposit
      Insurance* .
      The
      deposits of Cascade Bank are currently insured to a maximum of $100,000 per
      depositor and $250,000 for Individual Retirement Accounts through the Savings
      Association Insurance Fund (the "SAIF") administered by the FDIC. All insured
      banks are required to pay semi-annual deposit insurance premium assessments
      to
      the FDIC. The FDICIA included provisions to reform the Federal Deposit Insurance
      System, including the implementation of risk-based deposit insurance premiums.
      The FDICIA also permits the FDIC to make special assessments on insured
      depository institutions in amounts determined by the FDIC to be necessary to
      give it adequate assessment income to repay amounts borrowed from the U.S.
      Treasury and other sources, or for any other purpose the FDIC deems necessary.
      The FDIC has implemented a risk-based insurance premium system under which
      banks
      are assessed insurance premiums based on how much risk they present to the
      SAIF.
      Banks with higher levels of capital and a low degree of supervisory concern
      are
      assessed lower premiums than banks with lower levels of capital or a higher
      degree of supervisory concern.




*Dividends* .
      The
      principal source of the Corporation's revenue is dividends received from Cascade
      Bank. The payment of dividends is subject to government regulation, in that
      regulatory authorities may prohibit banks and bank holding companies from paying
      dividends that would constitute an unsafe or unsound banking practice. In
      addition, a bank may not pay cash dividends if that payment could reduce the
      amount of its capital below that necessary to meet minimum applicable regulatory
      capital requirements. Other than the laws and regulations noted above, which
      apply to all banks and bank holding companies, neither the Corporation nor
      Cascade Bank is currently subject to any regulatory restrictions on its
      dividends.


22


*Capital
      Adequacy* .
      Federal
      bank regulatory agencies use capital adequacy guidelines in the examination
      and
      regulation of bank holding companies and banks. If capital falls below minimum
      guideline levels, the holding company or bank may be denied approval to acquire
      or establish additional banks or non-bank businesses or to open new facilities.
      The FDIC and FRB use risk-based capital guidelines for banks and bank holding
      companies. These are designed to make such capital requirements more sensitive
      to differences in risk profiles among banks and bank holding companies, to
      account for off-balance sheet exposure and to minimize disincentives for holding
      liquid assets. Assets and off-balance sheet items are assigned to broad risk
      categories, each with appropriate weights. The resulting capital ratios
      represent capital as a percentage of total risk-weighted assets and off-balance
      sheet items. The guidelines are minimums, and the FRB has noted that bank
      holding companies contemplating significant expansion programs should not allow
      expansion to diminish their capital ratios and should maintain ratios well
      in
      excess of the minimum. The current guidelines require all bank holding companies
      and federally-regulated banks to maintain a minimum risk-based total capital
      ratio equal to 8%, of which at least 4% must be Tier I capital. Tier I capital
      for bank holding companies includes common shareholders' equity, certain
      qualifying perpetual preferred stock and minority interests in equity accounts
      of consolidated subsidiaries, less intangibles. At December 31, 2006, the Bank
      had Tier 1 capital equal to $116.1 million or 8.96% of average total assets,
      which is $64.2 million above the minimum leverage requirement of 4% as in effect
      on that date.




The
      FDIC
      also employs a leverage ratio, which is Tier I capital as a percentage of total
      assets less intangibles, to be used as a supplement to risk-based guidelines.
      The principal objective of the leverage ratio is to constrain the maximum degree
      to which a bank holding company may leverage its equity capital base. The FDIC
      requires a minimum leverage ratio of 3%. However, for all but the most highly
      rated bank holding companies and for bank holding companies seeking to expand,
      the FDIC expects an additional cushion of at least 1% to 2%.




FDICIA
      created a statutory framework of supervisory actions indexed to the capital
      level of the individual institution. Under regulations adopted by the FDIC,
      an
      institution is assigned to one of five capital categories depending on its
      total
      risk-based capital ratio, Tier I risk-based capital ratio, and leverage ratio,
      together with certain subjective factors. Institutions which are deemed to
      be
      "undercapitalized" depending on the category to which they are assigned are
      subject to certain mandatory supervisory corrective actions. The Corporation
      does not believe that these regulations have any material effect on its
      operations currently.




Reference
      is made to Note 13 of the Notes to the Consolidated Financial Statements in
      the
      Annual Report, which is listed as an exhibit under Item 15, for additional
      information concerning regulatory capital.




The
      FDIC
      risk-based requirement requires financial institutions to have total capital
      of
      at least 8% of risk-weighted assets. Total capital consists of Tier I capital
      and supplementary capital. Supplementary capital consists of certain permanent
      and maturing capital instruments that do not qualify as Tier I capital and
      general valuation loan and lease loss allowances up to a maximum of 1.25% of
      risk-weighted assets. Supplementary capital may be used to satisfy the
      risk-based requirement only to the extent of Tier I capital.




In
      determining the amount of risk-weighted assets, all assets, including certain
      off-balance sheet items, are multiplied by a risk weight, ranging from 0% to
      100%, based on the risk inherent in the type of asset. For example, prudently
      underwritten permanent one-to-four family first lien mortgage loans not more
      than 90 days delinquent and having a loan-to-value ratio of not more than 80%
      at
      origination, unless insured to such ratio by an insurer approved by FNMA or
      FHLMC, have been assigned a risk weight of 50%.




