UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 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............................................................September 30, 2007[       ]              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.(Exact name of registrant as specified in its charter)

|Washington                      | 87-0700148         
|------------------------------- | -------------------
|(State or other jurisdiction of | (I.R.S.  Employer  
|incorporation or organization)  | Identification 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 September 30, 2007

Common stock, no par value;                                                                                                                                 6,516,870 *

*  Includes 407,237 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 115,108 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



Table of Contents





|PART I  -     | FINANCIAL INFORMATION                                                                  | Page                                                                     
|------------- | -------------------------------------------------------------------------------------- | -------------------------------------------------------------------------
|              |                                                                                        |                                                                          
|ITEM 1 -      | Financial Statements                                                                   |                                                                          
|              |                                                                                        |                                                                          
|              | Consolidated Statements of Financial Condition at                                      |                                                                          
|              |                                                                                        | September 30, 2007 and December 31, 2006                                 
|              | Consolidated Statements of Income for the                                              |                                                                          
|              |                                                                                        | Three Months and Nine Months Ended September 30, 2007 and 2006           
|              | Consolidated Statements of Shareholders' Equity for the                                |                                                                          
|              |                                                                                        | Nine Months Ended September 30, 2007 and
the Year Ended December 31, 2006
|              | Consolidated Statements of Cash Flows for the                                          |                                                                          
|              |                                                                                        | Nine Months Ended September 30, 2007 and 2006                            
|              | 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                                                             | 10                                                                       
|              | Comparison of Financial Condition at                                                   |                                                                          
|              | September 30, 2007 and December 31, 2006                                               | 11                                                                       
|              | Comparison of Operating Results for the                                                |                                                                          
|              |                                                                                        | Three Months Ended September 30, 2007 and 2006                           
|              | Comparison of Operating Results for the                                                |                                                                          
|              |                                                                                        | Nine Months Ended September 30, 2007 and 2006                            
|              | 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                                                                                    
|              |                                                                                       
|EXHIBIT INDEX |                                                                                       
|Exhibit 31.1  | 27                                                                                    
|Exhibit 31.2  | 28                                                                                    
|Exhibit 32    | 29                                                                                    

1

<PAGE>





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



|ASSETS                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                             
|ASSETS:                                                                                                                                                                                                                                      
|Cash and cash equivalents                                                                                                                                                                                                                    
|Interest-bearing deposits with banks                                                                                                                                                                                                         
|Securities available-for-sale                                                                                                                                                                                                                
|Securities held-to-maturity (fair value of $46,337 at September 30, 2007 
                    
           and $51,589 at December 31, 2006)                                                                                                  
|Federal Home Loan Bank of Seattle ("FHLB") stock, at cost                                                                                                                                                                                    
|                                                                                                                                                                                                                                             
|Loans                                                                                                                                                                                                                                        
|Less allowance for loan losses                                                                                                                                                                                                               
|Loans, net                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                             
|Premises and equipment, net                                                                                                                                                                                                                  
|Accrued interest receivable                                                                                                                                                                                                                  
|Other assets                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                             
|TOTAL ASSETS                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                             
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                         
|                                                                                                                                                                                                                                             
|LIABILITIES:                                                                                                                                                                                                                                 
|Deposits                                                                                                                                                                                                                                     
|Non interest-bearing                                                                                                                                                                                                                         
|Interest-bearing                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                             
|Total deposits                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                             
|Borrowed funds                                                                                                                                                                                                                               
|Corporate drafts payable                                                                                                                                                                                                                     
|Accrued compensation and benefits                                                                                                                                                                                                            
|Other liabilities                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                             
|TOTAL LIABILITIES                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                             
|SHAREHOLDERS' EQUITY:                                                                                                                                                                                                                        
|Common stock, no par value: 49,000,000 shares authorized; 
         
6,516,870 issued and 5,994,525 outstanding at 
         
September 30, 2007; and 6,587,670 shares issued and 5,971,913
         
shares outstanding at December 31, 2006
|Unearned Employee Stock Ownership Plan ("ESOP") shares                                                                                                                                                                                       
|Accumulated other comprehensive loss, net of tax                                                                                                                                                                                             
|Retained earnings                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                             
|TOTAL SHAREHOLDERS' EQUITY                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                             
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                   

2

<PAGE>



RAINIER PACIFIC FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Income





|                                                      |  | Three Months Ended 
September 30, |  | Nine Months Ended 
September 30,
|----------------------------------------------------- |  | --------------------------------- |  | --------------------------------
|                                                      |  | 2007                              |  | 2006                            
|INTEREST INCOME                                       |  |                                   |  |                                 
|Loans                                                 |  | $         12,127                  |  | $          11,206               
|Securities available-for-sale                         |  | 2,015                             |  | 2,187                           
|Securities held-to-maturity                           |  | 527                               |  | 617                             
|Interest-bearing deposits                             |  | 28                                |  | 168                             
|FHLB dividends                                        |  | 21                                |  | -                               
|Total interest income                                 |  | 14,718                            |  | 14,178                          
|                                                      |  |                                   |  |                                 
|INTEREST EXPENSE                                      |  |                                   |  |                                 
|Deposits                                              |  | 4,104                             |  | 3,879                           
|Borrowed funds                                        |  | 3,881                             |  | 3,986                           
|Total interest expense                                |  | 7,985                             |  | 7,865                           
|Net interest income                                   |  | 6,733                             |  | 6,313                           
|                                                      |  |                                   |  |                                 
|PROVISION FOR LOAN LOSSES                             |  | 150                               |  | 150                             
|Net interest income after provision for loan losses   |  | 6,583                             |  | 6,163                           
|                                                      |  |                                   |  |                                 
|NON-INTEREST INCOME                                   |  |                                   |  |                                 
|Deposit service fees                                  |  | 906                               |  | 932                             
|Loan service fees                                     |  | 381                               |  | 308                             
|Insurance service fees                                |  | 552                               |  | 545                             
|Investment service fees                               |  | 189                               |  | 179                             
|Real estate lease income                              |  | 298                               |  | 277                             
|Gain on sale of securities, net                       |  | -                                 |  | 3                               
|Gain on sale of loans, net                            |  | 60                                |  | 23                              
|Gain on sale of premises and equipment, net           |  | 1                                 |  | 7                               
|Other operating income                                |  | 25                                |  | 29                              
|Total non-interest income                             |  | 2,412                             |  | 2,303                           
|                                                      |  |                                   |  |                                 
|NON-INTEREST EXPENSE                                  |  |                                   |  |                                 
|Compensation and benefits                             |  | 4,237                             |  | 3,935                           
|Office operations                                     |  | 1,006                             |  | 1,385                           
|Occupancy                                             |  | 649                               |  | 666                             
|Loan servicing                                        |  | 130                               |  | 125                             
|Outside and professional services                     |  | 250                               |  | 291                             
|Marketing                                             |  | 278                               |  | 276                             
|Other operating expenses                              |  | 799                               |  | 633                             
|Total non-interest expense                            |  | 7,349                             |  | 7,311                           
|                                                      |  |                                   |  |                                 
|INCOME BEFORE PROVISION FOR FEDERAL 
     
INCOME TAX |  | 1,646                             |  | 1,155                           
|                                                      |  |                                   |  |                                 
|PROVISION FOR FEDERAL INCOME TAX                      |  | 574                               |  | 404                             
|                                                      |  |                                   |  |                                 
|NET INCOME                                            |  | $            1,072                |  | $              751              
|                                                      |  |                                   |  |                                 
|EARNINGS PER COMMON SHARE:                            |  |                                   |  |                                 
|Basic                                                 |  | $              0.18               |  | $             0.13              
|Diluted                                               |  | $              0.18               |  | $             0.13              
|Weighted average shares outstanding-Basic             |  | 5,983,586(1)                      |  | 5,951,363 (2)                   
|Weighted average shares outstanding-Diluted           |  | 5,983,586                         |  | 5,993,987                       
|                                                      |  |                                   |  |                                 
|Dividends declared per share                          |  | $            0.065                |  | $            0.060              

|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Weighted average shares outstanding - Basic includes 212,593 vested and ratably earned shares of the 327,700 restricted shares granted and issued under the 2004 Management Recognition Plan ("MRP"), net of forfeited shares.
|(2) | Weighted average shares outstanding - Basic includes 149,313 vested and ratably earned shares of the 322,800 restricted shares granted and issued under the MRP, net of forfeited shares.                                     

