UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)

[ X ]                    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES                             EXCHANGE ACT OF 1934

For the quarterly period ended  June 30, 2006

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

For the transition period from ________________ to _________________

Commission File Number 000-50362



RAINIER PACIFIC FINANCIAL GROUP, INC.



|                                                                        |                                               
|----------------------------------------------------------------------- | ----------------------------------------------
|Washington(State or other jurisdiction ofincorporation or organization) | 87-0700148(I.R.S.  EmployerIdentification No.)
|                                                                        |                                               

1498 Pacific Avenue, Tacoma, WA 98402



(253) 926-4000



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   
YesX         No_____

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 Exchange Act. (Check one):

Large accelerated filer_____     Accelerated filer X        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  X

APPLICABLE ONLY TO CORPORATE ISSUERS

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

|                                                                                                                                                                                                                                                                                                                                          |                    
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|Title of class:                                                                                                                                                                                                                                                                                                                           | As of June 30, 2006
|Common stock, no par value                                                                                                                                                                                                                                                                                                                | 6,628,870*         
|                                                                                                                                                                                                                                                                                                                                          |                    
|*  Includes 492,107 shares held by the Rainier Pacific 401(k) Employee Stock Ownership Plan that have not been released, committed to be released, or allocated to participant accounts; and 190,570 restricted shares granted under the Rainier Pacific Financial Group, Inc. 2004 Management Recognition Plan that have not yet vested.

<PAGE>

RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY









|PART I  -  | FINANCIAL INFORMATION                                                                  | Page                                                                            
|---------- | -------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------
|           |                                                                                        |                                                                                 
|ITEM 1 -   | Financial Statements.                                                                  |                                                                                 
|           |                                                                                        |                                                                                 
|           | Consolidated Statements of Financial Condition at                                      |                                                                                 
|           |                                                                                        | June 30, 2006 and December 31, 2005                                             
|           | Consolidated Statements of Income for the                                              |                                                                                 
|           |                                                                                        | Three Months and Six Months Ended June 30, 2006 and 2005                        
|           | Consolidated Statements of Cash Flows for the                                          |                                                                                 
|           |                                                                                        | Six Months Ended June 30, 2006 and 2005                                         
|           | Consolidated Statements of Shareholders' Equity                                        |                                                                                 
|           |                                                                                        | for the Six Months Ended June 30, 2006 and 
For the Year Ended December 31, 2005
|           | Selected Notes to Unaudited Interim Consolidated Financial Statements                  | 7                                                                               
|           |                                                                                        |                                                                                 
|ITEM 2 -   | Management's Discussion and Analysis of Financial Condition and Results of Operations. |                                                                                 
|           |                                                                                        |                                                                                 
|           | Forward-Looking Statements                                                             | 11                                                                              
|           | Comparison of Financial Condition at                                                   | 11                                                                              
|           |                                                                                        | June 30, 2006 and December 31, 2005                                             
|           | Comparison of Operating Results for the                                                |                                                                                 
|           |                                                                                        | Three Months Ended June 30, 2006 and 2005                                       
|           | Comparison of Operating Results for the                                                |                                                                                 
|           |                                                                                        | Six Months Ended June 30, 2006 and 2005                                         
|           | Liquidity and Capital Resources                                                        | 21                                                                              
|           |                                                                                        |                                                                                 
|ITEM 3 -   | Quantitative and Qualitative Disclosures about Market Risk                             | 22                                                                              
|           |                                                                                        |                                                                                 
|ITEM 4 -   | Controls and Procedures                                                                | 22                                                                              
|           |                                                                                        |                                                                                 
|PART II -  | OTHER INFORMATION                                                                      |                                                                                 
|           |                                                                                        |                                                                                 
|ITEM 1 -   | Legal Proceedings                                                                      | 23                                                                              
|ITEM 1A -  | Risk Factors                                                                           | 23                                                                              
|ITEM 2 -   | Unregistered Sales of Equity Securities and Use of Proceeds                            | 23                                                                              
|ITEM 3 -   | Defaults Upon Senior Securities                                                        | 24                                                                              
|ITEM 4 -   | Submission of Matters to a Vote of Security Holders                                    | 24                                                                              
|ITEM 5 -   | Other Information                                                                      | 24                                                                              
|ITEM 6 -   | Exhibits                                                                               | 24                                                                              
|           |                                                                                        |                                                                                 
|SIGNATURES | 25                                                                                    
|           |                                                                                       

1

<PAGE>

RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition(In Thousands)



|                                                                                                                                                                                                                                            |  | At June 30,        |  | At December 31,   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | ------------------
|                                                                                                                                                                                                                                            |  | 2006               |  | 2005              
|ASSETS                                                                                                                                                                                                                                      |  |                    |  |                   
|Cash and cash equivalents                                                                                                                                                                                                                   |  | $            7,980 |  | $            9,955
|Interest-bearing deposits with banks                                                                                                                                                                                                        |  | 22,816             |  | 3,836             
|Securities available-for-sale                                                                                                                                                                                                               |  | 149,320            |  | 144,212           
|Securities held-to-maturity (fair value of $74,252 at June 30, 2006     and  $79,885 at December 31, 2005)                                                                                                                                  |  | 76,800             |  | 81,497            
|Federal Home Loan Bank ("FHLB") stock, at cost                                                                                                                                                                                              |  | 13,712             |  | 13,712            
|                                                                                                                                                                                                                                            |  |                    |  |                   
|Loans                                                                                                                                                                                                                                       |  | 608,414            |  | 582,894           
|Less: allowance for loan losses                                                                                                                                                                                                             |  | (8,410)            |  | (8,597)           
|Loans, net                                                                                                                                                                                                                                  |  | 600,004            |  | 574,297           
|                                                                                                                                                                                                                                            |  |                    |  |                   
|Premises and equipment, net                                                                                                                                                                                                                 |  | 35,173             |  | 34,307            
|Accrued interest receivable                                                                                                                                                                                                                 |  | 3,941              |  | 3,861             
|Other assets                                                                                                                                                                                                                                |  | 9,481              |  | 5,166             
|                                                                                                                                                                                                                                            |  |                    |  |                   
|TOTAL ASSETS                                                                                                                                                                                                                                |  | $       919,227    |  | $        870,843  
|                                                                                                                                                                                                                                            |  |                    |  |                   
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                        |  |                    |  |                   
|LIABILITIES:                                                                                                                                                                                                                                |  |                    |  |                   
|Deposits                                                                                                                                                                                                                                    |  |                    |  |                   
|Non-interest bearing                                                                                                                                                                                                                        |  | $         32,449   |  | $          31,065 
|Interest-bearing                                                                                                                                                                                                                            |  | 416,982            |  | 406,965           
|Total Deposits                                                                                                                                                                                                                              |  | 449,431            |  | 438,030           
|                                                                                                                                                                                                                                            |  |                    |  |                   
|Borrowed funds                                                                                                                                                                                                                              |  | 373,415            |  | 340,240           
|Corporate drafts payable                                                                                                                                                                                                                    |  | 3,985              |  | 2,977             
|Accrued compensation and benefits                                                                                                                                                                                                           |  | 2,090              |  | 1,958             
|Other liabilities                                                                                                                                                                                                                           |  | 5,040              |  | 2,928             
|                                                                                                                                                                                                                                            |  |                    |  |                   
|TOTAL LIABILITIES                                                                                                                                                                                                                           |  | 833,961            |  | 786,133           
|                                                                                                                                                                                                                                            |  |                    |  |                   
|SHAREHOLDERS' EQUITY:                                                                                                                                                                                                                       |  |                    |  |                   
|Common stock, no par value: 49,000,000 shares authorized; 6,628,870        shares issued and 5,946,193 shares outstanding at June 30, 2006; and        6,690,847 shares issued and 5,940,502 shares outstanding at December        31, 2005 |  | 49,603             |  | 49,598            
|Unearned Employee Stock Ownership Plan ("ESOP") shares                                                                                                                                                                                      |  | (4,921)            |  | (5,261)           
|Accumulated other comprehensive loss, net of tax                                                                                                                                                                                            |  | (1,768)            |  | (1,441)           
|Retained earnings                                                                                                                                                                                                                           |  | 42,352             |  | 41,814            
|                                                                                                                                                                                                                                            |  |                    |  |                   
|TOTAL SHAREHOLDERS' EQUITY                                                                                                                                                                                                                  |  | 85,266             |  | 84,710            
|                                                                                                                                                                                                                                            |  |                    |  |                   
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                  |  | $     919,227      |  | $        870,843  



2

<PAGE>

RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY



|                                                       | Three Months Ended
June 30, |  | Six Months Ended
June 30,
|------------------------------------------------------ | --------------------------- |  | -------------------------
|                                                       | 2006                        |  | 2005                     
|INTEREST INCOME                                        |                             |  |                          
|Loans                                                  | $       10,414              |  | $         8,364          
|Securities available-for-sale                          | 2,005                       |  | 1,129                    
|Securities held-to-maturity                            | 723                         |  | 812                      
|Interest-bearing deposits                              | 52                          |  | 5                        
|FHLB stock dividends                                   | -                           |  | -                        
|                                                       |                             |  |                          
|Total interest income                                  | 13,194                      |  | 10,310                   
|                                                       |                             |  |                          
|INTEREST EXPENSE                                       |                             |  |                          
|Deposits                                               | 3,277                       |  | 1,599                    
|Borrowed funds                                         | 3,821                       |  | 2,723                    
|                                                       |                             |  |                          
|Total interest expense                                 | 7,098                       |  | 4,322                    
|                                                       |                             |  |                          
|Net interest income                                    | 6,096                       |  | 5,988                    
|                                                       |                             |  |                          
|PROVISION FOR LOAN LOSSES                              | 150                         |  | 150                      
|                                                       |                             |  |                          
|Net interest income after provision for loan    losses | 5,946                       |  | 5,838                    
|                                                       |                             |  |                          
|NON-INTEREST INCOME                                    |                             |  |                          
|Deposit service fees                                   | 897                         |  | 971                      
|Loan service fees                                      | 290                         |  | 238                      
|Insurance service fees                                 | 518                         |  | 133                      
|Investment service fees                                | 163                         |  | 124                      
|Real estate lease income                               | 281                         |  | 119                      
|Loss on sale of securities, net                        | -                           |  | (2)                      
|Gain on sale of loans, net                             | 46                          |  | 109                      
|Gain/(loss) on sale of premise and equipment, net      | -                           |  | (2)                      
|Other operating income                                 | 27                          |  | 1                        
|                                                       |                             |  |                          
|Total non-interest income                              | 2,222                       |  | 1,691                    
|                                                       |                             |  |                          
|NON-INTEREST EXPENSE                                   |                             |  |                          
|Compensation and benefits                              | 4,034                       |  | 3,604                    
|Office operations                                      | 1,308                       |  | 1,312                    
|Occupancy                                              | 635                         |  | 472                      
|Loan servicing                                         | 144                         |  | 132                      
|Outside and professional services                      | 237                         |  | 403                      
|Marketing                                              | 222                         |  | 238                      
|Other operating expenses                               | 523                         |  | 408                      
|                                                       |                             |  |                          
|Total non-interest expense                             | 7,103                       |  | 6,569                    
|                                                       |                             |  |                          
|INCOME BEFORE PROVISION FOR FEDERAL      INCOME TAX    | 1,065                       |  | 960                      
|                                                       |                             |  |                          
|PROVISION FOR FEDERAL INCOME TAX                       | 372                         |  | 325                      
|NET INCOME                                             | $          693              |  | $          635           
|EARNINGS PER COMMON SHARE                              |                             |  |                          
|Basic                                                  | $         0.12              |  | $         0.10           
|Diluted                                                | $         0.12              |  | $         0.10           
|Weighted average shares outstanding-Basic              | 5,924,609(1)                |  | 6,148,455(2)             
|Weighted average shares outstanding-Diluted            | 5,935,785(1)                |  | 6,150,112(2)             
|Dividends declared per share                           | $         0.06              |  | $        0.06            

(1)    Weighted average shares outstanding (both Basic and Diluted) include 133,430 shares of the 324,000                       restricted shares (net of forfeited shares) granted and issued under the 2004 Management Recognition Plan                      ("MRP").