On
      December 31, 2006, the Bank had total risk-based capital of approximately $127.1
      million, including $116.1 million in Tier I capital and $11.0 million in
      qualifying supplementary capital (the allowance for loan losses), and
      risk-weighted assets of $1.1 billion, or total capital of 11.20% of
      risk-weighted assets. This amount was $36.3 million above the 8% requirement
      in
      effect on that date.




FDIC
      capital requirements are designated as the minimum acceptable standards for
      banks whose overall financial condition is fundamentally sound. The FDIC
      regulations state that if the FDIC determines that conditions so warrant, it
      may
      impose a greater capital standard on a particular institution.


23


Management
      believes that the Bank will continue to meet its minimum capital requirements
      in
      the foreseeable future. However, if circumstances were to materially and
      adversely impact the future earnings of the Bank, the ability of the Bank to
      meet its capital requirements could be impaired.




*Prompt
      Corrective Action* .
      Federal
      statutes establish a supervisory framework based on five capital categories:
      well capitalized, adequately capitalized, undercapitalized, significantly
      undercapitalized, and critically undercapitalized. An institution’s category
      depends upon where its capital levels are in relation to relevant capital
      measures. In order to be adequately capitalized, an institution must have a
      total risk-based capital ratio of not less than 8%, a Tier 1 risk-based capital
      of not less than 4%, and a leverage ratio of not less than 4%. Any institution
      which fails to meet these levels will be considered
      undercapitalized.




Undercapitalized
      institutions are subject to certain prompt corrective action requirements,
      regulatory controls and restrictions, which become more extensive as an
      institution becomes more severely undercapitalized. Failure by an institution
      to
      comply with applicable capital requirements will result in restrictions on
      their
      activities and lead to enforcement actions, including the issuance of a capital
      directive to ensure the maintenance of adequate capital levels. Banking
      regulators will take prompt corrective action with respect to depository
      institutions that do not meet minimum capital requirements.




At
      December 31, 2006, Cascade was a “well-capitalized” institution under the prompt
      corrective action regulations of the FDIC and the Federal Reserve
      Board.




TAXATION




Federal
      Taxation




The
      Corporation reports its income on a fiscal year basis using the accrual method
      of accounting and is subject to federal income taxation in the same manner
      as
      other corporations with some exceptions, including particularly Cascade’s
      reserve for bad debts as discussed below. In 2001, the Corporation’s fiscal year
      was changed to the calendar year. The following discussion of tax matters is
      intended only as a summary and does not purport to be a comprehensive
      description of the tax rules applicable to the Bank or the
      Corporation.




Tax
      Bad Debt Reserves




The
      reserve method of accounting for bad debt reserves was repealed for tax years
      beginning after December 31, 1995. As a result, the Bank is no longer able
      to
      calculate its deduction for bad debts using the percentage-of-taxable-income
      method. Instead, Cascade is required to compute its deduction based on specific
      charge-offs during the taxable year.




Distributions




To
      the
      extent that the Bank makes “non-dividend distributions” to the Corporation that
      are considered as made (i) from the reserve for losses as of June 30, 1988,
      or
      (ii) from the supplemental reserve for losses on loans (“Excess Distributions”),
      then an amount based on the amount distributed will be included in Cascade’s
      taxable income. Non-dividend distributions include distributions in excess
      of
      the Bank’s current and accumulated earnings and profits, distributions in
      redemption of stock, and distributions in partial or complete liquidation.
      However, dividends paid out of Cascade’s current or accumulated earnings and
      profits, as calculated for federal income tax purposes, will not be considered
      to result in a distribution from the Bank’s bad debt reserve. Thus, any
      dividends to the Corporation that would reduce amounts appropriated to the
      Bank’s bad debt reserve and deducted for federal income tax purposes would
      create a tax liability for Cascade. The amount of additional taxable income
      attributable to an Excess Distribution is an amount that, when reduced by the
      tax attributable to the income, is equal to the amount of the distribution.
      Thus, if Cascade makes a “non-dividend distribution,” then approximately one and
      one-half times the amount so used would be included in gross income for federal
      income tax purposes.




Dividends-Received
      Deduction and Other Matters




The
      Corporation may exclude from its income 100% of dividends received from the
      Bank
      as a member of the same affiliated group of corporations. The corporate
      dividends-received deduction is generally 70% in the case of dividends received
      from unaffiliated corporations with which the Corporation and the Bank will
      not
      file a consolidated tax return, except that if the Corporation or the Bank
      owns
      more than 20% of the stock of a corporation distributing a dividend, then 80%
      of
      any dividends received may be deducted.


24


Washington
      Tax




The
      Bank
      is subject to a business and occupation tax which is imposed under Washington
      law at the rate of 1.5% of gross receipts; however, interest received on loans
      secured by mortgages or deeds of trust on residential properties and interest
      on
      obligations issued or guaranteed by the United States are not presently subject
      to the tax. On August 15, 1994, the Department of Revenue of the State of
      Washington began an audit of the Corporation’s records for compliance regarding
      the business and occupation tax. The Department of Revenue issued a tax billing
      for approximately $148,000 of which the Corporation had accrued $104,000 and
      paid $16,000. In December 2006, the Corporation settled with the State in the
      amount of $95,000.