3

<PAGE>

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





|                                                                                 |  | Common Stock |  | Unearned
ESOP |  | Retained | Accumulated
Other
Comprehensive |         
|-------------------------------------------------------------------------------- |  | ------------ |  | ------------- |  | -------- | ------------------------------- | --------
|                                                                                 |  | Shares       |  | Amount        |  | Shares   |                                 | Earnings
|                                                                                 |  |              |  |               |  |          |                                 |         
|Balance, December 31, 2005                                                       |  | 6,690,847    |  | $49,598       |  | $(5,261) |                                 | $41,814 
|                                                                                 |  |              |  |               |  |          |                                 |         
|Common stock repurchased                                                         |  | (100,477)    |  | (1,700)       |  |          |                                 |         
|MRP forfeitures                                                                  |  | (2,700)      |  |               |  |          |                                 |         
|Earned ESOP shares released                                                      |  |              |  |               |  | 679      |                                 |         
|ESOP activity - Change in value of shares 
         
committed to be released    |  |              |  | 631           |  |          |                                 |         
|Dividends paid                                                                   |  |              |  |               |  |          |                                 | (1,594) 
|Amortization of compensation related to MRP                                      |  |              |  | 1,032         |  |          |                                 |         
|Amortization of compensation related to
         
2004 Stock Option Plan ("SOP") |  |              |  | 477           |  |          |                                 |         
|Comprehensive income:                                                            |  |              |  |               |  |          |                                 |         
|Net income                                                                       |  |              |  |               |  |          |                                 | 2,960   
|Unrealized gain on securities, net of 
              
tax of $342                |  |              |  |               |  |          |                                 |         
|Total comprehensive income                                                       |  |              |  |               |  |          |                                 |         
|                                                                                 |  |              |  |               |  |          |                                 |         
|Balance, December 31, 2006                                                       |  | 6,587,670    |  | $50,038       |  | $(4,582) |                                 | $43,180 
|                                                                                 |  |              |  |               |  |          |                                 |         
|Common stock repurchased                                                         |  | (76,700)     |  | (1,404)       |  |          |                                 |         
|Common stock issued for MRP                                                      |  | 10,000       |  |               |  |          |                                 |         
|MRP forfeitures                                                                  |  | (5,100)      |  |               |  |          |                                 |         
|Earned ESOP shares released                                                      |  |              |  |               |  | 510      |                                 |         
|ESOP activity - Change in value of shares 
         
committed to be released    |  |              |  | 304           |  |          |                                 |         
|Dividends paid                                                                   |  |              |  |               |  |          |                                 | (1,278) 
|Amortization of compensation related to MRP                                      |  |              |  | 771           |  |          |                                 |         
|Amortization of compensation related to SOP                                      |  |              |  | 247           |  |          |                                 |         
|Exercise of stock options                                                        |  | 1,000        |  | 16            |  |          |                                 |         
|Comprehensive income:                                                            |  |              |  |               |  |          |                                 |         
|Net income                                                                       |  |              |  |               |  |          |                                 | 2,944   
|Unrealized loss on securities, net of 
              
tax benefit of $163        |  |              |  |               |  |          |                                 |         
|Total comprehensive income                                                       |  |              |  |               |  |          |                                 |         
|                                                                                 |  |              |  |               |  |          |                                 |         
|Balance, September 30, 2007                                                      |  | 6,516,870    |  | $49,972       |  | $(4,072) |                                 | $44,846 

4

<PAGE>









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



|                                                                           |  | Nine Months Ended September 30,
|-------------------------------------------------------------------------- |  | -------------------------------
|                                                                           |  | 2007                           
|CASH FLOWS FROM OPERATING ACTIVITIES                                       |  |                                
|Net income                                                                 |  | $     2,944                    
|Adjustments to reconcile net income to net cash from operating activities: |  |                                
|Depreciation                                                               |  | 1,681                          
|Provision for loan losses                                                  |  | 450                            
|Deferred income tax/(benefit)                                              |  | (310)                          
|Gain on sale of securities, net                                            |  | -                              
|Gain on sale of premises and equipment, net                                |  | (11)                           
|Gain on sale of loans, net                                                 |  | (262)                          
|Amortization of premiums and discounts on securities                       |  | 477                            
|Amortization of intangible assets                                          |  | 198                            
|Accrued compensation for restricted stock awards                           |  | 771                            
|Accrued compensation for stock options                                     |  | 247                            
|Change in operating assets and liabilities, net:                           |  |                                
|Accrued interest receivable                                                |  | 102                            
|Other assets                                                               |  | 21                             
|Corporate drafts payable                                                   |  | (545)                          
|Other liabilities                                                          |  | (144)                          
|                                                                           |  |                                
|Net cash provided from operating activities                                |  | 5,619                          
|                                                                           |  |                                
|CASH FLOWS FROM INVESTING ACTIVITIES                                       |  |                                
|Increase/(decrease) in interest-bearing deposits with banks                |  | (675)                          
|Activity in securities available-for-sale:                                 |  |                                
|Sales                                                                      |  | -                              
|Maturities, prepayments, and calls                                         |  | 5,894                          
|Purchases                                                                  |  | -                              
|Activity in securities held-to-maturity:                                   |  |                                
|Maturities, prepayments, and calls                                         |  | 5,201                          
|Increase in loans, net                                                     |  | (11,773)                       
|Proceeds from sales of loans                                               |  | 17,504                         
|Purchases of premises and equipment                                        |  | (1,029)                        
|Proceeds from sales of premises and equipment                              |  | 11                             
|                                                                           |  |                                
|Net cash provided from/(used in) investing activities                      |  | 15,133                         
|                                                                           |  |                                
|CASH FLOWS FROM FINANCING ACTIVITIES                                       |  |                                
|Net increase in deposits                                                   |  | 3,492                          
|Advances on borrowed funds                                                 |  | 331,820                        
|Repayments of borrowed funds                                               |  | (355,641)                      
|Repayment of ESOP debt                                                     |  | 510                            
|Cash payments related to acquisition of insurance agencies                 |  | (1,226)                        
|Change in value of ESOP shares committed to be released                    |  | 304                            
|Proceeds from exercise of stock options                                    |  | 16                             
|Dividends paid                                                             |  | (1,278)                        
|Common stock repurchased                                                   |  | (1,404)                        
|                                                                           |  |                                
|Net cash provided from/(used in) financing activities                      |  | (23,407)                       
|                                                                           |  |                                
|NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                       |  | (2,655)                        
|                                                                           |  |                                
|CASH AND CASH EQUIVALENTS, at beginning of period                          |  | 11,847                         
|                                                                           |  |                                
|CASH AND CASH EQUIVALENTS, at end of period                                |  | $     9,192                    

5

<PAGE>



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



|                                                           |  | Nine Months Ended September 30,
|---------------------------------------------------------- |  | -------------------------------
|                                                           |  | 2007                           
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          |  |                                
|Cash payments for:                                         |  |                                
|Interest                                                   |  | $23,784                        
|                                                           |  |                                
|Income taxes                                               |  | $  1,830                       
|                                                           |  |                                
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES  |  |                                
|Unrealized gains/(losses) on available-for-sale securities |  | $   (465)                      
|                                                           |  |                                

6

<PAGE>





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 small to medium-sized businesses and professionals through 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 with the September 30, 2007 presentation.  These reclassifications have no effect on net income, equity, or earnings per share.

Note 2 - 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 effect 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, the valuation of the 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. Since December 31, 2006 through September 30, 2007, there have been no material changes in the Company's significant accounting policies or critical accounting estimates from those disclosed in the Company's 2006 Form 10-K.

Note 3 - Income Taxes

In June 2006, the Financial Accounting Standards Board ("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.  Our approach to adopting FIN 48 on January 1, 2007 consisted of an examination of our financial statements, our income tax provision, and our federal income tax returns.  We analyzed our tax positions including the permanent and temporary differences as well as the major components of income and expense.

Our permanent differences consist primarily of ESOP, MRP, and SOP adjustments, tax exempt investment income, meals and entertainment, and non-deductible dues.  These items are common within the banking industry and have not been subject to controversy.  We have supporting documentation for these differences and account for an allocable interest expense under Internal Revenue Code Sections 265 and 291 related to our tax exempt income.

7

<PAGE>

Our temporary differences consist primarily of loan loss adjustments, stock dividends from the FHLB, differences in depreciation, certain adjustments for the ESOP, MRP and SOP, and other timing differences that are common in the banking industry.  We have utilized cost segregation for a small percentage of our fixed assets, and this cost segregation study was performed by a third-party.

As disclosed in the Company's 2006 Form 10-K, we recorded a $300,000 valuation allowance in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes, in December 2006.  Additionally, in September 2007, we recorded an additional $124,000 valuation allowance, bringing the total to $424,000.  This valuation allowance was deemed necessary in connection with management's belief that it is more likely than not that the Company will be unable to realize the full deduction for the charitable contributions made in 2003 and 2004 because of potentially insufficient future taxable income.  Management does not believe this is an issue regarding the deductibility of the charitable contribution (in accordance with FIN 48), but rather whether the entire deduction will be recognized.

We do not believe that we have any uncertain tax positions as of September 30, 2007 that would rise to the level of having a material effect on our financial statements.  We have concluded, as of September 30, 2007, that no additional adjustments or valuation allowances are necessary, and there will be no material effect on the financial statements as a result of FIN 48.

Note 4 - Stock-Based Compensation

Accounting for Stock-Based Compensation.  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 the Company's 2006 Form 10-K for additional information regarding stock-based compensation.

On June 7, 2004, the Company granted 351,750 non-qualified stock options and 328,250 incentive stock options to certain directors and employees.  The fair market value of the Company's common stock on the date of grant was $16.26 per share.  On August 17, 2005, the Company granted an additional 40,000 incentive stock options to certain employees.  The fair market value of the Company's common stock on the August 17, 2005 grant date was $16.72 per share.  There were no grants in 2006.  On June 1, 2007, the Company granted an additional 72,000 incentive stock options to certain employees.  The fair market value of the Company's common stock on the June 1, 2007 grant date was $20.40 per share.  Each of these grants vest over a five-year period.