3

<PAGE>





RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows(In Thousands)



|                                                                                     |  | Six Months Ended
June 30,
|------------------------------------------------------------------------------------ |  | -------------------------
|                                                                                     |  | 2006                     
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |  |                          
|Net income                                                                           |  | $          1,335         
|Adjustments to reconcile net income to net cash from operating       activities:     |  |                          
|Depreciation                                                                         |  | 1,825                    
|Amortization of intangible assets                                                    |  | 130                      
|Provision for loan losses                                                            |  | 300                      
|FHLB stock dividends                                                                 |  | -                        
|Deferred income tax expense                                                          |  | 27                       
|Loss on sale of securities                                                           |  | -                        
|Gain on sale of premises and equipment                                               |  | -                        
|Gain on sale of loans, net                                                           |  | (52)                     
|Compensation for stock options                                                       |  | 296                      
|Compensation for restricted stock awards                                             |  | 522                      
|Net amortization of premiums on securities                                           |  | 423                      
|Change in operating assets and liabilities:                                          |  |                          
|Accrued interest receivable                                                          |  | (80)                     
|Other assets                                                                         |  | (4,298)                  
|Corporate drafts payable                                                             |  | 1,008                    
|Other liabilities                                                                    |  | 2,244                    
|                                                                                     |  |                          
|Net cash provided from/(used in) operating                                activities |  | 3,680                    
|                                                                                     |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |  |                          
|Activity in securities available-for-sale:                                           |  |                          
|Sales                                                                                |  | -                        
|Maturities, prepayments, and calls                                                   |  | 3,172                    
|Purchases                                                                            |  | (9,088)                  
|Activity in securities held-to-maturity:                                             |  |                          
|Maturities, prepayments, and calls                                                   |  | 4,581                    
|Purchases of FHLB stock                                                              |  | -                        
|Increase in loans, net                                                               |  | (32,972)                 
|Proceeds from sales of loans                                                         |  | 7,017                    
|Purchases of premises and equipment                                                  |  | (2,691)                  
|Proceeds from sales of premises and equipment                                        |  | -                        
|(Increase)/decrease in interest-bearing deposits with banks                          |  | (18,980)                 
|                                                                                     |  |                          
|Net cash used in investing activities                                                |  | (48,961)                 
|                                                                                     |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |  |                          
|Net increase in deposits                                                             |  | 11,401                   
|Advances of borrowed funds                                                           |  | 435,516                  
|Repayments of borrowed funds                                                         |  | (402,341)                
|Earned ESOP shares released                                                          |  | 340                      
|Change in value of ESOP shares                                                       |  | 147                      
|Dividends paid                                                                       |  | (797)                    
|Common stock repurchased                                                             |  | (960)                    
|                                                                                     |  |                          
|Net cash provided from financing activities                                          |  | 43,306                   
|                                                                                     |  |                          
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                              |  | (1,975)                  
|                                                                                     |  |                          
|CASH AND CASH EQUIVALENTS (at beginning of period)                                   |  | 9,955                    
|                                                                                     |  |                          
|CASH AND CASH EQUIVALENTS (at end of period)                                         |  | $          7,980         



4

<PAGE>

RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)(In Thousands)



|                                                          |  | Six Months Ended
June 30,
|--------------------------------------------------------- |  | -------------------------
|                                                          |  | 2006                     
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION         |  |                          
|Cash payments for:                                        |  |                          
|Interest                                                  |  | $      13,861            
|                                                          |  |                          
|Income taxes                                              |  | $        1,060           
|                                                          |  |                          
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES |  |                          
|Unrealized losses on securities available-for-sale        |  | $         (503)          
|                                                          |  |                          

5

<PAGE>

RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity(In Thousands)





|                                                                          |  | Common Stock |  | Debt
Relatedto ESOP |  | RetainedEarnings | Accumulated
Other
Comprehensive
(Loss) |            
|------------------------------------------------------------------------- |  | ------------ |  | ------------------- |  | ---------------- | -------------------------------------- | -----------
|                                                                          |  | Shares       |  | Amount              |  |                  | Total                                 
|                                                                          |  |              |  |                     |  |                  |                                        |            
|Balance, December 31, 2004                                                |  | 7,672,260    |  | $    64,672         |  | $    (5,940)     |                                        | $    40,799
|                                                                          |  |              |  |                     |  |                  |                                        |            
|Common stock repurchased                                                  |  | (973,613)    |  | (16,636)            |  |                  |                                        |            
|MRP forfeitures                                                           |  | (7,800)      |  |                     |  |                  |                                        |            
|Earned ESOP shares released                                               |  |              |  |                     |  | 679              |                                        |            
|ESOP activity-Change in value of        shares committed to be released   |  |              |  | 479                 |  |                  |                                        |            
|Dividends paid                                                            |  |              |  |                     |  |                  |                                        | (1,678)    
|Compensation for restricted stock        awards                           |  |              |  | 1,083               |  |                  |                                        |            
|Comprehensive income:                                                     |  |              |  |                     |  |                  |                                        |            
|Net income                                                                |  |              |  |                     |  |                  |                                        | 2,693      
|Other comprehensive loss:                                                 |  |              |  |                     |  |                  |                                        |            
|Change in unrealized loss on               securities, net of tax of $369 |  |              |  |                     |  |                  |                                        |            
|Total comprehensive income                                                |  |              |  |                     |  |                  |                                        |            
|Balance, December 31, 2005                                                |  | 6,690,847    |  | 49,598              |  | (5,261)          |                                        | 41,814     
|                                                                          |  |              |  |                     |  |                  |                                        |            
|Common stock repurchased                                                  |  | (60,477)     |  | (960)               |  |                  |                                        |            
|MRP forfeitures                                                           |  | (1,500)      |  |                     |  |                  |                                        |            
|Earned ESOP shares released                                               |  |              |  |                     |  | 340              |                                        |            
|ESOP activity-Change in value of       shares committed to be released    |  |              |  | 147                 |  |                  |                                        |            
|Dividends paid                                                            |  |              |  |                     |  |                  |                                        | (797)      
|Compensation for restricted stock       awards                            |  |              |  | 522                 |  |                  |                                        |            
|Compensation for stock options                                            |  |              |  | 296                 |  |                  |                                        |            
|Comprehensive income:                                                     |  |              |  |                     |  |                  |                                        |            
|Net income                                                                |  |              |  |                     |  |                  |                                        | 1,335      
|Other comprehensive loss:                                                 |  |              |  |                     |  |                  |                                        |            
|Change in unrealized loss on              securities, net of tax of $176  |  |              |  |                     |  |                  |                                        |            
|Total comprehensive income                                                |  |              |  |                     |  |                  |                                        |            
|Balance, June 30, 2006                                                    |  | 6,628,870    |  | $    49,603         |  | $    (4,921)     |                                        | $    42,352



6

<PAGE>

RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARYSELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006



Note 1 - Organization and Basis of Presentation



Organization.  On October 20, 2003, Rainier Pacific Savings Bank (the "Bank") converted from a Washington State chartered mutual savings bank to a Washington State chartered stock savings bank.  In connection with the Bank's conversion, Rainier Pacific Financial Group, Inc. (the "Company") was formed to be the bank holding company for the Bank.  The Company purchased 100% of the Bank's common stock simultaneously with the Bank's conversion to stock form and the Company's offering and sale of its common stock to the public.

The Bank provides a full range of banking services to consumers and limited banking services to small- and medium-sized businesses and professionals.  On July 17, 2006, the Bank opened a new full service branch office located in the Crossings shopping center in the City of Federal Way.  The Bank now has 14 banking offices located in the Tacoma-Pierce County market and the City of Federal Way.  The Bank also provides insurance and investment services through operating units of the Bank doing business as Rainier Pacific Insurance Services and Rainier Pacific Financial Services.



Basis of Presentation.

Reclassifications.  Certain amounts in the prior periods have been reclassified to conform to the June 30, 2006 presentation.  These reclassifications have no effect on net income, equity, or earnings per share.

Note 2 - Mutual-to-Stock Conversion of the Bank

The Board of Directors of the Bank adopted a Plan of Conversion (the "Plan") on March 22, 2003, which was amended on August 6, 2003.  The Plan provided for the conversion of the Bank from a Washington State chartered mutual savings bank to a Washington State chartered stock savings bank pursuant to the rules and regulations of the Washington State Department of Financial Institutions and the Federal Deposit Insurance Corporation.  As part of the conversion, the Plan provided for the concurrent formation of the Company which owns 100% of the common stock of the Bank.  On October 20, 2003, the Bank consummated the conversion following receipt of all required regulatory approvals, the approval of the Plan by depositors of the Bank, and the completion or fulfillment of all other conditions precedent to the conversion.

Upon conversion, the legal existence of the Bank did not terminate and the stock bank is a continuation of the mutual bank.  The stock bank has, holds, and enjoys the same rights as was possessed, held, and enjoyed by the mutual bank.  The stock bank continues to have and succeeds to all the rights, obligations, and relations of the mutual bank.