Availability
      of Filings




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




1)
            Annual
                Reports on Form 10-K; and


2)
            Quarterly
                Reports on Form 10-Q; and


3)
            Current
                Reports on Form 8-K.





These
      documents are generally posted within 24 hours after the Corporation files
      these
      documents electronically with the Securities and Exchange Commission. The
      Corporation is also willing to provide electronic or paper copies of its filings
      upon reasonable request.





**Item
      1A. Risk Factors**




The
      Bank,
      like all financial institutions, is subject to a number of risks as it conducts
      its business. The Management Committee, consisting of the Bank’s senior
      officers, serves as the integrated body that oversees the management enterprise
      risk bank wide. Within each division, processes are in place to ensure risk
      is
      measured, monitored and managed within the parameters established by the
      relevant Bank policies and consistent with stated goals and
      strategies.





Credit
      Risk





Credit
      risk, the possibility that our borrowers will be unwilling or unable to repay
      their obligations when due, is the most important risk in that credit losses
      will most likely have the most profound impact on the bank’s earnings and
      financial health. The ability of our customers to repay their obligations will
      be impacted by the general economic conditions impacting our market area and
      factors specific to the borrowers’ businesses, as well as the underlying
      financial strength of the borrower and any other guarantors.





While
      the
      Bank has successfully lent on commercial real estate in the Puget Sound Area
      of
      Washington state for a number of years, it is exposed to credit losses if that
      market experiences a significant and prolonged downturn.





Interest
      Rate Risk





The
      Bank
      is subject to fluctuations in interest rates in that its interest-bearing
      liabilities reprice on different terms than its interest-earning assets. Such
      asymmetrical changes can have a major impact on the Bank’s net interest income,
      which is its primary source of earnings.





The
      Bank
      measures, monitors, and manages interest rates through a variety of tools
      including simulation modeling. There is a risk that the Bank’s efforts will not
      effectively capture the asset/liability relationships and thereby not
      effectively mitigate changes in interest rates on the Bank’s
      income.





Further,
      the Bank has used derivatives, including interest rate swaps, in the management
      of interest rate risk. However, given the complicated nature of the accounting
      for derivatives, such instruments may lead to volatility in GAAP earnings even
      when successfully hedging the Bank’s balance sheet from changes in
      rates.


25
 Liquidity
        Risk





As
      a
      financial intermediary, the Bank must have adequate liquidity (cash and/or
      borrowing capacity) to meet its customers’ needs for loans and conversely, have
      adequate funds to meet any demands for their deposits. Inadequate liquidity
      could lead to a loss of business and revenue if the Bank were precluded from
      pursuing potential borrowers due to a lack of lendable funds.


The
      Bank
      establishes guidelines as to various measures of liquidity, including the
      sources and uses of funds, eligible collateral for pledging for secured
      borrowings, and the ability to borrow against its FHLB Line of Credit. However,
      the inability to tap these sources of funds, for whatever reason, would have
      a
      profoundly negative effect on the Bank’s ability to meet its customer’s
      needs.





Transaction
      Risk





The
      Bank
      is in the business of processing financial transactions for its customers.
      In
      the course of that business, it may be subject to fraud, embezzlement, or even
      honest mistakes in processing transactions. Such incidents expose the Bank
      to
      financial loss. In addition, improper processing of transactions could lead
      to
      regulatory sanctions and have a negative impact on Cascade’s reputation and
      relationships with its customers.





Compliance/Regulatory
      Risk





As
      a
      commercial bank, Cascade is subject to extensive examination and regulation
      at
      both the bank and holding company level. Failure to comply with any of the
      relevant statutes and regulations could lead to severe restrictions on our
      ability to conduct business and/or lead to material fines and penalties. The
      level of regulation has increased dramatically in recent years due to the Bank
      Secrecy Act and the privacy requirements of Gramm-Leach-Bliley Act. Assuring
      that the Bank has adequate resources to meet its new regulatory requirements
      could increase the Bank’s operating expenses.





Strategic
      Risk





Financial
      services, in general, and banking, in particular, are mature, highly competitive
      businesses. There is fierce competition for both loans and deposits from a
      wide
      array of providers. Many providers are seeking to penetrate the Bank’s existing
      market. The result has been margin compression as the relative price of lending
      has been pushed down and the relative price of deposits has been bid
      up.





Reputation
      Risk





As
      a
      provider of services to the public, the reputation of the Bank for competence,
      honesty, and integrity is of great importance. The loss of that reputation
      through poor customer service, misfeasance or malfeasance on the part of the
      Bank’s staff could have a profoundly negative impact on Cascade’s ability to
      successfully implement its business plan.





Business
      Continuity Risk





Like
      all
      businesses, Cascade is exposed to earthquakes, floods, and other natural or
      man-made disasters that can cause an interruption in its operations. The Bank
      has established a Business Continuity Plan to guide the restoration of business
      process departments in similar disruptions and tests the Plan on an annual
      basis. However, a major event could have a material impact on the Bank’s
      business and its earnings.





The
      Bank
      also runs the risk that it is not adequately insured against such events. Again,
      a lack of insurance or being under-insured would have an impact on the Bank’s
      profitability.