The following represents the stock option activity and option exercise price information for the nine months ended September 30, 2007:



|                              | Number of
 Options |  | Weighted-
Average Price
Exercise Price |  | Aggregate
Intrinsic Value (1)
|----------------------------- | ------------------ |  | -------------------------------------- |  | -----------------------------
|Balance at December 31, 2006  | 657,400            |  | $16.27                                 |  |                              
|                              |                    |  |                                        |  |                              
|Granted                       | 72,000             |  | 20.40                                  |  |                              
|Exercised                     | (1,000)            |  | 16.35                                  |  | 2,790                        
|Forfeited/Cancelled           | (7,600)            |  | 16.28                                  |  |                              
|                              |                    |  |                                        |  |                              
|Balance at September 30, 2007 | 720,800            |  | $    16.69                             |  | $7,208                       

(1)

8

<PAGE>

The estimated fair value of options granted was determined as of the grant dates (June 7, 2004, August 17, 2005, and June 1, 2007) using a binomial pricing model with the following assumptions:



|                                | 2007           |  | 2005           |  | 2004          
|------------------------------- | -------------- |  | -------------- |  | --------------
|                                |                |  |                |  |               
|Option exercise price           | $        20.40 |  | $    16.72     |  | $    16.26    
|Stock price on grant date       | $        20.40 |  | $        16.72 |  | $    16.26    
|Annual dividend yield           | 1.28%          |  | 1.40%          |  | 2.00%         
|Expected volatility             | 18.88%         |  | 19.63%         |  | 21.95%        
|Risk-free interest rate         | 4.92%          |  | 3.99%          |  | 4.39%         
|Employee attrition rate         | 7.50%          |  | 5.00%          |  | 3.00%         
|Vesting period                  | 5 years        |  | 5 years        |  | 5 years       
|Expected life                   | 6 years        |  | 6 years        |  | 7 years       
|                                |                |  |                |  |               
|Estimated fair value of options | $         3.72 |  | $        3.92  |  | $         3.60

Financial data pertaining to the stock options at September 30, 2007 is as follows:



|Year of
 Grant |  | Number of
Outstanding
Options |  | Weighted-
Average
Remaining
Contractual Life
in Years |  | Weighted-
Average
Exercise Price
of Outstanding
Options |  | Number
Exercisable |  | Weighted-
Average
Exercise Price
of Exercisable
Options
|-------------- |  | ----------------------------- |  | ----------------------------------------------------- |  | ------------------------------------------------------- |  | ------------------ |  | -------------------------------------------------------
|2004           |  | 630,000                       |  | 6.75                                                  |  | $  16.26                                                |  | 378,000            |  | $ 16.26                                                
|2005           |  | 18,800                        |  | 8.00                                                  |  | 16.72                                                   |  | 7,520              |  | 16.72                                                  
|2007           |  | 72,000                        |  | 9.75                                                  |  | 20.40                                                   |  | -                  |  | 20.40                                                  
|               |  | 720,800                       |  | 7.08                                                  |  | $  16.69                                                |  | 385,520            |  | $ 16.27                                                

Stock-based compensation expense for the SOP recognized by the Company in the Consolidated Statements of Income was $247,000 for the nine months ended September 30, 2007 compared to $389,000 for the nine months ended September 30, 2006.  The remaining unrecognized compensation expense for the fair value of outstanding stock options was approximately $522,000 and $518,000 at September 30, 2007 and December 31, 2006, respectively.



On June 24, 2004, the Company granted restricted stock awards of 336,800 shares of its common stock to its directors and certain employees under the MRP.  The fair market value of the restricted stock awards was $16.20 per share on June 24, 2004, and totaled $5.5 million.  These restricted stock awards vest over a five-year period and, therefore, the cost is accrued ratably over a five-year period as compensation expense.  On June 1, 2007, the Company granted restricted stock awards of 10,000 shares of its common stock to certain employees.  The fair market value of the restricted stock awards was $20.40 per share on June 1, 2007 and totaled $204,000.  These restricted stock awards also vest over a five-year period as compensation expense.  Compensation expense related to all MRP awards was $771,000 and $779,000 for the nine months ended September 30, 2007 and 2006, respectively.  A total of 62,060 MRP shares vested and were transferred to participants on June 22, 2007, with a fair market value of $1.1 million.  The remaining unrecognized compensation expense for MRP restricted stock was approximately $1.9 million and $2.6 million at September 30, 2007 and December 31, 2006, 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 periods presented.  Unallocated shares related to the ESOP are deducted in the calculation of weighted average shares outstanding.  Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during 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 not dilutive.  Common stock equivalents include the stock options and restricted stock awards granted under the SOP and the MRP, respectively, approved by the Company's shareholders in April 2004.

9

<PAGE>



The following table presents the computation of basic and diluted earnings per share for the periods indicated (dollars in thousands, except the number shares and per share data):



|                                                                                                                               |  | Three Months Ended 
September 30, |  | Nine Months Ended 
September 30,
|------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------- |  | --------------------------------
|                                                                                                                               |  | 2007                              |  | 2006                            
|Numerator:                                                                                                                     |  |                                   |  |                                 
|Net income                                                                                                                     |  | $        1,072                    |  | $           751                 
|                                                                                                                               |  |                                   |  |                                 
|Denominator:                                                                                                                   |  |                                   |  |                                 
|Denominator for basic EPS:                                                                                                     |  |                                   |  |                                 
|Weighted average shares                                                                                                        |  | 5,983,586                         |  | 5,951,363                       
|Effect of dilutive common stock equivalents:                                                                                   |  |                                   |  |                                 
|Stock options                                                                                                                  |  | -                                 |  | 29,754                          
|MRP restricted stock                                                                                                           |  | -                                 |  | 12,870                          
|Denominator for diluted EPS:                                                                                                   |  |                                   |  |                                 
|Weighted average shares and assumed 
               conversion of dilutive stock options and
               
 restricted stock |  | 5,983,586                         |  | 5,993,987                       
|                                                                                                                               |  |                                   |  |                                 
|Basic earnings per share                                                                                                       |  | $         0.18                    |  | $         0.13                  
|                                                                                                                               |  |                                   |  |                                 
|Diluted earnings per share                                                                                                     |  | $         0.18                    |  | $        0.13                   

Note 6 - Cash Dividends

On August 22, 2007, the Company announced a quarterly cash dividend of $0.065 per share payable on September 17, 2007 to shareholders of record on September 3, 2007.

Note 7 - Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157").  This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability.  Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  SFAS 157 is effective for fiscal years beginning after November 15, 2007, and is not expected to have a material effect on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statement 115("SFAS 159").  SFAS 159 permits entities to measure many financial instruments and certain other items at fair value.  Most of the provisions of this statement apply only to entities that elect the fair value option.  However, the amendment to FASB Statement No. 115



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; levels of
non-performing assets and other loans of concern; 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

10

<PAGE>

operations; costs of technology; pricing of products and services; time to
lease excess space in Company-owned buildings; and other risks detailed from
time to time in our filings with the SEC. 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. These risks could cause our
actual results for 2007 and beyond to differ materially from those expressed in
any financial statements made by or on behalf of the Company.

Comparison of Financial Condition at September 30, 2007 and December 31, 2006

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



|                                     | At September 30, |  | At December 31, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------------------ | ---------------- |  | --------------- |  | --------------------- |  | ---------------------
|                                     | 2007             |  | 2006           
|                                     |                  |  |                 |  |                       |  |                      
|Total assets                         | $    882,261     |  | $    902,697    |  | $    (20,436)         |  | (2.3)%               
|Investment securities (1)            | 185,691          |  | 197,762         |  | (12,071)              |  | (6.1)                
|Interest-bearing deposits with banks | 732              |  | 57              |  | 675                   |  | 1,184.2              
|Loans, net                           | 625,177          |  | 631,095         |  | (5,918)               |  | (0.9)                
|Deposits                             | 460,917          |  | 457,425         |  | 3,492                 |  | 0.8                  
|Borrowed funds                       | 321,574          |  | 345,395         |  | (23,821)              |  | (6.9)                
|Total shareholders' equity           | 89,638           |  | 87,830          |  | 1,808                 |  | 2.1                  

(1)

Total assets decreased by $20.4 million, or 2.3%, to $882.3 million at September 30, 2007 from $902.7 million at December 31, 2006.  This decrease reflects a $12.1 million decline in investment securities and a $5.9 million decline in net loans.  The decrease in loans is primarily the result of a high level of prepayments of multi-family and commercial real estate loans, sales of single-family mortgage loans, and a lower level of loan originations.  The decrease in investment securities is primarily the result of principal repayments on mortgage-backed securities and partial calls of trust preferred securities.  Mortgage-backed securities decreased $9.2 million, or 14.6%, to $53.8 million at September 30, 2007 from $63.0 million at December 31, 2006.  Deposits increased $3.5 million to $460.9 million at September 30, 2007 from $457.4 million at December 31, 2006, resulting primarily from increases in core customer deposits, predominantly comprised of money market and checking account relationships.  Shareholders' equity increased $1.8 million to $89.6 million at September 30, 2007 from $87.8 million at December 31, 2006, primarily as a result of the net income earned during the nine months ended September 30, 2007.