In connection with the conversion, the Bank established a liquidation account in an amount equal to its total net worth as of the latest statement of financial condition appearing in the financial statements contained in the Company's Registration Statement on Form S-1 filed with the SEC.  The liquidation account is maintained for the benefit of eligible depositors who continue to maintain their accounts at the Bank after the conversion.  The liquidation account is reduced annually to the extent that eligible depositors have reduced their qualifying deposits.  Subsequent increases will not restore an eligible account holder's interest in the liquidation account.  In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held.  The liquidation account balance is not available for payment of dividends.

7

<PAGE>

Note 3 - Summary of Significant Accounting Policies

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements.  Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein.

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, deferred tax asset and liability accounts, and the valuation of real estate or other collateral acquired in connection with foreclosures or in satisfaction of loans.  In connection with the determination of the allowance for loan losses and the valuation of foreclosed or repossessed assets held-for-sale, management obtains independent appraisals for significant properties. There were no material changes in the Company's significant accounting policies or critical accounting estimates from those disclosed in the Company's 2005 Form 10-K.

Accounting for Stock-Based Compensation.  Prior to the adoption of the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payment ("SFAS 123(R)"), the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  The Company adopted the pro forma disclosure-only provisions of SFAS 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure,an amendment of SFAS 123 and, as such, did not recognize any compensation expense for employee stock options for all periods prior to January 1, 2006.

On January 1, 2006 (the effective date), the Company adopted the fair value recognition provisions of SFAS 123(R), using the "modified prospective" method in which compensation cost is recognized for all share-based payments granted prior to the effective date of SFAS 123(R) that remained unvested on the effective date and for all awards granted to employees after the effective date.  See Note 4 for additional information regarding stock-based compensation.

Note 4 - Stock-Based Compensation

On June 7, 2004, the Company granted non-qualified stock options of 351,750 shares of common stock to certain employees and directors and granted incentive stock options of 328,250 shares of common stock to certain employees under the Company's 2004 Stock Option Plan ("SOP").  The fair market value of the Company's common stock on the date of grant was $16.26.  On August 17, 2005, the Company granted additional incentive stock options of 40,000 shares of common stock to certain employees.  The fair market value of the Company's common stock on the date of grant was $16.72.  The Company implemented the SOP to promote the long-term interests of the Company and its shareholders by providing an incentive to those key employees who contribute to the operating success of the Company.  The maximum number of options that may be issued under the SOP is 844,284.  Options are granted at the then fair market value and vest over five years.  Options expire 10 years from the date of grant and are subject to certain restrictions and limitations.



The estimated fair value of options granted was determined as of the grant dates (August 17, 2005 and June 7, 2004) using a binomial pricing model with the following assumptions for the years ended December 31:



|                                | 2005                   |  | 2004                  
|------------------------------- | ---------------------- |  | ----------------------
|Assumptions:                    |                        |  |                       
|Option exercise price           | $              16.72   |  | $              16.26  
|Stock price on grant date       | $          16.72       |  | $              16.26  
|Annual dividend yield           | 1.40%                  |  | 2.00%                 
|Expected volatility             | 19.63%                 |  | 21.95%                
|Risk-free interest rate         | 3.99%                  |  | 4.39%                 
|Employee attrition rate         | 5.00%                  |  | 3.00%                 
|Vesting period                  | 5 years                |  | 5 years               
|Expected life                   | 6 years                |  | 7 years               
|Contractual term                | 10 years               |  | 10 years              
|                                |                        |  |                       
|                                |                        |  |                       
|Estimated fair value of options | $                 3.92 |  | $                 3.60

8

<PAGE>

The following represents the stock option activity and option price information for the year ended December 31, 2005 and the six months ended June 30, 2006:



|                             | Number of
Options |  | Weighted-Average Exercise Price |  | Aggregate Intrinsic Value
|---------------------------- | ----------------- |  | ------------------------------- |  | -------------------------
|Balance at December 31, 2004 | 677,000           |  | $       16.26                   |  | $    1,110,280           
|                             |                   |  |                                 |  |                          
|Granted                      | 40,000            |  | 16.72                           |  |                          
|Exercised                    | -                 |  | -                               |  |                          
|Forfeited/expired            | (9,000)           |  | 16.26                           |  |                          
|                             |                   |  |                                 |  |                          
|Balance at December 31, 2005 | 708,000           |  | 16.29                           |  | -                        
|                             |                   |  |                                 |  |                          
|Granted                      | -                 |  | -                               |  |                          
|Exercised                    | -                 |  | -                               |  |                          
|Forfeited/expired            | (37,600)          |  | 16.49                           |  |                          
|                             |                   |  |                                 |  |                          
|Balance at June 30, 2006     | 670,400           |  | $                16.27          |  | $    1,515,104           

At June 30, 2006, the market value of the Company's shares was $18.53 per share.  Therefore, at June 30, 2006, the aggregate intrinsic value of stock options outstanding and stock options exercisable was $1.5 million and $590,000, respectively.  The weighted average contractual life of exercisable option shares as of June 30, 2006 was 8.0 years.  At December 31, 2005 and 2004, the market value of the Company's shares was $16.01 and $17.90, respectively.  Therefore, at December 31, 2005, the stock options outstanding had no aggregate intrinsic value, and at December 31, 2004 had an aggregate intrinsic value of $1.1 million.

Stock-based compensation expense from the SOP recognized by the Company in the Consolidated Statements of Income was $296,000 for the six months ending June 30, 2006 compared to the pro forma stock-based compensation expense of $526,000 for the six months ended June 30, 2005.  On an after-tax basis, stock-based compensation was $192,000 for the six months ended June 30, 2006 with basic and diluted earnings per share of $0.23 compared to the pro forma stock-based compensation expense of $347,000 for the six months ended June 30, 2005 with basic and diluted earnings per share of $0.17.

Financial data pertaining to the stock options at June 30, 2006 is as follows:

|Number of
 Options |  | Weighted-
Average
Remaining
Contractual Life
in Years |  | Weighted-Average
Exercise Price |  | Number
Exercisable |  | Weighted-
Average
Exercise Price
of Exercisable
Options
|------------------ |  | ----------------------------------------------------- |  | ------------------------------- |  | ------------------ |  | -------------------------------------------------------
|649,400            |  | 8.00                                                  |  | $         16.26                 |  | 259,760            |  | $    16.26                                             
|21,000             |  | 9.25                                                  |  | $         16.72                 |  | -                  |  | $            -                                         

The remaining unrecognized compensation expense for the fair value of outstanding stock options was approximately $708,000 and $1.1 million at June 30, 2006 and December 31, 2005, respectively.

Note 5 - Earnings Per Share

Earnings per share ("EPS") is computed using the basic and diluted weighted average number of common shares outstanding during the period.  Basic EPS is computed by dividing the Company's net income or loss by the weighted average number of common shares outstanding for the period.  Diluted EPS is computed by dividing net income by diluted weighted average shares outstanding, which includes common stock equivalent shares outstanding using the treasury stock method, unless such shares are anti-dilutive.  Common stock equivalents include the stock options and restricted stock awards under the SOP and the MRP approved by shareholders in April 2004.  Unallocated shares relating to the ESOP debt obligations are deducted in the calculation of weighted average shares outstanding.

9

<PAGE>





|                                                                                                       | Three Months Ended 
June 30, |  | Six Months Ended
June 30,
|------------------------------------------------------------------------------------------------------ | ---------------------------- |  | -------------------------
|                                                                                                       | 2006                         |  | 2005                     
|Numerator:                                                                                             |                              |  |                          
|                                                                                                       |                              |  |                          
|Net Income                                                                                             | $      693                   |  | $       635              
|                                                                                                       |                              |  |                          
|Denominator:                                                                                           |                              |  |                          
|                                                                                                       |                              |  |                          
|Denominator for basic net income per share:                                                            |                              |  |                          
|Weighted average shares                                                                                | 5,924,609                    |  | 6,148,455                
|Effect of dilutive securities:                                                                         |                              |  |                          
|Stock options                                                                                          | 1,414                        |  | -                        
|Restricted stock                                                                                       | 9,762                        |  | 1,657                    
|Denominator for diluted net income per share:                                                          |                              |  |                          
|Weighted average shares and assumed conversion of         
dilutive stock options and restricted stock | 5,935,785                    |  | 6,150,112                
|                                                                                                       |                              |  |                          
|Basic earnings per share                                                                               | $    0.12                    |  | $      0.10              
|                                                                                                       |                              |  |                          
|Diluted earnings per share                                                                             | $    0.12                    |  | $      0.10              

Note 6 - Cash Dividends

On May 19, 2006, the Company announced a quarterly cash dividend of $0.06 cents per share payable on June 12, 2006 to shareholders of record on June 1, 2006.

Note 7 - Recently Issued Accounting Standards

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments ("SFAS 155") - an amendment to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140").  SFAS 155 provides the framework for fair value remeasurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation as well as establishes a requirement to evaluate interests in securitized financial assets to identify interests. SFAS 155 further amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The SFAS 155 guidance also clarifies which interest-only strips and principal-only strips are not subject to the requirement of SFAS 133 and which concentrations of credit risk in the form of subordination are not embedded derivatives. This statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. SFAS 155 is not expected to have a material impact on our consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets ("SFAS 156") - an amendment of SFAS 140.  SFAS 156 requires the recognition of a servicing asset or servicing liability under certain circumstances when an obligation to service a financial asset by entering into a servicing contract.  SFAS 156 also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value utilizing the amortization method or fair market value method.  SFAS 156 is effective for an entity's first fiscal year that begins after September 15, 2006.  SFAS 156 is not expected to have a material impact on our consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes("FIN 48").FIN 48 requires recognition and measurement of uncertain tax positions using a "more-likely-than-not" approach.  FIN 48 is effective for fiscal years beginning after December 31, 2006, and is not expected to have a material impact on our consolidated financial statements.

10

<PAGE>

ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Company's strategies. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. The Company's actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: interest rate fluctuations; economic conditions in the Company's primary market area; deposit flows; demand for residential, commercial real estate, consumer, and other types of loans; real estate values; success of new products; competitive conditions between banks and non-bank financial service providers; regulatory and accounting changes; success of new technology; technological factors affecting operations; costs of technology; pricing of products and services; costs of constructing new buildings; time to lease excess space in Company-owned buildings; and other risks. Accordingly, these factors should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. The Company undertakes no responsibility to update or revise any forward-looking statements.