Change
      in Core Processing System





On
      September 18, 2006, the Company converted its core processing system. The goal
      of the conversion was to enhance the Company’s level of customer service and
      internal efficiency. The Company will continue to affirm that the new system
      will meet all the business requirements for which it was purchased.





**Item
      1B. Unresolved Staff Comments**




None


26


**Item
      2. Properties**




The
      Corporation owns eight full service branch locations and leases eleven full
      service locations. Owned offices range in size from 3,500 to 52,000 square
      feet
      and have a total net book value at December 31, 2006, including leasehold
      improvements, furniture and fixtures, of $12.0 million. The Corporation leases
      approximately 5% of its main office, approximately 25% of its Marysville office,
      and 50% of its Issaquah West office to non-affiliated parties. See Note 5 of
      the
      Notes to the Consolidated Financial Statements contained in the Annual Report
      which is listed in Item 15.




**Item
      3. Legal Proceedings**




The
      Corporation is not engaged in any legal proceedings of a material nature at
      the
      present time. Periodically, there have been various claims and lawsuits
      involving the Corporation and the Bank, principally as a defendant, such as
      claims to enforce liens, condemnation proceedings on properties in which the
      Bank holds security interests, claims involving the making and servicing of
      real
      property loans and other issues incident to the Corporation’s business. In the
      opinion of management and the Corporation’s legal counsel, no significant loss
      is expected from any of such pending claims or lawsuits.




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




None.  27


**PART
      II**




**Item
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities**




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





Quarter
                Ended
            
            
            High
            
            
            LowMarch
                31, 2005
            
            $
            16.00
            
            $
            13.97June
                30, 2005
            
            
            15.00
            
            
            12.60September
                30, 2005
            
            
            14.88
            
            
            12.82December
                31, 2005
            
            
            15.80
            
            
            13.60March
                31, 2006
            
            $
            15.38
            
            $
            14.00June
                30, 2006
            
            
            16.20
            
            
            14.56September
                30, 2006
            
            
            16.55
            
            
            15.00December
                31, 2006
            
            
            17.85
            
            
            16.00





(b)
            Cascade
                Financial Corporation has only one class of stock outstanding, which
                is
                common stock. At December 31, 2006, there were 12,093,699 shares
                outstanding which were held of record by approximately 2,400
                shareholders.





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




Quarter
                Ended
            
            Dividend
                Declared
            
            Record
                Date
            
            Payment
                DateSeptember
                2006
            
            $
            0.080
            
            
            10/11/06
            
            
            10/25/06June
                2006
            
            
            0.075
            
            
            07/12/06
            
            
            07/26/06March
                2006
            
            
            0.072
            
            
            04/12/06
            
            
            04/26/06December
                2005
            
            
            0.072
            
            
            01/12/06
            
            
            01/26/06





September
                2005
            
            
            0.072
            
            
            10/12/05
            
            
            10/26/05June
                2005
            
            
            0.064
            
            
            07/06/05
            
            
            07/20/05March
                2005
            
            
            0.064
            
            
            04/06/05
            
            
            04/20/05December
                2004
            
            
            0.064
            
            
            01/13/05
            
            
            01/27/05




Issuer
                  Purchases of Equity Securities**2006
                  PLAN**
              
              Total
              MaximumNumber
              Numberof
                  Shares
              of
                  SharesPurchased
              that
                  mayTotal
              Average
              as
                  Part of
              Yet
                  bePeriod
              
              Number
              Price
              Publicly
              Purchasedof
                  Shares
              Paid
              Announced
              Under
                  theBeginning
              Ending
              Purchased(1)
              per
                  Share
              Plan
              Plan
                  (2)June
                  1, 2006
              June
                  30, 2006
              -
              $     
                   -
              -
              375,000July
                  1, 2006
              July
                  31, 2006
              -
              -
              -
              375,000August
                  1, 2006
              August
                  31, 2006
              33,300
              15.58
              33,300
              341,700September
                  1, 2006
              September
                  30, 2006
              -
              -
              -
              341,700October
                  1, 2006
              October
                  31, 2006
              -
              -
              -
              341,700November
                  1, 2006
              November
                  30, 2006
              -
              -
              -
              341,700December
                  1, 2006
              December
                  31, 2006
              -
              -
              -
              341,700Total
              
              33,300
              $15.58
              33,300
              341,7001)
                  During the period presented, there were no shares purchased, which
                  were
                  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.




28


Shareholder
        Return Performance Graph
  The
        following graph compares the Company's cumulative shareholder return on its
        common stock with the return on the NASDAQ Composite Index and a peer group
        of
        the NASDAQ's OTC Bank Index. Total return assumes (i) the reinvestment of
        all
        dividends and (ii) the value of the investment in the Company's common stock
        and
        each index was $100 at the close of trading on December 31, 2001.
 