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 September 30, 2007 |  | At December 31, 2006 |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------------- | --------------------- |  | -------------------- |  | --------------------- |  | ---------------------
|                                | Amount                |  | Percent              |  | Amount                |  | Percent              
|Real estate:                    |                       |  |                      |  |                       |  |                      
|One-to four-family residential  | $   78,621            |  | 12.4%                |  | $    81,542           |  | 12.8%                
|Five or more family residential | 149,474               |  | 23.6                 |  | 163,060               |  | 25.5                 
|Commercial                      | 214,130               |  | 33.8                 |  | 195,854               |  | 30.6                 
|Total real estate               | 442,225               |  | 69.8                 |  | 440,456               |  | 68.9                 
|                                |                       |  |                      |  |                       |  |                      
|Real estate construction:       |                       |  |                      |  |                       |  |                      
|One-to four-family residential  | 70,867                |  | 11.2                 |  | 75,508                |  | 11.8                 
|Five or more family residential | 2,019                 |  | 0.3                  |  | 4,180                 |  | 0.7                  
|Commercial                      | 1,834                 |  | 0.3                  |  | -                     |  | -                    
|Total real estate construction  | 74,720                |  | 11.8                 |  | 79,688                |  | 12.5                 
|                                |                       |  |                      |  |                       |  |                      
|Consumer:                       |                       |  |                      |  |                       |  |                      
|Automobile                      | 23,711                |  | 3.7                  |  | 31,888                |  | 5.0                  
|Home equity                     | 44,537                |  | 7.0                  |  | 42,718                |  | 6.7                  
|Credit cards                    | 22,601                |  | 3.6                  |  | 23,327                |  | 3.6                  
|Other                           | 7,383                 |  | 1.2                  |  | 8,179                 |  | 1.3                  
|Total consumer                  | 98,232                |  | 15.5                 |  | 106,112               |  | 16.6                 
|                                |                       |  |                      |  |                       |  |                      
|Commercial/business             | 18,142                |  | 2.9                  |  | 13,122                |  | 2.0                  
|                                |                       |  |                      |  |                       |  |                      
|Total loans                     | 633,319               |  | 100.0%               |  | 639,378               |  | 100.0%               
|                                |                       |  |                      |  |                       |  |                      
|Less allowance for loan losses  | (8,142)               |  |                      |  | (8,283)               |  |                      
|                                |                       |  |                      |  |                       |  |                      
|Loans, net                      | $  625,177            |  |                      |  | $  631,095            |  |                      

Our net loan portfolio decreased $5.9 million, or 0.9%, to $625.2 million at September 30, 2007 from $631.1 million at December 31, 2006.  This decrease was primarily attributable to decreases in five or more family residential ("multi-family") real estate loans, which decreased $13.6 million, or 8.3%, primarily as a result of $17.6 million in prepayments; the automobile portfolio, which decreased $8.2 million, or 25.6%, as a result of our decision to reduce our exposure to indirect auto loans through implementation of more selective underwriting standards on new originations, and real estate construction loans, which decreased $5.0 million, or 6.2%.  Additionally, loan sales of $17.5 million resulted in a $2.9 million, or 3.6% decline in the one- to four-family residential loan portfolio.  Partially offsetting these decreases were increases in commercial real estate loans, which increased $18.3 million, or 9.3%, despite $18.8 million in commercial real estate prepayments.  Additionally, commercial/business loans increased $5.0 million, or 38.3% and home equity loans increased $1.8 million, or 4.3%.  Total loans secured by real estate decreased $1.4 million, or 0.2%, to $561.5 at September 30, 2007 from $562.9 million at December 31, 2006.  During the fourth quarter of 2007, we plan to focus on originating commercial real estate, multi-family, real estate construction, and commercial business loans while reducing our emphasis on indirect auto loan originations.

12

<PAGE>

Investment Securities. The following table sets forth the composition of the Company's investment securities at the dates indicated.  The available-for-sale securities are presented at net book value after a mark-to-market fair value adjustment, while the held-to-maturity securities are presented at amortized cost.  The Company's investment in the FHLB common stock is presented at cost and for reference purposes only (dollars in thousands):



|                                    | At September 30, |  | At December 31, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|----------------------------------- | ---------------- |  | --------------- |  | --------------------- |  | ---------------------
|                                    | 2007             |  | 2006            |  |                      
|Available-for-sale:                 |                  |  |                 |  |                       |  |                      
|U. S. Government Agency obligations | $   5,669        |  | $    5,565      |  | $       104           |  | 1.9%                 
|Corporate obligations               | 5,032            |  | 5,077           |  | (45)                  |  | (0.9)                
|Trust preferred securities          | 108,436          |  | 111,312         |  | (2,876)               |  | (2.6)                
|Mortgage-backed securities          | 19,208           |  | 23,156          |  | (3,948)               |  | (17.0)               
|Total available-for-sale portfolio  | 138,345          |  | 145,110         |  | (6,765)               |  | (4.7)                
|                                    |                  |  |                 |  |                       |  |                      
|Held-to-maturity:                   |                  |  |                 |  |                       |  |                      
|Municipal obligations               | 12,782           |  | 12,780          |  | 2                     |  | -                    
|Mortgage-backed securities          | 34,564           |  | 39,872          |  | (5,308)               |  | (13.3)               
|Total held-to-maturity portfolio    | 47,346           |  | 52,652          |  | (5,306)               |  | (10.1)               
|                                    |                  |  |                 |  |                       |  |                      
|Total investment securities         | 185,691          |  | 197,762         |  | (12,071)              |  | (6.1)                
|                                    |                  |  |                 |  |                       |  |                      
|FHLB stock                          | 13,712           |  | 13,712          |  | -                     |  | -                    
|                                    |                  |  |                 |  |                       |  |                      
|Total                               | $199,403         |  | $211,474        |  | $(12,071)             |  | (5.7)%               

Our investment securities portfolio decreased by $12.1 million, or 6.1%, to $185.7 million at September 30, 2007 from $197.8 million at December 31, 2006.  The decrease in investments was primarily the result of $9.2 million of principal repayments on mortgage-backed securities and a $2.9 million decline of trust preferred securities from partial calls, market value adjustments, and amortization of purchase premiums.  The mark-to-market fair value adjustment on all available-for-sale securities declined $465,000 during the nine months ended September 30, 2007.  No new investment securities were purchased during this period, as we continued to execute our strategy of replacing maturing investment securities with loans or reducing borrowed funds.

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



|                                            | At September 30, 2007 |  | At December 31, 2006 |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------------------------- | --------------------- |  | -------------------- |  | --------------------- |  | ---------------------
|                                            | Amount                |  | Percent              |  | Amount                |  | Percent              
|                                            |                       |  |                      |  |                       |  |                      
|Non-interest-bearing checking               | $   34,603            |  | 7.5%                 |  | $    33,722           |  | 7.4%                 
|Interest-bearing checking                   | 43,539                |  | 9.5                  |  | 41,548                |  | 9.1                  
|Savings accounts                            | 29,243                |  | 6.3                  |  | 30,487                |  | 6.7                  
|Money market accounts                       | 123,110               |  | 26.7                 |  | 108,990               |  | 23.8                 
|IRA accounts                                | 5,916                 |  | 1.3                  |  | 5,605                 |  | 1.2                  
|Certificates of deposit ("CDs")             | 224,506               |  | 48.7                 |  | 237,073               |  | 51.8                 
|Total deposits                              | $  460,917            |  | 100.0%               |  | $  457,425            |  | 100.0%               
|                                            |                       |  |                      |  |                       |  |                      
|Core deposits (all deposits, excluding CDs) | $  236,411            |  | 51.3%                |  | $  220,352            |  | 48.2%                
|Non-core deposits (CDs)                     | 224,506               |  | 48.7                 |  | 237,073               |  | 51.8                 
|Total deposits                              | $  460,917            |  | 100.0%               |  | $  457,425            |  | 100.0%               

Our deposits increased $3.5 million, or 0.8%, to $460.9 million at September 30, 2007 from $457.4 million at December 31, 2006.  Interest-bearing deposits increased by $2.6 million, or 0.6%, and non-interest bearing deposits increased $881,000, or 2.6%.  Our deposit mix at the end of the third quarter included 51.3% of relatively low-cost checking, savings, money market, and individual retirement accounts.  Certificates of deposit at September 30, 2007 included $51.0 million of brokered certificates of deposit, an increase of $141,000 from the $50.9 million of brokered certificates of deposit at December 31, 2006.

13

<PAGE>



Borrowed Funds.  Borrowed funds decreased $23.8 million, or 6.9%, to $321.6 million at September 30, 2007 from $345.4 million at December 31, 2006.  We continue to use 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.  The decrease during the first nine months of 2007 was primarily attributable to the reduction of the investment and loan portfolios.

Capital.  Total shareholders' equity increased $1.8 million, or 2.1%, to $89.6 million at September 30, 2007 from $87.8 million at December 31, 2006.  The increase in equity from December 31, 2006 to September 30, 2007 was the result of $2.9 million in net income and $1.8 million in equity adjustments related to stock compensation and benefits.  This increase in equity was partially offset by $1.4 million of common stock repurchases, $1.3 million of cash dividends paid to shareholders, and $302,000 in unrealized losses on securities, net of taxes.  As a result of these factors, and the $20.4 million decrease in assets, our capital-to-assets ratio increased to 10.16% at September 30, 2007 compared to 9.73% at December 31, 2006.