Comparison of Financial Condition at June 30, 2006 and December 31, 2005

The following table sets forth certain information concerning the Company's consolidated financial condition at the dates indicated (dollars in thousands):



|                                     | At June 30,       |  | At December 31,  |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------------------ | ----------------- |  | ---------------- |  | --------------------- |  | ---------------------
|                                     | 2006              |  | 2005            
|FINANCIAL CONDITION DATA:            |                   |  |                  |  |                       |  |                      
|Total assets                         | $         919,227 |  | $        870,843 |  | $            48,384   |  | 5.6%                 
|Investment securities                | 226,120           |  | 225,709          |  | 411                   |  | 0.2                  
|Interest-bearing deposits with banks | 22,816            |  | 3,836            |  | 18,980                |  | 494.8                
|Loans, net                           | 600,004           |  | 574,297          |  | 25,707                |  | 4.5                  
|Deposits                             | 449,431           |  | 438,030          |  | 11,401                |  | 2.6                  
|Borrowed funds                       | 373,415           |  | 340,240          |  | 33,175                |  | 9.8                  
|Total shareholders' equity           | 85,266            |  | 84,710           |  | 556                   |  | 0.7                  

Total assets increased by $48.4 million, or 5.6%, to $919.2 million at June 30, 2006 from $870.8 million at December 31, 2005.  This increase reflects loan portfolio growth of $25.7 million to $600.0 million from $574.3 million, and an increase of $411,000 in investment securities.  Additionally, interest-bearing deposits increased $19.0 million, or 494.8%, to $22.8 million from $3.8 million. The growth in assets was funded by deposits, which increased $11.4 million to $449.4 million from $438.0 million, and FHLB of Seattle advances, which increased $33.2 million to $373.4 million from $340.2 million at December 31, 2005.  Shareholders' equity increased $556,000 to $85.3 million at June 30, 2006 from $84.7 million at December 31, 2005.

11

<PAGE>

Loans.The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated (dollars in thousands):



|                                                                                                     | At June 30, 2006 |  | At December 31, 2005 |  | $ Increase (Decrease) |  | % Increase (Decrease)
|---------------------------------------------------------------------------------------------------- | ---------------- |  | -------------------- |  | --------------------- |  | ---------------------
|                                                                                                     | Amount           |  | Percent              |  | Amount                |  | Percent              
|Real estate:                                                                                         |                  |  |                      |  |                       |  |                      
|One-to four-family residential                                                                       | $      85,878    |  | 14.1%                |  | $        84,903       |  | 14.6%                
|Five or more family residential                                                                      | 165,344          |  | 27.2                 |  | 158,997               |  | 27.3                 
|Commercial                                                                                           | 180,390          |  | 29.7                 |  | 166,242               |  | 28.5                 
|Total real estate                                                                                    | 431,612          |  | 71.0                 |  | 410,142               |  | 70.4                 
|                                                                                                     |                  |  |                      |  |                       |  |                      
|Real estate construction:                                                                            |                  |  |                      |  |                       |  |                      
|One-to four-family residential                                                                       | 57,624           |  | 9.5                  |  | 53,247                |  | 9.1                  
|Five or more family residential                                                                      | 4,927            |  | 0.8                  |  | 4,859                 |  | 0.8                  
|Commercial                                                                                           | -                |  | -                    |  | 2,795                 |  | 0.5                  
|Total real estate construction                                                                       | 62,551           |  | 10.3                 |  | 60,901                |  | 10.4                 
|                                                                                                     |                  |  |                      |  |                       |  |                      
|Consumer:                                                                                            |                  |  |                      |  |                       |  |                      
|Automobile                                                                                           | 34,137           |  | 5.6                  |  | 39,429                |  | 6.8                  
|Home equity loans                                                                                    | 36,978           |  | 6.1                  |  | 31,948                |  | 5.5                  
|Credit cards                                                                                         | 21,735           |  | 3.6                  |  | 22,054                |  | 3.8                  
|Other                                                                                                | 8,655            |  | 1.3                  |  | 9,196                 |  | 1.6                  
|Total consumer                                                                                       | 101,505          |  | 16.6                 |  | 102,627               |  | 17.7                 
|                                                                                                     |                  |  |                      |  |                       |  |                      
|Commercial/business                                                                                  | 12,746           |  | 2.1                  |  | 9,224                 |  | 1.5                  
|                                                                                                     |                  |  |                      |  |                       |  |                      
|Subtotal                                                                                             | 608,414          |  | 100.0%               |  | 582,894               |  | 100.0%               
|                                                                                                     |                  |  |                      |  |                       |  |                      
|Less: allowance for loan losses                                                                      | (8,410)          |  |                      |  | (8,597)               |  |                      
|                                                                                                     |                  |  |                      |  |                       |  |                      
|Loans, net                                                                                           | $     600,004    |  |                      |  | $     574,297         |  |                      
|Asset Quality Ratios:                                                                                |                  |  |                      |  |                       |  |                      
|Non-accrual and 90 days or              more past due loans as a              percent of total loans |                  |  | 0.02%                |  |                       |  | 0.02%                
|Non-performing assets as a              percent of total assets                                      |                  |  | 0.01%                |  |                       |  | 0.02%                
|Allowance for loan losses as a              percent of total loans                                   |                  |  | 1.38%                |  |                       |  | 1.47%                
|Allowance for loan losses as a              percent of non-performing              loans             |                  |  | 8,581.63%            |  |                       |  | 7,541.23%            

Our net loan portfolio increased $25.7 million, or 4.5%, to $600.0 million at June 30, 2006 from $574.3 million at December 31, 2005. This increase was primarily attributable to growth of our commercial real estate loans, which increased $14.1 million, or 8.5%; multi-family real estate loans, which increased $6.3 million, or 4.0%, and home equity loans, which increased $5.0 million, or 15.7%.  Additional growth in the loan portfolio was generated in commercial/business loans, which were up $3.5 million or 38.2%, real estate construction loans, which increased $1.7 million, or 2.7%, and one-to-four family residential loans, which increased $975,000, or 1.1%.  These increases were partially offset by a decline in the automobile loan portfolio, which decreased $5.3 million, or 13.4%.  Total loans secured by real estate increased $28.2 million, or 5.6%, to $531.1 million at June 30, 2006 from $503.0 million at December 31, 2005.

12

<PAGE>

Investments. The following table sets forth the composition of the Company's investments at the dates indicated.  The amortized cost of the available-for-sale investments reflects the net book value after a mark-to-market fair value adjustment.  The Company's investment in the FHLB of Seattle's common stock is presented for reference purposes (dollars in thousands):



|                                   | At June 30,            |  | At December 31,    |  | $ Increase (Decrease) |  | % Increase (Decrease)
|---------------------------------- | ---------------------- |  | ------------------ |  | --------------------- |  | ---------------------
|                                   | 2006                   |  | 2005               |  |                      
|Available-for-sale portfolio:      |                        |  |                    |  |                       |  |                      
|U. S.  agency securities           | $                5,466 |  | $            5,495 |  | $       (29)          |  | (0.5)%               
|Corporate bonds                    | 5,067                  |  | 5,158              |  | (91)                  |  | (1.8)                
|Trust preferred securities         | 113,155                |  | 104,306            |  | 8,849                 |  | 8.5                  
|Mortgage-backed securities         | 25,632                 |  | 29,253             |  | (3,621)               |  | (12.4)               
|Total available-for-sale portfolio | 149,320                |  | 144,212            |  | 5,108                 |  | 3.5                  
|                                   |                        |  |                    |  |                       |  |                      
|Held-to-maturity portfolio:        |                        |  |                    |  |                       |  |                      
|U. S. agency securities            | 20,000                 |  | 20,000             |  | -                     |  | -                    
|Municipal bonds                    | 12,777                 |  | 12,776             |  | 1                     |  | -                    
|Mortgage-backed securities         | 44,023                 |  | 48,721             |  | (4,698)               |  | (9.6)                
|Total held-to-maturity portfolio   | 76,800                 |  | 81,497             |  | (4,697)               |  | (5.8)                
|                                   |                        |  |                    |  |                       |  |                      
|Total investment securities        | 226,120                |  | 225,709            |  | 411                   |  | 0.2                  
|                                   |                        |  |                    |  |                       |  |                      
|FHLB stock                         | 13,712                 |  | 13,712             |  | -                     |  | -                    
|                                   |                        |  |                    |  |                       |  |                      
|Total investments                  | $            239,832   |  | $        239,421   |  | $       411           |  | 0.2%                 

Our investment securities portfolio increased by $411,000, or 0.2%, to $226.1 million at June 30, 2006 from $225.7 million at December 31, 2005.  A total of $9.0 million of adjustable rate trust preferred securities was added to the portfolio during the first quarter of 2006, while mortgage-backed securities declined $8.3 million, or 10.7% to $69.7 million from $78.0 million primarily as a result of prepayments.  All other securities reflected a net decrease of $119,000.

Deposits.  The following table sets forth the composition of the Company's deposits at the dates indicated (dollars in thousands):



|                              | At June 30, 2006 |  | At December 31, 2005 |  | $ Increase (Decrease) |  | % Increase (Decrease)
|----------------------------- | ---------------- |  | -------------------- |  | --------------------- |  | ---------------------
|                              | Amount           |  | Percent              |  | Amount                |  | Percent              
|                              |                  |  |                      |  |                       |  |                      
|Non-interest-bearing checking | $    32,449      |  | 7.2%                 |  | $    31,065           |  | 7.1%                 
|Interest-bearing checking     | 41,626           |  | 9.3                  |  | 33,476                |  | 7.6                  
|Savings accounts              | 33,002           |  | 7.3                  |  | 34,214                |  | 7.8                  
|Money market accounts         | 92,573           |  | 20.6                 |  | 88,459                |  | 20.2                 
|IRA accounts                  | 5,943            |  | 1.3                  |  | 6,830                 |  | 1.6                  
|Certificates of deposit       | 243,838          |  | 54.3                 |  | 243,986               |  | 55.7                 
|Total deposits                | $  449,431       |  | 100.0%               |  | $  438,030            |  | 100.0%               
|                              |                  |  |                      |  |                       |  |                      
|Core deposits                 | $  205,593       |  | 45.7%                |  | $  194,044            |  | 44.3%                
|Non-core deposits             | 243,838          |  | 54.3                 |  | 243,986               |  | 55.7                 
|Total deposits                | $  449,431       |  | 100.0%               |  | $  438,030            |  | 100.0%               

Our deposits increased $11.4 million, or 2.6%, to $449.4 million at June 30, 2006 from $438.0 million at December 31, 2005. Interest-bearing deposits increased by $10.0 million, or 2.5% and non-interest bearing deposits were up $1.4 million.  Our deposit mix at the end of the second quarter included 45.7% of relatively stable low-cost checking, savings, money market, and individual retirement accounts.  Certificates of deposit at June 30, 2006 included $46.4 million of brokered certificates of deposit, which were $5.8 million lower than the $52.2 million of brokered certificates of deposit at December 31, 2005.