 
 12/31/01
                
                12/31/02
                
                12/31/03
                
                12/31/04
                
                12/31/05
                
                12/31/06Cascade
                    Financial Corporation
                
                
                100.00
                
                
                154.06
                
                
                312.58
                
                
                303.23
                
                
                286.29
                
                
                344.15NASDAQ
                    Composite Index
                
                
                100.00
                
                
                67.50
                
                
                101.22
                
                
                109.89
                
                
                111.42
                
                
                122.03NASDAQ
                    OTC Bank Index
                
                
                100.00
                
                
                104.83
                
                
                135.80
                
                
                150.73
                
                
                144.20
                
                
                160.71
 
 *Assumes
          that the value of the investment in the Company’s common stock and each index
          was $100 on December 31, 2001.
 
 **Item
          6. Selected Financial Data**
  The
          information contained in the section entitled “Selected Financial Data” of the
          Annual Report listed in Item 15 is incorporated herein by
          reference.
  **Item
          7. Management’s Discussion and Analysis of Financial Condition and Results of
          Operations**
  The
          information contained in the section entitled “Management’s Discussion and
          Analysis of Financial Condition and Results of Operations” of the Annual Report
          listed in Item 15 is incorporated herein by reference.
  **Item
          7A. Quantitative and Qualitative Disclosures About Market
          Risk**
  The
          information contained under the section captioned “Market Risk” in the
          Management’s Discussion and Analysis section of the Annual Report listed in Item
          15 is incorporated herein by reference.
  **Item
          8. Financial Statements and Supplementary Data**
  The
          financial statements and supplementary data in the Annual Report listed
          in Item
          15 is incorporated herein by reference.
  **Item
          9. Changes in and Disagreements with Accountants on Accounting and Financial
          Disclosure**
  None.
 29
 **Item
          9A. Controls and Procedures**
  (a)
                Evaluation
                    of Disclosure Controls and Procedures: An evaluation of the Corporation's
                    disclosure controls and procedures (as defined in section 13(a)
                    - 14(c) of
                    the Securities Exchange Act of 1934 (the "Act")) was carried
                    out under the
                    supervision and with the participation of the Corporation's Chief
                    Executive Officer, Chief Financial Officer and several other
                    members of
                    the Corporation's senior management effective December 31, 2006.
                    The
                    Corporation's Chief Executive Officer and Chief Financial Officer
                    concluded that the Corporation's disclosure controls and procedures
                    as
                    currently in effect are effective in ensuring that the information
                    required to be disclosed by the Corporation in the reports it
                    files or
                    submits under the Act is (i) accumulated and communicated to
                    the
                    Corporation's management (including the Chief Executive Officer
                    and Chief
                    Financial Officer) in a timely manner, and (ii) recorded, processed,
                    summarized and reported within the time periods specified in
                    the Security
                    and Exchange Commission’s (“the SEC’s”) rules and
                    forms.
 
 (b)
                Changes
                    in Internal Controls: In the year ended December 31, 2006, the
                    Corporation
                    did not make any significant changes in, nor take any corrective
                    actions
                    regarding, its internal controls or other factors that could
                    significantly
                    affect these controls.
 
 **Disclosure
          Controls and Internal Controls.** Disclosure controls are procedures that are designed with the objective
          of
          ensuring that information required to be disclosed in the Corporation's
          reports
          filed under the Act is recorded, processed, summarized and reported within
          the
          time periods specified in the SEC’s rules and forms. Disclosure controls are
          also designed with the objective of ensuring that such information is
          accumulated and communicated to our management, as appropriate to allow
          timely
          decisions regarding required disclosure. Internal Controls are procedures
          which
          are designed with the objective of providing reasonable assurance that
          (1)
          transactions are properly authorized; (2) assets are safeguarded against
          unauthorized or improper use; and (3) transactions are properly recorded
          and
          reported, all to permit the preparation of financial statements in conformity
          with generally accepted accounting principles.
 
 **Limitations
          on the Effectiveness of Controls** .
          The
          Corporation's management does not expect that our disclosure controls or
          our
          internal controls will prevent all error and all fraud. A control system,
          no
          matter how well conceived and operated, can provide only reasonable, not
          absolute, assurance that the objectives of the control system are met.
          Further,
          the design of the control system must reflect the fact that there are resource
          constraints, and the benefits of controls must be considered relative to
          their
          costs. Because of the inherent limitations in all control systems, no evaluation
          of controls can provide absolute assurance that all control issues and
          instances
          of fraud, if any, within the Corporation have been detected. These inherent
          limitations include the realities that judgments in decision-making can
          be
          faulty, and that breakdowns can occur because of simple error or mistake.
          Additionally, controls can be circumvented by the individual acts of some
          persons, by collusion of two or more people, or by management override
          of the
          control. The design of any system of controls also is based in part upon
          certain
          assumptions about the likelihood of future events, and there can be no
          assurance
          that any design will succeed in achieving its stated goals under all potential
          future conditions; over time, controls may become inadequate because of
          changes
          in conditions, or the degree of compliance with the policies or procedures
          may
          deteriorate. Because of the inherent limitations in a cost-effective control
          system, misstatements due to error or fraud may occur and not be
          detected.
 
 **Management’s
          Report on Internal Control Over Financial Reporting.** Management
          of Cascade Financial Corporation is responsible for preparing the Corporation’s
          annual financial statements. Management is also responsible for establishing
          and
          maintaining effective internal control over financial reporting presented
          in
          conformity with both accounting principles generally accepted in the United
          States of America and regulatory reporting in conformity with the Federal
          Financial Institutions Examination Council Instructions for Consolidated
          Reports
          of Condition and Income (call report instructions). The Corporation’s internal
          controls contain monitoring mechanisms, and actions are taken to correct
          deficiencies identified.
 