Comparison of Operating Results for the Three Months Ended September 30, 2007 and 2006

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



|                          | Three Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------- | -------------------------------- |  | --------------------- |  | ---------------------
|                          | 2007                             |  | 2006                  |  |                      
|                          |                                  |  |                       |  |                      
|Net interest income       | $     6,733                      |  | $     6,313           |  | $     420            
|Non-interest income       | 2,412                            |  | 2,303                 |  | 109                  
|Total revenue             | 9,145                            |  | 8,616                 |  | 529                  
|Provision for loan losses | 150                              |  | 150                   |  | -                    
|Non-interest expense      | 7,349                            |  | 7,311                 |  | 38                   
|Net income                | 1,072                            |  | 751                   |  | 321                  

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 September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|----------------------------- | -------------------------------- |  | --------------------- |  | ---------------------
|                              | 2007                             |  | 2006                  |  |                      
|Interest income:              |                                  |  |                       |  |                      
|Loans                         | $  12,127                        |  | $  11,206             |  | $    921             
|Securities available-for-sale | 2,015                            |  | 2,187                 |  | (172)                
|Securities held-to-maturity   | 527                              |  | 617                   |  | (90)                 
|Interest-bearing deposits     | 28                               |  | 168                   |  | (140)                
|FHLB dividends                | 21                               |  | -                     |  | 21                   
|Total interest income         | 14,718                           |  | 14,178                |  | 540                  
|                              |                                  |  |                       |  |                      
|Interest expense:             |                                  |  |                       |  |                      
|Deposits                      | 4,104                            |  | 3,879                 |  | 225                  
|Borrowed funds                | 3,881                            |  | 3,986                 |  | (105)                
|Total interest expense        | 7,985                            |  | 7,865                 |  | 120                  
|Net interest income           | $   6,733                        |  | $   6,313             |  | $    420             

Our net interest income increased $420,000, or 6.7%, to $6.7 million for the three months ended September 30, 2007 from $6.3 million for the three months ended September 30, 2006.  The net interest income increase was primarily the result of a $23.8 million increase in the average balance and a 31 basis point yield increase on loans.  These increases were partially offset by a decline in interest income on investments as a result of
lower balances, as well as increased deposit expense.

Interest Income. Our interest income increased $540,000, or 3.8%, to
$14.7 million for the three months ended September 30, 2007 from $14.2 million
for the three months ended September 30, 2006. Interest earned on loans for the
three months ended September 30, 2007 and 2006 was $12.1 million and $11.2
million, respectively. The average yield on total loans was 7.53% for the three
months ended September 30, 2007 compared to 7.22% for the same period in 2006
reflecting higher market rates for loans. The average balance of total loans
also increased by $23.9 million to $642.9 million for the three months ended
September 30, 2007 from $619.0 million for the same period in 2006. A
significant portion of the loan portfolio consists of fixed-rate real estate
secured loans which do not re-price when interest rates change. Construction
loans, home equity lines of credit, credit card loans, and

14

<PAGE>

commercial/business loans, however, generally re-price when short-term
interest rates change. The increase in yield on these loan products, combined
with an increase in the average balance of loans, were the primary contributors
to the increased interest income on loans. A $212,000 increase in loan
prepayment penalties for the three months ended September 30, 2007 compared to
the same period in 2006 also contributed to the increased interest income on
loans for the quarter ended September 30, 2007.

Interest income on investment securities (including mortgage-backed securities) decreased $262,000, or 9.3%, to $2.5 million for the three months ended September 30, 2007 from $2.8 million for the three months ended September 30, 2006 as a result of a lower average balance, partially offset by a higher yield earned.  The average balances of investment securities for the three months ended September 30, 2007 and 2006 were $188.2 million and $212.2 million, respectively.  The average yield on investment securities increased to 5.41% for the three months ended September 30, 2007 from 5.28% for the three months ended September 30, 2006, primarily as a result of adjustable-rate trust preferred securities repricing upward in connection with higher short-term interest rates and principal repayments of lower coupon mortgage-backed securities.

Interest Expense.  Our interest expense increased $120,000, or 1.5%, to $8.0 million for the three months ended September 30, 2007 from $7.9 million for the three months ended September 30, 2006.



Interest expense on deposits increased $225,000, or 5.8%, to $4.1 million for the three months ended September 30, 2007 from $3.9 million for the three months ended September 30, 2006.  The average cost of interest-bearing deposits increased 14 basis points to 3.81% for the three months ended September 30, 2007 from 3.67% for the three months ended September 30, 2006.  This increase in deposit costs for the three months ended September 30, 2007 was primarily a result of an average balance increase of $19.5 million in higher rate money market accounts, partially offset by an $11.6 million decrease in the average balance of even higher rate certificates of deposits.  In addition, interest expense increased as a result of enhanced local competition and higher short-term market interest rates required to attract and retain customer deposits.

Interest expense on borrowed funds decreased $105,000, or 2.6%, to $3.9 million for the three months ended September 30, 2007 from $4.0 million for the three months ended September 30, 2006.  The primary reason for the decrease was a $22.4 million decrease in the average balance of borrowed funds to $336.1 million for the three months ended September 30, 2007 compared to $358.5 million for the same period in 2006.  Partially offsetting the decrease in the average balance of borrowed funds was a 17 basis point increase in the cost of borrowed funds to 4.58% for the three months ended September 30, 2007 from 4.41% for the same period in 2006 as a result of higher short-term interest rates.

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):



|                                 | At or For the                    |  |                       |  |                      
|-------------------------------- | -------------------------------- |  | --------------------- |  | ---------------------
|                                 | Three Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|                                 | 2007                             |  | 2006                  |  |                      
|Allowance at beginning of period | $    8,235                       |  | $    8,410            |  | $    (175)           
|Provision for loan losses        | 150                              |  | 150                   |  | -                    
|Recoveries                       | 55                               |  | 82                    |  | (27)                 
|Charge-offs                      | (298)                            |  | (228)                 |  | (70)                 
|Allowance at end of period       | $    8,142                       |  | $    8,414            |  | $    (272)           

Our provision for loan losses was unchanged at $150,000 for the three month periods ended September 30, 2007 and 2006.  The provision was recorded at a level considered appropriate to ensure that the allowance for loan losses was adequate to address the inherent credit risk in the loan portfolio.  The allowance for loan losses decreased slightly to $8.1 million at September 30, 2007 compared to $8.3 million at December 31, 2006.  The allowance for loan losses as a percent of total loans at September 30, 2007 was 1.29% compared to 1.30% at December 31, 2006 and 1.34% at September 30, 2006.  The decrease in the allowance ratio over the last year was deemed appropriate because of the reduced risk in the portfolio attributable to the growth in real estate secured loans, which have historically experienced a very low level of losses; a decreased balance of auto loans, which have historically experienced higher losses; and improved overall credit quality of the loan portfolio.

Management believes our allowance
for loan losses as of September 30, 2007 was adequate to absorb the known and
inherent risks of loss in the loan portfolio at that date. While management
believes the estimates and assumptions used in its determination of the adequacy
of the allowance are reasonable, there can be no assurance that such estimates
and assumptions will not be proven incorrect in the future, or that the actual
amount of future provisions will not exceed the amount of past provisions or
that any increased provisions that may be required will not adversely affect our
financial condition and results of operations. In addition, the determination of
the amount of our allowance for loan losses is subject to review by bank
regulators, as part of the routine

15

<PAGE>

examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the time
of their examination.

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



|                           | Three Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|-------------------------- | -------------------------------- |  | --------------------- |  | ---------------------
|                           | 2007                             |  | 2006                  |  |                      
|Deposit service fees       | $     906                        |  | $     932             |  | $   (26)             
|Loan service fees          | 381                              |  | 308                   |  | 73                   
|Insurance service fees     | 552                              |  | 545                   |  | 7                    
|Investment service fees    | 189                              |  | 179                   |  | 10                   
|Real estate lease income   | 298                              |  | 277                   |  | 21                   
|Gain on sale of loans, net | 60                               |  | 23                    |  | 37                   
|Other operating income     | 26                               |  | 39                    |  | (13)                 
|Total non-interest income  | $   2,412                        |  | $   2,303             |  | $   109              

Our non-interest income for the three months ended September 30, 2007 increased $109,000, or 4.7%, to $2.4 million from $2.3 million for the three months ended September 30, 2006.  This increase was primarily a result of increases in three categories.  Loan service fees increased $73,000 primarily in connection with a $56,000 increase in loan modification fees.  Gain on sale of loans experienced a net increase of $37,000 as a result of our decision to recognize a mortgage servicing asset from loans sold during the quarter rather than the semi-annual frequency used in prior years. In addition, real estate lease income increased $21,000 as a result of a $29,000 lease termination fee from an early departure of a tenant in our downtown Tacoma corporate office building.  All other categories of non-interest income reflected an aggregate net increase of $22,000.

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



|                                  | Three Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|--------------------------------- | -------------------------------- |  | --------------------- |  | ---------------------
|                                  | 2007                             |  | 2006                  |  |                      
|Compensation and benefits         | $4,237                           |  | $3,935                |  | $   302              
|Office operations                 | 1,006                            |  | 1,385                 |  | (379)                
|Occupancy                         | 649                              |  | 666                   |  | (17)                 
|Loan servicing                    | 130                              |  | 125                   |  | 5                    
|Outside and professional services | 250                              |  | 291                   |  | (41)                 
|Marketing                         | 278                              |  | 276                   |  | 2                    
|Other operating expenses          | 799                              |  | 633                   |  | 166                  
|Total non-interest expense        | $7,349                           |  | $7,311                |  | $   38               



Our non-interest expense was essentially unchanged at $7.3 million for the three months ended September 30, 2007 and September 30, 2006, respectively.