13

<PAGE>

Borrowings.  The FHLB of Seattle advances increased $33.2 million, or 9.8%, to $373.4 million at June 30, 2006 from $340.2 million at December 31, 2005. We used the borrowed funds as part of our capital and interest rate risk management strategies for both short- and long-term funding of loans and investment securities.  We utilize borrowings from the FHLB of Seattle to fund attractive loan and investment opportunities and to enhance earnings in connection with leveraging the Company's capital to increase our net interest income.

Capital.  Total shareholders' equity increased $556,000, or 0.7%, to $85.3 million at June 30, 2006 from $84.7 million at December 31, 2005.  The increase in equity from December 31, 2005 to June 30, 2006 was primarily the result of net income of $1.3 million and was partially offset by $797,000 in cash dividends, or $0.12 per share, paid during the first and second quarters of 2006.  As a result of these factors, and the $48.4 million increase in assets, our capital-to-assets ratio under accounting principles generally accepted in the United States decreased to 9.28% at June 30, 2006 compared to 9.73% at December 31, 2005.

Comparison of Operating Results for the Three Months Ended June 30, 2006 and 2005

The following table sets forth certain information concerning the Company's results of operations for the periods indicated (dollars in thousands):



|                          | Three Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------- | --------------------------- |  | --------------------- |  | ---------------------
|                          | 2006                        |  | 2005                  |  |                      
|OPERATING DATA:           |                             |  |                       |  |                      
|Net interest income       | $         6,096             |  | $         5,988       |  | $            108     
|Non-interest income       | 2,222                       |  | 1,691                 |  | 531                  
|Total revenue             | 8,318                       |  | 7,679                 |  | 639                  
|Provision for loan losses | 150                         |  | 150                   |  | -                    
|Non-interest expense      | 7,103                       |  | 6,569                 |  | 534                  
|Net income                | 693                         |  | 635                   |  | 58                   

Net Interest Income.  The following table sets forth detailed information concerning our net interest income for the periods indicated (dollars in thousands):



|                              | Three Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|----------------------------- | --------------------------- |  | --------------------- |  | ---------------------
|                              | 2006                        |  | 2005                  |  |                      
|Interest income:              |                             |  |                       |  |                      
|Loans                         | $         10,414            |  | $           8,364     |  | $        2,050       
|Securities available-for-sale | 2,005                       |  | 1,129                 |  | 876                  
|Securities held-to-maturity   | 723                         |  | 812                   |  | (89)                 
|Interest-bearing deposits     | 52                          |  | 5                     |  | 47                   
|                              |                             |  |                       |  |                      
|Total interest income         | 13,194                      |  | 10,310                |  | 2,884                
|                              |                             |  |                       |  |                      
|Interest expense:             |                             |  |                       |  |                      
|Deposits                      | 3,277                       |  | 1,599                 |  | 1,678                
|Borrowed funds                | 3,821                       |  | 2,723                 |  | 1,098                
|Total interest expense        | 7,098                       |  | 4,322                 |  | 2,776                
|Net interest income           | $          6,096            |  | $           5,988     |  | $          108       

Our net interest income was relatively unchanged at $6.1 million for the three months ended June 30, 2006, compared to $6.0 million for the three months ended June 30, 2005.  The $108,000 increase in net interest income resulted from higher interest income of $2.9 million, which was largely offset by the increase in our interest expense.  Our interest rate spread decreased to 2.53%, or 49 basis points, for the three months ended June 30, 2006, from 3.02% for the same period in 2005, due to the impact of rising short-term rates and a flat yield curve that caused our liability costs to rise more rapidly than our yields on earning assets.  A $132.0 million increase in the average balance of interest-earning assets for the three months ended June 30, 2006 offset the impact of this margin compression and resulted in net interest income being relatively unchanged for the second quarter of 2006 compared to the same period one year ago.

Interest Income. Our interest
income increased $2.9 million, or 28.0%, to $13.2 million for the three months
ended June 30, 2006 from $10.3 million for the three months ended June 30, 2005.
Interest earned on loans for the three months ended June 30, 2006 and 2005 was
$10.4 million and $8.4 million, respectively. The average yield on total loans
was 6.92% for the three months ended

14

<PAGE>

June 30, 2006 compared to 6.63% for the same period in 2005. The average
balance of total loans also increased by $97.3 million to $602.4 million for the
three months ended June 30, 2006 from $505.1 million for the same period in
2005.

Interest income on investment securities (including mortgage-backed securities) increased $787,000, or 40.5%, to $2.7 million for the three months ended June 30, 2006 from $1.9 million for the three months ended June 30, 2005 as a result of a higher average balance and yields on investment securities.  The average balance of investment securities for the three months ended June 30, 2006 and 2005 was $228.5 million and $197.7 million, respectively.  The average yield on investment securities increased to 4.77% for the three months ended June 30, 2006 from 3.92% for the three months ended June 30, 2005.

Interest expense.  Our interest expense increased $2.8 million, or 64.2%, to $7.1 million for the three months ended June 30, 2006 from $4.3 million for the three months ended June 30, 2005.  In addition to an increase in the average balances of our deposits and borrowings, rising market rates increased our deposit and borrowing costs.



Interest expense on deposits increased $1.7 million, or 104.9%, to $3.3 million for the three months ended June 30, 2006 from $1.6 million for the three months ended June 30, 2005.  The average cost of deposits increased 134 basis points to 3.26% for the three months ended June 30, 2006 from 1.92% for the three months ended June 30, 2005.  This increase in deposit costs for the three months ended June 30, 2006 was primarily a result of a $57.4 million increase in the average balances of higher cost certificates of deposit and brokered deposit accounts, partially offset by a smaller increase of $13.6 million during the same period for lower cost core deposits.

Interest expense on borrowed funds increased $1.1 million, or 40.3%, to $3.8 million for the three months ended June 30, 2006 from $2.7 million for the three months ended June 30, 2005.  The average balances of FHLB of Seattle advances were $367.7 million in the quarter ended June 30, 2006, an increase of $66.0 million from $301.7 million for the three months ended June 30, 2005. In addition to the increased balances, the cost of borrowed funds increased by 54 basis points to 4.16% for the three months ended June 30, 2006 from 3.62% for the three months ended June 30, 2005 as short-term market rates rose.

Provision for Loan Losses.   The following table sets forth an analysis of our allowance for loan losses at the dates and for the periods indicated (dollars in thousands):



|                                 | Three Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|-------------------------------- | --------------------------- |  | --------------------- |  | ---------------------
|                                 | 2006                        |  | 2005                  |  |                      
|Allowance at beginning of period | $      8,487                |  | $     9,027           |  | $      (540)         
|Provision for loan losses        | 150                         |  | 150                   |  | -                    
|Recoveries                       | 55                          |  | 33                    |  | 22                   
|Charge-offs                      | (282)                       |  | (411)                 |  | 129                  
|Allowance at end of period       | $      8,410                |  | $     8,799           |  | $      (389)         

Our provision for loan losses was unchanged for the three months ended June 30, 2006 from $150,000 for the three months ended June 30, 2005.  The provision was recorded at a level considered appropriate to ensure that the allowance for loan losses was adequate to address both the $12.7 million increase in total loans for the three months ended June 30, 2006 and the inherent credit risk in the loan portfolio. The allowance for loan losses as a percent of total loans decreased to 1.38% at June 30, 2006 from 1.47% at December 31, 2005.  At June 30, 2006, the allowance for loan losses totaled $8.4 million compared to $8.6 million at December 31, 2005.

Non-interest Income.  The following table sets forth information regarding our non-interest income for the periods indicated (dollars in thousands):



|                                            | Three Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------------------------- | --------------------------- |  | --------------------- |  | ---------------------
|                                            | 2006                        |  | 2005                  |  |                      
|Deposit service fees                        | $          897              |  | $            971      |  | $         (74)       
|Loan service fees                           | 290                         |  | 238                   |  | 52                   
|Insurance service fees                      | 518                         |  | 133                   |  | 385                  
|Investment service fees                     | 163                         |  | 124                   |  | 39                   
|Real estate lease income                    | 281                         |  | 119                   |  | 162                  
|Loss on sale of securities, net             | -                           |  | (2)                   |  | 2                    
|Gain on sale of loans, net                  | 46                          |  | 109                   |  | (63)                 
|Loss on sale of premises and equipment, net | -                           |  | (2)                   |  | 2                    
|Other operating income                      | 27                          |  | 1                     |  | 26                   
|Total non-interest income                   | $       2,222               |  | $         1,691       |  | $          531       

15

<PAGE>

Our non-interest income for the three months ended June 30, 2006 increased $531,000, or 31.4%, to $2.2 million from $1.7 million for the three months ended June 30, 2005.  This increase was primarily a result of increases in insurance service fees of $385,000 and real estate lease income of $162,000.  The purchase of the Christopherson-Boze and Holman Insurance Agencies, completed on January 3, 2006, was the primary contributor to the increase in insurance service fee income.  The Tacoma administrative office was fully leased during the first six months of 2006, which contributed $146,000 of the $162,000 increase in real estate lease income.  Partially offsetting these increases was a $63,000 decline in the gain on sale of loans for the comparative periods as a result of a lower level of originations of single family loans.  Additionally, deposit services fees decreased $74,000 due to a lower incidence rate of overdraft and return item fees.  All other categories of non-interest income reflected a net increase of $121,000.

Non-interest Expense.  The following table sets forth information regarding our non-interest expense for the periods indicated (dollars in thousands):



|                                  | Three Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|--------------------------------- | --------------------------- |  | --------------------- |  | ---------------------
|                                  | 2006                        |  | 2005                  |  |                      
|Compensation and benefits         | $       4,034               |  | $       3,604         |  | $      430           
|Office operations                 | 1,308                       |  | 1,312                 |  | (4)                  
|Occupancy                         | 635                         |  | 472                   |  | 163                  
|Loan servicing                    | 144                         |  | 132                   |  | 12                   
|Outside and professional services | 237                         |  | 403                   |  | (166)                
|Marketing                         | 222                         |  | 238                   |  | (16)                 
|Other operating expenses          | 523                         |  | 408                   |  | 115                  
|Total non-interest expense        | $       7,103               |  | $       6,569         |  | $      534           



Non-interest expense increased $534,000, or 8.1%, to $7.1 million for the three months ended June 30, 2006 from $6.6 million for the three months ended June 30, 2005. The increase in the current quarter was primarily attributable to an increase in compensation and benefits of $430,000 and a $163,000 increase in occupancy expense.