 There
          are
          inherent limitations in the effectiveness of any internal control, including
          the
          possibility of human error and the circumvention or overriding of controls.
          Accordingly, even effective internal control can provide only reasonable
          assurance with respect to financial statement preparation. Further, because
          of
          changes in conditions, the effectiveness of internal control may vary over
          time.
 30
 It
          is
          also management’s responsibility to ensure satisfactory compliance with all
          designated laws and regulations, and in particular, those laws and regulations
          concerning loans to insiders and dividend restrictions.
 
 Management
          assessed the Corporation’s internal control over financial reporting presented
          in conformity with both U.S. generally accepted accounting principles and
          call
          report instructions as of December 31, 2006. This assessment was based
          on
          criteria for effective internal control over financial reporting described
          in *Internal
          Control—Integrated Framework* issued
          by the Committee of Sponsoring Organizations of the Treadway Commission.
          Based
          on this assessment, management believes that, as of December 31, 2006,
          the
          Corporation maintained effective internal control over financial reporting
          presented in conformity with both accounting principles generally accepted
          in
          the United States of America and call report instructions. Management also
          believes that there was satisfactory compliance during 2006 with the designated
          laws and regulations.
 
 Management’s
          assessment of the effectiveness of the Corporation’s internal control over
          financial reporting as of December 31, 2006, has been audited by Moss Adams
          LLP,
          the Corporation’s independent registered public accounting firm who audits the
          Corporation’s consolidated financial statements. The attestation report of Moss
          Adams LLP expresses unqualified opinions on management’s assessment and on the
          effectiveness of the Corporation’s internal control over financial reporting as
          of December 31, 2006.
 
 
 **Item
          9B. Other Information**
  None.
 31
 **PART
          III**
  **Item
          10. Directors, Executive Officers and Corporate
          Governance**
  The
          information contained under the section captioned “Proposal I--Election of
          Directors” contained in the Corporation’s Definitive Proxy Statement for the
          Corporation’s Annual Meeting of Stockholders (the “Proxy Statement”), is
          incorporated herein by reference. Reference is made to the cover page of
          this
          report for information regarding compliance with Section 16(a) of the Exchange
          Act, and to the section therein captioned “COMPLIANCE WITH SECTION 16(A) OF THE
          EXCHANGE ACT”.
  The
          following table sets forth information with respect to the executive officers
          of
          the Corporation and the Bank.
  Name
                Age(a)
                PositionCarol
                    K. Nelson(b)
                50
                President,
                    Chief Executive Officer and Director of Cascade Bank and Cascade
                    Financial
                    CorporationRobert
                    G. Disotell
                52
                Executive
                    Vice President, Chief Credit OfficerSteven
                    R. Erickson(b)
                51
                Executive
                    Vice President, Real Estate LendingLars
                    H. Johnson(b)
                53
                Executive
                    Vice President, Chief Financial OfficerLeAnne
                    M. Frank
                37
                Executive
                    Vice President, Chief Administrative OfficerRobert
                    F. Wojcik
                57
                Executive
                    Vice President, Business BankingDebbie
                    E. McLeod
                41
                Executive
                    Vice President, Retail Banking
  (a)  At
          December 31, 2006.
 (b)  Officer
          of the Corporation and Bank.
 