Compensation and benefits increased $302,000, or 7.7%, to $4.2 million for the three months ended September 30, 2007 from $3.9 million for the three months ended September 30, 2006.  The increase was primarily attributable to a $302,000 increase in the accrual of annual performance awards expected to be paid out to employees in the first quarter of 2008.  Additionally, other operating expenses increased $166,000, or 26.2%, to $799,000 from $633,000 for the same period a year earlier.  This increase included a $74,000 increase for deposit insurance premiums imposed by the Federal Deposit Insurance Corporation ("FDIC"), a $59,000 increase in operational losses, and a $31,000 increase in business and occupation tax ("B&O") as a result of increased revenue.  The increase in operational losses includes such items as check and debit card losses, fraud, and other operating losses.  The remaining other operating expense increases were spread throughout various expense categories.  Partially offsetting these increases was office operations expense, which decreased $379,000, or 27.4%, to $1.0 million for the three months ended September 30, 2007 from $1.4 million for the three months ended September 30, 2006.  The decrease was primarily attributable to a $449,000 reduction in depreciation expense as a significant portion of our software and computer equipment became fully depreciated during the fourth quarter of 2006.  All other non-interest expenses decreased by an aggregate net amount of $51,000 for the three months ended September 30, 2007 compared to the same period in 2006.

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 total dollar amounts
of interest income from average interest-earning

16

<PAGE>

assets and interest expense on average interest-bearing liabilities,
resultant yields and costs, net interest income, interest rate spread, and net
interest margin. Average balances have been calculated using the average of
daily balances during the period (amounts in thousands).



|                                         | Three Months Ended |  | Three Months Ended  |  |                 |  |                   
|---------------------------------------- | ------------------ |  | ------------------- |  | --------------- |  | ------------------
|                                         | September 30, 2007 |  | September 30, 2006  |  |                 |  |                   
|                                         | Average
 Balance   |  | Average
 Yield/Cost |  | Average
Balance |  | Average
Yield/Cost
|INTEREST-EARNING ASSETS:                 |                    |  |                     |  |                 |  |                   
|Total loans                              | $  642,857         |  | 7.53%               |  | $  619,012      |  | 7.22%             
|Mortgage-backed securities               | 55,863             |  | 4.40                |  | 69,166          |  | 4.21              
|Investment securities                    | 132,303            |  | 5.83                |  | 143,011         |  | 5.80              
|FHLB stock                               | 13,712             |  | 0.60                |  | 13,712          |  | -                 
|Interest-bearing deposits in other banks | 2,159              |  | 5.21                |  | 12,338          |  | 5.33              
|Total interest-earning assets            | 846,894            |  | 6.94                |  | 857,239         |  | 6.60              
|                                         |                    |  |                     |  |                 |  |                   
|Non-interest-earning assets              | 50,745             |  |                     |  | 50,190          |  |                   
|                                         |                    |  |                     |  |                 |  |                   
|Total assets                             | $  897,639         |  |                     |  | $  907,429      |  |                   
|                                         |                    |  |                     |  |                 |  |                   
|                                         |                    |  |                     |  |                 |  |                   
|Interest-bearing liabilities:            |                    |  |                     |  |                 |  |                   
|Savings accounts                         | $    31,692        |  | 0.26                |  | $    34,202     |  | 0.26              
|Interest-bearing checking accounts       | 42,907             |  | 1.41                |  | 41,122          |  | 2.02              
|Money market deposit accounts            | 122,829            |  | 3.71                |  | 103,379         |  | 3.59              
|Certificates of deposit                  | 229,497            |  | 4.87                |  | 241,120         |  | 4.51              
|Total deposits                           | 426,925            |  | 3.81                |  | 419,823         |  | 3.67              
|                                         |                    |  |                     |  |                 |  |                   
|Borrowed funds                           | 336,149            |  | 4.58                |  | 358,521         |  | 4.41              
|                                         |                    |  |                     |  |                 |  |                   
|Total interest-bearing liabilities       | 763,074            |  | 4.15                |  | 778,344         |  | 4.01              
|                                         |                    |  |                     |  |                 |  |                   
|Non-interest-bearing liabilities:        |                    |  |                     |  |                 |  |                   
|Non-interest bearing checking            | 32,880             |  |                     |  | 29,012          |  |                   
|Other                                    | 12,012             |  |                     |  | 13,927          |  |                   
|Total non-interest bearing liabilities   | 44,892             |  |                     |  | 42,939          |  |                   
|                                         |                    |  |                     |  |                 |  |                   
|Total liabilities                        | 807,966            |  |                     |  | 821,283         |  |                   
|                                         |                    |  |                     |  |                 |  |                   
|Equity                                   | 89,673             |  |                     |  | 86,146          |  |                   
|                                         |                    |  |                     |  |                 |  |                   
|Total liabilities and equity             | $  897,639         |  |                     |  | $ 907,429       |  |                   
|                                         |                    |  |                     |  |                 |  |                   
|Net interest income                      | $      6,733       |  |                     |  | $    6,313      |  |                   
|Interest rate spread(1)                  |                    |  | 2.79%               |  |                 |  | 2.59%             
|Net interest margin (2)                  | 3.20%              |  |                     |  | 2.96%           |  |                   

(1)  Difference between weighted average yield on interest-earning assets and weighted average rate on interest-bearing liabilities.

(2)  Net interest margin, otherwise known as net yield on interest-earning assets, is calculated as net interest income divided by average interest-earning assets.



17

<PAGE>

Comparison of Operating Results for the Nine Months Ended September 30, 2007 and 2006

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



|                          | Nine Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|------------------------- | ------------------------------- |  | --------------------- |  | ---------------------
|                          | 2007                            |  | 2006                  |  |                      
|                          |                                 |  |                       |  |                      
|Net interest income       | $  19,538                       |  | $  18,809             |  | $   729              
|Non-interest income       | 6,998                           |  | 6,545                 |  | 453                  
|Total revenue             | 26,536                          |  | 25,354                |  | 1,182                
|Provision for loan losses | 450                             |  | 450                   |  | -                    
|Non-interest expense      | 21,560                          |  | 21,695                |  | (135)                
|Net income                | 2,944                           |  | 2,086                 |  | 858                  

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



|                              | Nine Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|----------------------------- | ------------------------------- |  | --------------------- |  | ---------------------
|                              | 2007                            |  | 2006                  |  |                      
|Interest income:              |                                 |  |                       |  |                      
|Loans                         | $  35,371                       |  | $  31,613             |  | $  3,758             
|Securities available-for-sale | 6,099                           |  | 6,117                 |  | (18)                 
|Securities held-to-maturity   | 1,638                           |  | 2,082                 |  | (444)                
|Interest-bearing deposits     | 108                             |  | 284                   |  | (176)                
|FHLB dividends                | 55                              |  | -                     |  | 55                   
|Total interest income         | 43,271                          |  | 40,096                |  | 3,175                
|                              |                                 |  |                       |  |                      
|Interest expense:             |                                 |  |                       |  |                      
|Deposits                      | 12,268                          |  | 10,155                |  | 2,113                
|Borrowed funds                | 11,465                          |  | 11,132                |  | 333                  
|Total interest expense        | 23,733                          |  | 21,287                |  | 2,446                
|Net interest income           | $  19,538                       |  | $  18,809             |  | $    729             

Our net interest income increased $729,000, or 3.9%, to $19.5 million for the nine months ended September 30, 2007 from $18.8 million for the nine months ended September 30, 2006.  The increase in net interest income was primarily the result of a $2.3 million average balance increase and a 48 basis point yield increase on interest-earning assets.

Interest Income.  Our interest income increased $3.2 million, or 7.9%, to $43.3 million for the nine months ended September 30, 2007 from $40.1 million for the nine months ended September 30, 2006.  Interest earned on loans for the nine months ended September 30, 2007 and 2006 was $35.4 million and $31.6 million, respectively.  The average yield on total loans was 7.35% for the nine months ended September 30, 2007 compared to 6.99% for the same period in 2006 reflecting an increase in market interest rates for loans.  The average balance of total loans also increased by $38.6 million to $642.8 million for the nine months ended September 30, 2007 from $604.2 million for the same period in 2006.  A significant portion of the loan portfolio consists of fixed-rate real estate secured loans which do not re-price when interest rates change.  Construction loans, home equity lines of credit, credit card loans, and our commercial/business loans, however, generally re-price when short-term interest rates change.  The increase in yield on these loan products, combined with an increase in the average balance of loans, were the primary contributors to the increased interest income on loans.  Adding to the increase in loan interest income was a $377,000 increase in loan prepayment penalties received during the first nine months of 2007 compared to the same period in 2006.

Interest income on investment securities (including mortgage-backed securities) decreased $462,000, or 5.6%, to $7.7 million for the nine months ended September 30, 2007 from $8.2 million for the nine months ended September 30, 2006 as a result of a lower average balance, partially offset by higher yields earned.  The average balances of investment securities for the nine months ended September 30, 2007 and 2006 were $192.6 million and $224.0 million, respectively.  The average yield on investment securities increased to 5.36% for the nine months ended September 30, 2007 from 4.88% for the nine months ended September 30, 2006, primarily as a result of adjustable-rate trust preferred securities repricing upward in connection with increases in short-term interest rates and the principal reduction of lower yielding mortgage-backed securities.