Compensation and benefits increased $430,000, or 11.9%, to $4.0 million for the three months ended June 30, 2006 from $3.6 million for the three months ended June 30, 2005.  More than half of the increase in compensation and benefits were related to two items: $128,000 of compensation and benefit costs related to the 13 additional employees hired in connection with the acquisition of the Christopherson-Boze and Holman Insurance Agencies, and the expensing of previously granted stock options to employees and directors that totaled $139,000 for the quarter.

Occupancy expense increased $163,000, or 34.5%, primarily as a result of an $69,000 increase in the amortization of capitalized tenant and leasehold improvements, a $19,000 increase in occupancy expense related to the acquisition of the Christopherson-Boze and Holman Insurance Agencies, and a $44,000 increase in utilities and building and janitorial maintenance.

All other non-interest expenses decreased by a net of $59,000.  The $166,000 decrease in outside and professional services expense was partially offset by a $115,000 increase in other operating expense which was partially caused by a $56,000 increase in the amortization of our intangible assets.  Office operations, loan servicing expense and marketing were relatively unchanged between the three months ended June 30, 2006 and the same period a year before.

16

<PAGE>

Average Balances, Interest and Average Yield/Costs.  The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the resultant yields and costs, interest rate spread, and net interest margin (otherwise known as net yield on interest-earning assets) (dollars in thousands):



|                                               | Three Months Ended |  | Three Months Ended |  |                |  |           
|---------------------------------------------- | ------------------ |  | ------------------ |  | -------------- |  | ----------
|                                               | June 30, 2006      |  | June 30, 2005      |  |                |  |           
|                                               | Average            |  | Average            |  | Average        |  | Average   
|                                               | Balance            |  | Yield/Cost         |  | Balance        |  | Yield/Cost
|INTEREST-EARNING ASSETS                        |                    |  |                    |  |                |  |           
|Total loans                                    | $    602,370       |  | 6.92%              |  | $    505,111   |  | 6.63%     
|Investment securities                          | 228,535            |  | 4.77               |  | 197,664        |  | 3.92      
|FHLB stock                                     | 13,712             |  | -                  |  | 13,679         |  | -         
|Interest-bearing deposits                      | 4,626              |  | 4.38               |  | 761            |  | 2.61      
|Total interest-earning assets                  | 849,243            |  | 6.22               |  | 717,215        |  | 5.75      
|                                               |                    |  |                    |  |                |  |           
|Non-interest-earning assets                    | 52,863             |  |                    |  | 45,259         |  |           
|                                               |                    |  |                    |  |                |  |           
|Total assets                                   | $    902,106       |  |                    |  | $    762,474   |  |           
|                                               |                    |  |                    |  |                |  |           
|INTEREST-BEARING LIABILITIES                   |                    |  |                    |  |                |  |           
|Interest-bearing deposits                      | $    403,443       |  | 3.26               |  | $    333,769   |  | 1.92      
|FHLB advances                                  | 367,661            |  | 4.16               |  | 301,715        |  | 3.62      
|Total interest-bearing         liabilities     | 771,104            |  | 3.69               |  | 635,484        |  | 2.73      
|                                               |                    |  |                    |  |                |  |           
|Non-interest bearing liabilities:              |                    |  |                    |  |                |  |           
|Non-interest bearing checking                  | 29,957             |  |                    |  | 28,665         |  |           
|Other                                          | 16,092             |  |                    |  | 10,245         |  |           
|Total non-interest bearing         liabilities | 46,049             |  |                    |  | 38,910         |  |           
|                                               |                    |  |                    |  |                |  |           
|Total liabilities                              | 817,153            |  |                    |  | 674,394        |  |           
|                                               |                    |  |                    |  |                |  |           
|Equity                                         | 84,953             |  |                    |  | 88,080         |  |           
|                                               |                    |  |                    |  |                |  |           
|Total liabilities and equity                   | $    902,106       |  |                    |  | $    762,474   |  |           
|                                               |                    |  |                    |  |                |  |           
|Net interest income                            | $        6,096     |  |                    |  | $        5,988 |  |           
|Interest rate spread                           |                    |  | 2.53%              |  |                |  | 3.02%     
|Net interest margin                            | 2.87%              |  |                    |  | 3.33%          |  |           

Comparison of Operating Results for the Six Months Ended June 30, 2006 and 2005

The following table sets forth certain information concerning the Company's results of operations for the periods indicated (dollars in thousands):



|                          | Six Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------- | ------------------------- |  | --------------------- |  | ---------------------
|                          | 2006                      |  | 2005                  |  |                      
|OPERATING DATA:           |                           |  |                       |  |                      
|Net interest income       | $       12,496            |  | $12,350               |  | $146                 
|Non-interest income       | 4,242                     |  | 3,661                 |  | 581                  
|Total revenue             | 16,738                    |  | 16,011                |  | 727                  
|Provision for loan losses | 300                       |  | 450                   |  | (150)                
|Non-interest expense      | 14,384                    |  | 13,442                |  | 942                  
|Net income                | 1,335                     |  | 1,400                 |  | (65)                 



17

<PAGE>

Net Interest Income.  The following table sets forth detailed information concerning our net interest income for the periods indicated (dollars in thousands):



|                              | Six Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|----------------------------- | ------------------------- |  | --------------------- |  | ---------------------
|                              | 2006                      |  | 2005                  |  |                      
|Interest income:              |                           |  |                       |  |                      
|Loans                         | $     20,407              |  | $     16,537          |  | $        3,870       
|Securities available-for-sale | 3,930                     |  | 2,145                 |  | 1,785                
|Securities held-to-maturity   | 1,465                     |  | 1,654                 |  | (189)                
|Interest-bearing deposits     | 116                       |  | 9                     |  | 107                  
|FHLB stock dividends          | -                         |  | 54                    |  | (54)                 
|                              |                           |  |                       |  |                      
|Total interest income         | 25,918                    |  | 20,399                |  | 5,519                
|                              |                           |  |                       |  |                      
|Interest expense:             |                           |  |                       |  |                      
|Deposits                      | 6,276                     |  | 2,856                 |  | 3,420                
|Borrowed funds                | 7,146                     |  | 5,193                 |  | 1,953                
|Total interest expense        | 13,422                    |  | 8,049                 |  | 5,373                
|                              |                           |  |                       |  |                      
|Net interest income           | $     12,496              |  | $     12,350          |  | $          146       

Our net interest income increased slightly to $12.5 million for the six months ended June 30, 2006, compared to $12.4 million for the six months ended June 30, 2005.  The $146,000 increase in net interest income resulted from higher interest income of $5.5 million, and was largely offset by the $5.4 million increase in our interest expense.  Our interest rate spread decreased to 2.61%, or 54 basis points, for the six months ended June 30, 2006 compared to 3.15% for the same period in 2005.  A $133.0 million increase in the average balance of interest-earning assets for the six months ended June 30, 2006 offset the margin compression and resulted in net interest income being relatively unchanged for the six months ended June 30, 2006 compared to the same period one year ago.

Interest Income.  Our interest income increased $5.5 million, or 27.1%, to $25.9 million for the six months ended June 30, 2006 from $20.4 million for the six months ended June 30, 2005.  Interest earned on loans for the six months ended June 30, 2006 and 2005 was $20.4 million and $16.5 million, respectively.  The average yield on total loans was 6.86% for the six months ended June 30, 2006 compared to 6.59% for the same period in 2005.  The average balance of total loans also increased by $93.5 million to $596.8 million for the six months ended June 30, 2006 from $503.3 million for the same period in 2005.

Interest income on investment securities (including mortgage-backed securities) increased $1.6 million, or 42.0%, to $5.4 million for the six months ended June 30, 2006 from $3.8 million for the six months ended June 30, 2005 as a result of a higher average balance and yields on investment securities.  The average balance of investment securities for the six months ended June 30, 2006 and 2005 was $229.9 million and $195.2 million, respectively.  The average yield on investment securities increased to 4.69% for the six months ended June 30, 2006 from 3.89% for the six months ended June 30, 2005.

Interest Expense.  Our interest expense increased $5.4 million, or 66.8%, to $13.4 million for the six months ended June 30, 2006 from $8.0 million for the six months ended June 30, 2005.  The increase was attributable to higher rates paid on deposits and borrowings due to rising market interest rates.

Interest expense on deposits increased $3.4 million, or 119.7%, to $6.3 million for the six months ended June 30, 2006 from $2.9 million for the six months ended June 30, 2005.  The cost of deposits increased 134 basis points to 3.10% for the six months ended June 30, 2006 from 1.76% for the six months ended June 30, 2005.  This increase in deposit costs for the six months ended June 30, 2006 was primarily a result of a $73.4 million increase in the average balances of higher cost certificates of deposit and brokered deposit accounts, partially offset by a smaller increase of $9.3 million during the same period for lower cost core deposits.

Interest expense on borrowed funds increased $1.9 million, or 37.6%, to $7.1 million for the six months ended June 30, 2006 from $5.2 million for the six months ended June 30, 2005.  The average balances of FHLB of Seattle advances were $359.2 million during the six months ended June 30, 2006, an increase of $59.3 million from $299.9 million for the six months ended June 30, 2005. In addition to the increased balances, the cost of borrowed funds increased 52 basis points to 4.01% for the six months ended June 30, 2006 from 3.49% for the six months ended June 30, 2005 as short-term market rates rose.

18

<PAGE>

Provision for Loan Losses.  The following table sets forth an analysis of our allowance for loan losses at the dates and for the periods indicated (dollars in thousands):



|                                 | Six Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|-------------------------------- | ------------------------- |  | --------------------- |  | ---------------------
|                                 | 2006                      |  | 2005                  |  |                      
|Allowance at beginning of period | $      8,597              |  | $      8,981          |  | $     (384)          
|Provision for loan losses        | 300                       |  | 450                   |  | (150)                
|Recoveries                       | 139                       |  | 187                   |  | (46)                 
|Charge-offs                      | (626)                     |  | (819)                 |  | 191                  
|Allowance at end of period       | $      8,410              |  | $      8,799          |  | $     (389)          

Our provision for loan losses decreased $150,000, or 33.3%, to $300,000 for the six months ended June 30, 2006 from $450,000 for the six months ended June 30, 2005.  The provision was lower for the current six month period as a result of improved credit quality of the loan portfolio.  The provision was recorded at a level considered appropriate to ensure that the allowance for loan loss was adequate to address both the $25.5 million increase in total loans to $608.4 million from $582.9 million and the inherent credit risk in the loan portfolio.