 The
          principal occupation of each executive officer of the Corporation and Bank
          is
          set forth in the Proxy Statement or below. There are no family relationships
          among or between the executive officers listed above.
  CAROL
          K.
          NELSON was appointed Chief Executive Officer of the Company commencing
          May 1,
          2002. She has served as President of the Company and President and Chief
          Executive Officer of the Bank since February 2001. She was previously Senior
          Vice President and Northern Region Executive of Bank of America from 1996
          to
          2001. Ms. Nelson holds a Bachelor’s degree in Business Finance and a Master’s
          degree in Business Administration from Seattle University. Ms. Nelson serves
          as
          Chair of the Board of the Washington Bankers Association and on the Boards
          of
          Directors of the Seattle Branch of the Federal Reserve Bank of San Francisco,
          the Washington Roundtable, the Washington State Major League Baseball Stadium
          Public Facilities District, and the YWCA of King and Snohomish Counties.
          She
          also serves as a Trustee for Seattle University. Ms. Nelson serves as Vice
          Chair
          of the Company’s Executive Committee and as a member of the Bank’s Loan
          Committee. Ms. Nelson is a resident of Edmonds, Washington.
  ROBERT
            G.
            DISOTELL has been employed by Cascade Bank since 1977 and has served
            as
            Executive Vice President and Chief Credit Officer since February 2001.
            He is
            responsible for managing Loan Servicing and Credit Operations including
            overseeing the credit quality of the Bank’s loan portfolios. Mr. Disotell has
            managed a variety of business groups in his tenure at Cascade, including
            Mortgage Banking, Secondary Marketing, Retail Banking, and Community
            Reinvestment Act (CRA) activities. Mr. Disotell is a resident of Arlington,
            Washington.
 STEVEN
          R.
          ERICKSON is the Executive Vice President of Real Estate Lending for the
          Bank, a
          position held since November 1992. He is responsible for managing commercial
          and
          income property lending and serves as the Assistant Secretary for the
          Corporation. Mr. Erickson joined Cascade in 1978. He is a member of the
          Board
          for Big Brothers and Big Sisters of Snohomish County, Advisory Board Member
          for
          Snohomish County’s Pre-Diversion Program, and Trustee of the Boys and Girls Club
          of Snohomish County. He is a resident of Marysville, Washington.
 32
 LARS
          H.
          JOHNSON is the Executive Vice President, Chief Financial Officer of the
          Bank and
          Corporation and also serves as the corporate secretary. Mr. Johnson joined
          Cascade in April 2000. Mr. Johnson has 31 years of financial management
          experience, including 16 years with the Federal Home Loan Bank of Seattle.
          He
          serves as Treasurer of the Downtown Everett Association. Mr. Johnson is
          a
          resident of Edmonds, Washington.
  LEANNE
          M.
          FRANK is the
          Executive Vice President and Chief Administrative Officer for the Bank.
          She has
          20 years of consumer banking experience starting with Rainier Bank and
          Bank of
          America, where she served as Vice President and Region Service Manager.
          Ms.
          Frank joined Cascade in February 2001. She is a 2006 graduate of Pacific
          Coast
          Banking School and a member of the Board for the Snohomish County Red Cross.
          Ms.
          Frank is a resident of Everett, Washington.
  ROBERT
          F.
          WOJCIK is the Executive Vice President of Business Banking for the Bank,
          responsible for managing business relationships consisting of business
          loans,
          business deposits, Lines of Credit, owner occupied commercial real estate
          and
          other business services. Mr. Wojcik joined Cascade Bank in August 2004.
          He has
          27 years of commercial banking experience, recently retiring from Bank
          of
          America after 25 years in commercial banking. Mr. Wojcik is a member of
          the
          Board for the Snohomish County Junior Achievement and a Trustee for the
          Snohomish County YMCA. He has been involved in numerous other community
          organizations as a board member, coach and volunteer. Mr. Wojcik resides
          in Lake
          Stevens, Washington.
  DEBBIE
          E.
          McLEOD is Executive Vice President of Retail Banking for the Bank. Ms.
          McLeod
          joined Cascade Bank in February 2001. She has over 19 years of commercial
          banking experience and was previously Vice President and Northern Region
          Sales
          Manager for Bank of America. Ms. McLeod is a past Board Chair for United
          Way of
          Skagit County and is a Vice Chair of United Way of Snohomish County. Ms.
          McLeod
          resides in Burlington, Washington.
  **Item
          11. Executive Compensation**
  The
          information contained under the section captioned “Executive Compensation” in
          the Proxy Statement is incorporated herein by reference.
  **Item
          12. Security Ownership of Certain Beneficial Owners and Management and
          Related
          Stockholder Matters**
  (a)  Security
          Ownership of Certain Beneficial Owners
  Information
          required by this Item is incorporated herein by reference to the section
          captioned “Security Ownership of Certain Beneficial Owners and Management” in
          the Proxy Statement.
  (b)
                Security
                    Ownership of Management
 
 The
          information required by this Item is incorporated herein by reference to
          the
          section captioned “Security Ownership of Certain Beneficial Owners and
          Management” of the Proxy Statement.
  (c)
                Changes
                    in Control
 