18

<PAGE>

Interest Expense.  Our interest expense increased $2.4 million, or 11.5%, to $23.7 million for the nine months ended September 30, 2007 from $21.3 million for the nine months ended September 30, 2006.  In addition to an increase in the average balances of our deposits, rising market rates, and enhanced competition caused our deposit and borrowing costs to increase.



Interest expense on deposits increased $2.1 million, or 20.8%, to $12.3 million for the nine months ended September 30, 2007 from $10.2 million for the nine months ended September 30, 2006.  The average cost of deposits increased 55 basis points to 3.84% for the nine months ended September 30, 2007 from 3.29% for the nine months ended September 30, 2006.  This increase in deposit costs for the nine months ended September 30, 2007 was primarily a result of average balance increases of $29.9 million in higher rate money market accounts, partially offset by a $14.8 million decrease in the average balance of even higher rate certificates of deposits.  In addition, interest expense was higher as a result of enhanced local competition and higher short-term market interest rates required to attract and retain customer deposits.

Interest expense on borrowed funds increased $333,000, or 3.0%, to $11.5 million for the nine months ended September 30, 2007 from $11.1 million for the nine months ended September 30, 2006, despite a $17.7 million decrease in the average balance of borrowed funds.  The average balance of borrowed funds was $341.2 million for the nine months ended September 30, 2007, compared to $358.9 million for the same period in 2006.  The primary reason for the increase was a 34 basis point increase in the cost of borrowed funds to 4.49% for the nine months ended September 30, 2007 from 4.15% for the same period in 2006 as a result of higher short-term interest rates.

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):



|                                 | At or For the                   |  |                       |  |                      
|-------------------------------- | ------------------------------- |  | --------------------- |  | ---------------------
|                                 | Nine Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|                                 | 2007                            |  | 2006                  |  |                      
|Allowance at beginning of period | $  8,283                        |  | $  8,597              |  | $  (314)             
|Provision for loan losses        | 450                             |  | 450                   |  | -                    
|Recoveries                       | 191                             |  | 171                   |  | 20                   
|Charge-offs                      | (782)                           |  | (804)                 |  | 22                   
|Allowance at end of period       | $  8,142                        |  | $  8,414              |  | $  (272)             

Our provision for loan losses was unchanged at $450,000 for the nine month periods ended September 30, 2007 and 2006.  The provision was recorded at a level considered appropriate to ensure that the allowance for loan losses was adequate to address the inherent credit risk in the loan portfolio.  Net charge-offs (charge-offs less recoveries) were $591,000 and $633,000 for the nine months ended September 30, 2007 and 2006, respectively.  The growth of our real estate loan portfolio, which has historically lower loan losses, and the reduction of our indirect auto loan portfolio, which has historically higher loan losses, have improved the quality of our total loan portfolio.

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



|                           | Nine Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|-------------------------- | ------------------------------- |  | --------------------- |  | ---------------------
|                           | 2007                            |  | 2006                  |  |                      
|Deposit service fees       | $ 2,611                         |  | $ 2,633               |  | $ (22)               
|Loan service fees          | 1,019                           |  | 858                   |  | 161                  
|Insurance service fees     | 1,717                           |  | 1,579                 |  | 138                  
|Investment service fees    | 446                             |  | 463                   |  | (17)                 
|Real estate lease income   | 863                             |  | 841                   |  | 22                   
|Gain on sale of loans, net | 262                             |  | 75                    |  | 187                  
|Other operating income     | 80                              |  | 96                    |  | (16)                 
|Total non-interest income  | $ 6,998                         |  | $ 6,545               |  | $ 453                

Our non-interest income for the
nine months ended September 30, 2007 increased $453,000, or 6.9%, to $7.0
million from $6.5 million for the nine months ended September 30, 2006. This
increase was primarily a result of a $187,000 increase in net gains on the sale
of loans, a $161,000 increase in loan service fees, and a $138,000 increase in
property and casualty insurance service fees. The increase in gains on the sale
of loans of $187,000 was attributable to an increase in the number of
single-family mortgages sold, including the recognition of the associated
mortgage servicing assets totaling $144,000, during the first nine months of
2007. Additionally, the increase in insurance service fees was primarily the
result of increased policy sales and renewals for the first nine

19

<PAGE>

months of 2007 compared to the same period in 2006, and the increase in loan
service fees was the result of the increase in the size of the loan portfolio
and a $137,000 increase of loan modification fees received. All other categories
of non-interest income reflected an aggregate net decrease of $33,000.

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



|                                  | Nine Months Ended September 30, |  | $ Increase (Decrease) |  | % Increase (Decrease)
|--------------------------------- | ------------------------------- |  | --------------------- |  | ---------------------
|                                  | 2007                            |  | 2006                  |  |                      
|Compensation and benefits         | $  12,298                       |  | $  11,999             |  | $       299          
|Office operations                 | 2,948                           |  | 3,991                 |  | (1,043)              
|Occupancy                         | 1,908                           |  | 1,941                 |  | (33)                 
|Loan servicing                    | 369                             |  | 386                   |  | (17)                 
|Outside and professional services | 940                             |  | 947                   |  | (7)                  
|Marketing                         | 810                             |  | 727                   |  | 83                   
|Other operating expenses          | 2,287                           |  | 1,704                 |  | 583                  
|Total non-interest expense        | $  21,560                       |  | $   21,695            |  | $  (135)             



Our non-interest expense decreased $135,000, or 0.6%, to $21.6 for the nine months ended September 30, 2007 from $21.7 million for the nine months ended September 30, 2006.  The decrease was primarily attributable to lower office operations expense of $1.0 million partially offset by a $583,000 increase in other operating expenses and a $299,000 increase in compensation and benefits.

Office operations expense decreased $1.0 million, or 26.1%, to $3.0 million for the nine months ended September 30, 2007 from $4.0 million for the nine months ended September 30, 2006.  The decrease was primarily attributable to a $1.1 million reduction in depreciation expense as a significant portion of our software and computer equipment became fully depreciated during the fourth quarter of 2006.  Partially offsetting this decrease was other operating expenses, which increased $583,000, or 34.2%, to $2.3 million from $1.7 million and compensation and benefits, which increased $299,000, or 2.5%, to $12.3 million from $12.0 million for the same period.  The increase in other operating expenses included a $197,000 increase for FDIC deposit insurance premiums, operational losses, which increased $118,000 as a result of check and debit card losses, fraud, and other operating losses, a $104,000 increase in B&O taxes related to increased revenue for the first nine months of 2007, and a $91,000 increase in FDIC regulatory examination expense.  The increase in compensation and benefits expense is primarily attributable to costs related to additional staffing.  The remaining increase in other operating expense was spread throughout various expense categories.  All other non-interest expenses increased by an aggregate net amount of $26,000 for the nine months ended September 30, 2007 compared to the same period in 2006.

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 total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields and costs, net interest income, interest rate spread, and net interest margin.  Average balances have been calculated using the average of daily balances during the period (amounts in thousands).



|                                         | Nine Months Ended  |  | Nine Months Ended  |  |                 |  |                   
|---------------------------------------- | ------------------ |  | ------------------ |  | --------------- |  | ------------------
|                                         | September 30, 2007 |  | September 30, 2006 |  |                 |  |                   
|                                         | Average
Balance    |  | Average
Yield/Cost |  | Average
Balance |  | Average
Yield/Cost
|INTEREST-EARNING ASSETS:                 |                    |  |                    |  |                 |  |                   
|Total loans                              | $ 642,787          |  | 7.35%              |  | $ 604,188       |  | 6.99%             
|Mortgage-backed securities               | 59,166             |  | 4.35               |  | 73,133          |  | 4.15              
|Investment securities                    | 133,415            |  | 5.80               |  | 150,850         |  | 5.23              
|FHLB stock                               | 13,712             |  | 0.53               |  | 13,712          |  | -                 
|Interest-bearing deposits in other banks | 2,784              |  | 5.13               |  | 7,632           |  | 4.90              
|Total interest-earning assets            | 851,864            |  | 6.78               |  | 849,515         |  | 6.30              
|                                         |                    |  |                    |  |                 |  |                   
|Non-interest-earning assets              | 50,069             |  |                    |  | 48,474          |  |                   
|                                         |                    |  |                    |  |                 |  |                   
|Total assets                             | $ 901,933          |  |                    |  | $ 897,989       |  |                   
|                                         |                    |  |                    |  |                 |  |                   
|                                         |                    |  |                    |  |                 |  |                   
|Interest-bearing liabilities:            |                    |  |                    |  |                 |  |                   
|Savings accounts                         | $  32,176          |  | 0.27               |  | $35,738         |  | 0.26              
|Interest-bearing checking accounts       | 42,158             |  | 1.68               |  | 39,050          |  | 1.91              
|Money market deposit accounts            | 123,129            |  | 3.73               |  | 93,264          |  | 2.95              
|Certificates of deposit                  | 229,224            |  | 4.79               |  | 243,998         |  | 4.08              
|Total deposits                           | 426,687            |  | 3.84               |  | 412,050         |  | 3.29              
|                                         |                    |  |                    |  |                 |  |                   
|Borrowed funds                           | 341,242            |  | 4.49               |  | 358,942         |  | 4.15              
|                                         |                    |  |                    |  |                 |  |                   
|Total interest-bearing liabilities       | 767,929            |  | 4.13               |  | 770,992         |  | 3.69              
|                                         |                    |  |                    |  |                 |  |                   
|Non-interest-bearing liabilities:        |                    |  |                    |  |                 |  |                   
|Non-interest bearing checking            | 33,527             |  |                    |  | 29,267          |  |                   
|Other                                    | 11,291             |  |                    |  | 12,333          |  |                   
|Total non-interest bearing liabilities   | 44,818             |  |                    |  | 41,600          |  |                   
|                                         |                    |  |                    |  |                 |  |                   
|Total liabilities                        | 812,747            |  |                    |  | 812,592         |  |                   
|                                         |                    |  |                    |  |                 |  |                   
|Equity                                   | 89,186             |  |                    |  | 85,397          |  |                   
|                                         |                    |  |                    |  |                 |  |                   
|Total liabilities and equity             | $ 901,933          |  |                    |  | $ 897,989       |  |                   
|                                         |                    |  |                    |  |                 |  |                   
|Net interest income                      | $   19,538         |  |                    |  | $   18,809      |  |                   
|Interest rate spread(1)                  |                    |  | 2.65%              |  |                 |  | 2.61%             
|Net interest margin (2)                  | 3.06%              |  |                    |  | 2.95%           |  |                   