Non-interest Income.  The following table sets forth information regarding our non-interest income for the periods indicated (dollars in thousands):



|                                            | Six Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------------------------- | ------------------------- |  | --------------------- |  | ---------------------
|                                            | 2006                      |  | 2005                  |  |                      
|Deposit service fees                        | $     1,701               |  | $      1,845          |  | $       (144)        
|Loan service fees                           | 550                       |  | 456                   |  | 94                   
|Insurance service fees                      | 1,034                     |  | 300                   |  | 734                  
|Investment service fees                     | 284                       |  | 256                   |  | 28                   
|Real estate lease income                    | 564                       |  | 184                   |  | 380                  
|Loss on sale of securities, net             | -                         |  | (2)                   |  | 2                    
|Gain on sale of loans, net                  | 52                        |  | 316                   |  | (264)                
|Gain on sale of premises and equipment, net | -                         |  | 286                   |  | (286)                
|Other operating income                      | 57                        |  | 20                    |  | 37                   
|Total non-interest income                   | $     4,242               |  | $      3,661          |  | $        581         

Our non-interest income for the six months ended June 30, 2006 increased $581,000, or 15.9% to $4.2 million for the six months ended June 30, 2006 from $3.7 million during the same period a year ago.  This increase was primarily a result of increases in insurance service fees of $734,000 and real estate lease income of $380,000.  The acquisition of the Christopherson-Boze and Holman Insurance Agencies, completed on January 3, 2006, lead to the increase in insurance service fee income.  Tenant rental income from our downtown Tacoma administration building is responsible for nearly all of the $380,000 increase in real estate lease income as our administration building was fully leased for the entire six month period in 2006.  The $264,000 decrease in the gain on sale of loans is the result of a lower level of single-family loan originations during the first six months of 2006 compared to 2005 as the rising interest rate environment reduced refinancing activity.  Additionally, we experienced decreases in the gain on sale of premises and equipment of $286,000 and deposit service fees of $144,000.  In the six months ended June 30, 2005, we sold our old downtown Tacoma branch and recognized a gain on sale of premises of $288,000.  All other categories of non-interest income reflected a net increase of $161,000.

19

<PAGE>

Non-interest Expense.  The following table sets forth information regarding our non-interest expense for the periods indicated (dollars in thousands):



|                                  | Six Months Ended June 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|--------------------------------- | ------------------------- |  | --------------------- |  | ---------------------
|                                  | 2006                      |  | 2005                  |  |                      
|Compensation and benefits         | $      8,064              |  | $          7,171      |  | $       893          
|Office operations                 | 2,606                     |  | 2,752                 |  | (146)                
|Occupancy                         | 1,275                     |  | 960                   |  | 315                  
|Loan servicing                    | 261                       |  | 236                   |  | 25                   
|Outside and professional services | 656                       |  | 705                   |  | (49)                 
|Marketing                         | 451                       |  | 563                   |  | (112)                
|Other operating expenses          | 1,071                     |  | 1,055                 |  | 16                   
|Total non-interest expense        | $     14,384              |  | $       13,442        |  | $       942          

Non-interest expense increased $942,000, or 7.0%, to $14.4 million for the six months ended June 30, 2006 from $13.4 million for the six months ended June 30, 2005. The increase during this period was primarily attributable to an increase in compensation and benefits of $893,000.  Other changes include a $315,000 increase in occupancy expense and decreases of $146,000 and $112,000 for office operations and marketing, respectively.  All other non-interest expenses reflected a net decrease of $8,000.

Compensation and benefits increased $893,000, or 12.5%, to $8.1 million for the six months ended June 30, 2006 from $7.2 million for the six months ended June 30, 2005.  A significant portion of the increased compensation and benefit costs is attributable to two items: $306,000 of compensation and benefit costs related to the 13 additional employees hired in connection with the acquisition of the Christopherson-Boze and Holman Insurance Agencies, and the expensing of previously granted stock options to employees and directors that totaled $296,000 for the six months ended June 30, 2006.

Occupancy expense increased $315,000, or 32.8%, to $1.3 million for the six months ended June 30, 2006.  This increase was primarily a result of a $154,000 increase in the amortization of capitalized tenant and leasehold improvements, a $38,000 increase in rent expense related to the acquisition of the Christopherson-Boze and Holman Insurance Agencies, a $57,000 increase in utilities expense, and other increases in building and janitorial maintenance.

Office operations expense decreased $146,000, or 5.3%, to $2.6 million for the six months ended June 30, 2006 from $2.8 million for the six months ended June 30, 2005.  This decrease was primarily related to a $142,000 decrease in the depreciation of software and computer equipment.

Marketing expense decreased $112,000, or 19.9% to $451,000 for the six months ended June 30, 2006 from $563,000 for the six months ended June 30, 2005.

20

<PAGE>

Average Balances, Interest and Average Yield/Costs.  The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the resultant yields and costs, interest rate spread, and net interest margin (otherwise known as net yield on interest-earning assets) (dollars in thousands):



|                                              | Six Months Ended |  | Six Months Ended |  |              |  |           
|--------------------------------------------- | ---------------- |  | ---------------- |  | ------------ |  | ----------
|                                              | June 30, 2006    |  | June 30, 2005    |  |              |  |           
|                                              | Average          |  | Average          |  | Average      |  | Average   
|                                              | Balance          |  | Yield/Cost       |  | Balance      |  | Yield/Cost
|INTEREST-EARNING ASSETS                       |                  |  |                  |  |              |  |           
|Total loans                                   | $    596,776     |  | 6.86%            |  | $    503,251 |  | 6.59%     
|Investment securities                         | 229,887          |  | 4.69             |  | 195,176      |  | 3.89      
|FHLB stock                                    | 13,712           |  | -                |  | 13,548       |  | 0.80      
|Interest-bearing deposits                     | 5,278            |  | 4.36             |  | 692          |  | 2.60      
|Total interest-earning assets                 | 845,653          |  | 6.14             |  | 712,667      |  | 5.74      
|                                              |                  |  |                  |  |              |  |           
|Non-interest-earning assets                   | 49,976           |  |                  |  | 45,337       |  |           
|                                              |                  |  |                  |  |              |  |           
|Total assets                                  | $    895,629     |  |                  |  | $    758,004 |  |           
|                                              |                  |  |                  |  |              |  |           
|INTEREST-BEARING LIABILITIES                  |                  |  |                  |  |              |  |           
|Interest-bearing deposits                     | $    408,172     |  | 3.10             |  | $    326,275 |  | 1.76      
|FHLB advances                                 | 359,153          |  | 4.01             |  | 299,868      |  | 3.49      
|Total interest-bearing liabilities            | 767,325          |  | 3.53             |  | 626,143      |  | 2.59      
|                                              |                  |  |                  |  |              |  |           
|Non-interest bearing liabilities:             |                  |  |                  |  |              |  |           
|Non-interest bearing checking                 | 29,395           |  |                  |  | 28,583       |  |           
|Other                                         | 13,958           |  |                  |  | 12,357       |  |           
|Total non-interest bearing        liabilities | 43,353           |  |                  |  | 40,940       |  |           
|                                              |                  |  |                  |  |              |  |           
|Total liabilities                             | 810,678          |  |                  |  | 667,083      |  |           
|                                              |                  |  |                  |  |              |  |           
|Equity                                        | 84,951           |  |                  |  | 90,921       |  |           
|                                              |                  |  |                  |  |              |  |           
|Total liabilities and equity                  | $    895,629     |  |                  |  | $    758,004 |  |           
|                                              |                  |  |                  |  |              |  |           
|Net interest income                           | $      12,496    |  |                  |  | $     12,350 |  |           
|Interest rate spread                          |                  |  | 2.61%            |  |              |  | 3.15%     
|Net interest margin                           | 2.94%            |  |                  |  | 3.47%        |  |           

Liquidity and Capital Resources

Liquidity.

Our primary sources of funds are from customer deposits, loan repayments, loan sales, maturing investment securities, borrowed funds from the FHLB, other collateralized borrowing, and brokered deposits.  These sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations.  While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions, and competition.  We believe that our current liquidity position and our forecasted operating results are sufficient to fund all of our existing commitments.

At June 30, 2006, we were in compliance with our collateral requirements.  We maintained a credit facility with the FHLB equal to 50.0% of the Bank's total assets, contingent on the Bank meeting collateral requirements, with an unused portion of the facility amounting to 9.3% of the Bank's total assets, or $84.9 million.   The Bank also established an additional $100.0 million credit line collateralized by specific investment securities with the Fortis Group in May 2006 as an additional source of liquidity.  There were no outstanding balances on this credit line at June 30, 2006.  In addition, we held available-for-sale investment securities and readily saleable loans for liquidity purposes.

21

<PAGE>

Management believes that we have adequate resources to fund all loan commitments through deposits, borrowing from the FHLB or other sources, the sale of mortgage loans or investments, and brokered deposits.  At June 30, 2006, certificates of deposit (excluding individual retirement account certificates of deposit) amounted to $243.8 million or 54.3% of total deposits, including $46.4 million of brokered deposits which are scheduled to mature by December 31, 2006.  We have used brokered deposits and also borrowed from the FHLB to supplement retail deposit funding.  Management also believes that we can adjust the offering rates of certificates of deposit to increase, retain, or decrease deposits in changing interest rate environments.

In addition, the Company repurchased 500 shares of its common stock during the quarter ended June 30, 2006.  For information regarding the Company's repurchase plan, see "Common Stock Repurchases" contained in Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds under Part II - Other Information of this quarterly report.

Capital.  Consistent with our objective to operate a sound and profitable financial institution, we have maintained and will continue to focus on maintaining a "well capitalized" rating from regulatory authorities.  In addition, we are subject to certain capital requirements set by our regulatory agencies.  As of June 30, 2006, the Bank was classified as a "well capitalized" institution under the criteria established by the Federal Deposit Insurance Corporation and exceeded all minimum capital requirements.  Total equity was $85.3 million at June 30, 2006, or 9.28% of total assets on that date.  Our regulatory capital ratios at June 30, 2006, were as follows:  Tier I leverage of 8.95%; Tier I risk-based capital of 11.64%; and total risk-based capital of 12.86%.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk



One of our primary financial objectives is to generate ongoing profits.  The Bank's profitability depends primarily on its net interest income, which is the difference between the income it receives on its loan and investment portfolio and its cost of funds, which consists of interest paid on deposits and borrowings.  Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities.  When interest-earning assets increase, any positive interest rate spread will increase net interest income.  Net income is further affected by the level of non-interest income and expenses.  Non-interest income includes items such as service charges and fees on deposit accounts, loan servicing fees, and gains on sale of loans and investments.  Non-interest expenses include items such as compensation and benefits, office operations, outside and professional services, marketing, and other expenses.