 The
          Corporation is not aware of any arrangements, including any pledge by any
          person
          of securities of the Corporation, the operation of which may at a subsequent
          date result in a change in control of the Corporation.
  **Item
          13. Certain Relationships and Related Transactions, and Director
          Independence**
  The
          information required by this Item is incorporated herein by reference to
          the
          section captioned “Transactions with Management and Others” of the Proxy
          Statement.
  **Item
          14. Principal Accountant Fees and Services**
  The
          information required by this Item is incorporated herein by reference to
          the
          section captioned “INDEPENDENT AUDITORS” of the Proxy Statement.
 33
 **PART
          IV**
  **Item
          15. Exhibits, Financial Statement Schedules**
  (a)  (1)(2)  Reports
          of Independent Registered Public Accounting Firm
 Consolidated
          Financial Statements
 (a)
                Consolidated Balance Sheets at December 31,
                  2006, and
                  December 31, 2005. (b)
                Consolidated
                    Statements of Income for the years ended December 31, 2006, 2005
                    and
                    2004.
 (c)
                Consolidated
                    Statements of Stockholders’ Equity and Comprehensive Income for the years
                    ended December 31, 2006, 2005 and
                    2004.
 (d)
                Consolidated
                    Statements of Cash Flows for the years ended December 31, 2006,
                    2005 and
                    2004.
 (e)  Notes
          to
          Consolidated Financial Statements.
  All
          schedules have been omitted, as the required information is either inapplicable
          or contained in the Consolidated Financial Statements or related Notes
          contained
          in the Annual Report.
  (3)  Exhibits
  3.1
                    (i)
                Certificate
                    of Incorporation of Cascade Financial Corporation (Incorporated
                    by
                    reference to the Corporation’s Proxy statement on Form S-4 (File No.
                    33-83200)).
 3.2
                    (ii)
                Bylaws
                    of Cascade Financial Corporation (Incorporated by reference to
                    the
                    Corporation’s Registration Statement on Form S-4 (File No.
                    33-83200)).
 3.3
                    (ii)
                Amendment
                    to the Bylaws of Cascade Financial Corporation (Incorporated
                    by reference
                    to the Corporation’s Form 8-K filed September 27, 2005 (File No.
                    0-25286)).
 10.1
                Cascade
                    Financial Corporation 1994 Employee Stock Purchase Plan (Incorporated
                    by
                    reference to the Corporation’s Registration Statement on Form S-4 (File
                    No. 33-83200)).
 10.2
                Cascade
                    Financial Corporation 1992 Stock Option and Incentive Plan (Incorporated
                    by reference to the Corporation’s Form 10-KSB for the period ending June
                    30, 1995).
 10.3
                Cascade
                    Financial Corporation Employee Stock Ownership Plan (Incorporated
                    by
                    reference to the Corporation’s Annual Report on Form 10-KSB for the period
                    ending June 30, 1995).
 10.4
                Cascade
                    Financial Corporation 1997 Stock Option Plan (Incorporated by
                    reference to
                    Appendix E to the Prospectus included in the Corporation’s Registration
                    Statement on Form S-4 (File No.
                    333-24203)).
 10.5
                Form
                    of Change of Control Agreement entered into between the Bank
                    and its
                    executive officers. (Incorporated
                    by reference to Exhibit 10.6 of the Corporation’s Form 10-K for the period
                    ending December 31, 2001).
 10.6
                Cascade
                    Financial Corporation 1997 Elective Equity Plan. (Incorporated
                    by
                    reference to Exhibit 10.7 of the
                    Corporation’s Form 10-K for the period ending December 31, 2001).
 10.7
                Employment
                    Agreement Extension with Carol K. Nelson dated July 12, 2005
                    (Incorporated
                    by reference to Exhibit 10.1 of the Corporation’s Form 10-Q for the period
                    ending September 30, 2005).
 13
                Cascade
                    Financial Corporation December 31, 2006 Annual Report to Stockholders,
                    including the Selected Financial Data and Management Discussion
                    and
                    Analysis.
 21
                Subsidiaries. 23
                Consent
                    of Independent Registered Public Accounting Firm - Moss Adams
                    LLP.
 31.1
                Certification
                    of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002.
 31.2
                Certification
                    of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 2002.
 32
                Certification
                    of Annual Report on Form 10-K pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002.
  (b)  Reports
          on Form 8-K
  On
          January 23, 2007, the Corporation filed a Form 8-K reporting an attached
          press
          release announcing earnings information for the fourth quarter ended December
          31, 2006, under Items 2.02 and 9.01 of Form 8-K .
  34
  **SIGNATURES**
  Pursuant
          to the requirements of Section 13 or 15(d) of the Securities Exchange Act
          of
          1934, the registrant has duly caused this report to be signed on its behalf
          by
          the undersigned, thereunto duly authorized.
  **CASCADE
          FINANCIAL
          CORPORATION**
 
 Date:  March
          14,
          2007  By: /s/
          Carol K Nelson
 Carol
          K.
          Nelson
 President
          and Chief
          Executive Officer
 
 
 Pursuant
          to the requirements of Section 13 or 15(d) of the Securities Exchange Act
          of
          1934, this report has been signed below by the following persons on behalf
          of
          the registrant and in the capacities and on the dates indicated.
  By:
                /s/
                    Lars H. Johnson
                
                By:
                /s/
                    D. R. MurphyLars
                    H. Johnson
                  Executive
                    Vice President
                  (Chief
                    Financial Officer)
                
                
                D.
                    R. Murphy
                  DirectorDate:
                March
                    14, 2007
                
                Date:
                March
                    14, 2007By:
                /s/
                    David W. Duce
                
                By:
                /s/
                    Ronald E ThompsonDavid
                    W. Duce
                  Chairman
                
                
                Ronald
                    E. Thompson
                  DirectorDate:
                March
                    14, 2007
                
                Date:
                March
                    14, 2007By:
                /s/
                    Janice Halladay
                
                By:
                /s/
                    G. Brandt WestoverJanice
                    Halladay
                  Director
                
                
                G.
                    Brandt Westover
                  DirectorDate:
                March
                    14, 2007
                
                Date:
                March
                    14, 2007By:
                /s/
                    Craig Skotdal
                
                By:
                /s/
                    Dwayne LaneCraig
                    Skotdal
                  Director
                
                
                Dwayne
                    Lane
                  DirectorDate:
                March
                    14, 2007
                
                Date:
                March
                    14, 2007By:
                /s/
                    David O’Connor
                
                By:
                /s/
                    Richard AndersonDavid
                    O’Connor
                  Director
                
                
                Richard
                    Anderson
                  DirectorDate:
                March
                    14, 2007
                
                Date:
                March
                    14, 2007By:
                /s/
                    Katherine M. Lombardo
                
                By:
                /s/
                    Jim GaffneyKatherine
                    M. Lombardo
                  Director
                
                
                Jim
                    Gaffney
                  DirectorDate:
                March
                    14, 2007
                
                Date:
                March
                    14, 2007
 
 35