(1)  Difference between weighted average yield on interest-earning assets and weighted average rate on interest-bearing liabilities.

(2)  Net interest margin, otherwise known as net yield on interest-earning assets, is calculated as net interest income divided by average interest-earning assets.

Liquidity and Capital Resources

Liquidity.

21

<PAGE>

Our primary sources of funds are from customer and brokered deposits, loan repayments, loan sales, maturing investment securities, and borrowed funds.  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 cash flows from our forecasted operating results are sufficient to fund all of our existing commitments.

At September 30, 2007, we were in compliance with the collateral requirements of all of our borrowed funds arrangements.  We maintained a credit facility with the FHLB equal to 50% of the Bank's total assets, subject to available collateral.  At September 30, 2007, we had an available amount on this line of $51.3 million.  The Bank also maintains a $100.0 million credit line with Fortis Securities, LLC as an additional source of liquidity collateralized by specified investment securities.  There were no outstanding balances on this credit line at September 30, 2007.  During the quarter ended September 30, 2007, Fortis Securities, LLC changed their collateral requirements in response to changing credit market conditions.  Since we only pledge available-for-sale securities, the change of the collateral requirements will have minimal impact on our liquidity position because we can also sell the securities to increase cash flows.  In addition, we held readily saleable loans for liquidity purposes.



Management believes that we have adequate resources to fund all loan commitments through deposits, borrowings from the FHLB or other sources, and the sale of mortgage loans or investments.  At September 30, 2007, certificates of deposit (excluding individual retirement account certificates of deposit) amounted to $224.5 million, or 48.7%, of total deposits, including $51.0 million of brokered deposits, which are scheduled to mature and be renewed through March 31, 2008.  We have used brokered deposits and borrowed funds to supplement retail deposit funding.  Management also believes that we can adjust the offering rates of savings, money market, and certificates of deposit to retain, increase, or decrease deposits in changing interest rate environments.

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 September 30, 2007, the Bank was classified as a "well capitalized" institution under the criteria established by the FDIC and exceeded all minimum capital requirements.  Total equity at the Bank was $87.2 million at September 30, 2007, or 9.91% of total assets on that date.  Our regulatory capital ratios at September 30, 2007, were as follows:  Tier I leverage of 9.57%; Tier I risk-based capital of 11.68%; and total risk-based capital of 12.79%.

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk



One of our primary financial objectives is to generate ongoing profitability.  The largest contributor to our profitability is net interest income.  Net interest income is the difference between the income we receive on loans and investments and the expenses we incur on deposits and borrowed funds.  Net interest income is affected by the amount of interest-earning assets and interest-bearing liabilities that the Bank holds, as well as the associated yields and costs.

The asset liability management policy and the committee guide us in managing the Bank's market risk.  A summary of the asset and liability management committee activities is reported to our board of directors monthly and in more detail to the loan and investment committee of the board on a quarterly basis.

Some of the principal strategies that we employ to manage our interest rate sensitivity include: (1) selling long-term fixed-rate mortgage loans; (2) borrowing intermediate- to long-term funds at fixed rates; (3) originating consumer and income property loans with shorter maturities or at variable rates; (4) purchasing securities with shorter maturities or at variable rates; (5) appropriately modifying loan and deposit pricing to capitalize on the then current market opportunities; (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; and (7) maintaining adequate capital levels for the level of interest rate risk inherent in the balance sheet.  At September 30, 2007, there were no material changes in the Bank's market risk from the information provided in the Company's Form 10-K which was filed with the SEC on March 14, 2007.

At September 30, 2007, 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 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.

22

<PAGE>

The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as 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.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting (as defined in 13a-15(f) of the Act) that occurred during the quarter ended September 30, 2007, that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  The Company continued, however, to implement suggestions from its internal auditor and independent auditor on ways to strengthen existing controls.  The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud.  A control procedure, no matter how well designed and functioning, 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 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 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 cost-effective control procedures, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

ITEM 1 - Legal Proceedings

From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of business.  As of September 30, 2007, we were not involved in any significant litigation and do not anticipate incurring any material liability as a result of any such litigation.

ITEM 1A**-**Risk Factors



There have been no material changes in the risk factors previously disclosed in the Company's 2006 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 Market under the symbol "RPFG".  As of September 30, 2007, there were 6,516,870 shares of common stock issued, including 407,237 shares held by the ESOP that have not been released, committed, or allocated to participant accounts; and 115,108 restricted shares granted under the MRP that have not yet vested.  During the quarter ended September 30, 2007, the Company did not sell any securities that were not registered under the Securities Act of 1933.

Stock Purchases

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.

23

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The following table sets forth our purchases of Rainier Pacific Financial Group, Inc. outstanding common stock during the three months ended September 30, 2007:



|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
|-------------------------------------- |  | -------------------------------- |  | ---------------------------- |  | ------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------
|                                       |  |                                  |  |                              |  |                                                                                      |  |                                                                               
|July 1, 2007 -  July 31, 2007          |  | 50,000                           |  | $17.07                       |  | 50,000                                                                               |  | 163,920                                                                       
|August 1, 2007 - August 31, 2007       |  | -                                |  | -                            |  | -                                                                                    |  | 163,920                                                                       
|September 1, 2007 - September 30, 2007 |  | -                                |  | -                            |  | -                                                                                    |  | 163,920                                                                       
|                                       |  |                                  |  |                              |  |                                                                                      |  |                                                                               
|Total                                  |  | 50,000                           |  | $17.07                       |  | 50,000                                                                               |  |                                                                               

|    |                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On February 22, 2006, we announced our intention to purchase 5% (i.e., 307,000) of Rainier Pacific Financial Group, Inc. outstanding shares of common stock.  On February 21, 2007, we announced a 12-month extension of this repurchase program.  At September 30, 2007, there were163,920shares remaining to be purchased under this repurchase program.





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 Rainier Pacific Savings Bank Employee Severance Compensation Plan (1)10.6       Rainier Pacific 2004 Stock Option Plan (3)10.7       Rainier Pacific 2004 Management Recognition Plan (3)10.8       Form of Incentive Stock Option Agreement (4)10.9       Form of Non-Qualified Stock Option Agreement (4)10.10     Form of Restricted Stock Award Agreement (4)14          Code Business Conduct and 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)
| | (2)
| | (3)
| | (4)
| | (5)

24

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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.

October 31, 2007                                                                                                  /s/John A. Hall
                                                                                                                                John A. Hall
                                                                                                                               
President and Chief Executive Officer
                                                                                                                               
(Principal Executive Officer)
October 31, 2007                                                                                                  /s/Joel G. Edwards
                                                                                                                               
Joel G. Edwards
                                                                                                                               
Chief Financial Officer
                                                                                                                               
(Principal Financial and Accounting Officer)











25

<PAGE>



EXHIBIT INDEX



|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



























26

<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)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | b)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | c)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | d)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|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)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | b)                                                                                                                                                                                                                                                                                                                                     



Date:  October 31, 2007                                                                          /s/John A. Hall
                                                                                                                 
John A. Hall
                                                                                                                 
President and Chief Executive Officer

27

<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)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | b)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | c)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | d)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|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)                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                        
|   | b)                                                                                                                                                                                                                                                                                                                                     



Date:  October 31, 2007                                                                            /s/Joel G. Edwards
                                                                                                                   
Joel G. Edwards
                                                                                                                    Chief Financial Officer

28

<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

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), each of the undersigned hereby certifies in his capacity as an officer of Rainier Pacific Financial Group, Inc. ("the Company") and in connection with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 ("Report"), that:



1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such Report.





/s/John A. Hall                                                                                                                                                     
/s/Joel G. Edwards
   John A. Hall                                                                                                          Joel G. Edwards
    President and Chief Executive Officer                                                              Chief Financial Officer
Dated: October 31, 2007

29

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