The Bank is exposed to interest rate risk and actively manages the impact of interest rate changes on net interest income and capital.  Management employs various strategies to manage the Bank's interest rate sensitivity including: (1) selling long-term fixed-rate mortgage loans; (2) borrowing intermediate- to long-term funds at fixed rates; (3) originating consumer and income property or residential construction loans with shorter maturities or at variable rates; (4) purchasing securities with short to intermediate maturities or repricing features; (5) appropriately modifying loan and deposit pricing to capitalize on the then-current market opportunities; and (6) increasing core deposits, such as savings, checking and money-market accounts, in order to reduce our reliance on the traditionally higher cost, more rate sensitive certificates of deposit.  At June 30, 2006, there were no material changes in the Bank's market risk from the information provided in the Company's 2005 Form 10-K which was filed with the SEC on March 10, 2006.

At June 30, 2006, the Bank had no derivative financial instruments.  In addition, the Bank did not maintain a trading account for any class of financial instruments, nor has it engaged in hedging activities or purchased high risk derivative instruments.  Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.



ITEM 4 - Controls and Procedures



Evaluation of Disclosure Controls and Procedures



An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer, and other members of the Company's management team as of the end of the period covered by this quarterly report.  Based upon its evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures currently in effect are effective, in all material respects, in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.  However, the Company continues to implement additional controls and processes to strengthen the overall system of internal controls.  See "Changes in Internal Controls" below.

Changes in Internal Controls

During the period covered by this
quarterly report, management has implemented changes in the Company's internal
controls relating to information technology systems' security and access
privileges, segregation of duties, and the related management oversight thereof.
Management does not believe any of the changes made or currently underway in the
Company's systems of internal

22

<PAGE>

control, or in other factors that could significantly affect internal
control, have resulted in any significant deficiencies or material weaknesses in
the Company's internal control subsequent to the date of their most recent
evaluation.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures 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 control procedure is also 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 procedure, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

ITEM 1 - Legal Proceedings

From time to time, the Company or its subsidiary are engaged in legal proceedings in the ordinary course of business, none of which are considered to have a material impact on the Company's financial position or results of operations.

ITEM 1A**-**Risk Factors



There have been no material changes in the risk factors previously disclosed in the Company's 2005 Form 10-K.

ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds

The Company's common stock is traded on the NASDAQ Global Securities Market under the symbol "RPFG".  As of June 30, 2006, there were 6,628,870 shares of common stock issued, including 492,107 unearned ESOP shares and 190,570 unvested restricted shares granted under the MRP.  During the quarter ended June 30, 2006, the Company did not sell any securities that were not registered under the Securities Act of 1933.

Common Stock Repurchases

A bank holding company, except for certain "well-capitalized" and highly rated bank holding companies, is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10.0% or more of its consolidated net worth.  The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve.

The following table sets forth information about the Company's repurchases of its outstanding common stock during the three months ended June 30, 2006:



|Period                         |  | Total Number
 of Shares Purchased |  | Average Price Paid per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |  | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
|------------------------------ |  | --------------------------------- |  | ---------------------------- |  | ------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------
|                               |  |                                   |  |                              |  |                                                                                      |  |                                                                               
|April 1, 2006 - April 30, 2006 |  | 500                               |  | $         17.70              |  | 500                                                                                  |  | 280,260                                                                       
|May 1, 2006 - May 31, 2006     |  | -                                 |  |                              |  | -                                                                                    |  | 280,260                                                                       
|June 1, 2006 - June 30, 2006   |  | -                                 |  |                              |  | -                                                                                    |  | 280,260                                                                       
|                               |  |                                   |  |                              |  |                                                                                      |  |                                                                               
|Total                          |  | 500                               |  | $         17.70              |  | 500                                                                                  |  |                                                                               

|(1) | The Company announced its intention to purchase an additional 5% of its outstanding shares of common stock (307,000) on February 22, 2006.  This sixth repurchase plan is expected to be completed over a 12 month period.  At June 30, 2006, there were 280,260 shares remaining to be purchased under this repurchase program.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



<PAGE>

ITEM 3 - Defaults Upon Senior Securities

Not applicable.



ITEM 4 - Submission of Matters to a Vote of Security Holders



Not applicable.

ITEM 5 - Other Information



Not applicable.



ITEM 6 - Exhibits

|3.1   | Articles of Incorporation of the Registrant (1)                                                                           
|----- | --------------------------------------------------------------------------------------------------------------------------
|3.2   | Bylaws of the Registrant (1)                                                                                              
|10.1  | Form of Employment Agreement for President and
    Chief Executive Officer (1)                                            
|10.2  | Amended and Restated Employment Agreement
    between the Company and the Bank and John A. Hall (2)                       
|10.3  | Employment Agreement between the Company and
    the Bank and Victor J. Toy (2)                                           
|10.4  | Employment Agreement between the Company and the Bank and Joel G. Edwards (2)                                             
|10.5  | Form of Severance Agreement (1)                                                                                           
|10.6  | Form of Rainier Pacific Savings Bank Employee
    Severance Compensation Plan (1)                                         
|10.7  | Rainier Pacific 2004 Stock Option Plan (3)                                                                                
|10.8  | Rainier Pacific 2004 Management Recognition
    Plan (3)                                                                  
|10.9  | Form of Incentive Stock Option Agreement (4)                                                                              
|10.10 | Form of Non-Qualified Stock Option Agreement (4)                                                                          
|10.11 | Form of Restricted Stock Award Agreement (4)                                                                              
|14    | Code of Ethics (5)                                                                                                        
|31.1  | Certification of Chief Executive Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act                            
|31.2  | Certification of Chief Financial Officer
    Pursuant to Section 302 of the Sarbanes-Oxley Act                            
|32    | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

________

|(1) | Filed as an exhibit to the Registrant's
    Registration Statement on Form S-1 (333-106349). On February 17, 2004, the  Company entered into a three-year change in control severance agreement with Richard D. Pickett in the same form as those previously filed as an exhibit to the Registrant's Registration Statement.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Filed as an exhibit to the Registrant's Current Report on Form 8-K dated December 20, 2005 and incorporated herein by  reference.                                                                                                                                                                                           
|(3) | Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (333-117568) and incorporated herein by reference.                                                                                                                                                                                               
|(4) | Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 and  incorporated herein by reference.                                                                                                                                                                       
|(5) | Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003 and  incorporated herein by reference.                                                                                                                                                                              



<PAGE>SIGNATURES

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




Rainier Pacific Financial Group, Inc.



August 1, 2006                                                                                      /s/John A. Hall
                                                                                                               
John A. Hall
                                                                                                               
President and Chief Executive Officer
                                                                                                               
(Principal Executive Officer)
















August 1, 2006                                                                                      /s/Joel G. Edwards                                                                                                                Joel G. Edwards
                                                                                                               
Chief Financial Officer
                                                                                                               
(Principal Financial and Accounting Officer)














25














<PAGE>















EXHIBIT 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John A. Hall, certify that:



1.        I have reviewed this Quarterly Report on Form 10-Q of Rainier Pacific Financial Group, Inc.;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a            material fact necessary to make the statements made, in light of the circumstances under which such statements            were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly            present in all material respects the financial condition, results of operations and cash flows of the registrant as of,            and for, the periods presented in this report;

4.        The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls            and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial             reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:





a)        Designed such disclosure controls and procedures, or caused such disclosure controls and                                     procedures to be designed under our supervision, to ensure that material information relating to the                                     registrant, including its consolidated subsidiaries, is made known to us by others within those                                    entities, particularly during the period in which this report is being prepared;

b)       Designed such internal control over financial reporting, or caused such internal control over financial                                    reporting to be designed under our supervision, to provide reasonable assurance regarding the                                    reliability of financial reporting and the preparation of financial statements for external purposes in                                    accordance with generally accepted accounting principles;

c)       Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in                                   this report our conclusions about the effectiveness of the disclosure controls and procedures, as of                                   the end of the period covered by this report based on such evaluation; and

d)        Disclosed in this report any change in the registrant's internal control over financial reporting that                                   occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the                                   case of an annual report) that has materially affected, or is reasonably likely to materially affect, the                                   registrant's internal control over financial reporting; and





5.        The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal            control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of            directors (or persons performing the equivalent functions):





a)        All significant deficiencies and material weaknesses in the design or operation of internal control over                                  financial reporting which are reasonably likely to adversely affect the registrant's ability to record,                                  process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a                                 significant role in the registrant's internal control over financial reporting.








Date:  August 1, 2006                                                                                                    /s/John A. Hall                                                                                                                                        John A. Hall
                                                                                                                                       
President and Chief Executive Officer






26






<PAGE>

EXHIBIT 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Joel G. Edwards, certify that:



1.        I have reviewed this Quarterly Report on Form 10-Q of Rainier Pacific Financial Group, Inc.;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a            material fact necessary to make the statements made, in light of the circumstances under which such statements            were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly            present in all material respects the financial condition, results of operations and cash flows of the registrant as of,            and for, the periods presented in this report;

4.        The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls            and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial             reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:





a)        Designed such disclosure controls and procedures, or caused such disclosure controls and                                     procedures to be designed under our supervision, to ensure that material information relating to the                                     registrant, including its consolidated subsidiaries, is made known to us by others within those                                    entities, particularly during the period in which this report is being prepared;

b)       Designed such internal control over financial reporting, or caused such internal control over financial                                    reporting to be designed under our supervision, to provide reasonable assurance regarding the                                    reliability of financial reporting and the preparation of financial statements for external purposes in                                    accordance with generally accepted accounting principles;

c)       Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in                                   this report our conclusions about the effectiveness of the disclosure controls and procedures, as of                                   the end of the period covered by this report based on such evaluation; and

d)        Disclosed in this report any change in the registrant's internal control over financial reporting that                                   occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the                                   case of an annual report) that has materially affected, or is reasonably likely to materially affect, the                                   registrant's internal control over financial reporting; and





5.        The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal            control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of            directors (or persons performing the equivalent functions):





a)        All significant deficiencies and material weaknesses in the design or operation of internal control over                                  financial reporting which are reasonably likely to adversely affect the registrant's ability to record,                                  process, summarize and report financial information; and

b)      Any fraud, whether or not material, that involves management or other employees who have a                                 significant role in the registrant's internal control over financial reporting.








Date: August 1, 2006                                                                                                      /s/ Joel G. Edwards
                                                                                                                                      
Joel G. Edwards
                                                                                                                                      
Chief Financial Officer






27






<PAGE>














EXHIBIT 32

Certification of Chief Executive Officer and Chief Financial Officer 
of Rainier Pacific Financial Group, Inc.
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, that:

the report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and









/s/John A. Hall                                                                      /s/ Joel G. EdwardsJohn A. Hall                                                                                                                     Joel G. Edwards
President and Chief Executive Officer                                                                         Chief Financial Officer



Dated: August 1, 2006

28

<PAGE>